-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LasMj9yns0V+dtLZ8l/j6BK9wcUWia9x5y6vYQ1FuUJGZkT+TVt3hrNSbog5BD6c qpEg68LtAiYX1AHVN9hvsQ== 0000950109-97-004954.txt : 19970716 0000950109-97-004954.hdr.sgml : 19970716 ACCESSION NUMBER: 0000950109-97-004954 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN LEARNING SYSTEMS INC CENTRAL INDEX KEY: 0000912766 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 521492296 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-31273 FILM NUMBER: 97640490 BUSINESS ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4108438000 MAIL ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SYLVAN LEARNING SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- MARYLAND 52-1492296 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1000 LANCASTER STREET BALTIMORE, MARYLAND 21202 (410) 843-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- DOUGLAS L. BECKER PRESIDENT, CO-CHIEF EXECUTIVE OFFICER AND SECRETARY SYLVAN LEARNING SYSTEMS, INC. 1000 LANCASTER STREET BALTIMORE, MARYLAND 21202 (410) 843-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO: RICHARD C. TILGHMAN, JR., ESQUIRE MICHAEL J. SILVER, ESQUIRE JILL CANTOR NORD, ESQUIRE HOGAN & HARTSON L.L.P. PIPER & MARBURY L.L.P. 111 SOUTH CALVERT STREET 36 SOUTH CHARLES STREET BALTIMORE, MARYLAND 21202 BALTIMORE, MARYLAND 21201 (410) 659-2700 (410) 539-2530 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered in connection with dividend or interest reinvestment plans, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF TITLE OF SHARES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE - ------------------------------------------------------------------------------- 5,462,500 shares of Common Stock, $.01 par value..................... $186,749,219(1) $56,591(1) - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes 712,500 shares subject to an Underwriters' over-allotment option. Calculated in accordance with Rule 457(c) of the Securities Act of 1933, as amended, based on the average of the high and low sales price of the Common Stock on July 9, 1997. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION 4,750,000 Shares JULY 15, 1997 [LOGO OF SYLVAN LEARNING SYSTEMS APPEARS HERE] SYLVAN LEARNING SYSTEMS, INC. Common Stock -------- Of the 4,750,000 shares of Common Stock offered hereby, 1,464,505 shares are being sold by Sylvan Learning Systems, Inc. ("Sylvan" or the "Company"), 435,495 shares are being sold upon exercise of options (the "Options") that are being acquired by the Underwriters from certain selling option holders (the "Selling Optionholders") and 2,850,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders" and together with the Selling Optionholders, the "Selling Securityholders"). The Company will not receive any proceeds from the sale of the Common Stock by the Selling Stockholders or the sale of the Options by the Selling Optionholders, except the aggregate exercise price for the Options. See "Principal and Selling Securityholders" and "Underwriting." The Common Stock is quoted on The Nasdaq National Market under the symbol "SLVN." On July 14, 1997 the last sale price for the Common Stock as reported on The Nasdaq National Market was $35.50 per share. See "Price Range of Common Stock and Dividend Policy." -------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1)(2) SECURITYHOLDERS(3) - -------------------------------------------------------------------------------- Per Share.............. $ $ $ (3) - -------------------------------------------------------------------------------- Total(4)............... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Before deducting offering expenses payable by the Company estimated at $275,203. (2) Excludes payment to the Company of the aggregate exercise price of the Options, aggregating $1,445,090. (3) Includes proceeds to the Selling Stockholders, aggregating $ and proceeds to the Selling Optionholders, aggregating $ (weighted average per share proceeds of $ ), before deducting aggregate offering expenses payable by the Selling Securityholders estimated at $224,797. (4) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 412,500 and 300,000, respectively, additional shares of Common Stock to cover over-allotments, if any. To the extent that the Underwriters' option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the Underwriters' option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Securityholders will be $ , $ , $ and $ , respectively. See "Underwriting." -------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about , 1997. Alex. Brown & Sons INCORPORATED Merrill Lynch & Co. Montgomery Securities Morgan Stanley Dean Witter Smith Barney Inc. Robertson, Stephens & Company THE DATE OF THIS PROSPECTUS IS , 1997. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission, including the reports and other information incorporated by reference into this Prospectus, can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at rates prescribed by the Commission or from the Commission's Internet web site at http:// www.sec.gov. The Common Stock of the Company is quoted on The Nasdaq National Market. Reports, proxy statements and other information concerning the Company can be inspected at the offices of The Nasdaq Stock Market, 1735 K Street, Washington, D.C. 20006. This Prospectus does not contain all the information set forth in the Registration Statement of which this Prospectus is a part and exhibits relating thereto which the Company has filed with the Commission. Copies of such information and exhibits are on file at the offices of the Commission and may be obtained from the Public Reference Section of the Commission upon payment of the fees prescribed by the Commission and may be examined without charge at the offices of the Commission or through the Commission's Internet web site. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No. 0- 22844) pursuant to the 1934 Act are incorporated herein by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as amended by its Annual Report on Form 10-K/A; (ii) the Company's Current Reports on Forms 8-K and 8-K/A dated January 28, 1997, relating to the Company's acquisition of Wall Street Institute; (iii) the Company's Current Report on Form 8-K/A dated March 12, 1997 relating to the termination of the Company's Merger Agreement with National Education Corporation; (iv) the Company's Current Reports on Forms 8-K and 8-K/A dated April 17, 1997 and May 30, 1997 relating to the Company's acquisition of I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads"); (v) the Company's Current Report on Form 8-K dated July 15, 1997 supplementing certain historical financial information to reflect the acquisition of Educational Inroads; (vi) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997; (vii) the description of Common Stock contained in Item 1 of the Company's Registration Statement on Form 8-A, filed with the Commission under the 1934 Act; and (viii) all other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of filing of the Registration Statement of which this Prospectus is a part and prior to the termination of the offering made hereby. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, upon the request of any such person, a copy of any or all of the documents which have been incorporated herein by reference, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Requests for such documents should be directed to Sylvan Learning Systems, Inc., 1000 Lancaster Street, Baltimore, Maryland 21202, Attention: Chief Financial Officer, telephone: (410) 843-8000. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. ---------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE COMMON STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Consolidated Financial Statements and Notes thereto incorporated by reference into this Prospectus. Except as otherwise indicated, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option and (ii) is derived from the Company's Supplemental Consolidated Fnancial Statements and related Notes thereto included in the Company's Current Report on Form 8-K dated July 15, 1997, which is incorporated by reference herein. THE COMPANY Sylvan Learning Systems, Inc. (the "Company" or "Sylvan") is a leading international provider of educational and testing services. The Company delivers a broad array of supplemental and remedial educational services and computer-based testing through three principal divisions. The Core Educational Services division designs and delivers individualized tutorial services to school-age children and adults at 642 franchised and Company-owned Sylvan Learning Centers. Sylvan Prometric, the Company's testing services division, administers computer-based tests for major organizations, corporations, professional associations and governmental agencies through its worldwide network of Testing Centers. The Contract Educational Services division provides Sylvan's core educational services under federal and state funding programs to more than 9,500 students in 86 public schools and more than 40,000 students in 846 non-public schools (including Educational Inroads) and provides on-site educational and training services to employees of large corporations. Since 1994, the Company has substantially expanded its business through a combination of internal growth and acquisitions and has increased revenue and operating income from $68.7 million and $3.4 million, respectively, in 1994 to $181.9 million and $22.7 million, respectively, in 1996. Sylvan's 1996 systemwide revenues were approximately $310.3 million, consisting of $165.1 million from core educational services ($139.5 million from franchised Learning Centers and $25.6 million from Company-owned Learning Centers, product sales and franchise sales fees), $87.0 million from testing services and $58.2 million from contract educational services. Core Educational Services. The Company's Core Educational Services division provides supplemental instruction in reading, mathematics and reading readiness and features 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. As of May 31, 1997, the Company or its franchisees operated 642 Learning Centers in 49 states, five Canadian provinces, Hong Kong, South Korea and Guam, with 450 franchisees owning and operating 601 Sylvan Learning Centers and Sylvan owning and operating 41 Learning Centers. Sylvan Prometric Testing Services. As of May 31, 1997, Sylvan or its authorized representatives operated 1,616 Testing Centers, 1,001 of which were located in North America and the remainder in 95 foreign countries. The Company enters into contracts directly with various professional licensure, educational and information technology ("IT") businesses, organizations and agencies, under which Sylvan receives a fee based upon the number of tests given for those customers. Principal customers for the Company's testing services are Educational Testing Services ("ETS") and, in the IT industry, Microsoft Corp. ("Microsoft") and Novell, Inc. ("Novell"). IT customers sponsor worldwide certification programs for various professionals such as network administrators and engineers, service technicians and instructors. Sylvan has been designated as the exclusive commercial provider of computer-based tests administered by ETS (excluding the SAT and PSAT) and operates 47 testing centers in 33 countries to facilitate delivery of international testing for ETS. The Company also provides testing services for organizations responsible for licensing broker-dealers, pilots, aviation mechanics, computer professionals and medical laboratory technicians. Through the Company's December 1996 acquisition of Wall Street Institute International B.V. and its affiliates ("Wall Street"), Sylvan now provides live and computer-based English instruction and testing in Europe and Latin America through a network of more than 180 franchised and Company- owned centers. 3 Contract Educational Services; PACE; Sylvan-At-Work; Caliber Learning Network, Inc. Sylvan provides educational services under federal and various state funding programs to students in 86 public and 846 non-public schools. Sylvan provides educational and training services to large corporations throughout the United States, including racial and gender workplace diversity training and skills improvement programs such as writing, advanced reading, listening and public speaking, through its wholly-owned subsidiary, The PACE Group ("PACE"), and the Company's Sylvan-At-Work program. In November 1996, Caliber Learning Network, Inc. was formed as a joint initiative of Sylvan and MCI Telecommunications Corporation to become a worldwide distribution network of professional education centers equipped with satellite-based video conferencing and computer network capabilities. Sylvan currently owns a 10 percent interest in Caliber Learning Network and has the option to acquire a majority interest in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." The Company's principal executive offices are located at 1000 Lancaster Street, Baltimore, Maryland 21202, (410) 843-8000. RECENT DEVELOPMENTS EDUCATIONAL INROADS ACQUISITION On May 30, 1997, Sylvan acquired privately-held I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads") in exchange for the issuance of 1,414,000 shares of Sylvan Common Stock (the "IR Shares") to the two Educational Inroads stockholders. Educational Inroads provided remedial and special education services to public and non-public school systems, with current contracts in New Jersey, Maryland, Louisiana, Washington, D.C. and other school districts. Sylvan believes the acquisition of Educational Inroads will provide Sylvan's Contract Educational Services division with the critical mass necessary for long-term growth in the public and non-public school markets in addition to providing expertise in special education, bolstering Sylvan's capability to serve a wide range of educational needs. The aggregate market value for the IR Shares was approximately $50.0 million, based on the price of the Common Stock when the acquisition was consummated. In 1996, Educational Inroads generated $24.8 million in revenues. See "Selected Historical and Supplemental Consolidated Financial Data--Supplemental Consolidated Financial Data" and related Notes thereto. NATIONAL EDUCATION CORPORATION $30 MILLION TERMINATION FEE In March 1997, Sylvan and National Education Corporation ("NEC") executed a definitive agreement pursuant to which Sylvan was to acquire NEC. In May 1997, NEC accepted the offer of Harcourt General, Inc. to acquire all of the stock of NEC which resulted in the termination of NEC's agreement with Sylvan and NEC's payment to Sylvan of the $30.0 million termination fee required by that agreement (the "Termination Fee"). Sylvan recorded an approximately $4.0 million impairment loss for the Sylvan Prometric division as a result of certain strategic decisions made in contemplation of the NEC acquisition. Sylvan also incurred $1.5 million of expenses in connection with the NEC transaction. As a result, Sylvan recorded other income of approximately $24.5 million relating to the Termination Fee in the second quarter of 1997. SECOND QUARTER CONTRIBUTIONS In the second quarter of 1997, Sylvan made certain cash expenditures and Common Stock contributions resulting in an aggregate expense to the Company of approximately $22.0 million. The $22.0 million of recorded expense was attributable to Sylvan's contributions of (i) approximately $3.0 million in cash and Common Stock valued at $7.0 million to a nonprofit corporation whose sole purpose is to fund promotional and channel support programs for the Sylvan Prometric division, (ii) Common Stock valued at $5.0 million to a nonprofit corporation whose sole purpose is to develop and fund advertising programs for the Sylvan Learning Centers and (iii) Common Stock valued at $7.0 million to the newly-formed, nonprofit Sylvan Foundation formed to promote various educational pursuits. 4 THE OFFERING Common Stock offered by the Company................ 1,464,505 shares Common Stock offered by the Selling 3,285,495 shares Securityholders................................... Common Stock to be outstanding after the 29,590,985 shares offering(1)....................................... Use of proceeds by the Company..................... For general corporate pur- poses, including possible acquisitions Nasdaq National Market Symbol...................... SLVN
- -------- (1) Includes the 435,495 shares issuable upon exercise of the options being offered by the Selling Optionholders in this offering (the "Options"). See "Underwriting". Excludes 4,301,575 shares issuable upon exercise of all other warrants and stock options outstanding on July 11, 1997. See "Capitalization." 5 SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PARTNERSHIP AND SYLVAN PARTNERSHIP COMBINED SYLVAN ------------ ------------ ----------------------------------------- YEAR ENDED YEAR ENDED THREE MONTHS DECEMBER 31, DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------ ------------ ------------------------- --------------- 1992 1993 1994 1995 1996 1996 1997 ------------ ------------ ------- -------- -------- ------- ------- STATEMENTS OF OPERATIONS DATA: Total revenues.......... $33,821 $51,519 $68,748 $111,059 $181,936 $41,506 $51,944 Operating income (loss)................. (452) 1,208 3,362 4,829 22,732 3,014 5,353 Income (loss) from continuing operations before extraordinary items(2)............... (1,061) (205) 3,448 3,571 14,796 1,779 3,447 Income (loss) from discontinued operations(3).......... (1,273) 205 -- -- -- -- -- Net income (loss)(4).... (2,334) (177) 3,448 3,571 14,796 1,779 3,447 Income (loss) from continuing operations per share(4)(5)........ $ (0.02) $ 0.21 $ 0.21 $ 0.60 $ 0.07 $ 0.12 Weighted average shares outstanding(5)......... 12,967 16,533 17,386 24,996 24,901 27,207
MARCH 31, 1997 --------------------------- SUPPLEMENTAL AS ADJUSTED(6) ------------ -------------- BALANCE SHEET DATA: Cash and cash equivalents and available-for-sale securities....................................... $ 23,519 $ 74,339 Net working capital............................... 40,228 91,048 Intangible assets and deferred contract costs..... 120,948 120,948 Total assets...................................... 260,380 311,200 Long-term debt and capital leases................. 22,524 22,524 Stockholders' equity.............................. 201,880 252,700
- ------- (1) Prior to February 1, 1991, the Sylvan Learning Centers business was conducted by Sylvan Learning Corporation (the "Predecessor"). On February 1, 1991, the Predecessor contributed the Sylvan Learning Centers business to Sylvan KEE Systems, a Maryland general partnership (the "Partnership") in exchange for a 50% partnership interest, and Sylvan contributed its computer training software development business to the Partnership in exchange for the other 50% partnership interest. On January 26, 1993, Sylvan acquired the Predecessor and dissolved the Partnership. On September 3, 1993, Sylvan sold its computer training software development business. During 1994, Sylvan acquired by mergers all of the outstanding stock of Learning Services, Inc. ("LSI") and Loralex Corporation ("Loralex"). These companies owned and operated a total of nine Sylvan Learning Centers located in the Northeast United States and Florida. On February 17, 1995, Sylvan acquired by merger all of the outstanding stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc. (collectively, "READS"), a Philadelphia-based provider of remedial education and a variety of consulting services to school districts, county-wide educational agencies and municipalities in the Eastern United States. The READS, Loralex and LSI acquisitions have been accounted for by Sylvan as poolings-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods presented to include the results of operations of READS, Loralex and LSI. Effective September 30, 1995 Sylvan acquired Drake Prometric, L.P. ("Drake"), a leading provider of computer-based certification, licensure and assessment testing. The transaction was accounted for using the purchase method of accounting, and Sylvan's results of operations from October 1, 1995 include the operations of Drake. Effective December 1, 1996, Sylvan acquired Wall Street, a European-based franchisor and operator of learning centers that teach the English language. This transaction was accounted for using the purchase method of accounting and Sylvan's results of operations from December 1, 1996 include the operations of Wall Street. Sylvan paid $4.9 million of the $20.1 million purchase price in cash and the remainder in 714,884 shares of Common Stock. On May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding stock of Educational Inroads. Educational Inroads provided contract educational services to school districts in New Jersey and several other states. The Educational Inroads acquisition was accounted for by Sylvan as a pooling-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods prior to the acquisition to include the results of operations, financial position and cash flows of Educational Inroads. As of the date of this Prospectus, the Company has not issued financial statements for a period including the date the Educational Inroads acquisition was consummated and, therefore, the financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the consummation date of the Educational Inroads acquisition, these restated supplemental consolidated financial statements will become the historical consolidated financial statements of the Company. (2) Extraordinary items include a $350,000 gain on extinguishment of a $3.5 million debt to Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0 million of notes payable to stockholders, each recorded in 1993. (3) Represents Sylvan's computer training software development business, sold in September 1993, and a Canadian computer training business, 80.1% of which was sold in 1992. (4) Reducing compensation expense relating to Educational Inroads stockholders to reflect their post-acquisition contractual compensation levels and eliminating non-recurring merger costs would result in supplemental pro forma net income and net income per share of $16,266,000 and $0.65, respectively, in 1996 and $4,017,000 and $0.14, respectively in the first quarter of 1997. See Note 3 to the Company's Supplemental Consolidated Financial Statements incorporated by reference herein. (5) All share and per share data have been restated to retroactively reflect a 3-for-2 stock split of the Company's Common Stock for stockholders of record on November 7, 1996. (6) Adjusted for the sale of the 1,464,505 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $35.50 per share), $1.4 million of aggregate proceeds from the exercise of 435,495 options being offered by the Selling Optionholders and application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating an investment in the Common Stock. This Prospectus contains certain forward-looking statements. Actual results could differ materially from those projected in the forward- looking statements as a result of any number of factors, including the risk factors set forth below and elsewhere in this Prospectus. Risks Associated with Acquisition Strategy. A primary element of the Company's growth strategy is to continue to pursue strategic acquisitions that expand and complement the Company's businesses. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. Currently, the Company is not a party to any agreements, understandings, arrangements or negotiations regarding any material acquisitions; however, as the result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions. There can also be no assurance that the Company will be able to continue its acquisition strategy, and any failure to do so could have a material adverse effect on the Company's business, financial condition, results of operations and ability to sustain growth. In addition, the Company believes that it will compete for attractive acquisition candidates with other larger companies, consolidators or investors in the educational services industry. Increased competition for such acquisition candidates could have the effect of increasing the cost to the Company of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and otherwise require additional management, operational and financial resources. Moreover, there is no assurance that the Company will successfully integrate businesses acquired in the future into its business or operate such acquired businesses profitably. Acquisitions also may involve a number of additional risks including: adverse short-term effects on the Company's operating results; dependence on retaining key personnel; amortization of acquired intangible assets; and risks associated with unanticipated problems, liabilities or contingencies. The Company may require additional debt or equity financing to fund any future acquisitions, which may not be available on terms favorable to the Company, if at all. To the extent the Company uses its capital stock for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders, including the purchasers of Common Stock in this offering. In the event that the Company's capital stock does not maintain sufficient value or potential acquisition candidates are unwilling to accept the Company's capital stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources or is unable to use its capital stock as consideration for acquisitions, its growth through acquisitions could be limited. Dependence on Profitable Franchise Operations; Dependence on Franchisees for Technology Centers. More than 90% of Sylvan Learning Centers are currently operated by franchisees. Sylvan's revenues from franchised Learning Centers depend on the franchisees' ability to operate their Learning Centers profitably and adhere to Sylvan's standards. Although Sylvan has a quality review process, it cannot be certain that franchisees will conduct their operations profitably or in accordance with Sylvan's guidelines. The closing of unprofitable Learning Centers or the failure of franchisees to comply with Sylvan policies could adversely affect Sylvan's reputation and business prospects. If Sylvan is unable to attract new franchisees meeting its standards or to convince existing franchisees to open additional Learning Centers, any growth in royalties from franchised Learning Centers will depend solely upon increases in revenues at existing Learning Centers. 7 Importance of Computer-Based Testing. A significant amount of the growth in Sylvan's revenues and profits is expected to result from computer-based testing services. The termination, nonrenewal or material modification of Sylvan's NASD testing contracts, Sylvan's contracts with ETS, Novell or Microsoft or any other significant agreements to provide computer-based testing services would have a material adverse effect on Sylvan's results of operations and prospects for growth. Sylvan only began providing computer- based testing services in late 1991, and there can be no assurance that computer-based testing will receive sufficient market acceptance to cause test administrators to continue to offer computer-based tests or convert additional tests to computer-based versions in the near future. Furthermore, there can be no assurance that events beyond the control of both Sylvan and test administrators, such as testing security concerns, will not reduce or limit market acceptance of computer-based testing or discourage test administrators from continuing to offer computer-based tests or converting additional tests to a computer-based format. Limited Title I Market for Federal-Funded Contract Services; Possible Opposition to Services; Legislative Reauthorization of Title I. The majority of Sylvan's contracts contain provisions for cancellation by school district officials based on certain factors, including funding constraints. There can be no assurance that contracts with existing school districts will be renewed or that Sylvan will obtain contracts with other school districts. The market for Sylvan's Title I (defined below) services is effectively limited to the nation's larger school districts, in which the population of students eligible for Title I services and per- pupil Title I expenditures make Sylvan's services cost-effective. Many educators and policy makers have criticized the "pullout" approach, whereby Title I or similar services are provided in a separate classroom during regular school hours. This approach is the method currently prescribed by the Baltimore City Schools, as well as by other school districts in which Sylvan currently provides Title I services, and also is the method prescribed by many other school districts that are potential clients of Sylvan. School districts to which Sylvan now provides educational services under contract may decide not to renew existing contracts, and other school districts may decide not to use Sylvan's services because government agencies, parents and collective bargaining units representing teachers and aides may oppose Sylvan's Title I or similar programs based on the nature of Sylvan's teaching method or the potential threat to teacher and aide employment. Enactment of the Improving America's Schools Act of 1994 reauthorized the Chapter I program for an additional five years, effective July 1, 1995, under the name Title I of the Elementary and Secondary Education Act ("Title I"). Title I includes at least three substantive changes which potentially could have a material adverse effect on Sylvan. First, Title I provides greater impetus for school districts to implement schoolwide programs aimed at boosting achievement of disadvantaged children by improving a school's overall program. Sylvan currently provides "pullout" as opposed to schoolwide services. Second, Title I may reduce the reliance of school districts on standardized tests as a means of measuring student performance by requiring states to develop and apply assessments involving multiple measures of student performance. Sylvan's services now include the provision of standardized tests to measure student performance. Third, Title I may cause reductions in the extent of services available to disadvantaged students attending non-public schools. Sylvan cannot accurately predict the likely impact these substantive changes will have on Sylvan's contracts to provide Title I services or Sylvan's ability to have those contracts renewed or its ability to enter into contracts with additional school districts. Impact of Recent Supreme Court Decision on Title I Services for Non-Public School Students. On June 23, 1997, the Supreme Court, in Agostini v. Felton, held that under Title I the provision of supplemental, remedial instruction to disadvantaged children on the premises of sectarian schools by government employees does not violate the Establishment Clause of the First Amendment. The Court thus expanded the range of permissible means for delivering publicly-funded services to students attending religious schools, by allowing public teachers and counselors to provide such services. In light of the Agostini decision, school districts may decide not to use the Company's services because school districts may be able to provide similar services at a lower cost. 8 Dependence on Key Personnel. The Company is dependent in large part on the experience and knowledge of key personnel including R. Christopher Hoehn-Saric and Douglas L. Becker (Co-Chief Executive Officers), B. Lee McGee (Chief Financial Officer) and the Presidents of its three operating divisions. The loss of services of these key individuals could have a material adverse effect on the Company. The success of the Company is also dependent upon the continued service of, and its ability to attract and retain highly qualified technical, marketing, sales and management personnel. The competition for such personnel is intense. The failure to recruit and retain additional or substitute key personnel in a timely manner could have an adverse effect on the performance of the Company. Sylvan maintains an aggregate of $4.5 million of key man life insurance for each of Messrs. Hoehn-Saric and Becker and $3.0 million of key man life insurance for Mr. McGee. Competition. There is significant and increasing competition in the computer-based testing and remedial, supplemental, distance learning and professional education marketplaces. In addition, an increasing number of private, for-profit organizations, public and non-public schools, and existing colleges and universities are establishing or may hereafter establish their own supplemental education programs. Many of these organizations have greater financial resources than the Company. Certain Litigation. 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 the rights to administer testing services for the NASD. ACT has asserted that the Company tortiously interfered with ACT's relations, contractual and quasi-contractual, with the NASD, caused ACT to suffer the loss of its advantageous economic prospects with the NASD and other ACT clients and that the Company has monopolized and attempted to monopolize the computer-based testing services market. ACT has claimed unspecified amounts of compensatory, treble and punitive damages, as well as injunctive relief. If ACT were awarded significant compensatory or punitive damages, it could materially adversely affect the Company's results of operations and financial condition. Additionally, if ACT were granted significant injunctive relief, Sylvan may be required to dispose, limit expansion or curtail existing operations, of its Sylvan Prometric division, which, in turn, would materially adversely affect its results of operations and financial condition. The Court has entertained oral arguments relating to the Company's motion to dismiss this litigation but has not yet ruled on this motion, and minimal discovery has been conducted. The Company believes that all of ACT's claims are without merit, but it is unable to predict the outcome of the ACT litigation at this time. Regardless of the outcome, should the litigation continue for a significant period of time, a material level of management attention and cash resources of the Company could be diverted to resolve this matter. Limitations from Franchise Regulation. Sylvan is subject to federal and state laws regulating the offer and sale of franchises. These laws impose registration and extensive disclosure requirements on the offer and sale of franchises. These laws frequently apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. State franchise laws may delay or prevent Sylvan from terminating a franchise or withholding consent to renewal or transfer of a franchise, and Sylvan may, therefore, be required to retain a poorly performing franchisee and may be unable to replace the franchisee, which could have an adverse effect on franchise royalties. In addition, the nature and effect of any future legislation or regulation on Sylvan's franchise operations cannot be predicted. Risks Associated With International Sales and Currency Exchanges. As a result of the acquisition of Drake and Wall Street a significant portion of the Company's revenues are generated outside the United States. Conducting business outside of the United States is subject to certain risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations and greater difficulty in accounts receivable collection. Moreover, gains and losses on the conversion to U.S. dollars of accounts receivable not denominated in U.S. dollars and 9 accounts payable arising from international operations may in the future contribute to fluctuations in the Company's business and operating results. Variability of Quarterly Operating Results. The Company's revenues and operating results have varied substantially from quarter to quarter and will continue to vary, depending upon the timing of implementation of new computer- based testing contracts or new contracts funded under Title I or similar programs. Based on the Company's limited experience, revenues generated by computer-based testing services may vary based on the frequency or timing of delivery of individual tests and the speed of test administrators' conversion of tests to computer-based versions. Revenues or profits in any period will not necessarily be indicative of results in subsequent periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on Significant Customers. Testing services provided to ETS, and Microsoft and Novell collectively, accounted for approximately 10.8% and 22.3%, respectively, of total revenues in 1996 and approximately 9.8% and 18.7%, respectively, of total revenues in the first quarter of 1997. The Company believes that a substantial portion of its total revenues will continue to be derived from ETS and Microsoft. The Company's contract with ETS to provide domestic testing services expires in 1999. The Company's contract with Microsoft expires in July 1999, although currently the contract requires annual price evaluations by both parties. Failure to renew these contracts on terms favorable to the Company or termination of these contracts would have a material adverse effect on the Company's results of operations. Potential Effect of Shares Eligible for Future Sale on Price of Common Stock. Upon consummation of this offering, 29,590,985 shares of Common Stock will be outstanding. The 4,750,000 shares sold in this offering (other than shares that may be purchased by affiliates of the Company) and 14,429,910 of the remaining outstanding shares will be freely tradeable unless acquired by affiliates of the Company. The remaining 10,411,075 outstanding shares may be resold publicly only following their registration under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an available exemption from registration (such as provided by Rule 144 following a one year holding period for previously unregistered shares). The Company has agreed to register approximately 1,400,000 of these shares within the next 90 days and, in addition, approximately 700,000 of such shares by the end of 1997. In addition, upon completion of this offering, the Company will have outstanding options to purchase up to a total of 4,301,575 shares of Common Stock and 50,000 shares reserved for issuance under its Employee Stock Purchase Plan, virtually all of which shares are registered under the Securities Act for public resale. After their issuance, these shares generally will be freely tradeable by persons not affiliated with the Company unless the Company contractually restricts their resale. Sales, or the availability for sale of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and the future ability of the Company to raise equity capital and complete any additional acquisitions for Common Stock. All directors and executive officers and certain other stockholders of the Company who hold in the aggregate 6,678,305 shares of Common Stock, including outstanding options, have agreed not to sell or otherwise dispose of any of their shares for a period of 90 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. Alex. Brown & Sons Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the Common Stock subject to these lock-up agreements. No Dividends. Sylvan has never declared or paid cash dividends. Sylvan currently expects to retain its earnings for its business and does not anticipate paying dividends at any time in the foreseeable future. The decision whether to apply legally available funds to the payment of dividends on its Common Stock will be made by the Board of Directors from time to time in the exercise of its business judgment, as permitted by the Company's credit facilities. Potential Effects of Certain Anti-Takeover Provisions. Certain provisions of Sylvan's Charter and By-Laws may have the effect of making more difficult an acquisition of Sylvan in a transaction that is not 10 approved by its Board of Directors. For example, the Board of Directors can issue up to 10,000,000 shares of Preferred Stock in one or more series, without further authorization of its stockholders, and Sylvan has a classified Board of Directors. In September 1996, the Sylvan Board of Directors adopted a shareholders rights plan. These Charter and By-Laws provisions and adoption of the shareholders rights plan may have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of Sylvan even though such an attempt might be economically beneficial to Sylvan and its stockholders. 11 USE OF PROCEEDS The net proceeds to the Company from the sale of 1,464,505 shares of the Common Stock being offered hereby are estimated to be approximately $49.4 million ($63.4 million if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $35.50 per share. The Company will also receive $1.4 million of aggregate proceeds from the exercise of the Options. The Company will use the net proceeds for general corporate purposes, which may include the acquisition of complementary businesses. From time to time, the Company evaluates possible acquisitions, but is not currently considering any specific acquisition. The Company intends to invest substantially all of the net proceeds from this offering in interest-bearing, investment-grade obligations pending application thereof in the manner described above. The Company will not receive any proceeds from the sale of the Common Stock being offered by the Selling Securityholders other than the $1.4 million of aggregate proceeds from the exercise of the Options. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock has traded on The Nasdaq National Market since its initial public offering on December 9, 1993. Its trading symbol is SLVN. The high and low trade prices for 1995, 1996 and the first three quarters of 1997 (through July 14) for the Common Stock are set out in the following table. These prices are as reported by Nasdaq, and reflect inter-dealer price quotations, without retail mark-up, mark down or commission and may not necessarily represent actual transactions. All amounts reported have been retroactively restated to reflect the effects of a 3-for-2 stock split which occurred in November 1996.
HIGH LOW ------ ------ 1995 1st Quarter................................................. $13.17 $11.17 2nd Quarter................................................. $14.33 $11.09 3rd Quarter................................................. $21.67 $14.33 4th Quarter................................................. $21.17 $15.33 1996 1st Quarter................................................. $26.17 $18.00 2nd Quarter................................................. $27.50 $21.33 3rd Quarter................................................. $27.50 $18.67 4th Quarter................................................. $33.00 $24.25 1997 1st Quarter................................................. $37.12 $24.04 2nd Quarter................................................. $37.06 $23.14 3rd Quarter (through July 14)............................... $36.75 $32.63
The Company has never paid dividends and does not anticipate paying dividends in the foreseeable future. Payment of dividends is generally prohibited under the Company's existing credit facilities. 12 CAPITALIZATION The following table sets forth: (i) the historical total short-term debt and total capitalization of the Company on March 31, 1997; (ii) supplemental short-term debt and capitalization on that date; and (iii) such supplemental short-term debt and capitalization as adjusted to reflect the sale by the Company of 1,464,505 shares of Common Stock offered hereby (assuming a public offering price of $35.50 per share), after deducting the underwriting discount and estimated offering expenses, the aggregate proceeds from the exercise of the Options and application of the net proceeds therefrom. This table should be read in conjunction with the Company's Historical and Supplemental Consolidated Financial Statements and related Notes thereto and other financial information incorporated by reference in this Prospectus. See "Use of Proceeds."
MARCH 31, 1997 ----------------------------------------- SUPPLEMENTAL HISTORICAL SUPPLEMENTAL(1) AS ADJUSTED(1) ---------- --------------- -------------- (IN THOUSANDS) Short-term debt: Current portion of long-term debt.. $ 1,368 $ 3,056 $ 3,056 Other short-term debt.............. 250 250 250 -------- -------- -------- Total short-term debt............ $ 1,618 $ 3,306 $ 3,306 ======== ======== ======== Long-term debt(2).................... $ 15,819 $ 19,468 $ 19,468 Stockholders' equity: Preferred Stock, $0.01 par value; 10,000,000 shares authorized, no shares issued and outstanding .... -- -- -- Common Stock, $0.01 par value; 40,000,000 shares authorized; 23,579,707 shares issued and outstanding actual; 24,993,707 shares issued and outstanding supplemental; 26,893,707 shares issued and outstanding supplemental as adjusted(3)....... 236 250 269 Additional paid-in capital......... 187,559 187,551 238,352 Unrealized losses on available-for- sale securities................... -- (11) (11) Foreign currency translation ad- justments......................... (358) (358) (358) Retained earnings.................. 14,511 14,448 14,448 -------- -------- -------- Total stockholders' equity....... 201,948 201,880 252,700 -------- -------- -------- Total capitalization........... $217,767 $221,348 $272,168 ======== ======== ========
- -------- (1) On May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding stock of Educational Inroads. Educational Inroads provided contract educational services to school districts in New Jersey and several other states. The Educational Inroads acquisition was accounted for by Sylvan as a pooling-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods prior to the acquisition to include the results of operations, financial position and cash flows of Educational Inroads. As of the date of this Prospectus, the Company has not issued financial statements for a period including the date the acquisition was consummated and, therefore, these restated financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the date the acquisition was consummated, the supplemental consolidated financial statements will become the historical consolidated financial statements of the Company. (2) Includes an $8.1 million liability for Common Stock placed in escrow at the closing of the acquisition of Drake that will be released to the Drake sellers in the third quarter of 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Contingent Matters." (3) Includes the 435,495 shares issuable upon exercise of the Options. See "Underwriting." Excludes 4,930,246 shares issuable upon exercise of all other warrants and stock options outstanding on March 31, 1997, at a weighted average exercise price of $13.59 per share. 13 SELECTED HISTORICAL AND SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA The following combined statements of operations data for the year ended December 31, 1992 are unaudited and consist of the operations of the Sylvan KEE Systems, a Maryland general partnership (the "Partnership"), into which Sylvan Learning Corporation (the "Predecessor") contributed the Sylvan Learning Centers business. On January 26, 1993, Sylvan acquired the Predecessor and dissolved the Partnership. The selected statements of operations data for the year ended December 31, 1993 consists of the results of the Partnership for January 1993 plus Sylvan results for the eleven months ended December 31, 1993. The selected financial data for the years ended December 31, 1994, 1995 and 1996 have been derived from Sylvan's consolidated financial statements which have been audited by Ernst & Young LLP. The selected consolidated financial data below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and the Supplemental Consolidated Financial Statements and Notes thereto incorporated by reference herein. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
PARTNERSHIP AND SYLVAN PARTNERSHIP COMBINED SYLVAN ------------ ------------ ------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ------------ ------------ ----------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 ------------ ------------ -------- -------- --------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues................ $ 20,181 $ 29,622 $ 47,244 $ 87,991 $ 157,116 $ 34,557 $ 44,850 Cost and expenses: Direct costs........... 15,715 22,463 39,160 74,143 126,146 29,620 36,397 General and administrative expenses(2)........... 5,433 6,255 4,998 6,206 8,755 2,069 2,961 Loss on impairment of assets................ -- -- -- 3,316 -- -- -- -------- -------- -------- -------- --------- -------- -------- Total expenses.......... 21,148 28,718 44,158 83,665 134,901 31,689 39,358 -------- -------- -------- -------- --------- -------- -------- Operating income (loss)................. (967) 904 3,086 4,326 22,215 2,868 5,492 Non-operating income (expense).............. (112) (171) 224 391 363 92 (128) Interest income (expense), net......... (307) (999) 152 (960) 1,015 288 591 -------- -------- -------- -------- --------- -------- -------- Income (loss) from continuing operations before income taxes and extraordinary items.... (1,386) (266) 3,462 3,757 23,593 3,248 5,955 Income taxes............ (8) (7) (76) (209) (8,850) (1,469) (2,258) -------- -------- -------- -------- --------- -------- -------- Income (loss) from continuing operations before extraordinary items.................. (1,394) (273) 3,386 3,548 14,743 1,779 3,697 Discontinued operations(3): Loss from operations, net of tax............ (1,700) (375) -- -- -- -- -- Gain on disposal....... 427 580 -- -- -- -- -- -------- -------- -------- -------- --------- -------- -------- Income (loss) from discontinued operations............ (1,273) 205 -- -- -- -- -- -------- -------- -------- -------- --------- -------- -------- Net income (loss) before extraordinary items.... (2,667) (68) 3,386 3,548 14,743 1,779 3,697 Extraordinary items(4).. -- (177) -- -- -- -- -- -------- -------- -------- -------- --------- -------- -------- Net income (loss)...... $ (2,667) $ (245) $ 3,386 $ 3,548 $ 14,743 $ 1,779 $ 3,697 ======== ======== ======== ======== ========= ======== ======== Net income (loss) from continuing operations per share(5)........... $ (0.02) $ 0.22 $ 0.21 $ 0.59 $ 0.07 $ 0.14 ======== ======== ======== ========= ======== ======== Net income (loss) per share(5)............... $ (0.02) $ 0.22 $ 0.21 $ 0.59 $ 0.07 $ 0.14 ======== ======== ======== ========= ======== ======== Weighted average shares outstanding(5)......... 11,553 15,119 15,972 23,582 23,488 25,793 ======== ======== ======== ========= ======== ======== BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents ........... $ -- $ 11,315 $ 3,720 $ 2,529 $ 11,082 $ 3,844 $ 11,902 Available-for-sale securities ............ -- 1,000 2,352 30,379 16,299 22,173 10,081 Net working capital (deficit).............. (2,559) 12,869 11,530 38,317 28,387 42,719 39,912 Intangible assets and deferred contract costs.................. 149 7,000 7,932 82,849 122,932 81,173 120,948 Total assets............ 9,979 32,242 42,499 165,407 250,579 164,609 251,493 Long-term debt and capital leases......... 1,690 2,899 6,168 4,784 27,692 4,114 17,187 Stockholders' or partners' equity (deficit).............. (210) 23,971 31,834 136,464 179,591 139,772 201,948
- -------- See Notes following Selected Supplemental Consolidated Financial Data. 14 SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)
PARTNERSHIP AND SYLVAN PARTNERSHIP COMBINED SYLVAN ------------ ------------ --------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ------------ ------------ --------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------------ ------------ ------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues................ $33,821 $51,519 $68,748 $111,059 $181,936 $41,506 $51,944 Cost and expenses: Direct costs .......... 28,840 44,056 60,388 96,708 150,449 36,423 43,630 General and administrative expense(2)............ 5,433 6,255 4,998 6,206 8,755 2,069 2,961 Loss on impairment of assets................ -- -- -- 3,316 -- -- -- ------- ------- ------- -------- -------- ------- ------- Total expenses......... 34,273 50,311 65,386 106,230 159,204 38,492 46,591 ------- ------- ------- -------- -------- ------- ------- Operating income (loss)................. (452) 1,208 3,362 4,829 22,732 3,014 5,353 Non-operating income (expense).............. 1 (116) 224 391 363 92 (128) Interest income (expense), net......... (594) (1,290) (62) (1,440) 551 142 480 ------- ------- ------- -------- -------- ------- ------- Income (loss) from continuing operations before income taxes and extraordinary items.... (1,045) (198) 3,524 3,780 23,646 3,248 5,705 Income taxes............ (16) (7) (76) (209) (8,850) (1,469) (2,258) ------- ------- ------- -------- -------- ------- ------- Income (loss) from continuing operations before extraordinary items.................. (1,061) (205) 3,448 3,571 14,796 1,779 3,447 Discontinued operations(3): Loss from operations, net of tax............ (1,700) (375) -- -- -- -- -- Gain on disposal....... 427 580 -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Income (loss) from discontinued operations............ (1,273) 205 -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Net income (loss) before extraordinary items.... (2,334) -- 3,448 3,571 14,796 1,779 3,447 Extraordinary items(4).. -- (177) -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Net income (loss)(6)... $(2,334) $ (177) $ 3,448 $ 3,571 $ 14,796 $ 1,779 $ 3,447 ======= ======= ======= ======== ======== ======= ======= Net income (loss) from continuing operations per share(5)........... $ (0.02) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12 ======= ======= ======== ======== ======= ======= Net income (loss) per share(5)(6)............ $ (0.01) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12 ======= ======= ======== ======== ======= ======= Weighted average shares outstanding(5)......... 12,967 16,533 17,386 24,996 24,901 27,207 ======= ======= ======== ======== ======= ======= BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents............ $ 673 $11,499 $ 4,366 $ 2,903 $ 11,198 $ 4,272 $12,789 Available-for-sale securities............. 127 1,248 2,537 30,735 16,449 22,725 10,730 Net working capital (deficit).............. (3,302) 12,665 13,166 39,407 29,603 44,580 40,228 Intangible assets and deferred contract costs.................. 149 7,000 7,932 82,849 122,932 81,173 120,948 Total assets............ 18,446 42,003 50,046 174,070 259,590 174,200 260,380 Long-term debt and capital leases......... 5,578 6,640 9,814 9,854 32,228 10,519 22,524 Stockholders' or partners' equity....... 326 24,563 32,481 137,148 180,323 141,206 201,880
- ------- 15 - -------- (1) Prior to February 1, 1991, the Sylvan Learning Centers business was conducted by Sylvan Learning Corporation (the "Predecessor"). On February 1, 1991, the Predecessor contributed the Sylvan Learning Centers business to Sylvan KEE Systems, a Maryland general partnership (the "Partnership") in exchange for a 50% partnership interest, and Sylvan contributed its computer training software development business to the Partnership in exchange for the other 50% partnership interest. On January 26, 1993, Sylvan acquired the Predecessor and dissolved the Partnership. On September 3, 1993, Sylvan sold its computer training software development business. During 1994, Sylvan acquired by mergers all of the outstanding stock of Learning Services, Inc. ("LSI") and Loralex Corporation ("Loralex"). These companies owned and operated a total of nine Sylvan Learning Centers located in the Northeast United States and Florida. On February 17, 1995, Sylvan acquired by merger all of the outstanding stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc. (collectively, "READS"), a Philadelphia-based provider of remedial, education and a variety of consulting services to school districts, county-wide educational agencies and municipalities in the Eastern United States. The READS, Loralex and LSI acquisitions have been accounted for by Sylvan as poolings-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods presented to include the results of operations of READS, Loralex and LSI. Effective September 30, 1995 Sylvan acquired Drake Prometric, L.P. ("Drake"), a leading provider of computer-based certification, licensure and assessment testing. The transaction was accounted for using the purchase method of accounting, and Sylvan's results of operations from October 1, 1995 include the operations of Drake. Effective December 1, 1996, Sylvan acquired Wall Street, a European-based franchisor and operator of learning centers that teach the English language. This transaction was accounted for using the purchase method of accounting and Sylvan's results of operations from December 1, 1996 include the operations of Wall Street. Sylvan paid $4.9 million of the $20.1 million purchase price in cash and the remainder in 714,884 shares of Common Stock. On May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding common stock of Educational Inroads. Educational Inroads provided contract educational services to school districts in New Jersey and several other states. The Educational Inroads acquisition has been accounted for by Sylvan as a pooling-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods prior to the acquisition to include the results of operations of Educational Inroads. Educational Inroads generated revenues of $24.8 million in 1996. As of the date of this Prospectus, the Company has not issued financial statements for a period including the date the Educational Inroads acquisition was consummated, and, until that time, these restated financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the consummation date of the Educational Inroads acquisition, the supplemental consolidated financial statements will become the historical consolidated financial statements of the Company. (2) The Company has reclassified certain operating expenses previously included in general and administrative expense to direct costs. This change has been reflected for all periods presented. (3) Represents Sylvan's computer training software development business which was sold in September 1993 and a Canadian computer training business, 80.1% of which was sold in 1992. (4) Represents the $350,000 gain on extinguishment of a $3.5 million debt to Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0 million of notes payable to stockholders, each recorded in 1993. (5) All share and per share data have been restated to retroactively reflect a 3-for-2 stock split of the Company's common stock for stockholders of record on November 7, 1996. (6) Reducing compensation expense relating to Educational Inroads stockholders to reflect their post-acquisition contractual compensation levels and eliminating non-recurring acquisition transaction costs would result in supplemental pro forma net income and net income per share of $16,266,000 and $0.65, respectively, in 1996 and $4,017,000 and $0.14, respectively in the first quarter of 1997. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained herein that are not historical facts, including but not limited to, statements regarding the anticipated impact of uncollectible accounts receivable on future liquidity, expenditures to develop licensing and certification tests under existing contracts, the Company's contingent payment obligations relating to the PACE and Drake acquisitions, future capital requirements, potential acquisitions and the Company's future development plans are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: changes in the financial resources of the Company's clients, timing and extent of testing clients' conversions to computer-based testing, revenues earned by the Company's PACE and Drake operations, the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; general business and economic conditions; and the other risk factors described in the Company's reports filed from time to time with the Commission. The discussion and analysis below is based on the Company's Supplemental Consolidated Financial Statements and related Notes thereto included in the Company's Current Report on Form 8-K dated July 15, 1997 and incorporated herein by reference. OVERVIEW Sylvan generates revenues from three business segments: core educational services which primarily consist of franchise sales, royalties and Sylvan- owned Learning Center revenues; testing services, which consist of computer- based testing fees paid to Sylvan; and contract educational services, which consist of revenues attributable to providing supplemental and remedial education services to public and non-public schools and major corporations. The following selected supplemental segment data for the years ended December 31, 1994, 1995 and 1996 is derived from the Company's audited supplemental consolidated financial statements.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- --------------- 1994 1995 1996 1996 1997 ------- -------- -------- ------- ------- (IN THOUSANDS) Operating revenue: Core educational services........... $20,016 $ 26,063 $ 36,799 $ 7,213 $ 9,231 Contract educational services....... 35,067 50,430 58,186 16,493 17,574 Testing services.................... 13,665 34,566 86,951 17,800 25,139 ------- -------- -------- ------- ------- Total revenue..................... $68,748 $111,059 $181,936 $41,506 $51,944 ======= ======== ======== ======= ======= Direct costs: Core educational services........... $13,255 $ 18,675 $ 25,557 $ 5,605 $ 6,829 Contract educational services....... 33,108 47,685 53,373 15,331 16,168 Testing services.................... 14,025 30,348 71,519 15,487 20,633 ------- -------- -------- ------- ------- Total direct costs................ $60,388 $ 96,708 $150,449 $36,423 $43,630 ======= ======== ======== ======= =======
RESULTS OF OPERATIONS Comparison of results for the quarter ended March 31, 1997 and the quarter ended March 31, 1996. Revenue. Total revenues increased 25%, from $41.5 million in the first quarter of 1996 to $51.9 million in the first quarter of 1997. This increase resulted from higher revenues in all business segments -- core educational services, testing services and contract educational services. 17 Core educational services revenues increased 28%, from $7.2 million in the first quarter of 1996 to $9.2 million in the first quarter of 1997. Franchise royalties increased $0.5 million or 19%, to $3.0 million in the first quarter of 1997 compared to the same period in 1996. This increase in franchise royalties was due to the net increase of 18 Learning Centers opened in new territories and three Learning Centers opened in existing franchise territories in the first quarter of 1997, combined with an overall 14% increase in revenues at existing Learning Centers open for more than one year as of March 31, 1997. Franchise sales fees increased to $0.7 million in the first quarter of 1997 compared to $0.2 million in the same period in 1996. In the first quarter of 1997, five franchise Learning Center licenses and a $0.5 million area development agreement were sold, compared to six franchise Learning Center licenses sold in the first quarter of 1996. The ability of Sylvan to generate fees in the future from the sale of area development agreements or franchise Learning Center licences cannot be assured. Revenues from Company-owned Learning Centers increased 44%, from $3.4 million in the first quarter of 1996 to $4.9 million in the first quarter of 1997. Of the increase, $0.9 million resulted from the acquisition of 11 Learning Centers from two franchisees during the fourth quarter of 1996. Revenue growth related to student enrollment increases at Learning Centers operating more than one year as of March 31, 1997 resulted in $0.6 million of the increase. Contract educational services revenues increased 7%, from $16.5 million in the first quarter of 1996 to $17.6 million in the first quarter of 1997. This was due to both greater volumes of training and increases in the number of public and non-public school contracts. Testing services revenues increased 41%, from $17.8 million in the first quarter of 1996 to $25.1 million in the first quarter of 1997. The increase resulted primarily from the Company's acquisition of Wall Street during the fourth quarter of 1996, increased volumes from IT, professional licensure and certification clients and increased services under the ETS contracts. Cost and Expenses. Total direct costs increased 20%, from $36.4 million in the first quarter of 1996 to $43.6 million in the first quarter of 1997 but decreased as a percentage of total revenues from 88% in the first quarter of 1996 to 84% in the first quarter of 1997. Core educational services expense increased 22% from $5.6 million to $6.8 million in the first quarter of 1997. Company-owned Learning Center services expense increased 41% from $3.0 million in the first quarter of 1996 to $4.3 million in the first quarter of 1997 but decreased as a percentage of Company-owned Learning Center services revenue from 90% in the first quarter of 1996 to 88% in the first quarter of 1997. $1.1 million of the increase related to the acquisition of 11 Learning Centers from two franchisees. The remaining increase in expenses was primarily for advertising, labor and other Learning Center expenses associated with increased enrollment. Expenses for Learning Centers operating more than one year as of March 31, 1997 accounted for $0.2 million of the increase and represented 38% of incremental same-Learning Center revenue. Contract educational services expense increased 5%, from $15.3 million in the first quarter of 1996 to $16.2 million in the first quarter of 1997 but decreased as a percentage of contract educational services revenues from 93% in the first quarter of 1996 to 92% in the first quarter of 1997. Operating expenses for PACE accounted for $0.3 million of this increase. Testing services expense increased 33%, from $15.5 million in the first quarter of 1996 to $20.6 million in the first quarter of 1997 but decreased as a percentage of testing services revenues from 87% in the first quarter of 1996 to 82% in the first quarter of 1997. The expense in the first quarter of 1996 included $1.2 million of non-recurring charges related to the Drake acquisition. Therefore, recurring expenses in the first quarter of 1996 were 80% of testing services revenues for that period. The increase in recurring testing services expense as a percentage of testing services revenues was primarily a result of increased salary and other operating costs resulting from the integration of test delivery systems and growth in business that occurred after the first quarter of 1996 and expected growth in business volumes in 1997. 18 General and administrative expense increased 43%, from $2.1 million in the first quarter of 1996 to $3.0 million in the first quarter of 1997 and increased as a percentage of total revenues from 5% in the first quarter of 1996 to 6% in the first quarter of 1997. The increase resulted from increases in administrative staff salaries and expenses as well as increases in rent expense related to the Company's new headquarters. The Company's effective tax rate decreased from 45% in the first quarter of 1996 to 40% in the first quarter of 1997 mainly because a greater portion of the Company's earnings were generated in foreign jurisdictions having lower tax rates than the United States. Comparison of results for the year ended December 31, 1996 to the year ended December 31, 1995. Revenues. Total revenues increased 64%, from $111.1 million in 1995 to $181.9 million in 1996. This increase resulted from greater revenues in all business segments--core educational services, testing services and contract educational services. Core educational services revenues increased 41%, from $26.1 million in 1995 to $36.8 million in 1996. Franchise royalties increased 21%, from $9.2 million in 1995 to $11.2 million in 1996. This increase in franchise royalties was due to an overall 19% increase in revenues at Learning Centers that had been operating for more than one year as of December 31, 1996 combined with a net increase of 49 Learning Centers opened during 1996. Franchise sales fees increased 49%, from $2.1 million in 1995 to $3.2 million in 1996. During 1996, there were four area development agreements sold for $1.7 million and 38 franchise Learning Center licenses sold, compared to two area development agreements sold for $550,000 and 43 Learning Center licenses sold during 1995. Revenues from Company-owned Learning Centers increased 61%, from $11.5 million in 1995 to $18.5 million in 1996. Revenue growth related to increased student enrollment at Learning Centers that had been operating for more than one year as of December 31, 1996 resulted in $3.4 million, or 30%, of the increase from 1995 to 1996. Approximately $3.2 million of the revenue increase resulted from the acquisition of 11 Learning Centers from two franchisees. The opening of one new Learning Center during 1996 resulted in an additional $350,000 of revenues during 1996. Product sales increased 23%, from $3.2 million in 1995 to $3.9 million in 1996. This increase resulted from overall student enrollment increases at franchised Learning Centers. Contract educational services revenues increased 15%, from $50.4 million in 1995 to $58.2 million in 1996. Revenues from public and non-public school contracts accounted for $5.9 million of the increase, and greater revenues from PACE accounted for $1.9 million of the increase. The PACE increase primarily resulted from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995, and as such the 1995 revenues of Sylvan only reflect ten months of PACE revenues. Revenues from public and non-public school contracts executed during 1996 contributed $2.2 million to 1996 revenues. Revenues from public and non-public school contracts executed during 1995 increased by $4.6 million in 1996, primarily because a full year of revenues were generated under these contracts during 1996. Testing services revenues increased 152%, from $34.6 million in 1995 to $87.0 million in 1996. The significant increase in testing services revenues resulted primarily from the September 1995 acquisition of Drake, which provided increased revenues from IT clients. Increased services under ETS contracts, including the cost-plus international contract and the Graduate Record Exam (the "GRE"), and other professional testing revenue increases, including NASD testing, which began in February 1996, also contributed to the increase in testing services revenues. 19 Cost and Expenses. Total direct costs increased 56%, from $96.7 million in 1995 to $150.4 million in 1996 but decreased as a percentage of total revenues from 87% in 1995 to 83% in 1996. Core educational services expense increased 37% from $18.7 million in 1995 to $25.6 million in 1996. Franchise services expense increased 11%, from $5.9 million in 1995 to $6.5 million in 1996 but decreased as a percentage of franchise royalties and sales revenues from 52% in 1995 to 46% in 1996. The increased margin in 1996 primarily related to the effects of leveraging the fixed costs of supporting this line of business over a larger revenue base. Company-owned Learning Center expense increased 55%, from $10.4 million in 1995 to $16.1 million in 1996 but decreased as a percentage of Company-owned Learning Center services revenues from 90% in 1995 to 87% in 1996. Of the increase, $3.1 million related to the acquisition of 11 Learning Centers. The remaining increase primarily resulted from advertising, labor and general overhead associated with increased enrollment at Learning Centers that had been operating prior to 1996. Contract educational services expense increased 12%, from $47.7 million in 1995 to $53.4 million in 1996 but decreased as a percentage of contract educational services revenues from 95% in 1995 to 92% in 1996. The decline in these expenses as a percentage of contract educational services revenues resulted from increased revenues without corresponding increases in overhead. Operating expenses for public and non-public school contracts increased $4.6 million during 1996, while operating expenses for PACE increased $1.1 million during the same period. The PACE increase resulted from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995, and as such the 1995 results only reflect ten months of PACE results. Testing services expense increased 136%, from $30.3 million in 1995 to $71.5 million in 1996 but decreased as a percentage of testing services revenue from 88% in 1995 to 82% in 1996. The increased expense resulted primarily from the acquisition of Drake and the increased registration and delivery costs associated with an increased volume of tests. Testing services expense in 1996 included $2.4 million of amortization of contract rights related to the Drake acquisition. Testing services expense in 1995 included $4.1 million of amortization of contract rights, imputed interest and salary termination charges related to the Drake acquisition. Excluding non-recurring charges, testing services expense, as a percentage of testing services revenues, increased from 76% in 1995 to 79% in 1996. The principal reasons for this percentage increase in 1996 are the full year of amortization of goodwill associated with the Drake acquisition and increased staffing levels required to meet the growth in business volumes that occurred during 1996 and expected growth in business activity in 1997. General and administrative expense increased 41%, from $6.2 million in 1995 to $8.8 million in 1996 but decreased as a percentage of total revenues from 6% in 1995 to 5% in 1996. The percentage decline resulted from increased revenues from all segments without corresponding increases in overhead. There was $1.4 million of net interest expense in 1995 and $0.6 million of net interest income in 1996. This change resulted primarily from the $1.1 million of interest expense imputed on the purchase of Drake and an increase in the average invested cash amounts in 1996 compared to 1995. The Company's effective tax rate increased from 6% in 1995 to 37% in 1996. This increase was primarily caused by a decrease in 1995 in the amount of the valuation allowance for deferred tax assets, consisting principally of net operating loss carryforwards. Comparison of results for the year ended December 31, 1995 to the year ended December 31, 1994. Revenues. Total revenues increased 62%, from $68.7 million in 1994 to $111.1 million in 1995. This increase resulted from higher revenues in all business segments--core educational services, testing services and contract educational services. 20 Core educational services revenues increased 30%, from $20.0 million in 1994 to $26.1 million in 1995. Franchise royalties increased $1.3 million, or 16%, for 1995. This increase in franchise royalties was due to a net increase of 31 new Learning Centers in new territories and 15 new Learning Centers opened in existing franchise territories) in 1995, combined with an overall 14% increase in revenues at existing Learning Centers open for more than one year as of December 31, 1995. Franchise sales fees increased 70%, from $1.3 million in 1994 to $2.1 million in 1995. In 1995, there were two area development agreements sold for $0.6 million and 43 franchise Learning Center licenses sold, as compared to 31 franchise Learning Center licenses and one $0.1 million area development agreement sold in 1994. Revenues from Company-owned Learning Centers increased 34%, from $8.6 million in 1994 to $11.5 million in 1995. The increase primarily resulted from same-Learning Center revenue growth related to student enrollment increases. Product sales increased $1.0 million or 43%, to $3.2 million for 1995. Approximately $0.3 million of the increase in product sales was due to sales of new versions of math and algebra programs (which began in the second half of 1994) with the remainder resulting from overall increases in student enrollment. Contract educational services revenues increased 44%, from $35.1 million in 1994 to $50.4 million in 1995. Revenues from public and non-public school contracts increased $7.0 million in 1995. This increase was due primarily to $2.8 million in revenues from public and non-public school contracts obtained during 1995 and by a $4.2 million increase in revenues from public and non- public school contracts existing in 1994. Revenues from PACE, acquired effective February 28, 1995, accounted for $8.4 million of the increase. Testing services revenues increased 153%, from $13.7 million in 1994 to $34.6 million in 1995. Revenues from Drake, acquired as of September 30, 1995, accounted for $11.7 million of the increase and consisted primarily of revenues from IT clients. Revenues from the ETS international contract accounted for $3.7 million of the increase resulting primarily from the fact that the contract was in effect during the entire 1995 period compared to six months in 1994. During 1995, Sylvan sold the exclusive development rights for testing centers in India for $0.5 million and in the Middle East for $0.5 million. The remaining increase in testing services revenues for 1995 was attributable to a $1.7 million increase in revenues from the NCLEX test for the licensing of registered and practical nurses, which began in April 1994, $0.8 million of revenue from test development fees for ASVAB (the Armed Services Vocational Aptitude Battery tests) and other test volume increases in the GRE, PRAXIS and FAA tests. Cost and Expenses. Total direct costs increased 60%, from $60.4 million in 1994 to $96.7 million in 1995 but decreased as a percentage of total revenues from 88% in 1994 to 87% in 1995. Core educational services expense increased 41%, from $13.3 million in 1994 to $18.7 million in 1995. Franchise services expense increased 53%, from $3.8 million in 1994 to $5.9 million in 1995 and increased as a percentage of franchise royalties and sales revenues from 42% in 1994 to 52% in 1995. The reduced margin in 1995 primarily relates to increased marketing and advertising costs incurred to produce a new national advertising campaign. Company-owned Learning Center expense increased 35%, from $7.7 million in 1994 to $10.4 million in 1995 and increased as a percentage of Company-owned Learning Center services revenues from 89% in 1994 to 90% in 1995. The increased expenses were primarily advertising, labor and general overhead associated with increased Learning Center enrollment. Contract educational services expense increased 44%, from $33.1 million in 1994 to $47.7 million in 1995 and increased as a percentage of contract educational services revenues from 94% in 1994 to 95% in 1995. Operating expenses for public and non-public school contracts increased $7.1 million during 1995, while operating expenses for PACE accounted for $7.5 million of the increase during the same period. 21 The increase in contract educational services expense as a percent of related revenues during 1995 resulted from the following factors: (i) 1994 included consulting fee revenues of $0.5 million with no associated costs; and (ii) higher total cost estimates relating to READs contracts. Testing services expense increased 116%, from $14.0 million in 1994 to $30.3 million in 1995 but decreased as a percentage of total testing service revenues from 103% in 1994 to 88% in 1995. The decrease in testing services expense as a percentage of testing services revenues was attributable to several factors, including the fixed and semi-variable nature of test delivery and registration costs included in this segment. In addition, Sylvan recognized $1.0 million of testing revenues in 1995 related to the sale of exclusive development rights for testing centers in India and the Middle East and $0.8 million of testing revenues related to the contract to develop the ASVAB test. These revenues have significantly higher margins than fees for test delivery and registration services. Testing services expense during the fourth quarter of 1995 included amortization expense of $2.1 million related to contract rights recorded upon the acquisition of Drake and $1.1 million of non-recurring interest expense imputed on the unpaid purchase price from September 30, 1995 to December 13, 1995, the closing date for the acquisition. General and administrative expense increased 24%, from $5.0 million in 1994 to $6.2 million in 1995 but decreased as a percentage of total revenues from 7% in 1994 to 6% in 1995. The percentage decline resulted from increased revenues from all segments without corresponding increases in overhead. Interest expense of $1.4 million in 1995 was primarily attributable to $1.1 million of interest expense imputed on the purchase of Drake discussed above. During 1995, Sylvan recorded a non-recurring loss on impairment of assets of $3.3 million associated with the Drake acquisition. The Drake acquisition and resulting consolidation of operations resulted in the determination that certain assets in the Sylvan division were not recoverable and, therefore, were written down to their realizable value. During 1995, the Company reduced its valuation allowance relating to deferred income tax assets by $3.1 million. Approximately $1.1 million of this reduction was recorded through the allocation of the Drake purchase price. The remaining decrease of $2.0 million reduced the Company's effective tax rate by 54%. The Company's effective tax rate in 1995 and 1994 was substantially below the U. S. statutory income tax rate of 34% due to the recognition of income tax benefits from net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $0.4 million for the first quarter of 1997 compared to $1.8 million used by operating activities in the first quarter of 1996. Cash flow from operations before working capital changes increased from $5.5 million in the first quarter of 1996 to $7.6 million in the first quarter of 1997. This increase primarily resulted from significant overall growth in income from operations before depreciation and amortization and other non-cash charges. The Company's investment in working capital has significantly reduced cash flows provided by operations, particularly as a result of the growth in accounts and notes receivable and reductions in accounts payable and accrued expenses. The increase in accounts receivable related to a 25% increase in total revenues in the first quarter of 1997 compared to the first quarter of 1996. The Company expects this trend to continue as its revenues increase. Of the $3.5 million operating cash flow reduction attributable to an increase in accounts receivable, $2.4 million was related to the ETS international testing contract and the remainder to higher accounts receivable levels in all business segments. The increase in testing services accounts receivable resulted from an 22 increase in billings and longer collection periods under the international testing contract. The Company experiences varying collection periods for accounts receivable in its three operating divisions. The Company believes that uncollectible accounts receivable will not have a significant effect on future liquidity, as a significant portion of its accounts receivable are due from enterprises with substantial financial resources and governmental units. During the first quarter of 1997, the Company generated net proceeds of $6.2 million from the sale of available-for-sale securities. At March 31, 1997, the Company's portfolio of available for-sale securities had a market value equal to $10.7 million. The Company continues to incur expenditures for additions to property and equipment, which totaled $2.5 million in the first quarter of 1997. These additions primarily consist of furniture and equipment for general business expansion, including expenditures for new public and non-public school classrooms and equipment needed for Testing Centers operated by the Company. Under the international ETS testing contract, the Company is reimbursed for overseas equipment expenditures as that equipment is depreciated. This reimbursement includes a financing charge over the reimbursement period. The Company has a $15.0 million unsecured revolving line of credit which either expires, or the outstanding balance of which can be converted into a two year term loan, at the option of the Company on May 31, 1998. The credit line and the term loan, when converted, both bear interest at a floating rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.15% per annum (6.84% at March 31, 1997). At March 31, 1997, the balance on the credit line was $7.2 million, and at June 30, 1997, there was no balance outstanding. During the first quarter of 1997, the Company received $0.9 million as a result of the exercise of stock options and warrants to purchase 298,608 shares of Common Stock. During the first quarter of 1997, the Company paid $4.7 million of the $4.9 million cash portion of the Wall Street purchase price. Pursuant to the Caliber Learning Network stockholders' agreement, Sylvan is obligated to lend or guarantee up to $3.0 million of debt for Caliber and anticipates investing up to an additional $8.0 million in Caliber over the next 12 to 24 months. In March 1997, the Company and NEC executed a definitive agreement pursuant to which Sylvan was to acquire NEC. In May 1997, NEC accepted the offer of Harcourt General, Inc. to acquire all of the stock of NEC, resulting in the termination of its agreement with the Company and the payment by NEC to the Company of the $30.0 million termination fee required by that agreement. In connection with the terminated acquisition, the Company incurred approximately $1.5 million of direct expenses. Therefore, the termination fee resulted in a $28.5 million net positive impact on the Company's cash resources in the second quarter of 1997. Subsequent to receipt of the termination fee, Sylvan invested $3.0 million in cash in a non profit corporation formed to fund the Sylvan Prometric division marketing programs. The Company believes that the remaining cash from the termination fee, the net proceeds of this offering, and cash provided by operations and other available financial resources will be sufficient on a short-term basis and over the next 24 months to fund continued expansion of the business, including working capital needs and expected investments in property and equipment. CONTINGENT MATTERS The PACE acquisition agreement requires Sylvan to make a contingent payment equal to 6.5 times PACE's 1997 earnings before interest and income taxes ("EBIT"); or, if PACE's EBIT is less than $2.7 million in 1997, the PACE shareholders may elect to have the payment calculation based on EBIT in either 1998 or 1999. Management believes it is likely that the PACE shareholders will elect to calculate the contingent payment based on PACE's 1997 EBIT. The contingent payment is payable partially in cash and partially in Common Stock. The amount of any contingent payment to the PACE shareholders will be 23 capitalized as goodwill when paid and amortized over the remaining estimated recovery period. PACE is expected to meet its cash needs from its operations. PACE provides most of its services to large corporations with favorable credit histories. PACE operations are not capital intensive and historically have generated positive cash flow from operations. The Drake acquisition agreement provides for future contingent payments based on achievement of certain specified revenue targets in 1997 and 1998 (or 1999 at election of the Drake owners). The contingent payment of up to $40.0 million, if earned, is payable at least 12.5% in cash, with the remainder in shares of Common Stock. The amount of any contingent payment will be capitalized as goodwill when paid and amortized over the remaining useful life of the goodwill as estimated when the contingent payment is paid. Based on testing services revenues generated in 1996, 357, 143 of the 1,785,714 shares of Common Stock that were placed in escrow at the closing of the acquisition have been earned and, accordingly, will be released in the third quarter of 1997. At December 31, 1996, $8.1 million of goodwill relating to the earned shares was recorded and will be amortized over the 24-year remaining life of the goodwill. EFFECTS OF INFLATION Inflation has not had a material effect on Sylvan's revenues and income from continuing operations in the past three years. Inflation is not expected to have a material future effect. QUARTERLY FLUCTUATIONS Sylvan's revenues and operating results have varied substantially from quarter to quarter and may continue to vary, depending upon the timing of implementation of new computer-based testing contracts and contracts funded under Title I or similar programs. Based on Sylvan's limited experience, revenues generated by computer-based testing services may vary based on the frequency or timing of delivery of individual tests and the speed of test administrators' conversion of tests to computer-based format. Revenues or profits in any period will not necessarily be indicative of results in subsequent periods. 24 BUSINESS Sylvan is a leading international provider of educational and testing services. The Company delivers a broad array of supplemental and remedial educational services and computer-based testing through three principal divisions. The Core Educational Services division designs and delivers individualized tutorial services to school-age children and adults at its 642 franchised and Company-owned Sylvan Learning Centers. Sylvan Prometric, the Company's testing services division, administers computer-based tests for major organizations, corporations, professional associations and governmental agencies through its worldwide network of Testing Centers. The Contract Educational Services division provides Sylvan's core educational services under federal and state funding programs to more than 9,500 students in 86 public schools and more than 40,000 students in 846 non-public schools (including Educational Inroads) and provides on-site educational and training services to employees of large corporations. Since 1994, the Company has substantially expanded its business through a combination of internal growth and acquisitions and has increased revenues and operating income from $68.7 million and $3.4 million, respectively, in 1994 to $181.9 million and $22.7 million, respectively, in 1996. Sylvan's 1996 systemwide revenues were approximately $310.3 million, consisting of $165.1 million from core educational services ($139.5 million from franchised Learning Centers and $25.6 million from Company--owned Learning Centers, product sales and franchise sales fees), $87.0 million from testing services and $58.2 million from contract educational services. STRATEGY Sylvan's objective is to be the leading provider of lifelong educational services to families, schools and industry worldwide. The key components of Sylvan's strategy include: . CAPITALIZING ON ITS WORLDWIDE DISTRIBUTION NETWORK. Sylvan has built a global network of more than 2,000 Learning and Testing Centers throughout the United States and 95 foreign countries. Through this network, Sylvan currently provides remedial and enrichment educational services to more than 125,000 students and delivers more than 1.4 million computer-based tests worldwide annually. Sylvan's management will continue to focus on expanding its network to capitalize on the increasing number of educational products created by educators, schools, professional associations and business organizations. In addition, to maximize the benefits of Sylvan's extensive distribution network, the Company is developing innovative products and services for delivery in existing Learning Center locations. Some examples of these new products include pre-school learning programs; after-school learning programs developed in partnership with the National Geographic Society; and Sylvan@Home, an Internet-based product using the same concepts taught at traditional Sylvan Learning Centers. . DEVELOPING BRAND RECOGNITION AND LOYALTY. Management will continue to focus on making Sylvan synonymous with high quality, consistently delivered educational services and products which provide quantifiable results. The Company and its network of franchisees continues to develop the Sylvan brand name by spending significant resources on national advertising for both its educational and computer-based testing services. In 1997, Sylvan and its franchisees intend to spend an aggregate of approximately $25.0 million on advertising nationwide. In addition, Sylvan has strengthened its brand identity by expanding the scope of its products and services through partnerships with highly regarded academic institutions and professional associations. . CONTINUING PARTNERSHIPS WITH THE EDUCATIONAL ESTABLISHMENT. Sylvan seeks to enhance its educational service offerings by partnering with respected institutions in the educational field. In addition to its relationships with ETS and the Baltimore City Public Schools, the Company recently entered into an agreement with the National Geographic Society to provide after-school educational programs. . FOCUSING ON COMPUTER-BASED TESTING. Sylvan's international computer-based testing network gives Sylvan unique access to students at critical points throughout their continuing educational process. The increasing levels of education demanded in the United States make formal 25 testing/accreditation a key component of academic and professional development. Sylvan's established computer-based testing network uniquely positions the Company to participate in the increasing demand for computer-based testing. Moreover, its ongoing relationships with educators, professional associations and educational institutions developing and requiring these tests allows Sylvan's access to students at key junctures in their educational progression. This access provides Sylvan a unique platform from which it can extend its educational products and services for those using its testing services. . INCORPORATING STATE-OF-THE-ART TECHNOLOGY INTO THE DISTRIBUTION PROCESS. Sylvan management recognizes that technology is changing the way in which learning and testing occurs. To this end, Sylvan is pioneering the development of distance learning and testing networks utilizing state-of-the- art satellite, video-conferencing, computer network and internet/intranet technology. In addition, the Company regularly evaluates opportunities to create new channels of distribution for its products and services using information technology. GROWTH STRATEGY The Company's growth strategy includes the following key elements: . CONTINUE TO STRENGTHEN CORE EDUCATIONAL SERVICES. Management intends to continue to strengthen Sylvan's core educational services and the network of Learning Centers and the marketing of these core services. The Company also intends to increase the number of satellite Learning Centers in existing franchised territories and to sell franchises in new territories both domestically and internationally. The Company intends to continue broadening the age range of children participating in Sylvan programs by emphasizing offerings in study skills, preparation and pre-school learning programs and believes it can increase the length of time students stay in Sylvan programs by improving the marketing of the variety of program offerings such as the Sylvan Extended Day Program and by emphasizing to parents the program length necessary to achieve specific goals. . CONTINUE TO EXPAND COMPUTER-BASED TESTING SERVICES. The Company intends to continue to expand its computer-based testing services in academic, professional and IT certification, both domestically and internationally. Sylvan has established an international network of 1,616 computer-based testing centers through which Sylvan delivered more than 1.4 million tests in 95 countries during 1996. . CONTINUE TO EXPAND SERVICES UNDER THE TITLE I PROGRAM. The Company intends to continue to market its services to major school districts and education departments in order to gain additional Title I or similar contracts for both public and nonpublic schools and to increase the number of public and nonpublic schools served under existing contracts. The Company acquired Educational Inroads, READS and other Title I and similar contracts in furtherance of this strategy. . CONTINUE TO EXPAND SERVICES TO THE CORPORATE WORKPLACE AND FOR OTHER ADULT EDUCATION. The Company also provides educational services to adults in the corporate workplace through PACE, the Sylvan-At-Work program and in the near future through Caliber Learning Network. PACE and the Sylvan-at-Work program are provided to large corporations throughout the United States, including Ford Motor Company, International Business Machines Corp., BankOne, General Motors Corporation, AT&T Corporation, Motorola, Inc., Texas Instruments Incorporated and Martin Marietta Energy Systems, Inc. Caliber Learning Network was formed for the purpose of becoming a worldwide distribution network equipped with satellite-based video conference computer network capabilities that will be targeted to corporations, universities and professional continuing education associations. . CONTINUE TO EXPAND THROUGH ACQUISITIONS. A key component of the Company's growth strategy is to pursue strategic acquisitions that expand and complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such possible acquisitions. In the past three years, the Company has 26 acquired Loralex, LSI, READS, PACE, Drake, Wall Street and Educational Inroads in furtherance of this strategy. CORE EDUCATIONAL SERVICES: SYLVAN LEARNING CENTERS Sylvan is widely recognized as a provider of high quality educational services with consistent, quantifiable results and has delivered its core educational services to more than 1,000,000 students primarily in third through eighth grades during the past 17 years. The Company's Core Educational Services division provides supplemental instruction in reading, mathematics and reading readiness, featuring an extensive series of standardized diagnostic tests, individualized instruction, a student motivational system and continued involvement from both parents and the child's regular school teacher. Typically, a parent contacts a Sylvan Learning Center because the parent believes that his or her child may have insufficient reading or mathematics skills. Parents learn about Sylvan from the Company's media advertising, from a referral from another parent or from school personnel. Learning Center personnel ask the parent to bring the student to the Learning Center to complete a series of standardized diagnostic tests and to receive educational consultation. Approximately 35% of phone inquiries result in a visit to a Learning Center. The Learning Center's Sylvan-trained educators, all of whom are certified teachers, use test results to diagnose students' weaknesses and to design an individual learning program for each student. After the initial testing and consultation, the Company estimates that more than 90% of parents enroll the student in a full course of study. The program typically requires four to six months to complete and comprises approximately 36 to 60 hours of instruction. Franchise Operations. As of May 31, 1997, there were a total of 642 Learning Centers in 49 states, five Canadian provinces, Hong Kong, South Korea and Guam operated by the Company or its franchisees. As of that date, there were 450 franchisees operating 601 Sylvan Learning Centers, with the Company owning and operating an additional 41 Learning Centers. During the first five months of 1997, 25 franchised Learning Centers were opened, three were closed, and the Company acquired two. 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 income in the area. Most Learning Centers are located in suburban areas and have approximately 10 employees, two of whom are typically full-time employees and eight of whom are part-time instructors. The cost to open a typical franchised Learning Center ranges from approximately $79,000 to $145,000, including the franchise license fee, furniture, equipment and an initial supply of certain items required to be purchased under the Company's franchise agreement. The Company actively manages its franchise system. The Company requires franchisees and their employees to attend two weeks of initial training in Learning Center operations and Sylvan's educational programs. The Company also offers franchisees continuing training each year. The Company employs field operations managers that act as "consultants" to provide assistance to franchisees in technology implementation, business development, marketing, education and operations. These employees also facilitate regular communications between franchisees and the Company. Sylvan operates a quality assurance review program to maintain the quality of Sylvan Learning Centers. Sylvan's field operations managers confirm franchisee compliance with the Company's standards, including training requirements, exclusive use of approved educational materials and programs, correct administration of testing materials, proper execution of supervisory procedures, sufficient time spent in parent/teacher conferences, staffing and Learning Center appearance. Sylvan's consultants counsel franchisees that fail to meet the Company's quality or financial performance standards and assist these franchisees in developing a plan to improve their Learning Centers' performance. When necessary, the Company assists franchisees in selling their franchises. 27 The Company's typical domestic franchise agreement has an initial term of ten years, subject to unlimited additional ten year extensions at the franchisee's option on the same terms and conditions. The initial license fee ranges from $34,000 to $42,000, depending on factors such as the number of school-age children in the territory. Royalties are either 8% or 9% of gross revenues of the Learning Center, and the royalty rate depends upon the demographics of the territory and is specified in the franchise agreement. Advertising spending requirements range from $1,000 to $3,500 per month, or up to 6% of gross revenues, whichever is greater. The franchise agreement has been revised periodically, and several franchisees are operating under older agreements with different terms. Approximately 10% of franchisees operate under older agreements with royalties as low as 6% and without any requirement to contribute to the national advertising fund. The remaining 90% of the franchisees are required to contribute a minimum of 1.0% to 1.5% of gross revenues to a national advertising fund. This fund is administered by a nonprofit organization formed for the sole purpose of funding, advertising and marketing programs for the Company's core educational services. Franchisees must submit monthly financial data to the Company. 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 240 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. Approximately 11 new territories were sold in the first five months of 1997. The Company has sold franchise rights for the exclusive operation of Learning Centers in South Korea, Hong Kong, China and Israel. Franchisees in these countries offer the English version of the Sylvan program, and may not offer a foreign language version of the program without paying additional fees to the Company to subsidize the additional development costs associated with developing a foreign language version of the program. In pricing international franchise rights, the Company takes into account estimates of the number of centers that could be opened in an area. Company-owned Learning Centers. As of May 31, 1997, Sylvan owned and operated 41 Learning Centers: five in Baltimore, six in Dallas, seven in Los Angeles, five in the greater Philadelphia area, six in South Florida, seven in the greater Washington, D.C. area and five in the greater Minneapolis area. The Company's operation of Learning Centers enables it to test new educational programs, marketing plans and Learning Center management procedures. As of May 31, 1997, nine of the Company-owned Learning Centers contained Technology Centers for computer-based testing. Company-owned Learning Centers in Baltimore, Dallas, Los Angeles, Philadelphia, South Florida, greater Washington D.C. and greater Minneapolis give the Company a local presence in key markets, which has been helpful in marketing the Company's services to school districts utilizing Title I funds and to employers interested in the Sylvan-At-Work and PACE programs See "--Contract Educational Services." The Company may consider selected acquisitions of additional Learning Centers now operated by franchisees. SYLVAN PROMETRIC TESTING SERVICES As of May 31, 1997, Sylvan or its authorized representatives operated 1,616 Testing Centers, 1,001 of which were located in North America and the remainder in 95 foreign countries. Sylvan has 277 testing centers located in existing Learning Centers and 4 stand-alone testing centers that primarily deliver professional licensure and academic admissions testing and an additional 1,319 testing centers operated by authorized Sylvan Prometric representatives that deliver IT training certification testing. In addition, as a result of a January 1996 agreement with the NASD, Sylvan now operates 16 NASD testing centers where it delivers various broker-dealer computer based tests. The Company enters into contracts directly with various professional licensure, educational and IT businesses, organizations and agencies, under which Sylvan receives a fee based upon the number of tests given for those customers. Principal customers for the Company's testing services are ETS and, in the IT industry, Microsoft and Novell. IT customers sponsor 28 worldwide certification programs for various professionals such as network administrators and engineers, service technicians and instructors. Collectively, Microsoft and Novell generated $40.6 million, or 47% of Sylvan Prometric revenues in 1996. ETS, a leading educational testing firm, develops and administers more than 9.5 million tests each year, including the GRE, the Graduate Management Admissions Test ("GMAT"), the Test of English as a Foreign Language ("TOEFL"), the National Teachers Exam ("NTE") and the Advanced Placement Program, sponsored by organizations such as the College Board. The largest tests administered by ETS are the SAT (which is given annually to over 1.6 million college-bound students) and the PSAT, which is given annually to all students in grade 10 or 11. As one of the largest and most influential test developers and administrators, ETS is leading the conversion of tests to computer-based format from pencil and paper versions. The Company developed a working relationship with ETS as a result of a joint venture between ETS and a predecessor of the Company in the late 1980s. This relationship facilitated the Company's entering into a master agreement with ETS (the "ETS Agreement"), under which the Company is the exclusive commercial provider of computer-based tests administered by ETS. This exclusivity provision does not apply to the SAT, PSAT and Achievement Tests which are sponsored by the College Board. During 1996, the Company recognized approximately $19.6 million, or 23% of Sylvan Prometric's revenues in fiscal 1996, from services for ETS. The Company provides testing services through contracts with ETS both domestically and internationally. In April 1994, the Company entered into a ten year contract with ETS to develop test sites and provide computer-based tests internationally. During the first five months of 1997, the Company expanded international testing for ETS to 123 permanent and temporary sites in 59 countries. The terms of the contract stipulate that the Company will be compensated for its services through a fee equal to approved costs, plus 10 percent. The Company also will be reimbursed for its cost of capital and any foreign exchange losses. During 1996, the Company recognized revenues of approximately $7.6 million under this contract. Sylvan has been designated as the exclusive commercial provider of computer- based tests administered by ETS (other than the SAT and PSAT). The ETS Agreement provides that ETS may establish ETS-operated testing centers, client-specific testing locations or testing centers at colleges. However, ETS has agreed that Sylvan will receive at least one-half of ETS' U.S. volume of computer-based tests covered by the ETS Agreement. At present, there are no ETS-operated testing centers in existence. Under the ETS Agreement, the Company began offering computer-based versions of ETS' PRAXIS examination, which is used to license beginning teachers, in September 1992, and the GRE, which is used by graduate schools to evaluate applicants, in October 1992. In August 1992, Sylvan and ETS were jointly awarded a contract by the National Council of State Boards of Nursing to develop and deliver exclusively a computer-based licensing examination (NCLEX) for registered and practical nurses. Beginning in April 1994, the test has been offered exclusively in the computer-based version. In addition to the tests offered through its partnership with ETS, the Company is one of two entities licensed by the FAA to deliver computer-based versions of various pilot and mechanic licensing tests for private aviation. In addition to FAA testing, the Company provides testing services for organizations serving computer professionals, medical laboratory technicians, military candidates and others. Sylvan provides the supporting infrastructure and administration, including computer equipment and software systems in each Testing Center and where appropriate, registration and scheduling of candidates, downloading of individual tests and training of Testing Center personnel in accordance with procedures established by the sponsoring testing organization. For Testing Centers located in Learning Centers, the franchisee provides the space and personnel to staff the Testing Center. The Company provides 29 training and certification of the Testing Center personnel as computer-based test administrators. The Company has entered into a separate agreement with each franchisee that operates a Testing Center, whereby the franchisee receives a fee per test that decreases as the volume of the tests delivered increases. The independently owned and managed Testing Centers must meet certain criteria established by the Company for administering computer-based testing. The owners of the Testing Centers are required to furnish the space, equipment and personnel needed for their operation and receive compensation for test delivery in various forms, including hardware obsolescence guarantees and marketing assistance for their core business. The Learning Center and stand-alone sites contain up to 20 networked computers. The Company believes that it can increase capacity by adding workstations at existing Testing Centers, as well as by opening new Testing Centers. Opening a new Testing Center has taken, on average, 30 to 60 days. Computer-based tests, which can be offered during regular school hours and on weekends, increase utilization of Learning Centers. Testing also increases public awareness of Sylvan Learning Centers and the Company's core educational services. Effective December 1, 1996, the Company purchased Wall Street, 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. Wall Street generated revenues of $14.3 million for its fiscal year ended August 31, 1996 and currently has 181 franchised centers in operation in Europe and Latin America. The acquisition of Wall Street is an important step in Sylvan's strategy to increase its services to the adult education marketplace and to expand internationally. Sylvan began building a global network for the delivery of computer-based testing services in early 1994 through an exclusive international alliance with ETS. In addition to offering the English language programs, Wall Street locations can be utilized by Sylvan to administer certain computer-based testing programs in Europe and Latin America. Wall Street, which started franchising in 1991, has 92 centers in Spain with the remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile and Venezuela. Wall Street's international expansion was accomplished by selling Master Licensing Agreements, with each Master Licensor licensing franchisees to open centers in their development areas. Sylvan plans to continue this strategy to expand Wall Street's presence globally, with a focus on Asia and the Pacific Rim. CONTRACT EDUCATIONAL SERVICES: PUBLIC AND NON-PUBLIC SCHOOL BASED PROGRAMS FUNDED BY FEDERAL TITLE I AND STATE-BASED PROGRAMS; PACE AND SYLVAN-AT-WORK Title I and state-based programs. The federal government and various state and local governmental agencies allocate funds to local public school districts to provide supplemental and remedial education to academically and economically disadvantaged students in public, parochial and private schools. The main program is the Title I (formerly Chapter I) program, administered by the U.S. Department of Education. Title I services must be made available to all eligible children, regardless of whether they attend public or non-public schools. Federal law now contains minimum student performance standards for each school district receiving Title I funds. Title I school districts must satisfy obligations that include parent involvement in their children's education, student progress evaluations and report delivery, student record confidentiality protection and provision of other benefits to eligible non- public school students in the district. Although Title I does not expressly authorize school districts to contract out for Title I services, the U.S. Department of Education has allowed school districts to do so. The Company believes that the laws of many states neither specifically authorize nor prohibit school districts from entering into contracts for the Company's Title I services. In the absence of specific authorization, a school district would need to determine independently whether its general powers provide adequate legal authority for the district to contract with private companies for compensatory educational services. As of May 31, 1997, the Company had contracts to provide remedial educational services to the following public schools: 27 Baltimore 30 schools, 14 schools in Chicago, 10 schools in Detroit, 10 District of Columbia schools, two schools in Texas; six schools in three counties in Maryland, five schools in St. Paul, three schools in Newark, two schools in Broward County, Florida, two schools in New Orleans, two schools in Charleston, two schools in Oklahoma City and one school in Richmond. In 1996, approximately 14% of historical contract educational services revenues were generated from Baltimore City School contracts. The Company is actively seeking and is currently negotiating contracts to provide the Company's core educational program to other school systems. Sylvan offers virtually the same core educational services to students in schools as is offered at Sylvan Learning Centers. The school designates a classroom or other facility to be the Learning Center for the duration of the contract and modifies the space to resemble a typical Learning Center. Sylvan personnel administer standardized diagnostic tests at the request of the school district and, based on the results, prescribe an individualized learning program for each child. Students typically receive two hours of instruction per week, which includes use of personal computers as in a Learning Center. The Company can provide these services to students after school, on Saturdays, during the summer or as a "pullout" program during the regular school day, which is the method prescribed by all current contracts. There is a high degree of individual attention, with student to teacher ratios of no more than three to one. The program is designed to include a high degree of parental involvement, and teachers make a special effort to involve parents. Under most of its contracts, the Company has guaranteed that each student who receives instruction in the Sylvan program and meets prescribed attendance requirements will achieve some minimum measure of improvement required by the school districts, as measured by standardized tests. Improvement is measured using various standardized measures, including normal curve equivalents ("NCE's"), a generally accepted statistical measure of student performance. The typical minimum improvement required is two NCE's per year. If a student does not achieve the required improvement, the Company will provide 12 hours of remedial instruction to that student during the following summer or school year without charge. The Company has not incurred significant expense related to this guarantee. Under the contracts, the school districts pay the Company a set fee for all services, materials and equipment. The contracts have terms of one to three years, with the latest expiring in June 1998. All of the contracts contain provisions for cancellation by school district officials based on funding constraints. In contracting with school districts to provide Title I services, the Company is subject to various Title I requirements and may become responsible to the school district for carrying out specific functions required by law. For example, under the Baltimore City Schools' contract, Sylvan has responsibility for soliciting parental involvement, introducing program content adequate to achieve certain educational gains and maintaining the confidentiality of student records. The Company's failure to adhere to Title I requirements or to carry out regulatory responsibilities undertaken by contract may result in contract termination, financial liability or other sanctions. Additionally, until the Supreme Court's recent decision in Agostini v. Felton, Sylvan had typically been required to provide Title I services to non- public school students in a mobile unit classroom near, but not inside the non-public school. The Company cannot yet predict how the Supreme Court's decision in Agostini may affect its contracts for Title I services to non- public school students. See "Risk Factors--Impact of Recent Supreme Court Decision on Title I Services for Non-Public School Students." PACE; Sylvan-At-Work; Caliber Learning Network. The Company offers its core educational services to adults in the corporate workplace through PACE and its Sylvan-At-Work program. Services offered by PACE include racial and gender workplace diversity training and skills improvement programs such as writing, advanced reading, listening and public speaking. Management believes PACE is capitalizing on a trend toward outsourcing of training services by large corporations. PACE licenses most of these programs from the individuals who developed them and pays them royalties ranging from 5% to 15% of the revenues generated from the programs. These programs are typically offered on-site from one to several days at a time and are conducted by trained instructors employed by PACE. In some cases, PACE 31 will train the customer's employees to conduct the programs. Additionally, a corporation may purchase a site license to offer a particular PACE program. PACE and Sylvan-At-Work provide services to large corporations such as Ford Motor Company, IBM, BankOne, General Motors and AT&T, Motorola, Inc., and Martin Marietta Energy Systems, Inc. In November 1996, Caliber Learning Network, Inc., was formed as a joint initiative of Sylvan and MCI Telecommunications Corporation with the goal of becoming a worldwide distribution network of professional education centers equipped with satellite-based video conferencing and computer network capabilities. Sylvan currently owns a ten percent interest in Caliber Learning Network and has the option to increase its ownership to a majority stake in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." MARKETING The Company and its franchisees market Sylvan's core educational services to parents of school-aged children at all grade levels and academic abilities. A portion of Sylvan's advertising includes television advertisements on morning and evening news on the national networks. Sylvan's advertising campaign demonstrates the benefits of its personalized educational services through testimonials of actual parents and Sylvan teachers. It positions Sylvan as the leader in supplemental education and emphasizes Sylvan's high quality curriculum, personalized attention and positive results: better grades and improved self-esteem. Franchisees form local cooperatives to purchase local television and radio advertising and usually supplement their efforts with local newspaper and direct mail. The Company also has additional marketing support for specific programs, including reading, math, algebra, geometry, study skills, SAT college preparation and writing. The Company is actively involved in marketing computer-based testing services to national and international academic testing organizations, such as ETS, and licensing and professional certification organizations. The Company's network of testing centers, centralized registration capability and computer- based testing experience offer important competitive advantages. The Company markets its school-based educational services to several public school systems 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. Marketing efforts for PACE and Sylvan-at-Work programs are focused on large corporations seeking to outsource their training and educational programs. CERTAIN LITIGATION 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's claim arises out of the Company's acquisition rights to administer testing services for the NASD. ACT has asserted that the Company tortiously interfered with ACT's relations, contractual and quasi-contractual, with the NASD, caused ACT to suffer the loss of its advantageous economic prospects with the NASD and other ACT clients and that the Company has monopolized and attempted to monopolize the computer-based testing services market. ACT has claimed unspecified amounts of compensatory, treble and punitive damages, as well as injunctive relief. If ACT were awarded significant compensatory or punitive damages, it could materially adversely affect the Company's results of operation and financial condition. Additionally, if ACT were granted significant injunctive relief, Sylvan may be required to dispose, unit expansion or curtail existing operations of its Sylvan Prometric division, which, in turn, would materially adversely affect its results of operations and financial condition. The Court has entertained oral arguments relating to the Company's motion to dismiss this litigation but has not yet ruled on this motion, and minimal discovery has been conducted. The Company believes that all of ACT's claims are without merit, but it is unable to predict the outcome of the ACT litigation at this time. 32 MANAGEMENT The executive officers and directors of Sylvan are:
NAME AGE POSITION - ---- --- -------- R. Christopher Hoehn-Saric........... 34 Co-Chief Executive Officer and Chairman of the Board Douglas L. Becker.................... 31 Co-Chief Executive Officer, President; Secretary; Director B. Lee McGee......................... 41 Vice President and Chief Financial Officer; Treasurer Stephen A. Hoffman................... 45 President--Sylvan Prometric Division Peter J. Cohen....................... 42 President--Learning Services Division Paula Singer......................... 42 President--Contract Educational Services Division Donald V. Berlanti (1)(2)............ 59 Director Nancy S. Cole........................ 54 Director R. William Pollock................... 68 Director J. Phillip Samper (1)(2)............. 62 Director James H. McGuire (1)................. 53 Director Rick Inatome......................... 43 Director
- -------- (1) Member of the Audit Committee (2) Member of the Compensation Committee R. Christopher Hoehn-Saric. Mr. Hoehn-Saric has served as Chief Executive Officer and Chairman of the Board since April 1993 and was President of Sylvan from 1988 until 1993. He has been a Director of Sylvan or its predecessor since 1986. He is a principal in Sterling Capital, Ltd. ("Sterling"), the investment partnership that led the acquisition of the Predecessor in December 1986, and was a co-founder of Health Management Corporation, a health services company. Before becoming Sylvan's President, Mr. Hoehn-Saric was involved in Sterling's acquisition of several distribution, broadcasting and photography businesses. Douglas L. Becker. Mr. Becker has been President of Sylvan since April 1993 and Co-Chief Executive Officer since 1996. From February 1991 until April 1993, Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center Division of Sylvan. He has been a Director of Sylvan or its predecessor since 1986. Mr. Becker was a co-founder of Health Management Corporation and is a co-founder of Sterling. From January 1987 to February 1991, Mr. Becker directed the Predecessor's marketing and sales. B. Lee McGee. Mr. McGee has been Chief Financial Officer of Sylvan or its predecessor entities since 1987. Prior to that time, he held various positions with Kinder-Care Learning Centers, Inc. Stephen A. Hoffman. Mr. Hoffman has been the President of the Sylvan Prometric division since September 1996. For six years prior to joining Sylvan, Mr. Hoffman was the Senior Vice President of Operations for the Computer Task Group, a consulting and outsourcing firm serving the IT industry. For several years prior to that, he held various marketing and management positions for IBM. Peter J. Cohen. Mr. Cohen has been the President of the Learning Services division since August 1996. For three years prior to joining Sylvan, he was the Chief Executive Officer of The Pet Practice, an 85-hospital veterinary business. He also served as Vice President of Sales for National Media Corporation from January 1992 until January 1994 and served as Senior Vice President of Corporate Operations for Nutrisystem Weight Loss Centers prior to that. 33 Paula Singer. Ms. Singer has been the President of the Contract Educational Services division since November 1996. For three years prior to that, she served as Vice President of the division. From 1980 until 1992, Ms. Singer served in a variety of managerial positions at American Learning Corp. (which operated Brittanica Learning Centers), last serving as its Executive Vice President and General Manager. Donald V. Berlanti. Mr. Berlanti has been a Director of Sylvan since 1987. Since 1975, Mr. Berlanti has been involved in the ownership and management of several businesses, including a chain of convenience stores, restaurants and real estate development companies. Mr. Berlanti is the sole general partner of Quince Associates Limited Partnership, a stockholder of Sylvan. Nancy S. Cole. Ms. Cole has been employed by ETS since 1989, serving as President since 1994 and previously as Executive Vice President overseeing the program administration process for ETS. Ms. Cole currently is on the ETS Board of Trustees. Prior to joining ETS, Ms. Cole served for four years as Dean of Education and Professor at the University of Illinois at Urbana- Champaign. Ms. Cole's background includes previously serving as a member of the Graduate Record Examination Board and as a member of the College Board's SAT committee. R. William Pollock. Mr. Pollock has been a Director of the Company since December 1995. Mr. Pollock serves as the Chairman of the Board of Drake Holdings Limited, a company which owns interests in various businesses throughout the world and also serves as a director of Medox Limited. J. Phillip Samper. Mr. Samper has been a Director of Sylvan since 1993. Mr. Samper currently serves as Chief Executive Officer and Chairman of the Board of Cray Research, Inc. Mr. Samper served as President of Sun Microsystems, Inc. from 1994 to 1995, as Managing Partner of FRN Group from 1992 to 1993, as President and Chief Executive Officer of Kinder-Care Learning Centers, Inc. during 1990 and as Vice Chairman of Eastman Kodak Company from 1986 to 1989. Mr. Samper is also a director of Armstrong World Industries, Inc. and the Interpublic Group of Companies. James H. McGuire. Mr. McGuire has been a Director of the Company since December 1995. Mr. McGuire serves as President of NJK Holding Company, which controls the interests of Nasser J. Kazeminy (one of the prior owners of Drake Prometric, L.P., now owned by the Company) in various businesses throughout the country. Mr. McGuire also serves as a director of Green Isle Environmental Services, Inc. Rick Inatome. Mr. Inatome became a Director of the Company in July 1997. In the late 1980s, Mr. Inatome founded Inacom Corp., a 1996 Fortune 500 information systems provider, and he has served as its Chairman since then. Since 1993, Mr. Inatome has served as Co-Chairman of Speedy Printing Centers, Inc. Prior to that, Mr. Inatome founded Computer City, Inc. Mr. Inatome also serves as Chairman of Michigan's Liberty Business and Industrial Development Corporation and was appointed by the Governor of Michigan to serve on Michigan's Public Jobs Commission Board. 34 PRINCIPAL AND SELLING SECURITYHOLDERS The following table sets forth information regarding the beneficial ownership of the Company's Common Stock (including shares issuable upon the exercise of currently exercisable options and warrants) as of July 11, 1997 by (i) the Selling Securityholders, (ii) each person who owns beneficially more than 5% of the Company's Common Stock, (iii) each of the directors of the Company, (iv) the Co-Chief Executive Officers and each of the other most highly compensated executive officers and (v) all directors and executive officers as a group. Unless otherwise indicated, the named persons exercise sole voting and investment power over the shares that are shown as beneficially owned by them.
SHARES SHARES SHARES TO BE BENEFICIALLY BENEFICIALLY SOLD IN THIS OWNED AFTER OWNED(1) OFFERING(1) THIS OFFERING ----------------- ------------ ----------------- NAME NUMBER PERCENT NUMBER NUMBER PERCENT - ---- --------- ------- ------------ --------- ------- Donald V. Berlanti(2)......... 1,338,414 4.8% 822,491 515,923 1.7% Douglas L. Becker(3)(4)....... 1,673,915 5.9% 103,597 1,570,318 5.2% R. Christopher Hoehn- Saric(3)(4).................. 1,681,943 6.0% 103,597 1,578,346 5.3% J. Phillip Samper............. 41,536 * -- 41,356 * Nancy A. Cole(6).............. -- * -- -- -- R. William Pollock(5)......... 3,365,715 12.2% 1,250,000 2,115,715 7.2% Nasser J. Kazeminy(5)......... 1,941,881 7.0% 900,000 1,041,881 3.5% James H. McGuire.............. -- * -- -- -- Rick Inatome.................. -- * -- -- * B. Lee McGee(3)............... 64,850 * -- 64,850 * Stephen A. Hoffman(3)......... 8,200 * -- 8,200 * Paula Singer(3)............... 24,500 * -- 24,500 * Peter Cohen(3)................ -- * -- -- -- T. Rowe Price Associates, Inc.(7)...................... 1,365,751 4.9% -- 1,365,751 4.6% Denver Investment Partners(8).................. 1,738,949 6.3% -- 1,738,949 5.9% John Casey.................... 32,736 * 32,736 -- -- Anthony Cancelosi............. 870 * 870 -- -- Jill Becker................... 92,352 * 36,102 56,250 * Kathy Taslitz................. 90,060 * 36,102 53,958 * All directors and executive officers as a group (12 persons)................. 7,388,112 25.5% 2,279,685 5,108,427 16.6%
- -------- * Represents beneficial ownership of not more than one percent. (1) Includes Options to purchase an aggregate of 435,495 shares of Common Stock held by the Selling Optionholders which will be sold to the Underwriters, who will then exercise such Options at an average exercise price of approximately $3.32 per share of Common Stock and sell the shares of Common Stock issuable upon exercise of the Options in this offering. (2) The address of this holder is 145 Barranca Road, Santa Fe, New Mexico 87501. Includes shares held by Quince Associates Limited Partnership, of which Mr. Berlanti is sole general partner, and shares held by trusts for the benefit of Mr. Berlanti's children for which Mr. Berlanti serves as trustee. Includes options and warrants to purchase 209,241 shares. Excludes shares held by trusts for the benefit of Messrs. Richard and Donald Berlanti's children for which Richard Berlanti, Mr. Berlanti's brother, is trustee. (3) The address of Ms. Singer and Messrs. Becker, Hoehn-Saric, McGee, Hoffman and Cohen is 1000 Lancaster Street, Baltimore, Maryland 21202. (4) Includes the 810,961 shares issued to Messrs. Kazeminy and Pollock in connection with Sylvan's acquisition of Drake Prometric, L.P. in December 1995 and subject to a Voting Trust Agreement pursuant to which Messrs. Becker and Hoehn-Saric are voting trustees. (5) Includes the shares subject to the Voting Trust Agreement (see note 4 above). (6) Ms. Cole is the President of ETS and serves on its Board of Trustees. ETS owns 425,810 shares of stock in the Company, as to which Ms. Cole disclaims beneficial ownership. (7) T. Rowe Price Associates, Inc. exercises sole voting and investment power over 198,901 of the 1,365,751 shares held. The address of this holder is 100 E. Pratt Street, Baltimore, Maryland 21202. All information included herein is taken from the Schedule 13G filed with the Commission by this holder. (8) Denver Investment Partners exercises sole voting and investment power over 1,098,250 of the 1,738,949 shares held. The address of this holder is 1225 17th Street, 26th Floor, Denver, Colorado 80202. All information included herein is taken from the Schedule 13G filed with the Commission by this holder. 35 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Montgomery Securities, Morgan Stanley & Co. Incorporated, Smith Barney Inc. and Robertson, Stephens & Company LLC, have severally agreed to purchase from the Company and the Selling Securityholders the aggregate number of shares of Common Stock set forth opposite their respective names below, consisting of (i) 1,464,505 shares of Common Stock from the Company, (ii) Options from the Selling Optionholders exercisable for an aggregate of 435,495 shares of Common Stock and (iii) 2,850,000 shares of Common Stock from the Selling Stockholders. The purchase price for the 4,314,505 shares of Common Stock to be purchased from the Company and the Selling Stockholders will be the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. The aggregate purchase price for the Options will be equal to the aggregate number of shares of Common Stock issuable upon exercise of the Options multiplied by the public offering price per share of the Common Stock, less underwriting discounts and commissions set forth on the cover page of this Prospectus and the aggregate exercise price of the Options. The exercise price payable upon exercise of these Options will be paid by the Underwriters to the Company.
NUMBER UNDERWRITER OF SHARES ----------- --------- Alex. Brown & Sons Incorporated....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.................... Montgomery Securities................................................. Morgan Stanley & Co. Incorporated..................................... Smith Barney Inc. .................................................... Robertson, Stephens & Company LLC..................................... --------- Total............................................................... 4,750,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the Common Stock offered hereby if any of such shares are purchased. The Company and the Selling Securityholders have been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. The public offering price and other selling terms may be changed by the Underwriters. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 412,500 and 300,000, respectively, additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. The portion of the option granted by the Company may be exercised only after the Underwriters have exercised in full their option to purchase 300,000 shares of Common Stock from the Selling Stockholders. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to 4,750,000, and the Company and the Selling Securityholders will be obligated, pursuant to the Underwriters' option, to sell such additional shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the 4,750,000 shares of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 4,750,000 shares are being offered. 36 In connection with this offering, certain Underwriters may engage in passive market making transactions in the Common Stock on The Nasdaq National Market immediately prior to the commencement of sales in this offering in accordance with Rule 103 of Regulation M. Passive market making consists of displaying bids on The Nasdaq National Market limited by the bid prices of independent market makers and making purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. Subject to applicable limitations, the Underwriters, in connection with this offering, may place bids for or make purchases of the Common Stock in the open market or otherwise, for long or short account, or cover short positions incurred, to stabilize, maintain or otherwise affect the price of the Common Stock, which may be higher than the price that might otherwise prevail in the open market. There can be no assurance that the price of the Common Stock will be stabilized, or that stabilizing, if commenced, will not be discontinued at any time. Subject to applicable limitations, the Underwriters may also place bids or make purchases on behalf of the underwriting syndicate to reduce a short position created in connection with this offering. The Underwriters are not required to engage in these activities and may end these activities at any time. The Representatives, on behalf of the Underwriters, also may reclaim selling concessions allowed to an Underwriter or dealer, if the syndicate repurchases shares distributed by that Underwriter or dealer. The Company and the Selling Securityholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company, the Company's executive officers and directors and certain other stockholders of the Company, holding in the aggregate 6,678,305 shares of Common Stock, including outstanding options, have agreed not to offer, sell or otherwise dispose of any of such Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. Alex. Brown & Sons Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the Common Stock subject to these lock-up agreements. LEGAL MATTERS The legality of the shares offered hereby has been passed upon for the Company and the Selling Securityholders by Piper & Marbury L.L.P., Baltimore, Maryland and for the Underwriters by Hogan & Hartson L.L.P., Baltimore, Maryland. EXPERTS The historical consolidated financial statements and schedule and the supplemental consolidated financial statements and schedule of Sylvan Learning Systems, Inc. at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, incorporated by reference in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon incorporated by reference elsewhere herein which, as to the years 1996 and 1995, are based in part on the reports of Deloitte & Touche LLP, independent auditors, and as to the year 1994 is based in part on the report of Canterelli & Vernoia, CPAs, independent auditors. The financial statements referred to above are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. 37 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CON- NECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AU- THORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV- ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------ TABLE OF CONTENTS
PAGE ---- Available Information.................................................... 2 Incorporation of Certain Documents by Reference.......................... 2 Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Use of Proceeds.......................................................... 12 Price Range of Common Stock and Dividend Policy.......................... 12 Capitalization........................................................... 13 Selected Historical and Supplemental Consolidated Financial Data......... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 17 Business................................................................. 25 Management............................................................... 33 Principal and Selling Securityholders.................................... 35 Underwriting............................................................. 36 Legal Matters............................................................ 37 Experts.................................................................. 37
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4,750,000 Shares [LOGO OF SYLVAN LEARNING SYSTEMS APPEARS HERE] SYLVAN LEARNING SYSTEMS, INC. Common Stock ------------ PROSPECTUS ------------ Alex. Brown & Sons INCORPORATED Merrill Lynch & Co. Montgomery Securities Morgan Stanley Dean Witter Smith Barney Inc. Robertson, Stephens & Company , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses in connection with this Registration Statement. The Company will pay all expenses of the offering, except the legal, accounting and printing expenses, which will be paid pro rata by the Selling Securityholders. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission, NASD and Nasdaq. Filing Fee--Securities and Exchange Commission................... $ 56,591 NASD Filing Fee.................................................. 19,175 Nasdaq Listing Fees.............................................. 17,500 Fees and Expenses of Counsel..................................... 75,000 Accountants' Fees and Expenses................................... 100,000 Printing Expenses................................................ 150,000 Transfer Agent and Registrar's Fees.............................. 20,000 Miscellaneous Expenses........................................... 61,734 -------- TOTAL.......................................................... $500,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Charter provides that, to the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the Company shall have any liability to the Company or its stockholders for monetary damages. The Maryland General Corporation Law provides that a corporation's charter may include a provision which restricts or limits the liability of its directors or officers to the corporation or its stockholders for money damages except: (1) to the extent that it is provided that the person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received, or (2) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Company's Charter and By-laws provide that the Company shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent permitted by the Maryland General Corporation Law and that the Company shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with law. The Charter and By-laws provides that the Company will indemnify its directors and officers and may indemnify employees or agents of the Company to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Company. In addition, the Company's Charter provides that its directors and officers will not be liable to stockholders for money damages, except in limited instances. However, nothing in the Charter or By-laws of the Company protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. To the extent that a director has been successful in defense of any proceeding, the Maryland General Corporation Law provides that he shall be indemnified against reasonable expenses incurred in connection therewith. ITEM 16. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.01 Form of Underwriting Agreement.(a) 3.01 Articles of Amendment and Restatement of the Charter.(b)
II-1
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.02 Amended and Restated Bylaws.(b) 3.03 Amended and Restated Bylaws dated September 27, 1996.(c) 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 Rights Agreement by and between Registrant and State Street Bank & Trust Company dated as of October 1, 1996.(d) 5.01 Opinion of Piper & Marbury L.L.P.(a) 23.01 Consent of Ernst & Young LLP.(a) 23.02 Consent of Deloitte & Touche LLP.(a) 23.03 Consent of Canterelli & Vernoia.(a) 23.04 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01).(a) 24.00 Powers of Attorney (included on signature page).(a) 99.1 Opinion of Deloitte & Touche LLP.(a) 99.2 Opinion of Canterelli & Vernoia.(a)
- -------- (a) Filed herewith. (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 Company's Annual Report on Form 10-K for the Year ended December 31, 1996. (d) Incorporated by reference from the Company's Current Report on Form 8-K dated September 27, 1996. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suite or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN BALTIMORE, MARYLAND, ON THIS 14TH DAY OF JULY, 1997. Sylvan Learning Systems, Inc. By /s/ R. Christopher Hoehn-Saric R. CHRISTOPHER HOEHN-SARIC, CHAIRMAN OF THE BOARD AND CO-CHIEF EXECUTIVE OFFICER Know all men by these presents, that each person whose signature appears below constitutes and appoints R. Christopher Hoehn-Saric and Douglas L. Becker (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead in any and all capacities to sign any or all amendments or post-effective amendments to this Registration Statement, including post-effective amendments filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, to sign any all applications, registration statements, notices or other document necessary or advisable to comply with the applicable state securities laws, and to file the same, together with all other documents in connection therewith, with the appropriate state securities authorities, granting unto said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ R. Christopher Hoehn-Saric Co-Chief Executive Officer and July 14, _______________________________ Chairman of the Board of 1997 R. CHRISTOPHER HOEHN-SARIC Directors (Principal Executive Officer) /s/ Douglas L. Becker Co-Chief Executive Officer, July 14, _______________________________ President, Secretary and 1997 DOUGLAS L. BECKER Director /s/ B. Lee McGee Chief Financial Officer July 14, _______________________________ (Principal Financial and 1997 B. LEE MCGEE Accounting Officer)
II-4
SIGNATURE TITLE DATE --------- ----- ---- /s/ Donald V. Berlanti Director July 14, 1997 ______________________________ DONALD V. BERLANTI /s/ R. William Pollock Director July 14, 1997 ______________________________ R. WILLIAM POLLOCK /s/ James H. McGuire Director July 14, 1997 - ------------------------------ JAMES H. MCGUIRE /s/ J. Phillip Samper Director July 14, 1997 ______________________________ J. PHILLIP SAMPER Director July , 1997 ______________________________ NANCY S. COLE Director July , 1997 ______________________________ RICK INATOME
II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.01 Form of Underwriting Agreement.(a) 3.01 Articles of Amendment and Restatement of the Charter.(b) 3.02 Amended and Restated Bylaws.(b) 3.03 Amended and Restated Bylaws dated September 27, 1996.(c) 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 Rights Agreement by and between Registrant and State Street Bank & Trust Company dated as of October 1, 1996.(d) 5.01 Opinion of Piper & Marbury L.L.P.(a) 23.01 Consent of Ernst & Young LLP.(a) 23.02 Consent of Deloitte & Touche LLP.(a) 23.03 Consent of Canterelli & Vernoia.(a) 23.04 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01).(a) 24.00 Powers of Attorney (included on signature page).(a) 99.1 Opinion of Deloitte & Touche LLP.(a) 99.2 Opinion of Canterelli & Vernoia.(a)
- -------- (a) Filed herewith. (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 Company's Annual Report on Form 10-K for the Year ended December 31, 1996. (d) Incorporated by reference from the Company's Current Report on Form 8-K dated September 27, 1996. EX-1.01 2 UNDERWRITING AGREEMENT 4,750,000 Shares Sylvan Learning Systems, Inc. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT ---------------------- ___________, 1997 Alex. Brown & Sons Incorporated Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Montgomery Securities Morgan Stanley & Co. Incorporated Smith Barney Inc. As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated One South Street Baltimore, Maryland 21202 Gentlemen: Sylvan Learning Systems, Inc., a Maryland corporation (the "Company"), and certain shareholders of the Company named in Schedule II hereto (the "Selling Shareholders") propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 4,750,000 shares of the Company's Common Stock, $.01 par value (the "Firm Shares"), of which 1,464,505 shares will be sold by the Company and 3,285,495 shares will be sold by the Selling Shareholders, and certain stock optionholders of the Company named in Schedule II hereto (the "Selling Stock Optionholders") propose to sell to the several Underwriters stock options to purchase an aggre- -1- gate of 435,495 shares of Common Stock of the Company at exercise prices set forth on Schedule II hereto (the "Stock Options"). The shares so proposed to be sold by the Company are herein referred to as the "Company Shares." The respective amounts of the Firm Shares and Stock Options to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts of Firm Shares to be sold by the Selling Shareholders and Stock Options to be sold by the Selling Stock Optionholders are set forth opposite their names in Schedule II hereto. The Company, Selling Shareholders and the Selling Stock Optionholders are sometimes referred to herein collectively as the "Sellers." The Selling Shareholders and the Selling Stock Optionholders are sometimes referred to herein as the "Selling Securityholders". The Company also proposes to sell at the Underwriters' option an aggregate of up to 412,500 additional shares of the Company's Common Stock, and Selling Securityholders also propose to sell at the Underwriters' option an aggregate of up to 300,000 additional shares of the Company's Common Stock (collectively the "Option Securities"), as set forth below. As the Representatives, you have advised the Company and the Selling Securityholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares and Stock Options set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Securities if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares, the Stock Options and the Option Securities (to the extent the aforementioned option is exercised) are herein collectively called the "Securities." The Firm Shares, the shares issuable upon exercise of the Stock Options, and the additional shares included in the Option Securities are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING ------------------------------------------------------------- SECURITYHOLDERS. --------------- (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-3 (File No. 333- ________) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and -2- the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to the Registration Statement, any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rule 424(b) or 430A, and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of each of the -3- Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the Company Shares have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. The Stock Options have been duly authorized, executed and delivered by the Company and constitute valid, binding and enforceable obligations of the Company, the shares of Common Stock issuable upon exercise of the Stock Options have been duly authorized and reserved for issuance upon such exercise and, when issued and delivered upon exercise of the Stock Options in accordance with the terms thereof, such shares of Common Stock will be validly issued, fully paid and non-assessable and will not be subject to any preemptive or similar rights. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained or incorporated by reference in the Registration Statement. The form of certificates for the Shares conforms to the Maryland General Corporation Law. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and conforms and will conform, to the requirements of the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time filed with the Commission, conformed in all respects to the requirements of the Securities Exchange Act of 1934 or the Act, as applicable, and the rules and regulations of the Commission thereunder. The Registration Statement and any amendment -4- thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The financial statements, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries [and ANY SEPARATE FINANCIALS], at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included or incorporated by reference in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial statements and other pro forma financial information included or incorporated by reference in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) Ernst & Young L.L.P, who have certified certain of the financial statements filed with the Commission as part of or incorporated by reference in the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. -5- (viii) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which if determined adversely to the Company or any of its Subsidiaries might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (ix) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (x) The Company and the Subsidiaries have filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included or incorporated by reference in the Registration Statement. -6- (xii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Charter or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Company and its Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole or which would or might delay or prevent the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Charter or by-laws of the Company or any order, rule or regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xiii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xiv) The Company and each of the Subsidiaries holds all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses; and neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks or copyrights owned by or licensed to the Company. (xv) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected -7- to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act. (xvi) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations of the Commission thereunder. (xvii) The Company maintains a system of internal accounting controls in compliance with the Exchange Act and the rules and guidelines of the Commissions, and such system is sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xviii) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xix) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of -8- such qualification. (xx) The Company and its Subsidiaries are in compliance in all material respects with all applicable provisions of federal, state and local law governing the provision of educational services of the type provided by or contemplated to be provided by the Company and its Subsidiaries. (b) Each of the Selling Securityholders severally represents and warrants as follows: (i) Such Selling Securityholder who is a Selling Shareholder now has and at the Closing Date and, as applicable, the Option Closing Date (as such dates are hereinafter defined) will have, good and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Shares; and upon the delivery of, against payment for, such Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Securityholder who is a Selling Stock Optionholder is the lawful owner of the Stock Options to be sold by such Selling Stock Optionholder pursuant to this Agreement and now has, and at the Closing Date and, as applicable, the Option Closing Date, will have, good and marketable title to such Stock Options, free and clear of any liens, encumbrances, equities and claims and full right, power and authority to effect the sale and delivery of such Stock Options; and upon the delivery of, against payment for, such Stock Options pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (iii) Such Selling Securityholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custodian Agreement referred to below and to perform its obligations under such Agreements. The execution and delivery of this Agreement and the consummation by such Selling Securityholder of the transactions herein contemplated and the fulfillment by such Selling Securityholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, the organizational documents of such Selling Securityholder, if not an -9- individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Securityholder is a party, or of any order, rule or regulation applicable to such Selling Securityholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iv) Such Selling Securityholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Selling Securityholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (v) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Securityholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Securities by such Selling Securityholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement or the documents incorporated by reference therein. The information pertaining to such Selling Securityholder the caption "Principal and Selling Securityholders" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES AND STOCK OPTIONS. ---------------------------------------------------------------- (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, (i) the Company agrees to issue and sell to the several Underwriters the Company Shares, (ii) the Selling Shareholders, severally and not jointly, agree to sell to the several Underwriters the portion of the Firm Shares set forth on Schedule II hereof to be sold by them, and (iii) the Selling Stock Optionholders, severally and not jointly, agree to sell to the several Underwriters the Stock Options set forth on Schedule II hereto to be sold by them, and each Underwriter agrees, severally and not jointly, to purchase the number of Firm Shares and Stock Options set forth opposite the name of each Underwriter in Schedule I hereto, subject to -10- adjustments in accordance with Section 9 hereof. The Underwriters further agree, severally and not jointly, to exercise the Stock Options so purchased hereby at the Closing and the Company agrees, upon exercise and tender of the applicable warrant exercise price, to issue to the respective Underwriters the number of Shares issuable upon exercise of the Stock Options so exercised. The number of Firm Shares and Stock Options to be purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares and Stock Options being sold by each Seller as the number of Firm Shares and Stock Options being purchased by each Underwriter bears to the total number of Firm Shares and Stock Options to be sold hereunder. The obligations of the Company and of each of the Selling Securityholders shall be several and not joint. The purchase price to be paid to the Company and the Selling Shareholders for the Firm Shares shall be $________ per share (the "Share Price"). The purchase price to be paid to the Selling Stock Optionholders for each of the Stock Options shall be an amount equal to the Share Price multiplied by the number of Shares issuable upon exercise of that Stock Option, less the exercise price of that Stock Option (the "Stock Option Price"). (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholders and original stock options representing the total Stock Options to be sold hereunder by the Selling Stock Optionholders, endorsed in blank for transfer have been placed in custody with [Street State Bank & Trust Company] as custodian (the "Custodian") pursuant to the Custodian Agreement executed by each Selling Securityholder for delivery of all Securities to be sold hereunder by the Selling Securityholders. Each of the Selling Securityholders specifically agrees that the Securities represented by the certificates and stock options held in custody for the Selling Securityholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Securityholders for such custody are to that extent irrevocable, and that the obligations of the Selling Securityholders hereunder shall not be terminable by any act or deed of the Selling Securityholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Securityholder or the dissolution of a corporate Selling Securityholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Securities hereunder, the Securities shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Securities held by it against delivery of such Securities. -11- (c) Payment of the Share Price and the Stock Option Price for the Firm Shares and Stock Options to be sold hereunder, and for the exercise price of the Stock Options, is to be made in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company for the Company Shares and the exercise price of the Stock Options, and to the order of "[State Street Bank & Trust Company], as Custodian" for the Firm Shares and the Stock Options to be sold by the Selling Securityholders, in each case against delivery of certificates for the Firm Shares and the Shares issuable upon exercise of the Stock Options to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares and the Shares issuable upon exercise of the Stock Options will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Securityholders hereby grant an option to the several Underwriters to purchase the Option Securities at the Share Price and Stock Option Price, as applicable, as set forth in the first paragraph of this Section 2. The maximum number of Option Securities to be sold by the Selling Securityholders is as set forth opposite their respective names on Schedule II hereto. Each Underwriter agrees, severally and not jointly, to exercise any additional Stock Options included in the Option Securities so purchased and the Company agrees, upon exercise and tender of the applicable exercise price, to issue to the respective Underwriters the number of Shares called for by the applicable Stock Options so exercised. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company, the Attorney-in-Fact and the Custodian, setting forth the Option Securities as to which the several Underwriters are exercising the option, the names and denominations in which the certificates for the Shares to be delivered in connection therewith (including upon exercise of Stock Options included in the Option Securities) are to be registered and the time and date at which such certificates are to be delivered. If the option granted hereby is exercised in part, the respective number of -12- Option Securities to be sold by the Company and each of the Selling Securityholders shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule III hereto. The time and date at which certificates for Shares to be delivered in connection therewith are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Securities to be purchased by each Underwriter shall be in the same proportion to the total number of Option Securities being purchased as the number of Firm Shares and Stock Options being purchased by such Underwriter bears to the total number of Firm Shares and Stock Options, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Securities granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares and the Shares issuable upon exercise of the Stock Options by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Securities shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's checks drawn to the order of the Company for the Share Price of any Option Securities so purchased from the Company and the exercise price of any Stock Options so purchased, and to "[State Street Bank & Trust Company] as Custodian" for the Stock Option Price and Share Price of the Option Securities so purchased from the Selling Securityholders, against delivery of certificates for the Shares included in the Option Securities and the Shares issuable upon exercise of any Stock Options included among the Option Securities, at the offices of Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland. (e) If on the Closing Date or the Option Closing Date any Selling Securityholder fails to sell the Securities which such Selling Securityholder has agreed to sell on such date as set forth in Schedule II hereto, the Company ----------- agrees that it will sell or arrange for the sale of that number of shares of Common Stock to the Underwriters which represents Securities which such Selling Securityholder has failed to so sell including any Shares issuable upon exercise of Stock Options which such Selling Securityholder has failed to so sell, as set forth in Schedule II hereto, or such lesser number as may be ----------- requested by the Representatives. -13- 3. Offering by the Underwriters. ---------------------------- It is understood that the several Underwriters are to make a public offering of the Firm Shares and the shares underlying the Stock Options as soon as the Representatives deem it advisable to do so. The Firm Shares and the shares underlying the Stock Options are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Securities are purchased pursuant to Section 2 hereof, the Underwriters will offer the Shares represented thereby to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. Covenants of the Company and the Selling Securityholders. -------------------------------------------------------- (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations and (C) file on a timely basis all reports and any definitive proxy or information statements required to be filed with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the -14- Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), including documents incorporated by reference therein, and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend -15- or supplement the Prospectus to comply with any law, the Company promptly will either (i) prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus or (ii) prepare and file with the Commission an appropriate filing under the Exchange Act which shall be incorporated by reference in the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its securityholders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act, as amended. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated, except for issuances of shares upon exercise of outstanding options and warrants. (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Nasdaq National Market. (x) The Company has caused each officer and director of the Company, and shareholders specified to the Company by Alex. Brown & Sons Incorporated, to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such -16- person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Shares or derivative of Common Shares owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 90 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Alex. Brown & Sons Incorporated ("Lockup Agreements"). (xi) The Company shall apply the net proceeds of its sale of the Shares and the exercise of the Stock Options as set forth in the Prospectus. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares and the exercise of the Stock Options in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the 1940 Act. (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) Each of the Selling Securityholders covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Selling Securityholder or request the registration for the offer or sale of any of the foregoing (or as to which the Selling Securityholder has the right to direct the disposition of) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by such Selling Securityholder otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of -17- 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Securityholders agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Securityholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. Costs and Expenses. ------------------ The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Securityholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of the NASDAQ Stock Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. To the extent, if at all, that any of the Selling Securityholders engage separate legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Securityholder. Any transfer taxes imposed on the sale of the Securities to the several Underwriters will be paid by the Sellers pro rata. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company and its Subsidiaries. The Sellers shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Securityholders to perform any undertaking or satisfy any condition of this Agreement or -18- to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Securityholders shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. Conditions of Obligations of the Underwriters. --------------------------------------------- The several obligations of the Underwriters to purchase the Firm Shares [and the Stock Options] on the Closing Date and the Option Securities, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Securityholders contained herein, and to the performance by the Company and the Selling Securityholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Selling Securityholders, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the sale of any of the Securities, the exercise of any of the Stock Options or the issuance of any of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinions of Piper & Marbury L.L.P., counsel for the Company and the Selling Securityholders, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Maryland, with -19- corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions set forth in an exhibit to such opinion; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock, including the Shares to be sold by the Selling Shareholders, have been duly authorized and validly issued and are fully paid and non- assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, comply with Maryland law and the Company's Charter and By-laws; the shares of Common Stock to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof; the Stock Options have been duly authorized, executed and delivered by the Company and constitute the valid and binding obligations of the Company; the Stock Options are transferable to the Underwriters without restriction and without the consent of any person, including the Company, that has not been obtained; the Shares issuable upon exercise of the Stock Options have been duly authorized and reserved for issuance upon such exercise and, when issued and delivered upon exercise of the Stock Options and payment of the exercise price therefor, in accordance with the terms thereof, such Shares will be validly issued, fully paid and non-assessable. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe -20- for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto and documents incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules or other financial or statistical information included or incorporated by reference therein). (vi) The statements under the captions "__________________" and "___________________" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. -21- (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or by-laws of the Company, or any agreement or instrument filed with the Commission, listed on an exhibit to such opinion or otherwise known to such counsel as to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, required to register as an investment company under the 1940 Act as a result of the consummation of the transactions contemplated by this Agreement, assuming application of the net proceeds therefrom as described in the Prospectus. (xiii) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Securityholders. (xiv) Each Selling Securityholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Securities to be sold by such Selling Securityholder. (xv) The Custodian Agreement and the Power of Attorney executed and delivered by each Selling Securityholder are valid and binding. (xvi) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares and Stock Options being sold by each Selling Securityholder on the Closing Date, and the Option Closing Date, as the case may -22- be, [and have acquired good and marketable title to the Shares issued upon exercise of the Stock Options on the Closing Date, and the Option Closing Date, as the case may be, in each case] free and clear of all liens, encumbrances, equities and adverse claims. In rendering such opinion Piper & Marbury L.L.P. may rely as to matters governed by the laws of states other than Maryland, Pennsylvania, New York or Federal laws on local counsel in such jurisdictions and as to the matters set forth in subparagraphs (xiii), (xiv) and (xv) on opinions of other counsel representing the respective Selling Securityholders, provided that in each case Piper & Marbury L.L.P. shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Piper & Marbury L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received from Hogan & Hartson L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of this Section 6, and that the Company was incorporated and is a validly existing corporation under the laws of the State of Maryland. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act), contained an untrue statement of a material fact or -23- omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Hogan & Hartson L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Hogan & Hartson L.L.P. a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of Ernst & Young L.L.P. confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included or incorporated by reference in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained or incorporated by reference in the Registration Statement and Prospectus or as otherwise specified by the Underwriters and agreed to by Ernst & Young L.L.P. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registrations Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; -24- (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (g) The Company and the Selling Securityholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Shares have been approved for designation upon notice of issuance on the Nasdaq National Market. (i) The Lockup Agreements described in Section 4 (x) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Hogan & Hartson L.L.P., counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the -25- Company and the Selling Securityholders of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Selling Securityholders, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. -------------------------------------------- The obligations of the Sellers to sell and deliver the portion of the Securities required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. --------------- (a) The Company and the Selling Securityholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company and the Selling Securityholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof; and provided further that neither the Company nor the Selling Securityholders shall be liable to any Underwriter -26- under this Section 8(a) with respect to any Preliminary Prospectus to the extent that any such loss, claim, damage or liability of such Underwriter results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, such Preliminary Prospectus, which untrue statement or omission was corrected in the Prospectus, if the Company or the Selling Securityholders, as the case may be, shall sustain the burden of proving that such Underwriter sold Securities to the person alleging such loss, claim, damage or liability without sending or giving, at or prior to the written confirmation of such sale, a copy of the Prospectus if the Company has previously furnished copies thereof to such Underwriter. This indemnity agreement will be in addition to any liability which the Company or the Selling Securityholders may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Securityholders, and each person, if any, who controls the Company or the Selling Securityholders within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Securityholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Securityholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who -27- shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred (or within 30 days of presentation) the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Securityholders in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in -28- respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Securityholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Securityholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Securityholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company (including the proceeds from the exercise of the Stock Options) and the Selling Securityholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus or in the Term Sheet or Abbreviated Term Sheet, as the case may be. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Securityholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Securityholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent -29- misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Securities and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. ----------------------- If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Securities which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or a Selling Securityholder), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Securityholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares, Stock Options or Option Securities, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares, Stock Options or Option Securities, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Securities -30- with respect to which such default shall occur does not exceed 10% of the Firm Shares and Stock Options or Option Securities, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares and Stock Options or Option Securities, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares and Stock Options or Option Securities, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Securities with respect to which such default shall occur exceeds 10% of the Firm Shares and Stock Options or Option Securities, as the case may be, covered hereby, the Company and the Selling Securityholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Securityholders except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. ------- All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202, Attention: Alexander T. Daignault; with a copy to Alex. Brown & Sons Incorporated, One South Street, Baltimore, Maryland 21202. Attention: General Counsel; if to the Company or the Selling Securityholders, to Sylvan Learning Systems, Inc., 1000 Lancaster Street, Baltimore, Maryland 21202, Attention: Douglas L. Becker, President. 11. TERMINATION. ----------- This Agreement may be terminated by you by notice to the Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; -31- (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's common stock by the Commission on the Nasdaq National Market or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. ---------- This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Securityholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. ------------------------------------ -32- The Company, the Selling Securityholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page of the Prospectus, the Term Sheet or the Abbreviated Term Sheet, as the case may be (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. ------------- The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Securities under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Securityholders, the Company and the several Underwriters in accordance with its terms. -33- Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling Securityholder represents by so doing that he has been duly appointed as Attorney-in-Fact by such Selling Securityholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, SYLVAN LEARNING SYSTEMS, INC. By: President Selling Securityholders listed on Schedule II By: Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MONTGOMERY SECURITIES MORGAN STANLEY & CO. INCORPORATED SMITH BARNEY INC. As Representatives of the several Underwriters listed on Schedule I By: Alex. Brown & Sons Incorporated By: Authorized Officer -34- SCHEDULE I Schedule of Underwriters Number of Firm Shares Number of Underwriter to be Purchased Stock Options to be Purchased Total SCHEDULE II Schedule of Selling Shareholders and Selling Stock Optionholders
[Number of Number of Number of Additional Stock Selling Shareholder/ Stock Options to Additional Options to be Selling Stock Number of Firm be Sold/Exercise Shares to be Sold/Exercise Optionholder Shares to be Sold Price Per Share Sold Price Per Share] --------------- --------------- --------------- --------------- Totals
EX-5.01 3 OPINION OF PIPER & MARBURY EXHIBIT 5.01 ------------ PIPER & MARBURY L.L.P. CHARLES CENTER SOUTH WASHINGTON 36 SOUTH CHARLES STREET NEW YORK BALTIMORE, MARYLAND 21201-3018 PHILADELPHIA 410-539-2530 EASTON FAX: 410-539-0489 July 11, 1997 Sylvan Learning Systems, Inc. 1000 Lancaster Street Baltimore, Maryland 21202 RE: Registration Statement on Form S-3 ---------------------------------- Dear Sirs: We have acted as counsel to Sylvan Learning Systems, Inc., a Maryland corporation (the "Company"), in connection with the Company's Registration Statement on Form S-3 (the "Registration Statement") filed on the date hereof with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to up to 5,462,500 shares (the "Shares") of the Company's Common Stock, par value $.01 per share. Certain of the Shares are to be issued and sold by the Company (the "Company Shares"), certain of the shares have been previously issued by the Company and are being sold for the account of the holders thereof (the "Stockholder Shares") and certain of the Shares (the "Option Shares") are to be issued and sold upon exercise of outstanding options (the "Options") held by certain option holders of the Company. In this capacity, we have examined the Company's Charter and By-Laws, the proceedings of the Board of Directors of the Company relating to the issuance of the Company Shares, the Stockholder Shares and the Option Shares, such other documents, instruments and matters of law as we have deemed necessary to the rendering of this opinion. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with originals of all documents submitted to us as copies. Based upon the foregoing, we are of the opinion and advise you that (i) the Company Shares described in the Registration Statement have been duly authorized and, upon sale of such Company Shares as contemplated by the Registration Statement, will have been validly and legally issued, and will be fully paid and nonassessable; (ii) the Stockholder Shares described in the Registration Statement have been duly authorized and are validly issued, fully paid and nonassessable; and (iii) the Option Shares have been duly authorized and, upon due exercise of the Options, will have been validly and legally issued and will be fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus included therein. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations of the Commission thereunder. Very truly yours, PIPER & MARBURY L.L.P. EX-23.01 4 CONSENT OF ERNST & YOUNG Exhibit 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Historical and Supplemental Consolidated Financial Data" and "Experts" in the Registration Statement (Form S-3 No. 33-_______) and related Prospectus of Sylvan Learning Systems, Inc. for the registration of 4,750,000 shares of its common stock and to the incorporation by reference therein of (i) our report dated February 27, 1997, with respect to the consolidated financial statements and schedule of Sylvan Learning Systems, Inc. included in its Annual Report on Form 10-K for the year ended December 31, 1996 and (ii) our report dated July 10, 1997 with respect to the supplemental consolidated financial statements and schedule of Sylvan Learning Systems, Inc. included in its Current Report on Form 8-K dated on or about July 14, 1997, filed with the Securities and Exchange Commission. Baltimore, Maryland July 10, 1997 EX-23.02 5 CONSENT OF DELOITTE & TOUCHE Exhibit 23.03 CONSENT OF CANTERELLI & VERNOIA, CPAS, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated April 25, 1995 and May 10, 1995, with respect to the financial statements of I-R, Inc. and Independent Child Study Teams, Inc., respectively, included in the Registration Statement (Form S-3 No. 333-_______) and related Prospectus of Sylvan Learning Systems, Inc. for the registration of 4,750,000 shares of its common stock. /s/ Canterelli & Vernoia, CPAs Somerville, New Jersey July 10, 1997 EX-23.03 6 CONSENT OF CANTERELLI & VERNOIA Exhibit 23.02 CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS We consent to the use of our reports on the financial statements of Independent Child Study Teams, Inc. and I-R, Inc., dated March 14, 1997, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Registration Statement. /s/ Deloitte & Touche LLP Parsippany, New Jersey July 14, 1997 EX-99.1 7 OPINION OF DELOITTE & TOUCHE EXHIBIT 99.1 Report of Independent Auditors The Board of Directors and Stockholders of Independent Child Study Teams, Inc. We have audited the balance sheets of Independent Child Study Teams, Inc. as of December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Independent Child Study Teams, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 14, 1997 Report of Independent Auditors The Board of Directors and Stockholders of I-R, Inc. We have audited the balance sheets of I-R, Inc. as of December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements referred to above present fairly, in all material respects, the financial position of I-R, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Parsippany, New Jersey March 14, 1997 EX-99.2 8 OPINION OF CANTERELLI & VERNOIA Exhibit 99.2 Report of Independent Auditors The Board of Directors and Stockholders of Independent Child Study Teams, Inc. We have audited the balance sheet of Independent Child Study Teams, Inc. as of December 31, 1994, and the related statements of income, retained earnings and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Independent Child Study Teams, Inc. at December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Canterelli & Vernoia Somerville, New Jersey May 10, 1995 Report of Independent Auditors The Board of Directors and Stockholders of I-R, Inc. We have audited the balance sheet of I-R, Inc. as of December 31, 1994, and the related statements of income, retained earnings and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of I-R, Inc. at December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Canterelli & Vernoia Somerville, New Jersey April 25, 1995 -----END PRIVACY-ENHANCED MESSAGE-----