AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
Registration No. 333- _____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PROMETRIC, INC.
(Exact name of registrant as specified in its charter)
1000 LANCASTER STREET
BALTIMORE, MD 21202
(410) 843-8000
(Address of principal executive offices)
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MARYLAND 8748 applied for
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
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STEPHEN A. HOFFMAN
CHIEF EXECUTIVE OFFICER AND PRESIDENT
PROMETRIC, INC.
1000 LANCASTER STREET
BALTIMORE, MD 21202
(410) 843-8000
(Name, address, including zip code and telephone number, including area code of agent for service)
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COPIES TO:
Richard C. Tilghman, Jr. Walter G. Lohr, Jr.
Piper & Marbury L.L.P. Hogan & Hartson, L.L.P.
36 South Charles Street 111 South Calvert Street, Suite 1600
Baltimore, MD 21201 Baltimore, MD 21202
(410) 539-2530 (410) 659-2700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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, as amended (the "Securities Act") 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, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. |_|
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
- ---------------------------------------------------- ------------------------------------- -----------------------------------------
Shares of Common Stock, par value $.001 $100,000,000 $27,800
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act.
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, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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SUBJECT TO COMPLETION. DATED SEPTEMBER __, 1999
[INSERT PROMETRIC, INC. LOGO]
PROMETRIC, INC.
____________ SHARES
COMMON STOCK
This is an initial public offering of common stock of Prometric, Inc. We
anticipate that the initial public offering price will be between $______ and
$_____ per share.
We expect that the common stock will be quoted on the Nasdaq National Market
under the symbol "PROM."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE __.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATON TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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PER
SHARE TOTAL
Public offering price $_________ $__________
Underwriting discounts and commissions $_________ $__________
Proceeds, before expenses, to Prometric, Inc. $_________ $__________
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We have granted the underwriters the right purchase up to ___________ additional
shares of common stock at the public offering price to cover any
over-allotments.
DEUTSCHE BANC ALEX. BROWN
THE DATE OF THIS PROSPECTUS IS _________ __, 1999.
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[TO BE INSERTED VERTICALLY ON LEFT MARGIN OF COVER]
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities, and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
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[INSIDE FRONT COVER]
[GRAPHICS]
Prometric(R) is a registered trademark of Prometric, Inc. SAT, PSAT, LSAT, GMAT,
GRE, TOEFL, PRAXIS I and QUIZtek are trademarks of the owners of these tests.
All other trademarks and tradenames referred to herein are the property of their
respective owners.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION IN THIS PROSPECTUS. IT MAY
NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE
"RISK FACTORS" SECTION AND OUR FINANCIAL STATEMENTS AND THEIR RELATED NOTES. IN
THIS PROSPECTUS, "WE," "US," "OUR" AND "PROMETRIC" REFER TO PROMETRIC, INC. AND
ITS SUBSIDIARIES. "SYLVAN" REFERS TO SYLVAN LEARNING SYSTEMS, INC.
HISTORICALLY, SYLVAN HAS OPERATED ITS COMPUTER-BASED TESTING SERVICES
BUSINESS AS A DIVISION OF ITS OVERALL BUSINESS. AT THE TIME OF THIS OFFERING,
SYLVAN WILL TRANSFER ITS COMPUTER-BASED TESTING SERVICES BUSINESS TO US.
FOLLOWING THIS OFFERING, WE WILL BE A SEPARATE CORPORATION AND WILL OPERATE THE
COMPUTER-BASED TESTING SERVICES BUSINESS.
OUR BUSINESS
Prometric is the leading worldwide provider of comprehensive
computer-based testing and assessment services. We provide a complete
computer-based testing services solution to sponsors and administrators of
large-volume tests. Our services include test preparation, candidate scheduling
and registration, payment processing, test administration, test distribution,
test results processing, consulting and marketing. We provide these testing
services primarily to the technology certification, professional licensing and
certification and academic markets. As of July 31, 1999, we had contracts to
deliver over 2,400 different tests. Our global testing network consists of:
o 2,915 computer-based testing services centers in 141 countries,
1,477 of which are located in the United States and Canada, and
o 10 call centers in 9 countries, which will handle over 7.5 million
calls this year and operate in 25 languages and 33 currencies.
Our proprietary scheduling and test delivery software systems support our
testing and call centers and enable us to deliver our services on a secure and
cost-effective basis. Through our global testing network, we delivered over 3.5
million tests in 1998 and over 2.2 million tests during the first six months of
1999.
Our global testing network and testing software systems enable us to
provide:
o test scheduling in 141 countries;
o candidate registration and payment processing;
o candidate eligibility services;
o test preparation materials and practice tests over the Internet;
o reliable test center administration, including candidate
verification and test proctoring;
o reliable and secure global test delivery;
o immediate and accurate test results; and
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o detailed analytical reports of test results and test program
statistics.
We have entered into strategic relationships with several leading test sponsors
and administrators, including:
o EDUCATIONAL TESTING SERVICE (ETS) - the leading developer of academic
assessments and admissions tests. This relationship gives us the
exclusive commercial right to provide our testing services for many
ETS-sponsored computer-based tests in North America and around the
world, including the GMAT, GRE, TOEFL and PRAXIS I examinations.
o MICROSOFT - the leading developer of software, business networking and
personal computer software solutions. This relationship gives us the
right to provide testing services for Microsoft's certification
programs for application developers, system engineers, database
administrators, sales specialists and other information technology (IT)
professionals.
o NATIONAL ASSOCIATION OF SECURITIES DEALERS REGULATION, INC. (NASDR) -
the regulatory body and licensing organization for the securities
industry professionals. This relationship gives us the right to provide
our testing services for all of the NASDR's tests in North America,
including the Series 6, Series 7 and Series 63 tests and the tests for
the NASDR's continuing education programs.
o COMPTIA - a non-profit IT industry trade association. This relationship
gives us the right to provide testing services for CompTIA's
entry-level service technician, networking and document imaging
computer skills certification programs.
o U.K. DRIVING STANDARDS AGENCY - the government agency that licenses
drivers in the United Kingdom. This relationship gives us the exclusive
right to provide testing services for driver's license theory tests to
prospective drivers in the United Kingdom.
o THE CHAUNCEY GROUP - the leading developer of tests relating to
professional and occupational licensing, certification and assessment.
In 1999, we entered into a joint venture with Chauncey, a subsidiary of
ETS. The joint venture is called Experior Assessments LLC. This joint
venture relationship gives us the right to pursue jointly with Chauncey
all test development and administration opportunities for state and
local licensing agencies.
We began providing computer-based testing services in 1992. From 1996
through 1998, we delivered over 7.8 million tests worldwide. For the twelve
months ended June 30, 1999, revenues were $210.6 million and net income was
$18.3 million.
OUR COMPETITIVE ADVANTAGES
We intend to maintain our leading position within the computer-based
testing and assessment services business because of our competitive advantages:
o GLOBAL INFRASTRUCTURE. We have developed a global network of 2,915
testing centers in 141 countries. We believe there is no other
computer-based testing services company with a global network similar
in size and scope to ours.
o TECHNOLOGY AND SOFTWARE SYSTEMS. We have developed sophisticated test
delivery technology and proprietary software systems. Our software
manages every step of the testing process, from preparation and
distribution and conversion to delivery and results analysis.
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o RELATIONSHIPS WITH LEADING TEST SPONSORS. We have strategic
relationships with a number of leading educational organizations,
corporations and government agencies. We currently have over 65 IT
certification, 100 professional licensing and certification and five
academic testing customers.
o GLOBAL EXPERTISE. We have business, technical and sales and marketing
personnel in strategic locations throughout the world. Our staff has
substantial experience working with local governments and businesses
and in operating in local economies. We believe no other computer-based
testing services company has a similar breadth of global experience.
o COMPREHENSIVE COMPUTER-BASED TESTING SERVICES SOLUTION. Our global
expertise, testing network, relationships and software systems allow us
to provide a complete computer-based testing services solution.
OUR STRATEGY
Our goal is to maintain our position as the leading global provider of
computer-based testing and assessment services. We have adopted a six-part
strategy to achieve this goal:
o LEAD THE CONVERSION OF PAPER AND PENCIL TESTS TO COMPUTER-BASED TESTS.
We plan to work with test sponsors and administrators to help them
convert existing paper and pencil tests to computer-based tests. We
will leverage our existing relationships with major test sponsors to
convert more of their tests to computer-based format. We also will
expand our sales and marketing effort to educate more test sponsors on
the benefits of converting their tests to computer-based format.
o EXPAND COMPUTER-BASED TESTING PROGRAMS IN THE TECHNOLOGY CERTIFICATION
MARKET. We intend to work with IT and other technology companies to
develop training and certification programs. We will leverage our
existing relationships with major IT industry participants as they
release new products and upgrade their existing technology. We intend
to develop new relationships with other technology-related companies in
industries such as medical devices and telecommunications.
o FOCUS ON INTERNATIONAL TESTING OPPORTUNITIES. We intend to develop
relationships with foreign corporations, academic institutions and
government agencies to assist them in developing computer-based testing
services and certification programs. We are currently expanding our
sales and marketing efforts abroad to help us capitalize on
international testing opportunities.
o EXPAND INTERNET TEST DELIVERY. We intend to use the Internet to deliver
tests to proctored and unproctored locations. In 1999, we began to
offer test delivery over the Internet for programs that require lower
levels of security. We are also developing ways to deliver high
security tests over the Internet.
o EXPAND OUR TEST DELIVERY CHANNELS. ZapMe! Corporation is establishing a
broadband interactive network to deliver educational resources to
middle and high schools throughout the U.S. We intend to provide
testing and training services through our @school network using the
ZapMe Network Labs and other school-based computer labs. We will also
continue to expand access to broader computer-based testing programs by
establishing on-site testing centers at corporate universities,
community colleges and academic institutions.
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o EXPAND BRAND AWARENESS BY OFFERING ENHANCED SERVICES UNDER THE
PROMETRIC BRAND NAME. Our call centers and websites provide an
opportunity to sell candidates other products and services under the
Prometric brand name. These services include practice tests, test
preparation and self-study materials. Over the next several years, we
plan to introduce other products and services to increase test
candidates' brand awareness of Prometric.
RELATIONSHIP WITH SYLVAN
Until this offering, Sylvan operated our computer-based testing
services business as an unincorporated division. Sylvan has created us as a
separate corporation to separate our business from Sylvan's other businesses and
to facilitate this offering. Immediately before this offering is completed,
Sylvan will transfer to us all assets and liabilities related to our business.
We describe these assets and liabilities in "Our Separation from Sylvan" later
in this prospectus.
Immediately after this offering is completed, Sylvan will own about __%
of our outstanding common stock, or about ____% if the underwriters fully
exercise their over-allotment option. Sylvan has informed us that it expects to
distribute all of its shares of our common stock to its stockholders. However,
Sylvan will not make this distribution unless it first receives a ruling from
the Internal Revenue Service that the distribution would be tax-free to both
Sylvan and its stockholders. Sylvan has told us that it does not expect to
obtain an IRS ruling any earlier than during the second half of 2000. Therefore,
Sylvan does not believe it will complete a distribution of its shares of our
common stock until late in 2000. However, we cannot assure you that Sylvan can
obtain this ruling. We discuss the risks related to whether Sylvan completes
this distribution in the section titled "Risk Factors" under the subheading
"Sylvan will own at least 80% of our outstanding common stock and will be able
to control us" later in this prospectus.
We and Sylvan believe that there are a number of valid business reasons
to separate our computer-based testing services business from Sylvan's other
educational services businesses. We also believe that a number of benefits will
be realized from Prometric's becoming a separate public company. We discuss
these benefits and the reasons for Sylvan's decision to separate our
computer-based testing services business under the subheading "Reasons for This
Offering" in the section titled "Our Separation from Sylvan" later in this
prospectus.
We will enter into a number of agreements with Sylvan to provide for
the separation of our business from Sylvan's other businesses and our on-going
relationship with Sylvan. These agreements cover the following important
matters:
o the assets and liabilities to be transferred to us;
o administrative services that will be performed for us by Sylvan
employees;
o our indemnification of Sylvan for matters related to our business;
o Sylvan's indemnification of us for matters related to its other
businesses;
o allocations of income taxes between us;
o our cooperation with Sylvan in its effort to seek the IRS ruling;
and
o our grant to Sylvan of registration rights for its shares of our
common stock.
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We discuss these agreements in the section titled "Arrangements between
Prometric and Sylvan" later in this prospectus. Because we have been a division
of Sylvan before this offering, we cannot assure you that the terms of these
agreements are more or less favorable than those that we could have negotiated
with an unaffiliated third party.
THE OFFERING
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COMMON STOCK OFFERED BY US ............................ ______ shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING .... ______ shares
USE OF PROCEEDS ....................................... We expect about $___ million of net proceeds
from this offering. We intend to use them for
working capital and general corporate purposes.
See the section titled "Use of Proceeds."
RISK FACTORS........................................... See "Risk Factors" beginning on page __ for a
discussion of factors you should carefully
consider before deciding to invest in our common
stock.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL ................ PROM
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Unless we specifically state otherwise, the information we provide in
this prospectus does not take into account our possible issuance of ______
shares of our common stock that the underwriters have the option to purchase
from us solely to cover over-allotments. If they fully exercise this option,
______ shares of our common stock will be outstanding after this offering.
We have reserved _________ shares of our common stock for our 1999
Stock Incentive Plan but have not yet granted any options under the plan. We
describe this plan in the section titled "Management" later in this prospectus.
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We are a Maryland corporation. Our executive offices are located at 1000
Lancaster Street, Baltimore, Maryland 21202. Our telephone number is (410)
843-8000.
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SUMMARY FINANCIAL AND OPERATING DATA
The following table presents our summary historical and pro forma
financial data and summary operating data. Our historical financial statements
represent the carved-out historical financial position and results of operations
of the computer-based testing services division of Sylvan. At the time of this
offering, Sylvan will transfer its computer-based testing services business to
us. Following this offering, we will be a separate corporation and operate the
computer-based testing services business. We prepared the pro forma balance
sheet data as of June 30, 1999, as if the transfer of our business had been
completed on June 30, 1999.
Pro forma basic and diluted earnings per share presented in the
following table have been calculated assuming that the _________ common shares
issued in connection with our separation from Sylvan were outstanding for all
periods presented.
You should read our summary financial and operating data together with
our consolidated financial statements and their related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which we have included elsewhere in this prospectus.
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SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
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1994 1995 (1) 1996 1997 (2) 1998 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues $ 13,683 $ 34,565 $ 85,283 $ 115,622 $ 178,732 $ 74,458 $ 106,287
Costs and expenses:
Direct costs 13,225 27,602 58,340 80,063 120,120 51,547 71,121
General and administrative expense 862 3,248 13,823 26,880 27,160 12,562 19,280
Allocated indirect overhead costs (3) 1,587 2,350 2,686 3,835 4,740 2,370 3,520
Loss on impairment of assets -- -- -- 4,000 -- -- --
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Total costs and expenses 15,674 33,200 74,849 114,778 152,020 66,479 93,921
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Operating income (loss) (1,991) 1,365 10,434 844 26,712 7,979 12,366
Other income (expense) (167) (996) (378) (359) 892 236 1,324
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Income (loss) before income taxes (2,158) 369 10,056 485 27,604 8,215 13,690
Income tax benefit (expense) 820 (140) (3,810) (1,957) (12,357) (3,697) (6,160)
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Net income (loss) $ (1,338) $ 229 $ 6,246 $ (1,472) $ 15,247 $ 4,518 $ 7,530
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Pro forma earnings per share, basic and
diluted (4) $ $ $ $ $ $ $
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OPERATING DATA:
Total STC network 244 218 277 386 563 526 728
Total APTC network - 797 990 1,595 1,874 1,643 2,152
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Total test centers 244 1,015 1,267 1,981 2,437 2,169 2,880
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Tests delivered 296,949 567,708 1,412,869 2,290,724 3,503,161 1,526,554 2,201,596
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BALANCE SHEET DATA: AS OF JUNE 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED (4)
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Cash and cash equivalents $ 17,188
Working capital 16,875
Total assets 311,558
Total liabilities 41,718
Owner's net investment 269,282
Common stock and additional paid-in --
capital
Total owner's equity 269,840
(1) On September 30, 1995, we acquired Drake Prometric, L.P., a leading provider
of computer-based certification, licensing and assessment testing. The
transaction was accounted for using the purchase method of accounting, and our
results of operations from October 1, 1995 include the operations of Drake.
(2) On December 1, 1997, we acquired the business of Block Testing Services
L.P., Block State Testing Services L.P. and National Assessment Institute, Inc.
Prior to the acquisition, these companies were controlled by the same
shareholders and were engaged in the business of designing and administering
paper and pencil tests for the licensing of individuals. The acquisition was
accounted for using the purchase method of accounting, and our results of
operations from December 1, 1997 through December 31, 1998 include the
operations of these acquired companies. On January 1, 1999, we contributed the
net assets of Block and NAI to a newly-formed joint venture in which we have a
50% interest. We account for the joint venture using the equity method of
accounting.
(3) Sylvan has allocated to us indirect overhead costs during all of the periods
presented. These costs consist principally of corporate human resources,
finance, accounting and administration, investor relations and information
management services. After this offering, we will be charged by Sylvan for these
services under the provisions of an Administrative Services Agreement. You
should read "Arrangements Between Prometric and Sylvan."
(4) Pro forma as adjusted gives effect to the transfer of the computer-based
testing services division to us and the offering as if it had occurred on June
30, 1999.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS MAY
SUFFER IF ANY OF THE EVENTS DESCRIBED IN THE FOLLOWING RISK FACTORS ACTUALLY
OCCUR. THERE MAY BE ADDITIONAL RISKS THAT WE ARE NOT CURRENTLY ABLE TO IDENTIFY.
THESE MAY ALSO ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS. IF ANY OF THE EVENTS WE HAVE IDENTIFIED OR THOSE THAT WE CANNOT NOW
IDENTIFY OCCURS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU
MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
WE HAVE NEVER OPERATED INDEPENDENTLY OF SYLVAN
Sylvan has always operated its computer-based testing services business
as a division of its overall business. To facilitate this offering, Sylvan will
separate this business from its other businesses. At the time of completion of
this offering, Sylvan will transfer to us all assets related to our
computer-based testing services business, together with all liabilities
associated with our business.
We have enjoyed a number of benefits from being a division of Sylvan.
These benefits have included:
o Sylvan's extensive network of business relationships in the
education industry, such as its relationship with ETS;
o Sylvan's relationship with its franchisees, who currently host many
of the centers in our Sylvan Technology Center network;
o Sylvan's financial strength and capital-raising capacity; and
o Sylvan's support personnel who have performed many of our
administrative functions.
These benefits have had a very positive effect on the growth of our
computer-based testing services business over the past five years. Sylvan
expects to distribute its shares of our common stock during 2000 to its
stockholders. Whether or not Sylvan distributes those shares, we cannot assure
you that we can continue to take advantage of Sylvan's relationships or the
other benefits we have enjoyed as a division of Sylvan.
WE WILL CONTINUE TO DEPEND UPON SYLVAN FOR OUR ADMINISTRATIVE AND SUPPORT
SERVICES
At the time of completion of this offering, we will enter into an
Administrative Services Agreement with Sylvan. Under this agreement, Sylvan will
continue to provide us many of the administrative and support services that we
need to operate our business. These include services such as accounting and tax,
human resources, payroll, legal and management information services. Therefore,
we will depend on Sylvan's resources, systems and personnel for many of the
services that are vital to the day-to-day operation of our business. Until
Sylvan distributes its shares of our common stock to its stockholders, we will
pay Sylvan for these services based upon Sylvan's cost of providing them to us.
After that distribution, we will pay Sylvan for those services at its cost plus
10%.
Sylvan has agreed to provide these services only for the next two years
and will not be obligated to provide them after then. As a result, over the next
two years, we will need to develop our own systems
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and add support personnel to perform these functions. We may not be able to
accomplish this task within the necessary time. If we cannot, our ability to
operate our business may be adversely affected. Also, our cost of developing the
necessary systems and adding support personnel may exceed the amount of fees we
will pay Sylvan to provide these services over the next two years. If so, our
profitability may be lower than we expect.
SYLVAN WILL OWN AT LEAST 80% OF OUR OUTSTANDING COMMON STOCK AND WILL BE ABLE TO
CONTROL US
After completion of this offering, Sylvan will own __% of our
outstanding common stock (____% if the underwriters fully exercise their
over-allotment option). Sylvan has told us that it will not distribute its
shares of our common stock to its stockholders unless it gets a ruling from the
IRS that the distribution would be tax-free. Sylvan does not expect it will get
a ruling and complete the distribution any earlier than late 2000. Therefore,
you should assume that Sylvan will continue to own enough shares of our common
stock to control us for at least a year from this offering.
As long as Sylvan owns at least a majority of our outstanding common
stock, it will continue to be able to elect our entire board of directors and to
remove any director, for any reason. This will give Sylvan the power to control
the outcome of all of our corporate actions, including those that require
approval of our stockholders. Specifically, Sylvan will be able to control
matters such as:
o the composition of our board of directors;
o the direction and policies of our business;
o the appointment and removal of our officers;
o the acquisition or disposition of assets by our company;
o future issuances of our common stock and other equity or debt
securities;
o the incurring of debt by our company;
o any decisions regarding mergers or other business combinations
involving our company;
o any payment of dividends on our common stock; and
o various decisions regarding treatment of items in our tax returns
that are consolidated or combined with Sylvan's tax returns.
At the time of completion of this offering, our board of directors will
consist of all of the current directors of Sylvan, plus our Chief Executive
Officer and President, Stephen A. Hoffman. Two of these directors are also
executive officers of Sylvan.
THE IRS COULD CHALLENGE THE TAX-FREE NATURE OF OUR SEPARATION
Sylvan has not yet sought a ruling from the IRS that our separation
from Sylvan, this offering and Sylvan's distribution of its shares of our common
stock to its stockholders will qualify as tax-free to Sylvan and its
shareholders. Qualification as tax-free depends in part upon Sylvan's reasons
for these transactions and satisfaction of several other requirements. The IRS
is not obligated to issue this ruling. It is possible that the IRS could view
the facts differently and determine that the distribution does not
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qualify as tax-free. If Sylvan does not receive the IRS ruling, it will not
distribute its shares of our common stock to its stockholders and, therefore,
will continue to control us.
MEMBERS OF OUR BOARD OF DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY
ARE ALSO DIRECTORS OF SYLVAN
All but one of our eight initial directors are also directors of
Sylvan. Two of these directors, Messrs. Becker and Hoehn-Saric, are the Co-Chief
Executive Officers of Sylvan. Our directors who are also directors or executive
officers of Sylvan will have obligations to both companies. This may result in
conflicts of interest regarding a variety of matters that can affect our
business, such as business arrangements between the two companies, as well as
acquisitions, financings and other corporate opportunities that may be suitable
for both companies. Therefore, you cannot assume that any conflicts will be
decided in a manner that is in the best interests of our company.
SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF THEIR OWNERSHIP
OF SYLVAN STOCK
Our initial directors currently own a total of about 6.8 million shares
(or about 12.5%) of Sylvan's common stock, including options that are
exercisable within the next 60 days. This stock ownership may create, or seem to
create, potential conflicts of interest when the directors face decisions that
have different implications for our company and Sylvan.
OUR SEPARATION AGREEMENT WITH SYLVAN CONTAINS COVENANTS THAT MAY LIMIT THE WAY
WE OPERATE OUR BUSINESS AND OUR ABILITY TO SEEK CAPITAL
In connection with this offering, we will enter into an agreement with
Sylvan that contains several restrictive covenants. These covenants,
individually or together, could materially limit the way we conduct our business
and our ability to pursue our business objectives. For example, we will agree
not to enter into any agreement that will result in a person or group acquiring
50% or more of our common stock (including the shares we will issue in this
offering). These covenants could have a material adverse effect on our company
and your investment in our company. We describe these restrictions in the
subheading "Separation Agreement" in the section titled "Arrangements between
Prometric and Sylvan" later in this prospectus.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY
The historical financial information we have included in this
prospectus may not reflect what our results of operations, financial position
and cash flows would have been had we been a separate, stand-alone company
during the periods presented or what our results of operations, financial
position and cash flows will be in the future. This is because:
o Sylvan did not account for us as a separate, stand-alone business,
which required us to make a number of adjustments and allocations
when we separated our historical financial statements from Sylvan's;
o our historical financial statements do not reflect all of the
changes that will occur in our financial condition, capital
structure and operations as a result of this offering and Sylvan's
transfer of the computer-based testing services business to us; and
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o our historical financial statements do not reflect any debt that we
might have had to incur if we were a separate, stand-alone business,
because we relied upon Sylvan to provide us funds to operate and
grow our business.
We cannot assure you that the adjustments and allocations we have made
in preparing our historical financial statements appropriately reflect how our
operations during the periods would be presented if we had operated as a
stand-alone company. We cannot predict what the actual effect of our separation
from Sylvan will have on our future operating results, financial condition or
cash flows.
WE MAY BE UNABLE TO SUSTAIN OUR HISTORICAL GROWTH RATE
From 1996 through 1998, our revenues and net income grew at compound
annual rates of 44.8% and 56.2%. We may be unable to continue to grow our
revenues and/or our net income as quickly as we have over the past three years.
Our future growth prospects depend upon a number of factors, including our
ability to:
o work with test sponsors to convert their paper and pencil tests to
computer-based format;
o keep our existing contracts and obtain more contracts to deliver
computer-based testing services;
o expand the number of testing centers in our network to meet the
needs of our current and future customers;
o continue to deliver computer-based testing services without
interruptions, particularly interruptions resulting from technical
problems in our test delivery system;
o adapt quickly to technology advances and add test delivery channels,
such as the Internet;
o attract and retain enough talented technical people to expand our
network infrastructure to support growth;
o upgrade our management information systems as necessary to properly
manage a larger volume of business; and
o obtain additional capital to expand our network infrastructure and
support a larger volume of business.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH
We have rapidly and significantly expanded our computer-based testing
services business over the past several years and intend to continue to do so.
Growth will require us to add management personnel and expand our financial and
management systems and controls and facilities. If our revenue growth is less
than we project, the costs we will incur for these additions and expansions will
cause our profitability to decline from current levels. If we fail to make these
additions and expansions on a timely basis, we may be unable to operate our
business effectively. This could have a material adverse effect on our business,
financial condition and results of operations.
We have internally developed our test delivery system and the other
computer systems we need to operate our business. If our customer base and the
number of tests we deliver increase substantially, we
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will need to expand and upgrade our technology and network infrastructure. We
cannot be sure that we can do this quickly enough to keep up with the growth in
our business. Also, we may not be able to accurately predict the timing or cost
of needed expansion and upgrades of our systems.
WE DEPEND UPON OUR CONTRACTS AND RELATIONSHIPS WITH ETS AND MICROSOFT FOR A
SIGNIFICANT AMOUNT OF OUR REVENUES
Our contracts with ETS generated about $61.3 million, or 34.3% of our
revenues in 1998. Our contract with Microsoft generated about $43.0 million, or
24.0% of our revenues in 1998. We must continue to maintain a close working
relationship with these customers because they represent so much of our
computer-based testing services volume. Our overall revenues and profitability
could decline or we could be unable to grow our business if:
o ETS decides not to convert more paper and pencil tests to
computer-based format;
o ETS decides to develop its own network of computer-based testing
services centers;
o Microsoft decides to authorize other companies to deliver its IT
certification tests or decides to deliver its own tests; or
o we are unable to renew our contracts with ETS or Microsoft on terms
acceptable to us.
Our reputation in the training and testing industry is largely the
result of our relationship with these prestigious customers. If our business
relationships with them deteriorated, our overall reputation in the industry may
suffer. This could make it difficult or impossible for us to grow our business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
In 1998, we derived about 40.5% of our revenues from operations outside
the U.S. We face risks that are inherent in international operations, including
that:
o it is difficult to enforce agreements and collect receivables in
some foreign countries;
o tax rates in some foreign countries exceed those of the U.S., and
foreign earnings may be subject to withholding requirements or
imposition of tariffs, exchange controls or other restrictions;
o general economic and political conditions in the countries where we
operate may have an adverse effect on our operations in those
countries;
o there are difficulties associated with managing a large organization
spread throughout many countries;
o we must be able to understand and comply with a variety of foreign
laws and regulations; and
o it is potentially difficult for us to enforce our intellectual
property rights in some foreign countries.
We plan to continue to grow our business globally. Our success in doing
so profitably will depend on our ability to anticipate and effectively manage
these and other risks.
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EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Despite the scope of our international operations, we currently receive
most of our revenues in U.S. dollars. However, we pay a significant portion of
our expenses in other local currencies. Therefore, exchange rate fluctuations in
a foreign currency could have a material adverse effect on our financial
results.
SOME OF OUR CUSTOMERS MAY DECIDE TO AUTHORIZE A SECOND SOURCE FOR DELIVERY OF
THEIR TESTS OR DEVELOP THE IN-HOUSE CAPABILITY TO DELIVER TESTS
We are currently the sole source for delivery of computer-based tests
for a number of our professional licensing and certification and academic
customers. However, in most instances, our contracts with many of these
customers do not name us as the exclusive deliverer of the customer's
computer-based tests. For their own business reasons, some of these customers
may decide to authorize one of our competitors as a second source for
computer-based test delivery. Several of our significant IT certification test
customers have designated at least one other company as a deliverer of their
computer-based tests. Also, some customers may decide to develop their own
ability to deliver their tests in computer-based format because of the
importance of testing to their overall business objectives. If a number of our
larger customers made either decision, our volume of tests delivered and our
revenues are likely to decline.
WE MUST REMAIN CURRENT WITH RAPIDLY EVOLVING TECHNOLOGIES
Our test delivery and other computer systems are based on current IT
and communications technologies. These technologies are evolving rapidly.
Therefore, our future success will depend upon our ability to quickly implement
technology advances.
The Internet is rapidly gaining acceptance as a medium to deliver
tests, particularly those that do not require high security. We expect that
technology will develop to enable delivery of secure tests over the Internet and
to positively identify a candidate desiring to take a test over the Internet in
an unproctored location. If this happens and we do not implement these Internet
technologies, our volume of tests delivered and our revenues may fail to grow or
may actually decline.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH THE OPERATORS OF MOST OF OUR TEST
CENTERS
We own very few of our testing centers. Instead, we enter into
contracts with individual Sylvan Learning Center franchisees or other third
parties for most of our Sylvan Technology Center network, or STCs, and with
training companies or other third parties for most of our Authorized Prometric
Testing Center network, or APTCs. Under these contracts, the party with whom we
contract supplies the space for the testing center. Most of these contracts have
terms of three years or less. Our contracts with most of our Sylvan franchisees
expire on December 31, 2001 or December 31, 2002. If a significant number of the
parties with whom we contract decide not to renew their contracts with us, we
would be forced to find new places to install testing centers. This could cause
a substantial increase in our operating expenses. If we were unable to relocate
test centers quickly after existing contracts are not renewed, our volume of
tests delivered could decline.
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WE EXPECT TO FACE INCREASING COMPETITION
We currently have several direct competitors. A number of these
competitors are owned by public companies that are well known in the education
and testing industries. Also, ACT, Inc. (a leading developer and sponsor of
academic admissions and assessment tests) recently announced an alliance with
Electronic Data Systems Corporation to develop a network of computer-based
testing centers. We believe that these companies have the financial resources,
expertise and name recognition to become more significant competitors in the
future. We cannot predict if or when other companies with significant resources
will also decide to enter the market. Internet technology may advance to enable
secure tests to be delivered over the Internet. If this happens, the cost of
entering the computer-based testing services business should decline. As
competition increases, we would expect greater price and service competition. We
provide additional information about our competitors under the subheading
"Competition" in the "Business" section of this prospectus.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL
Our future success depends significantly on the continued services of
our executive officers and other members of our management team, as well as our
staff of IT and communications professionals. We will need to add highly skilled
individuals to our staff, and we face intense competition for highly qualified
people. There is a substantial shortage of IT and communications professionals.
We cannot assure you that we will be able to retain our existing key personnel
or that we will be able to attract, assimilate and retain enough additional or
replacement personnel to support our business. If we cannot, it is unlikely that
we will be able to grow our business as we are planning, and we may not be able
to operate our existing business efficiently.
OUR OPERATING RESULTS AND FINANCIAL PERFORMANCE MAY FLUCTUATE
Our revenues and operating results have varied substantially from
quarter to quarter during the past several years. We expect continued
fluctuations based on such factors as:
o our customers' timing of implementation of new computer-based
testing services programs;
o the frequency or timing of delivery of individual tests; and
o the changes in the prices we receive for the tests we deliver.
OUR BUSINESS IS SUBJECT TO THREE LAWSUITS
Sylvan is currently involved in three lawsuits that concern our
computer-based testing services business. We will agree to indemnify Sylvan from
any loss Sylvan may incur as a result of these three lawsuits. One of these
lawsuits involves our obtaining the contract to deliver the NASDR's
computer-based tests. The plaintiff, ACT, was the unsuccessful bidder for this
NASDR contract. ACT claims Sylvan violated federal antitrust law by monopolizing
and attempting to monopolize a portion of the computer-based testing services
industry. ACT also claims that Sylvan tortiously interfered with ACT's
contractual and quasi-contractual relations with the NASDR. If Sylvan were found
to have violated Federal antitrust law, we could be liable to ACT for three
times the amount of ACT's actual damages. ACT has not yet specified the amount
it alleges as its damages. If ACT were to win this case and the court awarded
ACT significant damages, our results of operations and financial condition could
be materially affected. Also, the court could enjoin us from continuing some of
our computer-based testing services business or order us to dispose of some of
our computer-based testing services assets. This type
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of injunction also could materially adversely affect our results of operations
and financial condition and could adversely affect our ability to grow our
business.
The other two lawsuits are related to each other. They involve a
license we granted to Novell of our test development software (TDL). We use this
software to generate tests in computer-based format. Novell sublicensed TDL to
Virtual University Enterprises (VUE). Sylvan sued VUE, which is now a division
of National Computer Services, Inc. (NCS). Sylvan claims that NCS's use of TDL
infringes Sylvan's copyright of TDL and that NCS has misappropriated Sylvan's
trade secrets. Novell recently filed a lawsuit against Sylvan seeking a
declaratory judgment that its grant of the sublicense of TDL to NCS does not
violate Sylvan's license of TDL to Novell. We would be unable to prevent NCS
from using TDL if Novell were to receive the declaratory judgment it is seeking.
We discuss these lawsuits in the subheadings "Litigation" in the
"Business" section of this prospectus.
WE MAY EXPERIENCE PROBLEMS RELATED TO THE YEAR 2000 ISSUES THAT COULD ADVERSELY
AFFECT OUR BUSINESS
Many currently installed computer systems and software products are
coded to accept only two-digit year entries in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish 21st century dates from
20th century dates. Although we believe that our principal computer systems are
Year 2000 compliant, some of our systems are not yet certified. Because we
depend substantially upon the proper functioning of our computer systems, a
failure of our systems to correctly recognize dates beyond December 31, 1999
could materially disrupt our operations and seriously harm our ability to
schedule and deliver tests. The Year 2000 problem could also adversely affect
our business by causing the systems operated by our customers, vendors or other
business partners to fail. Because our systems interact with these third party
systems, we may be unable to schedule or deliver tests and generate electronic
reports using data provided by these third parties. We discuss our efforts to
handle the Year 2000 issue in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY AFTER THIS OFFERING, AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT
Before this offering, there has been no public market for our common
stock. We cannot predict how our common stock will trade in the future. The
market price of our common stock may fluctuate significantly due to a number of
factors, some of which may be beyond our control. These factors include:
o announcements of new computer-based test delivery contracts by us or
our competitors;
o actual or expected fluctuations in our operating results;
o failure of securities analysts to cover our company;
o changes in earnings estimates for our company by securities analysts
or our ability to meet those estimates;
o the operating and stock price performance of other comparable
companies;
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o overall stock market fluctuations; and
o overall economic conditions.
Also, the stock market in general has experienced extreme volatility
from time to time. This volatility has often been unrelated or disproportionate
to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock,
regardless of our actual operating performance.
THE SALE OR AVAILABILITY FOR SALE OF ADDITIONAL SHARES OF OUR COMMON STOCK AFTER
THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock. A
reduction in the price of our common stock could reduce the value of your
investment in our common stock and could impair our ability to raise capital
through the sale of additional equity securities.
Upon completion of this offering, __________ shares of our common stock
will be outstanding and will be tradeable as follows:
o ___________ of these shares will be owned by Sylvan. Sylvan
generally will not be able to sell its shares of our common stock in
the stock market unless we register them under the Securities Act of
1933. However, Sylvan expects to distribute its shares of our common
stock to its stockholders sometime in 2000. Prior to the
distribution, we do not expect Sylvan to sell any shares. If the
distribution occurs, the shares distributed will then be freely
tradeable, except for shares held by our affiliates;
o Except for any shares purchased by our affiliates, the __________
shares of our common stock sold in this offering will be freely
tradeable without further restrictions or registration under the
Securities Act; and
o Shares of our common stock reserved for issuance under our stock
option plan will be freely tradeable after option exercise once we
register these shares under the Securities Act. We expect to
register them within 60 days after this offering. We describe this
plan in the paragraph "1999 Stock Incentive Plan" in the
"Management" section of this prospectus.
Sylvan expects to distribute its shares of our common stock to its
stockholders sometime in 2000. We cannot predict what Sylvan's stockholders will
do with the shares of our common stock they receive in this distribution. If
many of them decide to sell their shares of our common stock soon after the
distribution, the market price of our common stock could decline. Also, we have
granted Sylvan the right to require us to register Sylvan's shares of our common
stock. Sylvan may be unable to obtain the IRS ruling and, therefore, will not
distribute its shares of our common stock to its stockholders. If this happens,
Sylvan may decide to register and sell its shares of our common stock. This also
could cause the market price of our common stock to decline.
We describe these matters in more detail in the "Shares Eligible for
Future Sale" section of this prospectus.
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THE BOOK VALUE OF YOUR COMMON STOCK WILL BE SUBSTANTIALLY DILUTED IN THIS
OFFERING
The price you will pay for our common stock will be substantially
higher than the tangible book value per share of our common stock. As a result,
you will experience immediate and substantial dilution in tangible book value
per share, and Sylvan, as owner of all of the rest of our outstanding common
stock will receive a material increase in the tangible book value of its shares
of our common stock. The dilution to you in this offering will be about $______
per share.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this prospectus that are forward-looking
statements. These statements are subject to risks and uncertainties. These
forward-looking statements generally are accompanied by words such as "may,"
"will," "intend," "anticipate," "believe," "estimate," "expect," "should," or
similar expressions. You should understand that these forward-looking statements
are subject to a number of assumptions, risks and uncertainties that could cause
our actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that could cause actual results to
differ materially from the estimates or projections we make in our
forward-looking statements include those described in "Risk Factors."
We are under no duty to publicly update or revise any of the
forward-looking statements after the date of this prospectus. In light of the
risks we describe in "Risk Factors," the forward-looking events we discuss in
this prospectus may not occur.
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OUR SEPARATION FROM SYLVAN
HISTORY OF OUR COMPUTER-BASED TESTING SERVICES BUSINESS
Sylvan decided to establish a computer-based testing services business
in the early 1990's. Sylvan viewed this business as a natural extension of its
educational services. Sylvan also saw testing as a way to provide more revenues
to franchisees of its Sylvan Learning Centers and to increase utilization of
learning centers during the day when centers normally had little business
because students were in school. Sylvan recognized that it would have to incur
substantial start-up capital expenses to establish a network of testing centers
and equip them to deliver computer-based tests. Sylvan would need a source of
tests that would be delivered soon after establishing the testing network to
justify these capital expenditures.
Sylvan knew that a number of leading academic test sponsors and
administrators were evaluating the feasibility of computer-based testing
services. Sylvan's management had established a business relationship with ETS
in the late 1980's. This relationship facilitated management's discussing with
ETS the feasibility of using Sylvan Learning Centers to deliver tests that ETS
expected to convert from paper and pencil to computer-based format. In 1993, ETS
and Sylvan entered into a contract, under which ETS named Sylvan as its
exclusive U.S. commercial deliverer of computer-based tests administered by ETS
(other than the SAT and other tests owned by the College Board). This contract
provided Sylvan the test volume necessary to justify establishing a
computer-based testing services network in the U.S. In 1994, Sylvan obtained a
contract from ETS to deliver tests in computer-based format outside North
America, on a cost plus 10% basis. Sylvan then began to establish testing
centers outside North America. We discuss the terms of these contracts under the
subheading "Contracts" in the "Business" section of this prospectus.
In September 1995, Sylvan acquired Drake Prometric, L.P. Drake had
purchased the computer-based testing services business of Control Data in the
late 1980's. Control Data had been a pioneer in the business and had established
computer-based testing services for the NASDR's licensing tests in the 1980's.
The NASDR later decided to operate its computer-based testing services itself
rather than by contract with Control Data. By 1995, Drake had become the leader
in providing certification tests for the IT industry. Drake had contracts with
Microsoft and Novell. Many of our current APTCs were established by Drake, and a
number of our employees worked for Drake prior to its acquisition by Sylvan. The
Drake acquisition significantly increased the opportunities and ability for
Sylvan to expand its computer-based testing services business.
In December 1997, Sylvan purchased the business of Block Testing
Services L.P., Block State Testing Services L.P. and an affiliated corporation,
National Assessment Institute, Inc. We refer to these businesses together as
NAI/Block. These businesses developed and delivered paper and pencil tests for
several state and local licensing agencies. In January 1999, Sylvan formed a
joint venture with Chauncey, a subsidiary of ETS. Sylvan contributed the
NAI/Block business to the joint venture, and Chauncey contributed its state
licensing test business. The name of the joint venture is Experior Assessments
L.L.C. We believe this joint venture enables us to expand our computer-based
testing services business in the licensing segment of the market.
SEPARATION OF PROMETRIC FROM SYLVAN
Until this offering, Sylvan operated our computer-based testing
services business as an unincorporated division. This division has been managed
by its own division president since 1996 and has developed its own management
team and professional staff. However, many of the Division's accounting and
other administrative functions have been performed by Sylvan's personnel.
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Sylvan has created Prometric as a separate corporation to separate our
computer-based business from Sylvan's other businesses and to facilitate this
offering. Immediately before this offering is completed, Sylvan will transfer to
this new corporation all assets and liabilities related to the computer-based
business. The primary assets to be transferred are the:
o assets that make up our testing network, such as the computer
systems that deliver tests electronically to our testing centers,
register and schedule candidate tests and store data related to test
results;
o computer hardware and software and other equipment in the testing
centers;
o contracts with entities such as ETS, Microsoft and the NASDR to
deliver computer-based testing services;
o agreements with third-party operators of the testing centers in our
network;
o joint venture interest in Experior;
o stock in the subsidiary corporations that operate portions of the
computer-based testing services business;
o about $138 million of unamortized goodwill and contract rights; and
o current assets, such as cash and accounts receivable from our
customers.
Sylvan also will sublease to us office space in its headquarters in Baltimore
and will sublease to us the various other offices, data centers and call centers
we use around the world in our business.
The primary liabilities to be assumed by our new corporation are:
o accounts payable;
o accrued expenses;
o accrued but unpaid taxes; and
o deferred revenue associated with tests we have been paid to deliver
but that we have not yet delivered.
Also, we have agreed to assume the defense of two lawsuits relating to
our computer-based testing services business and to indemnify Sylvan from any
amounts that we or Sylvan may have to pay to settle these cases or as a result
of a judgment in favor of either plaintiff. We discuss these cases under the
subheading "Our Business is Subject to Three Lawsuits" in the "Risk Factors"
section and under the subheading "Litigation" in the "Business" section of this
prospectus.
When this offering is completed, the management team and professional
staff that operated our business as a Sylvan division will become our full-time
employees. Our board of directors will consist of all of the current directors
of Sylvan, plus our Chief Executive Officer and President, Stephen A. Hoffman,
who has been President of Sylvan's Prometric Division since 1996. Sylvan will
own about ___% of our outstanding common stock (____% if the underwriters fully
exercise their over-allotment option).
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DISTRIBUTION OF OUR SHARES BY SYLVAN
Sylvan has informed us that it expects to distribute its shares of our
common stock to its stockholders. Sylvan has told us that it will not make this
distribution unless it first receives a ruling from the Internal Revenue Service
that the distribution would be tax-free to both Sylvan and Sylvan's
stockholders. It takes considerable time to obtain rulings of this nature from
the IRS, and the IRS is not required to issue them. Therefore, we cannot be
certain that Sylvan will obtain this ruling. If it did not, Sylvan has told us
that it will not distribute its shares of our common stock to its stockholders.
We have agreed to cooperate fully with Sylvan in seeking the IRS ruling. Sylvan
has told us that it does not expect to obtain an IRS ruling any earlier than
during the second half of 2000. Therefore, Sylvan does not believe it could
complete a distribution of its shares of our common stock until late in 2000.
We discuss the risks related to whether Sylvan distributes its shares
of our common stock in the "Risk Factors" section of this prospectus under the
subheading "Sylvan will own at least 80% of our outstanding common stock and
will be able to control us." Sylvan has indicated that the following are the
component factors its board of directors will consider when deciding whether to
complete the distribution:
o obtaining a favorable ruling from the IRS as to the tax-free nature
of the distribution;
o whether the distribution would be detrimental to Sylvan's
stockholders;
o no regulatory action or litigation seeking to prevent the
distribution; and
o unforeseen adverse conditions then affecting our business or
Sylvan's business.
REASONS FOR THIS OFFERING
Since it completed its initial public offering in late 1993, Sylvan has
grown rapidly. Sylvan has accomplished this both through internal growth in its
core businesses and through numerous acquisitions of companies engaged in a
variety of education-related businesses. In 1996, Sylvan divided its business
into three divisions and established separate management teams for each, lead by
a division president. However, Sylvan is finding it more difficult to
effectively manage this wide range of businesses. Sylvan believes that
separating our business from its other businesses will improve Sylvan's ability
to manage its core educational services business. Sylvan's board of directors
has conducted a strategic review of Sylvan, its structure and prospects. The
board concluded that there are a number of valid business reasons to separate
our computer-based testing services business from Sylvan's other educational
services businesses. The board of directors determined that:
o our computer-based testing services business is sufficiently
different from Sylvan's other educational services businesses to
warrant being a separate company;
o our computer-based testing services business is of a sufficient size
and scope to operate as a separate public company;
o our computer-based testing services business has its own management
team and professional staff in place that is capable of operating
the business separately from Sylvan; and
o our computer-based testing services business is not dependent upon
Sylvan's other businesses for growth.
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We and Sylvan believe that there are a number of benefits that will be
realized from the proposed transactions. These benefits include:
o eliminating possible conflicts of interest because Sylvan offers or
may offer educational services that compete with services offered by
some of our current or potential computer-based testing services
customers;
o allowing Prometric's and Sylvan's management teams to focus
exclusively on their respective businesses;
o aligning management and employee compensation directly with the
success of our business, through incentive programs tied to the
market performance of our common stock; and
o increasing our access to capital financing, such as our ability to
raise cash by selling our equity or debt securities to support our
planned growth, including business acquisitions.
AGREEMENTS WITH SYLVAN
At the time of completion of this offering, we will enter into several
agreements with Sylvan. These agreements will provide for the separation of our
computer-based testing services business from Sylvan and the on-going
relationship between Sylvan and us after the separation. Under the Separation
Agreement, Sylvan will transfer to us all assets of its computer-based business,
and we will assume all related liabilities. Under the Administrative Services
Agreement, Sylvan and Prometric will share the services of Sylvan employees who
will provide us a number of specified administrative services for the next two
years. We will enter into a Tax Sharing and Separation Agreement with Sylvan.
This will govern allocations of income tax liabilities between the two
companies. Under a Registration Rights Agreement, we will grant Sylvan the right
to require us to register its shares of our common stock under the Securities
Act under some circumstances. We describe the agreements we will enter into with
Sylvan in the section "Arrangements between Prometric and Sylvan" later in this
prospectus.
Because we have been a division of Sylvan before this offering, we
cannot assure you that the terms of these agreements are more or less favorable
than those that we could have negotiated with an unaffiliated third party.
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USE OF PROCEEDS
Assuming an initial public offering price of $____ per share, we
estimate that we will receive approximately $_____ million in net proceeds from
this offering, or approximately $____ million if the underwriters exercise their
over-allotment option in full, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We intend to use the
net proceeds from this offering for working capital and general corporate
purposes. Until we use the net proceeds of this offering, we will invest them in
U. S. government securities or investment-grade, interest-bearing instruments.
DIVIDEND POLICY
We do not intend to pay cash dividends on our common stock for the
foreseeable future. This is because we need to retain our cash for working
capital and to finance our planned growth. However, our board of directors is
free to change our dividend policy in the future, based upon factors such as our
results of operations, financial condition, cash flow, cash needs and future
prospects.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999.
o on an actual basis;
o on a pro forma as adjusted basis as if Sylvan had transferred the
assets and liabilities of its computer-based testing services
business to us on June 30, 1999 in exchange for _____ shares of our
common stock and to give effect to the sale of _______ shares of
common stock in this offering at an assumed offering price of
$______ per share (after deducting estimated underwriting discounts
and commissions and estimated offering expenses).
You should read this table together with our financial statements and
their notes, which we have included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(in thousands, except share data)
<S> <C> <C>
Owner's equity:
Owner's net investment..................... $269,282
Accumulated other comprehensive income .... 558
--------
Total owner's equity................ 269,840
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000
shares authorized; no shares issued or
outstanding................................ --
Common Stock, $.001 par value, 150,000,000
shares authorized;______ shares issued and
outstanding, actual; _____ issued and outstanding,
pro forma as adjusted ..................... --
Additional paid-in capital ................ --
Accumulated other comprehensive income .... --
--------- -----------
--
Total stockholders' equity .......... ========= ===========
Total capitalization........ $269,840 $
========= ===========
</TABLE>
-23-
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $______,
or $_____ per share. Pro forma net tangible book value per share represents the
amount of our total pro forma tangible assets reduced by the amount of our total
pro forma liabilities, divided by the pro forma number of shares of common stock
outstanding as of June 30, 1999. These pro forma amounts assume our separation
from Sylvan occurred on June 30, 1999, and our sale of the_______ shares of our
common stock in this offering at an assumed initial public offering price of
$____ per share also occurred on June 30, 1999. After deducting underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value at June 30, 1999, would have been approximately
$_______, or $_____ per share. This represents an immediate increase in pro
forma net tangible book value of $_____ per share to Sylvan (as our only
stockholder prior to this offering) and an immediate dilution of $_____ per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price per share................................. $
Pro forma net tangible book value per share at June 30, 1999...................$
Increase in pro forma net tangible book value per share
attributable to new investors............................................
Adjusted pro forma net tangible book value per share
after this offering...........................................
=============
Dilution per share to new investors............................................. $
=============
The following table summarizes on a pro forma basis as adjusted at June
30, 1999:
o the number of shares of our common stock held by Sylvan, Sylvan's
net investment in our business and the average price per share
represented by Sylvan's net investment;
o the number of shares of our common stock purchased by new investors
in this offering, the total consideration and the price per share
paid by them for these shares; and
o the percentage of shares of our common stock held by Sylvan and the
new investors and the percentage of consideration to us for these
shares.
<CAPTION>
<S> <C> <C> <C> <C> <C>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
---------------------------------------- -------------------------
NUMBER PERCENT AMOUNT PERCENT COMMON SHARE
------------------------ ----------- ----------- ---------- ----------------
Sylvan............... $
% $ %
New investors........ $
======================== =========== =========== ==========
Total...........
% $ %
======================== =========== =========== ==========
</TABLE>
-24-
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table presents our selected historical financial and
operating data. Our historical financial statements represent the carved-out
historical financial position and results of operations of the computer-based
testing services business of Sylvan.
Pro forma basic and diluted earnings per share presented in the
following table have been calculated assuming that the _________ common shares
issued in connection with our separation from Sylvan were outstanding for all
periods presented.
You should read our selected financial data together with our financial
statements and their related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", which we have
included elsewhere in this prospectus. We have derived the statement of
operations data for each of the three years in the period ended December 31,
1998 and the balance sheet data as of December 31, 1997 and 1998 from our
audited financial statements included elsewhere in this prospectus. These
financial statements have been audited by Ernst & Young LLP. We have derived the
statement of operations data for each of the years ended December 31, 1994 and
1995 from our unaudited consolidated financial statements which we did not
include in this prospectus. We have derived the statement of operations data for
the six months ended June 30, 1998 and 1999 and our balance sheet data as of
June 30, 1999 from our unaudited consolidated financial statements which we have
included elsewhere in this prospectus. In our opinion, the unaudited
consolidated financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of our results
for the six-month periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------------------------------------
1994 1995 (1) 1996 1997 (2) 1998 1998 1999
---------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 13,683 $ 34,565 $ 85,283 $ 115,622 $ 178,732 $ 74,458 $ 106,287
Costs and expenses:
Direct costs 13,225 27,602 58,340 80,063 120,120 51,547 71,121
General and administrative expense 862 3,248 13,823 26,880 27,160 12,562 19,280
Allocated indirect overhead costs (3) 1,587 2,350 2,686 3,835 4,740 2,370 3,520
Loss on impairment of assets -- -- -- 4,000 -- -- --
---------------------------------------------------------------------------------------
Total costs and expenses 15,674 33,200 74,849 114,778 152,020 66,479 93,921
---------------------------------------------------------------------------------------
Operating income (loss) (1,991) 1,365 10,434 844 26,712 7,979 12,366
Other income (expense) (167) (996) (378) (359) 892 236 1,324
---------------------------------------------------------------------------------------
Income (loss) before income taxes (2,158) 369 10,056 485 27,604 8,215 13,690
Income tax benefit (expense) 820 (140) (3,810) (1,957) (12,357) (3,697) (6,160)
=======================================================================================
Net income (loss) $ (1,338) $ 229 $ 6,246 $ (1,472) $ 15,247 $ 4,518 $ 7,530
=======================================================================================
Pro forma earnings per share, basic and
diluted (4) $ $ $ $ $ $ $
=======================================================================================
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------------------------------------
1994 1995 (1) 1996 1997 (2) 1998 1998 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total STC network 244 218 277 386 563 526 728
Total APTC network - 797 990 1,595 1,874 1,643 2,152
--------- -------- ----------- ---------- --------- ---------- ----------
Total test centers 244 1,015 1,267 1,981 2,437 2,169 2,880
======== ======== =========== ========== ========= ========== ==========
Tests delivered 296,949 567,708 1,412,869 2,290,724 3,503,161 1,526,554 2,201,596
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $ 568 $ 4,358 $ 7,405 $ 16,261 $ 12,815 $ 20,249 $ 17,188
Working capital (deficit) 2,822 (895) (4,704) 9,139 16,106 12,863 16,875
Total assets 17,766 101,605 33,840 211,046 299,601 226,572 311,558
Total liabilities 2,258 17,480 28,146 36,980 37,646 36,947 41,718
Owner's net investment 15,508 84,055 105,473 173,967 260,796 190,512 269,282
Common stock and additional paid-
in capital - - - - - - -
Total owner's equity 15,508 84,125 105,694 174,006 261,955 189,625 269,840
</TABLE>
(1) On September 30, 1995, we acquired Drake Prometric, L.P., a leading provider
of computer-based certification, licensing and assessment testing. The
transaction was accounted for using the purchase method of accounting, and our
results of operations from October 1, 1995 include the operations of Drake.
(2) On December 1, 1997, we acquired the business of Block Testing Services
L.P., Block State Testing Services L.P. and National Assessment Institute, Inc.
Prior to the acquisition, these companies were controlled by the same
shareholders and were engaged in the business of designing and administering
paper and pencil tests for the licensing of individuals. The acquisition was
accounted for using the purchase method of accounting, and our results of
operations from December 1, 1997 through December 31, 1998 include the
operations of these acquired companies. On January 1, 1999, we contributed the
net assets of Block and NAI to a newly-formed joint venture in which we have a
50% interest. We account for the joint venture using the equity method of
accounting.
(3) Sylvan has allocated to us indirect overhead costs during all of the periods
presented. These costs consist principally of corporate human resources,
finance, accounting and administration, investor relations and information
management services. After this offering, we will be charged by Sylvan for these
services under the provisions of an Administrative Services Agreement. You
should read "Arrangements Between Prometric and Sylvan."
(4) Pro forma as adjusted gives effect to the transfer of the computer-based
testing services division to us and the offering as if it had occurred on June
30, 1999.
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR EACH OF THE PAST THREE YEARS AND FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND 1999. YOU SHOULD READ THIS DISCUSSION TOGETHER WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES, WHICH WE HAVE INCLUDED ELSEWHERE IN THIS
PROSPECTUS. WE MAKE SOME FORWARD-LOOKING STATEMENTS ABOUT OUR FUTURE
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS INCLUDE NUMEROUS RISKS AND
UNCERTAINTIES, AS DESCRIBED IN THE "RISK FACTORS" SECTION OF THIS PROSPECTUS.
INTRODUCTION
We have a global distribution network for computer-based testing
services. We provide our testing services for information technology
certification, professional licensing and certification, academic admissions and
other secure testing requirements. We have operated our business as a division
of Sylvan and will continue to do so until immediately before this offering.
Because we have operated as a Sylvan division:
o Sylvan used its cash management systems to pay many of our direct
operating costs and general and administrative expense;
o Sylvan allocated to us a portion of its overhead costs because it
provided us various administrative services. To make these
allocations, Sylvan estimated the amount of its total overhead costs
that were attributable to our operations;
o Sylvan acquired the Drake and NAI/Block businesses on our behalf;
and
o Sylvan acquired computer and other equipment and several testing
contracts on our behalf.
To account for these transactions, Sylvan has maintained an intercompany
account. "Owner's net investment" in the equity portion of our balance sheets
represents the balances in this intercompany account as of the dates of our
balance sheets. Upon completion of our separation from Sylvan, the amounts under
owner's net investment will be included within our stockholders' equity.
REVENUES. We derive our revenues primarily from the delivery of
computer-based testing services to our technology, professional and licensing
and academic customers. Our growth depends primarily upon the continued
conversion of paper and pencil tests to computer-based format and growth in new
certification programs that require computer-based testing. Our revenues
represent a portion of the overall fees candidates pay to take the tests we
deliver. The remainder of the candidates' fees belong to our customers. We
recognize the fees we receive for delivering these tests when the candidates
take them, except for fees we receive under our ETS international contract.
Under that contract, ETS pays us for our costs of delivering ETS tests
internationally plus 10%. These costs include depreciation and amortization of
the equipment and other assets we purchase to deliver ETS tests internationally.
Therefore, we recognize revenues under this contract as we incur costs that ETS
will reimburse to us.
PRICING. Our contracts generally provide for a per-test fee or a fee
based on the number of testing hours, subject to certain minimum payments. Our
contracts usually provide that the per test fee varies with the volume of tests
delivered. However, our ETS international contract is priced on a cost plus 10%
basis.
-27-
<PAGE>
DIRECT COSTS. Direct costs are the expenses we incur to:
o operate and staff our test delivery network, including our testing
centers, call centers and data centers (including costs that ETS
reimburses us under our international contract);
o compensate our testing centers for the tests they deliver;
o assist our customers in developing new computer-based tests or
converting existing tests to computer-based format; and
o provide technical support to our testing centers.
DEFERRED CONTRACT COSTS. We often incur costs to develop a new
computer-based testing program for a customer when we have a contract with a
customer for our delivery of the test. These costs are primarily labor and
benefits costs of our employees who do the development work. We capitalize these
costs as "deferred contract costs," and we amortize them over the term of the
test delivery contract. This amortization is included in our direct costs.
In 1996, we entered into three year contracts with a number of
operators of our APTCs. We paid these operators a total of $10.4 million at the
time of the contracts, which the operators accepted as full compensation for the
three years. As a result, we capitalized this amount as "deferred contract
costs," and we are amortizing it to direct costs over the three years.
CONTRACT RIGHTS. In 1996, we entered into a 10 year test delivery
contract with the NASDR. As part of this contract, we assumed the NASDR's leases
of 50 test centers it had used to deliver its own tests. We also purchased the
NASDR's fixed assets in these test centers. We incurred acquisition costs of
$6.4 million. Of this amount, we capitalized $6.2 million as "contract rights"
and $243,000 as fixed assets. We are amortizing these contract rights to direct
costs over the 10 year term of the NASDR contract.
GENERAL AND ADMINISTRATIVE EXPENSE. This expense includes:
o compensation we pay our management;
o sales and marketing;
o advertising;
o the cost of our general and administrative facilities;
o the cost of our accounting and finance departments that operate
separately from Sylvan; and
o goodwill amortization.
In 1997, we contributed $10.0 million to IT Training Marketing Company. We made
another contribution of $3.6 million to this company in the second quarter of
1999. This is a nonprofit organization whose sole purpose is to support and
promote IT training and certification programs, including those operated by our
IT customers and APTC operators. We expensed these payments when we made them.
-28-
<PAGE>
ALLOCATED INDIRECT OVERHEAD COSTS. These are Sylvan's costs it incurs
to provide us various administrative services. The primary services Sylvan
provides us are:
o human resources, such as payroll, benefits plan administration and
training;
o finance and accounting;
o legal and tax;
o investor relations; and
o information management.
Most of Sylvan's overhead costs consist of compensation and benefits for its
administrative staff. Sylvan allocated portions of these to us by analyzing the
amount of time that the members of its administrative staff spend to perform
services on our behalf. Historically, Sylvan has allocated these overhead
expenses to us at cost. After our separation from Sylvan, we intend to purchase
these services from Sylvan at Sylvan's cost. Once Sylvan distributes our shares
to its stockholders, we will purchase these services from Sylvan at Sylvan's
cost plus 10%.
ACQUISITIONS. Effective September 30, 1995, we acquired Drake. We
initially paid $70.6 million and later paid $71.7 million of additional purchase
price. We paid this additional amount because the Drake business achieved
various revenue targets for 1996 through 1998. We accounted for this acquisition
as a purchase and recorded $141.8 million of the purchase price as goodwill. We
are amortizing this goodwill over 25 years. Our results of operations include
Drake's operations from October 1, 1995.
In 1997, we purchased NAI/Block for $25.0 million and assumed $4.2
million of liabilities. The assets acquired had a fair value of $29.2 million.
We also accounted for this acquisition as a purchase and recorded $26.7 million
of the purchase price as goodwill. We were also amortizing this goodwill over 25
years. Effective January 1, 1999, we contributed the NAI/Block assets to our
Experior joint venture with Chauncey in exchange for a 50% joint venture
interest. Our results of operations include NAI/Block's operations from December
1, 1997 through December 31, 1998. Effective January 1, 1999, we began to
account for our interest in Experior using the equity method of accounting.
Therefore, we now include only our share of Experior's net income in our results
of operations.
IMPAIRMENT LOSS. In May 1997, we concluded that the value of some of
our software and hardware used in our test delivery network had become impaired.
We reached this conclusion when we determined that we needed to upgrade our
network to support growth in test volume. We recorded an impairment loss of $4.0
million. This amount represented the book value of the software and hardware. We
later disposed of these assets for no significant consideration.
INCOME TAXES. We are part of Sylvan's consolidated group for income tax
purposes. We calculated our income taxes on our statements of operations as if
we were a separate corporation rather than part of Sylvan's consolidated group.
Our income tax expense varies from the U.S. federal statutory income tax rate of
35% primarily because of permanent differences between pre-tax income in our
federal income tax returns and our financial statements. Permanent differences
between our financial statements and our income tax returns relate primarily to
our inability to deduct for income tax purposes goodwill amortization from the
acquisitions of Drake and NAI/Block. We are also subject to income taxes in
foreign countries at rates that differ from the federal statutory rate.
-29-
<PAGE>
RESULTS OF OPERATIONS. The following table shows the percentages of our
revenues that the various items on our statements of operations represent.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1996 1997 1998 1998 1999
------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 100% 100%
Direct costs and expenses 69 69 67 69 67
General and administrative expense 16 23 15 17 18
Allocated indirect overhead costs 3 3 3 3 3
Loss on impairment of assets -- 4 -- -- --
------------- ------------ ------------ ------------ ------------
Total costs and expenses 88 99 85 89 88
------------- ------------ ------------ ------------ ------------
Operating income 12 1 15 11 12
Other income -- -- 1 -- 1
------------- ------------ ------------ ------------ ------------
Income before taxes 12 1 16 11 13
Income taxes 5 2 7 5 6
------------- ------------ ------------ ------------ ------------
Net income (loss) 7% (1)% 9% 6% 7%
============= ============ ============ ============ ============
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
REVENUES. Revenues increased by $31.8 million, or 43%, from $74.5
million in the first half of 1998 to $106.3 million in the first half of 1999.
Revenues for the first half of 1998 include $6.6 million of NAI/Block's
revenues. On January 1, 1999, we contributed the NAI/Block business to Experior.
Therefore, revenues for the first half of 1999 do not include NAI/Block's
revenues. Revenues would have increased by $38.5 million, or 57%, from the first
half of 1998 to the first half of 1999, if we excluded NAI/Block's revenues from
the first half of 1998.
Our increase in revenues consisted of the following:
<CAPTION>
Dollar Increase Percent Increase
--------------- ----------------
<S> <C> <C>
Technology certification.................................... $17.4 million 48%
Professional licensing and certification.................... 6.6 million 56%
Academic.................................................... 14.5 million 72%
------------- ----------
Total........................ $38.5 million 57%
============= ==========
</TABLE>
The increase in technology certification revenues resulted from higher
volumes of tests delivered for Microsoft and other major technology
certification customers.
Most of the increase in our professional licensing and certification
revenues came from an agreed upon price increase for the NASDR tests and the
addition of the National Board of Medical Examiners (NBME) test in May of 1999.
The $14.5 million increase in our academic revenues resulted from:
o an increase of $10 million under our ETS international contract;
o adjustments in the pricing structure for tests we deliver under our
domestic ETS contract; and
-30-
<PAGE>
o higher volumes of ETS tests we deliver.
DIRECT COSTS. Direct costs increased by $19.6 million, or 38%, from
$51.5 million in the first half of 1998 to $71.1 million in the first half of
1999. Direct costs as a percentage of revenues decreased from 69% in the first
half of 1998 to 67% in the first half of 1999. Direct costs would have been
$46.0 million, or 68%, of revenues in the first half of 1998 if we excluded
NAI/Block's revenues and costs. We attribute the percentage decrease from the
first half of 1998 to the first half of 1999 to our ability to deliver a higher
volume of tests without the need to proportionately increase our test delivery
costs. These increases in operating efficiencies were partially offset by an
increase in lower margin international ETS revenues as a percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by $6.7 million, or 53%, from $12.6 million in the first half of 1998
to $19.3 million the first half of 1999. General and administrative expense as a
percentage of revenues increased from 17% to 18%. This increase resulted
primarily from higher advertising and sales and marketing expenses.
ALLOCATED INDIRECT OVERHEAD COSTS. Allocated indirect overhead costs
increased by $1.2 million, or 49%, from $2.4 million in the first half of 1998
to $3.5 million in the first half of 1999. These costs were 3% of revenues in
both periods. The higher dollar amount of these costs was the result of
increased overhead spending to support our higher volume of business in the
first half of 1999.
OTHER INCOME (EXPENSE). Other income increased by $1.1 million from
$236,000 in the first half of 1998 to $1.3 million in the first half of 1999.
The principal reason for this increase was our $945,000 share of Experior's net
income in the first half of 1999.
INCOME TAXES. Our effective income tax rate was 45% in both the first
half of 1998 and the first half of 1999.
1998 COMPARED TO 1997
REVENUES. Revenues increased by $63.1 million, or 55%, from $115.6
million in 1997 to $178.7 million in 1998. During 1998, NAI/Block generated
$12.9 million of revenues, an $11.6 million increase from 1997 when we operated
NAI/Block for only one month. Excluding revenues from NAI/Block, revenues would
have increased by $51.5 million, or 45%.
Our increase in revenues consisted of the following:
<TABLE>
<CAPTION>
Dollar Increase Percent Increase
--------------- ----------------
<S> <C> <C>
Technology certification.................................... $26.8 million 48%
Professional licensing and certification.................... 3.6 million 14%
Academic.................................................... 21.1 million 63%
------------- ---------
Total........................ $51.5 million 45%
============= ========
</TABLE>
The increase in our technology certification revenues resulted from
higher volumes of tests delivered for Microsoft and other major technology
certification customers.
The increase in our professional licensing and certification revenues
came from higher test volumes, primarily tests we deliver for the NASDR.
The $21.1 million increase in our academic revenues resulted from:
-31-
<PAGE>
o an increase of $15.0 million under our ETS international contract;
o commencement of the TOEFL test, which was converted to
computer-based format in July 1998; and
o a volume increase for GMAT, which we began delivering in October
1997.
DIRECT COSTS. Direct costs increased by $40.1 million, or 50%, from
$80.1 million in 1997 to $120.1 million in 1998. Direct costs as a percentage of
revenues decreased from 69% in 1997 to 67% in 1998. Direct costs would have been
$79.2 million or 69% of revenues in 1997 and $111.4 million or 67% in 1998 if we
excluded NAI/Block's revenues and costs. We attribute this percentage decrease
to our ability to deliver a higher volume of tests without the need to
proportionately increase our test delivery costs. These operating efficiencies
were partially offset by an increase in lower margin international ETS revenues
as a percentage of revenues.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by $280,000, from $26.9 million in 1997 to $27.2 million in 1998.
General and administrative expense as a percentage of revenues decreased from
23% in 1997 to 15% in 1998. We attribute this percentage decrease to the $10.0
million contribution to IT Training Marketing Company we made during the first
half of 1997.
ALLOCATED INDIRECT OVERHEAD COSTS. Allocated indirect overhead costs
increased by $905,000, or 24%, from $3.8 million in 1997 to $4.7 million in
1998. They were 3% percent of revenues in both periods. The higher dollar amount
in 1998 was the result of increased overhead spending to support our higher
volume of business.
LOSS ON IMPAIRMENT OF ASSETS. In May 1997, we concluded that the value
of some of our software and hardware used in our test delivery network had
become impaired. We reached this conclusion when we determined that we needed to
upgrade our network to support our expected growth in test volume. We recorded
an impairment loss of $4.0 million. This amount represented the book value of
the software and hardware. We later disposed of these assets for no significant
consideration.
OTHER INCOME (EXPENSE). Other income (expense) increased by $1.3
million, from other expense of $359,000 in 1997 to other income of $892,000 in
1998. The increase resulted from interest income and foreign currency gains.
INCOME TAXES. Our effective income tax rate in 1998 was 45%. In 1997,
we incurred an income tax expense of $2.0 million on income before taxes of
$485,000.
1997 COMPARED TO 1996
REVENUES. Revenues increased by $30.3 million, or 36%, from $85.3
million in 1996 to $115.6 million in 1997.
Our increase in revenues consisted of the following:
<TABLE>
<CAPTION>
Dollar Increase Percent Increase
--------------- ----------------
<S> <C> <C>
Technology certification.................................... $6.1 million 12%
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Professional licensing and certification.................... 3.8 million 16%
Academic.................................................... 20.4 million 159%
------------- ----
Total........................ $30.3 million 36%
============= ====
</TABLE>
The increase in technology certification revenues resulted from higher
volumes of tests delivered for Microsoft and other major technology
certification customers.
The increase in professional licensing and certification revenues was a
result of:
o $1.3 million of revenues from NAI/Block;
o additional testing agreements; and
o the full year effect of new customers added in 1996.
The $20.4 million increase in our academic revenue resulted from:
o $10.0 million of revenue under our ETS international contract;
o volume increases for ETS tests; and
o additional testing agreements, including GMAT in October 1997.
DIRECT COSTS. Direct costs increased by $21.7 million, or 37%, from
$58.3 million in 1996 to $80.1 million in 1997. Direct costs as a percentage of
revenues increased from 68% in 1996 to 69% in 1997. We attribute this percentage
increase primarily to an increase of lower margin international ETS revenues in
1997 and an increase in the number of employees serving our customers in
anticipation of increased test volumes.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by $13.1 million, or 94%, from $13.8 million in 1996 to $26.9 million
in 1997. General and administrative expense as a percentage of revenues
increased from 16% in 1996 to 23% in 1997. We attribute this percentage increase
to a $10.0 million contribution to IT Training Marketing Company that we made in
the second quarter of 1997.
ALLOCATED INDIRECT OVERHEAD COSTS. Allocated indirect overhead costs
increased by $1.1 million, or 43%, from $2.7 million in 1996 to $3.8 million in
1997. They were 3% of revenues in both periods. The higher dollar amount in 1997
was the result of increased overhead spending to support a higher volume of
business in 1997.
OTHER INCOME (EXPENSE). Other expense decreased $19,000 from 1996 to
1997. Our other expense in these periods consisted of foreign currency losses,
partially offset by interest and other income.
INCOME TAXES. In 1997, we incurred an income tax expense of $2.0
million on income before taxes of $485,000. In 1996, our 38% effective income
tax rate was higher than the U.S. statutory income tax rate of 35% by 3%. The
principal reason for this difference was the effect of state income taxes.
-33-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have generated significant positive cash flows from our operations
during the last three years. This has resulted from our net income before
non-cash charges (consisting principally of depreciation and amortization) and
our ability to manage our working capital needs. Net cash provided by operating
activities was $15.8 million in 1996, $12.3 million in 1997, $25.0 million in
1998 and $22.0 million in the first six months of 1999.
We believe that uncollectible accounts receivable will not have a
significant effect on future liquidity since a large portion of our accounts
receivable result from enterprises with substantial financial resources. We are
enhancing our fee processing capabilities to enable us to accept more
international payments directly. We expect this capability to allow us to
significantly reduce uncollectible accounts receivable.
Net cash used in investing activities was $14.9 million in 1996, $27.7
million in 1997, $40.0 million in 1998 and $17.9 million in the first six months
of 1999. Our investing activities during each of these periods principally
related to capital expenditures for our expanding network of global testing
centers, registration call centers and internal software development. We are
committed to build a testing network in the U.K. to deliver the driving theory
test under our contract with the U.K. Driving Standards Agency. We currently
estimate that our expenses to construct this network, which include test
centers, a call center and contract preparation costs, will be $18.0 million.
Some of our obligations are satisfied by Sylvan and accounted for
through an intercompany account. These obligations include direct costs of
revenues and overhead costs directly attributable to the Company's operations
and are paid through Sylvan's cash management systems. Intercompany account
balances are treated as permanent contributions and have been reflected as a
component of owner's equity in the accompanying financial statements. Sylvan
contributed $2.0 million in 1996, $24.3 million in 1997, $12.0 million in 1998
and $834,000 during the first six months of 1999.
We expect that available cash, cash flows from operations, and the
proceeds from this offering will be sufficient to meet our operating and
investing needs over the next several years. However, we continue to examine
opportunities to expand our business, and as a result, additional capital
resources may be needed.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs written using
two digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, production
difficulties, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
We have established a company-wide Year 2000 task force with
representatives from all departments. The task force has conducted a
comprehensive review of our information technology and non-information
technology systems affected by the Year 2000 issue. They have also developed an
implementation plan to resolve them. We measure our progress towards completion
based on the level of efforts completed to date compared to the total expected.
The process involves five phases:
Phase I - Inventory and Data Collection. This phase involves conducting
a comprehensive inventory of our information systems. This includes
telecommunications systems, computer hardware, software and networks. This also
includes building infrastructure such as HVAC, elevators and security
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systems. The identification of key third party vendors is also involved. During
this phase, all new systems are required to have passed Year 2000 compliance
tests before being purchased and implemented. We commenced this phase in the
first quarter of 1998 and the phase is complete.
Phase II - Assessment / Date Impact. In this phase, systems identified
during Phase I are reviewed to determine what impact, if any, the Year 2000
Issue has on the operation of these systems. This phase also identifies the
effects of Year 2000 being a leap year. This phase has been completed.
Phase III - Remediation. This phase involves modifying, replacing or
upgrading the systems that have failed during Phase II. The remediation phase
has been completed.
Phase IV - Testing. This phase involves review of systems for
compliance and re-testing as necessary. The testing phase is complete and all
software has been certified.
Phase V - Implementation. This phase involves implementing the systems
after they have been successfully remediated and tested. This is the final step
in assuring that the systems are Year 2000 compliant. All central systems have
been redeployed. Software movement to the test centers is ongoing as we receive
certifications from them. All field deployments will be completed by the end of
October 1999, with the exception of certain third party service providers
already identified as not Year 2000 compliant.
We believe the cost to remedy Year 2000 issues to be about $3.6
million. We expended about $800,000 in 1998 and about $2.3 million during the
first six months of 1999. We are not aware of any material non-compliance that
would have a material effect on our financial position. As part of the Year 2000
issue process, formal communication with our suppliers, customers and other
support services has been initiated. Our efforts will continue until positive
statements of readiness have been received from all third parties. We have
identified certain service suppliers that are not Year 2000 compliant. We are
working with the suppliers to ensure efforts are taken to correct the situation
and we are establishing contingency plans to ensure no material service
interruption. Therefore, we do not believe that the non-compliance by the
service suppliers will have a material impact on our business. However, we
cannot assure you we will not face this unanticipated non-compliance. This
non-compliance could require material costs to repair or could cause material
disruptions if not repaired. We are in the process of developing a strategy to
address these potential consequences that may result from unresolved Year 2000
issues, which will include the development of one or more contingency plans by
the end of October 1999.
EURO CONVERSION
On January 1, 1999, some countries of the European Union established
fixed conversion rates between their existing currencies and one common
currency, the Euro. The Euro is now traded on currency exchanges and may be used
in business transactions. Beginning in January 2002, new Euro-denominated
currencies will be issued and the existing currencies will be withdrawn from
circulation. We are currently evaluating the systems and business issues raised
by the Euro conversion. These issues include the need to adapt computer and
other business systems and equipment and the competitive impact of cross-border
transparency. We have not yet completed our estimate of the potential impact
likely to be caused by the Euro conversion. However, we do not currently believe
the Euro conversion will have a material impact on our financial condition or
results of operations.
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EFFECTS OF INFLATION
Inflation has not had a material effect on our revenues and income from
continuing operations in the past three years. Inflation is not expected to have
a material future effect.
QUARTERLY FLUCTUATIONS
Our revenues and operating results have varied substantially from
quarter to quarter. These results may continue to vary, depending upon the
timing of implementation of new computer-based testing services contracts. Based
on our 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
We are exposed to market risk from changes in foreign currency exchange
rates, which could affect our future results of operations and financial
condition. We manage our exposure to these risks through our regular operating
and financing activities.
FOREIGN CURRENCY RISK. We derive 40.5% of our revenues from testing
activities outside of the United States. A significant portion of these revenues
are generated under our ETS international contract where ETS has agreed to bear
the foreign currency exchange risk. Under that contract, foreign exchange rate
gains and losses are a component of reimbursable contract costs. We transact our
business through a network of international subsidiaries. Our foreign operations
providing IT testing services have functional currencies that are the local
currency. These foreign operations collect testing fees earned by us, which are
denominated in foreign currencies. These subsidiaries exchange their non-U.S.
dollar currencies for U.S. dollars and remit the fees in U.S. dollars to us.
Upon test delivery, we pay the test sponsor's fee in U.S. dollars and retain the
residual. The principal currencies of our foreign operations providing IT tests
are the British pound sterling, the German deutsche mark, the Australian dollar
and the Japanese yen. We generally are not exposed to foreign exchange rate
fluctuations related to collected fees on undelivered tests because of
contractual provisions in our contracts with test sponsors. Most of our foreign
exchange gains and losses have occurred from unsettled intercompany balances
between us and our foreign operations after the date of test delivery. Assuming
a 10% deterioration in foreign exchange rates at June 30, 1999, our exchange
losses would not be material.
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BUSINESS
INTRODUCTION
Prometric is the leading worldwide provider of comprehensive
computer-based testing and assessment services. We provide a complete
computer-based testing services solution to sponsors and administrators of
large-volume tests. Our services include test preparation, candidate scheduling
and registration, payment processing, test administration, test distribution,
test results processing, consulting and marketing. We provide these testing
services primarily to the technology certification, professional licensing and
certification and academic markets. As of July 31, 1999, we had contracts to
deliver over 2,400 different tests. Our global testing network consists of:
o 2,915 computer-based testing services centers in 141 countries,
1,477 of which are located in the United States and Canada, and
o 10 call centers in 9 countries, which will handle over 7.5 million
calls this year and operate in 25 languages and 33 currencies.
Our proprietary scheduling and test delivery software systems support our
testing and call centers and enable us to deliver our services on a secure and
cost-effective basis. Through our global testing network, we delivered over 3.5
million tests in 1998 and over 2.2 million tests during the first six months of
1999.
Our global testing network and testing software systems enable us to
provide:
o test scheduling in 141 countries;
o candidate registration and payment processing;
o candidate eligibility services;
o test preparation materials and practice tests over the Internet;
o reliable test center administration, including candidate
verification and test proctoring;
o reliable and secure global test delivery;
o immediate and accurate test results; and
o detailed analytical reports of test results and test program
statistics.
We have entered into strategic relationships with several leading test sponsors
and administrators, including:
o EDUCATIONAL TESTING SERVICE (ETS) - the leading developer of academic
assessments and admissions tests. This relationship gives us the
exclusive commercial right to provide our testing services for many
ETS-sponsored computer-based tests in North America and around the
world, including the GMAT, GRE, TOEFL and PRAXIS I examinations.
o MICROSOFT - the leading developer of software, business networking and
personal computer software solutions. This relationship gives us the
right to provide testing services for Microsoft's
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certification programs for application developers, system engineers,
database administrators, sales specialists and other IT professionals.
o NATIONAL ASSOCIATION OF SECURITIES DEALERS REGULATION, INC. (NASDR) -
the regulatory body and licensing organization for the securities
industry professionals. This relationship gives us the right to provide
our testing services for all of the NASDR's tests in North America,
including the Series 6, Series 7 and Series 63 tests and the tests for
the NASDR's continuing education programs.
o COMPTIA - a non-profit IT industry trade association. This relationship
gives us the right to provide testing services for CompTIA's
entry-level service technician, networking and document imaging
computer skills certification programs.
o U.K. DRIVING STANDARDS AGENCY - the government agency that licenses
drivers in the United Kingdom. This relationship gives us the exclusive
right to provide testing services for driver's license theory tests to
prospective drivers in the United Kingdom.
o THE CHAUNCEY GROUP - the leading developer of tests relating to
professional and occupational licensing, certification and assessment.
In 1999, we entered into a joint venture with Chauncey, a subsidiary of
ETS. The joint venture is called Experior Assessments LLC. This joint
venture relationship gives us the right to pursue jointly with Chauncey
all test development and administration opportunities for state and
local licensing agencies.
We began providing computer-based testing services in 1992. From 1996
through 1998, we delivered over 7.8 million tests worldwide. Our revenues have
increased from approximately $85.3 million in 1996 to $178.7 million in 1998.
Net income has grown from approximately $6.2 million in 1996 to approximately
$15.2 million in 1998. These represent compound annual growth rates of 44.8% for
revenues and 56.2% for net income.
INDUSTRY OVERVIEW
There are three main segments of the standardized testing and
assessment market:
TECHNOLOGY CERTIFICATION. The information technology (IT) industry is a
leader in providing technology skills certifications. Companies such as
Microsoft, IBM, Novell, Lotus, Oracle and Cisco offer extensive training
programs for their products. This training is typically out-sourced. New
training programs are developed each year as IT companies release new and
upgraded products. This training is typically followed by multiple levels of
certification tests to ensure that IT professionals are proficient in the
company's software and other products. According to the Office of Technology
Policy of the U.S. Department of Commerce, more than 1.3 million new IT
professionals will be needed between 1996 and 2006. These IT professionals are
increasingly seeking certification as a source of recognizable proof of
proficiency and professional achievement and as a means for advancement. In
addition, employers have begun to require certification to ensure that
prospective and current IT employees have a demonstrated level of competency. We
believe that most of today's technology certification tests are delivered in
computer-based format.
Other technology-driven industries, such as the medical device and
telecommunications industries, have begun, or are expected to begin, to develop
training and certification programs similar to those used in the IT industry.
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PROFESSIONAL LICENSING AND CERTIFICATION. Many professions and
occupations require a license or professional designation. To obtain most
licenses or professional designations, an individual must pass a standardized
licensing or designation certification test. According to the U.S. Bureau of
Labor Statistics, by 2005, about 45 million individuals in the U.S. will be
engaged in an occupation that requires a license or certification issued by a
state agency or national association. We believe that a growing number of
professional licensing and certification tests will be delivered in
computer-based format.
There are three basic types of tests in the professional licensing and
certification segment:
o LICENSING TESTS. Most federal, state and local governments require
standardized proficiency tests to gain many licenses. Examples include
tests for certified public accountant (CPA), medical doctor (MD) and
securities broker (NASDR Series 7 and Series 63). Most of these
licenses are required before a professional is permitted to practice.
Federal, state and local governments periodically add licenses to
ensure the proficiency of people working in certain occupations. For
example, states are now requiring licenses for food handlers because of
public concern over food safety.
o CERTIFICATION TESTS. Many professional organizations offer tests to
show specific proficiencies in order to gain certification
designations. Examples include tests for certified financial planner
(CFP), certified life underwriter (CLU), American Institute of
Certified Property and Casualty Underwriters (AICPCU) and certified
safety professional (CSP). Some of these certifications and
designations are required before a professional may practice within a
profession. In addition, many organizations require professionals to
attend continuing education programs and, increasingly, to pass tests
to prove continuing proficiency.
o ASSESSMENT TESTS. Individuals and employers use a wide range of tests
to measure skills and needs. Assessment tests measure personal
characteristics, basic skills and knowledge and can be tailored to an
employer's specific needs. Examples include the Meyers-Briggs Type
Indicator personality screening test, the QUIZtek IT professional
pre-employment test, and SkillCheck computer literacy, office and
clerical job tests. According to the Society of Human Resource
Management, about 55% of all companies now use some assessment testing
in the hiring process. Employers' human resource departments are
increasingly looking for ways to assess the qualifications of potential
employees and monitor the progress of employees. Assessment tests help
an employer hire and train qualified workers and improve the
consistency of skill in its workforce. In addition, many large
corporations are expanding their training programs (often known as
"corporate universities"). These corporate universities are being
developed to provide the specialized knowledge needed by their
employees. Standardized testing has become an integral part of this
specialized corporate training.
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ACADEMIC. Academic institutions and organizations give many tests to
measure academic achievement and aptitude. Some of these tests are critical to
admission, academic advancement and increasingly for graduation. Additionally,
millions of tests are administered in U.S. schools each year to measure the
progress of students, teachers and the schools themselves. According to the
Council of Chief State School Officers, more than 100 million academic
standardized tests are given to students in kindergarten through twelfth grade
in the U.S. each year. We believe that most of today's academic standardized
tests continue to be delivered in paper and pencil format.
There are three basic types of tests in the academic segment:
o ADMISSIONS TESTS. Most colleges, universities and graduate schools
require their applicants to take an admissions test as part of the
admissions process. Colleges and universities use these tests as an
objective evaluation of applicants for admission. Examples of these
tests include the SAT, ACT, GRE, GMAT, MCAT, LSAT and TOEFL
examinations. As education continues to become more important to
economic advancement, the number of applicants taking admissions tests
and the number of tests they take should continue to grow.
o STANDARDIZED TESTS. The use of standardized tests has increased
substantially in recent years. States increasingly use these tests to
measure the quality of education provided, the level of student
competency in a particular subject area and as criteria for graduation.
For example, the Iowa Test of Basic Skills and the California
Achievement Test measure achievement among elementary and middle school
students and are given each year to public school students throughout
the U.S. Due to increasing concern over the quality of public school
education, at least 20 states now require high school exit examinations
to graduate. Each year, a significant number of people also take the
GED, a high school equivalency test.
o END-OF COURSE TESTS. Throughout higher education and most secondary
education, courses end with a final exam to determine whether a student
has mastered the subject matter. Distance learning has developed in
response to the need of working adults for continuing education at
times and in locations that fit their busy schedules. Distance learning
institutions offer students the opportunity to take courses remotely
and are rapidly increasing in popularity and acceptance. Many of these
institutions offer their students the option of taking end-of-course
tests remotely and are increasing the use of computer-based testing.
COMPUTER-BASED TESTING SERVICES
The computer-based testing services market has evolved over the past
ten years as a result of a recognized need to provide an easier, more secure way
to deliver large-scale, standardized tests. The conversion of tests from paper
and pencil format to computer-based format and the continued development of
certifications in technology industries are driving market growth. We expect the
test conversion rate to accelerate now that the computer-based testing services
industry has become well-established and has demonstrated its capability of
providing large volumes of tests with a consistently high level of service. We
also expect the rapid evolution of new technologies to require the development
of more training and certification programs in technology-based industries.
A computer-based testing and assessment program delivered through a
testing center network offers the following advantages:
o MORE CONVENIENT. Candidates can be tested at any time, at numerous
places and can register immediately prior to the test. This means that
the test taker can take a test at a time and in a place
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that is convenient to his or her schedule and location. The candidate
also has many more opportunities to take or re-take the test because
computer-based tests can be given more often.
o MORE ACCURATE TESTS OF COMPETENCY. The technology used for
computer-based testing allows for a wide range of question types. For
example, tests can use simulations of real-life situations, graphics,
voice activated responses and software product simulations that
simultaneously show reading passages and questions about those
passages. Computer-based testing services can also match questions to
the test taker's ability by adapting the questions to the test taker
based on the answers given. As a result, computer-based tests can
provide a more accurate measure of a candidate's knowledge and
assessment of his or her abilities.
o IMMEDIATE SCORING AND RESULTS. Testing candidates can receive their
computer-based test results immediately. In contrast, candidates often
must wait four to six weeks to receive their scores from paper and
pencil tests. Computer-based testing systems can send the results
electronically to the candidate's school, employer or other designated
institution. This can greatly reduce the time required for a candidate
to receive an admission decision or a certificate or license.
o HIGHER LEVELS OF SECURITY. Computer-based tests can be programmed to
present questions in random order or construct a different test for
each individual by selecting questions from a large pool of questions.
As a result, each student or candidate can receive a different
examination, which improves the overall security of the test.
Computer-based technology eliminates the need for written test
materials, which can be lost or stolen. Computer-based testing centers
can also provide proctors as well as technology-based surveillance
equipment and data encryption to enhance security.
o REDUCED TEST ADMINISTRATION. Computer-based testing greatly reduces the
administrative and logistical burden for a test sponsor of delivering
and safeguarding tests and grading and distributing results. Small
numbers of candidates can be tested virtually anytime throughout the
year rather than large numbers only a few times a year. As a result,
the administrative workload is more evenly distributed over a longer
period of time rather than being concentrated over a few days.
PROMETRIC'S COMPETITIVE ADVANTAGES
As the leading worldwide provider of computer-based testing services
and assessment services, we are committed to staying at the forefront of our
industry. We intend to maintain our leading position because of our competitive
advantages:
o GLOBAL INFRASTRUCTURE. We have developed a global network of 2,915
testing centers in 141 countries. We currently have the test center
capacity to deliver about 13 million tests per year. Our experienced
network development team has the capacity to open and integrate into
our network as many as 100 new testing centers each month. We believe
there is no other computer-based testing services company with a global
network similar in size and scope to ours.
o TECHNOLOGY AND SOFTWARE SYSTEMS. We have developed sophisticated test
delivery technology and proprietary software systems. Our software
manages every step of the testing process, from preparation and
distribution and conversion to delivery and results analysis. We
minimize the risk of system interruption with hardware and software
back-up. We continuously reconcile testing candidates to test results
to make sure our test data are reliable.
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o RELATIONSHIPS WITH LEADING TEST SPONSORS. We have strategic
relationships with a number of leading educational organizations,
corporations and government agencies. These relationships include ETS,
the NASDR, Microsoft, CompTIA and the U.K. Driving Standards Agency. We
have gained valuable experience from creating large-scale, secure
testing and assessment programs for these customers. We currently have
over 65 IT certification, 100 professional licensing and certification
and five academic testing customers. Many of our customers are
acknowledged leaders in their industries.
o GLOBAL EXPERTISE. We have gained extensive experience doing business
worldwide in 141 countries and 25 languages and 33 currencies. We have
business, technical and sales and marketing personnel in strategic
locations throughout the world. Our staff has substantial experience
working with local governments and businesses and in operating in local
economies. This experience allows us to quickly implement a new testing
program on a worldwide basis. We believe no other computer-based
testing services company has a similar breadth of global experience.
o COMPREHENSIVE COMPUTER-BASED TESTING SERVICES SOLUTION. Our global
expertise, testing network, relationships and software systems allow us
to provide a complete computer-based testing services solution. We
provide service through each stage of the process, from consulting with
customers on the feasibility and advantages of creating a new
computer-based test or converting an existing paper and pencil test, to
assistance in test development and implementation, to registration and
scheduling of candidates and to preparing detailed analytical reports
of the test results and program statistics.
STRATEGY
Our goal is to maintain our position as the leading global provider of
computer-based testing and assessment services. We have adopted a six-part
strategy to achieve this goal:
o LEAD THE CONVERSION OF PAPER AND PENCIL TESTS TO COMPUTER-BASED TESTS.
We plan to work with test sponsors and administrators to help them
convert existing paper and pencil tests to computer-based tests. We
will leverage our existing relationships with major test sponsors such
as ETS, to convert more of their tests to computer-based format. We
also will expand our sales and marketing effort to educate more test
sponsors on the benefits of converting their tests to computer-based
format.
o EXPAND COMPUTER-BASED TESTING PROGRAMS IN THE TECHNOLOGY CERTIFICATION
MARKET. We intend to work with IT and other technology companies to
develop training and certification programs. We will leverage our
existing relationships with major IT industry participants such as
Microsoft, Novell and Oracle, as they release new products and upgrade
their existing technology. We intend to develop new relationships with
other technology-related companies in industries such as medical
devices and telecommunications.
o FOCUS ON INTERNATIONAL TESTING OPPORTUNITIES. We intend to develop
relationships with foreign corporations, academic institutions and
government agencies to assist them in developing computer-based testing
services and certification programs. For example, we recently entered
into a contract with the U.K. Driving Standards Agency to provide
driving theory tests, a requirement to receive a driver's license in
the U.K. We are adding about 150 testing centers, a call center and
other supporting infrastructure in the U.K. for this program. We are
currently expanding our sales and marketing efforts abroad to help us
capitalize on international testing opportunities.
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o EXPAND INTERNET TEST DELIVERY. We intend to use the Internet to deliver
tests to proctored and unproctored locations. In 1999, we began to
offer test delivery over the Internet for programs that require lower
levels of security. We now deliver over the Internet self-assessment
and practice tests for IT certification programs. We also deliver
assessment tests to prospective employees on behalf of corporate human
resources managers. By the end of 1999, some of our test sponsor
customers will begin to deliver via the Internet their higher security
tests to our proctored testing centers. We are also developing ways to
deliver high security tests over the Internet using remote video
proctoring and biometric technology to verify candidate identification.
We recently received a patent for this process.
o EXPAND OUR TEST DELIVERY CHANNELS. We recently entered into a business
relationship with ZapMe! Corporation. This company is establishing a
broadband interactive network to deliver educational resources to
middle and high schools throughout the U.S. We intend to provide
testing and training services through our @school network using the
ZapMe Network Labs and other school-based computer labs. The @school
network will allow us to deliver a wide range of educational assessment
and admissions tests and technology certifications directly in the
schools. We will also continue to expand access to broader
computer-based testing programs by establishing on-site testing centers
at corporate universities, community colleges and academic
institutions.
o EXPAND BRAND AWARENESS BY OFFERING ENHANCED SERVICES UNDER THE
PROMETRIC BRAND NAME. Nearly all candidates contact us by phone or by
accessing our websites to schedule tests. In 1998, our call centers
alone handled over 5.8 million calls. Our call centers and websites
provide an opportunity to sell candidates other products and services
under the Prometric brand name. These services include practice tests,
test preparation and self-study materials. Over the next several years,
we plan to introduce other products and services to increase test
candidates' brand awareness of Prometric.
THE PROMETRIC NETWORK
TESTING CENTERS. We have increased the number of our testing centers
from 1,267 centers at the end of 1996 to 2,915 centers as of July 31, 1999. We
currently have the capability to set up as many as 100 new testing centers each
month. We deliver most of our tests through two types of test center networks:
The Sylvan Technology Center network, or STCs, and the Authorized Prometric
Testing Center network, or APTCs. STCs deliver academic and professional
licensing and certification tests, which require a high level of security. APTCs
primarily deliver technology certification tests.
As of July 31, 1999, we had:
o 714 testing locations included in the STC network, of which:
o 487 were located throughout the U.S. and Canada; and
o 227 were located in 139 other foreign countries through the
world; and
o 2,201 APTCs, of which:
o 990 were located throughout the U.S. and Canada; and
o 1,211 were located in 119 other foreign countries.
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Our STC network contains about 6,900 test workstations. Our APTC
network contains about 11,100 test workstations.
STCS. Our STC network consists of testing centers that are located in
franchisee-owned or Sylvan-owned Sylvan Learning Centers or other third-party
contractual sites. Of the test centers in the domestic STC network: 22 are in
Sylvan-owned learning centers; 242 are in franchised learning centers; 36 are in
Caliber Learning Centers; and 187 are in third-party contractual sites,
including 84 in academic institutions. Of the test centers in the international
STC network, 49 are in Sylvan-owned or operated testing centers and 178 are in
third-party contractual sites.
We have a separate agreement with each Sylvan Learning Center
franchisee or other third party that operates an STC. As of January 1, 1999, we
entered into new agreements with most Sylvan franchisees that operate STCs in
North America. These agreements expire on either December 31, 2001 or December
31, 2002. Most of our agreements with parties that operate our international
STCs have an initial term of two years with automatic one year renewals unless
either party elects to terminate. The initial terms of a majority of these
agreements expire by December 2000. We have one agreement with Sylvan covering
all of the STCs in Sylvan-owned learning centers. This agreement with Sylvan
expires on December 31, 2005.
Under all of our STC agreements, the STC operator receives a minimum
monthly fee and a fee based on the number of test hours delivered. We provide
each STC with the infrastructure necessary to deliver testing services,
including Pentium-based computer terminals, test workstations and testing
software. We also agree to provide the administrative support, such as
centralized registration of test candidates and scheduling of tests, downloading
of individual tests and training and certification of the learning center
personnel who operate the STC. The testing center operator provides both the
necessary space and staff (including test proctors).
We regularly communicate with our STC operators to assure proper
operation of our testing center network. Our communications with them include:
o operating and policy manuals, periodic update bulletins and other
resource materials;
o daily electronic messages that include the next day's test schedule;
o regional managers' phone conferences on a monthly basis to discuss
testing procedures, new programs, best operating practices and
technology upgrades; and
o monthly newsletters.
Our STCs have a standard layout, which meets the specifications of our
test sponsors. A typical STC is a separate room within a Sylvan Learning Center.
It contains two to 15 private, modular workstations with comfortable seats and
proper lighting and ventilation. STCs employ video surveillance technology and
continuous proctoring to maintain high security.
APTCS. Most of our APTCs are located within the training facilities of
IT training companies. Most of these training locations are franchised, and the
franchisor has endorsed us as a provider of computer-based certification tests.
Having an APTC on-site allows the training company to administer certification
tests immediately or anytime after students complete training in a particular
subject. In-house training facilities also allow the training company to provide
assessment tests to students at various times during a course to determine their
progress. Training companies also generate additional testing
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revenues by offering IT certification tests to candidates who are not enrolled
in their program but whom we direct to their sites.
We have individual contracts with each APTC operator. A typical
contract with the APTC operator lasts for one year and automatically renews for
an additional one year period unless either party elects to terminate. Under
these contracts, we provide test delivery and all other necessary applications
software. We also provide the same level of administrative support for the APTC
that we do for each STC. The APTC operator provides the space, desktop computers
and personnel needed to operate the APTC. We often provide marketing assistance
to the operator's training business, such as including information about the
operator's business on our website.
Typically, APTCs do not have space dedicated exclusively to testing.
Testing occurs within instructional classroom or other space, which the APTC may
temporarily configure to accommodate the test. Most APTCs are located in suites
of two or three rooms, and most APTC testing events involve fewer than six
candidates.
APTC operators must abide by our policies and procedures. These cover
certification of testing proctors, test center layout, test administration
methods, security procedures and staff training.
MOBILE TESTING. We regularly provide temporary computer-based testing
services in places where there is insufficient volume to justify a permanent
testing center or for special events. For example, we may deliver an academic
test in a foreign country only a few times a year. Also, many of our IT
customers conduct periodic training on such topics as new product introductions
or refresher courses on existing products. These training programs can involve
employees, consultants, marketing partners and customers' employees. We support
these programs by installing mobile testing centers at the training site, such
as a conference center or corporate university. As of July 31, 1999, we had six
mobile testing centers, which we can configure as either STCs or APTCs.
SERVICES
We offer a wide range of services to our customers and their test
candidates. We have the capability of providing all of the services necessary to
establish and efficiently operate a customer's computer-based testing services
program. Our principal services are:
o Pre-sales consulting o Test results routing
o Program development o Data archiving
o Test development o Customer reporting
o Registration and scheduling o Technical support
o Test security
PRE-SALES CONSULTING. During this phase, one of our sales and marketing
teams assists a customer in determining the feasibility of establishing a
training and certification program or converting a test program from paper and
pencil to computer-based format. For example, we help IT companies evaluate the
need for developing a training and certification program for a release of new or
upgraded software and determine the steps to implement the program.
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PROGRAM DEVELOPMENT. Once a customer has decided to convert an existing
test to, or develop a new test in computer-based format, we assist the customer
in developing program materials, brochures and other instructional materials for
the test candidate. We often work with professional training and test
development organizations during this phase. We assign at least one account
manager and one program manager to each customer. These managers serve as
consultants to the customer to assure smooth program implementation and
promotion. Our program managers work with our customers to create a program
schedule that includes:
o determining the number of tests, test scoring methods, retake
policies and test types and features;
o selecting the type and location of test centers;
o defining candidate eligibility and registration and scheduling
policies;
o determining program reporting requirements; and
o setting up beta testing and evaluating its results.
We also assist with pre-test marketing of our customers' computer-based tests.
Our marketing teams work with our customers' marketing staffs to collect the
necessary information to develop and implement the appropriate marketing plan.
TEST DEVELOPMENT. Working with test development organizations, we
assist our customers in constructing their tests. Customers may choose to use
simulations of real-life situations and graphics, including audio and video, to
present more complex and interactive questions. Customers also may select
computer adaptive testing, where the computer alters the difficulty of questions
based on a candidate's response to prior questions. We also assist customers in
the actual conversion of paper and pencil tests to computer readable formats. We
use our test definition language (TDL) software to accomplish the conversion, or
we license TDL to the customer to allow the customer to do its own conversion.
Our program mangers also work with customers to establish a schedule for
updating tests, usually annually or semiannually.
REGISTRATION AND SCHEDULING. Our 10 call centers offer testing
information, appointments, directions and confirmation to test candidates. These
call centers have a total of 774 workstations. Our staff is trained on the
specifics of each testing program they support. Call centers operate around the
world, with each call center using essentially the same procedures. We have
established call centers in:
Baltimore, Maryland Tokyo, Japan
Minneapolis, Minnesota Beijing, China
Lelystadt, Netherlands Kuala Lumpur, Malaysia
Sydney, Australia Cairo, Egypt
New Delhi, India Johannesburg, South Africa
To support our new contract with the U.K. Driving Standards Agency, we
will open a call center in Manchester, England by the end of this year.
Candidates can register for tests through our call centers or by
calling or visiting a testing center. They can also register for some tests
through our websites. Each of our call center representatives has both a
telephone and a desktop computer that runs the scheduling software. This
software enables our operators to instantly schedule and confirm appointments
with candidates for any of our testing centers.
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The software facilitates collecting proper candidate information and scheduling
the eligible candidates. Our telephone registration process includes:
o collecting standard and customer-required candidate demographics;
o providing candidates with information about tests, test length and
test prerequisite policies;
o scheduling candidate tests and arranging special test center
accommodations;
o searching testing history for a particular candidate or, if the
sponsor requires, all candidate calls;
o providing candidates with pricing information;
o accepting test fee payment or invoicing for fees; and
o communicating test retake policies.
In 1998, our call centers handled over 5.8 million phone calls. We
believe our call centers have the capacity to handle substantial additional call
volume without significant hardware, software or procedural upgrades.
TEST SECURITY. We recognize that test security is a critical
consideration for any academic, licensing or credentialing organization. We use
various security methods, including:
o properly training test proctors in our security procedures;
o storing test questions and test results on a secure file server that
test center operators cannot access;
o requiring all candidates to produce positive identification as
specified by the test sponsor;
o encrypting data to protect test questions and customer files; and
o video- and audio-taping test sessions to monitor candidate
activities.
Our computers are programmed to:
o select from multiple forms of questions, controlling over-exposure
of any one question;
o present test questions in random order, allowing each candidate's
test to be unique; and
o construct tests instantaneously by selecting specific questions from
a large pool of questions.
TEST RESULTS ROUTING. Most tests are scored immediately, which means we
can provide immediate information to test candidates and test sponsors. We can
deliver test results on screen or in a written report. Our customers, however,
may choose not to provide candidates with immediate results, instead sending
test results by mail or other means. We can also send test results
electronically to a candidate's school, employer or other institutions.
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DATA ARCHIVING. We keep a daily record of attendance for all candidates
scheduled to take a test. We transmit this information, along with each
candidate's results, to one of our data centers. We process results daily and
assemble the data for electronic delivery to customers. We reconcile all testing
appointments daily, including determining whether each scheduled candidate took
the test, cancelled or did not appear. We also confirm that we received a test
result for each candidate recorded as having appeared for the test. We retain
all test results, which we store electronically at a secure location.
CUSTOMER REPORTING. Once our data center receives the test results, it
processes the results according to the customer's requirements. Within two days,
the results are placed into our customer's outgoing directory for electronic
retrieval by the customer. We have the ability to provide customized reports to
meet the specific needs of customers.
TECHNICAL SUPPORT. We provide technical support to our testing centers
worldwide. Our support staff currently handles up to 500 calls a day, dealing
with problems ranging from simple candidate handling issues to system
malfunctions.
OUR TEST DELIVERY SYSTEM
The following describes the important components of our test delivery
system:
TEST AUTHORING TOOLS. Each test must be written in a computer-readable
format. We provide test authors with software tools to allow them to write
examinations that are compatible with our systems. These tools utilize a
proprietary language that we developed and call TDL. Using TDL, a customer can
author a test that will run successfully on our testing software at our testing
centers. We have increased the functionality of TDL so that it can be used to
create more complex types of test questions. TDL can now be used to create
complex questions using multimedia, such as graphics, audio and video.
SCHEDULING. Our scheduling system handles all candidate registration
and fee collection transactions as well as scheduling for individual testing
centers. This software currently handles fee collection in 33 currencies and
manages separate pricing tables for all of the tests we deliver. It manages the
opening and closing hours of each testing center, as well as cancellations,
reschedulings and overbooking conditions at the centers. We recently introduced
automated telephone systems for our STC customers at four of our call centers.
These systems allow candidates to cancel and reschedule appointments over the
telephone at any time.
We are currently upgrading our scheduling system to allow the
scheduling of all of our tests through the Internet. Customers, candidates and
our test centers will be able to access the system 24 hours a day. We expect to
fully implement this upgrade during 2000.
TEST DRIVER. The test driver is the software that displays test
questions on the computer screen for the candidate. Our test driver:
o uses our TDL language to display each question on the screen;
o controls every interaction with the candidate during the actual
test;
o includes a multi-media display engine to allow graphic, audio and
video questions, split screen displays and other complex question
types;
o contains an adaptive testing algorithm;
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o has specific encryption technology to protect the test question; and
o records all candidate responses.
We recently adapted the test driver for use in the touch-screen mode
for the U.K. driver's license theory test that we will begin delivering in
January 2000.
TEST CENTER ADMINISTRATION. Our test center administration software
manages all of the business activity of each testing center. For example, in our
STCs proctors check in candidates, monitor security, manage the launching of
tests and arrange for transmission of test results to our data centers using
this software. The software has been programmed with special rules for each
test. These include the duration of the test, eligibility requirements,
procedures to limit exposure of individual test questions and security
restrictions. The software also coordinates communications with our scheduling
and registration system.
SYSTEM DEVELOPMENT AND MAINTENANCE
Our technical staff is capable of customizing our basic test delivery
system for a growing range of customer applications. Our technical staff
consists of seven groups, each with a different responsibility.
SOFTWARE DEVELOPMENT. This group has about 60 programmers. We have
separate groups to support STCs and APTCs. Our STC support group is responsible
for ongoing development of the system that runs the STC test delivery network.
This group also develops custom test delivery applications, such as the new
touch-screen test for the U.K. driver's license theory test. Our APTC support
group maintains the test delivery system that administers and delivers
technology certification tests. This group is also developing our Internet
services.
QUALITY ASSURANCE AND TESTING. This group has about 25 people
responsible for testing upgraded software and hardware. This group conducts
strict quality control and release planning prior to implementing any upgraded
software or hardware. We maintain testing labs for our APTC, STC and Internet
operating environments. We subject all new software to rigorous transaction load
testing and regression testing before release.
INTEGRATION GROUP. This group has about 10 people responsible for
integrating upgraded software and hardware into our testing center network. It
also conducts research and development for new test delivery methods and for
ways to improve our existing systems. The group integrates customer specific
software to interact with our systems.
PRODUCTION SYSTEMS GROUP. This group has about 15 people who maintain
our data center operations. They also maintain remote backups for all of our
major systems. They provide 24 hours a day, seven days a week worldwide hotline
support for technical and operating problems that may arise.
COMMUNICATIONS AND NETWORK MANAGEMENT GROUP. This group has about five
people who manage our connectivity to 141 countries. We manage a proprietary,
secure wide area network for the distribution of tests and collection of test
results. The communications we use in a particular country depend on the state
of the infrastructure in that country. This group is also responsible for the
maintenance of our network security procedures, including our Internet firewall.
They also are currently working to enable us to transmit non-secure data over
the Internet as a cost saving measure.
LOGISTICS GROUP. This group has about 40 people responsible for setting
up and maintaining our worldwide testing centers and our mobile testing centers.
Twice each year, the group performs system maintenance and upgrades on every
workstation in the network. This group can set up as many as 100
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new test centers each month. The group also implements software and hardware
upgrades to handle new customers or testing programs. The logistics group
assists in the training of our internal technical support staff and the STC
proctors.
TECHNICAL SUPPORT GROUP. This group has about 35 people who provide
assistance to the test proctors at our testing centers. This group provides
native language support in 25 languages.
TESTS DELIVERED AND CUSTOMERS
TECHNOLOGY CERTIFICATION TESTS. We have over 65 IT certification
customers. Our principal IT customers are Microsoft, Novell and CompTIA. Our IT
customers sponsor worldwide certification programs for various professionals,
such as network administrators and engineers, service technicians, instructors,
application specialists and developers, and system administrators, operators and
engineers.
Our IT customers include:
o MICROSOFT. We currently deliver 68 Microsoft certification tests. These
tests include those to certify individuals in the following
certification categories: Microsoft Office User Specialist, Microsoft
Sales Specialist, Microsoft Certified Trainer, Microsoft Certified
Professional, Microsoft Certified Systems Engineer, Microsoft Certified
Database Administrator and Microsoft Certified Solution Developer.
o NOVELL. We currently deliver 103 Novell certification tests. These
tests include those to certify individuals as Certified Novell
Engineer, Master Certified Novell Engineer, Certified Novell
Instructor, Certified Internet Professional, Certified Novell
Salesperson and Certified Novell Administrator.
o COMPTIA. CompTIA is a non-profit industry trade association of full
service computer resellers, value-added resellers (VARs), distributors
and manufacturers. CompTIA now has over 7,500 members worldwide. We
currently deliver tests for three CompTIA Certification Programs: A+,
Network +, and CDIA (Certified Document Imaging Architect). A fourth
certification program, i-Net+, is under development.
o OTHER SIGNIFICANT CUSTOMERS. In addition, we currently deliver 29
certification tests for Lotus, 24 certification tests for Oracle, 19
certification tests for Cisco and 50 certification tests for IBM.
PROFESSIONAL LICENSING AND CERTIFICATION TESTS. We currently have over
100 professional licensing and certification customers. Our licensing and
certification customers include:
o NASDR. We currently deliver 47 tests for the NASDR, including Series 7
(General Securities Representative), Series 6 (Investment Company
Products and Variable Contracts) and Series 63 (Uniform Securities
Agents State Law) as well as examinations for NASDR's new continuing
education programs.
o NBME. We began delivering six tests that comprise the U.S. medical
licensing exam in computer-based format in 1999 for the National Board
of Medical Examiners.
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o THE AMERICAN COLLEGE. We currently deliver 49 certification tests for
the American College. These include the Chartered Life Underwriter
(CLU) and the Chartered Financial Consultant (ChFC), designations for
insurance and financial personnel.
o NATIONAL COUNCIL OF ARCHITECTURAL REVIEW BOARDS. We currently deliver
the architects' licensing test for the National Council of
Architectural Review Boards (NCARB).
ACADEMIC TESTS. We currently have five academic customers. Our primary
academic customer is ETS. We currently deliver the following academic tests in a
computer-based format for ETS:
o GRE. The Graduate Record Examination is the general admissions
examination for graduate degree programs. This test is used by graduate
schools as a factor in evaluating students' applications for enrollment
in masters degree and other post-graduate programs.
o GMAT. The Graduate Management Admissions Test is the admissions
examination given by the Graduate Management Admissions Council for
masters of business administration programs.
o TOEFL. The Test of English as a Foreign Language is an examination
taken by students for whom English is not their primary language. The
test is required for foreign students for admission to most North
American undergraduate and graduate programs as well as U.S. high
school programs for foreign students.
o TEACHING TESTS. PRAXIS I is an examination used by various states as
part of their teacher certification process. The PRAXIS I is typically
taken by undergraduate students who want to be teachers. It is also
used by colleges and universities as admissions exams for graduate
education programs. The National Board of Professional Teaching
Standards (NBPTS) sponsors a series of tests for experienced teachers.
These tests demonstrate mastery of the subject matter. States are
increasingly linking teachers' compensation increases to NBPTS exams.
We also deliver about 40 tests for Regents College. Regents College is a fully
accredited "virtual university." Regents College gives credit-by-examination
tests so that students can earn college credits by demonstrating proficiency in
subject areas they have mastered through independent study or experience.
EXPERIOR
In January 1999, we entered into a joint venture agreement with
Chauncey to form Experior Assessments LLC. Chauncey was established by ETS in
1996 to provide test development and administration for state and municipal
licensing programs. Chauncey is a wholly-owned for-profit subsidiary of ETS. In
1997, Chauncey acquired Insurance Testing Corporation (ITC). ITC, which provided
computer-based testing services to state insurance departments, operated a small
network of testing centers. In 1997, Sylvan acquired NAI/Block, a company
involved in administering and delivering state licensing tests.
Under our joint venture agreement, Chauncey contributed the business
and assets of ITC in exchange for a 50% interest in Experior. We contributed the
business and assets of NAI/Block also in exchange for a 50% interest in
Experior. At the same time, we purchased the majority of ITC's Cogent Testing
Network test centers from Chauncey.
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Experior now engages in developing and administering state and
municipal licensing and certification programs and related services. Experior
has agreed to offer us the opportunity to deliver all computer-based tests that
Experior develops or administers. We and Chauncey have agreed that the joint
venture will be our exclusive vehicle to pursue test development opportunities
for state and municipal licensing and certification agencies.
Experior currently has contracts to administer tests for 30 state and
municipal governments. Examples include licensing tests for plumbers,
electricians, cosmetologists and insurance sales persons.
SALES AND MARKETING
As of July 31, 1999, we had about 30 people dedicated to sales and
marketing. Our staff is located primarily in Baltimore, Maryland and
Minneapolis, Minnesota. It is divided into three business units (technology
certification, professional licensing and certification and academic). Each
business unit leader is responsible for sales, marketing and support of all
customers within his or her market segment. To further our plan to obtain
international computer-based test delivery contracts, we recently hired a vice
president of international business development. We intend to continue to add
sales and marketing personnel as necessary to support our growth both
domestically and internationally.
We seek to identify potential customers for our computer-based testing
services through our direct sales force, supplemented by the following:
o our relationships with leading test development organizations;
o using consulting firms to identify potential customers and conduct
market research;
o participating and exhibiting at conferences and trade shows;
o responding to inquiries and requests for proposals for our testing
services; and
o customer referrals.
Our marketing teams also assist our customers in marketing their
computer-based testing services programs. We have learned that although an
organization may establish an excellent training and certification program, the
program must be effectively promoted to become successful. Candidates need to
learn about the program and its benefits to them. Our marketing team attends
customers' marketing plan development meetings to collect necessary information.
We review existing marketing plans and materials and work with a customer's
marketing staff to create and implement an appropriate marketing plan.
CONTRACTS
We usually enter into a separate contract with each computer-based
testing services customer. A contract may cover several different tests for the
same customer. Typically, each contract will contain a separate schedule
describing each test or group of tests we will deliver. The terms of our
contracts usually include:
o a description of the services we will provide;
o an option for alpha and beta testing of any new test;
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o a pricing schedule, usually on a per test or per test hour basis or
combination of the two;
o an initial term of two years or more;
o automatic renewal of the term unless either party provides advance
written notice of intent to terminate; and
o our obligation to reschedule tests or refund fees paid if we fail to
properly schedule and deliver tests.
As of July 31, 1999, we had contracts to deliver over 2,400 different
tests.
We often work with a test development organization to jointly submit a
conversion proposal to a test sponsor. If the sponsor agrees to the conversion
proposal, it may contract directly with the test development organization to
provide the conversion, and we enter into a subcontract with the test
development organization to provide the computer-based test delivery and one or
more of our pre- and post-testing services, such as registration and data
management.
The following is a description of our most important contracts.
ETS. Sylvan first developed a working relationship with ETS as the
result of a joint venture in the late 1980's. This relationship facilitated the
North American agreement we entered into with ETS in 1993. Under this agreement,
ETS named us as its exclusive commercial provider in North America of
computer-based tests that ETS administers. However, this exclusivity provision
does not apply to the SAT, the PSAT, the SAT II (Achievement Tests) and the
Advanced Placement Tests, all of which are sponsored by The College Board. To
remain ETS' exclusive commercial provider, we must continuously provide
sufficient capacity to meet candidate testing demand. ETS retained the right to
establish its own testing centers at three specified ETS field offices,
locations requested by ETS customers and at colleges, universities and similar
institutions. As of July 31, 1999, ETS had established 79 institutional test
sites. We provide test support services, registration services, data
distribution services and technology support at those sites for ETS. Our
contract requires that we receive at least 50% of ETS' computer-based testing
services volume in North America, excluding tests sponsored by The College
Board. This contract had an initial term that would have expired in 1999. In
1997, we renegotiated the contract, and the term now expires in 2005. We receive
a per-test fee and an hourly fee according to the total number of tests and
hours delivered. ETS receives a reduction on the per-test and hourly fees if the
total volumes of its programs exceed predetermined thresholds. In 1998, we
recognized revenues of $28.4 million under this contract.
In 1994, we entered into a separate international contract with ETS to
cover the delivery of computer-based tests outside North America. The term of
the international contract expires in December 2003. Under this contract, we
agreed to establish a global network of test centers in those countries ETS
designates. Similar to the domestic agreements, we are the exclusive commercial
provider of secure computer-based testing services outside North America,
excluding tests sponsored by The College Board. ETS may establish its own test
sites only where we fail to provide sufficient capacity or where our cost of
providing testing is not the lowest available. Currently, ETS has not
established any international computer-based test delivery sites. As of July 31,
1999, we had 191 permanent and 36 temporary international computer-based testing
services centers in 139 countries. Under the ETS international contract, we are
paid fees equal to our costs of establishing international test centers and
delivering tests in them, plus 10%. Under the international contract, we are
also paid interest on our capital and protected against any foreign exchange
losses we incur. In 1998, we recognized revenues of $33.0 million under the ETS
international contract.
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MICROSOFT. Drake Prometric, L.P. first developed a working relationship
with Microsoft in 1991. We acquired Drake in 1995 and have continued the
relationship with Microsoft. We entered into a new agreement with Microsoft
effective July 1, 1999, with an initial term of two years. This agreement will
terminate earlier if either party provides 90 days' notice of its intent to
terminate. In addition, we receive a fee for each test delivered or scheduled.
Under this agreement, Microsoft granted to us the right to deliver its
certification tests worldwide. Microsoft sets all test fees and determines which
test centers will deliver them. We arrange all candidate payments for the tests
we deliver for Microsoft. We remit to Microsoft the difference between test fees
we collect and our fees. In 1998, we recognized $43.0 million of revenues under
our prior contract with Microsoft.
COMPETITION
We currently have several direct competitors. There are many other
entities involved in various aspects of the education and testing industry that
may decide in the future to offer computer-based testing services in order to
expand their service offerings. These include tests sponsors or administrators,
test preparation firms and professional training companies. Many of our existing
and potential competitors have substantial financial and human resources and
acknowledged expertise in various aspects of education, training and/or testing.
Our current competitors are:
o VIRTUAL UNIVERSITY ENTERPRISES. Virtual University Enterprises (VUE)
was acquired in 1997 by National Computer Services, Inc. (NCS). NCS is
a publicly-traded company that, among other businesses, provides
computerized grading of standardized tests, including tests
administered by ETS. We know VUE has non-exclusive contracts to deliver
computer-based certification tests for Microsoft and Novell. Recently,
the National Council of State Boards of Nursing (NCSBN) announced that
it has awarded VUE the contract to provide the National Council
Licensing Exam for Nurses. This contract will be effective in 2002 when
our contract with NCSBN expires. We are not sure how many testing
centers VUE currently operates, but we do know VUE has stated its
intention to establish a substantial network of testing centers in the
U.S. and other countries.
o COMPUTER ADAPTIVE TESTING. Computer Adaptive Testing (CAT) was acquired
by Houghton Mifflin in 1998. We believe CAT is currently focusing on
the professional certification market. CAT has a non-exclusive contract
with Lotus to provide computer-based IT certification tests. We have a
similar contract with Lotus. We believe CAT currently operates testing
centers similar to our APTCs.
o ASSESSMENT SYSTEMS, INC. Assessment Systems, Inc. (ASI) was acquired in
1996 by Harcourt General, a publicly-traded company. We believe ASI
currently provides computer-based test delivery of a number of
licensing and certification tests for state agencies and associations.
ASI has announced its intention of establishing at least 200 testing
centers during 1999. We believe these centers will be similar to our
STCs.
o ACT, INC. ACT is a leading developer and sponsor of academic admissions
and assessments tests. In June 1999, ACT announced an alliance with
Electronic Data Systems Corporation (EDS) to develop a U.S. network of
computer-based training and testing centers. We believe the alliance
intends to establish training and testing centers primarily at
two-and-four year colleges.
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o COMPUTER ASSISTED TESTING SERVICE. Computer-Assisted Testing Service
(CATS) delivers licensing tests in computer-based format in testing
centers located primarily in flight training schools. We know CATS has
the non-exclusive right to deliver FAA general aviation licensing
tests. In 1998, VUE and CATS announced CATS' testing centers would
become approved testing locations for IT certification tests delivered
by VUE.
o APPLIED MEASUREMENT PROFESSIONALS. Applied Measurement Professionals
(AMP) is owned by the National Board for Respiratory Care. AMP provides
test development services to various licensing and certification
organizations. In 1997, AMP announced plans to establish a U.S. network
of testing centers to deliver computer-based tests in H&R Block tax
preparation offices. We are not certain how many testing centers AMP
currently operates.
VUE, CAT and ASI are owned by large companies that are well known in
the education and testing industry. We believe, therefore, that these companies,
as well as the ACT and EDS alliance, have the financial resources, expertise and
name recognition to become more significant competitors in the future.
We believe the most important competitive factors in our business are:
o number and locations of testing centers and geographic coverage of
the testing center network;
o proven ability to deliver computer-based tests throughout a network
without technical difficulty;
o security of the test delivery network;
o ability to provide test related services, particularly registration
and scheduling and data management, reporting and retrieval;
o quality and breadth of other customer services; and
o price.
To date, our competitors have generally chosen not to compete primarily
on price. We believe this is because of the high cost of establishing a test
center network and the need to cover the fixed costs of operating the network
through test delivery revenues. As our competitors gain a higher volume of
tests, price competition may increase. We expect technology to advance, which
will lower the cost of entering the computer-based testing services business.
GOVERNMENT REGULATION
The computer-based testing services business is essentially unregulated
in the United States and most countries. However, we do not know whether it will
become regulated in the future. As use of the Internet continues to grow, the
United States or other countries could adopt laws or regulations that cover
privacy, pricing, copyright infringement or other matters affecting our use of
the Internet to deliver tests, transmit data, conduct e commerce business or
otherwise deal with test candidates. We cannot predict how any future regulation
would affect our methods or cost of doing business.
EUROPEAN UNION PRIVACY INITIATIVE. In October 1998, the European Union
(EU) Data Protection Directive became effective. The primary goal of the
directive is to protect personal information about
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individuals who reside in one of the EU countries To accomplish this goal, the
directive restricts the transfer of personal data to non-EU countries that do
not have an "adequate level of protection." The EU has not designated the United
States as a country with an adequate level of protection. Therefore, the
directive could prevent us from transferring personal data about test candidates
to our data centers or our customers in the U.S.
We plan to implement several steps to comply with the directive. We are
establishing a privacy policy for handling personal data. All of the EU
countries currently have some form of data protection laws in effect and have or
are in the process of enacting data protection laws to comply with the
directive. We are tracking the status of these laws and working to comply with
the laws of the individual countries. We are also preparing notices to apprise
test candidates in EU countries of our information and privacy practices. We are
evaluating safe harbor and contractual mechanisms that we could use to ensure an
adequate level of protection of personal information. We are preparing contracts
between our EU subsidiary and us. We understand the U.S. Department of Commerce
is actively negotiating with the EU for a safe harbor. We will attempt to take
advantage of any safe harbor negotiated by the Department with the EU.
Because the directive is relatively new and has not been tested, we do
not know if our efforts will be sufficient to comply with the directive. We are
not certain what penalties the EU may impose for failing to comply. If the EU
ever decided we do not comply with the directive, it is possible that the EU
would prevent us from transferring personal data to the U.S. We currently
consider this possibility unlikely.
PROPRIETARY RIGHTS
We have internally developed a substantial amount of the software and
other technology that we use throughout our business. We regard this software
and technology, as well as many of our business methods, as proprietary. We rely
primarily on a combination of copyrights, trademarks, trade secrets, license
agreements, non-disclosure and other contractual provisions and technical
measures to protect our proprietary information We recently were awarded a
patent on a system for delivering remotely-proctored, secure tests to a remote
testing station. This system uses biometric technology, including photographs,
fingerprints and retinal scans, to verify and record the identity of the test
taker. Prometric(R) is our registered trademark. International protection and
enforcement of our intellectual property rights is sometimes unavailable or more
limited than in the United States.
We also seek to control access to and distribution of our documentation
and other proprietary information. We also have confidentiality and
non-disclosure agreements with most of our employees, including our critical
management and technical resources staff. Despite these precautions, we cannot
assure you our steps to protect our proprietary rights will be adequate to
prevent misappropriation.
Sylvan will transfer all of this intellectual property to us under the
Separation Agreement upon completion of this offering.
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<PAGE>
EMPLOYEES
Before this offering, all employees involved in our computer-based
testing services business were employees of Sylvan. These include our management
team, our technical staff, our sales and marketing teams and our call center
representatives. Upon completion of this offering, nearly all of these Sylvan
employees will become our employees. As of July 31, 1999, Sylvan employed about
1,400 people that we expect to become our employees. About 29% of these people
are located outside North America. We believe that Sylvan's relationship with
these employees is good.
Under the Administrative Services Agreement we will enter into with
Sylvan, Sylvan will provide us a number of administrative and support services.
These services include human resources, payroll, employee benefits and
administration, legal and management information. This agreement has a two year
term. Therefore, we expect to develop the capability of performing these
functions with our own personnel over the next two years.
We will employ a large staff of IT, communications and other highly
skilled technical professionals. There is a shortage of these professionals
throughout the world, and competition for them is intense. Sylvan has
experienced significant turnover among these professionals, and we expect to
experience high turnover as well. Our ability to grow our business will depend
on our success in attracting and retaining enough technical professionals
worldwide.
FACILITIES AND EQUIPMENT
Our headquarters are located within Sylvan's headquarters in Baltimore,
Maryland. After completion of this offering, Sylvan will sublease us this space.
We also operate 10 call centers in various countries in the world and three
logistics support facilities in Baltimore, Maryland, the Netherlands and
Malaysia. We will sublease these facilities from Sylvan at Sylvan's cost. Sylvan
rents all of this space from unaffiliated third parties at rents we believe to
be competitive. Therefore, we believe the rent we will pay Sylvan under these
subleases is comparable to the rent we would pay unaffiliated third parties.
After the expiration of the Administrative Services Agreement, we will continue
subleasing these facilities from Sylvan, lease them directly or relocate them.
Sylvan currently owns or leases all of the computer and other equipment
we use in our business. Sylvan will transfer all of this equipment to us at
closing on this offering.
RISK MANAGEMENT
The primary risk in our business is a malfunction in our registration
and scheduling, test delivery or other computerized systems. A malfunction
could:
o make it impossible for us to schedule tests for candidates;
o interrupt delivery of computer-based tests through our network; or
o cause us to lose data about test results or be unable to transmit
test results.
To manage this risk, we have back-up systems for our data servers and software
systems in the event that we experience a system failure. We also depend upon
telephone and satellite systems operated by other companies to transmit tests to
our testing centers, take reservations and transmit test results. We do not
carry insurance to cover the risk of system interruption.
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<PAGE>
We are included in Sylvan's insurance policies to cover public
liability, property damage and workers' compensation until Sylvan distributes
its shares of our common stock to its stockholders. We believe this insurance is
adequate to protect us from these types of potential losses. We expect to obtain
our own insurance policies after then.
LITIGATION
In connection with this offering, we will agree to indemnify Sylvan
from any costs and losses it incurs because of any claims related to our
business, whether the claims arise before or after this offering. Sylvan is
currently a party to the following lawsuits that relate to our business:
ACT LITIGATION. Sylvan is a defendant in a case brought against it in
1996 by ACT in the United States District Court for the Northern District of
Iowa. ACT's claims relate to our award of the contract to deliver the NASDR's
tests in January 1996. ACT had negotiated during 1996 with the NASDR in the hope
of obtaining the contract. In the fall of 1996, the NASDR invited to submit a
proposal. After both ACT and Sylvan submitted proposals, the NASDR selected
Sylvan.
ACT has made the following claims against Sylvan:
o Sylvan tortiously interfered with ACT's contractual and prospective
business relations with the NASDR; and
o Sylvan has monopolized and attempted to monopolize a computer-based
testing services market.
ACT seeks an unspecified amount of damages and an injunction against Sylvan's
continued monopolization and attempted monopolization of the market. Under
federal antitrust law, if we were found to have monopolized or attempted to
monopolize the market, we could be liable to ACT for three times the amount of
ACT's actual damages.
During 1998 and the first half of 1999, we and ACT conducted extensive
discovery, including document production and numerous depositions of key
personnel. In July 1999, we filed a Motion for Summary Judgment on all of ACT's
claims. In this motion, we argue that there is an insufficient legal and factual
basis to support either of ACT's claims. Oral argument on our motion will occur
on September 27, 1999. If the judge does not grant our motion as to all of ACT's
claims, we expect a trial to begin in January 2000.
We believe that we have a number of defenses to each of ACT's claims
and that ACT cannot establish facts sufficient to prevail on its claims.
However, we cannot assure you that we will prevail. If we do not, ACT could be
awarded significant damages, which could be trebled. These damages could have a
material adverse effect on both our results of operations and financial
condition. Also, the court could enjoin us from continuing some of our
computer-based testing services business or order us to dispose of some of our
computer-based testing services assets. This type of injunction also could have
a material adverse effect on our results of operations and financial condition,
and it could materially adversely affect our prospects for growth.
NCS/NOVELL LITIGATION. Sylvan is a party to two lawsuits relating to
TDL, which we use to generate tests in computer-based format. In 1996, Sylvan
granted a non-exclusive, royalty-free license of TDL to Novell. In 1996, Sylvan
licensed TDL to Novell and agreed that Novell could grant sublicenses of TDL to
other providers of test delivery services. Sylvan asserts the license to Novell
limited Novell's use of TDL to delivering only Novell tests. In 1997, Novell and
Virtual University Enterprises (VUE)
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entered into a license agreement covering VUE's use of TDL. In 1998, Sylvan and
Novell entered into a new agreement to replace their 1996 agreement. In the new
agreement, Sylvan again licensed TDL to Novell on a non-exclusive, royalty-free
basis and granted Novell the right to sublicense TDL for the purpose of creating
Novell tests. In the new agreement, Novell acknowledged that TDL was Sylvan's
proprietary property. Novell expressly agreed that all sublicenses had to be in
writing, with the sublicensee agreeing to maintain the confidentiality of TDL.
Novell was required to provide Sylvan with a copy of each sublicense.
In August 1999, Sylvan filed suit against National Computer Services
(NCS), which acquired VUE in 1998. This suit was filed in the United States
District Court for the District of Maryland. Sylvan charges NCS with copyright
infringement, misappropriation of trade secrets, common law unfair competition,
tortious interference with economic relations and conversion. Sylvan seeks to
enjoin NCS from using or offering to use TDL for any purpose. Sylvan also seeks
substantial monetary damages.
Also in August 1999, Novell filed suit against Sylvan in state court in
Utah. Novell seeks a declaratory judgment that the sublicense of TDL that Novell
granted NCS is valid, does not violate the license agreements between Sylvan and
Novell and that NCS's use of TDL "supports Novell's business purposes."
These two lawsuits have only been recently filed. We cannot yet predict
the likely outcome of either suit. We and Sylvan believe that NCS' use of TDL is
inconsistent with Sylvan's agreements with Novell. However, we would be unable
to prevent NCS from using TDL if Novell were to receive the declaratory judgment
it is seeking.
OTHER LITIGATION. From time to time, Sylvan is a party to routine
litigation incidental to our business. However, Sylvan is not currently a party
to any other material litigation.
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<PAGE>
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of this offering, our directors, executive officers and
key employees will be:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Stephen A. Hoffman.............................. 46 Chief Executive Officer, President and Director
Martin G. Bean.................................. 34 Executive Vice President of Information
Technology and Marketing
Bruce J. Davis.................................. 36 Senior Vice President of Operations
Graham J. Taylor................................ 43 Vice President and Chief Financial Officer
Jeffrey H. Cohen................................ 33 Vice President of Academics
John E. Kennedy................................. 58 Vice President of Professional Licensure
Douglas L. Becker............................... 33 Director
Donald V. Berlanti.............................. 61 Director
R. Christopher Hoehn-Saric...................... 37 Director
Rick Inatome.................................... 45 Director
James H. McGuire................................ 55 Director
R. William Pollock.............................. 70 Director
J. Phillip Samper............................... 64 Director
KEY EMPLOYEES
Steven E. Hemping............................... 55 Vice President of Human Resources
Stephen T. Phipps............................... 47 Vice President of International
Theodore B. Root................................ 36 Vice President of Channel Services
- ------------
</TABLE>
STEPHEN A. HOFFMAN became Division President of Sylvan's computer-based
testing services division in 1996. He will be our Chief Executive Officer and
President when we complete this offering. He became one of our directors in
September 1999. Prior to joining Sylvan, Mr. Hoffman was Senior Vice President
of Marketing and Sales and Vice President of Operations for Computer Task Group,
a consulting and outsourcing firm serving the IT industry, from 1990 to 1996.
MARTIN G. BEAN became Executive Vice President of Information
Technology Business Unit and Marketing of Sylvan's computer-based testing
services division in 1997. He will be our Executive Vice President of
Information Technology and Marketing when we complete this offering. From 1993
to 1997, Mr. Bean was Vice President of Sales and Marketing Development for
Novell. In this position, he was responsible for the worldwide implementation of
Novell's authorized training and certification programs.
BRUCE J. DAVIS has served as Division Senior Vice President of
Operations of Sylvan's computer-based testing services division since 1998 . He
will serve as our Senior Vice President of Operations when we complete this
offering. Mr. Davis joined Sylvan in 1994 as Director of International Planning
and became Vice President of Sylvan's Academic Business Unit in 1995. Prior to
joining Sylvan, Mr. Davis was a manager with Deloitte Touche Tohmatsu
International in Cairo, Egypt, from 1987 to 1992. From 1993 to 1994, Mr. Davis
earned his M.B.A. from Columbia University's School of Business.
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<PAGE>
GRAHAM J. TAYLOR became Division Vice President and Chief Financial
Officer of Sylvan's computer-based testing services division in August 1999. He
will become our Vice President and Chief Financial Officer when we complete this
offering. Prior to joining Sylvan, Mr. Taylor held various Chief Financial
Officer positions for business units of American Express, including Worldwide
Technologies, Latin America and the Caribbean Region and the U.K. area, from
1989 to 1999. From 1984 to 1989, Mr. Taylor was the Chief Financial Officer for
several of Grand Metropolitan's companies.
JEFFREY H. COHEN became Vice President for Academic Services of
Sylvan's computer-based testing services division in 1998. He will become our
Vice President of Academic Services when we complete this offering. Mr. Cohen
joined Sylvan in 1997 as Director of Corporate Development, serving as a
strategist on new business development and public policy issues affecting
Sylvan. He is also the Executive Director of the Sylvan Learning Foundation, a
private nonprofit foundation dedicated to promoting best practices in education.
Prior to joining Sylvan, Mr. Cohen served for two years as a political appointee
in the Clinton Administration. From 1993 to 1995, Mr. Cohen practiced law at
Tydings & Rosenberg, LLP in Baltimore, Maryland.
JOHN E. KENNEDY became Vice President of Professional Licensure of
Sylvan's computer-based testing services division in 1998. He will become our
Vice President of Professional Licensure when we complete this offering. Prior
to joining Sylvan, Mr. Kennedy served as Vice President of Sales and
Relationship Management for Syntel, Inc., a software services company. From 1993
to 1995, he was the Director of Corporate Accounts and Support Services for
Kelley Services, Inc., a temporary employment agency. Prior to 1993, Mr. Kennedy
spent over 25 years at IBM. Mr. Kennedy's last position at IBM was Business Unit
Executive/Branch Manager, which he held from 1981 to 1993.
DOUGLAS L. BECKER has served as Sylvan's President since 1993, its
Co-Chief Executive Officer since 1995 and its Vice Chairman since 1998. He has
been a director of Sylvan since 1986. He became one of our directors in
September 1999. Mr. Becker served as Chief Executive Officer of Sylvan's
Learning Center Division from 1991 to 1993. Mr. Becker is also the Vice Chairman
of the board of directors and Secretary of Caliber Learning Network, Inc. He is
also a principal in Sterling Capital, Ltd., an investment partnership.
DONALD V. BERLANTI has served as a director of Sylvan since 1987. He
will become one of our directors when we complete this offering. Since 1975, Mr.
Berlanti has been involved in the ownership and management of several business,
including radio stations, a chain of convenience and greeting card stores and
real estate development companies.
R. CHRISTOPHER HOEHN-SARIC has served as Sylvan's Chairman and Co-Chief
Executive Officer since 1993 and a director since 1986. From 1988 until 1993, he
was President of Sylvan. He became one of our directors in September 1999. He is
also Chairman of the board of directors of Caliber Learning Network, Inc., a
public company established by Sylvan in 1996, and a principal in Sterling
Capital, Ltd.
RICK INATOME has served as a director of Sylvan since 1997. He will
become one of our directors when we complete this offering. Mr. Inatome serves
as Chairman of the Board of Inacom Corporation. He also serves as a director of
Atlantic Premium Brands.
JAMES H. MCGUIRE has served as a director of Sylvan since 1995. He will
become one of our directors when we complete this offering. Mr. McGuire
currently serves as President of NJK Holding Company, which controls the
interests of Nasser J. Kazeminy in various businesses across the country. Mr.
Kazeminy was one of the owners of Drake, which Sylvan acquired in 1995.
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<PAGE>
R. WILLIAM POLLOCK has served as a director of Sylvan since 1995. He
will become one of our directors when we complete this offering. Mr. Pollock
serves as Chairman of the Board of Drake Holdings Limited, a company which owns
interests in various business throughout the world. He is also one of the prior
owners of Drake.
J. PHILIP SAMPER has served as a director of Sylvan since 1993. He will
become one of our directors when we complete this offering. Mr. Samper currently
serves as Chairman of Placeware, Inc. and was the founder of Gabriel Venture
Partners. From 1997 to 1998, he was Chief Executive Officer and President of
Avistar Systems Corporation. From 1996 to 1997, he was Chief Executive Officer
and President of Quadlux, Inc. From 1995 to 1996, he was Chairman and Chief
Executive Officer of Cray Research, Inc. Mr. Samper served as President of Sun
Microsystems, Inc. from 1994 to 1995.
STEVEN E. HEMPING has served as Division Vice President of Human
Resources of Sylvan's computer-based testing services division since 1995. He
will become our Vice President of Human Resources when we complete this
offering. Prior to joining Sylvan, Mr. Hemping was a member of the founding
employee group of Drake. Prior to joining Drake in 1990, he was President of the
Venture Group, Inc., a human resources consulting firm.
STEPHEN T. PHIPPS became Vice President of International Business
Development of Sylvan's computer-based testing services division in August 1999.
He will become our Vice President of International Business Development when we
complete this offering. Prior to joining Sylvan, Mr. Phipps was Executive Vice
President and Director of Change Management for DHL Worldwide Express from 1996
to 1998. From 1993 to 1996, Mr. Phipps was Worldwide Head of
Airline/Transportation Consulting for Sabre Decision Technologies, a division of
AMR Corporation.
THEODORE B. ROOT has served as Division Vice President of Channel
Services of Sylvan's computer-based testing services division since April 1999.
He will become our Vice President of Channel Services when we complete this
offering. Mr. Root joined Sylvan in 1997 as Operations Director of the
computer-based testing services division and became Executive Director of STC
Channel Services in 1998. Prior to joining Sylvan, Mr. Root was a manager in the
Supply Chain Consulting Group for Ernst & Young LLP from 1995 to 1997. From 1992
to 1995, Mr. Root was Operations and Senior Marketing Manager for Champion
Products, a division of Sara Lee Corporation.
BOARD COMMITTEES
Our board of directors will establish an Audit Committee and a
Compensation Committee. We expect Messrs. Berlanti, McGuire and Samper to be the
initial members of the Audit Committee and the Compensation Committee. We expect
that, as long as Sylvan owns a majority of our outstanding common stock, a
majority of the members of both committees will also be directors of Sylvan. At
least two directors who are not employees of either Prometric or Sylvan will
serve at all times as members of our Audit Committee.
The board of directors may from time to time establish other
committees. Our Audit Committee's principal functions will include making
recommendations to the Board regarding the annual selection of independent
public accountants, reviewing the proposed scope of each annual audit and
reviewing the recommendations our auditors following each annual audit of our
financial statements. The Compensation Committee's principal function is to
establish the compensation of our officers and to establish and administer our
compensation programs, including our 1999 Stock Incentive Plan.
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<PAGE>
COMPENSATION OF DIRECTORS
Our directors who are also our employees will not receive any
additional compensation for their services as our directors. Our non-employee
directors will receive annual cash compensation of $15,000 and will be
reimbursed for expenses incurred to attend meetings of the board and committees.
Each non-employee director will be granted options to purchase _______ shares of
our common stock with an exercise price equal to fair market value of our stock
on the date of grant upon:
o appointment, election or re-election to the board; and
o each anniversary thereof if he or she continues to serve as a director.
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<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by Sylvan to Mr.
Hoffman and our six other executive officers who were the next most highly
compensated, based upon 1998 compensation paid to them by Sylvan:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------------------
AWARDS
OTHER SECURITIES
NAME ANNUAL UNDERLYING ALL OTHER
AND COMPEN- OPTIONS/ COMPEN-
PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) SATION ($) SARS (#) SATION ($)
- ------------------ ----------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Stephen A. Hoffman ................ 1998 $230,416 $63,000 $ 6,600 -- $18,085(1)
Division President 1997 219,738 58,000 6,600 -- 132,193(2)
1996 57,211 -- 15,058(3) 168,750 --
--
Martin G. Bean .................... 1998 200,000 100,945 6,600 -- 7,741(1)
Executive Vice President of 1997 116,667 13,370 84,321(4) 90,000 3,380(1)
Information Technology Business 1996 -- -- -- -- --
Unit and Marketing
Bruce J. Davis .................... 1998 145,833 72,550 6,600 30,000 189,764(2)
Division Senior Vice President 1997 98,334 34,541 6,600 -- --
of Operations 1996 92,750 45,833 3,850 -- --
Jeffrey H. Cohen................... 1998 98,333 16,733 6,050 30,000 --
Vice President for 1997 48,205 5,000 -- 7,500 --
Academic Services 1996 -- -- -- -- --
John E. Kennedy.................... 1998 150,000 33,177 16,374(5) -- --
Vice President of 1997 43,270 230 17,544(6) 56,250 --
Professional Licensure 1996 -- -- -- -- --
Steven E. Hemping.................. 1998 103,849 29,590 6,600 -- --
Division Vice President 1997 97,000 21,712 52,800(7) -- 122,526(2)
of Human Resources 1996 81,302 21,525 6,600 -- --
Theodore B. Root................... 1998 98,467 19,012 -- -- --
Division Vice President 1997 87,083 8,146 -- 7,500 --
of Channel Services 1996 1,180 10,000 -- -- --
- --------------------
(1) This amount represents forgiveness of interest on loans made by Sylvan to these individuals.
(2) This amount includes the value realized from exercise of Sylvan stock options.
(3) This amount includes a $2,200 car allowance and $12,858 of moving expenses.
(4) This amount includes a $3,850 car allowance and $80,471 of moving expenses.
(5) This amount includes a $6,600 car allowance and $9,774 of moving expenses.
(6) This amount includes a $2,200 car allowance and $15,344 of moving expenses.
(7) This amount includes a $6,600 car allowance and $46,200 moving expenses allowance.
</TABLE>
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<PAGE>
OPTIONS GRANTS DURING 1998
The following table shows all grants of options to purchase Sylvan
common stock made by Sylvan to our named executive officers during 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS POTENTIAL REALIZABLE VALUE
UNDERLYING GRANTED TO EXERCISE AT ASSUMED ANNUAL RATES OF
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION STOCK PRICE
NAME GRANTED FISCAL YEAR SHARE DATE APPRECIATION FOR OPTION TERM
- ---- ------- ----------- ----- ---- ----------------------------
5% 10%
---- ----
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Hoffman ...... -- -- -- -- -- --
Martin G. Bean........... -- -- -- -- -- --
Bruce J. Davis........... 30,000 * $28.7066 2004 292,807 664,845
Jeffrey H. Cohen......... 30,000 * $28.7066 2004 292,807 664,845
John E. Kennedy.......... -- -- -- -- -- --
Steven E. Hemping........ -- -- -- -- -- --
Theodore B. Root......... -- -- -- -- -- --
.........
</TABLE>
* Represents amounts less than 1%.
All of these options were granted under Sylvan's 1998 Stock Option
Plan. Generally, these options vest twenty percent each year over five years.
All of them immediately vest in the event of a change in control of Sylvan.
We recommend caution in interpreting the financial significance of the
amounts shown as the potential realizable value of the stock options. These
amounts were calculated by multiplying the number of options granted by the
difference between a future hypothetical stock price and the option exercise
price, as required by the rules of the SEC. They are not intended to forecast
possible future appreciation, if any, of Sylvan's stock price or to establish a
present value of options.
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<PAGE>
AGGREGATED OPTION EXERCISES DURING 1998 AND YEAR-END OPTION VALUES.
The following table shows all exercises during 1998 of options to
purchase Sylvan common stock granted by Sylvan to our named executive officers:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END (#)(1) AT FISCAL YEAR-END ($)
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------- ------------- -------------- -------------
<S> <C> <C>
Stephen A. Hoffman ...... -- -- 67,500 (E) $ 941,625 (E)
101,000 (U) 1,408,950 (U)
Martin G. Bean........... -- -- 36,000 (E) 256,680 (E)
54,000 (U) 385,020 (U)
Bruce J. Davis........... 10,500 $189,764 44,250 (E) 769,508 (E)
46,500 (U) 474,367 (U)
Jeffrey H. Cohen......... -- -- 9,000 (E) 32,140 (E)
28,500 (U) 75,112 (U)
John E. Kennedy.......... -- -- 11,250 (E) 36,000 (E)
45,000 (U) 145,201 (U)
Steven E. Hemping........ 6,250 122,526 25,250 (E) 455,976 (E)
24,750 (U) 432,396 (U)
Theodore B. Root......... -- -- 3,000 (E) 22,500 (E)
4,500 (U) 33,750 (U)
</TABLE>
- ---------------
(1) (E) = Exercisable; (U) = Unexercisable.
1999 STOCK INCENTIVE PLAN
In September 1999, we adopted a stock incentive plan to promote our
long-term growth and profitability by providing our people with incentives to
improve stockholder value and contribute to our growth and financial success. We
believe the plan will assist us in attracting, retaining and rewarding the best
available people.
The Compensation Committee of our board of directors has been given
broad authority to administer our stock incentive plan. The Compensation
Committee may grant the following types of awards under our stock incentive plan
to our employees, officers, directors and consultants:
o incentive and nonqualified stock options;
o stock appreciation rights;
o restricted and unrestricted stock awards;
o phantom stock awards;
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o performance awards; and
o other stock-based awards.
The Compensation Committee determines the size and terms of all awards
under the plan. However, no more than an aggregate of ______________ shares of
our common stock, plus the number of any shares surrendered to us in connection
with any award, may be issued under stock incentive plan awards. In addition, no
person may receive awards for more than _____________ shares of common stock in
any one year. These share amounts may be adjusted for future stock dividends,
spin-offs, split-ups, recapitalizations, mergers, consolidations, business
combinations, exchanges of shares and the like.
We have not yet granted any options or other awards under the plan.
The stock incentive plan terminates automatically in September 2009,
but our board of directors may amend or terminate it at any time.
The following is a summary of the types of awards that we may grant
under our stock incentive plan.
STOCK OPTIONS. Our plan permits the committee to grant options to
purchase shares of our common stock intended to qualify as incentive stock
options under the Internal Revenue Code and options that do not qualify as
incentive stock options. The exercise price of each option will be determined by
the Compensation Committee, but the exercise price of any stock option may not
be less than the fair market value of our common stock on the date of grant.
The term of each option will be fixed by the Compensation Committee,
but the term of any incentive stock option may not exceed 10 years from the date
of grant. The Compensation Committee will determine the vesting of each option
and the period of time, if any, after retirement, death, disability or
termination of employment during which options may be exercised. Options may
vest in installments. The vesting of options may be accelerated by the
Compensation Committee.
To exercise an option, the optionee must pay the exercise price in full
either in cash or cash equivalents or by delivery of shares of common stock
already owned by the optionee. The exercise price may also be delivered by a
broker under irrevocable instructions to the broker from the optionee.
STOCK APPRECIATION RIGHTS. The Compensation Committee may grant a right
to receive a number of shares, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares of our common
stock underlying the right during a period specified by the Compensation
Committee. The Compensation Committee may grant these stock appreciation rights
alone or in connection with stock options. Upon exercise of a stock appreciation
right that is related to a stock option, the holder will surrender the option
for the number of shares as to which the stock appreciation right is exercised
and will receive payment of an amount computed as described in the stock
appreciation right award. A stock appreciation right granted in connection with
a stock option will usually be exercisable at the time or times, and only to the
extent that, the related stock option is exercisable and will not be
transferable except to the extent the related option is transferable.
RESTRICTED AND UNRESTRICTED STOCK. The Compensation Committee may also
award shares of our common stock to participants. These stock awards may be
conditioned on the achievement of performance goals and/or continued employment
with us through a specified restriction period. If the performance goals and any
other restrictions are not attained, the holder will forfeit his or her
restricted shares. The Compensation Committee may also grant shares of common
stock that are free from any
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restrictions under the stock incentive plan. Unrestricted shares of common stock
may be issued to participants in recognition of past services or in lieu of cash
compensation. The purchase price, if any, for shares of our common stock under
stock awards will be determined by the Compensation Committee.
PHANTOM STOCK AWARDS. The Compensation Committee may also grant phantom
stock awards to participants. These awards are contractual rights that are
equivalent in value to but not actual shares of our common stock. Phantom stock
awards may be conditioned on the achievement of performance goals and/or
continued employment with us through a specified date. The Compensation
Committee will determine the time or times when a participant will be paid the
value of the phantom stock award, and the payment may be in cash, in shares of
our common stock or in a combination of cash and common stock. Because phantom
stock awards are not actual shares of our common stock, they do not have any
voting rights.
PERFORMANCE STOCK AWARDS. The Compensation Committee may also grant
performance stock awards to receive shares of our common stock upon achievement
of performance goals and other conditions determined by the Compensation
Committee.
OTHER STOCK-BASED AWARDS. The Compensation Committee is authorized to
grant to participants other awards that may be based on or related to our common
stock. These could include:
o convertible or exchangeable debt securities;
o other rights convertible or exchangeable into shares;
o purchase rights for shares or other securities; and
o incentive awards with value and payment contingent upon performance.
The Compensation Committee will determine whether other stock-based awards will
be paid in our common stock, other securities, cash or a combination of these
mediums.
401(K) SAVINGS PLAN
We participate in the Sylvan 401(k) Retirement Savings Plan. The 401(k)
Plan is a defined contribution pension plan with a cash or deferred arrangement
as described in Section 401(k) of the Internal Revenue Code. The 401(k) Plan is
intended to qualify under Section 401(a) of the Code so that contribution, and
earnings on contributions are not taxable to employees until withdrawn.
Generally, all our employees who have worked for us for three months are
eligible to participate in the 401(k) Plan. Each participant may make pre-tax
and/or after-tax salary deferral contributions up to 15% of his or her annual
compensation. We also may make annual discretionary matching contributions and
discretionary profit sharing contributions in amounts determined by our board of
directors. We have not yet made any contributions. An employee must have worked
for us for one year before he or she is eligible to receive matching or profit
sharing contributions. The Trustee of the 401(k) Plan invests each participant's
account at their direction. Participants may choose among several investment
options, which do not currently include our or Sylvan's common stock.
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RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
MESSRS. BEAN AND HOFFMAN. On March 17, 1997, Sylvan entered into a
promissory note and pledge agreement with Stephen A. Hoffman. Under this
agreement, Sylvan loaned $231,000 to Mr. Hoffman to purchase shares of Sylvan
stock. The loan is secured by a pledge of the shares purchased. The interest
rate is the applicable federal interest rate. If Mr. Hoffman resigns or is
terminated for cause:
o prior to September 16, 2000, the loan amount becomes due and payable in
full; or
o after September 16, 2000 but prior to September 16, 2001, 50% of the loan
amount becomes due and payable.
If Mr. Hoffman's employment terminates after September 16, 2001 for whatever
reason, the loan will be forgiven and no amount will be due. If Mr. Hoffman is
employed by Sylvan:
o on September 16, 2000, 50% of the shares purchased will be released to
him; and
o on September 16, 2001, all of the shares purchased will be released to
him.
If he is terminated between September 16, 2000 and September 16, 2001, Sylvan
can sell 50% of the shares purchased and apply the proceeds to the amounts
outstanding. Any amount over the loan amount due shall be retained by Sylvan.
On July 31, 1997, Sylvan entered into a promissory note and pledge
agreement with Martin G. Bean. Under this agreement, Sylvan loaned $100,000 to
Mr. Bean to purchase shares of Sylvan stock. The interest rate is the applicable
federal interest rate. The loan is secured by a pledge of the shares purchased.
If Mr. Bean resigns or is terminated for cause prior to July 31, 2000, the loan
amount becomes due and payable in full. If his employment is terminated for
whatever reason after July 31, 2000, the entire loan amount will be forgiven. If
Mr. Bean is employed by Sylvan on July 31, 2000, all shares purchased shall be
released.
Caliber Learning Network, Inc. granted options to purchase 24,547
shares of its common stock to Mr. Hoffman and options to purchase 12,273 shares
of its common stock to Mr. Bean. The exercise price for these options is $1.63
per share. The options were granted on December 31, 1997 and expire on December
31, 2003. The options vest 20% on each anniversary of the date of grant.
CALIBER LEARNING NETWORK, INC. Caliber Learning Network, Inc. was
established as a joint initiative of Sylvan and MCI WorldCom and completed its
initial public offering in May 1998. Sylvan and Messrs. Becker and Hoehn-Saric
each continue to have an equity position in Caliber, and Messrs. Becker and
Hoehn-Saric are officers and/or directors of Caliber. Caliber owns and operates
36 of our STCs within its Caliber Learning Centers. These Caliber centers had
been NASDR testing centers. They were leased to Sylvan by the NASDR when the
NASDR awarded Sylvan the contract to deliver the NASDR's tests. In 1997, Sylvan
and Caliber entered into a management agreement, whereby Caliber assumed control
of the 36 centers. Caliber then converted them to Caliber Learning Centers and
installed an STC in each center. Under this management agreement, Caliber pays
all operating costs for these centers. Sylvan pays Caliber a fixed monthly
payment, plus a fee per computer-based test delivered above a specified number.
Management fees paid under this agreement totaled $1.2 million in 1997 and $2.0
million in 1998. Sylvan will transfer to us the leases on these 36 Caliber
centers as part of the separation of our computer-based testing services
business from Sylvan. Sylvan will also assign us the management agreement with
Caliber.
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ARRANGEMENTS BETWEEN PROMETRIC AND SYLVAN
INTRODUCTION
We and Sylvan will accomplish the separation of our computer-based
testing services business from Sylvan under a Separation Agreement. This
agreement will be effective immediately before closing on this offering. At this
closing, we will also enter into an Administrative Services Agreement and
several other agreements with Sylvan. These agreements together will govern the
separation and our on-going relationship with Sylvan. They will cover the
following key matters:
o the assets and liabilities to be transferred to us;
o administrative services we will receive from Sylvan;
o our indemnification of Sylvan for any costs or losses related to our
computer-based business, the liabilities Sylvan will transfer to us and
the litigation to which Sylvan is currently a party;
o Sylvan's indemnification of us for any costs or losses related to
Sylvan's other businesses;
o allocation of income taxes between Sylvan and us while we remain part of
Sylvan's consolidated group;
o our cooperation with Sylvan in seeking a ruling from the IRS about the
tax-free nature of Sylvan's distribution of its shares of our common
stock to its stockholders, and our cooperation if Sylvan receives the
ruling and then makes the distribution; and
o our grant to Sylvan of registration rights for its shares of our common
stock.
After this offering, we will not make any changes to these agreements
unless the changes are approved by a majority of our directors who are neither
officers or directors of Sylvan.
SEPARATION AGREEMENT
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES. Sylvan will transfer
to us or our subsidiaries all assets related to the computer-based business. We
will assume and agree to pay on a timely basis all liabilities associated with
the computer-based testing services business. We have described the basic
categories of these assets and liabilities in the section "Our Separation from
Sylvan" earlier in this prospectus. Sylvan will make no representation and
warranty about the condition of these assets or their suitability for our
continued operation of the business. However, Sylvan will warrant that we will
receive all of Sylvan's right, title and interest in the transferred assets. If
any of these assets cannot be transferred to us before closing on this offering
because the necessary consents or approvals of third parties have not yet been
obtained, Sylvan will agree to hold these assets for our exclusive benefit and
transfer them to us as soon as possible.
INDEMNIFICATION. We will agree to indemnify Sylvan and hold it harmless
from any costs, losses, claims or damages arising out of:
o the assets transferred to us and the liabilities we assume;
o the operation of our business after closing on this offering;
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o the litigation to which Sylvan is currently a party that relates to our
business and any litigation that arises after the separation and relates
to our business;
o this offering, including the disclosures made in this prospectus about us
and our computer-based business; and
o our breach of any of our covenants related to Sylvan's expected
distribution of its shares of our common stock to its stockholders, as
described below.
Similarly, Sylvan will agree to indemnify us and hold us harmless from any
costs, losses, claims or damages arising out of:
o Sylvan's other businesses;
o any of Sylvan's liabilities that we have not expressly assumed; and
o any disclosure in this prospectus related to Sylvan other than
disclosures about our computer-based testing services business.
All of this indemnification covers matters arising before the closing, whether
or not we or Sylvan are now aware of them, as well as matters that arise after
the closing.
CLAIMS AND LITIGATION. The Separation Agreement requires us to assume
the defense of the ACT litigation and the Novell litigation, to which Sylvan is
currently a defendant. Under the agreement, Sylvan has also agreed that:
o we may prosecute the case Sylvan recently brought against NCS (VUE) as we
see fit; and
o Sylvan will cooperate fully with us in the defense and/or prosecution of
these cases, including making documents and Sylvan officers and employees
available to us.
Under the Separation Agreement, we also will be responsible for any future
litigation or other claims related to our computer-based business, including
future claims based on situations occurring prior to this offering. Neither we
nor Sylvan is currently aware of any other material litigation or claims of this
type, but we cannot assure you that none will be asserted after this offering.
DISTRIBUTION BY SYLVAN OF ITS SHARES OF OUR COMMON STOCK. Sylvan has
informed us that it expects to distribute its shares of our common stock to its
stockholders, assuming it receives a ruling from the IRS that the distribution
would be tax-free to both Sylvan and its stockholders. In order to make it
possible for Sylvan to make this tax-free distribution, we have agreed that we
will not issue any shares of our capital stock if the issuance would cause
Sylvan to own less than 80% of the combined voting power of all our outstanding
voting stock or less than 80% of any class of our non-voting stock. However,
this agreement will not prohibit us from granting stock options to our employees
or making restricted stock awards to them, as long as we repurchase enough of
our shares when these options or awards become exercisable to preserve Sylvan's
80% ownership of our outstanding stock. This covenant about preserving Sylvan's
80% ownership of our stock will expire two years after this offering. Failing to
preserve the 80% ownership interest might effectively prevent Sylvan from
subsequently distributing its Prometric shares due to the potential adverse
income tax consequences and prevent Sylvan and Prometric from joining in a
consolidated tax return for federal income tax purposes.
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In the Separation Agreement, we have agreed to cooperate with Sylvan in
completing the distribution, assuming Sylvan receives the IRS ruling. We expect
that this will require us to do one or more of the following:
o assist Sylvan in seeking the ruling from the IRS that the distribution
would be tax-free to both Sylvan and its stockholders;
o register under the Securities Act all of the shares of our common stock
Sylvan will distribute;
o continue the active trade or business of our company and not dispose of
our assets outside the ordinary course of business;
o refrain from entering into certain transactions with respect to our
capital stock; and
o before Sylvan completes the distribution, fully pay any amounts we owe
Sylvan, other than accounts payable arising in the ordinary course of
business.
Our agreement to cooperate with Sylvan in completing the distribution
will expire two years after the distribution.
COVENANTS NOT TO COMPETE. Sylvan will agree that until December 31,
2004, it will not engage in the computer-based testing services business or
otherwise enter into any business that competes with our business as it exists
at the time of this offering.
OTHER MATTERS. In the Separation Agreement we will make a number of
other important covenants to Sylvan, including:
o FINANCIAL INFORMATION - so long as Sylvan is required to consolidate our
results of operations and financial position for accounting purposes or
account for its investment in our company under the equity method, we
will provide Sylvan all information regarding us that Sylvan reasonably
needs to comply with these accounting requirements, including providing
Sylvan with quarterly reviewed and annual audited financial statements
meeting the SEC's requirements.
EXPENSES. We and Sylvan will agree as follows about expenses related to the
separation:
o Sylvan will pay all expenses related to the transfer to us of the assets
and liabilities of the computer-based testing services business,
including preparation of the Separation Agreement and the other
agreements we will enter into with Sylvan;
o we will pay the expenses of this offering, including preparation of this
prospectus and our historical financial statements, as well as
underwriting discounts and commissions; and
o Sylvan will pay the fees of any outside legal, accounting, tax or other
advisors we retain with Sylvan's consent to advise us in connection with
our cooperating with Sylvan in its efforts to obtain the IRS ruling and
to complete the distribution of its shares of our common stock to its
stockholders.
After this offering, each of us will be generally responsible for our own
expenses, except as otherwise provided for in any on-going agreements between
us.
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DISPUTE RESOLUTION. Under the Separation Agreement, we and Sylvan will
agree to a method to resolve any disputes that may arise between us under any of
the agreements we will enter into with Sylvan in connection with the separation
of the computer-based testing services business from Sylvan. If a dispute
arises, we and Sylvan agree to promptly notify the other in writing. We will
agree to use commercially reasonable efforts to resolve any dispute before
resorting to arbitration. If we are unable to resolve the dispute by negotiation
after 60 days from a dispute notice, either of us may require binding
arbitration of the dispute. We and Sylvan have agreed that any arbitration will
be before a three-person arbitration panel that will act by majority vote. We
will select one arbitrator and Sylvan will select one arbitrator from a panel of
arbitrators maintained by a professional arbitration service. The two
arbitrators then will select a third arbitrator from the same panel.
ADMINISTRATIVE SERVICES AGREEMENT
Under this agreement, Sylvan will agree to:
o provide us the accounting and tax services we will need to operate as a
separate business and as a public company at a level comparable to the
level of services currently provided;
o provide us various administrative services, such as human resources,
payroll, employee benefits administration, legal and management
information;
o include us in its insurance policies that cover public liability,
property damage, workers' compensation and other risks;
o permit our employees to continue to participate in Sylvan's 401(k)
retirement plan; and
o provide us other support services that we request if Sylvan is capable of
providing them.
FEES. We have agreed to pay Sylvan for these services based upon
Sylvan's cost of providing them to us. However, once Sylvan completes the
distribution of its shares of our common stock, we will pay Sylvan based upon
its cost plus 10%, which Sylvan and Prometric believe represents the fair market
value for such services.
DURATION. The Administrative Services Agreement will continue for two
years from closing on this offering. Sylvan is not required to continue to
provide services to us after that date. This means that over the next two years,
we will have to develop the in-house capability to perform the functions covered
by the Administrative Services Agreement. However, we are not required to obtain
any particular service from Sylvan. We may terminate the Administrative Services
Agreement any time by providing Sylvan with 90 days advance notice, but only
after Sylvan completes the distribution of its shares of our common stock to its
stockholders.
TAX MATTERS
We will enter into a Tax Sharing and Separation Agreement with Sylvan.
This agreement governs allocations of income tax liabilities between us. So long
as Sylvan owns at least 80% of our outstanding capital stock, we will be part of
Sylvan's "consolidated group" for federal and most state income tax purposes.
This means that Sylvan will include our items of income, deduction and exclusion
with its own in determining its over-all income taxes payable to taxing
authorities.
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Under this tax agreement, we will be responsible for all income taxes
for all periods beginning on or after January 1, 1999 payable on account of our
business. We will calculate those taxes as if we were a separate corporation
rather than a member of Sylvan's consolidated group. As long as we are a member
of its consolidated group, we must pay those taxes to Sylvan in time for Sylvan
to pay its over-all taxes on a timely basis. For the 1999 tax year, Sylvan will
give us credit for our pro rata share of estimated income tax payments it made
before the separation of our business. There are some states and other
jurisdictions that do not allow consolidated corporate income tax returns. In
those instances, we will file our own tax returns and pay any taxes due directly
to the appropriate taxing authorities.
If we were to generate a loss for federal or other income taxes while a
member of Sylvan's consolidated group, Sylvan will pay us an amount equal to any
resulting tax reduction of Sylvan's over-all consolidated income taxes payable.
We will be allowed to determine all tax elections while a member of Sylvan's
consolidated group, except those that may adversely affect Sylvan's consolidated
group or that can only be made by the parent of a consolidated group. Tax
elections are choices that taxpayers may make that affect the treatment of items
on an income tax return.
Sylvan will be responsible for paying any amounts due (and be entitled
to any refund) from any audit adjustments made by the IRS or other taxing
authorities to Sylvan's consolidated tax returns for periods ending on or before
December 31, 1998. We will be responsible for any audit adjustments related to
our business for all periods beginning on or after January 1, 1999. We have
agreed to cooperate fully with Sylvan in any tax audits, appeals or litigation.
We will be required to prepare our own tax returns and pay all taxes
due directly to taxing authorities after Sylvan no longer owns at least 80% of
our capital stock.
Sylvan will be responsible for all income taxes payable on account of
its other business. Sylvan will also be responsible for any income taxes
resulting from the separation of our business from Sylvan if those taxes relate
to assets retained by Sylvan and for any income taxes attributable to Sylvan's
distribution of its shares of our common stock to its stockholders.
REGISTRATION RIGHTS AGREEMENT
Sylvan expects to distribute its shares of our common stock to its
stockholders, assuming it receives a ruling from the IRS that the distribution
would be tax-free to both Sylvan and its stockholders. Sylvan may not receive
this ruling and, therefore, may not make this distribution. Because Sylvan
cannot sell our shares of common stock without registration under the Securities
Act, we will enter into a Registration Rights Agreement with Sylvan. This
agreement becomes effective once Sylvan notifies us that it no longer intends to
pursue distributing its shares of our common stock to Sylvan's stockholders.
SHARES COVERED. The Registration Rights Agreement covers all shares of
our common stock that Sylvan owns at closing on this offering, as long as Sylvan
still owns them when the Registration Rights Agreement becomes effective. Sylvan
may not assign its rights under the Registration Rights Agreement, except to one
of its wholly-owned subsidiaries or in connection with a merger (or other
acquisition transaction) of Sylvan with another entity. This means that if
Sylvan sold our shares in a private transaction, the purchaser would not obtain
the right to require us thereafter to register the shares.
DEMAND REGISTRATIONS. Sylvan may require us, on three occasions to
register its shares of our common stock. Sylvan may designate the type and
terms of each public offering covered by a demand registration. Sylvan could
select one of the following types of registration:
o an underwritten public offering;
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o a shelf registration;
o the distribution or exchange of Sylvan's shares of our common stock to
holders of Sylvan's equity or debt securities or the debt or equity
securities of another entity; or
o a distribution by Sylvan of securities convertible into, or exchangeable
for, Sylvan's shares of our common stock.
Any demand registration must involve shares of our common stock having a market
value of at least $5.0 million. We are not required to file a registration
statement within 180 days of effectiveness of a prior demand registration
statement. Also, we may delay filing any demand registration statement for up to
90 days if we reasonably determine that filing a registration statement could
adversely affect any plans by our company to engage in a material transaction.
However, we may exercise this delay right only once in any 12-month period.
Sylvan has the right to select the underwriters for any underwritten public
offering, subject to our reasonable objection. We have the right to select our
counsel, auditors and other professionals to assist us in the registration. We
may include shares of our common stock for sale by us, or shares owned by
others, in any demand registration statement only if doing so will not adversely
affect Sylvan's proposed sale of its shares of our common stock.
PIGGYBACK REGISTRATION. In the Registration Rights Agreement, we will
also grant Sylvan "piggyback" registration rights. If we intend to file a
registration statement covering shares of our common stock for sale by us or
others, subject to customary exceptions, we must first give Sylvan at least 30
days' advance notice. If Sylvan so elects, we must include in the registration
the number of Sylvan's shares of our common it designates. If the registration
relates to an underwritten public offering and the underwriters advise us that
the number of shares to be offered must be reduced, we will include shares in
accordance with these priorities:
o first, the shares we propose to offer;
o second, the shares Sylvan requested to be included; and
o third, shares owned by an other persons or entities.
We have the right to select the underwriters for any underwritten public
offering where Sylvan has exercised its piggyback rights, even if we do not
include any shares to be sold by us in the offering.
REGISTRATION PROCEDURES AND EXPENSES. The Registration Rights Agreement
contains various procedures for registration. We agree to make our senior
management available to the underwriters for their due diligence review and for
"roadshow" presentations. Sylvan must pay all expenses of each demand
registration, including fees of our counsel and auditors, filing fees and
roadshow expenses of our senior management. We must pay these expenses of a
registration where Sylvan exercised its piggyback registration rights. In all
registrations, Sylvan must pay underwriting discounts and commissions or other
selling expenses on its shares of our common stock. Sylvan must also pay the
expenses of its own counsel.
INDEMNIFICATION. The Registration Rights Agreement includes customary
indemnification and contribution provisions. We agree to indemnify Sylvan and an
underwriters for any false or misleading statements we are found to have made in
a demand or piggyback registration statement. Sylvan agrees to similarly
indemnify us for an such statements it is found to have made in a registration
statement.
DURATION. The Registration Rights Agreement will last until the
earliest of:
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o all of Sylvan's shares of our common stock have been registered;
o Sylvan no longer owns at least 20% of our common stock; or
o December 31, 2004.
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PRINCIPAL STOCKHOLDER
Immediately prior to this offering, Sylvan will own all of our
outstanding common stock. Immediately after this offering, Sylvan will own __%
of our common stock, or ____% if the underwriters fully exercise their
over-allotment option. We are not aware of any other person or group that will
beneficially own 5% or more or our common stock following this offering.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
o 150 million shares of common stock, par value $.001 per share, _____ of
which will be outstanding upon completion of this offering; and
o 10 million shares of preferred stock, par value $.001 per share, none of
which will be outstanding upon completion of this offering.
COMMON STOCK
VOTING RIGHTS. The holders of our common stock are entitled to one vote
per share on all matters to be voted on by stockholders. Holders of our common
stock are not entitled to cumulate their votes in the election of directors.
Generally, all matters on which stockholders will vote must be approved by a
majority of the votes entitled to be cast by all shares of common stock present
in person or represented by proxy, subject to any voting rights granted to
holders of any preferred stock. However, our charter includes some supermajority
requirements, which we describe below in "Amendment of Charter and Bylaw
Provisions."
DIVIDENDS. Holders of our common stock are entitled to share ratably in
any dividends declared by our board of directors, subject to any priority
dividend rights of any preferred stock we may issue in the future. We do not
intend to pay cash dividends on our common stock for the foreseeable future.
This is because we need to retain our cash for working capital and to finance
our planned growth. However, our board of directors is free to change our
dividend policy in the future, based upon factors such as our results of
operations, financial condition, cash flow, cash needs and future prospects.
OTHER RIGHTS. If we are liquidated, dissolved or wound up, we must
first pay all amounts we owe our creditors and then pay the full amounts
required to be paid to holders of any shares of our preferred stock then
outstanding before we may make any payments to holders of shares of our common
stock. All holders of shares of our common stock are entitled to share ratably
in any assets available for distribution to them, after all of our creditors
have been satisfied and we have paid the liquidation preferences of any of our
preferred stock.
No shares of our common stock are subject to redemption by us. Holders
of shares of our common stock do not have any preemptive rights to purchase
additional shares of our common stock.
All of our shares of our common stock to be outstanding after this
offering will be validly issued, fully paid and nonassessable.
PREFERRED STOCK
We may issue preferred stock from time to time in one or more classes
or series, with the exact terms of each class or series established by our board
of directors. Our board may establish each of the following rights for each
class or series of preferred stock that we issue:
o dividends;
o voting;
o conversion;
o redemption;
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o liquidation preferences; and
o other rights and limitations.
Without seeking stockholder approval, our board may issue preferred
stock with voting and other rights that could adversely affect the voting power
of the holders of our common stock and that could have anti-takeover effects.
CLASSIFIED BOARD OF DIRECTORS
Our charter provides for our board to be divided into three classes of
directors. The term of office of the first class will expire at our 2000 annual
meeting of our stockholders; the term of office of the second class will expire
at our 2001 annual meeting of our stockholders; and the term of office of the
third class will expire at our 2002 annual meeting of our stockholders. At each
annual meeting we hold after 2002, a class of directors will be elected to
replace the class whose term has then expired. As a result, approximately
one-third of the members of our board will be elected each year, and each of the
directors will serve a staggered three-year term. Also, our charter provides
that directors may be removed only for cause, upon the vote of 80% of our
outstanding shares of capital stock.
These provisions could prevent a stockholder (or group of stockholders)
having majority voting power from obtaining control of our board until the
second annual stockholders' meeting after the time that the stockholder (or
group of stockholders) obtains majority voting power. Therefore, these
provisions may discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of us.
SPECIAL MEETINGS
Our bylaws provide that special meetings of our stockholders may only
be called by a majority of our board, the chairperson of our board, our Chief
Executive Officer or holders of a majority of our outstanding voting stock.
These provisions may make it more difficult for stockholders to take an action
that our board opposes.
ADVANCE NOTICE PROVISIONS
Our bylaws establish an advance written notice procedure for
stockholders seeking:
o to nominate candidates for election as directors at any annual meeting of
stockholders; and
o to bring business before an annual meeting of our stockholders.
Our bylaws provide that only persons who are nominated by our board or
by a stockholder who has given timely written notice to our secretary before the
meeting to elect directors will be eligible for election as our directors. Our
bylaws also provide that any matter to be presented at any meeting of
stockholders must be presented either by our board or by a stockholder in
compliance with the procedures contained in our bylaws. A stockholder must give
timely written notice to our secretary of its intention to present a matter
before an annual meeting of stockholders. Our board then will consider whether
the matter is one that is appropriate for consideration by our stockholders
under Maryland corporate law and the SEC's rules.
Under our bylaws, to be timely, we must receive any stockholder notice
between 60 days and 90 days before the first anniversary of our last proxy
statement. Under our bylaws, a stockholder's notice must also contain the
information specified in the bylaws. These provisions may preclude or deter some
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stockholders from bringing matters before a stockholders' meeting or from making
nominations for directors at an annual meeting.
AMENDMENT OF CHARTER AND BYLAW PROVISIONS
Our charter provides that our board may adopt, repeal, alter, amend or
rescind any provision of our bylaws. Our bylaws also provides that only the
holders of at least 80% of the total number of votes entitled to vote generally
in the election of directors may adopt, repeal, alter, amend or rescind bylaw
provisions.
The affirmative vote of holders of at least 80% of the total number of
votes entitled to vote generally in the election of directors is also required
to amend, modify or repeal the provisions of our charter relating to:
o our classified board of directors;
o the limitation of liability of our officers and directors;
o the election and removal of directors;
o indemnification of officers and directors; and
o the right to call special meetings.
In all other cases, our charter may be amended by the affirmative vote of a
majority of the number of votes entitled to vote generally in the election of
directors.
ANTI-TAKEOVER EFFECTS PROVISIONS OF MARYLAND GENERAL CORPORATION LAW
BUSINESS COMBINATIONS. The Maryland General Corporation Law prohibits
specified "business combinations" between a Maryland corporation and an
"interested stockholder." These business combinations include a merger,
consolidation, share exchange, an asset transfer or issuance or reclassification
of equity securities. Interested stockholders are either:
o anyone who beneficially owns 10% or more of the voting power of the
corporation's shares; and
o an affiliate or associate of the corporation who was an interested
stockholder or an affiliate or an associate of the interested stockholder
at any time within the two-year period prior to the date in question.
These business combinations are prohibited for five years after the most recent
date on which the stockholder became an interested stockholder. Thereafter, any
of these business combinations must be recommended by the board of directors of
the corporation and approved by the vote of:
o at least 80% of the votes entitled to be cast by all holders of voting
shares of the corporation's voting shares; and
o at least 66-2/3% of the votes entitled to be cast by all holders of the
corporation's voting other than voting shares held by the interested
stockholder or an affiliate or associate of the interested stockholder.
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However, these special voting requirements do not apply if the corporation's
stockholders receive a minimum price for their shares (as specified in the
statute) and the consideration is received in cash or in the same form
previously paid by the interested stockholder for its shares.
This business combination statute does not apply to business
combinations that are approved or exempted by the corporation's board of
directors prior to the time that the interested stockholder becomes an
interested stockholder. A Maryland corporation may adopt an amendment to its
charter electing not to be subject to these special voting requirements. Any
amendment would have to be approved by at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66-2/3% of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not interested stockholders. We have elected to be generally subject to this
statute. However, in our charter, we have elected not to have the statute apply
to Sylvan.
CONTROL SHARE ACQUISITIONS. The Maryland General Corporation Law
provides that "control shares" of a Maryland corporation acquired in a "control
share acquisition" have no voting rights unless approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by the
acquiror or by the corporation's officers or directors who are employees of the
corporation. Control shares are shares of voting stock which, if aggregated with
all other shares of stock previously acquired, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power:
o 20% or more but less than 33-1/3%;
o 33-1/3% or more but less than a majority; or
o a majority of all voting power.
Control shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A control share acquisition generally means the acquisition of, ownership of or
the power to direct the exercise of voting power with respect to, control
shares.
A person who has made or proposes to make a "control share
acquisition," under specified conditions, including an undertaking to pay
expenses, may require the board of directors to call a special stockholders'
meeting to consider the voting rights of the shares. The meeting must be held
within 50 days of the demand. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, the corporation generally may redeem any or all of the control shares,
except those for which voting rights have previously been approved. This
redemption of shares must be for fair value, determined without regard to voting
rights as of the date of the last control share acquisition or of any
stockholders' meeting at which the voting rights of the shares are considered
and not approved. If voting rights for "control shares" are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the stock determined for purposes of appraisal rights
may not be less than the highest price per share paid in the control share
acquisition. The limitations and restrictions otherwise applicable to the
exercise of dissenters' rights do not apply in the context of a "control share
acquisition."
-81-
<PAGE>
The control share acquisition statute does not apply to stock acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or to acquisitions previously approved or exempted by a
provision in the charter or bylaws of the corporation. We have elected to be
generally subject to this statute. However, in our bylaws, we have elected not
to have the statute apply to any shares of our common stock owned by Sylvan.
TRANSFER AGENT
The transfer agent and registrar for our common stock is First Union
National Bank, Charlotte, North Carolina.
-82-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of this offering, __________ shares of our common
stock will be outstanding and will be tradeable as follows:
o ___________ of these shares will be owned by Sylvan. Sylvan generally
will not be able to sell its shares of our common stock in the stock
market unless we register them under the Securities Act of 1933. However,
Sylvan expects to distribute its shares of our common stock to its
stockholders sometime in 2000. Prior to the distribution, we do not
expect Sylvan to sell any shares. If the distribution occurs, the shares
distributed will then be freely tradeable, expect for shares held by our
affiliates;
o Except for any shares purchased by our affiliates, the __________ shares
of our common stock sold in this offering will be freely tradeable
without further restrictions or registration under the Securities Act;
and
o Shares of our common stock reserved for issuance under our stock option
plan will be freely tradeable after option exercise once we register
these shares under the Securities Act. We expect to register them within
60 days after this offering. We describe this plan in the paragraph "1999
Stock Incentive Plan" in the "Management" section of this prospectus.
If any person who is our affiliate purchases shares of our common stock
in this offering or in the open market after this offering, these shares also
become subject to Rule 144. Shares properly sold in reliance upon Rule 144 to
persons who are not our affiliates thereafter become freely tradable in the open
market.
Generally, Rule 144 provides that a person who has beneficially owned
restricted shares for at least one year is entitled to sell in the open market
in brokers' transactions within any three month period a number of shares that
does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; and
o the average weekly trading volume in our common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to post-sale notice requirements and the
availability of current public information about us.
Sales of substantial amounts of our common stock in the open market, or
their availability for sale, could adversely affect the price of our common
stock. If Sylvan completes the distribution of shares of our common stock to its
stockholders, the shares distributed by Sylvan will be eligible for immediate
resale in the public market without restrictions by persons other than our
affiliates. Our affiliates would be subject to the restrictions of Rule 144
described above, other than the one-year holding period requirement.
We and Sylvan have agreed that, without the prior written consent of
Deutsche Bank Securities Inc. on behalf of the underwriters, neither of us will,
for 180 days after the date of this prospectus, sell or otherwise dispose of any
shares of our common stock, subject to certain exceptions. Sylvan's distribution
of its shares of our common stock to its stockholders is specifically exempted
from this agreement.
-83-
<PAGE>
We have reserved a total of ______________ shares of our common stock
for issuance under our 1999 Stock Incentive Plan. We intend to file a
registration statement on Form S-8 covering the issuance of these shares before
we grant any options or other stock awards. Accordingly, any shares issued under
this plan will be freely tradable, subject to the restrictions on resale by
affiliates under Rule 144.
-84-
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representative Deutsche Bank Securities
Inc., have severally agreed to purchase from us the following respective numbers
of shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus:
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Deutsche Bank Securities Inc..........................
Total............................................
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered hereby are subject
to conditions. The underwriters are obligated to purchase all of the shares of
common stock offered hereby, other than those covered by the over-allotment
option described below, if any of these shares are purchased.
We have been advised by the representative that the underwriters
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to dealers at
a price that represents a concession not in excess of $_____ per share under the
public offering price. The underwriters may allow, and these dealers may
re-allow, a concession not in excess of $_____ per share to other dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the underwriter's representative. We estimate our expenses of this
offering, all of which we are paying, to be $________. The following table sets
forth the public offering price and all discounts and commissions to be allowed
to the underwriters:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Underwriting Discounts Our
Public Offering Price and Commissions Proceeds
Per Share...................
Total.......................
</TABLE>
We have granted to the underwriters an option, exercisable not later
than 30 days after the date of this prospectus, to purchase up to ___________
additional shares of our common stock at the initial public offering price less
the underwriting discounts and commissions. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
common stock offered hereby. If the underwriters exercise the option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of the option shares that the number of shares of common stock to be
purchased by it in the above table bears to ________. We will be obligated,
under the option, to sell these shares to the underwriters if the option is
exercised. If any additional shares of common stock are purchased, the
underwriters will offer the additional shares on the same terms as those on
which the _________ shares are being offered.
We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act.
-85-
<PAGE>
Our executive officers and directors and Sylvan have agreed not to
offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any portion of, any common stock for a period of 180 days after
the date of this prospectus without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without public notice. We
have entered into a similar agreement with Deutsche Bank Securities Inc.
Sylvan's distribution of its shares of our common stock to its stockholders is
specifically exempted from this agreement.
The underwriter's representative has advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
To facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. Specifically, the underwriters may over-allot shares
of our common stock in connection with this offering, thus creating a short
position in our common stock for their own account. Additionally, to cover these
over-allotments or to stabilize the market price of our common stock, the
underwriters may bid for, and purchase, shares of our common stock in the open
market. Finally, the representative, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities. If they do,
they may end any of these activities at any time.
The underwriter's representative, other underwriters and their
affiliates may be lenders to, engage in transactions with, and perform services
for us in the ordinary course of their business.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price will be determined by
negotiations among us, Sylvan and the underwriter's representative. We expect
that the factors to be considered in the negotiations will be prevailing market
conditions, our results of operations in recent periods, the market
capitalizations and stages of development of other companies that we and the
underwriter's representative believe to be comparable to us and estimates of our
business potential.
-86-
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock we are offering will be
passed upon for us by our counsel, Piper & Marbury L.L.P., Baltimore, Maryland.
Some legal matters related to this offering will be passed upon for the
underwriters by their counsel, Hogan & Hartson L.L.P., Baltimore, Maryland.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1997 and 1998, and for each of the
three years in the period ended December 31, 1998, as set forth in their report.
We have included our financial statements (and schedule) in this prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC under
the Securities Act covering the shares of our common stock offered by this
prospectus. This prospectus does not contain all the information we included in
the registration statement and the exhibits and schedules we attached to it. For
further information about us and the shares we are offering by this prospectus,
you should review this registration statement and the exhibits and schedules
attached to it. A copy of our registration statement, including the exhibits and
schedules, may be read and copied at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains an Internet site at http://www.sec.gov, from which you
can electronically access our registration statement, including the exhibits and
schedules attached to it.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill these requirements by filing periodic reports and other information with
the SEC. We intend to furnish our stockholders with annual reports containing
consolidated financial statements certified by an independent public accounting
firm.
-87-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors...............................................F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999............F-3
Statements of Operations for the years ended December 31, 1996, 1997
and 1998 and for the six month periods ended June 30, 1998 and 1999......F-5
Statements of Owner's Equity for the years ended December 31, 1996,
1997 and 1998 and for the six months ended June 30, 1999.................F-6
Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998 and for the six month periods ended June 30, 1998 and 1999......F-7
Notes to Financial Statements................................................F-8
INDEX TO FINANCIAL STATEMENT
SCHEDULES
Report of Independent Auditors...............................................S-1
Schedule II - Valuation and Qualifying Accounts..............................S-2
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the balance sheets of Sylvan Prometric (a Division of Sylvan
Learning Systems, Inc.) as of December 31, 1997 and 1998, and the related
statements of operations, owner's equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Sylvan Prometric (a Division of
Sylvan Learning Systems, Inc.) at December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 20, 1999
F-2
<PAGE>
SYLVAN PROMETRIC (A DIVISION OF SYLVAN LEARNING SYSTEMS, INC.)
BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998 1999
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 16,261 $ 12,815 $ 17,188
Receivables:
Accounts receivable 21,033 29,095 32,639
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,581 5,496 3,586
Other receivables 3,882 2,052 1,848
-------------- --------------- ---------------
27,496 36,643 38,073
Allowance for doubtful accounts (887) (1,278) (1,588)
-------------- --------------- ---------------
26,609 35,365 36,485
Prepaid expenses 1,260 3,343 3,405
Other current assets 294 1,703 1,353
-------------- --------------- ---------------
Total current assets 44,424 53,226 58,431
Property and equipment:
Furniture and equipment 25,671 46,890 51,748
Computer software 2,202 13,713 23,664
Leasehold improvements 2,918 4,706 4,885
-------------- --------------- ---------------
30,791 65,309 80,297
Accumulated depreciation and amortization (6,141) (13,966) (19,675)
-------------- --------------- ---------------
24,650 51,343 60,622
Intangible assets:
Goodwill 124,747 146,264 146,263
Contract rights 13,973 13,973 13,973
-------------- --------------- ---------------
138,720 160,237 160,236
Accumulated amortization (13,533) (18,945) (22,475)
-------------- --------------- ---------------
125,187 141,292 137,761
Allocated deferred income taxes 1,612 1,308 1,308
Deferred contract costs, net of accumulated amortization
of $5,761 as of December 31, 1997, $10,806 as of
December 31, 1998, and $13,612 as of June 30, 1999 8,670 5,238 3,801
Net assets to be transferred to joint venture - 31,175 -
Investments in and advances to affiliates - 2,000 35,731
Other investments - 8,000 8,000
Other assets 6,503 6,019 5,904
-------------- --------------- ---------------
Total assets $ 211,046 $ 299,601 $ 311,558
============== =============== ===============
</TABLE>
F-3
<PAGE>
SYLVAN PROMETRIC (A DIVISION OF SYLVAN LEARNING SYSTEMS, INC.)
BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998 1999
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 27,079 $ 28,823 $ 33,937
Deferred revenue 8,206 8,297 7,619
------------ ------------- --------------
Total current liabilities 35,285 37,120 41,556
Other long-term liabilities 1,695 526 162
Commitments and contingent liabilities - - -
Owner's equity:
Owner's net investment 173,967 260,796 269,282
Accumulated other comprehensive income 99 1,159 558
------------ ------------- --------------
Total owner's equity 174,066 261,955 269,840
------------ ------------- --------------
Total liabilities and owner's equity $ 211,046 $ 299,601 $ 311,558
============ ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
SYLVAN PROMETRIC (A DIVISION OF SYLVAN LEARNING SYSTEMS, INC.)
STATEMENTS OF OPERATIONS
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------- -----------------------------------
1996 1997 1998 1998 1999
----------------------------------------------- -----------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 85,283 $ 115,622 $ 178,732 $ 74,458 $ 106,287
COSTS AND EXPENSES
Direct costs 58,340 80,063 120,120 51,547 71,121
General and administrative expense 13,823 26,880 27,160 12,562 19,280
Allocated indirect overhead costs 2,686 3,835 4,740 2,370 3,520
Loss on impairment of assets - 4,000 - - -
------------- --------------- --------------- ---------------- -----------------
Total costs and expenses 74,849 114,778 152,020 66,479 93,921
------------- --------------- --------------- ---------------- -----------------
Operating income 10,434 844 26,712 7,979 12,366
OTHER INCOME (EXPENSE)
Interest and other income 35 375 642 210 483
Equity in net income of affiliates - - - - 945
Foreign currency gain (loss) (413) (734) 250 26 (104)
------------- --------------- --------------- ---------------- -----------------
Income before income taxes 10,056 485 27,604 8,215 13,690
Income tax expense (3,810) (1,957) (12,357) (3,697) (6,160)
------------- --------------- --------------- ---------------- -----------------
Net income (loss) $ 6,246 $ (1,472) $ 15,247 $ 4,518 $ 7,530
============= =============== =============== ================ =================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
SYLVAN PROMETRIC (A DIVISION OF SYLVAN LEARNING SYSTEMS, INC.)
Statements of Owner's Equity
(amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
Owner's Other TOTAL
Net Comprehensive OWNER'S
Investment Income (Loss) EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 84,055 $ 70 $ 84,125
Net contribution from Sylvan 15,171 - 15,171
Comprehensive income:
Net income for 1996 6,246 - 6,246
Other comprehensive income - foreign currency translation adjustment - 151 151
-------------
Total comprehensive income 6,397
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 105,472 221 105,693
Net contribution from Sylvan 69,967 - 69,967
Comprehensive income (loss):
Net income for 1997 (1,472) - (1,472)
Other comprehensive income (loss) - foreign currency translation adjustment - (122) (122)
-------------
Total comprehensive income (loss) (1,594)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 173,967 99 174,066
Net contribution from Sylvan 71,582 - 71,582
Comprehensive income:
Net income for 1998 15,247 - 15,247
Other comprehensive income - foreign currency translation adjustment - 1,060 1,060
-------------
Total comprehensive income 16,307
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 260,796 1,159 261,955
Net contribution from Sylvan 956 - 956
Comprehensive income:
Net income for the six months ended June 30, 1999 (unaudited) 7,530 - 7,530
Other comprehensive income (loss) - foreign currency translation adjustment - (601) (601)
-------------
Total comprehensive income 6,929
---------------- ------------- -------------
BALANCE AT JUNE 30, 1999 (UNAUDITED) $ 269,282 $ 558 $ 269,840
================ ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
SYLVAN PROMETRIC (A DIVISION OF SYLVAN LEARNING SYSTEMS, INC.)
STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------------
1996 1997 1998 1998 1999
---------------------------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,246 $ (1,472) $ 15,247 $ 4,518 $ 7,530
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,919 4,049 8,273 3,049 5,708
Amortization 6,945 8,418 11,649 5,706 6,335
Provision for doubtful accounts 60 (87) 391 470 310
Loss on impairment of assets - 4,000 - - -
Allocated deferred income taxes 579 (2,525) 313 - -
Non-cash issuance of Sylvan options to non-employees - 550 539 270 122
Equity in net income of affiliates - - - - (945)
Changes in operating assets and liabilities:
Accounts and other receivable (4,694) (11,733) (6,699) 109 (3,341)
Cost and estimated earnings in excess of billings
on uncompleted contracts (679) 753 (2,916) (747) 1,911
Prepaid expenses 932 (917) (1,961) (604) (61)
Other current assets (409) 521 (1,417) 10 350
Accounts payable and accrued expenses 3,015 9,381 2,359 (648) 5,116
Deferred revenue 859 1,390 90 1,018 (678)
Other long-term liabilities - - (894) (1,059) (364)
----------- ---------- --------- ---------- ----------
Net cash provided by operating activities 15,773 12,328 24,974 12,092 21,993
----------- ---------- --------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (6,380) (18,512) (33,977) (16,507) (14,988)
Investment in and advances to affiliates - - (2,000) - (1,610)
Purchase of contract rights - (1,244) - - -
Expenditures for deferred contract costs (7,262) (5,384) (1,614) (1,152) (1,369)
Cash acquired from acquisition of NAI/Block - 190 - - -
Increase in other assets (1,209) (2,741) (2,395) (1,213) 114
----------- ---------- --------- ---------- ----------
Net cash used in investing activities (14,851) (27,691) (39,986) (18,872) (17,853)
----------- ---------- --------- ---------- ----------
FINANCING ACTIVITIES
Net cash contribution from Sylvan 1,972 24,341 12,038 11,755 834
----------- ---------- --------- ---------- ----------
Net cash provided by financing activities 1,972 24,341 12,038 11,755 834
----------- ---------- --------- ---------- ----------
Effects of exchange rate changes on cash 153 (122) (472) (987) (601)
----------- ---------- --------- ---------- ----------
Net increase (decrease) in cash 3,047 8,856 (3,446) 3,988 4,373
Cash at beginning of period 4,358 7,405 16,261 16,261 12,815
----------- ---------- --------- ---------- ----------
Cash at end of period $ 7,405 $ 16,261 $ 12,815 $ 20,249 $ 17,188
=========== ========== ========= ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION AND OPERATIONS
Sylvan Prometric ("the Company"), a division of Sylvan Learning Systems, Inc.
("Sylvan"), is a worldwide provider of comprehensive computer-based testing and
assessment services. These services are provided primarily to the technology
certification, professional licensing and certification, and academic markets.
BASIS OF PRESENTATION
The accompanying financial statements of the Company represent the financial
position, operations and cash flows of the Sylvan Prometric division of Sylvan.
As more fully discussed in Note 5, the consolidated financial statements for all
periods presented include allocations of corporate expenses. For financial
reporting purposes, the equity activity of the Company has been accumulated into
a single caption entitled "owner's net investment."
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
The accompanying unaudited financial statements for the six months ended June
30, 1998 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
2. ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives. Estimated useful lives of
furniture and equipment and computer software range from three to seven years.
Leasehold improvements are depreciated over the lesser of the lease term or the
useful life of the asset.
F-8
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
2. ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN AFFILIATES
Sylvan maintains investments in affiliates which are attributable to its
computer-based testing operations. These investments are included in the
financial statements of the Company, and are accounted for using the equity
method.
INTANGIBLE ASSETS
Goodwill consists of the cost in excess of fair value of the identifiable net
assets of entities acquired in purchase transactions, and is amortized on a
straight-line basis over the estimated useful life of 25 years. At December 31,
1997 and 1998, accumulated amortization of goodwill was $6,634 and $10,877,
respectively.
Contract rights consist of the allocated cost of acquiring computer-based
testing contracts in business combinations accounted for as purchases. Contract
rights are being amortized on a straight-line basis, over the term of the
related contract, which range from nine months to 10 years. At December 31, 1997
and 1998, accumulated amortization of contract rights was $6,899 and $8,068,
respectively.
DEFERRED CONTRACT COSTS
Deferred contract costs include direct costs, consisting principally of labor
and related benefits, incurred to develop computer-based tests under contractual
arrangements with customers. Under these arrangements, the Company incurs costs
related to the development of new computer-based tests on behalf of the customer
in return for the right to deliver the computer-based tests and collect a
testing fee from either the candidate or the sponsoring organization. These
costs are capitalized and amortized over the shorter of the estimated utility
period of the test or the contractual period for delivery of the test.
Deferred contract costs also include payments of approximately $10,400 made to
non-affiliated computer-based testing centers in 1996 that have entered into
three-year contracts with the Company to deliver information technology
computer-based certification tests. In accordance with the terms of these
contracts, the independent testing centers have received an advance payment and
will receive no additional fees upon delivery of the computer-based
certification tests. These costs are being amortized over the contractual term
of three years.
F-9
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
2. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. If an impairment indicator is present,
the Company evaluates whether an impairment exists on the basis of undiscounted
expected future cash flows from operations for the remaining amortization
period. If an impairment exists, the asset is reduced by the estimated shortfall
of discounted cash flows.
REVENUE RECOGNITION
Testing revenues, with the exception of revenues attributable to an
international testing contract with Educational Testing Services ("ETS"), are
recognized upon the delivery of tests. Under a ten-year contract with ETS to
deliver academic tests outside of the United States expiring in 2004, the
Company is compensated for its services for a fee equal to approved costs plus
10 percent, and the Company recognizes revenue accordingly.
MARKETING AND ADVERTISING
The Company expenses marketing and advertising costs as incurred. Marketing and
advertising expense totaled approximately $306, $10,750 and $1,724 in 1996,
1997, and 1998, respectively. Advertising expense in 1997 includes a $10,000
payment to IT Training Marketing Company, a nonprofit corporation whose sole
purpose is to fund promotional and channel support programs for the Sylvan
Prometric distribution channel.
INCOME TAXES
The operations of the Company are included in the consolidated federal income
tax returns of Sylvan. For financial reporting purposes, the Company has used
the separate return method to determine the U.S. federal income tax expense
attributable to its operations. Under this method, in computing income tax
expense, the Company has assumed that it was not eligible to be included in the
consolidated U.S. federal income tax return of Sylvan but rather was a separate
taxpayer. Federal income taxes attributable to the Company's operations that
were paid or accrued by Sylvan are included as a component of owner's net
investment.
The Company is also subject to certain state and foreign taxes based on its
separate operations in these jurisdictions.
F-10
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
2. ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS GRANTED TO EMPLOYEES AND NON-EMPLOYEES
The Company's employees participate in the stock option plans of Sylvan. The
Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"). Under APB 25, if the exercise price of
employee stock options equals the estimated fair value of the underlying stock
on the date of grant, no compensation expense is generally recognized. Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"), encourages companies to recognize expense for
stock-based awards based on their estimated fair value on the date of grant.
Statement 123 requires disclosure of pro forma data in the notes to the
financial statements if the fair value method is not elected. The Company
supplementally discloses in Note 9 to these financial statements the pro forma
information as if the fair value method had been adopted.
The Company records compensation expense for all stock options granted to
non-employees in an amount equal to the estimated fair value at the date of
grant, determined using the Black-Scholes option valuation model. The
compensation expense is recognized ratably over the vesting period.
FOREIGN CURRENCY TRANSLATION
The financial statements of certain foreign subsidiaries that are measured in
local functional currencies are translated into U.S. dollars using the current
rate method. All balance sheet accounts are translated using the exchange rates
at the balance sheet date. Income statement amounts have been translated using
the average exchange rates for the year. Translation gains or losses, resulting
from the changes in exchange rates from year to year, are reported in other
comprehensive income.
The financial statements of other foreign subsidiaries, primarily those
subsidiaries providing services overseas to ETS, prepare financial statements
using the U.S. dollar as the functional currency. The transactions of these
subsidiaries that are denominated in foreign currencies have been remeasured
into U.S. dollars. Any resulting gain or loss is recorded as an adjustment of
the amount due from ETS as the contract with ETS requires ETS to bear the risk
of foreign currency gains or losses.
F-11
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
2. ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Non-owner changes in equity, consisting of foreign currency translation
adjustments, are included in other comprehensive income. The Company reports
comprehensive income in the statement of owner's equity.
START-UP COSTS
Start-up costs, including pre-contract costs associated with testing contracts,
are expensed as incurred.
EFFECT OF PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required
to be adopted in years beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
3. ACQUISITIONS AND JOINT VENTURE
NAI/BLOCK
Effective December 1, 1997, the Company acquired Block Testing Services L.P.,
Block State Testing Services L.P. and National Assessment Institute, Inc.,
(collectively "NAI/Block"), commonly controlled companies engaged in the
business of designing, marketing, selling, distributing and administering paper
and pencil tests and the licensing of individuals. The purchase price of $25,000
was paid by Sylvan. The acquisition was accounted for using the purchase method
of accounting, and assets with a fair value of $29,216 were acquired and
liabilities of $4,216 were assumed. Goodwill of $26,713 was recorded and is
being amortized over a period of 25 years. During the year ended December 31,
1998, NAI/Block recognized revenues of $12,937 and reported pre-tax earnings of
$3,474.
F-12
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
3. ACQUISITIONS AND JOINT VENTURE (CONTINUED)
On January 1, 1999, the Company entered into an agreement with The Chauncey
Group International Ltd. to form Experior Assessments LLC ("Experior"), a joint
venture engaged in the business of developing and administering state and
municipal sponsored licensing and certification programs and other related
services. In exchange for a 50% interest in Experior, the Company contributed
the net assets of NAI/Block, excluding certain working capital balances. These
net assets were transferred at historical cost with no gain or loss recorded on
the transfer. As of December 31, 1998, the Company has classified the net assets
contributed to Experior in 1999 of $31,575 as net assets to be transferred to
joint venture in the accompanying balance sheet.
During the six months ended June 30, 1999, the Company made working capital
advances to Experior totaling $1,611, and recorded an increase in the investment
of $945 for its share of earnings. The total investment in and advances to
Experior at June 30, 1999 of $34,131 is included in investments in and advances
to affiliates in the accompanying balance sheet.
DRAKE PROMETRIC, L.P.
Effective September 30, 1995, the Company acquired Drake Prometric, L.P.
("Drake"), a provider of computer-based certification, licensing and assessment
testing programs. The Company acquired Drake for an initial purchase price of
$70,600 which was paid by Sylvan. The purchase agreement further provided for
the payment of contingent consideration to the extent that (i) certain revenue
targets relating to portions of the combined computer-based testing business
were achieved from 1996 through 1998 and (ii) an additional $40,000 of
contingent consideration to the extent other revenue targets were achieved in
1998 or 1999, with the measuring year selected by the sellers. As of December
31, 1998, all contingencies surrounding the payment of additional consideration
to the sellers were resolved and total contingent consideration of $71,951 was
recorded in 1996, 1997, and 1998 and paid or accrued by Sylvan.
4. ACQUISITION OF CONTRACT RIGHTS
In 1996, the Company acquired the rights to provide computer-based tests on
behalf of the National Association of Securities Dealers Regulation, Inc. ("the
NASDR") for a period of ten years. As part of the agreement, the Company assumed
certain lease obligations and acquired the fixed assets of approximately 50
testing centers previously operated by the NASDR. Sylvan paid the NASDR $6,359
on behalf of the Company, of which $6,116 related to contract rights and $243
related to fixed assets.
F-13
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
5. RELATED PARTY TRANSACTIONS AND CORPORATE ALLOCATIONS
Certain obligations of the Company during the periods presented were satisfied
by Sylvan and accounted for through an intercompany account. These obligations
included certain direct costs of revenues and overhead costs directly
attributable to the Company's operations and paid through Sylvan's cash
management systems. In addition, management has allocated indirect overhead
costs to the Company based on an analysis of the components of corporate general
and administrative expenses and the estimated percentage of each component
attributable to the Company. Corporate general and administrative expense
consists principally of corporate payroll, and compensation expense was
allocated considering the estimated efforts of individual employees. Management
believes that the method used to allocate these expenses is reasonable.
Allocated indirect overhead consists principally of the following:
o Corporate human resources, including labor relations, payroll and
training;
o Finance, accounting, legal and administration;
o Tax services, including tax return preparation;
o Investor relations;
o Information management services.
Sylvan also acquired certain testing businesses, testing contracts and
investments on behalf of the Company. Payments to the sellers related to these
transactions are included in intercompany balances.
Intercompany account balances for all periods presented have been treated as
permanent contributions and have been reflected as a component of owner's equity
in the accompanying financial statements.
F-14
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
5. RELATED PARTY TRANSACTIONS AND CORPORATE ALLOCATIONS (CONTINUED)
The following table summarizes the components of the changes in owner's net
investment during the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997 1998 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Beginning net investment $ 84,055 $ 105,472 $ 173,967 $ 260,796
Contributions
Cash paid by Sylvan for:
Property and equipment 4,531 8,100 15,511 6,170
Allocated overhead 2,686 3,835 4,740 3,520
Allocated income taxes 3,230 4,482 12,045 6,160
Other contributions (distributions) (8,475) 7,924 (20,258) (15,016)
------------- ------------- ------------- --------------
Total cash contributions (distributions) 1,972 24,341 12,038 834
Non-cash contributions by Sylvan for:
Acquisitions:
Drake contingent consideration 8,327 20,076 43,548 -
NAI/Block - 25,000 - -
Cogent Testing Network - - 7,457 -
------------- ------------- ------------- --------------
Total acquisitions 8,327 45,076 51,005 -
Contract rights 4,872 - - -
Other investments - - 8,000 -
Issuance of stock options to non-employees - 550 539 122
------------- ------------- ------------- --------------
Total non-cash contributions by Sylvan 13,199 45,626 59,544 122
------------- ------------- ------------- --------------
Net contribution from Sylvan 15,171 69,967 71,582 956
Net income (loss) 6,246 (1,472) 15,247 7,530
------------- ------------- ------------- --------------
Ending net investment $ 105,472 $ 173,967 $ 260,796 $ 269,282
============= ============= ============= ==============
Average balance during the period $ 91,778 $ 126,142 $ 198,741 $ 265,039
============= ============= ============= ==============
</TABLE>
F-15
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
6. TRANSACTIONS WITH CALIBER LEARNING NETWORK, INC.
During 1997, the Company assigned the leases for 32 testing centers to Caliber
Learning Network, Inc. ("Caliber"), for the use by Caliber in its operations.
Sylvan owns approximately 10% of the voting common stock of Caliber. Upon
assignment of the centers, the Company agreed to pay management fees to Caliber
to manage the delivery of certain computer-based tests at the transferred
centers. Management fees are calculated based on a fixed amount per month, plus
an additional fee per test for tests exceeding prescribed volume levels.
Management fees under this agreement totaled $1,199 and $2,066 during the years
ended December 31, 1997 and 1998, respectively.
At December 31, 1997, the Company was owed $3,610 for expenses paid on Caliber's
behalf. This amount, included in other receivables, was repaid to the Company in
1998.
7. LEASES
The Company conducts all of its operations from leased facilities. These
facilities consist principally of administrative offices, registration call
centers and testing sites. In addition, a portion of Sylvan's corporate
headquarters lease expense is charged to the Company based on an estimate of
square footage occupied. The terms of these leases are five years or less, and
generally contain renewal options. The Company also leases certain equipment
under operating leases of 36 months or less. Future minimum lease payments at
December 31, 1998, excluding corporate headquarters charges from Sylvan, by year
and in the aggregate, under all non-cancelable operating leases are as follows:
Years ending December 31:
1999 $ 4,466
2000 3,905
2001 2,333
2002 1,773
2003 1,568
Thereafter 435
---------------
$ 14,480
===============
Rent expense under all cancelable and non-cancelable leases was $2,622, $5,350
and $2,130 for the year ended December 31, 1996, 1997 and 1998, respectively.
F-16
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
8. CONTINGENCIES
On November 18, 1996, ACT, Inc. filed suit against Sylvan alleging that Sylvan
violated federal antitrust laws and committed various state law torts in
connection with the operations of its computer-based testing operations and in
obtaining a testing services contract from the NASDR (see Note 4). Sylvan
believes the grounds of the lawsuit are without merit and is defending the
lawsuit vigorously. Management is unable to predict the ultimate outcome of the
lawsuit, but believes that the ultimate resolution of the matter will not have a
material effect on the Company's financial position.
The Company is subject to other legal actions arising in the ordinary course of
its business. In management's opinion, the Company has adequate legal defenses
and/or insurance coverage with respect to the eventuality of such actions and
does not believe any settlement would materially affect the Company's financial
position.
9. STOCK OPTIONS
Sylvan has five stock options plans under which stock options were granted to
employees of the Company. Options outstanding under all of Sylvan's stock option
plans have been granted at prices which are equal to the market value of the
stock on the date of grant and vest ratably over periods not exceeding six
years.
During 1997, Sylvan established the Sylvan Technology Center Stock Option Plan
("the STC Plan") for the franchisee owners of testing centers. The STC Plan
provides for the granting of stock options to purchase up to 450,000 shares of
common stock. During 1997, 317,000 options were granted that vest ratably over a
three-year period and expire 10 years after the date of grant or on the date of
cessation of operations of the center. The fair value of these options,
determined using the Black-Scholes option valuation model, was $1,386, of which
$550 and $539 of expense was recognized in 1997 and 1998, respectively, with the
remainder to be recognized in expense over the next two years as the options
vest.
F-17
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
9. STOCK OPTIONS (CONTINUED)
The following table summarizes the stock option activity attributable to the
Company.
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ------------ --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year 696,199 $ 8.93 1,060,950 $ 13.00 1,658,062 $ 17.06
Granted 614,438 16.16 693,637 22.41 218,750 29.12
Exercised (249,687) 9.42 (29,025) 9.94 (233,572) 11.70
Forfeited - - (67,500) 11.33 (130,125) 15.50
------------- ------------ --------------- -------------- ------------- -------------
Outstanding - end of year 1,060,950 $ 13.00 1,658,062 $ 17.06 1,513,115 $ 19.76
============= ============ =============== ============== ============= =============
Exercisable at end of year 90,157 $ 8.94 278,947 $ 11.45 480,242 $ 15.85
============= ============ =============== ============== ============= =============
Weighted-average fair value of
options granted during the
year $ 6.42 $ 7.66 $ 10.72
============ ============== =============
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$3.48 to $30.81 as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OF REMAINING EXERCISE PRICES OF
RANGE OF EXERCISE OUTSTANDING OUTSTANDING CONTRACTUAL LIFE OF EXERCISABLE EXERCISABLE
PRICES OPTIONS OPTIONS OUTSTANDING OPTIONS OPTIONS OPTIONS
-------------------- ------------------ -------------------- ------------------------ ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
$3.48-$6.78 58,738 $ 5.33 1.1 years 49,738 $ 5.07
$11.33-$16.75 442,262 14.11 3.3 years 211,974 13.65
$17.17-$23.37 647,115 19.84 5.5 years 187,780 19.29
$26.62-$30.81 365,000 28.44 5.1 years 30,750 27.48
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, pro forma net income
information required by Statement 123 has been determined as if the Company had
accounted for stock options granted to its employees using the fair value
method. The fair value of these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1996, 1997 and 1998: risk-free interest rate of 6.00%, dividend
yield of 0%, volatility factors of the expected market price of Sylvan's common
stock of .399, .280 and .360, respectively, and an expected life of granted
options which varies from zero to six years depending upon the vesting period.
F-18
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
9. STOCK OPTIONS (CONTINUED)
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
Sylvan's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
Sylvan's stock options.
For purposes of pro forma net income, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
net income (loss) was $5,641, $(2,299), and $14,284 in 1996, 1997 and 1998,
respectively.
10. IMPAIRMENT LOSS
In May 1997, the Company determined that certain assets were impaired as a
result of strategic changes that were made as a result of Sylvan pursuing the
acquisition of related businesses. Sylvan developed certain plans that resulted
in required changes in both software systems and hardware being utilized in the
Company's existing network of testing centers. The impaired assets, consisting
of computer equipment and software, were impaired as a result of changes in the
technical requirements and specifications of certain computer hardware and
software. The impairment loss of $4,000 was determined by evaluating the net
proceeds from the disposition of the assets compared to their book value.
F-19
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
11. INCOME TAXES
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------------- ---------------- -----------------
Current:
Federal $ 2,225 $ 2,284 $ 8,792
Foreign 373 1,677 1,641
State 632 521 1,612
----------------- ---------------- -----------------
Total current 3,230 4,482 12,045
Deferred (benefit):
Federal 387 (2,136) 255
State 193 (389) 57
----------------- ---------------- -----------------
Total deferred 580 (2,525) 312
----------------- ---------------- -----------------
Total provision $ 3,810 $ 1,957 $ 12,357
================= ================ =================
For the years ended December 31, 1996, 1997 and 1998, foreign income before
income taxes was approximately $1,848, $2,742 and $4,993, respectively.
The Company uses the liability method to account for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
F-20
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
11. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
DECEMBER 31,
1997 1998
------------- ----------------
Deferred tax assets:
Net operating loss carryforwards $ 246 $ 252
Loss on impairment of assets 779 -
Allowance for doubtful accounts 289 451
Marketing and advertising costs 3,468 415
Amortization of intangible assets 299 221
Non-employee stock option expense 209 326
Tax credit carryforwards 744 744
Other 233 769
-------------- --------------
Total deferred tax assets 6,267 3,178
Deferred tax liabilities:
Deferred contract costs 2,281 917
Contract rights 170 78
Depreciation 483 673
Deferred income 1,518 -
-------------- --------------
Total deferred tax liabilities 4,452 1,668
-------------- --------------
Net future income tax assets 1,815 1,510
Valuation allowance for deferred tax assets (246) (252)
-------------- --------------
Net deferred tax assets $ 1,569 $ 1,258
============== ==============
At December 31, 1998, undistributed earnings of non-U.S. subsidiaries totaled
$13.9 million. Deferred tax liabilities have not been recognized for these
undistributed earnings because it is management's intention to reinvest such
undistributed earnings outside of the U.S. If all undistributed earnings were
remitted to the U.S., the amount of incremental U.S. Federal and foreign income
taxes, net of foreign tax credits, would be approximately $3.3 million.
F-21
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
11. INCOME TAXES (CONTINUED)
The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory tax rates to income before income
taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
----------- ------------- ------------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate $3,419 $165 $9,661
Permanent differences 194 993 1,738
State income tax expense, net of federal tax
benefit 544 88 1,085
Tax effect of foreign income taxed at different rates (255) 745 (106)
Other (92) (34) (21)
----------- ------------- ------------
$3,810 $1,957 $12,357
=========== ============= ============
</TABLE>
12. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company has three customers whose revenues represent a significant portion
of consolidated revenues. The following table summarizes as a percentage of
consolidated revenues the revenues recognized from services provided to these
customers.
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------- ------------ -------------
ETS 22.9% 29.5% 34.3%
Microsoft 19.6 21.8 24.0
Novell 23.3 12.2 5.6
The Company maintains an allowance for losses on receivables based on the
collectibility of all amounts owed. The Company generally does not require
collateral for trade receivables. At December 31, 1998, the Company does not
have any significant concentrations of credit risk.
F-22
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
13. DEFINED CONTRIBUTION RETIREMENT PLAN
Sylvan sponsors a defined contribution retirement plan under section 401(k) of
the Internal Revenue Code. The provisions of this plan allow for voluntary
employee contributions, subject to certain annual limitations, and discretionary
contributions which are allocated to eligible participants based upon
compensation. All employees of the Company are eligible after meeting certain
service requirements. Sylvan made discretionary contributions to this plan of
$95 in 1997 and $85 in 1998 on behalf of the Company.
14. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
The Company operates in one business segment, computer-based testing services.
The Company conducts operations in foreign countries, however revenue and
long-lived assets attributable to an individual foreign country are not
material. Revenues and long-lived assets attributable to operations in the
United States and foreign countries are summarized below.
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
LONG-LIVED
REVENUES ASSETS
-------------------- --------------------
United States $ 54,370 $ 11,779
Foreign countries - total 30,913 1,450
-------------------- --------------------
Total $ 85,283 $ 13,229
==================== ====================
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
LONG-LIVED
REVENUES ASSETS
-------------------- --------------------
United States $ 71,359 $ 19,825
Foreign countries - total 44,263 4,825
-------------------- --------------------
Total $ 115,622 $ 24,650
==================== ====================
F-23
<PAGE>
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
Notes to Financial Statements
(Dollar in thousands, except per share data)
14. BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
LONG-LIVED
REVENUES ASSETS
-------------------- --------------------
United States $ 106,328 $ 38,847
Foreign countries - total 72,404 12,496
-------------------- --------------------
Total $ 178,732 $ 51,343
==================== ====================
Revenues are attributed to countries based on the location of the customer.
Revenues from individual foreign countries did not exceed 10% of revenues in any
of the years presented. Long-lived assets domiciled in individual foreign
countries did not exceed 10% of long-lived assets in any of the years presented.
Note 12 to the financial statements contains information about major customers
of the Company.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the financial statements of Sylvan Prometric (a Division of
Sylvan Learning Systems, Inc.) as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated September 20, 1999 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
Baltimore, Maryland
September 20, 1999
S-1
<PAGE>
<TABLE>
<CAPTION>
Schedule II -- Valuation and Qualifying Accounts
Sylvan Prometric (a Division of Sylvan Learning Systems, Inc.)
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------------------
Balance at Charged to Costs Charged to Other Deductions- Balance at
Description Beginning of Period and Expenses Accounts - Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December, 31, 1998:
Deducted from assets accounts:
Allowance for doubtful accounts $ 887 $ 1,587 $ (1,196) (1) $ 1,278
====== ======== ========= =======
Year Ended December, 31, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts $ 974 $ 935 $ (1,022) (1) $ 887
====== ====== ========= =====
Year Ended December, 31, 1996:
Deducted from assets accounts:
Allowance for doubtful accounts $ 914 $ 345 $ (285) (1) $ 974
====== ====== ======= =====
(1) Uncollectible accounts written off, net of recoveries.
</TABLE>
S-2
<PAGE>
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
PAGE
Prospectus Summary............................
Risk Factors..................................
Disclosure Regarding Forward-Looking Statements
Our Separation from Sylvan....................
Use of Proceeds...............................
Dividend Policy...............................
Capitalization................................
Dilution......................................
Selected Financial and Operating Data.........
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business......................................
Management....................................
Arrangements Between Prometric and Sylvan.....
Principal Stockholder.........................
Description of Capital Stock..................
Shares Eligible for Future Sale...............
Underwriting..................................
Legal Matters.................................
Experts.......................................
Additional Information........................
Index to Financial Statements................. F-1
Dealer prospectus delivery obligation:
Until _______, 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
[PROMETRIC, INC.
LOGO]
PROMETRIC, INC.
_________SHARES
COMMON STOCK
------------
DEUTSCHE BANC ALEX. BROWN
PROSPECTUS
___________, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by us in
connection with the registration of the securities offered hereby. All of the
amounts shown are estimated except the SEC registration fee, the NASD filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................................. $27,008
NASD filing fee................................................................... 10,500
Nasdaq National Market listing fee................................................ *
Transfer agent's and registrar's fees............................................. *
Printing expenses................................................................. *
Legal fees and expenses........................................................... *
Accounting fees and expenses...................................................... *
Miscellaneous expenses............................................................ *
================
Total........................................................................ $ *
================
-------------------------
</TABLE>
* To be completed by amendment.
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 2-418 of the Maryland General Corporation Law permits
indemnification of directors, officers, employees and agents of a corporation
under certain conditions and subject to limitations. Our bylaws include
provisions to require us to indemnify our directors and officers to the fullest
extent permitted by Section 2-418, including circumstances in which
indemnification is otherwise discretionary. Section 2-418 also empowers us to
purchase and maintain insurance that protects our officers, directors, employees
and agents against any liabilities incurred in connection with their service in
such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification of our directors and
officers by the Underwriters, for certain liabilities arising under the
Securities Act.
15. RECENT SALES OF UNREGISTERED SECURITIES
On _________, 1999, we issued ______ shares of our common stock to Sylvan
in exchange for all assets and liabilities of Sylvan's computer-based testing
services business. These securities were issued by us in reliance upon the
exemptions provided for in Section 4(2) of the Securities Act. The certificates
representing these shares contain a restrictive legend that prohibits transfer
without registration or an applicable exemption.
II-1
<PAGE>
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Form of Underwriting Agreement
3.1 Charter of Registrant
3.2 Bylaws of Registrant
4.1 Specimen stock certificate for shares of Common Stock of Registrant
5.1 Opinion of Piper & Marbury L.L.P. *
10.1 Registrant's 1999 Stock Incentive Plan
10.2 Form of Separation Agreement between Registrant and Sylvan Learning
Systems, Inc. *
10.3 Form of Administration Services Agreement between Registrant and Sylvan Learning Systems,
Inc. *
10.4 Form of Tax Sharing and Separation Agreement between Registrant and Sylvan Learning Systems,
Inc. *
10.5 Form of Registration Rights Agreement between Registrant and Sylvan Learning Systems, Inc. *
10.6 Master Agreement for International Distribution between Educational Testing Service and
Sylvan Learning Systems, Inc. dated as of April 1, 1994 +
10.7 Master Agreement between Educational Testing Service and Sylvan Learning Systems, Inc. dated
as of December 12, 1997 +
11.1 Statement of computation of earnings per share*
21.1 List of subsidiaries of Registrant*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1 hereto) *
24.1 Power of Attorney of Directors (included in signature pages)
27 Financial Data Schedule
99.1 Consent of Director Nominee - Berlanti
99.2 Consent of Director Nominee - Samper
99.3 Consent of Director Nominee - McGuire
99.4 Consent of Director Nominee - Pollock
99.5 Consent of Director Nominee - Inatome
--------------
</TABLE>
* To be filed by amendment.
+ Portions of these exhibits have been omitted based upon a request for
confidential treatment filed with the SEC.
II-2
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Auditors on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts (contained in the
"Financial Statements" section of the prospectus)
17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Charter or Bylaws or the Maryland
General Corporation Law 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 Securities 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, employee or agent of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted form 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, 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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Prometric, Inc. has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, on September 24, 1999.
Prometric, Inc.
By: /s/ Stephen A. Hoffman
--------------------------------------
Stephen A. Hoffman
Chief Executive Officer and President
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 date indicated. Each person whose signature appears below
in so signing also makes, constitutes and appoints Stephen A. Hoffman and Graham
J. Taylor, and each of them acting alone, his true and lawful attorney-in-fact,
with full power of substitution, for him in any and all capacities, to execute
and cause to be filed with the Securities and Exchange Commission any and all
amendments and post-effective amendments to this Registration Statement, with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or his or her substitute or
substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NAME TITLE DATE
/s/ Stephen A. Hoffman Chief Executive Officer, President and September 24, 1999
- ---------------------- Director (Principal Executive Officer)
Stephen A. Hoffman
/s/ Graham J. Taylor Chief Financial and Chief Accounting Officer September 24, 1999
- --------------------
Graham J. Taylor (Principal Financial Officer)
/s/ R. Christopher Hoehn-Saric Director September 24, 1999
- ------------------------------
R. Christopher Hoehn-Saric
/s/ Douglas L. Becker Director September 24, 1999
- ---------------------
Douglas L. Becker
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1 Form of Underwriting Agreement
3.1 Charter of Registrant
3.2 Bylaws of Registrant
4.1 Specimen stock certificate for shares of Common Stock of Registrant
5.1 Opinion of Piper & Marbury L.L.P. *
10.1 Registrant's 1999 Stock Incentive Plan
10.2 Form of Separation Agreement between Registrant and Sylvan Learning
Systems, Inc. *
10.3 Form of Administration Services Agreement between Registrant and Sylvan Learning Systems,
Inc. *
10.4 Form of Tax Sharing and Separation Agreement between Registrant and Sylvan Learning Systems,
Inc. *
10.5 Form of Registration Rights Agreement between Registrant and Sylvan Learning Systems, Inc. *
10.6 Master Agreement for International Distribution between Educational Testing Service and
Sylvan Learning Systems, Inc. dated as of April 1, 1994 +
10.7 Master Agreement between Educational Testing Service and Sylvan Learning Systems, Inc. dated
as of December 12, 1997 +
11.1 Statement of computation of earnings per share*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1 hereto) *
24.1 Power of Attorney of Directors (included in signature pages)
27 Financial Data Schedule
99.1 Consent of Director Nominee - Berlanti
99.2 Consent of Director Nominee - Samper
99.3 Consent of Director Nominee - McGuire
99.4 Consent of Director Nominee - Pollock
99.5 Consent of Director Nominee - Inatome
-------------
</TABLE>
* To be filed by amendment.
+ Portions of these exhibits have been omitted based upon a request for
confidential treatment filed with the SEC.
EXHIBIT 1.1
_______________ Shares
Prometric, Inc.
Common Stock
($0.001 Par Value)
UNDERWRITING AGREEMENT
_______________, 19__
Deutsche Bank Securities Inc.
[ ]
As Representatives of the
Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202
Gentlemen:
Prometric, Inc., a Maryland corporation (the "Company")
proposes 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 __________ shares of the Company's Common
Stock, $0.001 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to __________ additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (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 set forth
opposite their respective names in Schedule I, plus their pro rata portion of
the Option Shares if you elect to exercise the over-allotment option in whole or
in part for the
<PAGE>
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) 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.
The Company represents and warrants to each of the
Underwriters as follows:
(a) A registration statement on Form S-1 (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 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 the 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. The registration statement, together
with any related 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 any 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."
(b) 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 as listed in Exhibit
A hereto (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
-2-
<PAGE>
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 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.
(c) The outstanding shares of Common Stock of the Company have
been duly authorized, are validly issued, fully paid and
non-assessable; the Shares to be issued and sold by the Company 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.
(d) 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 in the Registration
Statement. The form of certificates for the Shares conforms to the
Maryland General Corporation Law.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares and has not 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 will conform to, the requirements of the
Act and the Rules and Regulations. The Registration Statement and any
amendments thereto do not contain, and will not contain, any untrue
statement of a material fact and do not omit, and will not omit, 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,
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.
-3-
<PAGE>
(f) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement, present fairly the financial
position and the results of operations and cash flows of the Company
and the consolidated Subsidiaries, 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 in the Registration Statement
presents fairly the information shown therein; and that data has been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company.
(g) Ernst & Young LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(h) 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.
(i) 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 or subleases, as appropriate, conforming
in all material respects to the description thereof set forth in the
Registration Statement.
(j) 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. All tax liabilities have been adequately
provided for in the financial statements of the Company.
-4-
<PAGE>
(k) 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 in the Registration
Statement.
(l) 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. 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.
(m) 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.
(n) The Company and each of the Subsidiaries hold 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
-5-
<PAGE>
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. The Company owns, or possesses adequate
rights to use, all patents, patent rights, inventions, trade secrets,
licenses, know-how, proprietary techniques, including processes and
substances, trademarks, service marks, trade names and copyrights
described or referred to in the Prospectus as owned or used by it or
which are necessary for the conduct of its business as described in the
Prospectus, except as otherwise disclosed in the Prospectus. To the
best knowledge of the Company, except as disclosed in the Prospectus,
all such patents, patent rights, licenses, trademarks, service marks
and copyrights are (a) valid and enforceable and (b) not being
infringed by any third parties which infringement could, whether singly
or in the aggregate, materially and adversely affect the business,
properties, operations, condition (financial or otherwise), income,
business prospects or results of operations of the Company, as
presently being conducted or as proposed to be conducted in the
Prospectus. Except as disclosed in the Prospectus, the Company has no
knowledge of, nor has it received any notice of, infringement of or
conflict with, asserted rights of others with respect to any patents
issued prior to the Closing Date, inventions, trade secrets, licenses,
know-how, proprietary techniques, including processes and substances,
trademarks, service marks, trade names or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or
finding could materially and adversely affect the business, properties,
operations, condition (financial or otherwise), income, business
prospects or results of operations of the Company as presently being
conducted or as proposed to be conducted in the Prospectus.
(o) 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 to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares.
(p) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company
Act of 1940 and the rules and regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting
controls 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
-6-
<PAGE>
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) 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.
(s) 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 such
qualification.
(t) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of doing Business with Cuba, and
the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become
effective with the Commission or with the Florida Department of Banking
and Finance (the "Department"), whichever date is later, or if the
information reported in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the
Department notice of such business or change, as appropriate, in a form
acceptable to the Department.
(u) To the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's
officers, directors or 5% or greater securityholders, except as set
forth in the Registration Statement.
(v) Except as disclosed in the Prospectus, the Company has
implemented procedures to analyze and address the risk that the
computer hardware and software used or produced by it may be unable to
recognize and properly execute date-sensitive functions involving
certain dates after December 31, 1999 (the "Year 2000 Problem"),
-7-
<PAGE>
and has determined, to the best of its knowledge, that such risk will
be remedied on a timely basis without material expense and will not
have a material adverse effect upon the financial condition and results
of operations of the Company. The Company believes, after due inquiry,
that each supplier, vendor, customer or financial service organization
used or serviced by the Company has remedied or will remedy on a timely
basis the Year 2000 Problem, except to the extent that a failure to
remedy by any such supplier, vendor, customer or financial service
organization would not have a material adverse effect on the Company.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set
forth, the Company agrees to sell to the Underwriters and each
Underwriter agrees, severally and not jointly, to purchase, at a price
of $_____ [net price] per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be
made by wire transfer of immediately available funds to a bank account
designated by the Company against delivery of certificates therefor to
the Representatives for the several accounts of the Underwriters. Such
payment and delivery are to be made at the offices of Deutsche Bank
Securities Inc., 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 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.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as
set forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part but only once and at any
time upon written notice given within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters and
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and
denominations in which the
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Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which
certificates for Option Shares 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 the option, nor in any
event prior to the Closing Date (the 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 Shares to be purchased by each Underwriter shall be in
the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares, adjusted by you
in such manner as to avoid fractional shares. The option with respect
to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel the
option at any time prior to its expiration by giving written notice of
the cancellation to the Company. To the extent, if any, that the option
is exercised, payment for the Option Shares shall be made on the Option
Closing Date by wire transfer of immediately available funds to a bank
account designated by the Company for the Option Shares against
delivery of certificates therefor at the offices of Deutsche Bank
Securities Inc., One South Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem
it advisable to do so. The Firm Shares 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 Shares are purchased pursuant to Section 2 hereof,
the Underwriters will offer them 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 STOCKHOLDERS.
The Company covenants and agrees with the several Underwriters
that:
(a) 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
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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 by the Company with the Commission
subsequent to the date of the Prospectus and prior to the termination
of the offering of the Shares by the Underwriters.
(b) 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 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.
(c) 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.
(d) 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
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reasonably be requested), and of all amendments thereto, as the
Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), 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
or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to 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.
(f) The Company will make generally available to its security
holders, 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 earnings 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
earnings 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.
(g) 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. 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.
(h) Except for the distribution of the Company's shares by
Sylvan Learning Systems, Inc. to its shareholders, 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 180 days after the
date of this
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Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of Deutsche Bank Securities
Inc.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on The Nasdaq Stock Market.
(j) The Company will not issue any stock options pursuant to
its 1999 Stock Incentive Plan that are exercisable or saleable
(including the underlying Common Stock) during the 180 day period
following the date of this Agreement, unless the Company first obtains
a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each person who is to receive stock
options from the Company, 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, other than sales of Common Stock
contemplated by this Agreement, charitable contributions or certain
transfers without consideration, 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 180 days after
the date of this Agreement, directly or indirectly, except with the
prior written consent of Deutsche Bank Securities Inc. ("Lockup
Agreements").
(k) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus and shall file such reports
with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of the Subsidiaries to
register as an investment company under the Investment Company Act of
1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(n) 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.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to
the performance of its obligations under this Agreement, including,
without limiting the generality of the
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foregoing, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company; 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. Any transfer taxes imposed on the sale of
the Shares to the several Underwriters will be paid by the Company. The
Company 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
to perform any undertaking or satisfy any condition of this Agreement
or 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 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 on the Closing Date and the Option Shares, 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 contained herein, and to the performance
by the Company of its covenants and obligations hereunder and to the
following additional conditions:
(a) The transactions described under the captions "Our
Separation from Sylvan" and "Arrangements between Prometric and Sylvan"
in the Registration Statement shall have taken place.
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<PAGE>
(b) 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, 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 issuance of the Shares.
(c) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of
Piper & Marbury L.L.P., counsel for the Company, 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 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 in which the conduct of
their business requires such qualification, or in which the
failure to qualify would have a material adverse effect upon
the business of the Company and the Subsidiaries taken as a
whole; 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 under the caption "Capitalization"
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 have been duly authorized and
validly issued and
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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, are in due and proper form; the
shares of Common Stock, including the Option Shares, if any,
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; and no preemptive rights of stockholders exist
with respect to any of the Shares or the issue or sale
thereof.
(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 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 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 included therein).
(vi) The statements under the captions "Risk Factors
- We will continue to depend upon Sylvan for our
administrative and support services," "Risk Factors - The
Separation Agreement with Sylvan contains covenants that may
limit our ability to seek capital in the future," "Our
Separation from Sylvan - Agreements with Sylvan," "Business -
The Prometric Network," "Business - Experior," "Business -
Contracts," "Business - Government Regulation," "Related Party
Transactions and Relationships - Messrs. Bean and Hoffman
"Related
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Party Transactions and Relationships - Caliber Learning
Network, Inc.," "Arrangements between Prometric and Sylvan,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" 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 the Registration
Statement or described in the Registration Statement or the
Prospectus which are no so filed 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.
(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 known to such counsel 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, as a
result of the consummation of the transactions contemplated by
this Agreement, and application of the net proceeds therefrom
as described in the Prospectus, required to register as an
investment company under the 1940 Act.
In rendering such opinion Piper & Marbury L.L.P. may rely as
to matters governed by the laws of states other than Maryland or
Federal laws on local counsel in
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such jurisdictions, 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.
(d) 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 (c) of this Section 6, and that the Company
is a duly organized and validly existing corporation under the laws of
the State of Maryland. In rendering such opinion Hogan & Hartson L.L.P.
may rely as to all matters governed other than by the laws of the State
of Maryland or Federal laws on the opinion of counsel referred to in
Paragraph (c) of this Section 6. 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) 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, 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.
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(e) 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.
(f) 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 LLP 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 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 in the Registration
Statement and Prospectus.
(g) 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;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He or she 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
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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.
(h) The Company 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.
(i) The Firm Shares and Option Shares, if any, have been
approved for designation upon notice of issuance on the Nasdaq Stock
Market.
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
Company 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 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 COMPANY.
The obligations of the Company to sell and deliver the Shares
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
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the effectiveness of the Registration Statement shall have been issued
and in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees 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 will not be liable (i) 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 or (ii) with respect to any untrue
statement contained in or any omission from a Preliminary Prospectus of
the untrue statement or omission from a Preliminary Prospectus was
corrected in the applicable Prospectus and the person asserting any
loss, liability, claim or damage was not given or sent a copy of the
applicable Prospectus in the manner and at such time as required by the
Act, provided the Company has furnished you with copies of the
applicable Prospectus. This indemnity agreement will be in addition to
any liability which the Company 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 and each person, if
any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company or any
such director, officer 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
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<PAGE>
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 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 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
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<PAGE>
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 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 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 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 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 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 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. 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 on the one hand or the Underwriters on the other and the
parties' relative intent,
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<PAGE>
knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company 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 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 Shares 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.
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<PAGE>
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 Shares 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), 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 such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, 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 or
Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate
number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be,
covered hereby, the other Underwriters shall be obligated, severally,
in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case
may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or
Option Shares, as the case may be, with respect to which such default
shall occur exceeds 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the Company 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 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
Deutsche Bank Securities Inc., One South Street, Baltimore, Maryland
21202, Attention: Scott A. Wieler; with a copy to Deutsche Bank
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<PAGE>
Securities Inc., One South Street, Baltimore, Maryland 21202,
Attention: General Counsel; if to the Company, to Prometric, Inc., 1000
Lancaster Street, Baltimore, Maryland 21202, Attention: Stephen A.
Hoffman, Chief Executive Officer; with a copy to Piper & Marbury
L.L.P., 36 South Charles Street, Baltimore, Maryland 21201, Attention:
Richard C. Tilghman, Jr.
11. TERMINATION.
This Agreement may be terminated by you by notice to the
Company 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 date of this Agreement;
(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, (iii) suspension of trading in securities generally on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq Stock
Market or over-the counter market 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 Stock 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.
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<PAGE>
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company 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.
The Company 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 (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 Shares 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
Company and the several Underwriters in accordance with its terms.
Very truly yours,
PROMETRIC, INC.
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<PAGE>
By
-------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
DEUTSCHE BANK SECURITIES INC.
[ ]
As Representatives of the several
Underwriters listed on Schedule I
By: Deutsche Bank Securities Inc.
By
--------------------------------
Authorized Officer
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SCHEDULE I
SCHEDULE OF UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased
----------- -------------------------------------
Deutsche Bank Securities Inc.
----------
Total ----------
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EXHIBIT A
SUBSIDIARIES OF THE COMPANY
-29-
PROMETRIC, INC.
ARTICLES OF INCORPORATION
FIRST: The undersigned, Richard C. Tilghman, Jr. whose address is 36
South Charles Street, Baltimore, Maryland 21201, being at least eighteen years
of age, acting as incorporator, does hereby form a corporation under the General
Laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
"CORPORATION") is:
PROMETRIC, INC.
THIRD: (a) The purposes for which and any of which the Corporation is
formed and the business and objects to be carried on and promoted by it are:
(1) To provide testing and other educational services; and
(2) To engage in any one or more businesses or transactions,
or to acquire all or any portion of any entity engaged in any one or more
businesses or transactions which the Board of Directors may from time to
time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the time
or theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no
way limited or restricted by reference to, or inference from, the terms of any
other clause of this or any other Article of the charter of the Corporation, and
each shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the Corporation
in this State is 1000 Lancaster Street, Baltimore, Maryland 21202.
FIFTH: The name and address of the resident agent of the Corporation in
this State are Robert W. Zentz, c/o Prometric, Inc., 1000 Lancaster Street,
Baltimore, Maryland 21202. Said resident agent is a citizen of Maryland who
resides in Maryland.
SIXTH: (a) The amount of the total authorized capital stock of the
Corporation is 160,000,000 shares, par value $.001 per share, amounting in
aggregate par value to $160,000, which capital stock is divided into classes of
shares designated as 150,000,000 shares of Common Stock, par value $.001 per
share (the "COMMON STOCK"), and 10,000,000 shares of Preferred Stock, par value
$.001 per share (the "PREFERRED STOCK"). The Board of Directors may classify and
reclassify any unissued shares of capital stock by setting or changing in any
one or
<PAGE>
more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares of stock. To the fullest extent permitted by
Maryland law, a majority of the entire Board of Directors, without action by the
stockholders, may amend the charter to increase or decrease the aggregate number
of shares of stock or the number of shares of stock of any class or series that
the Corporation has authority to issue.
(b) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the Common
Stock of the Corporation:
(1) Each share of Common Stock shall have one vote,
and, except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock.
Shares of Common Stock shall not have cumulative voting rights.
(2) Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time
and in such amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
holders of the Common Stock shall be entitled, together with the holders
of any other class of stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or
winding up of the Corporation, to share ratably in the net assets of the
Corporation remaining, after payment or provision for payment of the
debts and other liabilities of the Corporation and the amount to which
the holders of any class of stock hereafter classified or reclassified
having a preference on distributions in the liquidation, dissolution or
winding up of the Corporation shall be entitled.
(c) Subject to the foregoing, the power of the Board of
Directors to classify and reclassify any of the shares of capital stock shall
include, without limitation, subject to the provisions of the charter, authority
to classify or reclassify any unissued shares of such stock into a class or
classes of preferred stock, preference stock, special stock or other stock, and
to divide and classify shares of any class into one or more series of such
class, by determining, fixing, or altering one or more of the following:
(1) The distinctive designation of such class or series
and the number of shares to constitute such class or series; provided
that, unless otherwise prohibited by the terms of such or any other class
or series, the number of shares of any class or series may be decreased
by the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of
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<PAGE>
such class or series may be increased by the Board of Directors in
connection with any such classification or reclassification, and any
shares of any class or series which have been redeemed, purchased,
otherwise acquired or converted into shares of Common Stock or any other
class or series shall become part of the authorized capital stock and be
subject to classification and reclassification as provided in this
sub-paragraph.
(2) Whether or not and, if so, the rates, amounts and
times at which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such dividends
shall rank senior or junior to or on a parity with the dividends payable
on any other class or series of stock, and the status of any such
dividends as cumulative, cumulative to a limited extent or non-cumulative
and as participating or non-participating.
(3) Whether or not shares of such class or series shall
have voting rights, in addition to any voting rights provided by law and,
if so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall
have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the conversion
or exchange rate in such events or at such times as the Board of
Directors shall determine.
(5) Whether or not shares of such class or series shall
be subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption
dates; and whether or not there shall be any sinking fund or purchase
account in respect thereof, and, if so, the terms thereof.
(6) The rights of the holders of shares of such class
or series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Corporation, which
rights may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall rank senior or junior to
or on a parity with such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon
the payment of dividends or making of distributions on, or the
acquisition of, or the use of moneys for purchase or redemption of, any
stock of the Corporation, or upon any other action of the Corporation,
including action under this sub-paragraph, and, if so, the terms and
conditions thereof.
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<PAGE>
(8) Any other preferences, rights, restrictions,
including restrictions on transferability, and qualifications of shares
of such class or series, not inconsistent with law and the charter of the
Corporation.
(d) For the purposes hereof and of any articles supplementary
to the charter providing for the classification or reclassification of any
shares of capital stock or of any other charter document of the Corporation
(unless otherwise provided in any such articles or document), any class or
series of stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series
shall be entitled to the receipt of dividends or of amounts distributable
on liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as
to dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over the
holders of such other class or series; and
(3) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such class
or series shall be subject or subordinate to the rights of the holders of
such other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as the
case may be.
SEVENTH: (a) The initial number of directors of the Corporation shall
be three, which number may be increased or decreased by at least two-thirds of
the directors then in office pursuant to the By-Laws of the Corporation, but
shall never be less than the minimum number permitted by the General Laws of the
State of Maryland now or hereafter in force.
(b) Subject to the rights of the holders of any class of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies on the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office, or other cause shall be filled by the required vote of the
stockholders or the directors then in office. A director so chosen by the
stockholders shall hold office for the balance of the term then remaining. A
director so chosen by the remaining directors shall hold office until the next
annual meeting of stockholders, at which time the stockholders shall elect a
director to hold office for the balance of the term then remaining. No decrease
in the number of directors constituting the Board of Directors shall affect the
tenure of office of any director.
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<PAGE>
(c) Whenever the holders of any one or more series of Preferred
Stock of the Corporation shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the Board of Directors shall
consist of said directors so elected in addition to the number of directors
fixed as provided in paragraph (a) of this Article SEVENTH or in the By-Laws.
Notwithstanding the foregoing, and except as otherwise may be required by law,
whenever the holders of any one or more series of Preferred Stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the terms of the director or directors
elected by such holders shall expire at the next succeeding annual meeting of
stockholders.
(d) Subject to the rights of the holders of any class separately
entitled to elect one or more directors, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of the holders of at least 80% of the combined
voting power of all classes of shares of capital stock entitled to vote in the
election for directors voting together as a single class. For purposes of the
foregoing, "cause," shall mean only (i) conviction of a felony, (ii) declaration
of unsound mind by order of a court, (iii) gross dereliction of duty, (iv)
conviction of any act involving moral turpitude or (v) commission of an act that
constitutes intentional misconduct or a knowing violation of law if such action
in either event results both in an improper substantial personal benefit to the
director and in a material injury to the Corporation.
(e) The directors (except for any directors elected by the holders of
any one or more series of Preferred Stock of the Corporation as provided in
paragraph (c) of this Article SEVENTH) shall be divided into three classes as
follows:
(1) The term of office of Class I directors shall be until the
2000 annual meeting of stockholders and until their successors shall be
elected and have qualified and thereafter shall be for three years and
until their successors shall be elected and have qualified;
(2) the term of office of Class II directors shall be until the
2001 annual meeting of stockholders and until their successors shall be
elected and have qualified and thereafter shall be for three years and
until their successors shall be elected and have qualified; and
(3) the term of office of Class III directors shall be until the
2002 annual meeting of stockholders and until their successors shall be
elected and have qualified and thereafter shall be for three years and
until their successors shall be elected and have qualified.
If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain or attain, if possible, the
equality of the number of directors in each class. If such equality is not
possible, the increase or decrease shall be apportioned among the classes in
such a way that the difference in the number of directors in any two classes
shall not exceed one.
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(f) The names of the individuals who will serve as the initial
directors of the Corporation until their successors are elected and qualify are
as follows:
(1) The following person shall serve as a Class I director:
Douglas L. Becker
(2) The following person shall serve as a Class II director:
R. Christopher Hoehn-Saric
(3) The following person shall serve as a Class III director:
Stephen A. Hoffman
EIGHTH: (a) The following provisions are hereby adopted for the purpose
of defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
(1) The Board of Directors is hereby empowered to
authorize the issuance from time to time of shares of its stock of any
class, whether now or hereafter authorized, or securities convertible
into shares of its stock of any class or classes, whether now or
hereafter authorized, for such consideration as may be deemed advisable
by the Board of Directors and without any action by the stockholders.
(2) No holder of any stock or any other securities of
the Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board of
Directors may determine to offer for subscription may, as the Board of
Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at the
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall,
consistent with applicable law, have power in its sole discretion:
(A) to determine from time to time in
accordance with sound accounting practice or other reasonable
valuation methods what constitutes annual or other net
profits, earnings, surplus, or net assets in excess of
capital;
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(B) to fix and vary from time to time the
amount to be reserved as working capital, or determine that
retained earnings or surplus shall remain in the hands of the
Corporation;
(C) to set apart out of any funds of the
Corporation such reserve or reserves in such amount or amounts
and for such proper purpose or purposes as it shall determine
and to abolish any such reserve or any part thereof;
(D) subject to the rights of the holders of
any Preferred Stock, to distribute and pay distributions or
dividends in stock, cash or other securities or property, out
of surplus or any other funds or amounts legally available
therefor, at such times and to the stockholders of record on
such dates as it may, from time to time, determine; and
(E) to determine whether and to what extent
and at what times and places and under what conditions and
regulations the books, accounts and documents of the
Corporation, or any of them, shall be open to the inspection
of stockholders, except as otherwise provided by statute or by
the By-Laws, and, except as so provided, no stockholder shall
have any right to inspect any book, account or document of the
Corporation unless authorized do to so by resolution of the
Board of Directors.
(4) Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of
the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall
be valid and effective if authorized by the affirmative vote of the
holders of a majority of the total number of shares of all classes
outstanding and entitled to vote thereon, except as otherwise provided in
the charter.
(5) The Corporation shall indemnify (A) its directors
and officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law and
(B) other employees and agents to such extent as shall be authorized by
the Board of Directors or the Corporation's By-Laws and be permitted by
law. The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be entitled.
The Board of Directors may take such action as is necessary to carry out
these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such by-laws, resolutions or
contracts implementing such provisions or such further indemnification
arrangements as may be permitted by law. No amendment of the charter of
the Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with respect to
acts or omissions occurring prior to such amendment or repeal.
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(6) To the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, no director or
officer of this Corporation shall be personally liable to the Corporation
or its stockholders for money damages. No amendment of the charter of the
Corporation or repeal of any of its provisions shall limit or eliminate
the limitation on liability provided to directors and officers hereunder
with respect to any act or omission occurring prior to such amendment or
repeal.
(7) In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, repeal, alter, amend and rescind the
By-Laws of the Corporation upon the vote of not less than two-thirds of
the directors then in office.
(b) The Corporation reserves the right from time to time to
make any amendments of its charter which may now or hereafter be authorized by
law, including any amendments changing the terms or contract rights, as
expressly set forth in its charter, of any of its outstanding stock by
classification, reclassification or otherwise; PROVIDED, HOWEVER, that any
amendment to, repeal of or adoption of any provision inconsistent with Article
SEVENTH or Article EIGHTH must be authorized by not less than 80% of the
aggregate votes entitled to be cast thereon (considered for this purpose as a
single class), by vote at a meeting or in writing with or without a meeting.
(c) The enumeration and definition of particular powers of the
Board of Directors included in the foregoing shall in no way be limited or
restricted by reference to or inference from the terms of any other clause of
this or any other Article of the charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereafter in force.
(d) The provisions of Sections 3-601 to 3-604 of the
Corporations and Associations Article of the Annotated Code of Maryland shall
not apply to any "business combination" with the Corporation and Sylvan Learning
Systems, Inc., any present or future associates or affiliates of any one or more
of the foregoing and any other person now or hereafter acting in concert or as a
group with any one or more of the foregoing. Such persons are exempted from such
Sections of the Annotated Code of Maryland to the fullest extent permitted by
Maryland law.
NINTH: The duration of the Corporation shall be perpetual.
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IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act, on September 21, 1999.
WITNESS:
/s/ William Taylor, IV /s/ Richard C. Tilghman, Jr.
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Richard C. Tilghman, Jr.
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PROMETRIC, INC.
BY-LAWS
ARTICLE I.
STOCKHOLDERS
SECTION 1.01. ANNUAL MEETING. The Corporation shall hold an annual
meeting of its stockholders to elect directors and transact any other business
within its powers, either at 9:00 a.m. on the fifteenth of May in each year if
not a legal holiday, or at such other time on such other day falling on or
before the 30th day thereafter as shall be set by the Board of Directors. Except
as the Charter or statute provides otherwise, any business may be considered at
an annual meeting without the purpose of the meeting having been specified in
the notice. Failure to hold an annual meeting does not invalidate the
Corporation's existence or affect any otherwise valid corporate acts.
SECTION 1.02. SPECIAL MEETING. At any time in the interval between
annual meetings, a special meeting of the stockholders may be called by the
President, the Chairman of the Board or by the Board of Directors or on the
written request (addressed to the Secretary of the Corporation) of stockholders
entitled to cast at least a majority of all the votes entitled to be cast at the
meeting.
SECTION 1.03. PLACE OF MEETINGS. Unless the Charter provides
otherwise, meetings of stockholders shall be held at such place as is set from
time to time by the Board of Directors.
SECTION 1.04. NOTICE OF MEETINGS; WAIVER OF NOTICE. Not less than
ten nor more than 90 days before each stockholders' meeting, the Secretary shall
give written notice of the meeting to each stockholder entitled to vote at the
meeting and each other stockholder entitled to notice of the meeting. The notice
shall state the time and place of the meeting and, if the meeting is a special
meeting or notice of the purpose is required by statute, the purpose of the
meeting. Notice is given to a stockholder when it is personally delivered to
him, left at his residence or usual place of business, or mailed to him at his
address as it appears on the records of the Corporation. Notwithstanding the
foregoing provisions, each person who is entitled to notice waives notice if he
before or after the meeting signs a waiver of the notice which is filed with the
records of stockholders' meetings, or is present at the meeting in person or by
proxy.
SECTION 1.05. QUORUM; VOTING. Unless statute or the Charter
provides otherwise, at a meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting constitutes a quorum, and a majority of all the votes
cast at a meeting at which a quorum is present is sufficient to approve any
matter which properly comes before the meeting, except that a plurality of all
the votes cast at a meeting at which a quorum is present is sufficient to elect
a director.
<PAGE>
SECTION 1.06. ADJOURNMENTS. Whether or not a quorum is present, a
meeting of stockholders convened on the date for which it was called may be
adjourned from time to time without further notice by a majority vote of the
stockholders present in person or by proxy to a date not more than 120 days
after the original record date. Any business which might have been transacted at
the meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
SECTION 1.07. GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter
provides for a greater or lesser number of votes per share or limits or denies
voting rights, each outstanding share of stock, regardless of class, is entitled
to one vote on each matter submitted to a vote at a meeting of stockholders. In
all elections for directors, each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, an
authorization by a telegram, cablegram, datagram, electronic mail or any other
electronic or telephonic means to the person authorized to act as proxy or to
any other person authorized to receive the proxy authorization on behalf of the
person authorized to act as the proxy, including a proxy solicitation firm or
proxy support service organization. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a stockholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or another general interest in the Corporation or its assets or
liabilities.
SECTION 1.08. LIST OF STOCKHOLDERS. At each meeting of
stockholders, a full, true and complete list of all stockholders entitled to
vote at such meeting, showing the number and class of shares held by each and
certified by the transfer agent for such class or by the Secretary, shall be
furnished by the Secretary.
SECTION 1.09. CONDUCT AND BUSINESS OF VOTING. At all meetings of
stockholders the proxies and ballots shall be received, and all questions
touching the qualification of voters and the validity of proxies, the acceptance
or rejection of votes and procedures for the conduct of business not otherwise
specified by these By-Laws, the Charter or law, shall be decided or determined
by the chairman of the meeting.
SECTION 1.10. ADVANCE NOTICE PROVISIONS FOR ELECTION OF DIRECTORS.
Only persons who are nominated in accordance with the following procedures shall
be eligible for election as directors of the Corporation. Nominations of persons
for election to the Board of Directors may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors, (a) by or at the direction of the Board of Directors (or
any duly authorized committee thereof) or (b) by any stockholder of the
Corporation (i) who is a
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stockholder of record on the date of the giving of the notice provided for in
this Section and on the record date for the determination of stockholders
entitled to vote at such meeting and (ii) who complies with the notice
procedures set forth in this Section. A stockholder's notice must be delivered
to or mailed and received by the Secretary at the principal executive offices of
the Corporation (a) in the case of an annual meeting, not less than 60 days or
more than 90 days prior to the first anniversary of the date the proxy materials
were first mailed for the preceding year's annual meeting; PROVIDED, HOWEVER,
that in the event that the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date, notice by
the stockholder must be so delivered not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made; and (b) in the
case of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed or public
disclosure of the date of the special meeting was made, whichever first occurs.
A stockholder's notice to the Secretary must be in writing and set forth (a) as
to each person whom the stockholder proposes to nominate for election as a
director, all information relating to such person that is required to be
disclosed in connection with solicitations of proxies for election of directors
pursuant to Regulation 14A of the Exchange Act, and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice (i) the
name and address of such stockholder as they appear on the Corporation's books
and of the beneficial owner, if any, on whose behalf the nomination is made,
(ii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such stockholder and
such beneficial owner, (iii) a description of all arrangements or understandings
between such stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by such stockholder, (iv) a representation that such stockholder intends to
appear in person or by proxy at the meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Regulation 14A of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to be named as a nominee and to serve as a director if
elected. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. If the chairman of the meeting determines that a nomination was not
made in accordance with the foregoing procedures, the chairman of the meeting
shall declare to the meeting that the nomination was defective and such
defective nomination shall be disregarded. No adjournment or postponement of a
meeting of stockholders shall commence a new period for the giving of notice of
a stockholder proposal hereunder.
SECTION 1.11. ADVANCE NOTICE PROVISIONS FOR BUSINESS TO BE
TRANSACTED AT ANNUAL MEETING. No business may be transacted at an annual meeting
of stockholders, other than business that is either (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
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Directors (or any duly authorized committee thereof) or (c) otherwise properly
brought before the annual meeting by any stockholder of the Corporation (i) who
is stockholder of record on the date of the giving of the notice provided for in
this Section and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section. A stockholder's notice must be delivered
to or mailed and received by the Secretary at the principal executive offices of
the Corporation not less than 60 days or more than 90 days prior to the first
anniversary of the date the proxy materials were first mailed for the preceding
year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, notice by the stockholder must be so delivered not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which public announcement of the date of such
meeting is first made. A stockholder's notice to the Secretary must in writing
and set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address of such stockholder as they appear on
the Corporation's books and of the beneficial owner, if any, on whose behalf the
proposal is made, (iii) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially or of record by such
stockholder and such beneficial owner, (iv) a description of all arrangements or
understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business and
(v) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting. No
business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in Section 1.10 or in this Section, PROVIDED, HOWEVER, that once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in Section 1.10 or in this Section shall be deemed to
preclude discussion by any stockholder of any such business. If the chairman of
an annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the chairman of the
meeting shall declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted. No adjournment or
postponement of a meeting of stockholders shall commence a new period for the
giving of notice of a stockholder proposal hereunder.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. FUNCTION OF DIRECTORS. The business and affairs of
the Corporation shall be managed under the direction of its Board of Directors.
All powers of the Corporation may be exercised by or under authority of the
Board of Directors, except as conferred on or reserved to the stockholders by
statute or by the Charter or By-Laws.
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SECTION 2.02. NUMBER OF DIRECTORS. The Corporation shall have at
least three directors at all times. The Corporation shall have the number of
directors provided in the Charter until changed as herein provided. Two-thirds
of the entire Board of Directors may alter the number of directors set by the
Charter to not exceeding 25 nor less than three directors, but the action may
not affect the tenure of office of any director, except as provided in Section
2.04.
SECTION 2.03. ELECTION AND TENURE OF DIRECTORS. The directors shall
be divided into three classes as nearly equal in number as possible. At each
successive annual meeting of stockholders, the holders of stock present in
person or by proxy at such meeting and entitled to vote thereat shall elect
members of each successive class to serve for three year terms and until their
successors are elected and qualify. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, and any
additional director of any class shall, subject to Section 2.05, hold office for
a term that shall coincide with the remaining term of that class, but in no case
shall a decrease in the number of directors shorten the term of any incumbent
director.
SECTION 2.04. REMOVAL OF DIRECTOR. Any director or the entire Board
of Directors may be removed only in accordance with the provisions of the
Charter.
SECTION 2.05. VACANCY ON BOARD. A vacancy on the Board of Directors
may be filled only in accordance with the provisions of the Charter.
SECTION 2.06. REGULAR MEETINGS. Any regular meeting of the Board of
Directors shall be held on such date and at any place as may be designated from
time to time by the Board of Directors.
SECTION 2.07. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the President or in writing with or
without a meeting. A special meeting of the Board of Directors shall be held on
such date and at any place as may be designated from time to time by the Board
of Directors. In the absence of designation such meeting shall be held at such
place as may be designated in the call.
SECTION 2.08. NOTICE OF MEETING. The Secretary shall give notice to
each director of each regular and special meeting of the Board of Directors. The
notice shall state the time and place of the meeting. Notice is given to a
director when it is delivered personally to him, left at his residence or usual
place of business, or sent by telegraph, facsimile transmission or telephone, at
least 24 hours before the time of the meeting or, in the alternative by mail to
his address as it shall appear on the records of the Corporation, at least 72
hours before the time of the meeting. Unless the By-Laws or a resolution of the
Board of Directors provides otherwise, the notice need not state the business to
be transacted at or the purposes of any regular or special meeting of the Board
of Directors. No notice of any meeting of the Board of Directors need be given
to any director who attends, or to any director who, in writing executed and
filed with the records of the meeting either before or after the holding
thereof, waives such notice. Any meeting of the Board of Directors, regular or
special, may adjourn from time to time to reconvene at the same or some other
place, and no notice need be given of any such adjourned meeting other than by
announcement.
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SECTION 2.09. ACTION BY DIRECTORS. Unless statute or the Charter or
By-Laws requires a greater proportion, the action of a majority of the directors
present at a meeting at which a quorum is present is action of the Board of
Directors. A majority of the entire Board of Directors shall constitute a quorum
for the transaction of business. In the absence of a quorum, the directors
present by majority vote and without notice other than by announcement may
adjourn the meeting from time to time until a quorum shall attend. At any such
adjourned meeting at which a quorum shall be present, any business may be
transacted which might have been transacted at the meeting as originally
notified. Any action required or permitted to be taken at a meeting of the Board
of Directors may be taken without a meeting, if an unanimous written consent
which sets forth the action is signed by each member of the Board and filed with
the minutes of proceedings of the Board.
SECTION 2.10. MEETING BY CONFERENCE TELEPHONE. Members of the Board
of Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 2.11. COMPENSATION. By resolution of the Board of Directors
a fixed sum and expenses, if any, for attendance at each regular or special
meeting of the Board of Directors, and other compensation for their services as
such, may be paid to directors. Directors who are full-time employees of the
Corporation need not be paid for attendance at meetings of the board for which
fees are paid to other directors. A director who serves the Corporation in any
other capacity also may receive compensation for such other services, pursuant
to a resolution of the directors.
ARTICLE III.
COMMITTEES
SECTION 3.01. COMMITTEES. The Board of Directors may appoint from
among its members an Executive Committee, a Compensation Committee, an Audit
Committee, and other committees composed of one or more directors and delegate
to these committees any of the powers of the Board of Directors, except the
power to authorize dividends on stock, elect directors, issue stock other than
as provided in the next sentence, recommend to the stockholders any action which
requires stockholder approval, amend these By-Laws, or approve any merger or
share exchange which does not require stockholder approval. If the Board of
Directors has given general authorization for the issuance of stock providing
for or establishing a method or procedure for determining the maximum number of
shares to be issued, a committee of the Board of Directors, in accordance with
that general authorization or any stock option or other plan or program adopted
by the Board of Directors, may authorize or fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors.
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SECTION 3.02. COMMITTEE PROCEDURE. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the committee and filed with
the minutes of the committee. The members of a committee may conduct any meeting
thereof by conference telephone in accordance with the provisions of Section
2.10.
SECTION 3.03. EMERGENCY. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by the
Charter and these By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.01. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section. This Section shall
be subject to implementation by resolution of the Board of Directors passed from
time to time for that purpose, and any provisions of these By-Laws (other than
this Section) and any resolutions which are contrary to the provisions of this
Section or to the provisions of any such implementary resolutions shall be
suspended until it shall be determined by any interim Executive Committee acting
under this Section that it shall be to the advantage of the Corporation to
resume the conduct and management of its affairs and business under all the
other provisions of these By-Laws.
ARTICLE IV.
OFFICERS
SECTION 4.01. EXECUTIVE OFFICERS. The Corporation shall have a
President, a Secretary and a Treasurer. It may also have one or more
Vice-Presidents, one or more Assistant Vice-Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers and such other officers deemed
necessary. A person may hold more than one office in the Corporation but may not
serve concurrently as both President and Vice-President of the Corporation.
SECTION 4.02. PRESIDENT. The President shall preside at all
meetings of the stockholders and of the Board of Directors at which he shall be
present; he shall have general charge and supervision of the assets and affairs
of the Corporation; he may sign and execute, in the name of the Corporation, all
authorized deeds, mortgages, bonds, contracts or other instruments, except in
cases in which the signing and execution thereof shall have been expressly
delegated to some other officer or agent of the Corporation; and, in general, he
shall perform all
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duties incident to the office of a president of a corporation, and such other
duties as are from time to time assigned to him by the Board of Directors.
SECTION 4.03. VICE-PRESIDENTS. The Vice-President or
Vice-Presidents, at the request of the President or in his absence or during his
inability to act, shall perform the duties and exercise the functions of the
President, and when so acting shall have the powers of the President. If there
be more than one Vice-President, the Board of Directors may determine which one
or more of the Vice-Presidents shall perform any of such duties or exercise any
of such functions, or if such determination is not made by the Board of
Directors, the President may make such determination; otherwise any of the
Vice-Presidents may perform any of such duties or exercise any of such
functions. The Vice-President or Vice-Presidents shall have such other powers
and perform such other duties, and have such additional descriptive designations
in their titles (if any), as are from time to time assigned to them by the Board
of Directors or the President.
SECTION 4.04. SECRETARY. The Secretary shall keep the minutes of
the meetings of the stockholders, of the Board of Directors and of any
committees, in books provided for the purpose; he shall see that all notices are
duly given in accordance with the provisions of the By-Laws or as required by
law; he shall be custodian of the records of the Corporation; he may witness any
document on behalf of the Corporation, the execution of which is duly
authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same; and, in general, he shall perform all duties incident to the office of a
secretary of a corporation, and such other duties as are from time to time
assigned to him by the Board of Directors or the President.
SECTION 4.05. TREASURER. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by the Board of
Directors; he shall render to the President and to the Board of Directors,
whenever requested, an account of the financial condition of the Corporation;
and, in general, he shall perform all the duties incident to the office of a
treasurer of a corporation, and such other duties as are from time to time
assigned to him by the Board of Directors or the President.
SECTION 4.06. ASSISTANT AND SUBORDINATE OFFICERS. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors or the President.
SECTION 4.07. ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board
of Directors shall elect the officers. The Board of Directors may from time to
time authorize any committee or officer to appoint assistant and subordinate
officers. Election or appointment of an officer, employee or agent shall not of
itself create contract rights. All officers shall be appointed to hold their
offices, respectively, during the pleasure of the Board. The Board of Directors
(or, as to any assistant or subordinate officer, any committee or officer
authorized by the Board) may remove an officer at any time. The removal of an
officer does not prejudice any
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<PAGE>
of his contract rights. The Board of Directors (or, as to any assistant or
subordinate officer, any committee or officer authorized by the Board) may fill
a vacancy which occurs in any office for the unexpired portion of the term.
SECTION 4.08. COMPENSATION. The Board of Directors shall have power
to fix the salaries and other compensation and remuneration, of whatever kind,
of all officers of the Corporation. No officer shall be prevented from receiving
such salary by reason of the fact that he is also a director of the Corporation.
The Board of Directors may authorize any committee or officer, upon whom the
power of appointing assistant and subordinate officers may have been conferred,
to fix the salaries, compensation and remuneration of such assistant and
subordinate officers.
ARTICLE V.
STOCK
SECTION 5.01. CERTIFICATES FOR STOCK. Each stockholder is entitled
to certificates which represent and certify the shares of stock he holds in the
Corporation. Each stock certificate shall include on its face the name of the
Corporation, the name of the stockholder or other person to whom it is issued,
and the class of stock and number of shares it represents. It shall be in such
form, not inconsistent with law or with the Charter. Each stock certificate
shall be signed by the President and countersigned by the Secretary. Each
certificate may be sealed with the actual corporate seal or a facsimile of it or
in any other form and the signatures may be either manual or facsimile
signatures. A certificate is valid and may be issued whether or not an officer
who signed it is still an officer when it is issued.
SECTION 5.02. TRANSFERS. The Board of Directors shall have power
and authority to make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock.
SECTION 5.03. RECORD DATES AND CLOSING OF TRANSFER BOOKS. The Board
of Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Section 1.06, more than 90 days before the
date on which the action requiring the determination will be taken; the transfer
books may not be closed for a period longer than 20 days; and, in the case of a
meeting of stockholders, the record date or the closing of the transfer books
shall be at least ten days before the date of the meeting.
SECTION 5.04. STOCK LEDGER. The Corporation shall maintain a stock
ledger which contains the name and address of each stockholder and the number of
shares of stock of each class which the stockholder holds. The stock ledger may
be in written form or in any other form which can be converted within a
reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the principal office in the State
of Maryland or the principal executive offices of the Corporation.
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<PAGE>
SECTION 5.05. LOST STOCK CERTIFICATES. The Board of Directors of
the Corporation may determine the conditions for issuing a new stock certificate
in place of one which is alleged to have been lost, stolen, or destroyed.
ARTICLE VI.
FINANCE
SECTION 6.01. CHECKS, DRAFTS, ETC. All checks, drafts and orders
for the payment of money, notes and other evidences of indebtedness, issued in
the name of the Corporation, shall, unless otherwise provided by resolution of
the Board of Directors, be signed by the President, a Vice-President or an
Assistant Vice-President and countersigned by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary.
SECTION 6.02. ANNUAL STATEMENT OF AFFAIRS. The President or chief
accounting officer shall prepare annually a full and correct statement of the
affairs of the Corporation, to include a balance sheet and a financial statement
of operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
SECTION 6.03. FISCAL YEAR. The fiscal year of the Corporation shall
be the twelve calendar months period ending December 31 in each year, unless
otherwise provided by the Board of Directors.
SECTION 6.04. DIVIDENDS. If declared by the Board of Directors at
any meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter.
ARTICLE VII.
INDEMNIFICATION
SECTION 7.01. PROCEDURE. Any indemnification, or payment of
expenses in advance of the final disposition of any proceeding, shall be made
promptly, and in any event within 60 days, upon the written request of the
director or officer entitled to seek indemnification (the "INDEMNIFIED PARTY").
The right to indemnification and advances hereunder shall be enforceable by the
Indemnified Party in any court of competent jurisdiction, if (i) the Corporation
denies such request, in whole or in part, or (ii) no disposition thereof is made
within 60 days. The Indemnified Party's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be reimbursed by the
Corporation. It shall be a defense to any action for advance for expenses that
(a) a determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received both (i) an undertaking as required by law to repay such advances in
the event it shall ultimately be determined that the standard of conduct has not
been met and (ii) a written affirmation by the
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<PAGE>
Indemnified Party of such Indemnified Party's good faith belief that the
standard of conduct necessary for indemnification by the Corporation has been
met.
SECTION 7.02. EXCLUSIVITY, ETC. The indemnification and advance of
expenses provided by the Charter and these By-Laws shall not be deemed exclusive
of any other rights to which a person seeking indemnification or advance of
expenses may be entitled under any law (common or statutory), or any agreement,
vote of stockholders or disinterested directors or other provision that is
consistent with law, both as to action in his or her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, shall continue in respect of all events occurring
while a person was a director or officer after such person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. The Corporation shall not be liable
for any payment under this By-Law in connection with a claim made by a director
or officer to the extent such director or officer has otherwise actually
received payment under insurance policy, agreement, vote or otherwise, of the
amounts otherwise indemnifiable hereunder. All rights to indemnification and
advance of expenses under the Charter of the Corporation and hereunder shall be
deemed to be a contract between the Corporation and each director or officer of
the Corporation who serves or served in such capacity at any time while this
By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law,
provided that no such amendment shall diminish the rights of any person
hereunder with respect to events occurring or claims made before its adoption or
as to claims made after its adoption in respect of events occurring before its
adoption. Any repeal or modification of this By-Law shall not in any way
diminish any rights to indemnification or advance of expenses of such director
or officer or the obligations of the Corporation arising hereunder with respect
to events occurring, or claims made, while this By-Law or any provision hereof
is in force.
SECTION 7.03. SEVERABILITY; DEFINITIONS. The invalidity or
unenforceability of any provision of this Article VII shall not affect the
validity or enforceability of any other provision hereof. The phrase "THIS
BY-LAW" in this Article VII means this Article VII in its entirety.
ARTICLE VIII.
SUNDRY PROVISIONS
SECTION 8.01. BOOKS AND RECORDS. The Corporation shall keep correct
and complete books and records of its accounts and transactions and minutes of
the proceedings of its stockholders and Board of Directors and of any executive
or other committee when exercising any of the powers of the Board of Directors.
The books and records of a Corporation may be in written form or in any other
form which can be converted within a reasonable time into written form for
visual inspection. Minutes shall be recorded in written form but may be
maintained in the form of a reproduction. The original or a certified copy of
the By-Laws shall be kept at the principal office of the Corporation.
SECTION 8.02. CORPORATE SEAL. The Board of Directors shall provide
a suitable seal, bearing the name of the Corporation, which shall be in the
charge of the Secretary. The Board of Directors may authorize one or more
duplicate seals and provide for the custody
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<PAGE>
thereof. If the Corporation is required to place its corporate seal to a
document, it is sufficient to meet the requirement of any law, rule, or
regulation relating to a corporate seal to place the word "Seal" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
SECTION 8.03. BONDS. The Board of Directors may require any
officer, agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his duties, with one or more sureties
and in such amount as may be satisfactory to the Board of Directors.
SECTION 8.04. VOTING UPON SHARES IN OTHER CORPORATIONS. Stock of
other corporations or associations, registered in the name of the Corporation,
may be voted by the President, a Vice-President, or a proxy appointed by either
of them. The Board of Directors, however, may by resolution appoint some other
person to vote such shares, in which case such person shall be entitled to vote
such shares upon the production of a certified copy of such resolution.
SECTION 8.05. MAIL. Any notice or other document which is required
by these By-Laws to be mailed shall be deposited in the United States mails,
postage prepaid.
SECTION 8.06. EXECUTION OF DOCUMENTS. A person who holds more than
one office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
SECTION 8.07. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. The
provisions of Sections 3-701 to 3-709 of the Corporations and Associations
Article of the Annotated Code of Maryland shall not apply to any share of the
capital stock of the Corporation now or hereafter beneficially held (during the
period of such beneficial ownership) by Sylvan Learning Systems, Inc., any
present or future the associates or affiliates of any one or more of the
foregoing, and any other person now or hereafter acting in concert or as a group
with any one or more of the foregoing. Such shares of capital stock are exempted
from such Sections of the Annotated Code of Maryland to the fullest extent
permitted by Maryland law.
ARTICLE IX.
AMENDMENTS
In accordance with the Charter, these By-Laws may be repealed,
altered, amended or rescinded and new by-laws may be adopted (a) by the
stockholders of the Corporation (considered for this purpose as one class) by
the affirmative vote of not less than 80% of all the votes entitled to be cast
by the outstanding shares of capital stock of the Corporation generally in the
election of directors which are cast on the matter at any meeting of the
stockholders called for that purpose (provided that notice of such proposal is
included in the notice of such meeting) or (b) by the Board of Directors by the
affirmative vote of not less than two-thirds of the Board of Directors at a
meeting held in accordance with the provisions of these By-Laws.
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PROMETRIC, INC.
- ---------------
COMMON STOCK COMMON STOCK
$.001 PAR VALUE $.001 PAR VALUE
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $.001 PAR VALUE PER
SHARE OF PROMETRIC, INC. (the "Corporation") transferable on the books of the
Corporation by the owner hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby, are issued and
shall be held subject to all the provisions of the articles of incorporation of
the Corporation, and any amendments thereto.
Each share of the common stock shall have equal rights, privileges and
preferences and shall be entitled to one vote per share. This Certificate is not
valid until countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
- ---------------------- ----------------------------
Secretary President
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<PAGE>
COUNTERSIGNED AND REGISTERED:
First Union National Bank
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
<TABLE>
<CAPTION>
<S> <C>
UNIF GIFT MIN ACT - Under the ________ Uniform Gifts to Minors Act___________________as
(State) (Name of Custodian)
custodian for____________________.
(Name of Minor)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,__________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
__________________________________________________________________________Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and
appoint_________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,____________________
-----------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
A FULL STATEMENT OR SUMMARY OF THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION
AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS,
QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH
CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE AUTHORITY OF THE
BOARD OF DIRECTORS TO SET THE RELATIVE RIGHTS AND PREFERENCES OF ANY SERIES OF
CAPITAL STOCK, WILL BE FURNISHED TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON
REQUEST TO THE SECRETARY OF THE CORPORATION AT THE CORPORATION AT THE
CORPORATION'S PRINCIPAL OFFICE.
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PROMETRIC, INC.
1999 STOCK INCENTIVE PLAN
1. ESTABLISHMENT, PURPOSE AND TYPES OF AWARDS
PROMETRIC, INC., a Maryland corporation (the "Company"), hereby
establishes the PROMETRIC, INC. 1999 STOCK INCENTIVE PLAN (the "Plan"). The
purpose of the Plan is to promote the long-term growth and profitability of the
Company by (i) providing key people with incentives to improve stockholder value
and to contribute to the growth and financial success of the Company, and (ii)
enabling the Company to attract, retain and reward the best-available persons.
The Plan permits the granting of stock options (including incentive
stock options qualifying under Code section 422 and nonqualified stock options),
stock appreciation rights, restricted or unrestricted stock awards, phantom
stock, performance awards, other stock-based awards, or any combination of the
foregoing.
2. DEFINITIONS
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "AFFILIATE" shall mean any entity, whether now or hereafter
existing, which controls, is controlled by, or is under common control with, the
Company (including, but not limited to, joint ventures, limited liability
companies, and partnerships). For this purpose, "control" shall mean ownership
of 50% or more of the total combined voting power or value of all classes of
stock or interests of the entity.
(b) "AWARD" shall mean any stock option, stock appreciation right,
stock award, phantom stock award, performance award, or other stock-based award.
(c) "BOARD" shall mean the Board of Directors of the Company.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder.
(e) "COMMON STOCK" shall mean shares of common stock of the Company,
par value of $0.001 per share.
(f) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(g) "FAIR MARKET VALUE" shall mean, with respect to a share of the
Company's Common Stock for any purpose on a particular date, the value
determined by the Administrator in good faith. However, if the Common Stock is
registered under Section 12(b) of the Exchange Act, "FAIR MARKET VALUE" shall
mean, as applicable, (i) either the closing price or the average of the high and
low sale price on the relevant date, as determined in the Administrator's
discretion, quoted on the New York Stock Exchange, the American Stock Exchange,
or the Nasdaq National Market; (ii) the last sale price on the relevant date
quoted on the Nasdaq SmallCap Market; (iii) the average of the high bid and low
asked prices on the relevant date quoted on the Nasdaq OTC Bulletin Board
Service or by the National Quotation Bureau, Inc. or a comparable service as
determined in the Administrator's discretion; or (iv) if the Common Stock is not
quoted by any of the above, the average of the closing bid and asked prices on
the relevant date furnished by a professional market maker for the Common Stock,
or by such other source, selected by the Administrator. If no public trading of
the Common
<PAGE>
Stock occurs on the relevant date, then Fair Market Value shall be determined as
of the next preceding date on which trading of the Common Stock does occur. For
all purposes under this Plan, the term "relevant date" as used in this Section
2.1(g) shall mean either the date as of which Fair Market Value is to be
determined or the next preceding date on which public trading of the Common
Stock occurs, as determined in the Administrator's discretion.
(h) "GRANT AGREEMENT" shall mean a written document memorializing the
terms and conditions of an Award granted pursuant to the Plan and shall
incorporate the terms of the Plan.
(i) "PARENT" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation" provided
in Code section 424(e), or any successor thereto.
(j) "SUBSIDIARY" AND "SUBSIDIARIES" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Code section 424(f), or any
successor thereto.
3. ADMINISTRATION
(a) ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board or by such committee or committees as may be appointed by the Board from
time to time (the Board, committee or committees hereinafter referred to as the
"Administrator").
(b) POWERS OF THE ADMINISTRATOR. The Administrator shall have all the
powers vested in it by the terms of the Plan, such powers to include authority,
in its sole and absolute discretion, to grant Awards under the Plan, prescribe
Grant Agreements evidencing such Awards and establish programs for granting
Awards.
The Administrator shall have full power and authority to take all other
actions necessary to carry out the purpose and intent of the Plan, including,
but not limited to, the authority to: (i) determine the eligible persons to
whom, and the time or times at which Awards shall be granted; (ii) determine the
types of Awards to be granted; (iii) determine the number of shares to be
covered by or used for reference purposes for each Award; (iv) impose such
terms, limitations, restrictions and conditions upon any such Award as the
Administrator shall deem appropriate; (v) modify, amend, extend or renew
outstanding Awards, or accept the surrender of outstanding Awards and substitute
new Awards; (vi) accelerate or otherwise change the time in which an Award may
be exercised or becomes payable and to waive or accelerate the lapse, in whole
or in part, of any restriction or condition with respect to such Award,
including, but not limited to, any restriction or condition with respect to the
vesting or exercisability of an Award following termination of any grantee's
employment or other service relationship with the Company; and (vii) establish
objectives and conditions, if any, for earning Awards and determining whether
Awards will be paid after the end of a performance period.
The Administrator shall have full power and authority, in its sole and
absolute discretion, to administer and interpret the Plan and to adopt and
interpret such rules, regulations, agreements, guidelines and instruments for
the administration of the Plan and for the conduct of its business as the
Administrator deems necessary or advisable.
(c) NON-UNIFORM DETERMINATIONS. The Administrator's determinations
under the Plan (including without limitation, determinations of the persons to
receive Awards, the form, amount and timing of such Awards, the terms and
provisions of such Awards and the Grant Agreements evidencing such Awards) need
not be uniform and may be made by the Administrator selectively among persons
who receive, or are eligible to receive, Awards under the Plan, whether or not
such persons are similarly situated.
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<PAGE>
(d) LIMITED LIABILITY. To the maximum extent permitted by law, no
member of the Administrator shall be liable for any action taken or decision
made in good faith relating to the Plan or any Award thereunder.
(e) INDEMNIFICATION. To the maximum extent permitted by law and by the
Company's charter and by-laws, the members of the Administrator shall be
indemnified by the Company in respect of all their activities under the Plan.
(f) EFFECT OF ADMINISTRATOR'S DECISION. All actions taken and decisions
and determinations made by the Administrator on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Administrator's
sole and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Company, its stockholders, any participants in the Plan
and any other employee, director of the Company, or any other individual in a
service relationship with the Company and their respective successors in
interest.
4. SHARES AVAILABLE FOR THE PLAN, MAXIMUM AWARDS
Subject to adjustments as provided in Section 7(d) of the Plan, the
shares of Common Stock that may be issued with respect to Awards granted under
the Plan shall not exceed an aggregate of _________ shares of Common Stock. The
Company shall reserve such number of shares for Awards under the Plan, subject
to adjustments as provided in Section 7(d) of the Plan. If any Award, or portion
of an Award, under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited or otherwise terminated, surrendered or canceled
as to any shares, or if any shares of Common Stock are surrendered to the
Company in connection with any Award (whether or not such surrendered shares
were acquired pursuant to any Award), the shares subject to such Award and the
surrendered shares shall thereafter be available for further Awards under the
Plan; provided, however, that any such shares that are surrendered to the
Company in connection with any Award or that are otherwise forfeited after
issuance shall not be available for purchase pursuant to incentive stock options
intended to qualify under Code section 422.
Subject to adjustments as provided in Section 7(d) of the Plan, the
maximum number of shares of Common Stock subject to Awards of any combination
that may be granted during any one fiscal year of the Company to any one
individual under this Plan shall be limited to _______. Such per-individual
limit shall not be adjusted to effect a restoration of shares of Common Stock
with respect to which the related Award is terminated, surrendered or canceled.
5. PARTICIPATION
Participation in the Plan shall be open to all employees, officers, and
directors of, and other individuals providing bona fide services to or for, the
Company, or of any Affiliate of the Company, as may be selected by the
Administrator from time to time.
6. AWARDS
The Administrator, in its sole discretion, establishes the terms of all
Awards granted under the Plan. Awards may be granted individually or in tandem
with other types of Awards. All Awards are subject to the terms and conditions
provided in the Grant Agreement. The Administrator may permit or require a
recipient of an Award to defer such individual's receipt of the payment of cash
or the delivery of Common Stock that would otherwise be due to such individual
by virtue of the exercise of, payment of, or lapse or waiver of restrictions
respecting, any Award. If any such payment deferral is required or permitted,
the Administrator shall, in its sole discretion, establish rules and procedures
for such payment deferrals.
-3-
<PAGE>
(a) STOCK OPTIONS. The Administrator may from time to time grant to
eligible participants Awards of incentive stock options as that term is defined
in Code section 422 or nonqualified stock options; provided, however, that
Awards of incentive stock options shall be limited to employees of the Company
or of any Parent or Subsidiary of the Company. Options intended to qualify as
incentive stock options under Code section 422 must have an exercise price at
least equal to Fair Market Value on the date of grant, but nonqualified stock
options may be granted with an exercise price less than Fair Market Value. No
stock option shall be an incentive stock option unless so designated by the
Administrator at the time of grant or in the Grant Agreement evidencing such
stock option.
(b) STOCK APPRECIATION RIGHTS. The Administrator may from time to time
grant to eligible participants Awards of Stock Appreciation Rights ("SAR"). An
SAR entitles the grantee to receive, subject to the provisions of the Plan and
the Grant Agreement, a payment having an aggregate value equal to the product of
(i) the excess of (A) the Fair Market Value on the exercise date of one share of
Common Stock over (B) the base price per share specified in the Grant Agreement,
times (ii) the number of shares specified by the SAR, or portion thereof, which
is exercised. Payment by the Company of the amount receivable upon any exercise
of an SAR may be made by the delivery of Common Stock or cash, or any
combination of Common Stock and cash, as determined in the sole discretion of
the Administrator. If upon settlement of the exercise of an SAR a grantee is to
receive a portion of such payment in shares of Common Stock, the number of
shares shall be determined by dividing such portion by the Fair Market Value of
a share of Common Stock on the exercise date. No fractional shares shall be used
for such payment and the Administrator shall determine whether cash shall be
given in lieu of such fractional shares or whether such fractional shares shall
be eliminated.
(c) STOCK AWARDS. The Administrator may from time to time grant
restricted or unrestricted stock Awards to eligible participants in such
amounts, on such terms and conditions, and for such consideration, including no
consideration or such minimum consideration as may be required by law, as it
shall determine. A stock Award may be paid in Common Stock, in cash, or in a
combination of Common Stock and cash, as determined in the sole discretion of
the Administrator.
(d) PHANTOM STOCK. The Administrator may from time to time grant Awards
to eligible participants denominated in stock-equivalent units ("phantom stock")
in such amounts and on such terms and conditions as it shall determine. Phantom
stock units granted to a participant shall be credited to a bookkeeping reserve
account solely for accounting purposes and shall not require a segregation of
any of the Company's assets. An Award of phantom stock may be settled in Common
Stock, in cash, or in a combination of Common Stock and cash, as determined in
the sole discretion of the Administrator. Except as otherwise provided in the
applicable Grant Agreement, the grantee shall not have the rights of a
stockholder with respect to any shares of Common Stock represented by a phantom
stock unit solely as a result of the grant of a phantom stock unit to the
grantee.
(e) PERFORMANCE AWARDS. The Administrator may, in its discretion, grant
performance awards which become payable on account of attainment of one or more
performance goals established by the Administrator. Performance awards may be
paid by the delivery of Common Stock or cash, or any combination of Common Stock
and cash, as determined in the sole discretion of the Administrator. Performance
goals established by the Administrator may be based on the Company's or an
Affiliate's operating income or one or more other business criteria selected by
the Administrator that apply to an individual or group of individuals, a
business unit, or the Company or an Affiliate as a whole, over such performance
period as the Administrator may designate.
(f) OTHER STOCK-BASED AWARDS. The Administrator may from time to time
grant other stock-based awards to eligible participants in such amounts, on such
terms and conditions, and for such consideration, including no consideration or
such minimum consideration as may be required by law, as it shall determine.
Other stock-based awards may be denominated in cash, in Common Stock or other
securities, in stock-
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<PAGE>
equivalent units, in stock appreciation units, in securities or debentures
convertible into Common Stock, or in any combination of the foregoing and may be
paid in Common Stock or other securities, in cash, or in a combination of Common
Stock or other securities and cash, all as determined in the sole discretion of
the Administrator.
7. MISCELLANEOUS
(a) WITHHOLDING OF TAXES. Grantees and holders of Awards shall pay to
the Company or its Affiliate, or make provision satisfactory to the
Administrator for payment of, any taxes required to be withheld in respect of
Awards under the Plan no later than the date of the event creating the tax
liability. The Company or its Affiliate may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the grantee or holder of an Award. In the event that payment to the Company or
its Affiliate of such tax obligations is made in shares of Common Stock, such
shares shall be valued at Fair Market Value on the applicable date for such
purposes.
(b) LOANS. The Company or its Affiliate may make or guarantee loans to
grantees to assist grantees in exercising Awards and satisfying any withholding
tax obligations.
(c) TRANSFERABILITY. Except as otherwise determined by the
Administrator, and in any event in the case of an incentive stock option or a
stock appreciation right granted with respect to an incentive stock option, no
Award granted under the Plan shall be transferable by a grantee otherwise than
by will or the laws of descent and distribution. Unless otherwise determined by
the Administrator in accord with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal representative.
(d) ADJUSTMENTS; BUSINESS COMBINATIONS. In the event of changes
affecting the Company, the capitalization of the Company or the Common Stock of
the Company by reason of any stock dividend, spin-off, split-up,
recapitalization, merger, consolidation, business combination or exchange of
shares and the like, the Administrator shall, in its discretion, make
appropriate adjustments to the maximum number and kind of shares reserved for
issuance or with respect to which Awards may be granted under the Plan as
provided in Section 4 of the Plan and to the number, kind and price of shares
covered by outstanding Awards, and shall, in its discretion and without the
consent of holders of Awards, make any other adjustments in outstanding Awards,
including but not limited to reducing the number of shares subject to Awards or
providing or mandating alternative settlement methods such as settlement of the
Awards in cash or in shares of Common Stock or other securities of the Company
or of any other entity, or in any other matters which relate to Awards as the
Administrator shall, in its sole discretion, determine to be necessary or
appropriate.
Notwithstanding anything in the Plan to the contrary and without the
consent of holders of Awards, the Administrator, in its sole discretion, may
make any modifications to any Awards, including but not limited to cancellation,
forfeiture, surrender or other termination of the Awards in whole or in part
regardless of the vested status of the Award, in order to facilitate any
business combination that is authorized by the Board to comply with requirements
for treatment as a pooling of interests transaction for accounting purposes
under generally accepted accounting principles.
The Administrator is authorized to make, in its discretion and without
the consent of holders of Awards, adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations, or accounting
principles, whenever the Administrator determines that
-5-
<PAGE>
such adjustments are appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the Plan.
(e) SUBSTITUTION OF AWARDS IN MERGERS AND ACQUISITIONS. Awards may be
granted under the Plan from time to time in substitution for Awards held by
employees, officers, other individuals in a service relationship or directors of
entities who become or are about to become employees, officers, other
individuals in a service relationship or directors of the Company or an
Affiliate as the result of a merger or consolidation of the employing entity
with the Company or an Affiliate, or the acquisition by the Company or an
Affiliate of the assets or stock of the employing entity. The terms and
conditions of any substitute Awards so granted may vary from the terms and
conditions set forth herein to the extent that the Administrator deems
appropriate at the time of grant to conform the substitute Awards to the
provisions of the awards for which they are substituted.
(f) TERMINATION, AMENDMENT AND MODIFICATION OF THE PLAN. The Board may
terminate, amend or modify the Plan or any portion thereof at any time.
(g) NON-GUARANTEE OF EMPLOYMENT OR SERVICE. Nothing in the Plan or in
any Grant Agreement thereunder shall confer any right on an individual to
continue in the service of the Company or shall interfere in any way with the
right of the Company to terminate such service at any time with or without cause
or notice.
(h) COMPLIANCE WITH SECURITIES LAWS; LISTING AND REGISTRATION. If at any
time the Administrator determines that the delivery of Common Stock under ZZthe
Plan is or may be unlawful under the laws of any applicable jurisdiction, or
federal or state securities laws, the right to exercise an Award or receive
shares of Common Stock pursuant to an Award shall be suspended until the
Administrator determines that such delivery is lawful. The Company shall have no
obligation to effect any registration or qualification of the Common Stock under
federal or state laws.
(i) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a grantee or any other person. To
the extent that any grantee or other person acquires a right to receive payments
from the Company pursuant to an Award, such right shall be no greater than the
right of any unsecured general creditor of the Company.
(j) GOVERNING LAW. The validity, construction and effect of the Plan,
of Grant Agreements entered into pursuant to the Plan, and of any rules,
regulations, determinations or decisions made by the Administrator relating to
the Plan or such Grant Agreements, and the rights of any and all persons having
or claiming to have any interest therein or thereunder, shall be determined
exclusively in accordance with applicable federal laws and the laws of the State
of Maryland, without regard to its conflict of laws principles.
(k) EFFECTIVE DATE; TERMINATION DATE. The Plan is effective as of the
date on which the Plan is adopted by the Board, subject to approval of the
stockholders within twelve months before or after such date. No Award shall be
granted under the Plan after the close of business on the day immediately
preceding the tenth anniversary of the effective date of the Plan, or if
earlier, the tenth anniversary of the date this Plan is approved by the
stockholders. Subject to other applicable provisions of the Plan, all Awards
made under the Plan prior to such termination of the Plan shall remain in effect
until such Awards have been satisfied or terminated in accordance with the Plan
and the terms of such Awards.
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MASTER AGREEMENT FOR INTERNATIONAL DISTRIBUTION
BETWEEN
EDUCATIONAL TESTING SERVICE
AND
SYLVAN LEARNING SYSTEMS, INC.
FOR COMPUTER-BASED TESTING SERVICES
OUTSIDE THE UNITED STATES, CANADA AND THEIR TERRITORIES
THIS AGREEMENT, effective as of April 1, 1994, by and between
EDUCATIONAL TESTING SERVICE (ETS) , a nonprofit, nonstock corporation,
organized and existing under the Education Law of the State of New York, with
principal offices at Princeton, New Jersey 08541, and SYLVAN LEARNING SYSTEMS,
INC. (Sylvan), a Maryland business corporation, with its headquarters at 9135
Guilford Road, Columbia, Maryland 21046.
WITNESSETH:
WHEREAS, ETS has developed, and is continuing to develop,
computer-based versions of various tests and exams which are designed to be
administered on local area network-based personal computers;
WHEREAS, ETS has also developed a proprietary ETS Computer-Based
Testing System, a set of computer software that permits the administration of
computer-based versions of tests on local area network-based PCs;
WHEREAS, under the terms of an agreement effective as of September 1,
1993, between ETS and SYLVAN, Sylvan has been Providing computer-based test
administration and related services for various ETS testing, programs,
utilizing Sylvan's network of Sylvan Technology centers in the United States,
Canada and their territories; and
WHEREAS, ETS and SYLVAN wish to establish a long-term contractual
basis for creating a network of test centers capable of providing secure
computer- based test administrations outside the United States, Canada and their
territories, in countries to be designated by ETS;
ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
*Portions of this exhibit has been omitted based upon a request for confidential
treatment.
<PAGE>
NOW, THEREFORE, ETS and Sylvan agree to the following:
1.0 GENERAL:
The objective of this Agreement is to serve as a master agreement for
the establishment by Sylvan of a network of secure testing centers
outside of the United States, Canada and their territories in
countries to be designated by ETS, which will provide the highest
quality testing and related services which are both easily accessible
to and economical for the Examinees to utilize.
The Sylvan services to be provided under this Agreement will normally
include but are not necessarily limited to: establishment of a
network of testing centers in locations selected by ETS in various
countries outside the United States, Canada, and their territories,
throughout the world, scheduling of tests, registration of
examinees, receipt of payments, computer-based test administration,
and local score reporting.
ETS services to Sylvan may include but are not necessarily limited
to: test development, conversion of paper-based tests into
computer-based tests, licensing of certain ETS developed software
systems and loaning to Sylvan certain software and ETS owned
equipment.
To accomplish this objective, Sylvan will form a wholly-owned
subsidiary or subsidiaries, will provide the subsidiary(s) with
sufficient capital to establish and operate the international network
of test centers and will provide the subsidiary(s), at Sylvan's
actual cost, various administrative services necessary to establish
and operate this network. ETS will not bear any of the direct costs
associated with the establishment of this network. The parties agree
that due to the dynamic nature of technology-based testing, it may be
necessary from time to time to update and revise this Agreement.
ETS and Sylvan shall cooperate in the development and implementation
of plans for the warehousing, distribution, installation, and
operation of accommodative equipment and software at the testing
centers, and to accommodate examinees with disabilities who need
special testing. Therefore in keeping with this spirit and intent,
Sylvan shall use its best efforts to see that examinees with
disabilities in any country covered by this Agreement, will be tested
in testing centers that conform as closely as is possible to the
United States Americans With Disabilities Act's requirements.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
The parties recognize that close cooperation between them will be
critical to the successful establishment of an international network
of testing centers in accordance with the standards required by ETS
for test administration. Accordingly, the parties agree to establish
the Strategic Development Committee and to use their best efforts to
accomplish the objectives of this Agreement and to meet the deadlines
contained in the schedules that will be developed and agreed to
hereunder, from time to time.
The parties acknowledge that due to existing contractual agreements
between ETS and its foreign agents who administer ETS paper and
pencil tests in the countries covered by this Agreement, it may be
necessary to phase-in the computer-based versions of these ETS tests
on a country-by-country and/or test-by-test basis, as these
individual existing contractual agreements expire, or are amended.
2.0 DEFINITIONS:
For purposes of this Agreement, the following terms shall have the
meaning indicated below:
2.1 Certain Portions of the ETS Computer-Based Testing System:
The object code (but not the source code) for the following
sub-systems of the ETS proprietary open system architecture
computer-based testing system: the Test Delivery Application System,
the Test Administrative System, and the Network Management Control
System. Among other things, the open systems architecture permits
the administration of computer-based versions of tests on local area
network based personal computers.
2.2 Technologies and Materials:
2.2.1 ETS owned Technologies and Materials:
*
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
*Text omitted based upon request for confidential treatment.
<PAGE>
System Functions, which include all of
the following:
*
Administrative Functions, which include
all of the following:
*
Station Service Functions, which include
all of the following:
*
All OSA Test Delivery software and
Program Specific Software and Data.
2.2.2 Sylvan Owned Technologies and Materials:
*
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
*Text omitted based upon request for confidential treatment.
<PAGE>
System Functions, which include all of
the following:
*
Administrative Functions, which include
all of the following:
*
Station Service Functions, which include
all of the following:
*
All Sylvan Test Delivery software and
Program Specific data.
2.3 ETS Proprietary and Confidential Information:
All of, but not limited to, the following:
Certain Portions of the ETS Computer-Based Testing System for
test administration and delivery, the test databases and
scripts and all individual test questions, all data collected
from Examinees, all Examinee test scores and the identities
of the Examinees, the Manual, internal ETS procedures for
the secure administration of computer-based tests and any
other information identified by ETS to Sylvan as
confidential.
2.4 ETS Scheduling Algorithm:
An ETS proprietary scheduling algorithm which maximizes
scheduling at Test Centers by estimating work station
availability based on a variety of parameters.
2.5 ETS Client:
Any third party or entity for whom ETS provides tests, such
as but not limited to:
2.5.1 APICS:
The computer-based versions of the American
Production and Inventory Control Society test.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
*Text omitted based upon request for confidential treatment.
<PAGE>
2.5.2 GRE(R):
The computer-based versions of the Graduate Record
Examinations.
2.5.3 TOEFL(R):
The computer-based versions of the Test of English as
a Foreign Language.
2.6 ETS Tests:
All computer-based versions of a test (including reviews by
Examinees of their previously taken tests), which Sylvan is
authorized by ETS to deliver or administer on behalf of ETS at
a Test Center under this Agreement, including but not limited
to the GRE, TOEFL and APICS computer-based tests.
2.7 Non-ETS Tests
All computer-based versions of tests that Sylvan delivers or
administers other than ETS Tests.
2.8 Examinee:
Any individual who receives or takes any test or is scheduled
to take an ETS Test at a Test Center, or who reviews his or
her previously taken ETS Test, if such review is permitted by
ETS.
2.9 Strategic Development Committee:
The committee established pursuant to Section 4 of this
Agreement.
2.10 LAN:
A local area network made up of PCs.
2.11 Manual:
The most current ETS approved version of the ETS Computer-
Based Test Center Administrator's Manual, based on the
recommendations from the Strategic Development Committee from
time to time as necessary for use in Test Centers located
outside the United States, Canada and their territories.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
2.12 Master Agreement for U.S.-Canada Distribution
The Agreement entered into by and between ETS and Sylvan
effective as of September 1, 1993, as subsequently amended,
providing for Sylvan's administration of various ETS testing
programs utilizing Sylvan's network of Sylvan Technology Center
in the United States, Canada, and their territories.
2.13 Permitted Costs: The costs defined in Section 7.4.
2.14 PCs:
Personal computer(s).
2.15 Sylvan:
The parent organization, any controlled subsidiary,
affiliated organization, successor organization, or assignee,
in whole or in part.
2.16 Sylvan Registration Center ("SRC"):
The centralized reservation processing system operated and
staffed by Sylvan for scheduling prospective Examinees and the
collection, maintenance and storage of all confidential
relevant data regarding the delivery of services as directed by
ETS under this Agreement.
2.17 Test Center:
A Sylvan designated testing facility approved by ETS, located
outside the United States, Canada or their territories,
operated by Sylvan and used for ETS Tests.
2.18 Test Hour
Each hour scheduled for administering a test at a Test Center.
The Strategic Development Committee shall determine standard
Test Hours for all ETS Tests. The standard Test Hours for all
Non-ETS Tests administered by Sylvan shall be determined by the
particular non-ETS client and reviewed by the Strategic
Development Committee.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
3.0 TERM AND RENEWAL:
Unless earlier terminated as provided for herein, this Agreement
shall commence on the effective date and shall expire on December 31,
2003. This Agreement will renew automatically for an unlimited number
of consecutive, additional three (3) year renewal periods on the
first day of January of 2004 (and on the anniversary of said date every
three years thereafter), unless either ETS or Sylvan provides notice at
least two (2) years before the expiration date of the initial or
renewal term that this Agreement will not be renewed.
Notwithstanding the above, in the event that the Master Agreement for
U.S.-Canada Distribution is either terminated or not renewed, ETS at
its sole option may terminate this Agreement at any time following
such termination or non-renewal and prior to December 31, 2003, upon
providing 30 days written notice to Sylvan.
4.0 THE STRATEGIC DEVELOPMENT COMMITTEE
4.1 As soon as practical, the parties shall establish the
Strategic Development Committee, consisting of
representatives of each of ETS and Sylvan. The principal role
of Sylvan's representatives on the Strategic Development
Committee is to advise ETS in determining and revising from
time to time the proposed specifics of the network of Test
Centers to be established and operated by Sylvan. ETS and
Sylvan shall each appoint their own representatives to the
Committee and from time to time may appoint replacements or
additional representatives; provided that at all times, a
majority of the members of the Strategic Development
Committee shall be representatives of ETS. Each
representative shall be a full-time employee of the party
appointing that representative.
4.2 In accordance with ETS's directives, the Strategic
Development Committee shall be responsible for establishing
and revising from time to time as necessary the specifics of
the international network of Test Centers to be created
under this Agreement, including without limitation such
matters as:
a. countries and cities where Test Centers will be
located, Test Center facilities requirements, and
approval criteria for Test Centers operated by
subcontractors or agents to Sylvan;
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
b. days and hours of operation of individual Test
Centers;
C. whether an individual Test Center will be permanent or
temporary, the size thereof and the number of testing
terminals therein;
d. whether to provide for local registration of
Examinees;
e. whether to establish one or more centralized
registration centers (similar to the SRC) , whether to
use a toll-free telephone registration methodology;
f. the transmission of: data, Examinee fees, and forms
back to ETS;
g. which tests will be offered at individual Test Centers
and the expected volumes of those tests to be
administered at those Test Centers; and
h. operating procedures for the Test Centers and ETS
approved revisions to the Manual as necessary for use
in Test Centers located outside the United States,
Canada and their territories.
4.3 The Strategic Development Committee shall prepare a written
report no less frequently than annually describing the
specifics of the international network of Test Centers and
recommending objectives for the establishment and operation of
such network. The first such report shall cover specifics for
the calendar years 1994, 1995 and 1996. The written report
shall also specify how the objectives are to be accomplished.
ETS has the discretion to either accept the report as submitted
by the Strategic Development Committee or make changes as it
deems appropriate.
It is intended that the Strategic Development Committee will
prepare this written report at least annually, so that there
will always be a written report covering the next calendar year
plus the two subsequent years. As an example, the second
written report would cover the calendar years of 1995, 1996 and
1997.
All cost estimates shall be constructed based upon generally
accepted accounting principles. Planned expenditures for
capital equipment shall be capitalized using mutually agreed
upon depreciation methods and schedules.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
4.4 After ETS has approved the written report describing the
specifics of the international network of Test Centers and
each time thereafter that there is an ETS approved revision of
such report, Sylvan shall prepare an estimate of the cost of
implementing the matters described in such initial report or
revision. This estimate shall present costs in as much detail
as possible. Each such cost estimate shall be submitted to the
Strategic Development Committee which shall review the same
(utilizing outside consultants if necessary) in order to verify
to the extent possible the legitimacy of such cost estimate.
Once the Strategic Development Committee has so verified such
cost estimate, the cost estimate shall be submitted to ETS. ETS
then may authorize Sylvan to commence implementation of the
matters to which such cost estimate relates. If ETS instead
determines that the cost of implementation is not
appropriate, given ETS's objectives, it may revise the
previously approved report to which the cost estimate relates,
and Sylvan then shall revise its cost estimate as appropriate
for such revisions made by ETS and shall submit such revised
cost estimate to ETS for its approval. Notwithstanding the
above, in the event that ETS is able to obtain a particular
requirement at a cost lower than that estimated by Sylvan, ETS
shall provide Sylvan the opportunity to match that lower cost.
If Sylvan does not do so, ETS reserves the right to contract
with a third party(s) to provide that particular requirement
and Sylvan agrees to work with any such third party selected by
ETS.
4.5 Once final approval by ETS of a cost estimate has been
obtained, Sylvan shall proceed to implement matters covered by
such estimate. Sylvan shall provide ETS with a report of
expenses to date no less than once each quarter.
If at any time Sylvan has reason to believe that the funds
remaining in the ETS approved cost estimate are not sufficient
to allow Sylvan to complete the remaining work based upon the
ETS approved objectives, Sylvan shall immediately inform ETS in
writing and provide ETS with a revised cost estimate containing
Sylvan's estimate of the cost to complete the remaining work.
Sylvan shall not expend funds in excess of the ETS approved
cost estimate for such matters without the prior approval of
ETS, and until such approval is obtained, Sylvan may suspend
implementation, and such
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
suspension shall not constitute a default of its obligations
under this Agreement.
4.6 The parties recognize that the key to the success of the
establishment of the network of international Test Centers is
cooperation at the Strategic Development Committee level, the
ETS approval level, and the Sylvan cost estimation and
implementation level. The parties, therefore, shall seek ways
to minimize the formality of the processes described above in
this Section 4 and to work together in good faith to identify
problems and to solve them as expeditiously as possible so that
the network of international Test Centers can be established as
quickly as possible and operate in an efficient and effective
manner. Sylvan or the Strategic Development Committee may
recommend deviations and exceptions from the requirements of
this Agreement and the Manual where appropriate or justified to
achieve the aforesaid objectives, which deviations and
exceptions ETS may or may not approve and allow on a case-by-
case basis.
5.0 SYLVAN'S RESPONSIBILITIES
5.1 Sylvan Facilities.
At each Test Center, Sylvan will provide a testing room
convenient for access by the Examinees and suitable for secure
testing purposes, meeting the specifications established from
time to time by the Strategic Development Committee and
approved by ETS, and will appropriately equip the room with
Sylvan equipment and software (and install and maintain
software provided by ETS).
The parties acknowledge that Test Centers may be located within
facilities operated by third parties (such as Novell) that
provide computer-based training and/or testing and
certification. Notwithstanding the above, Sylvan shall be
responsible to ETS for the operation of each Test Center,
regardless of who operates the Test Center. Whenever a Test
Center is to be operated by a subcontractor or agent of Sylvan,
the contract governing such operation shall incorporate and
apply the principal clauses contained in this Agreement where
applicable, and shall be subject to ETS's review and approval.
Where permitted by Sylvan's SMARTS(R) client (which permission
Sylvan shall use its reasonable best efforts to obtain), Sylvan
shall allow Examinees access to its
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
International Smarts Centers and the associated technological
infrastructure.
5.2 Sylvan Equipment and Software
Sylvan agrees to assume responsibility for obtaining and paying
for PCs and software licenses (including but not limited to MS
Windows and Novell Operating System) and for maintenance of
such PCs and software in good working order for the duration of
this Agreement, and to assume the risk of loss for such PCs and
software, except where ETS has waived the requirement that
Sylvan obtain insurance covering the PCs and software and has
approved the quantity and cost of the PCs and software to be
installed, in which event, ETS shall be responsible for
one-third of the cost resulting from such loss. PCs and
software will remain the property of Sylvan or its lessor(s)
and licensor(s) .
Excent where deviations are permitted by ETS, all Test Center
LAN systems shall be consistent and in compliance with the
specifications recommended from time to time by the Strategic
Development Committee and approved by ETS.
Except for maintenance, repairs and corrections for software
defects, Sylvan will notify ETS at least thirty (30) days in
advance of any proposed changes, additions, or deletions to
Sylvan equipment and software, and Sylvan will obtain ETS's
approval before implementing any such changes, additions, or
deletions, to Sylvan Equipment and Software. Such approval
shall not be unreasonably withheld.
Sylvan agrees to operate an ETS owned software security
mechanism (which is a part of the Test Administration
System/Kernel and the Test Delivery Application System) which
will be used to monitor and maintain the security of all ETS
Tests, test items and the ETS Application System software
installed on Sylvan's LAN-based PCs. ETS reserves the right to
review and approve the software security mechanism to be used
by Sylvan at any time.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
5.3 Test Center Certification
Sylvan agrees that each new and/or relocated Test Center will
be required to complete a facilities review, staff training and
software certification as part of a Test Center authorization
process prior to the delivery of ETS Tests and at other times
when significant software or operational changes occur.
Sylvan shall correct any condition where in ETS's opinion,
either security or operating procedures have not been correctly
established or maintained. At ETS's request, Sylvan agrees to
initiate immediately progressive disciplinary action with any
Test Center to correct a condition. In the event that any such
condition is not corrected by Sylvan within twenty-five (25)
days after Sylvan receives ETS's written notice of need for
remedial action, ETS reserves the right where, in ETS's sole
opinion, the severity of the condition so warrants, at the
express written direction or approval of an ETS Executive Vice
President or ETS's President, to terminate immediately the Test
Center's authorization to deliver ETS Tests, upon the delivery
of written notice of termination to Sylvan.
5.4 Maintaining Market Capacity
5.4.1 If a Test Center ceases operating or loses its
authorization to administer Tests, or if a Test
Center, which Sylvan represented in writing to ETS as
a Test Center to be opened, does in fact not open, for
whatever reason, by the time requested by ETS, Sylvan
will open and establish an alternative Test Center
within fifty (50) miles (81 km) of the represented
Test Center location within forty-five (45) days
following the closing or represented opening date.
However, if a Test Center serving a market or area
ceases operating or loses its authorization to
administer Tests, and that market is also served by
another Test Center located within fifty (50) miles
(81 km) of the Test Center that ceased operations,
Sylvan shall be required to open and establish an
alternative Test Center only if the market is then
dete rmined by ETS to be under served after the
closing of the Test Center.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
Notwithstanding the above, Sylvan agrees that if the closed
Test Center was specifically designated as one that was
requested by an ETS Client, Sylvan shall immediately open a
replacement Test Center, as near to the location of the closed
Test Center, as is possible.
5.4.2 If an Examinee has paid a surcharge to take a Test in a market
or area served by a Test Center and is unable to do so due to
lack of adequate Sylvan capacity under the circumstances
described in Section 5.4.1, and ETS must refund such surcharge
to the Examinee, Sylvan shall be liable for and shall reimburse
ETS for all of such surcharges refunded.
5.4.3 If Sylvan fails to comply with any of the requirements
contained in Section 5.4, ETS shall then be free to procure the
needed capacity itself or through other parties.
5.5 Training, Staffing and Support
Sylvan will provide all training to ETS approved standards for Test
Centers' staff, as well as assure that the correct administrative
procedures and schedules are followed. Sylvan will communicate at least
quarterly in writing to the Strategic Development Committee and ETS
about progress and problems during the course of this Agreement,
including but not limited to the status of Test Center operations,
completed training and retraining activities, disciplinary actions with
Test Centers and the resulting Test Center's actions.
Sylvan will provide all staff required to administer the tests in
strict accordance with the procedures detailed in the most current
Strategic Development Committee report approved by ETS, including
procedures to operate the test administration and delivery software, to
complete security identification of all Examinees, to operate the Test
Center while maintaining appropriate system and test security, to
secure Examinees responses to appropriate ancillary questionnaires, and
to return all proprietary and confidential materials to ETS.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
5.6 Scheduling, Collection of Test Fees and Administration
Sylvan will use the ETS Scheduing Algorithm, based upon existing
parameters, or future parameters to be mutually agreed upon, to
schedule appointments for testing, and in accordance with ETS
procedures, administer ETS Tests to Examinees who have either
preregistered with ETS or completed the proper registration procedure
(including payment of the proper registration fees payable to ETS).
Examinees taking ETS Tests will be given priority in scheduling of
tests over Examinees taking non-ETS tests. On a test by test basis, ETS
may direct that Examinees taking ETS Tests be allowed to view their
score on-screen upon their completion of the ETS Test.
Sylvan and its Test Centers will use their best efforts to schedule all
Examinees taking ETS Tests so that the administration of their Tests
fail within the Test Center's regular operating hours.
ETS, in consultation with the Strategic Development Committee, shall
determine the form in which fees for ETS Tests shall be paid at each
Test Center and the manner in which they shall be collected. Sylvan
shall comply with all such procedures established by ETS and the
Strategic Development Committee and its compliance shall be subject to
audit pursuant to Section 10.2. As long as Sylvan shall comply with the
procedures for conversion and transmission of testing fees, all risk of
loss (and gains arising) from fluctuations in currency conversion
rates/deviation shall be borne by and inure to the benefit of ETS.
5.7 Contract Compliance
Sylvan will comply with all contractual obligations ETS has to ETS
Clients with respect to ETS Tests delivered to Examinees at Test
Centers, and such contractual obligations (including those hereinafter
incurred) are incorporated herein by reference for all purposes.
Sylvan agrees to follow the ETS approved directives of the Strategic
Development Committee.
6.0 COVENANTS
6.1 ETS's Covenants
6.1.1 As long as no notice of termination or notice of non-renewal
has been given by either party
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hereunder, ETS agrees that Sylvan will be the exclusive
provider of computerized commercial testing capacity to ETS for
all secure ETS testing programs outside the United States,
Canada and their territories. If either party shall have given
notice of termination or notice of non-renewal, as provided
elsewhere herein, ETS shall be free to establish or contract
with third parties to establish Test Centers anywhere without
restriction.
Notwithstanding anything in this Agreement to the contrary and
regardless of the fact that neither party has given notice of
termination or notice of non-renewal, Sylvan understands and
agrees that ETS may procure needed services and/or capacity
itself or through other parties pursuant to subsections 4.4 and
5.4.3 and Sylvan agrees to coordinate its efforts with ETS and
another party selected by ETS.
6.2 Sylvan's Covenants
6.2.1. Security:
Sylvan shall subject all ETS Tests to security procedures that
ensure that Examinees have access to the ETS Tests only during
testing, and that neither an ETS Test nor any part of it shall
be disclosed or made available to any person who is not subject
to confidentiality and nondisclosure obligations regarding
same.
6.2.2. Sylvan's Covenant Not to Compete:
Sylvan covenants and agrees that during the term of this
Agreement and, if this Agreement is terminated in accordance
with the provisions of Section 14 or not renewed in accordance
with Section 3, for a period of two (2) years after termination
or expiration of this Agreement, it will not engage as an
owner, operator, joint venturer or in any other capacity in a
business (i) offering computer-based testing services or
facilities to any entity, person, company or organization that
is or has been at any time during the term of this Agreement an
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Client, or (ii) offering a test or tests that are in direct
competition with any tests offered by ETS or an ETS Client.
Sylvan acknowledges that ETS's remedy at law for Sylvan's
breach of this Section 6.2.2 would be inadequate and that,
accordingly, in such event, ETS shall be entitled to immediate
injunctive relief to enforce the terms of this Section.
Sylvan agrees that within five months from the date of this
Agreement and at all times thereafter, Sylvan will require that
all of its officers and employees who are participants in any
stock option plan maintained by Sylvan, execute a non-compete
agreement containing a covenant that prohibits the employee,
during the term of his or her employment and for a period of
two (2) years after termination of employment, from engaging
in, as an owner, employee, operator or in any other capacity, a
business (i) offering computer-based testing services or
facilities to any entity, person, company or organization that
is or has been at any time during the term of employment an ETS
Client; (ii) offering a test or tests that are in direct
competition with any tests offered by ETS or an ETS Client.
Further, Sylvan agrees that effective upon execution of this
Agreement, Sylvan will require that (i) all persons who
subsequently become officers and employees who are participants
in any stock option plan maintained by Sylvan and (ii) Chris
Hoehn-Saric and Douglas Becker, shall execute an agreement that
prohibits the employee, during the term of his or her
employment and for a period of two (2) years after termination
of employment, from offering coaching (as described in Section
15) with respect to any ETS Test being administered at a test
center under this Agreement. Further, the non-compete agreement
will contain a provision deeming ETS to be a third-party
beneficiary of such agreement, and entitling ETS to such rights
and remedies of enforcement as are available at law or in
equity, including injunctive relief.
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6.2.3. Force Majeure:
If, as a result of an occurrence not occasioned by the
conduct of either party hereto, such as an act of God,
act or failure to act by a third party, weather, riot,
civil commotion, war, intervention of public
authorities, work stoppage, interruption of utility
service, or any other comparable event (an
"Extraordinary Event") , a party is temporarily unable
to perform, in whole or in part, any of that party's
obligations under this Agreement, that party's
obligation to perform shall be correspondingly
suspended or delayed, as the case may be, so long as
the Extraordinary Event shall exist. Within
seventy-two (72) hours after the Extraordinary Event
no longer exists, the affected party shall submit a
plan to the other party describing how performance
will be restored or achieved. Within forty-eight (48)
hours of receipt of the plan, the other party shall
respond with any objections it may have to such plan
and thereafter the parties shall attempt to negotiate
in good faith any appropriate changes to the plan.
6.2.4. Sylvan's Key Personnel
No replacement of the key personnel in their
capacities listed below shall be made without prior
written notice to ETS. Sylvan shall notify ETS in
writing reasonably in advance of the proposed
replacement and shall submit justification for the
proposed replacement in sufficient detail to permit
evaluation of the impact on Sylvan's responsibilities
hereunder.
Name Title
Chris Hoehn-Saric Chairman and Chief
Executive Officer
Douglas Becker President
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6.3 Capabilities of the Parties
Neither Sylvan nor ETS will develop capabilities
provided by the other without first informing and
consulting with the party providing the services that
would be duplicated. Each party will use their best
efforts to periodically inform the other party of
discussions or contacts with potential clients who
might utilize the services of the other party.
7.0 CAPITAL, FEES, COMPENSATION, TAXES AND REIMBURSEMENT
Sylvan agrees to secure and provide whatever capital is
required for establishing and maintaining the Test Centers.
All monetary amounts (whether stated in this Section or
elsewhere in this Agreement), prices, and payments are in
United States dollars, unless otherwise specifically stated.
For the services to be provided hereunder by Sylvan, ETS agrees
to pay Sylvan in the following manner:
7.1 Cost Plus Compensation
The parties agree that Sylvan's compensation under
this Agreement shall equal the sum of 1) Sylvan's
Permitted Costs (as defined in Section 7.4) plus an
amount equal to 10% of such Permitted Costs, and 2)
ETS's share of Sylvan's Cost of Capital (as defined
in Section 7.5) which shall be payable as hereinafter
described.
7.2 Payments During First Four Years
Upon approval by ETS of the report of the Strategic
Development Committee covering establishment and
administration of the international network of Test
Centers during calendar 1994, 1995, 1996, and 1997,
and approval by ETS of Sylvan's estimates of
Permitted Costs and Cost of Capital for such four
year period, the parties shall calculate a "Test Hour
Fee." The Test Hour Fee shall be determined by
dividing (i) the sum of Sylvan's estimates, as
approved by ETS, of the amount of its Permitted Costs
for such four-year period plus 10% of such Permitted
Costs plus its Cost of Capital by (ii) the total
number of Test Hours that ETS estimates will be used
to administer ETS tests during the four-year period.
No less often than annually during 1994, 1995, 1996
and 1997, the parties shall recalculate the Test Hour
Fee by revising the volumes of tests, hours required
per test, or costs used in the
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calculation pursuant to the procedures set forth in Section 4
of this Agreement.
Sylvan shall submit invoices to ETS within 30 days after the
end of each calendar quarter, commencing with the quarter in
which the first ETS Test is administered in a Test Center. Such
invoices shall itemize the number of Test Hours by ETS testing
program, by Test Center and by administration dates. ETS
shall pay each such invoice within 30 days after receipt.
Sylvan shall provide ETS quarterly reports itemizing its actual
Permitted Costs and Cost of Capital during the four-year
period. As soon as practical after December 31, 1997, Sylvan
shall prepare a final report detailing its actual Permitted
Costs and its Cost of Capital for the years 1994, 1995, 1996
and 1997, and the actual number of Test Hours used in
administering ETS Tests in Test Centers during the four-year
period. Using this report, Sylvan shall determine whether its
actual Permitted Costs plus 10% of such Permitted Costs plus
its Cost of Capital for the four-year period exceed or are less
than the aggregate amount previously paid to Sylvan by ETS
pursuant to the procedures outlined above in this Section 7.2.
If there is such an excess, Sylvan shall submit an invoice to
ETS in the amount of the excess, which shall be paid by ETS
within 30 days after receipt. If Sylvan has been overpaid by
ETS, Sylvan shall repay such overpayment amount to ETS no later
than March 31, 1998.
7.3 Payments During Remainder of Agreement
For all years beginning on or after January 1, 1998, based on
annual cost estimates approved by ETS, ETS shall pay Sylvan for
Sylvan's actual Permitted Costs plus 10% of such Permitted Cost
plus its Cost of Capital. Sylvan shall.calculate these costs on
a calendar quarterly basis and submit an itemized invoice to
ETS therefor within 30 DAYS AFTER THE END OF EACH calendar
quarter. ETS shall pay each such invoice within 30 days of
receipt. Sylvan will prepare an annual reconciliation of Pe =
itted Costs and Cost of Capital within 45 days after the end of
the calendar year and the appropriate party will pay the other
to the extent of any over payments or under payments within 30
days after receiving such reconciliation.
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7.4 Definition of Sylvan's Permitted Costs.
Permitted Costs for purposes of this section 7 shall include
the following:
7.4.1 All costs incurred by Sylvan that are directly
attributable to the provision of services to ETS or a
particular ETS Client and that would not have been
incurred but for the provision of such services
("Nonallocable Costs").
7.4.2 ETS's share of all costs (other than Nonallocable
Costs) incurred by Sylvan in establishing and
operating the Test Centers ("Allocable Costs"),
including but not limited to rents, salaries and
benefits of employees assigned to the Test Centers,
compensation paid to any third parties/agents or
operators of test Centers, insurance, duties,
utilities, supplies, depreciation and amortization of
capitalized items and expenditures for non-capital
items, taxes that are classified under generally
accepted accounting principles as business expenses,
but specifically excluding (i) taxes that are not
classified as business expenses under generally
accepted accounting principles (such as but not
limited to income and sales/services taxes) and (ii)
Sylvan's share of any uninsured losses incurred by
Sylvan under Section 5.2. Allocable Costs shall also
include the cost of services (such as data services,
technical systems, scheduling, training and
accounting) provided to the Test Centers by Sylvan.
Allocable costs shall not include the capital invested
or advanced by Sylvan to establish or operate Test
Centers, those amounts, as adjusted, being taken into
account under the calculation of Sylvan's Cost of
Capital under Section 7.5. ETS's share of Allocable
Costs for a particular period shall be determined by
multiplying the Allocable Costs for the period by the
percentage derived from dividing the number of Test
Hours used to administer ETS Tests during the period
by the number of Test Hours used to administer all
tests during the period.
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7.4.3 The cost of services provided by Sylvan shall be the
actual cost of such services, but shall include an
appropriate allocation of Sylvan's general and
administrative expense, as approved by ETS. Costs
incurred by Sylvan in providing access to its
International Smarts Centers and the associated
technical infrastructure will not be taken into
account in determining Sylvan's costs for purposes
of this Section 7. If ETS provides services in
connection with the delivery of ETS Tests, ETS shall
not be reimbursed for the cost of such services. If
ETS provides services in connection with the
delivery of tests for testing clients other than ETS
Clients, ETS shall be reimbursed for the actual cost
of such services, plus 10 percent. Services provided
by ETS, whether with or without charge to Sylvan,
shall not be taken into account in determining
Allocable Costs or Nonallocable Costs.
7.5 Definition of Cost of Capital
Sylvan's Cost of Capital shall be deemed to be Citibank's prime
rate of interest, as in effect on the first day of each
calendar quarter and computed on a quarterly basis, times the
average outstanding balance of Sylvan's Capital Account during
the calendar quarter (which average shall be calculated by
dividing by three the sum of the month-end Capital Account
balances for each of the months in the quarter), divided by
four. Sylvan's Capital Account shall be the amounts advanced
from time to time by Sylvan (in the form of equity or loans)
to establish, equip and operate the Test Centers, and shall be
decreased by any and all cost. reimbursement payments made by
ETS under Sections 7.2 and 7.3. Any single addition to Sylvan's
Capital Account in excess of $50,000 must be approved by ETS.
ETS's share of Sylvan's Cost of Capital for the particular
period shall be determined by multiplying Sylvan's Costs of
Capital for the period by the percentage derived from dividing
the number of Test Hours used to administer ETS Tests during
the period by the number of Test Hours used to administer all
tests during the period. For purposes of this Section 7,
Sylvan's Capital Account shall include only that capital
invested or advanced by Sylvan that is properly allocable to
the establishment or operation of Test Centers administering
ETS tests, and only such amounts as are then dedicated for
those purposes.
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7.6 No costs shall be taken into account more than once for
purposes of this Section 7.
7.7 All costs taken into account for purposes of this Section 7
shall be determined in accordance with generally accepted
accounting principles.
7.8 Notwithstanding anything in this Agreement to the contrary,
Sylvan agrees that Sylvan shall be solely responsible for
collecting, paying, and filing for any and all taxes, such as
but not limited to sales taxes, value added taxes, and income
taxes, incurred by Sylvan under this Agreement.
7.9 All costs, terms, and benefits granted by Sylvan herein are
comparable to or better than the equivalent terms being offered
by Sylvan to any present customer. If Sylvan shall, during the
term of this Agreement, enter into arrangements with any other
customer providing greater benefits or more favorable terms,
this Agreement shall thereupon be deemed amended to provide the
same to ETS.
8.0 OWNERSHIP
8.1 Sylvan acknowledges and agrees that ETS holds all proprietary
rights, including, but not limited to, copyright, trade secret,
and patent in the ETS OWNED Technologies and Materials, which
will be provided to and/or used by Sylvan to perform its
responsibilities under this Agreement. ETS Owned Technologies
and Materials shall include any hardware or software that
Sylvan utilizes which is supplied by ETS.
8.2 Sylvan acknowledges that, except for the right to use the ETS
Owned Technologies and Materials, in accordance with the terms
of this Agreement, no proprietary rights in the ETS Owned
Technologies and Materials are granted to Sylvan pursuant to
this Agreement. Neither Sylvan nor any third party who obtains
access to the ETS owned Technologies and Materials shall (i)
reproduce, distribute, disclose or create derivative works
based upon the ETS Owned Technologies & Materials or (ii)
reverse-engineer, decompile, disassemble or in any way
attempt to create source code from Certain Portions of the ETS
Computer-Based Testing System. Sylvan shall assume full
responsibility and liability for any acts taken by a third
party in violation of this Section.
8.3 Sylvan shall not make any changes or modifications in the
ETS-Owned Technologies and Materials without the
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prior written consent of ETS. In the event Sylvan makes any
such changes or modifications, whether authorized or
unauthorized, all title and ownership rights to such
modifications or enhancements shall vest in ETS.
ETS may make such changes or modifications to the ETS-Owned
Technologies and Materials as, in its sole discretion, it deems
appropriate. ETS is under no obligation to make any
modifications upon the ETS-Owned Technologies and Materials. In
the event ETS develops any modifications or enhancements, all
title and ownership rights to such modifications or
enhancements shall vest in ETS.
8.4 Sylvan also understands and agrees that ETS, EDUCATIONAL
TESTING SERVICE, and the ETS logo are the registered trademarks
of ETS, registered in the U.S.A., and in many other countries.
Sylvan agrees not to use, reproduce, copy or create materials
bearing the ETS name or the ETS registered trademarks for
promotional or other purposes, without ETS's advance written
approval and review of such materials.
9.0 CONFIDENTIALITY AND SECURITY
Sylvan acknowledges and agrees that, during the term of this Agreement,
certain information which is proprietary and confidential to ETS shall
be disclosed to Sylvan and its employees.
Sylvan agrees that such ETS Proprietary and Confidential Information,
including Examinee data, is disclosed to Sylvan in trust and that it
will not disclose the ETS Proprietary and Confidential Information to
any third party without ETS's prior written consent. When the ETS
Proprietary and Confidential Information is not in use, Sylvan agrees
to keep the ETS Proprietary and Confidential Information in a secure,
locked location.
Sylvan also agrees that it will disclose the ETS Proprietary and
Confidential Information only to employees of Sylvan with a need to
know such ETS Proprietary and Confidential Information.
Sylvan agrees that it will use the ETS Proprietary and Confidential
Information for the sole purpose of performing its responsibilities in
connection with this Agreement. Upon either the termination or
expiration of this Agreement, Sylvan shall cease to use the ETS
Proprietary and Confidential Information, shall remove all copies of
Certain
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Portions of the ETS Computer-Based Testing System from its machine-
readable media, shall retrieve all copies of ETS Proprietary and
Confidential Information from any third parties, and shall return all
copies of Certain Portions of the ETS Computer-Based Testing System
and other ETS Proprietary and Confidential Information to ETS.
In the event that Sylvan uses vendors for either equipment or software
installation and/or maintenance support, Sylvan agrees to have each
such vendor sign a non-disclosure agreement to be supplied by ETS
before permitting such vendors any access to Certain Portions of the
ETS Computer-Based Testing System or the LAN-based PCs upon which
Certain Portions of the ETS Computer-Based Testing System, Tests or
Test data are stored.
Sylvan agrees that all tests are subject to security procedures that
ensure that Examinees have access to the test(s) only during testing,
and that the test itself or any part of it shall not be disclosed or
made available to any person who is not subject to confidentiality and
nondisclosure obligations regarding same.
10.0 ETS'S RIGHT TO AUDIT
10.1 Technical and Security Audits
ETS reserves the right to send either announced or unannounced
observers to perform either technical and/or security audits at
Test Centers, Sylvan's corporate center, and other Sylvan sites
or back-up sites, at any time, to observe/monitor operations
during Test Center staff training sessions, administration of
the tests, and pre-and post-testing periods, and to verify the
Test Centers, security arrangements. Upon arrival at a site,
the ETS observers will furnish proper identification.
10.2 Financial Audit
ETS reserves the right to perform financial audits, during
Sylvan's normal business hours, of Sylvan's financial records
to verify Examinee counts, Sylvan's costs subject to the cost
and compensation arrangements of Section 7, and Sylvan's
collection and transmission of fees pursuant to Section 5.6.
11.0 INSURANCE
During the term of this Agreement, Sylvan shall procure and maintain
with an insurance carrier comparably rated "A+"
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with a financial class of "15" determine by A.M. Best, the following
kinds of insurance coverages in each of the countries in wnich Sylvan
provides services to ETS under this Agreenent, with minimum limits set
forth below. It is agreed that local coverages secured will be
comparable to insurance requirements for the United States in all
material respects, and that ETS may waive or adjust certain coverage
requirements in certain countries.
Line Perils Minimum Limits
Worker's Statutory Worker's Compensation
Compensation Compensation Statutory Coverage
and Employers
Liability
General a. Comprehensive $1,000,000
Liability General Liability Bodily Injury
$1,000,000
Property Damage
b. Premises-Operation $1,000,000
Bodily Injury
$1,000,000
Property Damage
C. Personal Injury $1,000,000
Bodily Injury
d. Contractual $1,000,000
Bodily Injury
$1,000,000
Property Damage
e. Independent $1,000,000
Contractor's Bodily Injury
$1,000,000
Property Damage
f. Owners Protective $1,000,000
(which is Hold Harmless) Bodily Injury
$1,000,000
Property Damage
Umbrella Excess of Primary $9,000,000
Liability Policies Listed Above Bodily Injury
$9,000,000
Property Damage
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At least thirty (30) days before any Test Center begins operating in a
country, Sylvan shall furnish ETS with an insurance certificate
evidencing the above coverage with respect to the Test Center and
providing for at least ninety (90) days prior written notice of policy
cancellation or modification.
The certificates of insurance shall name ETS as an "Additional
Insured" to reflect the fact that ETS has been named as an "additional
insured" on the policy, and shall specify the country (or location if
different) by name that the insurance is applicable to.
The insurance specified herein shall be minimum requirements, and
Sylvan is responsible for providing any additional insurance deemed
necessary to protect Sylvan's interests from other hazards or claims
in excess of the minimum coverage. The liability of Sylvan to ETS is
not limited to Svlvan's insurance coverage, nor is this clause intended
to limit Sylvan's liability in any way for other non-insurable risks.
12.0. HOLD HARMLESS
12.1 Sylvan will indemnify and hold harmless ETS, its employees,
guests, and visitors from any and all loss, damage, injury,
costs, expenses or any other liability (including without
limitation ETS's attorneys' fees) arising directly or
indirectly out of Sylvan's services to ETS, clients, or third
parties, including operation of Sylvan owned or leased
equipment, acts of omission, commission, or negligence of
Sylvan's employees or agents when engaged in carrying out its
services, and the failure to comply with applicable laws,
regulations and ordinances. Sylvan will assume responsibility
and liability for ETS owned or leased equipment in its
custody, including maintenance of, taxation of, defects in, and
the return of same to the appropriate party.
12.2 Sylvan agrees to waive and disclaim, and hereby waives and
disclaims any right it may now or hereafter have against ETS,
its agents, employees, successors and assigns for any and all
losses, damages, penalties, injuries, claims, actions and
suits, including legal expenses of whatsoever kind and nature,
in contract or tort, including, but not limited to ETS's strict
liability in tort, arising out of the acceptance or rejection
of the ETS Equipment and Software, the ownership of the ETS
Equipment and Software during the term of this Agreement, and
the delivery, possession, maintenance, uses, condition, return
or operation of
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the ETS Equipment and Software (including, without limitation,
latent and other defects, whether or not discoverable by ETS or
Sylvan and any claim for patent, trademark or copyright
infringement).
12.3 ETS will indemnify and hold Sylvan harmless from any and all
loss, damage, injury, costs, expenses, or any other liability
(including without limitation Sylvan's attorneys' fees)
arising out of or in connection with the content, character,
and/or validity of any test, and the test development and
measurement provided for any ETS Client, by ETS, or in
connection with any ETS developed test administered by Sylvan
under this Agreement.
13.0 NOTICES AND APPROVALS
Any notices, approvals or other communications required or which may be
given by either party to the other party under this Agreement, shall be
in writing and may he sent by FAX, however the original shall be sent
either by overnight courier express, with a verified receipt,
registered or certified mail, postage prepaid and addressed to and at
the address stated below or to such other address as the parties shall
subsequently designate to each other by notice given in accordance with
this Section. Such notice or approval shall be deemed to be
sufficiently given when the original is received by the receiving
party.
FOR ETS: EDUCATIONAL TESTING SERVICE
Rosedale Road
Princeton, NJ 08541
ATTENTION: Russell W. Martin, Esq.
CC: Candus K. Hedberg
FOR SYLVAN: SYLVAN LEARNING SYSTEMS, INC.
9135 Guilford Road
Columbia, MD 21046
ATTENTION: 0. Steven Jones
General Counsel
CC: R. Christopher Hoehn-Saric, CEO
14.0 TERMINATION
14.1 Termination for Cause:
This Agreement may be terminated by either party only for good
cause (good cause being a material breach of an obligation or
responsibility imposed upon a party by this Agreement) and only
after notice and opportunity to cure has been given. With
respect to a monetary
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default, the notice must provide for an opportunity to cure of
at least ten (10) days following receipt of the notice. With
respect to non-monetary defaults, the notice must provide for
an opportunity to cure of at least thirty (30) days following
receipt of the notice. If the party receiving the notice has
not cured the breach before the cure date stated in the notice,
only then may the party giving the notice terminate this
Agreement by giving the party in breach a written termination
notice, stating the date on which termination is to be
effective. Any such termination shall have no effect upon any
payments remaining due under this Agreement, all of which shall
become immediately due and payable on the termination date.
14.2 Changes in Sylvan's Business or Financial Condition
Notwithstanding anything contained in this Agreement to the
contrary, ETS reserves the right to treat as good cause for
immediate termination of this Agreement under Section 14.1
above, any of the following events:
a. Sale of Sylvan's Assets:
The sale of all or substantially all of Sylvan's
assets to a single purchaser or to a group of
purchasers.
b. Control of Sylvan's Voting Stock:
The acquisition or accumulated ownership (by virtue
of Sylvan's repurchase of its shares, or by merger,
consolidation or acquisition etc.) of more than 50%
of Sylvan's outstanding voting corporate
shares by any single person or entity, or by a group
of affiliated persons or entities as defined by Rule
12b-2 of the rules of the Securities and Exchange
Commission.
C. Sylvan's Insolvency or Bankruptcy:
1) if Sylvan shall be declared either insolvent or
bankrupt;
2) if a petition is filed in any court and not
dismissed in sixty (60) days to declare Sylvan
bankrupt or for a reorganization under the
Bankruptcy Law or any similar statute; or
3) if a Trustee in Bankruptcy or a Receiver or
similar entity is appointed for Sylvan.
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d. Termination of Sylvan's Business:
Sylvan's bona fide decision to terminate its
business and liquidate its assets.
15.0 PROHIBITION AGAINST COACHING
During the term of this Agreement and for a period of 180 days after
the termination or completion of this Agreement:
a. Neither Sylvan, nor any Test Center (whether owned, leased, or
franchised), nor any employee or independent contractor of
Sylvan or any Test Center, will develop or offer any coaching
advice, assistance, service, software, or materials (including
those developed by any third party) for the tests being
administered under this Agreement; and
b. Neither Sylvan nor any Test Center (whether owned, leased, or
franchised), will sublet, rent to, or make space available to
any third party that offers coaching advice, assistance,
service, software, or materials, for the tests being
administered under this Agreement.
Each Test Center staff member administering the tests covered
by this Agreement shall be required to sign with Sylvan an ETS
provided agreement, stating that they agree to be bound by the
terms of this provision and Sylvan will take all steps
necessary to enforce said agreements.
16.0 CONFLICT OF INTEREST
No Test Center staff administering the tests covered by this Agreement,
shall take a test covered by this Agreement for a period of one hundred
eighty (180) days following the last improvement in any aspect of the
administration of such a test.
No Test Center staff shall handle materials for the administration of
or administer a test covered by this Agreement, for a period of ninety
(90) days prior to the date of a test administration that involves
either a household or immediate family member.
Each Test Center staff member administering the tests covered by this
Agreement shall be required to sign with Sylvan an ETS provided
agreement, stating that they agree to be bound by the terms of this
provision and Sylvan will take all steps necessary to enforce said
agreements.
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
17.0 USE OF NAMES, LOGOS, TRADEMARKS
17.1 ETS shall not use Sylvan's name, logos, or trademarks, without
the prior written consent of Sylvan.
17.2 Sylvan shall not use ETS's name, logos, or trademarks, without
the prior written consent of ETS.
18.0 STANDARDS OF CONDUCT
It is the policy of ETS not to discriminate on the basis of race,
ethnic background, creed, age, or sex. Accordingly, by executing this
Agreement, Sylvan agrees not to permit any of its agents or employees
to behave, either through speech or conduct, in a manner that could
reasonably be construed as offensive to members of any such group or
otherwise to be in violation of the aforesaid policy whether or not
such conduct is proscribed by applicable law.
19.0 PROHIBITION ON GIFTS AND GRATUITIES
Sylvan warrants that it has not offered or given, and will not offer or
give to any employee, or representative or immediate family member of
an ETS employee a payment, gratuity, personal service, entertainment
or gift, other than novelty advertising items (i.e., pencils, pens,
clipboards, cups) of a nominal value. Any such offerings may be
construed as Sylvan's attempt to improperly influence decisions at ETS,
and Sylvan agrees that ETS may, by written notice to Sylvan, terminate
this Agreement if it is found by ETS that Sylvan has violated this
provision. In the event this Agreement is terminated by ETS pursuant to
this provision, ETS shall be entitled, in addition to any other rights
and remedies, to recover or withhold the amount of the cost incurred by
Sylvan in providing such gratuities.
20.0 EQUAL OPPORTUNITY
Sylvan shall comply with all applicable provisions of Section 202 of
Executive Order 11246 (Equal Employment Opportunity) dated 9/24/65 and
subsequently amended.
21.0 FAIR LABOR STANDARDS ACT
Sylvan shall comply with all applicable requirements of the Fair Labor
Standards Act of 1938, as amended.
22.0 COMPLIANCE WITH LAW
Sylvan and all Test Centers shall, in the performance of this
Agreement, comply with all applicable foreign, federal,
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
state, and local laws now and hereafter in effect (including but not
limited to the Foreign Corrupt Practices Act; the anti-boycott
regulations; the Trading with the Enemy Act; the International
Emergency Economic Powers Act; and any applicable export control
regulations, including obtaining any required export licenses).
23.0 LAWS GOVERNING
This Agreement and any disputes, controversies or claims arising out
of, or relating to, or having any connection with this Agreement shall
be governed by the laws of the State of New Jersey, now and hereafter
in effect. Notwithstanding the above, any disputes relating to the
implementation or interpretation of Section 28.0, "Arbitration",
including but not limited to the authority of the court to grant
provisional or interim relief in aid of arbitration, shall be governed
by the federal law applicable in the federal courts in New York.
24.0 INDEPENDENT CONTRACTOR
Under this agreement, Sylvan agrees that it will perform as an
independent contractor, and not an agent or employee of ETS.
Nothing in this Agreement shall be construed as having established a
joint venture, a partnership, an agency, or any similar relationship
between the parties.
25.0 SURVIVAL BEYOND COMPLETION
It is mutually agreed that any term or provision, including but not
limited to, 6.2.2 (Sylvan's Covenant Not to Compete), Sections 8
(Ownership), 9 (Confidentiality and Security), 10 (ETS's Right to
Audit), 12 (Hold Harmless), 15 (Prohibition Against Coaching), 16
(Conflict of Interest), and 17 (Use of Names, Logos, Trademarks), which
by its nature would survive any termination, cancellation, or
expiration of this Agreement, shall survive any termination,
cancellation, or expiration of this Agreement.
26.0 ASSIGNMENT
Sylvan agrees not to assign this Agreement without the prior written
approval of ETS. Sylvan agrees to obtain ETS's prior written approval
of the proposed incorporation of any subsidiary. Sylvan agrees not to
assign any part of this Agreement or any Sylvan responsibility
thereunder, without the prior written approval of ETS. Any such request
for approval of a proposed assignment, shall be accompanied by
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ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
a copy of the proposed contract between Sylvan and the proposed
assignee/subcontractor.
27.0 MODIFICATIONS
This Agreement can be modified only by a writing signed by both
parties.
28.0 ARBITRATION
This Agreement and any disputes, controversies or claims arising out
of, or relating to, or having any connection with this Agreement shall
be submitted to binding arbitration in the City of Newark, New
Jersey, under the rules then prevailing of the American Arbitration
Association. Judgment upon any award made in such arbitration may be
entered and enforced in any court of competent jurisdiction.
Notwithstanding the above, any disputes regarding or petitions for
provisional or interim relief in aid of arbitration shall be submitted
to the jurisdiction of the federal courts of the Southern District of
New York and neither party shall seek to remove or dismiss on
jurisdictional grounds any such action brought in such court by the
other party.
29.0 ENTIRE AGREEMENT
This Agreement constitutes and expresses the entire Agreement and
understanding between the parties hereto in reference to all the
matters herein referred to, all previous discussions, promises,
representations, and understandings relative thereto, if any, had
between the parties hereto, being herein merged.
-33-
ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
<PAGE>
IN WITNESS WHEREOF, the parties hereunder have executed this Agreement
with the intent that it become effective as of April 1, 1994.
SYLVAN LEARNING SYSTEMS, INC. EDUCATIONAL TESTING SERVICE
By /s/ R. CHRISTOPHER HOEHN-SARIC By /s/ ERNEST J. ANASTASIO
------------------------------- -------------------------
R. Christopher Hoehn-Saric Ernest J. Anastasio
Title Chief Executive Officer Title Executive Vice President
------------------------------- ------------------------
Date April 13, 1994 Date April 13, 1994
------------------------------- ------------------------
Attest: /s/ O. STEVEN JONES Witness /s/ RUSSELL W. MARTIN
------------------------------ -----------------------
O. Steven Jones Russell W. Martin
Title Assistant Secretary Title Assistant General Counsel
------------------------------- -------------------------
Date April 13, 1994 Date April 13, 1994
------------------------------- --------------------------
SLS-Lf
ETS (R)
[LOGO APPEARS HERE]
EDUCATIONAL TESTING SERVICE
MASTER AGREEMENT BETWEEN
EDUCATIONAL TESTING SERVICE
AND
SYLVAN LEARNING SYSTEMS, INC.
FOR COMPUTER-BASED. TESTING SERVICES
AT SYLVAN TECHNOLOGY CENTERS
IN THE UNITED STATES AND CANADA
THIS AGREEMENT, effective as of December 12, 1997 by and between
EDUCATIONAL TESTING SERVICE (ETS), a nonprofit, nonstock corporation, organized
and existing under the Education Law of the State of New York, with principal
offices at Princeton, New Jersey 08541, and SYLVAN LEARNING SYSTEMS, INC.
(Sylvan), a Maryland business corporation, with its headquarters at 1000
Lancaster Street, Baltimore, Maryland 21202.
WITNESSETH:
WHEREAS, ETS has developed, and is continuing to develop,
computer-based versions of various tests and exams which are designed to be
administered on networked personal computers; and
WHEREAS, ETS has also developed an ETS proprietary Computer-Based
Testing System, a set of computer software that permits the administration of
computer-based versions of tests on networked personal computers; and
WHEREAS, Sylvan operates a network of franchised/leased/owned, Sylvan
Technology Centers in the United States and its territories (as well as other
computer-based testing centers and mobile computer- based testing operations)
that are capable of administering computer-based tests to test-takers and
Sylvan wishes to utilize certain ETS test development and ETS software Systems
capabilities; and
WHEREAS, under the terms of an agreement effective as of September 1,
1993 (the " 1993 Agreement") between ETS and Sylvan, Sylvan has been providing
certain computer-based test administration and related services, for ETS
testing programs; and
WHEREAS, ETS and Sylvan wish to redefine their contractual
relationship to address issues that have arisen in the implementation of the
Agreement and to provide contract performance oversight.
NOW, THEREFORE, ETS and Sylvan agree to the following:
GENERAL STATEMENT OF PRINCIPLES
-------------------------------
It is implicit in this Agreement that the use of the Test Center
network by third parties be encouraged, thus providing a higher utilization and
allowing Sylvan to extend the best possible unit pricing to ETS.
The current success of CBT is due in large part to the flexibility,
which both parties have shown, in our approach to the daily operation of the
testing network.
1
*Portions of this exhibit has been omitted based upon a request for confidential
treatment.
<PAGE>
We are separate organizations with sometimes different goals and needs. Our
planning cannot and should not be at the expense of either organization's
separate goals. Both ETS and Sylvan must respect the other organization's goals
and operate with a level of trust that assures a mutually successful future.
1.0 GENERAL
-------
The objective of this Agreement is to serve as a master agreement
under which ETS utilizes the Sylvan network of secure testing centers
in the U.S., Canada, and their territories that provides the highest
quality testing and related services, which are both easily accessible
to and economical for the Examinees to utilize.
These Sylvan services will normally include, but are not necessarily
limited to: local and national scheduling of Tests, registration of
Examinees (as defined in 2.17 below), receipt of payments (including,
but not limited to, credit card payments), computer-based test
administration, and local score reporting.
ETS services to Sylvan may include, but are not necessarily limited
to: test development, conversion of paper-based tests into
computer-based tests, and licensing of certain ETS developed software
systems.
ETS and Sylvan shall cooperate in the development and implementation
of plans for the warehousing, distribution, installation, and
operation of accommodative equipment and'softw-are at the Test
Centers, to accommodate Examinees with disabilities who need special
testing.
The parties further agree to use their best efforts to accomplish the
objectives of this Agreement and to meet the deadlines contained in
the mutually agreed to schedules that will be developed hereunder,
from time to time.
2.0 DEFINITIONS
-----------
For purposes of this Agreement, the following terms shall have the
meaning indicated below:
2.1 CBT Network:
The system for providing Computer Based Testing services on
behalf of ETS and ETS's Clients. This includes the conversion
of Tests to CBT format, the creation of new CBT Tests, the
administration of CBT Tests, the creation and delivery of CBT
related products, including but not limited to Practice Tests,
Tutorial and Test Preparation materials, CBT related
fulfillment activities and any other services and products
that ETS and Sylvan may determine to provide in the CBT field.
2.2 ETS:
Educational Testing Service (ETS) means the non-profit
organization established under New York law and located in
Princeton, New Jersey.
2
<PAGE>
2.3 ETS Computer-Based Testing System:
The ETS proprietary open system architecture Computer-Based
Testing System currently consists of the following
sub-systems: the Computer-Based Test Development and
Production System, the Network Data Distribution and Routing
System, the Test Delivery Application System, the Test
Administrative System, the Network Management Control System.
Among other things, the open Systems architecture permits the
administration of computer-based versions of tests on local
area network based personal computers. These components will
be changed or replaced from time to time to take advantage of
new technology.
2.4 ETS Supported CBT Centers:
ETS supported CBT centers in ETS offices and institutions of
higher education.
2.5 Technologies and Materials:
2.5.1 ETS Owned, Acquired or Contracted For Technologies and
Materials:
ETS Owned, Acquired or Contracted For Technologies and
Materials shall include the ETS Computer-Based Testing
System, the Test databases and scripts to be
administered and all individual Test Questions
(including but not limited to discrete items,
simulations, vignettes, and performance assessments),
the Manual, and any other software, manuals,
documentation, secure test administration or
operational procedures or other materials developed by
ETS which will be provided to and/or used by Sylvan to
perform its responsibilities under this Agreement.
The following functions/applications were either
developed/written by ETS or were owned, acquired, or
contracted for by ETS as off-the-shelf (OTS) vendor
provided software that ETS is responsible for
maintaining.
System Functions, include all of the following:
*
*Text omitted based upon request for confidential treatment.
3
<PAGE>
Administrative Functions, include all of the following:
*
Station Service Functions, include all of the following:
*
2.5.2 Sylvan Owned, Acquired, or Contracted For Technologies and
Materials:
The following functions/applications were either
developed/written by Sylvan or were owned, acquired, or
contracted for as OTS vendor provided software that
Sylvan is responsible for maintaining.
System Functions, include all of the following:
*
Administrative Functions, include all of the following:
*
Station Service Functions, include all of the following:
*
2.6 ETS Proprietary and Confidential Information:
ETS Proprietary and Confidential Information shall include but
not be limited to, the ETS Computer-Based Testing System for
test administration and delivery, the Test databases and
scripts and all individual Test questions, all data collected
from Examinees, all Examinee test scores AND THE IDENTITIES OF
THE EXAMINEES, THE MANUAL, internal ETS procedures for the
secure administration of computer-based tests and any other
information identified by ETS to Sylvan as confidential.
Sylvan's responsibilities concerning ETS Proprietary and
Confidential Information, are enumerated in Paragraphs 8.0 and
10.0 of this Agreement.
2.7 Examinee:
Examinee means any individual who receives or takes any Test or
a Test related activity such as a practice test or tutorial
product or is scheduled to take a Test or a test related
activity at a Test Center, or who reviews their previously
taken Test, if such review is permitted by ETS.
4
*Text omitted based upon request for confidential treatment.
<PAGE>
2.8 LAN:
A local area network made up of personal computers.
2.9 Manual:
The most current version of the ETS Computer-Based Test Center
Administrator's Manual. The Manual is attached hereto as
Attachment #4.
2.10 Private Test:
Any Test which at ETS's direction is to be administered to an
Examinee as the sole occupant or user of the Room during the
Test.
2.11 Room:
The room(s) within the Test Center where the actual testing
takes place using the network based PC's.
2.11.1 Regular Testing Room:
A Room large enough to simultaneously test several
Examinees, but which may also be used for the private
testing of a single Examinee who requires private
testing because of a disability.
2.11.2 Private Testing Room:
A private Room separate from the Regular Testing Room
which is designed to accommodate a single Examinee who
requires private testing because of a disability and
the Examinee's reader or amanuenses.
2.12 Scheduled Hours of Service:
The amount of time, to be scheduled for each Examinee as
determined by ETS, including time allotted for the taking of a
Test, including a Specialized Test, plus the time allotted for
breaks during the Test, for the administration of any tutorial
or familiarization with computer-based test taking; and for
computerized registration of the Examinee. The Scheduled Hours
of Service may, but does not necessarily, equal the maximum
time in which any Test may be administered. Scheduled Hours of
Service for any Test may be modified from time to time by ETS.
2.13 Specialized Test:
Any test that, by virtue of an Examinee's disability, condition
or handicap, requires the involvement of special assistance to
the Examinee, in the way of additional equipment or aids,
and/or a reader or amanuenses.
5
<PAGE>
2.14 Sylvan:
Sylvan means the parent organization, any subsidiary, or
affiliated organization, successor organization, or assignee in
whole or in part.
2.1.5 Sylvan Candidate Services Call Center ("CSCC"):
The Sylvan Candidate Services Call Center ("CSCC") shall mean
the centralized reservation processing system operated and
staffed by Sylvan for scheduling prospective Examinees and the
collection, maintenance and storage of all confidential relevant
data regarding the delivery of services as directed by ETS under
this Agreement.
2.16 Sylvan Proprietary and Confidential Information:
Sylvan Proprietary and Confidential Information shall include
but not be limited to, the Sylvan test administration system and
scheduling system, Sylvan Manuals and procedures, internal
Sylvan procedures for the secure administration of
computer-based tests and any other information identified by
Sylvan to ETS as confidential. ETS"s responsibilities concerning
Sylvan Proprietary and Confidential Information, are enumerated
in Paragraphs 9.0 and 11.0 of this Agreement.
2.17 Sylvan Registration Services:
The series of activities authorized by ETS taking place at
Sylvan's CSCC and at STC's necessary to assist ETS in the
registration process. This can include such services as: 1) for
a walk-in Examinee at an STC collecting Examinee data, payment
receipt or payment information receipt and transmission of data
to ETS; 2) at the CSCC, coordination and communication to
correct Examinee registration information and receipt of
eligibility files.
2.18 Test(s):
2.18.1 Tests Administered on Behalf of ETS:
All computer-based versions of a Test (including
reviews by Examinees of their previously taken Tests),
which Sylvan is authorized by ETS to deliver or
administer at a Test Center under this Agreement,
including those Tests and test programs set forth on
Attachment 13 . Sylvan agrees that all Tests are
subject to security procedures that ensure that
Examinees have access to the Test(s) only during
testing, and that the Test itself or any part of it
shall not be disclosed or made available to any person
who is not subject to confidentiality and
nondisclosure obligations regarding same.
2.19 Test Center:
A Sylvan or ETS designated testing facility approved by ETS,
located in the United States, Canada or their territories,
operated by Sylvan and/or ETS trained and authorized staff,
including Sylvan Technology CentersO, facilities in ETS Offices
and institutions,
6
<PAGE>
or through other parties. Centers operated by Sylvan or its
agents are sometimes called herein "Sylvan Test Centers".
Centers operated by ETS or other parties under Paragraph
16.1.2 are sometimes called herein"'ETS Test Centers".
2.20 Testing Client:
Any ETS client whose tests are administered through ETS
Computer Based Testing Network Group, provided that no Testing
Client is a third party beneficiary of this Agreement or
otherwise succeeds to any rights of ETS under this Agreement.
3.0 TERM AND RENEWAL
----------------
Unless earlier terminated as provided for herein, this Agreement shall
commence on the Effective Date and will expire on December 31, 2005.
This Agreement will renew automatically for an unlimited number of
consecutive, additional three (3) year renewal periods on the first day
of January of 2006 (and on the anniversary of said date every three
years thereafter), unless ETS or Sylvan provides notice at least two
(2) years before the expiration date of the initial or renewal term
that this Agreement will not be renewed. During each renewal term, the
terms and conditions of this Agreement shall remain in effect, except
that any agreed to changes in pricing and/or performance standards
shall be effective at the start of each renewal term.
4.0 CONTRACT PERFORMANCE OVERSIGHT
------------------------------
4.1 Contract Performance Oversight
As soon as practicable, but no later than January 1, 1998, the
parties shall establish the Contract Performance Oversight
Committee (the "Oversight Committee), consisting of officers
and employees of both organizations. The Oversight Committee
will consist of one officer each from ETS and Sylvan, and such
other employees of ETS and Sylvan as may be considered
appropriate. The ETS officer will chair the Oversight
Committee and ETS will have final approval authority for all
decisions of the Oversight Committee. The Oversight COMMITTEE
SHALL HAVE the ability to appoint and dissolve subcommittees
it deems necessary to the accomplishment of its mission. The
Oversight Committee will be charged with guiding the operation
and development of THE CBT NETWORK and with approving and
monitoring overall compliance with each 18 month operation and
development plan for the CBT Network (the "CBT Network Plan").
Both parties agree that the Oversight Committee shall have the
final say with regard to all operational and strategic issues
arising in the delivery of Tests and Test related events as
governed by this Agreement.
4.2 CBT Network Plan
The CBT Network Plan will be a comprehensive plan addressing
both the expansion of the CBT Network and operational
guidelines for system development and network operational
requirements addressing ETS and its client needs. The CBT
Network Plan will address development of the CBT Network and
related activities for each 18 month period. This can include,
in addition to the expansion and operation of the CBT Network,
such areas as future product introduction, sales of ancillary
CBT products, new CBT academic program implementation and the
general advancement of CBT.
7
<PAGE>
The CBT Network Plan can, in the course of developing a system
to meet ETS's requirements for serving ETS's client base,
address design of systems and procedures, soffivare and hardware
upgrades, network upgrades, and system architecture in terms of
hardware, software, and manual processing functions, The CBT
Network Plan will include the requirements necessary for Sylvan
to service the ETS client base with due consideration of other
Sylvan clients using the same system. The CBT Network Plan will
recognize that (i) any system that serves multiple clients will
remain ultimately in the control of Sylvan and will address
ETS's requirements in the context of serving multiple clients
using the same systems and (ii) ETS will remain ultimately in
control of ETS-owned Eystems and systems used exclusively for
ETS clients.
The initial CBT Network Plan will be agreed to by the parties
within six (6) months of the Effective Date of this Agreement.
For subsequent plans the parties will begin the planning process
for each 18 month CBT Network Plan at least six (6) months
before the end of the previous plan. The plan for any subsequent
18 month period shall be completed at least sixty (60) days
prior to the end date of the prior plan. The Contract
Performance Oversight Committee will regularly review progress
against plan and budget.
4.3 Subcommittee
The Oversight Committee shall appoint a subcommittee consisting
of employees from both ETS and Sylvan that is charged with
preparing the CBT Network. Plan ("Subcommittee"). The
Subcommittee shall also propose to the Oversight Committee
amendments to the CBT Network Plan to accommodate the need for
changes to the CBT Network Plan that arise during the 18 month
period the CBT Network Plan is in effect. Either party may
submit a proposed change to the CBT Network Plan to the
Subcommittee. If the proposed change is minor the subcommittee
may authorize the change. If the proposed change is major, the
Subcommittee must submit the change to the Oversight Committee
which will approve or reject the change. The definition of minor
and ma or changes will be set forth in the first CBT NETWORK
PLAN, but the Oversight Committee with have ultimate authority
to determine whether a proposed change is minor or major in the
case of a disagreement. The Subcommittee must submit proposals
concerning major changes to the CBT Network Plan to the
Oversight Committee at least three (3) months before the
proposed change is to become operational. Each party will use
its best efforts to expediently approve changes proposed by the
other party.
4.4 Quality Control
ETS and Sylvan shall each make changes, upgrades, and
substitutions to the hardware and software in their respective
systems without the consent of the other party when such
changes, upgrades, and substitutions have no effect on the other
party; provided, however, that to protect against software and
hardware incompatibility the parties shall establish a Quality
Assurance Laboratory at a neutral location to test all such
changes before they are released as a production version that
may affect the CBT Network. This Quality Assurance Laboratory
will be designed to reproduce the typical high security testing
environment. Both parties may use the facility for quality
assurance that
8
<PAGE>
software and hardware changes will not degrade Test Center
performance. Sylvan will manage the Quality Assurance
Laboratory and maintain the quality assurance testing
schedule. Overall supervision of Sylvan's operation of the
Quality Assurance Laboratory will be provided by the Oversight
Committee. Sylvan will be responsible for the direct out-of-
pocket costs of equipping and operating the Quality Assurance
Laboratory, and ETS will reimburse Sylvan for one-half of such
costs.
When Sylvan and ETS desires changes, upgrades, and
substitutions to hardware or software and those changes will
affect the other party's testing needs, except for maintenance
repairs and corrections for software defects, the party making
the change will notify the other party with sufficient
information for the other party to evaluate the impact of the
change and will simultaneously or as close to the notice date
as possible begin testing the proposed change, upgrade and/or
substitution in the Quality Assurance Laboratory. The party
not submitting the change will approve or disapprove the
change based on the results obtained from testing at the
Quality Assurance Laboratory. In those circumstances where
testing is not possible in the Quality Assurance Laboratory,
the party not submitting the change will be provided fifty
(50) calendar days to approve or disapprove the changes. Any
approvals required by this paragraph shall not be
unreasonably withheld.
5.0 SYLVAN'S RESPONSIBILITIES
-------------------------
5. 1 Sylvan Facilities and Furniture
At each Test Center, Sylvan will provide a testing Room
convenient for access by the Examinees and suitable for secure
testing purposes, which meet the specifications contained in
Attachment #1 hereto "ETS Computer-Based Test Center
Specifications".
During the time that an ETS Test is being administered in the
Room, Sylvan shall not allow the Room, or any areas near the
Room, to be used in a manner which would be detrimental to a
standardized testing environment. At all other times, Sylvan
shall either lock the Room or ensure through appropriate
mechanisms that there is no access to the ETS Application
System, the Tests, or other ETS confidential and proprietary
materials. The Sylvan Test Centers located in the United
States and its territories are to conform to the standards set
forth in Attachment #2 hereto "The Americans with Disabilities
Act" of 1990. Sylvan shall use its best efforts to ensure that
Examinees tested in Test Centers in Canada and its territories
will be tested under conditions that conform as closely as
possible to the requirements of the Americans with
Disabilities Act. Sylvan and all Test Centers shall, in the
performance of this agreement, comply with all applicable U.S.
and Canadian federal, state, provincial, local and territorial
laws now and hereafter in effect.
5.2 Sylvan Equipment and Software
PCs and software as specified in Attachment #3 hereto "Sylvan
provided ComputerBased Test Center Hardware and Software" will
remain the property of Sylvan or its lessor(s) or licensor(s).
Sylvan agrees to assume responsibility for obtaining and
paying for software licenses (including but not limited to Ms
Windows and Novell Operating System) and maintenance of those
PCs and software and to keep them in working order for the
duration of this Agreement, and to assume the risk of loss for
those PCs and
9
<PAGE>
software. Except where deviations are permitted by ETS, all
Sylvan Test Center LAN Systems shall be consistent in all Test
Centers and in compliance with the specifications set forth in
Attachment # 1, as modified from time to time by ETS - The
parties will agree on the appropriate hardware and software
required for Test Centers in each 18 month CBT Network Plan. To
the extent that any hardware or software changcs are required
by any future CBT Network Plan, the costs of the change will be
shared between the parties in accordance with Attachment # 6
"Fees".
5.3 Sylvan Test Center Certification
Sylvan agrees that each new (including previously certified
Sylvan Test Centers when ownership of a Sylvan Test Center
changes) and/or relocated Sylvan Test Center will be required
to complete a facilities review, staff training and software
certification as part of a Test Center authorization process
prior to the delivery of ETS Tests and at other times when
significant software or operational changes occur.
Sylvan shall correct any condition where either security or
operating procedures have not been maintained In the event that
any such condition is not corrected by Sylvan within twenty-
five (25) days after Sylvan receives ETS's written notice of
need for remedial action, ETS reserves the right, at the
express written direction or approval of an ETS Executive Vice
President or ETS's President, to terminate immediately the
Sylvan Test Center's authorization to deliver ETS Tests, upon
the delivery of written notice of termination to Sylvan.
Where in ETS's sole opinion, the severity of the condition so
warrants, at the express written direction or approval of an
ETS Executive Vice President or ETS's President, ETS may
immediately terminate a Sylvan Test Center's authorization to
deliver ETS Tests, upon the delivery of written notice to
Sylvan.
5.4 Market Coverage/Additional Capacity
5.4.1 Sylvan and ETS will agree as part of each CBT Network
Plan on the designation of GEOGRAPHIC AREAS FOR MARKET
COVERAGE. Sylvan will at all times maintain a
SUFFICIENT NUMBER OF TEST CENTERS (STC's) in each
geographic area so as to MEET THE TEST AND TEST RELATED
event demand. Sylvan will be deemed to be providing
sufficient capacity if it meets the scheduling criteria
of placing 99% of all Examinees in a seat within 20
days of their requested date and within 50 miles of
their requested site as set forth in the Key
Performance Standards set forth in Attachment # 12
below. The parties recognize that in certain sparsely
populated locations it is impractical to maintain a
Test Center within fifty mile zones. Notwithstanding
the requirement set forth above, for those sparsely
populated areas, the parties shall, as part of the CBT
Network Plan, mutually agree on specific coverage
requirements for those areas.
Sylvan is not obligated to open a Test Center under
this paragraph or any other circumstance if the new
Test Center is within a fifty (50) mile radius of an
existing Sylvan Test Center, unless the existing Test
Center capacity is insufficient to serve the market
need as defined by Attachment # 12. Nothing
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<PAGE>
stated in this Paragraph 5.4.1 shall in any way be
deemed to limit ETS's rights set forth in Paragraphs
16.1.2 and 16.1.3.
5.4.2 Both parties recognize that ETS may require additional
Test Centers to be opened in certain locations. The
parties agree.
a. For each of the first five years that this Agreement
is in effect Sylvan will open up to ten (10) Test
Centers per year in any location designated by ETS at
no cost to ETS. These Test Centers may be selected in
addition to the mutually agreed network plan. Mobile
testing sites and institutional sites will be
considered adequate for purposes of this clause. Sylvan
will open any center designated under this paragraph
within ninety (90) days of receipt of ETS's written
request.
b. After the first ten (10) centers per year and for
Test Centers opened in year six of the Agreement and
beyond, Sylvan will open a Test Center in any location
designated by ETS provided ETS pays a fee to Sylvan for
the cost of opening the Test Center. The fee for
opening a Test Center under this paragraph 5.4.2 b.
will be agreed to by the parties at the time the center
is requested by ETS. Upon agreement by both parties on
a fee and the location of the center, Sylvan will open
the Test Center within ninety (90) days of agreement.
c. With regard to both Subparagraphs 5.4.2 a and b,
Test Centers opened pursuant to those subparagraphs are
in addition to any Test Centers Sylvan is required to
open to meet the market coverage obligations of
Paragraph 5.4. 1.
For both a and b above Sylvan is not obligated to open
a Test Center under this paragraph or any other
circumstance if the new Test Center is within a fifty
(50) mile radius of an existing Sylvan Test Center,
unless the existing Test Center capacity is
insufficient to serve the market need. If Sylvan fails
to advise ETS that it will open a requested Test Center
pursuant to a or b above, or if Sylvan does not open
the requested Test CENTER IN THE TIME PERIOD ALLOWED,
ETS MAY THEN PROCURE THE DESIRED TESTING CAPACITY
ITSELF OR THROUGH OTHER PARTIES.
5.4.3 ETS and Sylvan recognize that there are times when ETS
testing reaches a peak in event volume. ETS and Sylvan
agree that ETS can block purchase up to * of the
network under the following conditions:
ETS may purchase a maximum of * of the US/Canadian
domestic testing network capacity for any specified day
within the normal workweek of Monday to Saturday upon
six months notice to Sylvan. ETS must purchase the seat
time in contiguous blocks and may purchase up
to * of the hours available in the entire
testing network for the day or days selected. For
example, ETS will purchase up to * of the
morning time available on the day it chooses in every
test site in the network. The price will be the hourly
rate in effect for the network capacity in hours
purchased plus the unit cost multiplied by the number
of events actually administered. Sylvan will bill ETS
the hourly fees immediately upon ETS's exercise of its
option to purchase. ETS will pay the hourly fees at
least three months in advance of the date or dates
purchased. The
11
*Text omitted based upon request for confidential treatment.
<PAGE>
per event fees will be paid in the normal course of
payment after administration of the events. The
following conditions apply:
a. ETS must purchase the time at least six months in
advance so that Sylvan can block the schedule and
avoid disruption of other testing programs.
b. ETS may not buy more than five days in any month
and no more than one Saturday per month. Any Saturday
purchased is included in the maximum of five days per
month.
c. If seat capacity is not scheduled 4 8 hours in
advance, Sylvan may begin scheduling other Client
Candidates into the blocked hours. If Sylvan resells
the seat time during this 48 hour period, ETS shall be
refunded 100% of the per test hour fees it paid for
the seats Sylvan fills but will not be reimbursed for
any empty seats during the blocked hours. Regardless
of whether ETS uses the purchased seat, the seat is
resold within the 48 hours or the seat remains empty,
ETS may count the hours purchased as part of the
calculation of total test hours for calculation of
fees in accordance with Attachment # 6 "Fees".
At all times and in its sole discretion, Sylvan
reserves the right to refuse to sell block seat time.
ETS requests for block purchase will not be
unreasonably denied.
5.4.4 If a Test Center, that is necessary to provide
adequate capacity in a geographic area, should cease
operating or lose its authorization to administer
Tests, or if a Test Center, which Sylvan has
represented in writing to ETS as a Center to be
opened, does not in fact open, for whatever reason, by
the time represented by Sylvan, Sylvan will open and
establish an alternative Test Center within fifty (50)
miles of the represented Test Center location within
thirty (30) days following the closing or represented
opening date. If necessary to meet existing test
demand during the thirty day period, Sylvan will
schedule mobile testing events in the interim.
However, if a Test Center serving a market or area
should cease operating or lose its authorization to
administer Tests, AND THAT MARKET or area is also
served by another Test Center located within fifty
(50) miles of the Test Center that ceased operations,
Sylvan shall be required to open and establish an
alternative Test Center only if the market is
determined, under Paragraph 5.4.1 immediately above,
to be underserved after the closing of the Test
Center.
5.4.5 If an Examinee has paid a surcharge to take a
computer-based Test in a market or area served by a
Sylvan Test Center and is unable to do so due to a
lack of adequate capacity under the circumstances
described in Paragraphs 5.4.1 immediately above, and
ETS must refund such surcharge to the Examinee, Sylvan
shall be liable for and shall reimburse ETS for all of
such surcharges refunded.
5.4.6 In the event that Sylvan fails to comply with any of
the requirements contained in this Paragraph 5.4, ETS
shall then be free to procure the needed capacity
itself
12
<PAGE>
or through other parties, in accordance with the
requirements of Paragraph 16.1.2.
5.5 Training,, Staffing and Support
Sylvan will provide all training to ETS standards for Sylvan's
Computer Based Test Center staff, as well as assure that the
correct administrative procedures and schedules are followed in
accordance with the Configuration Control and Communications
Plan as required by Attachment # 10. ETS shall provide
certification for those individuals trained to deliver Tests
and who demonstrate appropriate ability to do so. Sylvan will
provide all staff required to administer the Tests in strict
accordance with the procedures detailed in the most current
Manual. The Manual will include procedures to operate the test
administration and delivery software, to complete security
identification of all Examinees, to operate the Test Center
while maintaining appropriate test, system, and test security,
to secure Examinees responses to appropriate ancillary
questionnaires, and to return all proprietary and confidential
materials to ETS.
Sylvan will also provide all communication activities, hotline
support, retraining, and other activities necessary to comply
with the Configuration Control and Communications Plan
developed in accordance with Attachment 10.
5.6 Honoraria
Where ETS is conducting validation research on Tests, and will
pay Examinees to take such Tests, ETS may elect to use Sylvan
Test Centers and request Sylvan to recruit Examinees from the
area served by the Test Centers, and using Sylvan checks, pay
to each Examinee who completes the Test the ETS specified
honorarium.
53 Scheduling and Administration
Sylvan will operate and staff the Sylvan CSCC described in
Paragraph 2.15.
Sylvan will schedule ETS Examinees in accordance with existing
Sylvan CSCC guidelines and, in accordance with ETS procedures,
administer the Tests to Examinees who have either preregistered
with ETS or completed the proper registration procedure
(including payment of the proper registration fees payable to
ETS). ETS Examinees will be provided at least as much lead time
to register and schedule as the Examinees for any other Client
Sylvan has that uses the same network of Test Centers that ETS
uses. On a Test by Test basis, ETS may direct that Examinees be
allowed to view their score onscreen upon their completion of
the Test.
In those instances when an Examinee seeks to take a Test at a
Test Center that is located within fifty (50) miles of an
institutional Test Center or an ETS Office where the Test may
also be taken, Sylvan will advise the Examinee of the
availability and location of said non- Sylvan facilities and
allow the Examinee to select the location of his/her choice,
based on the testing time slots available at the Test Centers
from which the Examinee may choose. Sylvan shall provide the
same level of service for scheduling ETS institutional and ETS
Office Test Centers.
13
<PAGE>
The Sylvan operating hours for the scheduling function shall be
the normal business hours local time for each Sylvan Test
Center. If a call is made to a Sylvan Test Center which is not
open at the time of the call, a recording device such as voice
mail or an answering machine will allow the caller the option to
leave a recorded message, inform the caller as to the hours of
operation for that Sylvan Test Center as well as for Sylvan's
CSCC, and provide the caller with the phone number of Sylvan's
CSCC.
5.8 Transmission of Data, Payments, Forms, and Other Information to
ETS
The CSCC will receive from the Sylvan Test Centers and transmit
directly to ETS all Examinee data in accordance with the
performance criteria attached as Attachment # 12 Payments,
forms, and materials will be returned to ETS on schedules to be
determined by each testing program as are included in the
Manual.
5.9 Recovery Standards
5.9.1 Applicable to Sylvan Test Centers
In the event that a Sylvan Test Center should be unable
to provide testing, the Sylvan Test Center shall
immediately notify the Sylvan CSCC. The CSCC will
notify and reschedule any Examinees affected using the
rescheduling standards set forth in Attachment # 12.
Sylvan will notify ETS as quickly as possible and in
the best manner possible. Sylvan will provide such
information as is reasonably required, including, but
not limited to, the names of affected Candidates.
Sylvan will make best efforts to provide information in
an adequate, timely fashion, with the understanding
that Candidate service will at all times be the top
priority. Sylvan shall use its best efforts to fix or
replace malfunctioning equipment and restore service at
the affected Test Center within 48 hours, so that
testing may resume no later than two Sylvan business
days after testing became unavailable. Sylvan will
automate the notice requirement in concert with its
revision of the registration and scheduling system. The
automation will provide ETS with read-only access to
the information on all Sylvan Test Centers that are
unable to deliver tests AND INFORMATION ON ALL affected
Examinees. This automation will take place not later
than eighteen (18) months after the Effective Date of
this Agreement.
For those programs that have testing window
restrictions, ETS will keep its Item Banks active for
two weeks past the scheduled testing window for the
purpose of offering retests and rescheduled appointment
times to any Examinees affected by a Test Center
outage.
5.9.2 Applicable to Sylvan Test Centers, Sylvan's Data
Communications Network, and Sylvan's Headquarters
In the event of a disaster, Sylvan agrees to
immediately notify ETS and to take the steps necessary
to implement Sylvan's Disaster Recovery Plan developed
in accordance with Attachment # 9.
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<PAGE>
5.10 Contract Compliance
Sylvan will comply with all requirements, covenants and
standards to be performed by Sylvan as contained in any
agreement that ETS shall enter into with a Testing Client
pursuant to Paragraph 6.1 for the provision of computer-based
test development and delivery services. Said agreements, and
all agreements subsequently entered into pursuant to Paragraph
6.1 are incorporated herein by reference for all purposes.
Where requirements, covenants and standards contained in an ETS
Testing Client contract are different from the service
offerings contained in this Agreement and Attachments, the
parties shall negotiate an equitable adjustment to price, time
of performance or other Sylvan obligations where the differing
requirements, covenants and standards cause an increase in
price, time of'performance or Sylvan's obligations.
5.11 Sylvan Services to ETS Test Centers
Sylvan will provide to ETS Test Centers all Sylvan developed
software required to offer ETS Tests and Sylvan will provide
scheduling services, and operate, monitor, and maintain the
data communications service as if they were Sylvan Test Centers
so long as the ETS Test Centers meet all the criteria required
for Sylvan Test Centers.
5.12 Software Downloads
All installation of ETS Proprietary Software and Testing Client
software in Test Centers shall be provided by Sylvan. Sylvan
will download all Item Banks, software upgrades and/or releases
and other data, by electronic means or other means approved by
ETS at the rate specified in Paragraph 7.0 and Attachment # 6.
Installation and downloading of software and data shall be in
accordance with the performance standards set forth in
Attachment # 12.
5.13 Additional Planning and Reporting Documents Required of Sylvan
5.13.1 Software Development'Plan
Sylvan will produce a software development plan in
accordance with the guidelines set forth in Attachment
# 7. Both parties will participate in planning
software development for all scheduling, registration
and administration systems CONNECTED WITH THE DELIVERY
OF TESTING SERVICES PURSUANT TO THIS Agreement and
such planning will include both Sy).van's and ETS's
software. This plan will address requirements for the
software systems, schedules for development, testing
and formal walk-throughs and technical reviews. The
plan will also include a process that addresses a
software revision release policy to prevent software
changes that impact the system from being released
without warning or time to performance test the
change. Again, systems which are used by multiple
clients will accept requirements from ETS but the
system and changes must remain in Sylvan's control.
This plan should include a Systems Testing and
Acceptance procedure as part of its overall software
development plan.
15
<PAGE>
5.13.2 Quality Control Plan
Sylvan will develop a Quality Control Plan in
accordance with the guidelines set forth in
Attachment # 8. Both parties will participate in
development of a Quality Control Plan addressing
quality issues for both organizations. In accordance
with Attachment # 8, the plan to be developed will
define the quality control procedures, approval
processes and times, and other quality issues.
5.13.3 Security/Contingency Plan
Sylvan will develop a Security/Contingency Plan. The
Plan will address those items delineated in
Attachment # 9.
5.13.4 Configuration Control and Communications Plan
Sylvan will develop a Configuration Control and
Communications Plan in accordance with the
requirements of Attachment # 10. Sylvan will prepare
a comprehensive Configuration Control and
Communications Plan which will include notification
procedures, escalation procedures, problem and
complaint recordation procedures, and change control
procedures. The plan will be used as the criteria for
all systems problem/changes notification and both
parties will use the plan's procedures.
5.13.5 Management Information Reports
Sylvan will supply as standard reports, at no
additional cost, the reports set forth in Attachment
# 11. ETS may order such additional custom reports as
it requires at a fixed fee for the report to be
agreed to by the parties at the time the report is
requested.
5.14 Performance Standards
SYLVAN WILL PERFORM ALL SERVICES REQUIRED UNDER this contract
in accordance with the Performance Standards set forth in
Attachment # 12.
6.0 ETS'S RESPONSIBILITIES
----------------------
6.1 Procurement and Testing Contracts
Where appropriate, ETS will use reasonable best efforts to
procure contracts with its Testing Clients and prospective
Testing Clients, for, among others, the express purpose of
causing those clients' paper and pencil tests, in whole or in
part, to be delivered or administered in the United States,
Canada, and their territories, through a computerbased format
in Sylvan Test Centers and ETS Test Centers.
16
<PAGE>
6.2 ETS Operated Test Centers
ETS will provide, operate, and maintain all of ETS's software
and all required hardware for the ETS Test Centers- that are
required for data communications and other Examinee services
at the ETS Test Centers.
ETS agrees to operate the ETS Test Centers so that the ETS
data communications and scheduler functions are compatible to
those at the Sylvan Test Centers.
6.3 Readers/Amanuenses
For all Tests ETS will be directly responsible for the
selection of persons qualified to serve as readers or
amanuenses in Specialized Testing delivery, and for scheduling
and compensating such persons for their services.
7.0 FEES, COMPENSATION, AND REIMBURSEMENTS
--------------------------------------
For the services to be provided hereunder by Sylvan, ETS agrees to pay
Sylvan the fees set forth in Attachment # 6.
7.1 No Charges for Aborted Tests Due to-Sylvan Failures
In the event that an Examinee is unable to complete a Test due
to a failure due to Sylvan, Sylvan will not bill ETS for such
time. Sylvan will retest the Examinee(s) as soon as possible,
at no additional charge to the Examinee(s).
7.2 All monetary amounts (whether stated in this Section or
elsewhere in this Agreement), prices, and payments are in
United States Dollars or Canadian Dollars.
7.3 Unless otherwise specified herein, all payments on Sylvan
invoices shall be due and payable to Sylvan within forty-five
(45) days after receipt of the invoices. Invoices paid after
the forty-five (45) day period will accrue interest at the
Citibank prime rate, adjusted as of the beginning of each
month, until payment is made.
8.0 ETS OWNERSHIP
-------------
8.1 Sylvan acknowledges and agrees that ETS holds all
proprietary rights, including, but not limited to, copyright,
trade secret, and patent, in the ETS-Owned Technologies and
Materials, which will be provided to and/or used by Sylvan to
perform its responsibilities under this Agreement. ETS-Owned
Technologies and Materials shall include any hardware or
software that Sylvan utilizes which is paid for by ETS.
8.2 Sylvan understands and agrees that, except for the right to
use the ETS-Owned Technologies and Materials, in accordance
with the terms of this Agreement, no proprietary rights in
the ETS-Owned Technologies and Materials are granted to
Sylvan. Sylvan agrees that it will not reproduce, modify,
distribute, disclose or create derivative works based upon
any of the ETS-owned software and other materials. Sylvan
also agrees that it will not reverse-engineer, decompile,
disassemble or in any way attempt to create source code from
the ETS Computer-Based Testing System.
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<PAGE>
8.3 Sylvan also understands and agrees that ETS, EDUCATIONAL
TESTING SERVICE, and the ETS logo are the registered
trademarks of ETS, registered in the U.S.A., and in many other
countries. Sylvan agrees not to use, reproduce, copy or create
materials bearing the ETS name or the ETS registered
trademarks for promotional or other purposes, without ETS's
advance written approval and review of such materials.
8.4 Sylvan agrees not to use the names of ETS Examinees except as
required to perform its duties under this Agreement. Provided
it first obtains written permission from E,rs, Sylvan may also
use the names of ETS Examinees to perform standard customer
satisfaction surveys or similar activities necessary to
further CBT, Sylvan performance of this Agreement or ETS
program goals in general. When ETS has given permission,
Sylvan may use the services of reputable third parties in
carrying out customer satisfaction surveys or similar
activities. Sylvan will guarantee that any third party engaged
by it to carry out customer satisfaction surveys or similar
activities will only use Examinee data in accordance with this
paragraph 8.4 and suitable restrictions will be placed in any
third party's contract with Sylvan. ETS permission shall not
be unreasonably withheld.
9.0 SYLVAN OWNERSHIP
----------------
9.1 ETS acknowledges and agrees that Sylvan holds all proprietary
rights, including, but not limited to, copyright, trade
secret, and patent, in the Sylvan-Owned Technologies and
Materials, which will be provided to and/or used by ETS to
perform its responsibilities under this Agreement.
Sylvan-Owned Technologies and Materials shall include any
hardware or software that ETS utilizes which is paid for by
Sylvan.
9.2 ETS understands and agrees that, except for the right to use
the Sylvan-Owned Technologies and Materials, in accordance
with the terms of this Agreement, no proprietary rights in the
Sylvan-Owned Technologies and Materials are granted to ETS.
ETS agrees that it will not reproduce, modify, distribute,
disclose or create dcrivative works based upon any of the
Sylvan-owned software and other materials. ETS also agrees
that it will not reverse-engineer, decompile, disassemble or
in any way attempt to CREATE SOURCE CODE FROM ANY SYLVAN OWNED
SOFTWARE.
9.3 ETS also understands and agrees that Sylvan, Sylvan Leaming
Systems, Sylvan Technology Center, Sylvan Prometric, and the
Sylvan logos are the registered trademarks of Sylvan,
registered in the U.S.A., and in many other countries. ETS
agrees not to use, reproduce, copy or create materials bearing
the Sylvan name or the Sylvan registered trademarks for
promotional or other purposes, without Sylvan's advance
written approval and review of such materials.
9.4 ETS acknowledges and agrees that Sylvan is the sole owner of
the Sylvan Equipment and Software used under this Agreement
and that ETS has no ownership right in the Sylvan Equipment
and Software, and the only right granted to ETS concerning the
Sylvan Equipment and Software, is the right to use the Sylvan
Equipment and Software in accordance with this Agreement. ETS
agrees, at the request of Sylvan, to affix in a prominent
position on each item of Sylvan Equipment and Software plates,
tags or other identifying labels supplied to ETS by Sylvan
showing ownership of the Sylvan
18
<PAGE>
Equipment and Software by Sylvan. Sylvan or its designee, will
have the right to inspect the Sylvan Equipment and Software
and ETS's maintenance records related thereto.
10.0 SYLVAN CONFIDENTIALITY AND SECURITY
-----------------------------------
Sylvan acknowledges and agrees that, during the term of this Agreement,
certain information which is proprietary and confidential to ETS shall
be disclosed to Sylvan and its employees.
Sylvan agrees that such ETS Proprietary and Confidential Information,
including Examinee data, is disclosed.to Sylvan in trust and that it
will not disclose the ETS Proprietary and Confidential Information to
any third party without ETS's prior written consent. When the ETS
Proprietary and Confidential Information is not in use, Sylvan agrees
to keep the ETS Proprietary and Confidential Information in a secure,
locked location.
Sylvan also agrees that it will disclose the ETS Proprietary and
Confidential Information only to employees of Sylvan with a need to
know such ETS Proprietary and Confidential Information.
Sylvan agrees that it will use the ETS Proprietary and Confidential
Information for the sole purpose of performing its responsibilities in
connection with this Agreement. Upon either the termination or
expiration of this Agreement, except as provided in Paragraph 17.1
below, Sylvan agrees to remove all copies of the ETS Computer-Based
-Testing System from its machinereadable media and shall return all
copies of the ETS Computer-Based Testing System and other ETS
Proprietary and Confidential Information to ETS.
In the event that Sylvan uses vendors for either equipment or software
installation and/or maintenance support, Sylvan agrees to have each
such vendor sign a non-disclosure agreement to be supplied by ETS
before permitting such vendors any access to the ETS Computer-Based
Testing System or the LAN-based PCs upon which the ETS Computer-Based
Testing System, Tests or Test data are stored.
11.0 ETS CONFIDENTIALITY AND SECURITY
--------------------------------
ETS acknowledges and agrees that, during the term of this Agreement,
certain information which is proprietary and confidential to Sylvan
shall be disclosed to ETS and its employees.
ETS agrees that such Sylvan Proprietary and Confidential Information is
disclosed to ETS in TRUST AND that it will not disclose the Sylvan
Proprietary and Confidential Information to any third party without
Sylvan's prior written consent. When the Sylvan Proprietary and
Confidential Information is not in use, ETS agrees to keep the Sylvan
Proprietary and Confidential Information in a secure, locked location.
ETS also agrees that it will disclose the Sylvan Proprietary and
Confidential Information only to employees of ETS with a need to know
such Sylvan Proprietary and Confidential Information.
ETS agrees that it will use the Sylvan Proprietary and Confidential
Information for the sole purpose of performing its responsibilities in
connection with this Agreement. Upon either the termination or
expiration of this Agreement, except as provided in Paragraph 17.1
below, ETS agrees to remove all copies of the Sylvan software system
from its machine-readable media and
19
<PAGE>
shall return all copies of the Sylvan software and other Sylvan
Proprietary and Confidential Information to Sylvan.
In the event that ETS uses vendors for perfon-nance of its obligations
under this Agreement, ETS agrees to have each such vendor sign a
nort-disclosure agreement agreeing to keep Sylvan Proprietary and
Confidential Information confidential.
12.0 ETS'S RIGHT TO AUDIT
--------------------
12.1 Security Audits
ETS reserves the right to send either announced or unannounced
observers to perform either security audits at Sylvan Test
Centers, Sylvan's corporate center, and other Sylvan sites or
back-up sites, at any time, to observe/monitor operations
during Test Center staff training sessions, administration of
the Tests, and pre-and post-testing periods, and to verify the
Test Centers' security arrangements. Upon arrival at a site,
the ETS observers will furnish proper identification.
ETS reserves the right to conduct audits of the security and
communications procedures and technologies used by Sylvan.
Changes in procedures and technologies that result from such
an audit will be implemented by Sylvan, provided that the
changes are reasonable and do not increase Sylvan's operating
costs.
12.2 Financial Audit
ETS reserves the right to perform financial audits, during
Sylvan's normal business hours, of Sylvan's financial records
to verify Examinee counts, cost plus a fee activities
undertaken by Sylvan on ETS's behalf, Sylvan's honoraria
payments to Examinees, and the integrity of any reporting
activity to ETS undertaken by Sylvan in accordance with this
Agreement. ETS's right to audit is limited as follows:
a. Financial audits shall be limited to once per year
b. The scope of the audit will be confined to examining
records related to Examinee counts, fixed fee activities
undertaken by Sylvan on ETS's behalf, honoraria payments, and
the integrity of the content of Sylvan's reporting to ETS.
c. Audits will be conducted by an independent, qualified
auditing body.
d. Audits will be limited to ten (10) business days in
duration.
e. Sylvan will be provided at least thirty (30) days written
notice before an audit takes place.
f. Routine audits may not occur at certain peak times such as
Sylvan year end or certain peak testing periods. These periods
include the months of January, June, July, October and
November each year.
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<PAGE>
g. Notwithstanding the foregoing, ETS shall have the right to
conduct one or more additional audits per year, upon no less
than 15 business days notice, as to any issue for which
credible allegations of error or false or mistaken reporting
come to the attention of ETS.
The parties agree to review these restrictions in the event of
any significant change in the ownership of Sylvan's stock.
13.0 INSURANCE
---------
During the term of this Agreement, Sylvan shall procure and maintain
with an insurance carrier comparably rated "A+" with a financial class
of " 15 " as determined by A.M. Best, the following kinds of insurance
coverage in the U.S., Canada, and their territories, with minimum
limits set forth below. It is agreed that local coverage secured will
be comparable to insurance requirements for the U.S. in all material
respects, and that ETS may waive or adjust certain of the coverage
requirements in Canada or U.S. or their territories.
<TABLE>
<CAPTION>
<S> <C> <C>
Line Perils Minimum Limits
---- ------ --------------
Worker's Compensation Statutory Worker's Statutory Coverage
Employers Bodily Injury by
Liability Accident $500,000.00 each accident
Bodily Injury by Disease $500,000.00 policy limit
Bodily Injury by Disease $500,000.00 each employee
a. Comprehensive $1,000,000
General General Liability Bodily Injury
Liability $1,000,000
--------- Property Damage
b. Premises-Operation $1,000,000
Bodily Injury
$1,000,000
Property Damage
c. Personal Injury $1,000,000
Bodily Injury
d. Contractual $1,000,000
Bodily Injury
$1,000,000
Property Damage
e. Independent $1,000,000
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Contractor's Bodily Injury
$1,000,000
Property Damage
f. Owners Protective $1,000,000
(Which is Hold Harmless) Bodily Injury
$1,000,000
Property Damage
g. Advertising Injury $1,000,000.00 each occurrence
Umbrella Excess of Primary $9,000,000
Liability Policies Listed Above Bodily Injury
$9,000,000
Property Damage
Blanket Crime Crime & Fidelity $1,000,000.00
Including Employee Dishonesty
All Risk Prove For ETS Hardware/Software Replacement Value
in Sylvan's Care, Custody
& Control
Miscellaneous Professional Errors or Omissions in $3,000,000.00
Liability Test Administration
Valuable Papers CBT Test Items $500,000.00
</TABLE>
Within thirty (30) days of Sylvan's signing of this Agreement, Sylvan
shall furnish ETS with insurance certificates evidencing the above
coverage and providing for at least fifteen (15) days prior written
notice of policy cancellation or modification.
The Certificates of Insurance shall name ETS as AN "ADDITIONAI INSURED"
TO REFLECT THE FACT THAT ETS has been named as an "Additional Insured"
on the policy.
The Insurance specified herein shall be minimum requirements, and
Sylvan is responsible for providing any additional insurance deemed
necessary to protect Sylvan's interests from other hazards or claims in
excess of the minimum coverage. The liability of Sylvan to ETS is not
limited to Sylvan's insurance coverage, nor is this clause intended to
limit Sylvan's liability in any way for other non-insurable risks.
14.0 HOLD HARMLESS
-------------
14.1 Sylvan will indemnify and hold ETS, its employees, guests, or
visitors, harmless from any and all loss, damage, injury, or
liability arising directly or indirectly out of Sylvan's
services to ETS, clients, or third parties, including
operation of Sylvan or ETS owned or leased equipment, acts of
omission, commission, or negligence of Sylvan's employees or
agents when engaged in carrying out its services, and the
failure to comply with applicable laws, regulations and
ordinances. Sylvan will assume responsibility and
22
<PAGE>
liability for ETS owned or leased equipment in its custody,
including maintenance of, taxation of, defects in, and the
return of same to the appropriate party.
14.2 ETS will indemnify and hold Sylvan harmless from any and all
loss, damage, injury or liability claims arising out of or in
connection with the content, character, and/or validity of
any'rest, and the test development and measurement provided
for any Testing Client, by ETS, or in connection with any ETS
developed Test administered by Sylvan under this Agreement.
15.0 NOTICES
-------
Any notices or other communications required or which may be given by
either party to the other party under this Agreement, shall be in
writing and may be sent by FAX, however the original shall be sent
either by ovemight courier express, with a verified receipt, registered
or certified mail, postage prepaid and addressed to and at the address
stated below or to such other address as the parties shall subsequently
designate to each other by notice given in accordance with this
Paragraph. Such notice shall be deemed to be sufficiently given when
the original is received by the receiving party.
FOR ETS: EDUCATIONAL TESTING SERVICE
Rosedale Road
Princeton, NJ 08541
ATTN: Russell W. Martin, Esq.
CC: Candus K. Hedberg
FORSYLVAN: SYLVAN LEARNING SYSTEMS, INC.
1000 Lancaster Street
Baltimore, MD 21202
ATTN: 0. Steven Jones General Cou-nsel
CC: Stephen A. Hoffman, President
Anthony R. Scicchitano, Manager, Contract Administration
Both parties shall name a single point of contact and two alternates
for all operational concerns. All notices related to software, test
site failures, registration issues and other day-to-day operational
concerns shall be given to these individuals or their altemates only.
The individuals designated as operational notice recipients and their
alternates will be designated in the Configuration Control and
Communications Plan.
16.0 COVENANTS PROVIDER
------------------
16.1 ETS'Covenants
16.1.1 Except in those instances contained in Paragraph
16.1.2 below, ETS agrees that Sylvan will be the -
exclusive provider of computerized commercial testing
capacity to ETS for all secure ETS testing programs,
including those testing services provided for Testing
Clients under Paragraph 6. 1, throughout the United
States, Canada and their territories.
23
<PAGE>
16.1.2 ETS may itself or through a party other than Sylvan,
establish or procure computerized testing capacity
pursuant to Paragraph 5.4; in addition ETS may itself,
or through a party other than Sylvan, establish or
procure computerized testing capacity in the following
instances:
a. at ETS Supported CBT Centers limited to Oakland,
California, Evanston Illinois, and Atlanta, Georgia;
b. at locations requested by an ETS Testing Client
after ETS, where appropriate, has proposed delivery of
that Testing Client's Test(s) in Sylvan Test Centers
and the Testing Client has declined due to conditions
or needs unique to that Testing Client;
C. subject to the restrictions set forth below, at
locations situated in facilities operated by public or
private primary and secondary schools, colleges,
universities and professional or graduate schools, to
be known as Institutional Sites;
provided, however, that in no event shall Sylvan's
portion of ETS's computer based testing volume, as
measured in Scheduled Hours of Service, in the Ufnited
States, Canada, and their territories (excluding
College Board tests) be less than fifty percent (50%).
Further, ETS shall cooperate with Sylvan's efforts to
establish Test Centers at such locations. ETS may open
and operate Institutional Sites only after the
Institutional Sites have rejected the installation of
a Sylvan Test Center due to conditions or needs unique
to that Institution.
16,13 Notwithstanding the above, if either party shall have
given notice of termination or notice of non-renewal,
as provided elsewhere herein, ETS shall be free to
establish Test Centers anywhere without restriction
and the fifty percent (50%) required minimum shall no
longer apply.
16.2 Sylvan's Covenants
16.2.1 Sylvan agrees that ETS will be the exclusive test
development provider for Sylvan and that Sylvan will
use its reasonable best efforts to procure test
development business for ETS. Should any third party
desire to utilize the services of Sylvan and its Test
Centers in the delivery of computerized tests, and
that third party desires or requires assessment
services or test development services, Sylvan agrees
to refer that third party to ETS for the provision of
such services, and to promptly advise ETS of those
circumstances, and ETS may or may not, as it shall
deem appropriate, pursue the opportunity to provide
such services. If the third party is unable to reach
an arrangement with ETS for such services, or if,
after Sylvan has advised ETS of Sylvan's contacts with
the third party, the third party affirmatively
declines Sylvan's proffer of ETS's services, Sylvan
shall not be restricted or prohibited in any instance,
except as provided in Paragraph 16.2.2 below, from
providing Sylvan services to the third party.
24
<PAGE>
16.2.2 Sylvan will not enter into any agreement with any
third party for the delivery of any computerized
test(s) which, when the agreement is entered into, is
in competition with any tests offered or being
discussed with third parties by ETS.
16.2.3 Sylvan will not distribute preparatory publications or
materials that compete with ETS materials offered by
Sylvan for ETS testing programs delivered by Sylvan.
16.3 Capabilities of the Parties
Neither Sylvan nor ETS will develop capabilities provided by
the other without first informing and consulting with the
party providing the services that would be duplicated.
17.0 TERMINATION
-----------
17.1 Termination for Cause
This Agreement may be- terminated by either party only for
good cause (good cause being a material breach of an
obligation or responsibility imposed upon a party by this
Agreement) and only after notice and opportunity to cure has
been given. With respect to a monetary default, the notice
must provide for an opportunity to cure of at least ten (10)
days following receipt of the notice. With respect to
non-monetary defaults, the notice must provide for an
opportunity to cure of at least thirty (30) days following
receipt of the notice. If the party receiving the notice has
not cured the breach before the cure date stated in the
notice, only then may the party giving the notice terminate
this Agreement by giving the party in breach a written
termination notice, stating the date on which the termination
is to be effective.
In the event of termination by ETS for cause for a material
breach of this Agreement, Sylvan shall provide to ETS a
limited term non-exclusive software license and license for
the CBT source code for a term of one (1) year from the date
of termination. ETS may use said licensed software only for
the provision of services to Testing Clients with whom ETS was
negotiating a contract for CBT distribution, responding to
solicitations for CBT distribution or PROVIDING CBT
DISTRIBUTION THROUGH THE NETWORK. The licenses will be
provided at no cost. ETS shall not sublicense the Sylvan
software or source code nor may any third parties use the
software or source code. Only that Sylvan software necessary
for the delivery of ETS's Tests formerly delivered by Sylvan
will be licensed.
In the event of termination by Sylvan for cause for a material
breach of this Agreement, ETS shall provide to Sylvan a
limited term non-exclusive software license and license for
the CBT source code for a term of one (1) year from the date
of termination. Sylvan may use said licensed software only for
the provision of services to existing Sylvan clients with whom
Sylvan was negotiating a contract for CBT distribution,
responding to solicitations for CBT distribution or providing
CBT distribution through the network. The licenses will be
provided at no cost. Sylvan shall sublicense only its network
of test delivery centers and shall engage no other third
parties or subcontractors that will have access to the
licensed materials other than Test Centers. Only that software
necessary to the delivery of Sylvan's client's tests will be
licensed.
25
<PAGE>
17.2 Sylvan's Covenant Not to Compete
17.2.1 Sylvan covenants and agrees that during the tem-i of
this Agreement and, if this Agreement is terminated in
accordance with the provisions of Paragraph 17. 1, or
not renewed in accordance with Paragraph 3.0, then in
either event, Sylvan for a period of two (2) years
after such termination, will not engage as an owner,
operator or in any other capacity, in a business
offering computer-based testing services or facilities
to any entity, person, company or organization that is
or has been at any time during the term of this
Agreement a Testing Client, or offers a test or tests
that are in direct competition with any Tests offered
by ETS or a Testing Client. Sylvan acknowledges that
ETS's remedy at law for Sylvan's breach of this
Paragraph 17.2 would be inadequate and that,
accordingly, in such event, ETS shall be entitled to
immediate injunctive relief to enforce the terms of
this Paragraph.
17.2.2 Sylvan will require that all of its officers, and any
key employees who routinely access and use ETS
Proprietary information and who are participants in
any stock option plan maintained by Sylvan, execute a
non-compete agreement containing a covenant that
prohibits the officer or key employee, during the te
of his employment-and for a period of two (2) years
after termination of employment, from engaging in, as
an owner, employee, operator or in any other capacity,
a business offering computer-based testing services or
facilities to any entity, person, company or
organization that is or has been at any time during
the term of employment a Testing Client, or offers a
test or tests that are in direct competition with any
Tests offered by ETS or a Testing Client. Further, the
noncompete agreement will contain a provision deeming
ETS to be a third-party beneficiary of such agreement,
and entitling ETS to such rights and remedies of
enforcement as are available at law or in equity,
including injunctive relief.
17.3 Force Majeure
If, as a result of an occurrence not occasioned by the conduct
of either party hereto such as an act of god, act or failure to
act by a third party, weather, riot, civil commotion,
intervention of public authorities, work stoppage, interruption
of utility service, or any other comparable event (an
"Extraordinary Event"), a party is temporarily unable to
perform, in whole or in part, any of that party's obligations
under this Agreement, that party's obligation to perform shall
be correspondingly suspended or delayed, as the case may be, so
long as the Extraordinary Event shall exist. Within seventy-two
(72) hours after the Extraordinary Event no longer exists, the
affected party shall submit a plan to the other party
describing how performance will be restored or achieved. Within
fortyeight (48) hours of receipt of the plan, the other party
shall respond with any objections it may have to such plan and
thereafter the parties shall attempt to negotiate in good faith
any appropriate changes to the plan.
Notwithstanding the above, which is applicable to Sylvan as an
entity and not to individual Sylvan Test Centers, if ten
percent (10%) or twenty-five (25) Sylvan Test Centers,
whichever is less, of the Sylvan Test Centers should become
unavailable for testing as a result of a force majeure event,
for a period of ten (10) or more days, ETS shall have the right
to either establish its own Test Centers or to contract with a
third
26
<PAGE>
party to establish Test Centers in the areas where the Sylvan
Test Centers are unavailable for testing because of the force
majeure.
17.4 Changes in Sylvan's Business or Financial Condition
Notwithstanding anything contained in this Agreement to the
contrary, ET'S reserves the right to treat as good cause for
termination of this Agreement under Paragraph 17.1 above, any
of the following events:
a. Sale of Sylvan's Assets:
The sale of all or substantial ly'all of Sylvan's
assets to a single purchaser or to a group of
purchasers;
b. Control of Sylvan's Voting Stock:
The acquisition or accumulated ownership (by virtue of
Sylvan's repurchase of its shares, or by merger,
consolidation or acquisition, etc.) of more than 50%
of Sylvan's outstanding voting corporate shares by any
single person or entity, or by a group of affiliated
persons or entities as defined by Rule 12b-2 of the
rules of the Securities and Exchange Commission;
C. Sylvan's Insolvency or Bankruptcy:
1) if Sylvan shall be declared either insolvent or
bankrupt;
2) if a petition is filled in any court and not
dismissed in sixty (60) days to declare Sylvan
bankrupt or for a reorganization under the Bankruptcy
Law or any similar statute; or
3) if a Trustee in Bankruptcy or a Receiver or similar
entity is appointed for Sylvan; or
d. Termination of Sylvan's Business:
Sylvan's bona fide decision to terminate its business
and liquidate its assets.
18.0 PROHIBITION AGAINST COACHING
----------------------------
During the term of this Agreement and for a period of 180 days after
the termination or completion of this Agreement:
a. Neither Sylvan, nor any Sylvan Test Center (whether owned, leased,
or franchised), nor any employee or independent contractor of Sylvan or
any Sylvan Test Center, will develop or offer any coaching advice,
assistance, service, software, or materials (including those developed
by any third party) for the Tests being administered under this
Agreement; and
27
<PAGE>
b. Neither Sylvan nor any Sylvan Test Center (whether owned, leased, or
franchised), will sublet, rent to, or make space available to any third
party that offers coaching advice, assistance, service, software, or
materials, for the Tests being administered under this Agreement.
Each Sylvan Test Center staff member administering the Tests covered by
this Agreement shall be required to sign with Sylvan an ETS provided
agreement, stating that they agree to be bound by the terms of this
provision and Sylvan will take all steps necessary to enforce said
agreements.
19.0 CONFLICT OF INTEREST
--------------------
No Sylvan Test Center staff administering the Tests covered by this
Agreement, shall take a Test covered by this Agreement for a period of
one hundred eighty (180) days following their last involvement in any
aspect of the administration of such a test.
No Sylvan Test Center staff shall handle materials for the
administration of or administer a Test covered by this Agreement, for a
period of ninety (90) days prior to the date of a Test administration
that involves either a household or immediate family member.
Each Sylvan Test Center staff member administering the Tests covered by
this Agreement shall be required to sign with Sylvan an ETS provided
agreement, stating that they agree to be bound by the terms of this
provision and Sylvan will take all steps necessary to enforce said
agreements.
20.0 USE OF NAMES,LOGOS, AND TRADEMARKS
----------------------------------
20.1 ETS shall not use Sylvan's name, logos, or trademarks,
without the prior written consent of Sylvan.
20.2 Sylvan shall not use ETS's name, logos, or trademarks,
without the prior written consent of ETS.
21.0 STANDARDS OF CONDUCT
--------------------
It is the policy of ETS not to discriminate on the basis of race,
ethnic background, creed, age, or sex. Accordingly, by executing this
Agreement, Sylvan agrees not to permit any of its agents or employees
to behave, either through speech or conduct, in a manner that could
reasonably be construed as offensive to members of any such group or
otherwise to be in violation of the aforesaid policy.
22.0 PROHIBITION ON GIFTS AND GRATUITIES
-----------------------------------
Sylvan warrants that it has not offered or given, and will not offer or
give to any employee, or representative, or immediate family member of
an ETS employee a payment, gratuity, personal service, entertainment or
gift, other than novelty advertising items (i.e., pencils, pens,
clipboards, cups) of a nominal value. Any such offerings may be
construed as Sylvan's attempt to improperly influence decisions at ETS,
and Sylvan agrees that ETS may, by written notice to Sylvan, terminate
this Agreement if it is found by ETS that Sylvan has violated this
provision. In the event this Agreement is terminated by ETS pursuant to
this provision, ETS shall be
28
<PAGE>
entitled, in addition to any other rights and remedies, to recover or
withhold the amount of the cost incurred by Sylvan in providing such
gratuities.
23.0 EQUAL OPPORTUNITY
-----------------
Sylvan shall comply with all applicable provisions of Section 202 of
Executive Order 11246 (Equal Employment Opportunity) dated 9/24/65 as
subsequently amended.
24.0 FAIR LABOR STANDARDS ACT
------------------------
Sylvan shall comply with all applicable requirements of the Fair Labor
Standards Act of 1938, as amended.
25.0 COMPLIANCE WITH LAW
-------------------
Sylvan warrants that in the performance of this Agreement, it has
complied and will comply with all applicable U.S. and Canadian federal,
provincial, state, and local laws now and hereafter in effect.
26.0 LAWS GOVERNING
--------------
This Agreement shall be governed by the laws of the State of New
Jersey, now and hereafter in effect.
27.0 INDEPENDENT CONTRACTOR
----------------------
Under this agreement, Sylvan agrees that it will perform as an
independent contractor, and not an agent or employee of ETS.
Nothing in this Agreement shall be construed as. having established a
joint venture or a partnership between the parties.
28.0 ASSIGNMENT
----------
Sylvan agrees not to assign this Agreement, or any part thereof, or any
responsibility thereunder, without the prior written approval of ETS.
Any such request for approval of a proposed assignment, shall be
accompanied by a copy of the proposed contract between Sylvan and the
proposed ass ignee/subcontractor.
Notwithstanding the above, for those Sylvan Test Centers that are not
owned by Sylvan, but operate under a separate agreement with Sylvan,
Sylvan agrees to require the owner(s) of each such Test Center to sign
with Sylvan a written agreement containing the Flow Down Clauses,
attached hereto as Attachment #5, and, upon request, to send to ETS a
signed copy of each such agreement. Sylvan will take all necessary
steps to enforce said agreements.
29.0 SURVIVAL BEYOND COMPLETION
--------------------------
It is mutually agreed that Paragraphs 8.0 and 9.0, Ownership; 10.0 and
11.0, Confidentiality and Security; 12.0, ETS's Right to Audit; 14.0,
Hold Harmless; 17.2, Sylvan's Covenant Not to
29
<PAGE>
Compete; 18.0, Prohibition Against Coaching; 19.0, Conflict of
Interest; and 20.0 Use of Names, Logos, and Trademarks, shall survive
any termination or completion of this Agreement.
30.0 MODIFICATIONS
-------------
This Agreement can be modified only by a writing signed by both
parties.
31.0 ENTIRE AGREEMENT
----------------
This Agreement, including the Attachments, listed herein and made a
part hereof, constitutes and expresses the entire Agreement and
understanding between the parties hereto in reference to all the
matters herein referred to, all previous discussions, promises,
representations, and understandings relative thereto, if any, had
between the parties hereto, being herein merged.
<TABLE>
<CAPTION>
<S> <C>
Attachment Attachment
Number Title
I . ETS Computer-Based Test Center Specifications
2. The American With Disabilities Act of 1990
3. Sylvan Provided Computer-Based Test Center Hardware and Software
4. ETS Computer Based Test-Center Administrator's Manual
5. Flow Down Clauses
6. Fees
7. Software Development Plan Requirements
8. Quality Control Plan Requirements
9. Security/Contingency Plan Requirements
10. Configuration Control and Communication Plan Requirements
11. Sylvan Standard Reports
12. Performance Standards
13. ETS Testing Programs
</TABLE>
32.0 TERMINATION OF PRIOR AGREEMENT
------------------------------
It is mutually agreed that this Agreement will terminate the agreement
between the parties dated September 1, 1993, and all amendments
thereto, as of the Effective Date of this Agreement.
33.0 COUNTERPARTS
------------
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original and which together shall constitute one and
the same instrument.
30
<PAGE>
IN WITNESS WHEREOF, the parties hereunder have executed this Agreement
effective as of the day and year first above written.
SYLVAN LEARNING SYSTEMS, INC. EDUCATIONAL TESTING SERVICE
By: /s/ R.C. Hoehn-Saric By: /s/ Ernest J. Anastasio
---------------------- ---------------------------
Name: R.C. Hoehn-Saric Name: /s/ Ernest J. Anastasio
--------------------------- --------------------------
Title: CEO Title: /s/ Executive Vice President
-------------- -----------------------------
Date: 12/12/97 Date: 12/12/97
-------------- --------------
Attest: /s/ Janet L. Bowker Attest: /s/ Bruce Davis
--------------------------- -----------------------
Name: /s/ Janet L. Bowker Name: /s/ Bruce Davis
------------------------- ---------------------
Title: /s/ Vice President Title: /s/ Vice President
------------------------- -------------------------
Date: 12/12/97 Date: 12/12/97
-------------- ---------------
31
<PAGE>
ATTACHMENT 1
ETS TEST CENTER SPECIFICATIONS
PC Network Server
*
Administrative PC
Same specifications as the test station PCs with the following exception:
A Digital Image capture card is required
Ancillary Equipment/Materials
- the server and Netware
- an Administrative PC
- a Hayes Accura External Modem
- a laser printer
- a video camera, monitor and tripod for use in taking digitized examinee
pictures
- a video camera with sound pickup, monitor and a VCR to record sessions
- a metal cabinet to house the server, bolted to the floor, with an
internal fan and a heavy duty lock.
- parabolic mirrors to facilitate proctoring
- lockers for examinees to store personal belongings before testing
- cabling and connectors for the network
- network cards for the testing PCs
- bankers lamps
- earplugs
- laser cartridges
- video cassette tapes
Testing Stations:
Stations will include a desk or PC table of 48"x 30" surrounded on three
sides by freestanding privacy panels. The back panel is a MINIMUM OF 48"
wide, 48"-54" high, and 1 "-2.5" deep. The two side panels are 43" wide,
48"-54" high, and 1 "-2.5" deep. At least one adjustable height
workstation is to be provided at each CBT site and one additional
adjustable height workstation for each five incremental workstations
(i.e., 9 workstations - I adjustable height workstation, 10 workstations -
2 height-adjustable workstations.) A height-adjustable cushioned
upholstered chair with padded arms and wheels.
*Text omitted based upon request for confidential treatment.
<PAGE>
ATTACHMENT 3
*
*Text omitted based upon request for confidential treatment.
<PAGE>
ATTACHMENT 5
------------
FLOW DOWN CLAUSES
The following provisions shall appear in any agreement entered into between
Sylvan and a third party operator (referenced in the provisions below as
"Agent") of a Test Center offering any Test Administered on Behalf of ETS:
A. AGENT'S RESPONSIBILITIES
1. Agent Facilities
At each Test Center, Agent will provide a testing Room convenient for
access by the Examinees and suitable for secure testing purposes, which
meet the specifications required by Sylvan.
During the time that an ETS Test is being administered in the Room,
Agent shall not allow the Room, or any areas near the Room, to be used
in a manner which would be detrimental to a standardized testing
environment. At all other times, Agent shall either lock the Room or
ensure through appropriate mechanisms that there is no access to the
ETS Application System, the Tests, or other ETS confidential and
proprietary materials.
The Test Center shall conform to the standards set forth in "The
Americans with Disabilities Act" of 1990, and all applicable federal,
state, and local laws, regulations, and ordinances, now or here after
in effect.
2. Security Measures
Agent agrees to operate an ETS owned software security mechanism which
will be used to monitor and maintain the security of all ETS Tests,
Test items and the ETS Application System software installed on the
Test Center's LAN-based PCs. ETS reserves the right to review and
approve the software security mechanism to be used by Agent at any time
prior to or after the experimental or operational administrations of
the Tests.
Page 1 of 9
<PAGE>
3. Training, Staffing and Support
Agent will provide all training to ETS standards for Agent's Computer
Based Test Center staff, as well as assure that the correct
administrative procedures and schedules are followed. Agent will
communicate at least quarterly in writing to Sylvan about progress and
problems during the course of this Agreement. Agent will provide all
staff required to administer the Tests in strict accordance with the
procedures detailed in the most current Manual.
4. Honoraria
Where ETS is conducting validation research on Tests, and will pay
Examinees to take such Tests, Agent will recruit Examinees from the
area served by the Agent's Test Center, and using Sylvan's checks, pay
to each Examinee who completes the Test the ETS specified honorarium.
5. Transmission of Data, Payments, Forms, and Other Information to
Sylvan/ETS
The Agent will transmit directly to Sylvan or ETS all Examinee data
(Examinee performance records and images) according to schedules
established by Sylvan. All remaining Examinee data files, supervisor
reports, security logs, related Test Center data and an accounting of
any honoraria paid will be transmitted to Sylvan or ETS at the end of
every day the Agent's Test Center operates.
6. Recovery Standards
In the event that Agent's Test Center should be unable to provide
testing, Agent shall immediately notify Sylvan and all registered
Examinees so affected.
Agent shall fix or replace malfunctioning equipment and restore service
at the Test Center within 24 hours, so that testing may resume no later
than one business day after testing became unavailable.
Should the Test Center still be unable to provide testing after one
business day, Agent shall immediately notify Sylvan and follow Sylvan's
instructions concerning the rescheduling of Examinees.
Page 2 of 9
<PAGE>
B. OWNERSHIP
Agent acknowledges and agrees that ETS holds all proprietary rights,
including, but not limited to, copyright, trade secret, and patent, in the
Ets-Owned Technologies and Materials, which will be provided to and/or used
by Agent to perform its responsibilities.
Agent understands and agrees that, except for the right to use the
ETS-Owned Technologies and Materials, in accordance with the terms of this
Agreement, no proprietary rights in the ETS-Owned Technologies and
Materials are granted to Agent. Agent agrees that it will not reproduce,
modify, distribute, disclose or create derivative works based upon any of
the ETS-owned software and other materials. Agent also agrees that it will
not reverse-engineer, decompile, disassemble or in any way attempt to
create source code from the ETS Computer-Based Testing System.
Agent also understands and agrees that the registered trademarks of ETS,
registered in the U.S.A. and in many other countries, are owned by ETS, and
that Agent shall have no interest or ownership in same. Agent agrees not to
use, reproduce, copy or create materials bearing the ETS name or the ETS
registered trademarks for promotional or other purposes, without ETS'
advance written approval and review of such materials.
C. CONFIDENTIALITY AND SECURITY
Agent acknowledges and agrees that, during the term of this Agreement,
certain information which is proprietary and confidential to ETS shall be
disclosed to Agent and its employees.
Agent agrees that such ETS Proprietary and Confidential Information,
including Examinee data, is disclosed to Agent in trust and that it will
not disclose the ETS Proprietary and Confidential Information to any third
party without ETS' prior written consent. When the ETS Proprietary and
Confidential Information is not in use, Agent agrees to keep the ETS
Proprietary and Confidential Information in a secure, locked location.
Agent also agrees that it will disclose the ETS Proprietary and
Confidential Information only to employees of Agent with a need to know
such ETS Proprietary and Confidential Information.
Page 3 of 9
<PAGE>
Agent agrees that it will use the ETS Proprietary and Confidential
Information for the sole purpose of performing its responsibilities in
connection with this Agreement. Upon either the termination or expiration
of this Agreement, Agent agrees to remove all copies of the ETS
Computer-Based Testing System from its machine-readable media and shall
return all copies of the ETS Computer-Based Testing System and other ETS
Proprietary and Confidential Information to ETS.
D. ETS'S RIGHT TO AUDIT
1. Technical and Security Audits
ETS reserves the right to send either announced or unannounced
observers to perform either technical and/or security audits at Agent's
Test Center, at any time, to observe/monitor operations during Test
Center staff training sessions, administration of the Tests, and pre-
and post-testing periods, and to verify the Test Centers' security
arrangements. Upon arrival at a site, the ETS observers will furnish
proper identification.
2. Financial Audit
ETS reserves the right to perform financial audits, during Agent's
normal business hours, of Agent's financial records to verify Examinee
counts and Agent's honoraria payments to Examinees.
E. INSURANCE
During the term of this Agreement, Agent agrees to procure and maintain
with an insurance carrier rated "A+" with a financial class of "15" as
determined by A.M. Best, the following kinds of insurance with minimum
limits set forth below:
Line Perils Minimum Limits
---- ------ --------------
Worker's Statutory Worker's Compensation-
Compensation Compensation Statutory Coverage
and Employers
Liability
General a. Comprehensive $1,000,000
Liability General Liability Bodily Injury
$1,000,000
Property Damage
Page 4 of 9
<PAGE>
b. Premises-Operation $1,000,000
Bodily Injury
$1,000,000
Property Damage
c. Personal Injury $1,000,000
Bodily Injury
d. Contractual $1,000,000
Bodily Injury
$1,000,000
Property Damage
e. Independent $1,000,000
Contractor's Bodily Injury
$1,000,000
Property Damage
f. Owners Protective $1,000,000
(which is Hold Harmless) Bodily Injury
$1,000,000
Property Damage
Umbrella Excess of Primary $4,000,000
Liability Policies Listed Above until December 31, 1995
and $9,000,000
thereafter
Bodily Injury
$4,000,000
until December 31,
1995 and $9,000,000
thereafter
Property Damage
Within thirty (30) days of Agent's signing of this Agreement, Agent shall
furnish Sylvan with insurance certificates evidencing the above coverage
and providing for at least fifteen (15) days prior written notice of policy
cancellation or modification.
The Certificates of Insurance shall name ETS as an "Additional Insured" to
reflect the fact that ETS has been named as an "additional insured" on the
policy.
Page 5 of 9
<PAGE>
The Insurance specified herein shall be minimum requirements, and Agent is
responsible for providing any additional insurance deemed necessary to
protect Agent's insurance coverage, nor is this clause intended to limit
Agent's interests from other hazards or claims in excess of the minimum
coverage. The liability of Agent to ETS is not limited to Agent's insurance
coverage, nor is this clause intended to limit Agent's liability in any way
for other non-insurable risks.
F. HOLD HARMLESS
Agent will indemnify and hold ETS, its employees, guests, or visitors,
harmless from any and all loss, damage, injury, or liability arising
directly or indirectly out of Agent's services to ETS, clients, or third
parties, including operation of Agent or ETS owned or leased equipment,
acts of omission, commission, or negligence of Agent's employees or agents
when engaged in carrying out its services, and the failure to comply with
applicable laws, regulations and ordinances.
G. COVENANT NOT TO COMPETE
Agent covenants and agrees that during the term of this Agreement and, if
this Agreement is terminated or not renewed, Agent, for a period of two (2)
years after such termination, will not engage as an owner, operator or in
any other capacity, in a business offering computer-based testing services
or facilities to any entity, person, company or organization that is or has
been at any time during the term of this Agreement a Testing Client, or
offers a test or tests that are in direct competition with any Tests
offered by ETS.
H. PROHIBITION AGAINST COACHING
During the term of this Agreement and for a period of 180 days after the
termination or completion of this Agreement:
1. Neither Agent, nor any employee or independent contractor of Agent,
will develop or offer any coaching advice, assistance, service,
software, or materials (including those developed by any third party)
for the Tests being administered under this Agreement; and
Page 6 of 9
<PAGE>
2. Agent agrees not to sublet, rent to, or make space available to any
third party that offers coaching advice, assistance, service, software,
or materials, for the Tests being administered under this Agreement.
Each Agent Test Center staff member administering the Tests covered by
this Agreement may be required to sign with Agent an ETS provided
agreement, stating that they agree to be bound by the terms of this
provision.
I. CONFLICT OF INTEREST
No Agent Test Center staff administering the Tests covered by this
Agreement, shall take a Test covered by this Agreement for a period of one
hundred eighty (180) days following their last involvement in any aspect of
the administration of such a test.
No Agent Test Center staff shall handle materials for the administration of
or administer a Test covered by this Agreement, for a period of ninety (90)
days prior to the date of a Test administration that involves either a
household or immediate family member.
Each Agent Test Center staff member administering the Tests covered by this
Agreement shall be required to sign with Agent an ETS provided agreement,
stating that they agree to be bound by the terms of this provision and
Agent will take all steps necessary to enforce said agreements.
J. STANDARDS OF CONDUCT
It is the policy of ETS not to discriminate on the basis of race, ethnic
background, creed, age, or sex. By executing this Agreement, Agent agrees
not to permit any of its agents or employees to behave, either through
speech or conduct, in a manner that could reasonably be construed as
offensive to members of any such group or otherwise to be in violation of
the aforesaid policy.
Page 7 of 9
<PAGE>
K. PROHIBITION ON GIFTS AND GRATUITIES
Agent warrants that it has not offered or given, and will not offer or give
to any employee, or representative, or immediate family member of an ETS
employee a payment, gratuity, personal service, entertainment or gift,
other than novelty advertising items (i.e., pencils, pens, clipboards,
cups) of a nominal value. Any such offerings may be construed as Agent's
attempt to improperly influence decisions at ETS, and Agent agrees that
Sylvan may, by written notice to Agent, terminate this Agreement.
L. EQUAL OPPORTUNITY
The provisions of Section 202 of Executive Order 11246 (Equal Employment
Opportunity) dated 9/24/65 and subsequently amended, are incorporated
herein by reference and shall be applicable to this Agreement unless this
Agreement is exempted under rules, regulations, or order of the Secretary
of Labor.
M. FAIR LABOR STANDARDS ACT
Agent warrants that by accepting this Agreement, that for the performance
of the services specified therein, it has complied and will comply with all
requirements of the Fair Labor Standards Act of 1938, as amended.
N. COMPLIANCE WITH LAW
Agent warrants that in the performance of this Agreement, it will comply
with all applicable federal, state, and local laws now and hereafter in
effect.
O. INDEPENDENT CONTRACTOR
Under this agreement, Agent agrees that it will perform as an independent
contractor, and not an agent or employee or ETS.
P. ASSIGNMENT
Agent agrees not to assign this Agreement, or any part thereof, or any
responsibility thereunder, without the prior written approval of Sylvan.
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<PAGE>
Q. SURVIVAL BEYOND COMPLETION
It is mutually agreed that paragraphs B. Ownership, C. Confidentiality and
Security, D. ETS's Right to Audit, F. Hold Harmless Agreement, G. Covenant Not
to Compete, H. Prohibition Against Coaching, and I. Conflict of Interest shall
survive any termination/completion of this Agreement.
Page 9 of 9
<PAGE>
ATTACHMENT 6
FEES, COMPENSATION AND REIMBURSEMENTS
This Attachment 6 is effective as of the Effective Date of the
Agreement.
The parties agree to the following:
1) SERVICE TYPE DEFINITIONS
------------------------
Non-Testing Services: Services provided that are not Tests such as:
Familiarity and practice products
Pretests and other research or test
development-oriented activities
Test Disclosure
Basic Testing Services:
No eligibility checks
Standard check-in procedure with no photo
id
No additional test taking materials
The normal seating time and distance
requirements of 50 miles and 20
days do not apply. Candidates
will be lowest priority for
scheduling and NRC handling and
may be scheduled up to 45 days
from registration call. Call
center metrics for hold times
do not apply. Sylvan may use a
separate NRC scheduling method,
including the exclusive use of
telephony systems at Sylvan's
discretion. Seat times may not
be reserved for non-testing
events during peak times.
Any event which includes any single service level characteristic
higher than outlined above will automatically advance to either Standard
Testing or Expanded Testing.
Standard Testing: Eligibility checks or eligibility files
are present in a mutually
agreed format that speeds the
registration process.
Standard check-in procedure, including
photo, 2 standard Ids
Score reports on screen
No additional test taking materials
Testing available at least
monthly and substantially the
entire month (substantially
being defined as at least
twenty (20) days of testing per
month), continuous testing
availability of the Item Banks
1
<PAGE>
Review and challenge can occur at same
time as operational testing*
Any event which includes any single service level characteristic
higher than outlined in Standard Services above will automatically advance to
Expanded Testing.
* This refers to the ability of a Candidate to review his/her test and
challenge questions. To the extent this occurs immediately after the
examination, for example the review and challenge is completed within 15 to
20 minutes of completion of the examination, and is limited to a written
challenge without discussion or interaction with the Client, this is included
with the Standard Service. If review and challenge must occur with the Client
present, completion of review and challenge takes more than 20 minutes after
the examination is completed, will prove disruptive to the test environment
or requires the test center to be closed to all but the Candidate, this will
fall within the Expanded Testing category.
Expanded Testing: Eligibility files are not in mutually agreed format
that speeds registration process.
Additional check-in requirements such as
security paragraphs; digital signature,
additional ID
Printed or customized score reports
Printed supplementary testing materials
Limited testing windows*
Review and challenge require private use
of test center
Any test will automatically advance from Standard Testing to the
Expanded Testing category when any single characteristic of the Expanded
Testing category exists in the testing services required.
*This provision will be waived for the GRE and GMAT programs for the first
four years of the Agreement after the effective date. Thereafter, GRE and
GMAT must be continuously testing (i.e. available seven days per week, every
week of the year) or GRE and GMAT must become Expanded Testing category
programs. Until these, or other ETS programs, become continuous, ETS will
cooperate with Sylvan to adjust testing windows to achieve maximum network
capacity and load leveling.
2) PER TEST FEE. This is a fixed fee that will cover the fixed costs
and per test variable costs that occur each time a test is
delivered. The per test fee is set out in the chart below. The per
test fee applies for all tests delivered but will vary depending on
the service level chosen and the volume of tests as set forth in
the chart below.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Volume in Tests Basic-Testing Standard Expanded
450,000 - 575,000 US$* US$* US$*
575,001 - 700,000 US$* US$* US$*
700,00f - 825,000 US$* US$* US$*
825,001 - 950,000 US$* US$* US$*
950,001 - 1,075,000 US$* US$* US$*
1,075,001 - 1,200,000 US$* US$* US$*
1,200,001 - 1,325,000 US$* US$* US$*
1,325,001 - 1,450,000 US$* US$* US$*
</TABLE>
3) PER APPOINTMENT HOUR FEE. This is a fixed hourly rate to cover the
variable costs associated with the length of each event involved.
The hourly rate will vary depending on volumes but will not vary
between the types of services offered. The per appointment hour fees
are set forth in the chart below.
TESTING HOURS Hourly Fees
(Average=4hrs/test
2,000,000-2,500,000 hours US$ * hour
2,500,001-3,000,000 hours US$ * hour
3,000,001-3,500,000 hours US$ * hour
3,500,001-4,000,000 hours US$ * hour
4,000,001-4,500,000 hours US$ * hour
4,500,001-5,000,000 hours US$ * hour
5,000,001-5,500,000 hours US$ * hour
5,500,001-6,000,000 hours US$ * hour
With regard to both 2) and 3) above:
a) ETS will pay Sylvan the applicable Per Test Fee from the
applicable chart above for Tests delivered at all test sites
delivering ETS tests. This fee will provide for all registration,
electronic transmission of results and photo as well as all other
support services provided by Sylvan to Test sites.
b) The hourly test volume that determines the row of the table to
be used for the hourly fee is the total hourly volume from all ETS
testing programs tested in all US domestic and Canadian centers,
including Sylvan Technology Centers, institutional centers operated
by Sylvan, or other centers approved by ETS and Sylvan. In
determining total test hour volume ETS will receive credit for all
used and unused seat time it purchases in block purchases pursuant
to Paragraph 5.4.3
*Text omitted based upon request for confidential treatment.
3
<PAGE>
of the Agreement. The test volume that the determines the row of the
table to be used for test fees is the total number of tests from all
ETS testing programs tested in all US domestic and Canadian centers,
including Sylvan Technology Centers, institutional centers operated
by Sylvan, or other centers approved by ETS and Sylvan.
c) Volume break points were determined based on current program
plans for introduction of computer-based testing. Based on current
projections, testing volumes are expected to be 1.5 - 2.0 million
hours in 1997-98. By 1999-00 with the introduction of TOEFL testing
hours are projected to grow to 3.5 - 4.0 million hours. The volumes
for determining pricing breakpoints includes all test volumes from
the following programs: GRE, GMAT, PRAXIS, TOEFL, SAT-IAAY, NBPTS,
TOEFL Pilot, APICS, AICPA, CEBS, NAPLEX, NCLEX,and NBPME.
d) Total volume will be projected prior to the start of each ETS
fiscal year (JulyJune) and the appropriate per test fees and hourly
rates used accordingly on monthly invoices. Any adjustments, if
necessary, will be determined at the end of ETS's fiscal year and
the appropriate credits/invoices will be issued.
e) The fees in this Attachment 6 will be effective July 1, 1998 and
will remain in effect for the term of the contract. All fees will be
adjusted annually in accordance with adjustments made to the
Consumer Price Index; provided however, that the maximum increase in
any Agreement year will be four (4%) but in any agreement year that
the actual adjustment to the Consumer Price Index exceeds four (4%)
percent, Sylvan will receive the maximum increase of four (4%)
percent in as many following years as is necessary to make up the
difference in revenue shortfall between the actual increase and four
(4%) percent.
4) MINIMUM ANNUAL PROGRAM RETAINER/SMALL PROGRAM CHARGE. This will be a
fixed annual minimum for any and all programs testing in the system.
The per test and per appointment hour fees will be used as a draw
down against this minimum program retainer. The minimum annual
retainer will be US$ * per year for each year the program is
in existence.
5) FEES TO BE COLLECTED SEPARATELY FROM PER TEST AND PER HOUR SEAT FEES.
a) Network Infrastructure Upgrade/Modification Reimbursements - ETS
and Sylvan have agreed on a methodology for ETS cost reimbursement
for Network Infrastructure Upgrades and Modifications based on the
current contract language (Ref contract 6.6, page 22). Any upgrades
or changes initiated solely to implement ETS's program requirements
will be reimbursed 100% by ETS. Any upgrades or changes initiated
solely to implement Sylvan's program requirements will not be
reimbursed by ETS. When upgrades or changes are beneficial to both
ETS and Sylvan, the parties will agree on an equitable split of the
costs.
4
*Text omitted based upon request for confidential treatment.
<PAGE>
b) Forfeit Fees (No Shows) - If any Examinee fails to appear as
scheduled for a Test or other non-testing event, ETS will pay to
Sylvan *% of the seat fee (the per test fee plus the hourly
rate for the event) that Sylvan would have been paid had the Test or
other non- testing event been administered to the Examinee when
scheduled.
c) Rescheduling Fee - When a Candidate reschedules for his own
purposes and not because of a Sylvan error, a fee of US$*
will be charged directly to the Candidate for each reschedule
undertaken for the Candidate.
d) Private Testing - For each Private Test approved by ETS, ETS will
pay to Sylvan an additional $* fee for each such Private Test
administered, if testing occurs in the Regular Testing Room because
of the absence of a Private Testing Room.
e) Data Downloads - Eighty-five cents (US$*) per megabyte
for all data downloads to each individual test site. There will be
no free downloads including no free initial downloads. This will
include all downloads regardless of medium actually used and
regardless of whether ISDN was available at the site or not. This is
subject to the restrictions placed on data downloads in Attachment
12.
6) REPORT PREPARATION FEES
Sylvan will provide those standard reports set forth in Attachment
11 at no charge. ETS may elect to have customized reports. Sylvan shall be
reimbursed at a fixed price for those customized reports developed and
delivered in accordance with ETS's request. Sylvan will develop the plans,
devise the methods of measuring the data required by the plans and develop
the personnel and structures necessary to create and maintain such reports.
Sylvan will submit an invoice for the custom reports at the mutually agreed
upon fixed price.
7) NON-STANDARD SERVICES
The pricing established in 1 through 6 above is the pricing for the
standard service offering agreed to between the parties. From time to time,
ETS may request and Sylvan may, in its sole discretion, undertake
non-standard services on behalf of ETS. These services shall be priced in
advance on a fixed price basis and billed to ETS based on the mutually
agreed fixed price.
8) CONFERENCE TESTING
In those instances where ETS requests Sylvan's assistance for
conference testing, Sylvan will charge a fee of US$* per day plus
the actual cost of additional equipment rental, transportation, lodging and
meals.
5
*Text omitted based upon request for confidential treatment.
<PAGE>
9) BEST PRICING
ETS will, during the term of this Agreement, receive the best price
Sylvan offers any other client with similar tests (being defined as Tests in
the same categories as ETS Tests),z similar volumes and similar program
requirements.
10) NON-TESTING SERVICES
ETS and Sylvan will negotiate separate agreements for each
Non-Testing Service delivered through the Sylvan testing network.
11) INCENTIVES AND PENALTIES
In order to ensure that ETS test candidates are provided the highest
quality and most efficient services, key performance standards will be
mutually agreed upon each year. The target performance standards will be
established in March of each year to become effective for the ETS fiscal year
beginning July 1 and ending June 30 the following year.
Incentives and penalties will be applied to the Per Test Hour fees
based on Sylvan's performance against the standards each calendar quarter of
the ETS fiscal year. Sylvan's performance will be measured quarterly and
incentives will be paid or penalties levied at each calendar quarter.
Two percent of the annual Per Test Hour fees paid will be both the
maximum incentive and the maximum penalty for any single twelve month period,
e.g., Sylvan may earn Per Test Hour fees in a range starting from a low of
* (*%) of total possible yearly Per Test Hour fees for substandard
performance and a maximum of * (*%) of Per Test Hour fees for full
compliance with the performance standards. The amount of penalty or incentive
will be calculated as follows. ETS and Sylvan have assigned to key
Performance Standards set forth in Attachment 12 a point for each standard
regarded as an important customer service benchmark. Sylvan's base Per Test
Hour Compensation will be assumed to be * (*%) percent of the total
Per Test Hour fees available in any quarter. For each PERFORMANCE STANDARD
met by Sylvan each quarter Sylvan will be awarded a point. For each
Performance Standard Sylvan fails to meet each quarter Sylvan will have a
point subtracted. The sum of all points added or subtracted divided by the
total number of points available and that quotient multiplied by the
incentive range (2%) will yield the final incentive or penalty percentage for
the quarter.
The penalties discussed in this paragraph 11) shall become effective one
hundred and eighty (180) days after the Effective Date of this Attachment 6,
provided that the Performance Standards of Attachment 12 and the agreed to
measurement methodologies have become effective.
6
*Text omitted based upon request for confidential treatment.
<PAGE>
The incentives shall become effective within 12 months of the Effective
Date of this Attachment 6, provided that the Performance Standards of
Attachment 12 have been established and measurement methodologies agreed
to.
The money from each penalty levied and each incentive earned shall be
applied by the parties to aid in improvements to the network focused on the
specific metrics needing improvement.
7
<PAGE>
ATTACHMENT 7
SOFTWARE DEVELOPMENT PLAN
This Attachment 7 sets forth the requirements and guidelines for
Software Development to be followed by. both parties. These guidelines will
be incorporated into the contract as Attachment 7. Sylvan will develop a
Software Plan in accordance with these guidelines and implement the same
within one hundred eighty (180) days after the contract revision effective
date.
SOFTWARE DEVELOPMENT GUIDELINES
In order to insure that test scheduling, administration and delivery
software fit the evolving needs of both parties, the following guidelines
will be followed:
1. All software will be planned, designed and developed according to
industry-standard life cycle methodologies. All software will be Year
2000 compliant. (ETS software must be Year 2000 compliant as well.)
2. All software development and enhancements will be planned on a schedule
which includes ample time for:
o integration planning
o gathering, review and acceptance of requirements
o logical and physical design
o prototyping where appropriate
o quality assurance testing
o fully loaded production performance testing, where appropriate
3. All ETS requirements for Sylvan software development and enhancements
must be included in the project requirements document which must be
delivered to Sylvan, in writing, within the project time frame. This
document must be agreed to and signed by all stakeholders prior to the
start of the project (This includes both ETS and Sylvan stakeholders.)
4. Where information is stored at Sylvan and required by ETS, that
information will be accessed by a standard interface and/or by standard
scheduled data transfer procedures, including Application Protocol
Interface (API).
5. Where appropriate, mutually agreed upon software tools and utilities
should be used so that both organizations can develop and use compatible
information access and enhancement methods.
6. Important software components will be upgraded on a regular schedule.
Unscheduled updates will be discouraged by both parties.
7. Version Control procedures will be developed and enforced so that there
is only one production version of a given component in the field or the
data center at any time.
8. All software which is to be implemented in the Sylvan network will be
acceptance tested by Sylvan.
9. Software source and production versions will be tracked by an
appropriate Release Management system. No software will be sent to the
field without passing through this system after the QA cycle.
<PAGE>
10. Sylvan will continue to participate in the ETS Release Planning team to
facilitate communications and appropriate planning.
<PAGE>
ATTACHMENT 8
QUALITY CONTROL PLAN
This Attachment 8 sets forth the requirements and guidelines for a
Quality Control Plan. . Sylvan will develop this plan and the parties will
jointly approve it. This plan will be developed and become effective one
hundred eighty (180) days after contract revision effective date.
QUALITY CONTROL GUIDELINES
Given the nature of the computer based testing business, software and
technology quality must be of utmost importance to both Sylvan and ETS. The
following will serve as a framework to ensure that Quality Control is a
priority to both parties during the day-today business of delivering
academic tests:
1. Software
In the areas of scheduling and registration, test center
administration, test delivery, and results processing, all software
which supports the testing process must be error free of critical
errors and support all appropriate requirements in order to ensure
that the candidate experience and service of test delivery are
acceptable.
2. Test Center Facilities
Sylvan has standards and specifications which support uniformity,
ergonomics, ADA access, proper monitoring, and security. These
standards must continue to be enforced and reviewed.
3. Test Center Administrators
The people who administer and monitor the testing process must be
properly trained and certified. They must have the tools needed to
handle irregularities and make decisions during the day-to-day
business of testing.
4. Test Content
Test item banks must be certified by ETS free of presentation
errors and obviously incorrect data.
5. Data Transmission
Software, Item banks, appointment data, test administration data
(such as eligibilities and retest files), test results and other
information must be protected from corruption while being
transmitted at the highest reasonable speed.
6. Scheduling
Assuming that software quality is addressed above, procedures for
handling the scheduling process, including special conditions
scheduling and other exceptions exist and must continue to be
monitored and enforced.
7. Documentation
Both Sylvan and ETS must ensure that all technical and user
documentation are complete, correct and up-to-date. This must be
part of the quality control of all items above.
<PAGE>
8. Quality Control Tools
Sylvan will employ the following Quality Control tools in its
Quality Control program.
a. Software
Automated Code Checking
Automated Testing of Code
b. Test Center Facilities/Test Center Administrators
Mystery/Secret Shopper___ times per year____ center. This applies
to all centers delivering ETS Tests. For any center
found deficient the frequency will increase to___ times
per____year center in addition to requiring a plan for
correction of the deficiencies. Interactive training
for TCAs will be part of the plan.
c. Test Content
Sylvan will develop or purchase automated tools for test
presentation checking. (Not Test Content)
d. Data Transmission
Sylvan will monitor 100% of all transmissions. Sylvan will
upgrade the network and will purchase services from
providers that will insure greatly reduced or error
free transmissions.
e. Scheduling
Newscheduling system will have automatic checking and
will run processes to validate schedules. Sylvan will
do real time validation against business rules.
f. Documentation
Sylvan's plan is to have a single set of documentation and
access by applicable personnel will be on-line and
on-demand.
<PAGE>
ATTACHMENT 9
SECURITY/CONTINGENCY PLAN
The contract revision will include as Attachment 10 the requirements
set forth below,for a Communications Plan. Sylvan will develop this plan.
This plan will contain those Security Audit plan features desired by ETS.
This plan will be developed and become effective one hundred eighty (180)
days after contract revision effective date.
SECURITY
Sylvan has security procedures in the following areas:
1. Data Center
Includes central servers, golden servers, the main back-end data base
system, and physical (corporate headquarters) building security
2. Data transmission
Includes the safety of software and item banks, test results, and other
client- and candidate-specific information which must be protected from
theft and tampering during movement to and from testing centers, the
Sylvan data center, and ETS
3. Testing Center
Includes the safety of software and item banks, test results, and other
client- and candidate-specific information which must be protected from
theft and tampering while resident at a Sylvan Testing Center. Also
includes the security of physical network and ancillary equipment.
4. Call Center
Includes appointment and test schedule data, candidate demographics,
and client related infon-nation. Also includes the security of call
center computers and other equipment.
5. Test Production
This is not currently an ETS issue.
Sylvan will share highlights and ETS specific portions of the plan with ETS
but must withhold customer sensitive issues. Sylvan will provide mutually
agreed ETS security requirements in the plan.
CONTINGENCY
Plans are in place to handle "disaster recovery" for:
1. The Sylvan Data Center
2. The Candidate Services Call Center
3. Any individual Sylvan Test Center
4. Communications and data transfer lines between any of the above, or
between Sylvan and ETS
The contingency plans include procedures for escalation, communication with
ETS, time frames for handling recovery tasks, "post mortem", and return to
normal operations.
<PAGE>
Though personnel and candidate safety and equipment/facility security must
always be Sylvan's first concern, communications with ETS and other clients are
a high priority after a problem has occurred which affects ongoing testing
operations.
<PAGE>
ATTACHMENT 10
CONFIGURATION CONTROL AND COMMUNICATIONS PLAN
The contract revision will include as Attachment 10 the requirements
set forth below for a Configuration Control and Communications Plan. Sylvan
will develop this plan and the parties will jointly approve it. This plan
will be developed and become effective one hundred eighty (180) days after
contract revision effective date.
CONFIGURATION CONTROL AND COMMUNICATIONS PLAN
The control of pertinent operations and Sylvan./ETS communications will be
tied together in the Configuration Control and Communications Plan. This
plan may include, but not be limited to:
1. Standard test delivery and STC operations procedures, as set forth in the
Policies, Procedures and Practices (PPP) manual
2. Physical and electronic security procedures both at Sylvan and ETS, as
set forth in the Security Plan
3. Schedules and procedures for ensuring that regular processes are
completed and errors handled so that normal testing operations may
continue
4. Communication and problem escalation procedures.
5. Candidate complaint procedures, including appropriate actions under
different circumstances. It is incumbent upon ETS to ensure that such
procedures may be implemented across programs.
6. Procedures for the collection, review and incorporation of business
requirements into software and other processes, as set forth in the
Software Development Plan. This will include costing, scheduling, and
impact analysis.
7. Software Version Control procedures, as set forth in the Software
Development Plan
8. Procedures for the joint diagnosis and correction of test center system
problems which do not appear to have an immediate source
9. Quality Control procedures for software and for manual processes, as set
forth in the Quality Control Plan
10. Procedures for the maintenance and dissemination of appropriate user and
technical documentation
11. Communication of procedures (as set forth in the Quality Control Plan)
to remedy problems stemming from misunderstanding of the PPP and/or
inadequate TCA training
12. Standard procedures for dissemination of periodic reports and
statistical information. The standard reporting packages will be fully
defined by calendar year end 1997.
13. Procedures for the protection of company private and trade secret
information
<PAGE>
14. Procedures for collecting, verifying and incorporating information
required for capacity planning. This will include required lead times for
volume forecasts, and appropriate remedies when forecast and reality turn
out to be very different.
15. Procedures for communicating and responding to changes in the market and
business environment
<PAGE>
ATTACHMENT 11
SYLVAN STANDARD REPORTS
Sylvan will develop a new standard reporting package. This Sylvan
Standard Client Reporting Package will be distributed monthly and will
consist of the reports set forth below. This Attachment I I will be
effective one hundred eighty (180) days after contract revision effective
date. All reports will be approved by the Contract Performance Oversight
Committee.
1. Candidate Services Report
Call Center Statistics
Local Registration Statistics
Registration Report
2. Client Services Report
Status Report
3. Logistics
Capacity Recap
4. Technical Services Status Report (If applicable)
5. Annual Operating Report
6. Reports necessary to monitor Performance Standards.
<PAGE>
ATTACHMENT 12
PERFORMANCE STANDARDS
Note: UNLESS OTHERWISE STATED, ALL MEASUREMENT OF THE APPLICABLE METRICS
WILL BE QUARTERLY. WHENEVER NOTICE IS REQUIRED UNDER THIS ATTACHMENT,
NOTICE SHALL BE GIVEN TO THE INDIVIDUAL DESIGNATED IN THE NOTICE SECTION OF
THE AGREEMENT FOR ACCEPTANCE OF ALL OPERATIONAL NOTICES.
This Attachment 12 will become effective 180 days after contract revision
effective date. During the time that Sylvan installs Project Wirewalker and
moves its current systems and activities unto the Project Wirewalker
systems platform, these performance standards will be suspended for a three
month period. Sylvan will provide periodic reports to ETS during the three
month period.
<TABLE>
<CAPTION>
DESCRIPTION OF PERFORMANCE STANDARD POINTS
1. SCHEDULING TEST TAKERS
<S> <C> <C>
a. *% of test takers will be offered an appointment within 20 days ofhis/her initial *
request and within 50 miles of the requested site. *% of test takers will be offered
an appointment within 60 days of his/her initial request and within 50 miles of the
requested site.
b. *% of all registration telephone calls will be answered in 5 minutes orless *
measured as an average queue time for each month.
c. *% of all Examinees who leave a message at the CSCC will be called back *
within 48 hours. Sylvan will document all call-backs including attempts resulting in
the Examinee not being available.
II. RESCHEDULING OF TEST TAKERS
a. ETS will be notified of the identity of individuals being rescheduled as a result of *
Sylvan operations within 24 hours.
b. When a justified scheduling complaint or a service disruption requires a
rescheduling of the test taker, Sylvan will respond as follows:
1. Sylvan will make 3 attempts to make voice contact within 24 hours of the *
need for rescheduling to occur for *% of test takers affected.
2. If voice contact fails, *% of affected test takers will receive a mailed *
post card requesting them to reschedule.
3. Once contact is established, Sylvan will complete rescheduling of test *
taker within 72 hours or document that test taker refused appointment
offers.
</TABLE>
*Text omitted based upon request for confidential treatment.
1
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF PERFORMANCE STANDARDS Points
<S> <C> <C>
4. When necessary, Sylvan will open additional testing times at the original *
testing site or at a site within 50 miles of test takers original test site
to insure test taker is rescheduled within 15 days of establishing contact
with Sylvan. Where test taker chooses a date outside of the 15 days, the 15
day limit is waived.
5. Where a test taker documents that there will be a material injury to test *
taker if normal scheduling guidelines are followed, Sylvan will arrange for
the test taker to be rescheduled within a week.
6. ETS will extend the time the item banks are available for the sole
purpose of rescheduling test takers.
III. SPECIAL FACILITIES TEST TAKERS
a. *% of Special Facilities test takers will be offered an appointment within 20 *
days of their first choice and within 50 miles of the first center
requested.
IV. Test Delivery
a. *% of all tests will be delivered each month as scheduled. *
b. *% of all tests will result in a completed EPR except where disruption *
and/or cessation of testing is a result of ETS software errors or force
majeure circumstances.
c. *% of results will be communicated to ETS electronically within 24 hours, *% *
within 48 hours and *% within 4 business days.
V. SUPPORT OF ETS DEVELOPED SOFTWARE/SUPPORT OF SYLVAN DEVELOPED SOFTWARE/SERVICE
DISRUPTIONS
Both parties equally share the responsibility to support all software
systems. Therefore the parties agree to the following support functions:
1. When the problem is discovered by Sylvan:
a. EIR will be filed by Sylvan as soon as the problem is discovered.
b. When the technical staff at Sylvan perceives that there are multiple
cases of the same problem affecting at least 10 test takers or multiple
sites or the national registration system, Sylvan will notify ETS within 60
minutes of discovering the issue for *% of all incidents and within 12
hours for *% of the incidents.
c. An oral or written summary of the problem will be communicated to ETS
within 24 hours for a problem that prevents successful completion of the
testing process and within 4 business days for non-critical problems.
</TABLE>
2
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<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF PERFORMANCE STANDARDS POINTS
<S> <C> <C>
d. Requests for reasonable and relevant information regarding the incident(s)
in question, will be answered within 5 business days.
e. If the incident requires a Sylvan solution or Sylvan input into a
solution, Sylvan will prepare a recovery plan, including a resolution time
line, within a time commensurate with the severity of the problem. ETS must
provide all relevant and reasonable information and its cooperation where
necessary to accomplish the recovery plan in a timely fashion
2. When the problem is discovered by ETS
a. ETS will forward the equivalent of an EIR to Sylvan.
b. If the condition will or has affected 10 or more test takers, multiple
centers or the national registration system, then ETS will notify Sylvan
Corporate within 60 minutes of discovery of the problem for *% of all
incidents and within 12 hours for *% of all incidents.
c. ETS will provide an oral or written summary of the problem within 24 hours
for a problem that prevents successful completion of the testing process and
within four business days for non-critical problems.
d. Requests for reasonable and relevant information regarding the incident(s)
in question, will be answered within 5 business days.
e. If the incident requires an ETS solution or ETS input into a solution, ETS
will prepare a recovery plan, including a resolution timeline, within a time
commensurate with the severity of the problem. Sylvan must provide all
relevant and reasonable information and its cooperation where necessary to
accomplish the recovery plan in a timely fashion.
V1. DISTRIBUTION OF SOFTWARE AND DATA
a. *% of all software and data will be distributed to all locations in the *
network required to have it by the published date, provided it is received a
minimum of 96 hours before the published date. All hours are assumed to be
over business days.
b. *% of all locations will have all software and data distributed to them *
by the published date, provided it is received a minimum of 72 hours before
the published date. All hours are assumed to be over business days.
c. *% of all locations will have all software and data distributed to them *
by the published date, provided it is received a minimum of 48 hours before
the published date. All hours are assumed to be over business days.
The following conditions are required for this metric:
</TABLE>
3
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<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF PERFORMANCE STANDARD Points
<S> <C> <C>
- Work orders must be received by 4:00 p.m. eastern time the appropriate
number of business hours before each of a) through c) above.
- Individual work orders exceeding 15 megabytes must be received 268 hours
before the published date.
- The aggregate of all work orders due on the same published date may not
exceed 30 megabytes. Where the aggregate of all work orders will exceed 30
megabytes, Sylvan will require a priority list and will not guarantee
distribution per a), b) and c) above, for low priority data that exceeds
the 30 megabyte limit.
- These standards do not apply for non-ISDN sites. Non-ISDN sites will
have all data distributed by the published date provided it is received 10
business days before it is due.
- These standards do not apply to remote sites such as Guam, American
Samoa, etc. Sylvan will supply ETS with a comprehensive list of those
sites deemed remote.
- Theses standards do not apply when a force majeure condition applies.
d. Any candidate affected by the failure to distribute the data in
accordance with the above will be tested free.
VIL DISPOSITION OF IRREGULARITIES
a. *% of all EIRs will be closed within 3 business days.
b. *% of all EIRs will be closed within 5 business days.
c. When Sylvan or ETS believes corrective action is necessary, a remedial
action plan, with a timetable for completion, will be developed within 5
business days. Disagreement concerning the need for corrective action will
be adjudicated by the Contract Performance Oversight Committee.
VIII. RECOVERY STANDARDS
a. Site will immediately notify the CSCC when they are unable to deliver
tests. The CSCC will reschedule any candidates affected using the
rescheduling standards set forth above.
b. Sylvan will notify ETS as quickly as possible and in the best manner
available, but in any event not longer than 48 hours after a test center
goes down. Current practice is to notify ETS via ETS beeper and e-mail.
Sylvan and ETS are working to include all necessary information in an
automated client information system. Until that process is complete,
Sylvan will continue the current practice and will monitor that practice
to make certain it remains the best available manner.
</TABLE>
4
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<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF PERFORMANCE STANDARD POINTS
<S> <C> <C>
c. Sylvan will use its best efforts to bring the site back on line within 48
hours of the initial shut down.
d. If the site cannot be brought back on line within 48 hours, Sylvan Corp.
will notify ETS and reschedule the affected candidates through the CSCC.
e. Within 3 business days of the incident, Sylvan will notify ETS in writing
of candidates who could not be reached or could not be rescheduled.
</TABLE>
Note: These standards as written represent the performance targets for the
first year of this Agreement, a key transition year for two major testing
programs. To effect continuous improvement in service to the ETS test takers
and test program sponsors, the measures contained in this Attachment 12 will
be reviewed, adjusted, and agreed upon each year. Financial penalties and
incentives associated with these Performance Standards will be determined
quarterly based on the formula in Attachment 6. Sylvan and ETS must jointly
determine the measurement methodologies for each of these Performance
Standards. These Performance Standards, the measurement methodologies and
the financial incentives and penalties will become effective one hundred
eighty (180) days after the Effective Date of the Master Agreement Between
Educational Testing Service and Sylvan Learning Systems, Inc. for Computer
Based Testing Services at Sylvan Technology Centers in the United States and
Canada entered into by Sylvan and ETS to replace the former Amended and
Restated Master Agreement dated September 1. 1993.
<PAGE>
Attachment 13
ETS Testing Programs
GRE
GMAT
PRAXIS
TOEFL
SAT-IAAY
NBPTS
TOEFL Pilot
APICS
AICPA
CEBS
NAPLEX
NBPME
NCLEX
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Selected
Financial and Operating Data" and "Experts" and to the use of our reports dated
September 20, 1999 on the financial statements and schedule of Sylvan Prometric
(a Division of Sylvan Learning Systems, Inc.), in the Registration Statement
(Form S-1 No. 333 - ___________________) and related prospectus of Prometric,
Inc. dated September 24, 1999.
/s/ ERNST & YOUNG LLP
----------------------
Ernst & Young LLP
September 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 12,815 17,188
<SECURITIES> 0 0
<RECEIVABLES> 36,643 38,073
<ALLOWANCES> 1,278 1,588
<INVENTORY> 0 0
<CURRENT-ASSETS> 53,226 58,431
<PP&E> 65,309 80,297
<DEPRECIATION> 13,966 19,675
<TOTAL-ASSETS> 299,601 311,558
<CURRENT-LIABILITIES> 37,120 41,446
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 261,955 269,840
<TOTAL-LIABILITY-AND-EQUITY> 299,601 311,558
<SALES> 0 0
<TOTAL-REVENUES> 178,732 106,287
<CGS> 0 0
<TOTAL-COSTS> 120,120 71,121
<OTHER-EXPENSES> 31,900 22,800
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 27,604 13,690
<INCOME-TAX> 12,357 6,160
<INCOME-CONTINUING> 15,247 7,530
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,247 7,530
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
Exhibit 99.1
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors
of Prometric, Inc., a Maryland corporation, in its Registration Statement on
Form S-1, and any and all amendments or supplements thereto, to be filed with
the U.S. Securities and Exchange Commission.
September 21, 1999 /s/ Donald V. Berlanti
---------------------------------------
Donald V. Berlanti
Exhibit 99.2
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors
of Prometric, Inc., a Maryland corporation, in its Registration Statement on
Form S-1, and any and all amendments or supplements thereto, to be filed with
the U.S. Securities and Exchange Commission.
September 21, 1999 /s/ J. Phillip Samper
-----------------------------
J. Phillip Samper
Exhibit 99.3
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors
of Prometric, Inc., a Maryland corporation, in its Registration Statement on
Form S-1, and any and all amendments or supplements thereto, to be filed with
the U.S. Securities and Exchange Commission.
September 21, 1999 /s/ James H. McGuire
--------------------------
James H. McGuire
Exhibit 99.4
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors
of Prometric, Inc., a Maryland corporation, in its Registration Statement on
Form S-1, and any and all amendments or supplements thereto, to be filed with
the U.S. Securities and Exchange Commission.
September 21, 1999 /s/ R. William Pollack
---------------------------------
R. William Pollock
Exhibit 99.5
CONSENT OF DIRECTOR NOMINEE
I hereby consent to being named as a nominee to the Board of Directors
of Prometric, Inc., a Maryland corporation, in its Registration Statement on
Form S-1, and any and all amendments or supplements thereto, to be filed with
the U.S. Securities and Exchange Commission.
September 21, 1999 /s/ Rick Inatome
---------------------------
Rick Inatome
