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As filed with the Securities and Exchange Commission on July 28, 2000
Registration No. 333-
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
eSYLVAN, INC.
(Exact Name of Registrant as Specified in its Charter)
___________________
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<S> <C> <C>
Maryland 8299
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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___________________
34 Market Place
Baltimore, Maryland 21202
(410) 843-8000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
___________________
Robert Zentz, Esq.
Secretary
eSylvan, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
(410) 843-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
___________________
Copy to:
Michael W. Conron, Esq.
Venable, Baetjer and Howard, LLP
2 Hopkins Plaza, Suite 1800
Baltimore, Maryland 21201
(410) 244-7424
___________________
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial 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 [_]______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
___________________
CALCULATION OF REGISTRATION FEE
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======================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount to be Offering Price Aggregate Amount of
To be Registered Registered Per Share(1) Offering Price (1) Registration Fee
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Class A Stock, par value $0.001 3,000,000 $.875 $2,625,000 $695
Common Stock, par value $0.001
==================================================================================================================
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Section 6(b) of the Securities Act and Rule 457(i).
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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS 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 IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED July 28, 2000
eSylvan, Inc.
Class A Common Stock
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We are a development stage company which seeks to deliver high quality
supplemental education to families and children through a variety of
applications on the Internet.
We are offering shares of our Class A common stock to certain holders of
Sylvan Learning Systems, Inc. franchise license agreements or area development
agreements in exchange for their execution of certain agreements. We will
receive no cash consideration for this offering of Class A stock. The specific
number of shares of Class A stock that we are offering in each offering under
this prospectus is set forth in an accompanying prospectus supplement relating
to that offering. No one may use this prospectus to consummate sales of shares
of our Class A stock unless it is accompanied by a prospectus supplement.
Our Class A stock automatically converts, on a one-to-one basis, into common
stock following the listing of our capital stock on the New York Stock Exchange,
Inc, the American Stock Exchange, Inc. or the Nasdaq National Market. We have
no current plans to list our Class A stock on any stock market or stock
exchange. Also, our Class A stock is subject to restrictions on transfer.
Accordingly, following this offering and for the foreseeable future, we do not
expect a public market to develop for our Class A stock.
Investing in our Class A stock involves risks. See "Risk Factors" on Page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000
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[Inside Front Cover]
You should rely only on the information contained in this document or to which
we have referred you when you are considering the information in this
prospectus. We have not authorized anyone to provide you with information that
is different. This document may be used only where it is legal to sell these
securities. The information in this document may only be accurate on the date of
this document.
Table of Contents
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PAGE
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward-Looking Statements; Market Data.................................. 18
The Offering............................................................. 19
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Selected Financial Statements............................................ 28
Management's Discussion and Analysis of Financial Condition and
Plan of Operation....................................................... 29
Business................................................................. 32
Management............................................................... 45
Related Party Transactions............................................... 49
Principal Stockholders................................................... 51
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 60
Plan of Distribution..................................................... 60
Transfer Agent and Registrar.............................................
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
Annex A Subscription Agreement........................................... A-1
Annex B Participation Agreement.......................................... B-1
Annex C Terms of Class A Stock........................................... D-1
</TABLE>
______________________________
Our principal executive offices are located at 34 Market Place,
Baltimore, Maryland 21202, and our telephone number is (410) 843-2622. Our
Internet website is eSylvan.com. The information on our website is not
incorporated by reference into this prospectus.
Sylvan, eSylvan and eSylvan.com are trademarks of Sylvan Learning
Systems, Inc. All other trade names, trademarks and service marks appearing in
this prospectus are the property of their holders.
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Prospectus Summary
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in this offering. You should read the entire
prospectus carefully.
Business of eSylvan, Inc.
Sylvan Learning Systems, Inc., or Sylvan, founded our company,
eSylvan, Inc., in October 1999, as an unincorporated division of Sylvan that was
separately incorporated in February 2000, to deliver high quality supplemental
education to families and children through a variety of applications on the
Internet. We plan to pursue this goal by establishing a website, developing or
acquiring appropriate technology for the delivery of educational services over
the Internet and then enrolling students. Our goal is to make our website a
leading provider of online educational services.
To date, our operations have consisted of organizational and capital
raising activities, research and analysis with respect to educational
opportunities on the Internet, the development of technical infrastructure,
testing of that infrastructure and the development of strategic relationships.
As of the date of this prospectus, our website is under construction and is not
publicly available, we have not generated any revenues and we do not have any
sources of revenues. Therefore, to a significant extent, the description of our
business in this prospectus is based on a business model and relates to
activities that are solely in the planning stage.
Risk Factors
We will be operating in a new industry and our business and securities
involve a high degree of risk. The principal risks are described under "Risk
Factors." Among these are the following:
. we have no operating history which makes it difficult to evaluate our
business and prospects
. we face many risks in establishing a new business enterprise in Internet
educational services
. our business model and its potential for profit are unproven
. we have no present source of revenues and for us to generate revenues, we
will need to establish a website, acquire appropriate technology and enroll
students
. we anticipate incurring significant losses for the foreseeable future
. some of our competitors have substantially greater financial, technical and
marketing resources and experience, operating histories, greater name
recognition, established
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and significant customer bases and broader online product and service
offerings than we have
. As of the date of this prospectus, Sylvan Ventures, LLC, a majority owned
subsidiary of Sylvan, holds 13,714,286 shares, or 97.96%, of our outstanding
common stock. As a result, Sylvan Ventures controls our management and
policies and will be able to control substantially all matters submitted to
our stockholders for consideration, including the election of directors and
all proposals for merger, liquidation, sale of substantially all of our
assets and charter amendments.
Strategic Alliance with Sylvan and Sylvan Ventures
We have entered into agreements with Sylvan to provide
. Management services and facilities
. Licenses for the intellectual property and other materials we believe are
necessary for the implementation of our business plan
. Tutoring, other professional services and certain co-marketing arrangements
We have entered into agreements with Sylvan Ventures to provide:
. A revolving line of credit in the amount of $10 million which terminates on
December 31, 2001
. An investment of $20 million in our Series A preferred stock to be issued in
six separate closings ending on December 31, 2001
For the foreseeable future, we will be substantially dependent on our strategic
relationship with Sylvan and Sylvan Ventures for the execution of our business
plan.
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Risk Factors
You should carefully consider the risks described below before making a
decision to invest in our Class A stock. If any of the following risks actually
occurs, our business could be harmed. In that case, you may lose all or part of
your investment. You should also refer to the other information in this
prospectus, including our financial statements and the related notes.
Risks Related to Our Business
-----------------------------
We have not launched our website, and we have no operating history.
We have not launched the eSylvan website. In addition, with the assistance
of third party service providers, we are in the process of designing and
developing our website. We expect to have our website completed and publicly
available before the end of 2000. We intend to use a significant portion of our
capital to fund the design and development of our website.
We have no Internet-based operating history from which you can evaluate our
business plan and prospects. In addition, although we intend to pursue
strategic alliances with third parties, we cannot assure you that we will be
able to establish or maintain these relationships.
As a new entrant to the Internet business, we face risks and uncertainties
relating to our ability to implement successfully the Internet component of our
business strategy, including:
. Successful design and development of the eSylvan website and the technical
infrastructure necessary for the online delivery of tutoring services
. Creation of public awareness of the eSylvan brand and website
. Successful implementation of our online tutoring system
. Development and marketing of the Internet business of eSylvan
If we are unsuccessful in addressing these risks and uncertainties, our
business, results of operations and financial condition will be materially
adversely affected.
Use of the Internet to deliver tutoring services is new and untested.
We will be a pioneer in the delivery of tutoring services through the
Internet. Accordingly, we will need to rely upon cutting edge Internet-based
technology, some of which will be developed by or specifically for us, to
achieve our business objectives. In the event of a failure on our part or on
the part of our strategic partners to develop or
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integrate such technology to provide reliable service to our consumers, our
business, results of operations and financial condition could be materially and
adversely affected.
We have no current source of revenues and we expect to generate operating losses
and to experience negative cash flow for the foreseeable future.
From inception on October 1, 1999 through February 2, 2000 we operated as
an unincorporated division of Sylvan, from February 2, 2000 to June 30, we
operated as a subsidiary of Sylvan, and since June 30 we have operated as a
majority-owned subsidiary of Sylvan Ventures. During these periods, our
operations have consisted of organizational activities, research and analysis
with respect to the Internet educational services industry, exploration of
strategic relationships, development of our website and identifying and testing
key technology. As of March 31, 2000 we have generated no revenues and have
incurred expenses and a cumulative operating loss of approximately $1.2 million
from inception, consisting primarily of legal, accounting, consulting,
development, personnel and facilities costs. Since our inception, Sylvan has
provided us with most of the administrative personnel and services which we have
required. We do not currently have any source of revenue. Our ability to
generate revenue will depend on our ability to establish a website with
appropriate technology to deliver tutoring services and attract customers to our
online educational services. Following the offering, we expect to incur
operating expenses to commence marketing, significantly expand our staff and to
develop our website for the online delivery of our services. Such expenses will
be significant and generally will precede revenues. If these expenses are not
followed by increased revenues, our business, results of operations, cash flows
and financial condition will be materially and adversely affected.
We will need capital.
We require substantial capital to fund our business. We expect to
experience negative cash flow from operations for the foreseeable future. We
expect that our available funds will be insufficient to meet our expected needs
for working capital and capital expenditures for the next 24 months.
Accordingly, we will need to raise additional funds prior to the end of this
period. If we raise additional funds through the issuance of equity or debt
securities, then these securities may have rights, preferences or privileges
senior to the rights of the Class A stock, and holders may experience dilution.
We cannot be certain that additional financing will be available to us on
favorable terms when required or at all.
Our business strategy is new, evolving, unproven and subject to change and may
not generate revenue opportunities. In addition, we may not be able to develop
or expand the content or services on our website to attract users.
Our business objective is to become the premier website that students and
their parents trust for tutoring and college entrance exam preparation services
and rely on as a preferred destination for educational content. Our business
strategy is new, evolving and unproven. Due to the rapidly changing nature of
the Internet, we are continuously
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modifying our business strategy and expect to continue to modify our strategy in
the future. Our business model assumes that students and their parents will be
attracted to and will use educational information and related services available
on our website which will, in turn, allow us the opportunity to market fee-based
services and advertising designed to reach those consumers. Our current business
strategy may not be successful, and, if it is not successful, we may not be able
to modify it in a timely and successful manner. In addition, we may not be able
to develop successful business strategies to capitalize on opportunities in new
and unproven areas.
Consumers may not accept an online source for tutoring services.
Our success depends on attracting and retaining a high volume of online
consumers at a reasonable cost. Factors that could prevent widespread consumer
acceptance of online tutoring services, and consequently our ability to increase
our revenues, include:
. student or parent preference for in-person tutoring relationships
. pricing that does not meet consumer expectations of finding "the lowest
price on the Internet"
. lack of consumer awareness of our online presence
We may fail to hire, retain and integrate key personnel.
Our success depends on our senior management. Loss of the services of our
senior management would harm our business. Several senior management positions
have not been filled. Our senior management may not perform effectively as
individuals or work together as a team. Our success also depends on our ability
to attract, retain and motivate skilled employees. Competition for employees in
our industry is intense. We expect to experience difficulty in hiring and
retaining skilled employees.
Quarterly operating results may fluctuate significantly.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. Many of these factors are outside our
control and include:
. our ability to retain existing consumers, to attract new consumers at a
steady rate and to maintain consumer satisfaction
. our ability to maintain positive gross margins
. changes in the growth rate of Internet usage and online user traffic
levels
. the timing and amount of costs relating to the expansion of our
operations
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. improvements to our computer systems from time to time
. general economic and market conditions
As a result of these factors and our absence of operating history, our future
revenues are difficult to forecast.
If we do not establish, maintain and strengthen our brand we may not attract
users to our website or generate revenue opportunities.
We must expend significant resources to establish the eSylvan brand and
promote our services. We are in competition with a number of Internet companies
currently seeking to establish their names as dominant brands in the online
tutoring market. The following factors may affect our ability to successfully
establish our brand and generate traffic on our website:
. consumers must, among other things, perceive our content as relevant and
reliable
. our strategic partners must, among other things, consider our website to be
professional, reliable and well operated
. teachers and parents must view our site as an appropriate destination for
students requiring tutoring services
We intend to use a significant portion of our resources to pursue an
aggressive online direct response marketing campaign. Our online advertising
may include strategic relationships that require costly, long-term commitments.
This advertising may not attract a significant number of consumers to our
website or generate substantial sales of fee-based services. In addition,
software is now or will soon be available that permits an Internet user to block
online banner advertising. If consumers are able to block the viewing of banner
advertising, then our advertising investment may not generate the expected level
of sales. If our promotional efforts are unsuccessful, we may fail to establish
eSylvan as a leading brand in our market.
If we fail to establish and maintain additional strategic relationships, we may
be unable to increase traffic on our website and establish our brand identity.
In addition to our relationships with Sylvan and Sylvan Ventures, we must
establish and maintain additional strategic relationships with popular websites
targeting the appropriate demographic. We intend to be the for-profit education
partner of choice for appropriate websites to increase the number of visitors to
our website and establish our Internet presence. There is intense competition
for relationships with these types of companies, and we may not be able to enter
into these relationships on commercially reasonable terms or at all. Even if we
enter into strategic relationships with these types of companies, they may not
be able to continue to attract a significant number of users. As a result, our
website may not receive the expected additional users from these relationships.
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Moreover, we may have to pay significant fees to establish these relationships.
Some companies we may pursue for strategic relationships may offer services that
compete with our services. As a result, these companies may be reluctant to
enter into strategic relationships with us. Our inability to enter into
additional strategic relationships could have a material adverse effect on our
business, financial condition and results of operations.
We face intense competition.
We compete with numerous providers of tutoring services, including other
online companies as well as traditional bricks and mortar tutoring providers.
Some of our competitors have greater access to capital than we do and use these
resources to engage in aggressive advertising and promotion campaigns such as
offering free services to attract new consumers. We also intend to advertise
and offer promotions, but we do not intend to engage in strategies that we
believe offer little benefit from the perspective of consumer loyalty and repeat
business. Nevertheless, the current prevalence of aggressive advertising and
promotion may generate pricing pressures to which we must respond.
We expect that competition will continue to increase because of the
relative ease with which new websites may be developed. The nature of the
Internet as an electronic delivery medium for services (which may, among other
things, facilitate competitive entry and price comparisons) may also render it
inherently more competitive than traditional formats of service delivery.
Increased competition may reduce our gross margins, cause us to lose market
share and decrease the value of the eSylvan brand.
We may lose users if we do not adapt to rapid technological change and provide
tools and features which meet the changing demands of our users.
The Internet market is characterized by rapidly changing technology,
evolving industry standards and frequent new service announcements. We must
adapt to our rapidly changing market by continuing to improve the performance,
features and reliability of our website and, in particular, its functionality
with new versions of web browsers and other platforms. We also could incur
substantial costs if we need to modify our services or infrastructure in order
to adapt to these changes. If we fail to keep pace with technological
advancements, our consumers may not use our website and instead may use our
competitors' services. In addition, we must provide informational content,
interactive tools and other features that consumers demand in order to continue
to attract and retain our consumer audiences. We must allocate significant
resources to continue to improve our website, and we must properly anticipate,
identify and respond to changes in consumer demands. If we fail to respond to
changes in consumer demand, expand the scope of our content and services,
introduce new services quickly and efficiently, or if our content and services
fail to achieve market acceptance, traffic on our website could be materially
and adversely affected.
We may be unable to increase our capacity to support increased traffic to our
website.
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Our success depends on generating a high volume of traffic to our website.
However, growth in the number of users accessing our website may strain or
exceed the capacity of our computer systems and lead to declines in performance
or systems failure. Failure to accommodate increased traffic may decrease levels
of consumer service and satisfaction.
We must continually improve and enhance the functionality and performance
of our website, consumer tracking and other technical systems to provide a
convenient learning experience. We also must introduce additional or enhanced
features and services from time to time to attract and retain consumers. Failure
to improve these systems effectively or within a reasonable period of time may
significantly impact repeat business. New services or features may contain
errors, and we may need to modify the design of these services to correct
errors. If consumers encounter difficulty with or do not accept new services or
features, our business will be harmed.
We expect to incur significant expenses for compensation paid to Sylvan for
participating in our program.
We expect to incur significant expenses for the consideration we plan to
pay to Sylvan for the provision of instructors, education developers and other
professionals. The amount of such expenses was not determined through arms
length negotiation and such expenses may be in excess and perhaps substantially
in excess of the cost to retain such professionals on the open market from
unaffiliated third parties.
Our computer and communications systems may fail or experience delays.
Our success, and in particular our ability to receive and fulfill orders
and provide quality consumer service, depends on the efficient and uninterrupted
operation of our computer systems. Systems interruptions may result from fire,
power loss, water damage, telecommunications failures, vandalism and other
malicious acts and problems related to our equipment. Our website may also
experience disruptions or interruptions in service due to failures by third-
party communications providers. We will depend on communications providers and
our website host to provide our consumers with access to our website. In
addition, our consumers depend on their own Internet service providers for
access to our website. Periodic systems interruptions will occur. These
occurrences may cause consumers to perceive our website as not functioning
properly and therefore cause them to stop using our services. Prolonged systems
interruptions would harm our business.
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Others may infringe upon or misappropriate our intellectual property rights.
The trademarks and service marks that we license from Sylvan for use on the
Internet are critical to our success. We will rely on trademark and copyright
law, trade secret protection and confidentiality, license and other agreements
with consumers, strategic partners and others to protect our proprietary rights.
The steps taken to protect this intellectual property may not be adequate, and
third parties may infringe upon or misappropriate our intellectual property
rights.
We may be unsuccessful in enrolling student leads or in keeping students through
course completion.
Our sales and profitability will depend, in significant part, on our
ability to convert sales leads (i.e., inquiries prompted by our advertising,
promotional materials and referrals) into enrollments and to motivate our
students. Although we intend to implement a cost-effective direct marketing
system similar to that used by Sylvan and our course materials and multiple
media instruction, and delivery methods are designed to encourage our students
to maintain a continuing relationship with us through the tutoring program,
there can be no assurance that we will be able to establish satisfactory
conversion rates. A poor conversion rate would have an adverse effect on our
financial performance.
Our business plan is untested.
We have made numerous assumptions in developing our business plan, such as
the size of the potential market, the cost to develop our website and online
tutoring technology and the retail pricing of our products and services. The
assumptions underlying our business plan may prove to be too optimistic, and we
may encounter delays in achieving the objectives in our business plan. This is
likely to result in lower than planned revenues, higher than expected expenses
and sustained unprofitability. We can give no assurance that we will be able to
adjust our operations and business plan.
Our tutoring concept may not be accepted.
Use of the Internet for delivery of tutoring services will require a
significant change in the way students and tutors have traditionally interacted.
Parents and students may be unwilling to accept the online tutoring as an
appropriate way to provide quality instruction. Students may not accept online
tutoring as an alternative to traditional classroom instruction. If the online
tutoring fails to gain this acceptance, it is unlikely that eSylvan will ever
become a viable business.
The market data in this prospectus may not be accurate.
Market and related data appearing in this prospectus were obtained from
industry publications and reports prepared by independent sources or internal
data compiled by us or Sylvan. We have not independently verified the accuracy
of such information or
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sought the consent of every organization to refer to its reports in this
prospectus. The methodology typically used in compiling market and related data
(including the fact that such data are usually based upon a selected sampling of
the market or population rather than a survey of the market or population as a
whole) means that the data are subject to uncertainties and estimations. As a
result, the market and other data in this prospectus, upon which we have relied
in developing our business plan, may not be accurate, complete or indicative of
future results.
Anti-takeover provisions in our charter documents and Maryland law could prevent
or delay a change in control of our company, which could adversely affect our
stock price if or when trading in our stock commences.
Maryland corporate law and our charter restrict transactions between us and
potential acquirers. In the event that in the future our stock is publicly
traded, the applicability of these provisions may discourage bids for our common
stock at a premium over the market price and may adversely affect the market
price and the voting rights of our common stock. These provisions may
discourage, delay or prevent someone from acquiring or merging with us. For a
detailed description of the anti-takeover provisions in our charter documents,
see "Description of Capital Stock--Anti-takeover effect of charter provisions."
Our control by Sylvan Ventures and Sylvan and the presence of interlocking
directors and officers create potential conflicts of interest and could prevent
a change of control.
Sylvan Ventures owns a substantial majority of our outstanding capital
stock on a fully diluted basis. Sylvan Ventures is a majority-owned subsidiary
of Sylvan. Further, several of our officers and directors, including our chief
executive officer are directors and/or officers of Sylvan and/or Sylvan Ventures
and, in most cases, either own, or hold an option to purchase, equity securities
of Sylvan and/or Sylvan Ventures. See "Related Party Transactions." As a result,
the directors and officers of Sylvan and Sylvan Ventures will be able to control
our day-to-day operations and the outcome of substantially all matters submitted
to our stockholders for approval, including the election of directors and any
proposed merger, liquidation, transfer or encumbrance of a substantial portion
of our assets, or amendment to our charter to change our authorized
capitalization. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company even if it would be
beneficial to our stockholders. See "Principal Stockholders". Further, these
directors and officers have inherent conflicts of interest when making decisions
related to transactions between us and Sylvan Ventures or Sylvan. The ability of
Sylvan Ventures and Sylvan to control matters listed above together with the
potential conflicts of interest of their affiliates who also serve as our
executive officers could adversely affect the operation of our business. These
factors could limit the price that investors might be willing to pay for our
securities in the future. In addition, those persons serving as both our
officers and key employees and those of Sylvan Ventures and Sylvan have not
committed to devote any specific percentage of their business time to us. The
competing claims upon each officer's time
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and energies could divert attention from our affairs, placing additional demands
on our resources. The efforts of all or any of these individuals may not be
sufficient to meet both our needs and those of Sylvan Ventures and/or Sylvan. If
we were deprived of access to any key members of our management team, or other
personnel, or lost access to these services altogether, our business, prospects,
results of operations and financial condition could be materially adversely
affected. See "Related Party Transactions."
On June 30, 2000, we entered into agreements with Sylvan, including a
professional services agreement, a license agreement, a services agreement and a
facility use agreement for the purpose of defining our on-going relationship
with Sylvan following this offering. Also on June 30, 2000, we entered into a
$10 million revolving credit agreement and a Series A preferred stock purchase
agreement with Sylvan Ventures. See "Related Party Transactions." We cannot
assure you that the terms of these agreements, or the related transactions, will
be effected on terms at least as favorable to us as could have been obtained
from unaffiliated third parties. Further, we are substantially dependent on
Sylvan and Sylvan Ventures for the implementation of our business plan. If we
are unable to obtain adequate services from Sylvan and Sylvan Ventures our
business, prospects, results of operations and financial condition could be
materially adversely affected.
Risks Related to the Internet
-----------------------------
We depend on continued growth in use of the Internet and online commerce.
Our success depends upon the ability of the Internet infrastructure to
support increased use. The performance and reliability of the Internet may
decline as the number of online users grows or bandwidth requirements increase.
The Internet has experienced a variety of outages due to damage to portions of
its infrastructure. If outages or delays frequently occur in the future,
Internet usage (including usage of our website) could grow slowly or decline.
Concerns about inadequate Internet infrastructure, security, reliability,
accessibility, privacy and the availability of cost-effective, high-speed
service also may inhibit growth in Internet usage. Even if the necessary
infrastructure or technologies develop, we may incur significant costs to adapt
our operating strategy. Our success also depends upon acceptance and use of the
Internet as an effective medium for the delivery of services. Widespread use of
the Internet and online service delivery is a recent phenomenon. A large base of
consumers may not adopt and continue to use the Internet as a medium of service
delivery.
We may not be able to deliver various services if third parties fail to provide
reliable software, systems and related services to us.
We will be dependent on various third parties for software, systems and
related services. For example, we rely on third party service providers for the
design and development of our website, website hosting and technical support.
Some of these third parties that provide software and services to us may have a
limited operating history, may have relatively immature technology and may
themselves be dependent on reliable
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delivery of services from others. As a result, our ability to deliver various
services to our users may be adversely affected by the failure of these third
parties to provide reliable software, systems and related services to us. If
these outages or delays frequently occur in the future, Internet usage, as well
as the usage of our website, could grow more slowly or decline.
We may be sued due to privacy or security concerns.
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online service delivery. To transmit confidential information securely, we will
rely on encryption and authentication technology licensed to us by third
parties. Events or developments may result in a compromise or breach of the
algorithms that we use to protect consumer transaction data. Any penetration of
our network security or misappropriation of our consumers' personal information
could subject us to liability.
Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. We may need to expend significant
additional capital and other resources to protect against a security breach or
to alleviate problems caused by any breaches. Our business may be harmed if our
security measures do not prevent security breaches.
Claims may be based on other misuses of personal information, such as for
unauthorized marketing purposes. Websites typically place identifying data
"cookies" on a user's computer hard drive without the user's express consent.
We may use cookies for a variety of reasons, including the collection of data
derived from the user's Internet activity. Any reduction or limitation in the
use of cookies could limit the effectiveness of our sales and marketing efforts.
Most currently available Internet browsers allow users to remove cookies at any
time or to prevent cookies from being stored on their computer hard drives. In
addition, some commentators, privacy advocates and governmental bodies have
suggested that the use of cookies be limited or eliminated. The Federal Trade
Commission and several states have investigated the use of personal information
by online companies. We may incur expense if regulations regarding the use of
personal information are introduced or if our privacy practices were
investigated.
Government regulation and legal uncertainties could add additional burdens to
doing business on the Internet.
Laws and regulations applicable to Internet communications, commerce and
advertising are becoming more prevalent. Online commerce is new and rapidly
changing, and federal and state regulations relating to the Internet and online
commerce are evolving. Currently, there are few laws or regulations directly
applicable to access to the Internet or online commerce. Due to the increasing
popularity of the Internet, it is possible that laws and regulations may be
enacted to address issues such as user privacy, pricing, content, copyrights,
distribution, antitrust matters and the quality of products and services. The
adoption of these laws or regulations could reduce the rate of growth of the
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Internet, which could potentially decrease the usage of our website and could
otherwise harm our business. In addition, the applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, libel, obscenity and personal privacy is
uncertain. Most of these laws were adopted prior to the advent of the Internet
and do not contemplate or address the unique issues of the Internet. New laws
applicable to the Internet may impose substantial burdens on companies
conducting business over the Internet. In addition, the growth and development
of online commerce may prompt calls for more stringent consumer protection laws
in the United States and abroad. We also may be subject to regulation not
specifically related to the Internet, such as laws affecting catalog sellers.
Several telecommunications carriers have asked the Federal Communications
Commission to regulate telecommunications over the Internet. Due to the
increasing use of the Internet and the burden it has placed on the
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet and online service providers and to impose access fees on
those providers. If the FCC imposes access fees, the costs of using the
Internet could increase dramatically. In this event, our business could be
negatively impacted.
We may be liable for information displayed on and communicated through our
website.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or other theories relating to the information that we
publish on our website. These claims have been brought against online companies
as well as print publications in the past. Based on hyperlinks that we provide
to other websites, we may also be subjected to claims based upon online content
that we do not control but that is accessible from our website.
Changes in registration of domain names may result in the loss of or change in
our domain name and a reduction in brand awareness among our consumers.
For the foreseeable future, we will substantially rely on the eSylvan.com
domain name. Domain names are typically registered by regulatory bodies. The
regulation of domain names in the United States and abroad is subject to change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may not acquire or maintain the eSylvan.com domain name
in every jurisdiction in which we conduct business. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. As a result, we could be unable to prevent third
parties from acquiring domain names that infringe upon or otherwise decrease the
value of our trademarks and other proprietary rights.
Our users depend on others for access to our website.
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Our users will depend on Internet service providers, online service
providers and other website operators for access to our website. Many of these
service providers have experienced significant outages in the past, and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
Risks Related to this Offering
------------------------------
The value of the shares of Class A common stock offered by this prospectus may
not equal or exceed the value of the obligations undertaken by Sylvan
franchisees in exchange for those shares.
We have not undertaken a valuation of the obligations of Sylvan franchisees
under the participation agreement that are undertaken in exchange for our Class
A stock and the value of these obligations may be greater than, and possibly
much greater than, the value of our Class A stock and the cash payment in
exchange for which such obligations are to be undertaken.
We do not intend to pay dividends.
We do not currently intend to pay any dividends on our Class A stock or the
common stock into which it may be converted.
Our Class A Common Stock is not a liquid investment.
No market exists for our Class A common stock or any of our securities and
we do not expect that a market for our Class A stock will develop in the future.
No public market may ever develop for any of our securities. Our charter
contains provisions that restrict the transfer of our Class A stock for the
foreseeable future. See "Description of Capital Stock--Class A Common Stock;
Annex C"
In connection with this offering you will be required to execute a
subscription agreement which imposes significant contractual restrictions on the
resale of shares of common stock into which Class A stock is convertible until
up to 180 days following the effective date of our initial public offering
registration statement and your share certificates may carry a legend to reflect
these restrictions. See "The Offering--Subscription Agreement;" "Annex A." You
should not expect to be able to sell our Class A stock or otherwise liquidate
your investment, even in an emergency or if your circumstances change.
Moreover, if a sale were possible, the price that you would receive may not
equal or exceed the value of your investment. You must be prepared to bear the
economic risk of holding our Class A stock for an indefinite period of time.
The certificates representing our Class A stock will bear appropriate legends
referring to restrictions on transferability imposed by the contractual
restrictions, the Securities Act of 1933 and applicable state securities laws.
Our Class A Common Stock is subject to redemption at a price that may not
reflect the fair market value of the common stock into which it may convert.
Our Class A common stock is subject to redemption in the event of the death
(under certain circumstances) or dissolution of the holder, of an involuntary
transfer by the holder, including bankruptcy and divorce, the transfer
restrictions are held invalid and a holder attempts to make a transfer, a
franchise license agreement or area development agreement terminates or of a
transfer of a franchise license agreement or area development agreement. The
redemption price per share of Class A stock redeemed, as discussed above, will
be the greater of $0.875 or the most recently appraised value per share of the
Class A stock as determined or approved by our Board of Directors. Due to the
transfer restrictions and terms and conditions of redemption and conversion of
the Class A stock and the timing of the most recent appraisal, the redemption
value of a share of Class A stock will likely be substantially less than the
fair market value of the shares of common stock into which that share of Class A
stock would convert upon the occurrence of an event giving rise to a conversion.
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Under our business plan, investors will experience dilution with future stock
issuances.
We currently intend to finance a significant amount of our growth with
shares of our capital stock. As of the date of this offering we will have 100
million authorized shares of capital stock. As of the date of this prospectus,
we have 14 million shares of common stock outstanding. In addition, we have 3
million shares of common stock reserved for options under the 2000 eSylvan, Inc.
Omnibus Stock Plan. On June 30, 2000, we entered into a stock purchase agreement
with Sylvan Ventures under which Sylvan Ventures agreed to purchase an aggregate
of 10,526,316 shares of our Series A Preferred Stock in equal closings on the
last day of each of the next six fiscal quarters at an aggregate price of $20
million which represents a price per share of $1.90. Further, our Series A
Preferred Stock contains anti-dilution provisions that may increase the dilution
experienced by our existing stockholders in the event of future issuances. See
"Description of Capital Stock--Series A Preferred Stock." Our charter permits us
to increase the number of authorized shares of stock by vote of the board of
directors without the approval of our stockholders. Consequently, we will be
able to finance our growth by issuing significant amounts of additional shares
of capital stock without obtaining stockholder approval of these issuances. To
the extent we are successful in financing our growth through the issuance of
capital stock, dilution in percentage ownership will be experienced by existing
stockholders. In addition, dilution in percentage ownership will be experienced
by existing stockholders upon the issuance of our Series A Preferred Stock and
upon the exercise of any options or warrants that we have granted or will grant
in the future.
You will incur tax consequences from your investment in our Class A common
stock.
Your investment in our Class A common stock will have certain income tax
consequences. You are urged to consult your tax advisor with respect to the
United States federal, state, local and foreign tax consequences of your
investment in this offering. See "The Offering--Certain Federal Income Tax
Consequences."
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Forward-Looking Statements; Market Data
Many statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Plan of Operation" and "Business" and elsewhere are forward-
looking statements that are not based on historical facts. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
You may identify forward-looking statements by the use of words like
"believes," "intends" "expects" "may," "will," "should" or "anticipates," or the
negative equivalents of those words or comparable terminology, and by
discussions of strategies that involve risks and uncertainties. Although we
believe that the expectations reflected in our forward-looking statements are
reasonable, our expectations may prove incorrect. We cannot assure you that our
future results, levels of activity and achievements will occur as we expect, and
we assume no responsibility for the accuracy and completeness of our forward-
looking statements. We disclaim any obligation to update or revise any forward-
looking statements, whether as a result of new information or future events or
otherwise.
This prospectus contains market data related to our business plan and the
Internet. This market data includes projections that are based on a number of
assumptions. The assumptions include:
. no catastrophic failure of the Internet will occur
. the number of people online and the total number of hours spent online will
increase significantly over the next five years
. the online delivery of tutoring services will be accepted in the marketplace
. the development of an online tutoring experience that is qualitatively
comparable to an in-person tutoring experience is technologically feasible
. the download speed of content will increase dramatically
. Internet security and privacy concerns will be adequately addressed
If any one or more of the foregoing assumptions turns out to be incorrect,
actual results may differ from our projections based on these assumptions. The
failure of these markets to grow at our projected rates may have a material
adverse effect on our business, results of operations and financial condition,
and the value of our Class A stock.
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The Offering
Class A common stock offered by this prospectus:
Maximum Offering: 3,000,000
Minimum Offering: 2,700,000
Use of proceeds: There will be no proceeds to
us from this offering
Shares Offered
We are offering up to 3,000,000 shares of Class A common stock under this
prospectus in separate offerings to franchise licensees under numbered franchise
license agreements with Sylvan dated on or prior to July 28, 2000 relating to
territories in the United States (exclusive of its territories) and Canada and
certain potential franchise licensees under area development agreements with
Sylvan relating to territories in the United States (exclusive of its
territories) and Canada. Any potential franchise licensee under an area
development agreement relating to a territory in which the potential franchise
licensee was not, as of July 28, 2000, in compliance with the development
schedule set forth in such area development agreement is excluded from this
offering.
The specific number of shares of Class A stock that we are offering to you
is set forth in a prospectus supplement accompanying this prospectus that sets
forth your name and the number of your franchise license agreement and/or the
territory of your area development agreement with Sylvan. No one may use this
prospectus to consummate sales of shares of our Class A stock unless it is
accompanied by a prospectus supplement. The delivery in any jurisdiction of this
prospectus together with a prospectus supplement relating to a specific offering
of our Class A stock shall not constitute an offer in that jurisdiction of any
other securities covered by this prospectus but not described in the prospectus
supplement.
In connection with this offering, we will pay to each person that invests
in shares of our Class A common stock an amount in cash equal to $0.35
multiplied by the number of shares of Class A common stock that we are offering
to you.
Please note that if you are party to more than one franchise license
agreement with Sylvan or if you are party to an area development agreement with
Sylvan pertaining to more than one Sylvan franchise territory, you will receive
a separate solicitation for each franchise license agreement and each area
development agreement territory.
The number of shares that we offer to you, as included in the prospectus
supplement relating to our offering to you, was determined as of July 28, 2000,
by multiplying the number of shares that we are offering in your country by the
fraction, the numerator of which is the K-12 student age population in the
territory set forth in your franchise license agreement or area development
agreement with Sylvan, and the denominator of which equals the total K-12
student age population in all Sylvan licensed territories in your country which
was 31,532,690 for the United States and 2,664,547 for Canada. We determined
the number of shares we are offering in your country by multiplying the total
number of shares that we are offering under this prospectus by the
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fraction, the numerator of which is the reported 1999 gross revenues from
licensed Sylvan centers in your country (exclusive of its territories), and the
denominator of which is the total 1999 reported gross revenues from licensed
Sylvan centers in both the United States (exclusive of its territories) and
Canada. Based on this calculation, we intend to offer 2,850,000 shares in the
United States and 150,000 shares in Canada.
We determined the formula described above and the other terms by which
Sylvan franchisees may participate in our business, as described in the form of
participation agreement attached hereto as Annex B, through more than nine
months of negotiations between our representatives and the board of directors of
the Sylvan Franchise Owners Association, Inc., or FOA. The FOA was chartered by
Sylvan franchisees to share information, represent the views of franchisees to
Sylvan's management and to participate with Sylvan in the management of critical
resources. Membership in the FOA is open to all Sylvan franchisees and a
majority of Sylvan franchisees are currently members. The board of directors of
the FOA is comprised of up to ten FOA members representing its member
franchisees in four regions in the United States and one region in Canada that
are elected to two year terms.
The resale or transfer of the shares of Class A stock that we are offering
under this prospectus will be subject to significant restrictions on transfer
and a repurchase option. See "Description of Capital Stock--Class A Common
Stock; Annex D" We have no current plans to list our Class A stock on an
exchange or other public market and, accordingly, we expect our Class A stock to
be severely illiquid for the foreseeable future.
Subscription Agreement (See Annex A, hereto)
If you decide to invest in this offering, you must execute and forward to
us a copy of the subscription agreement, a form of which is attached and made a
part of this prospectus. By executing the subscription agreement you will be
making an irrevocable offer to invest in shares of our Class A stock and to
receive $0.35 in cash for each share of our Class A stock in which you invest in
exchange for entering into the participation agreement. Your offer will be
irrevocable because we will rely on your offer in determining whether the
minimum has been sold. See "Plan of Distribution."
Under the terms of the subscription agreement, you represent, warrant and
acknowledge as follows:
. As of July 28, 2000 and as of the date of the subscription agreement, you are
the person that is party to the franchise license agreement or area
development agreement that is described in the subscription agreement and
prospectus supplement that relate to our offering to you
. In the event you are party to an area development agreement, as of July 28,
2000 and as of the date of the subscription agreement, you were in compliance
with the development schedule set forth in that area development agreement
. You have duly authorized the execution and performance of the subscription
agreement and the participation agreement
. You require no consents or approvals for the execution of the subscription
agreement or the participation agreement
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. The subscription agreement and the participation agreement will not
conflict with any of your other obligations
. You are acquiring shares of our Class A stock for investment, for your own
account and not with a view to or for sale in connection with any
distribution thereof or with any intention of disposing of the same or any
interest therein
. You are exercising your own business judgment in determining whether to
make an offer to invest in shares of our Class A stock using such tax,
financial and legal advice as you deem appropriate, and you have received
and reviewed this prospectus and the prospectus supplement relating to our
offering to you
. You acknowledge that you are free to enter into the participation agreement
with Sylvan without offering to invest in our Class A stock
Under the terms of the subscription agreement, you agree as follows:
. Upon the request of the underwriter of a public offering of our capital
stock you will execute an agreement restricting the transfer of all shares
of our capital stock that you then hold for up to 180 days. See
"Description of Capital Stock--Class A Common Stock."
. To the extent that determining the value of shares of our Class A stock is
necessary for any federal, state, local or foreign tax purpose, the value
of the shares shall be no less than $0.875 per share.
. You are receiving shares of our Class A stock and cash from the Company in
compensation for services, the shares of Class A stock and cash will be
taxable to you as ordinary income and you will not take any action or
position (including in connection with the filing of any federal, state,
local or foreign tax return of any kind) inconsistent with this position.
. Maryland law will apply to the subscription agreement, any lawsuit under
the subscription agreement may be brought exclusively in the state and
federal courts of Maryland and you consent to the jurisdiction of these
courts.
Participation Agreement (See Annex B, hereto)
Sylvan is offering you the opportunity to participate in our eSylvan
business on the terms set forth in the participation agreement, a form of which
is attached and made part of this prospectus. If you decide to invest in shares
in the offering, you will be required to execute and forward to Sylvan a copy of
the participation agreement. By executing the participation agreement, you will
be making an irrevocable offer to participate in our business plan on the terms
and conditions set forth therein. See "Plan of Distribution."
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Under the terms of the participation agreement, you will represent,
warrant, acknowledge and agree as follows:
. You shall adhere to Sylvan's reasonable directives concerning
promotion of our business, including displaying posters or other
promotional materials at your center that promote our business
. As of July 28, 2000 and as of the date of the participation agreement,
you are the person that is party to the franchise license agreement or
area development agreement that is described in the subscription
agreement and prospectus
. In the event you are party to an area development agreement, as of
July 28, 2000 and as of the date of the participation agreement, you
were in compliance with the development schedule set forth in that
area development agreement
. Our business is separate and distinct from Sylvan and the rights
granted to you as licensee under your franchise license agreement or
potential licensee under your area development agreement with Sylvan
. Nothing in your franchise license agreement or area development
agreement with Sylvan or the relationship created thereby prevents or
restricts Sylvan from establishing our business, seeking independent
investors in our business, licensing to us the right to use Sylvan
proprietary rights, including all Sylvan trademarks, service marks,
copyrighted materials, know how, programs, systems, teaching
techniques, diagnostic tests and academic and prescriptive educational
courses or programs for us to use in developing our business
. Sylvan may contract with us to provide administrative or other
services and may jointly promote and advertise the Sylvan Learning
Center System and our business
. You shall not assert any claim you may now or in the future have
against Sylvan or us with respect to the establishment or development
of our business or the offering of our products and services to the
public in accordance with the participation agreement and our
agreements with Sylvan
. We are a beneficiary of the waivers set forth above and that we have
the right directly to enforce our rights under the participation
agreement
. The participation agreement shall remain in effect until the earlier
of
. the termination of our license agreement with Sylvan (see
"Business--Strategic Alliance with Sylvan and Sylvan Ventures.")
. the termination of your franchise license agreement with Sylvan
. the expiration or termination of your area development agreement
with Sylvan if prior to that expiration or termination, you do
not enter into a franchise license agreement pertaining to the
territory covered by the area development agreement
. Maryland law will apply to the participation agreement and any dispute
under the participation agreement shall be settled in accordance with
the procedures set forth in your franchise license agreement or the
area development agreement with Sylvan.
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In the event that you enter into a participation agreement with Sylvan,
Sylvan will pay you a reverse royalty based on the amount of revenues that we
generate in the zip codes covered by your franchise license agreement or area
development agreement with Sylvan. The amount of the reverse royalty will be
75% of royalty revenues that we pay to Sylvan that are derived from the
applicable zip codes (but in no event less than 3% of our net revenues from such
zip codes). You will not be entitled to receive any reverse royalty until we
have paid Sylvan an amount based on the amount of revenues that we generate in
the zip codes covered by your franchise license agreement or area development
agreement with Sylvan equal to $0.47 multiplied by the number of shares of our
Class A stock that you hold as of the date of the participation agreement. We
will pay Sylvan royalties under our license agreement with Sylvan. See
"Business--Strategic Alliance with Sylvan and Sylvan Ventures."
You may also elect to participate in optional benefits as described below,
but if you make such an election, you will be obligated to perform the
corresponding obligations as set forth in the participation agreement. You may
withdraw from an optional benefit at any time upon giving 60 days written notice
to Sylvan and shall thereafter no longer be subject to the corresponding
obligations. Such withdrawal will not affect your other obligations under the
participation agreement.
. Referrals to eSylvan. Sylvan will pay you for each student that you refer to
us. The payments will equal 5%, up to a maximum of $100, of all revenues
received by us for the programs to which each referred student initially
subscribes, including testing and registration fees. Sylvan will credit you
with a referral when a student uses your center number or location when
initially enrolling for our services or when you send an email referral to us
or Sylvan.
. Referrals from eSylvan. For each student that we refer to you, you will pay
Sylvan 5%, up to a maximum of $100, of all revenues received by you for such
program, including testing and registration fees.
. Instructor management. Sylvan may also periodically ask you to provide or
manage instructors, education directors and sales personnel. To the extent
you provide any such personnel, Sylvan shall reimburse you for the salary of
such instructors or other personnel at an hourly rate based on the base
compensation such person receives from you. In addition to salary
reimbursement, Sylvan will pay you a 30% management fee for each hour of
direct instruction or test administration, including some specified
preparation time, or parent conferences (calculated as a salary reimbursement
multiplied by 30%). Additional services to be provided to us by center
personnel and corresponding fees may be arranged subsequently on such terms
and conditions as may be approved by the eSylvan Committee. See "Management--
Program Agreement."
. Sales Commission. For each student enrollment that you generate for us from
your center, in addition to the referral fees discussed above, you will
receive a sales commission from Sylvan equal to 5%, up to a maximum of $100,
of the revenues
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received by us for the first program(s) to which the student initially
subscribes through the center. A "student enrollment" means your online
submission to Sylvan or us for engagement in our business of an enrollment
form and acceptable payment.
For a period of 12 months after the date on which each of the benefits
described above becomes operational, Sylvan has agreed not to modify the terms
of such benefits. Following the end of such period, Sylvan may in its
discretion implement changes to the benefits that it considers commercially
necessary, so long as:
. The changes apply to all participants in that benefit
. Any changes have been reviewed and approved by the eSylvan Committee, and
. Sylvan provides you not less than 60 days prior written notice
Certain Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax
consequences to participants receiving cash and shares of Class A common stock
pursuant to this offering. This summary does not discuss all aspects of United
States federal income taxation that may be relevant to a particular participant,
nor does it discuss most aspects of applicable state or local tax laws, nor any
aspects of foreign tax laws. This summary is based on U.S. laws, regulations,
rulings and decisions currently in effect, all of which are subject to change,
possibly with retroactive effect.
You are urged to consult your tax advisor with respect to the United States
federal, state, local and foreign tax consequences of your investment in this
offering.
A participant who receives cash and our Class A common stock in this
offering generally will recognize ordinary income equal to (1) the amount of
cash received and (2) the fair market value of the stock received. This income
generally will be recognized at the time the stock is delivered to the
participant and will generally be subject to tax at ordinary income tax rates.
Such income may also be subject to employment taxes, and state and local income
taxes.
A participant's tax basis in the stock will generally be equal to the
ordinary income recognized as a result of the participant's receipt of the
stock. A participant's holding period for the stock will generally begin on the
date on which ordinary income is recognized.
When a participant sells shares of the stock, the participant will
generally recognize gain (or, under certain conditions, loss) at the time of
sale equal to the difference between the amount realized and the participant's
tax basis in the stock. Provided that the stock is a capital asset in the hands
of the participant, the gain (or loss) will be long-term capital gain (or loss)
if more than one year has elapsed between the date
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on which ordinary income was recognized and the date of sale, and short-term
gain (or loss) if one year or less has elapsed.
Our board of directors with the advice of an investment banking firm
and based on economic, market and other conditions in effect on the date of this
prospectus, has determined that, as of the date of this prospectus, the per
share value of the Class A common stock to be issued under this prospectus is
not more than $0.875. We do not undertake any obligation to update, revise or
reaffirm this determination after the date of this prospectus. This
determination is provided to you solely for the limited purpose of assisting
you, in consultation with your tax advisor, in the event you should decide to
invest in our Class A common stock, in determining the value of the shares of
our Class A common stock for tax purposes and may not be relied upon by you for
any other purpose. If you do not invest in shares of our Class A common stock,
you may not rely on this determination for any purpose. No other person may rely
upon this determination for any purpose. We can give no assurance that the U.S.
Internal Revenue Service or any other tax authority will agree with this value
determination of our board of directors.
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Use of Proceeds
We will not receive any proceeds from the offering of shares of our Class A
stock under this prospectus.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that our board of
directors may deem relevant.
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Capitalization
. The following table sets forth our capitalization as of March 31, 2000 on an
actual basis; on an as adjusted basis to give effect to:
(a) the issuance of 14,000,000 shares of our common stock to Sylvan
Learning Systems, Inc. pursuant to a contribution agreement between
eSylvan, Inc. and Sylvan Learning Systems, Inc.;
(b) the subscription by Sylvan Ventures LLC for 10,526,316 shares of our
Series A Preferred Stock pursuant to a stock purchase agreement between
eSylvan, Inc. and Sylvan Ventures LLC; and,
(c) the issuance of 3,000,000 shares of common stock at an assumed value of
$0.875 per share and the related cash payment of $1,050,000 ($0.35 per
share) to the investors in connection with this offering.
This table should be read in conjunction with our financial statements
and related notes thereto and other financial information appearing elsewhere in
this Prospectus. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Plan of Operations."
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------
Actual As adjusted
------------- ----------------
<S> <C> <C>
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value;
20,000,000 shares authorized; no shares issued and
outstanding actual; 10,526,316 shares issued and outstanding
as adjusted $ - $ 10,526
Common stock, $0.001 par value; 70,000,000 shares authorized;
no shares issued and outstanding actual; 14,000,000 shares
issued and outstanding as adjusted - 14,000
Class A common stock, $0.001 par value; 10,000,000 shares
authorized; no shares issued and outstanding actual;
3,000,000 shares issued and outstanding as adjusted - 3,000
Additional paid-in capital 545,490 27,597,474
Receivable from sale of common stock - (3,404,510)
Subscription receivable - preferred stock - (20,000,000)
Accumulated deficit (767,711) (767,711)
--------- ---------------
Total stockholders' equity (deficit) and capitalization $(222,221) $ 3,452,779
========= ===============
</TABLE>
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Selected Financial Data
The following table presents the selected financial data of our business. The
financial data for the period October 1, 1999 (date of inception) through March
31, 2000 has been derived from, and are qualified by reference to, our audited
financial statements included elsewhere in this prospectus.
You should read the selected financial data together with "Management's
Discussion and Analysis of Financial Condition and PLan of Operation" and our
financial statements and related notes.
<TABLE>
<CAPTION>
Period from
October 1, 1999
(inception) to
March 31, 2000
-------------------
<S> <C>
Statement of Operations:
Revenues $ -
Cost and expenses:
Sales and marketing 79,265
General and administrative 1,255,023
Research and development 344,316
Allocated indirect overhead costs 327,079
---------------
Total cost and expenses 2,005,683
---------------
Operating loss (2,005,683)
Allocated income tax benefit 786,865
---------------
Net loss $ (1,218,818)
===============
<CAPTION>
As of March 31, 2000
-----------------------------
Actual As adjusted(1)
--------- ---------------
<S> <C> <C>
Balance Sheet Data (at end of period)
Cash and cash equivalents $ - $ -
Working capital deficit (720,983) (720,983)
Total assets 498,762 4,173,762
Equity (deficit) (222,221) 3,452,779
</TABLE>
(1) The as adjusted balance sheet data above gives effect to the issuance of
14,000,000 shares of common stock to Sylvan Learning Systems, Inc. pursuant
to a contribution agreement between eSylvan, Inc. and Sylvan Learning
Systems, Inc., the issuance of 3,000,000 shares of common stock at an
assumed value of $0.875 per share and the related cash payment of
$1,050,000 ($0.35 per share) to the investors in connection with this
offering.
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Management's Discussion and Analysis of Financial Condition and Plan of
Operation
Plan of Operation
We are a development stage business and intend to deliver high quality
supplemental education to families and children through a variety of
applications on the Internet. Our operations to date have not generated revenues
and our lack of operating history makes it difficult to evaluate our business
and prospects. You must consider our prospects in light of the risks, expenses
and difficulties frequently encountered by companies in their early stage of
development, particularly companies dependent upon the relatively new and
rapidly evolving Internet environment. See "Risk Factors." We have no
assurance that we will be successful in addressing these or any other risks, and
our failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
From inception on October 1, 1999 through February 2, 2000 we operated as
an unincorporated division of Sylvan, from February 2, 2000 to June 30, 2000, we
operated as a subsidiary of Sylvan and since June 30, 2000, we have operated as
a majority owned subsidiary of Sylvan Ventures. During these periods, our
operations have consisted of organizational activities, research and analysis
with respect to the Internet educational services industry, exploration of
strategic relationships, development of our website and identifying and testing
key technology. As of March 31, 2000 we have generated no revenues and have
incurred expenses and a cumulative operating loss of approximately $1.2 million
from inception, consisting primarily of legal, accounting, consulting,
development, personnel and facilities costs. Since our inception, Sylvan has
provided us with most of the administrative personnel and services that we have
required. We do not currently have any source of revenue.
Our ability to implement our business plan depends primarily upon the
successful and timely completion and public launch of our website. Our website
is being developed in cooperation with multiple website development firms.
Although we have been testing a prototype version of our website and the limited
delivery of tutoring services over the Internet, this prototype website is not
yet publicly available and we are currently offering no services to the public.
Although our website design and development, as well as promotion of the eSylvan
brand, will be an ongoing process, we estimate that our website will be
substantially completed and ready for visitors within six months after the
completion of this offering.
Simultaneously with the design and development of our website, we have
developed content and technology for the delivery of our services. We intend to
offer two separate services through our website, diagnostic prescriptive
tutoring and college entrance examination preparation. In this regard, we intend
to establish relationships with content providers and third parties. We also
intend to develop strategic relationships with other companies that desire to
market our services to our selected demographic. We expect to commence the
public offering of both diagnostic prescriptive tutoring services
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and college entrance examination preparation services within six months of the
completion of this offering. These time frames are based upon our management's
research of the online educational services industry, our internal testing and
discussions with website design and development firms.
During the first 12 months of operations, the expenses we expect to incur
in connection with the implementation of our business plan include:
. Development of our website
. Development of technical infrastructure for online delivery of tutoring
services
. Development or purchase of online tutoring content
. Direct marketing, advertising and promotion of the eSylvan.com website and
the eSylvan brand
. Recruiting and retention of executive, marketing, technical and tutoring
personnel
We currently estimate that during the period of July 2000 to December 2001
the cost of website development and technical infrastructure for online delivery
of tutoring services will be at least $5 million, the cost of online tutoring
content will be at least $2 million, the cost of marketing and advertising
expenditures will be at least $4.5 million and the cost of personnel will be at
least $7.5 million. Because we are a new entrant to the Internet market, these
expenditures may be significantly higher than we anticipate.
Until we begin to recognize revenue from operations, we will continue to be
a development stage company. We anticipate that, for the foreseeable future, we
will incur substantial operating losses and negative cash flow as we execute our
business model and acquire and integrate the necessary technology, systems and
supporting infrastructure, enroll students in our service, develop our brand
name, hire employees and contract personnel and expand our business. The extent
of these losses will depend, in part, on the amount and rates of growth in our
revenue from enrolled students.
To the extent that revenue does not grow at anticipated rates or that
increases in our operating expenses precede or are not subsequently followed by
commensurate increases in revenue, our business, results of operations and
financial condition will be materially and adversely affected. There can be no
assurance that our operating losses will not increase in the future or that we
will ever achieve or sustain profitability. See "Risk Factors - We have not
launched our website and we have no operating history" and "-- We have no
current source of revenues and we expect to generate operating losses and to
experience negative cash flow for the foreseeable future."
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Liquidity And Capital Resources
On June 30, 2000, we entered into a revolving credit note with Sylvan
Ventures pursuant to which we may borrow up to $10 million. This note bears
interest on the unpaid principal balance equal to the prime lending rate and
terminates on December 31, 2001. As of June 30, 2000, the principal balance on
the note was $0.
We have entered into a stock purchase agreement with Sylvan Ventures under
which we have agreed to issue an aggregate of 10,526,316 shares of Series A
preferred stock in six separate closings on September 30, 2000, December 31,
2000, March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001
for an aggregate price of $20 million which represents a price per share of
$1.90. See "Related Party Transactions."
As of the date of this prospectus we do not have a source of revenues and
do not expect to begin recognizing revenues until our website and technology for
the delivery of online educational services has been implemented and we are able
to enroll students. We expect to incur significant negative cash flow from
operations for the foreseeable future. We do not expect that our current
resources will be sufficient to support our growth and operations during this
period of negative cash flow from operations and we expect that we will need to
raise additional funds. We cannot guarantee that we will be able to raise
additional funds, or, if we can, that we will be able to do so on terms that we
deem acceptable. In particular, potential investors may be unwilling to invest
in us due to Sylvan Venture's voting control over us. See "Risk Factors - Our
control by Sylvan Ventures and Sylvan and the presence of interlocking directors
and officers create potential conflicts of interest and could prevent a change
of control." Our failure to raise the funds necessary to establish and grow our
business would have a material adverse effect on our business and our ability to
generate and grow revenues and could result in a complete loss in the value of
our Class A stock offered by this prospectus. If we raise funds through the
issuance of equity, equity-related or debt securities, these securities will
likely have rights, preferences or privileges senior to those of the rights of
our Class A stock, and our Class A stockholders may experience dilution.
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Business
Overview
We are a development stage company which seeks to deliver high quality
supplemental education to families and children via a variety of applications on
the Internet. We intend to devote our resources to attractive segments of the
supplemental education industry that exist on the Internet as follows:
. Delivery of online tutoring for Grade 2-12 students. We intend to develop a
fee-based Internet application through which we can deliver our diagnostic-
based tutoring in real time with the same quality that Sylvan provides in its
traditional bricks and mortar learning center environment. As such, we will
be able to leverage our partnership with Sylvan to provide online tutoring
based on a proven educational model.
. Supplemental education services for college entrance exam preparation. We
will seek to capitalize upon Sylvan's experience to address the specific
needs and requirements of students as they prepare for SAT and ACT college
entrance examinations.
Our operations to date have consisted primarily of organizational and
capital raising activities, research and analysis with respect to Internet
education industry opportunities, development of technical and operational
infrastructure and the development of strategic relationships. As of the date of
this prospectus, we do not have a website that is publicly available and have
not generated any revenues, nor do we have any sources of revenues.
The Market Opportunity
The K-12 e-Learning Market
According to Merrill Lynch, the United States spends an estimated $360
billion annually on K-12 education, of which, $7.0 billion was spent directly on
technology during the 1998 school year, a figure that is growing by 18%
annually. Merrill Lynch estimates that the K-12 e-learning market today is $1.3
billion and that the K-12 e-learning market is poised for dramatic growth as it
encompasses a large number of potential users - 53 million school children,
three million teachers and 23 million families.
According to Merrill Lynch, nearly half the students that enter the
California public university system are not ready for college level reading and
math, and this scenario is repeated in state after state. According to Merrill
Lynch, the e-knowledge industry is estimated to grow from $3.6 billion in 1999
to $25.3 billion in 2003 and investors, perceiving the growing demand for
knowledge services, have provided capital to those knowledge services firms
offering the best solutions to the biggest problems.
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According to Merrill Lynch, in 1999, venture capitalists invested $469 million
in the K-12 educational services industry.
Schools are rapidly expanding their computer networks and adding Internet
access with the help of a four year, $9 billion matching funds program
implemented by the Federal Communications Commission in January 1998. According
to Merrill Lynch, spending in technology is up 18% annually from $2.1 billion in
1991-92 to $6.7 billion over the past seven years, including a substantial
funding jump last year as a result of new funding sources such as the federal e-
rate. Moreover, according to Merrill Lynch, the ratio of school PCs to students
has improved from one PC for every 16 students in 1992 to one PC for every six
students in 1999 and the number of K-12 schools using the Internet grew from 35%
in 1994 to 89% in 1999. Indeed, Merrill Lynch indicates that nearly every
school in the United States has some form of Internet access, and student
accessibility through classroom access is growing rapidly.
In addition to the expanding presence of computers and Internet access in
schools, Merrill Lynch has recognized a similar trend of increasing penetration
of computers in the homes of people with children. According to Merrill Lynch,
nearly 20 million children and teens currently use the Internet at home and the
number of children ages 2-12 using online services at home is expected to grow
from 4.3 million in 1998 to 10.1 million in 2002. According to Merrill Lynch,
by 2003, it is expected that 67% of homes, 67% of teens and 55% of children will
be online. We believe that this proliferation of computers and access to the
Internet has enabled children to become increasingly comfortable and skilled
with using computers effectively and is altering their approach to many basic
activities in their lives, such as education and research.
Distance Learning Through the Internet
We believe that the broad accessibility of the Internet and its real-time
interactive nature make it an ideal platform for distance learning. Online
learning allows students to participate in classes and activities at times that
are convenient for them from a variety of geographic locations, including
learning centers or their own homes. Online learning allows both students and
parents additional flexibility by eliminating transportation requirements.
According to Merrill Lynch, the domestic broadband market will expand to 2.3
million homes this year, up 200% from approximately 750,000 in 1998. By 2004,
Merrill Lynch expects broadband to reach 48% of Internet users, or 30 million
households. We expect this growth in distance learning to expand to other
education activities like tutoring as home penetration of computers continues,
broadband Internet access becomes more widespread and two-way audio and video
conferencing in the home becomes more generally available.
In order to meet this demand, we believe that education providers face
several challenges in delivering high quality education over the Internet. We
believe that effective online learning requires that students receive:
. Comparable experience and results to in-person learning
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<PAGE>
. Access to high quality content
. Access to qualified teachers and tutors
. The ability to track results
Due to the anonymity of the Internet, we expect that a significant number
of parents, teachers and students will prefer to use online services and
products to protect their privacy.
The eSylvan solution
Our business plan encompasses the delivery of products and services which
are fee-based as follows:
Diagnostic Tutoring
We intend to offer one-to-one, diagnostic-based tutoring over the Internet
for students who are seeking personalized, assessment based tutoring programs,
but find physical learning centers too inconvenient or potentially stigmatizing.
By providing tutoring services accessible from the home, we intend to make the
tutoring process more convenient for both the student and the parent, as
tutoring sessions can be conducted at flexible hours, including weekends, while
eliminating the need for transportation. Our Internet based model also removes
any negative stigma that a parent or student may associate with remedial
programs or learning centers. Modeled after Sylvan's center-based program, we
expect our Internet-based program to require from four to six months to complete
and comprise 40 to 60 hours of instruction. We intend to provide instruction
twice a week in one-hour sessions, and our tutors will schedule online parent
conferences after every 12 hours of instruction. Throughout a student's course
of study, we intend to test the student using standardized diagnostic tests, and
share the results with parents in personal online conferences.
Our tutors will be recruited from Sylvan's network of 1,000 corporate-
based tutors and 9,000 franchise-based tutors and other sources. See
"Business--Strategic Alliance with Sylvan and Sylvan Ventures."
SAT/ACT Preparation Courses
---------------------------
The 1.8 million annual participants in the Scholastic Aptitude Test
[registered trademark] (SAT) and approximately 1 million participants in the
American College Test(TM)(ACT) are competing against growing numbers of their
peers for spots in college and university entering classes. Consequently, more
students are taking preparation courses for college entrance exams.
Traditionally, students have had to pay high prices for a private tutor or
travel long distances to attend in-person coaching courses. By offering
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<PAGE>
preparation courses over the Internet, we intend to make the courses much more
convenient for students and their parents.
To prepare students for college entrance exams, we intend to provide
courses over the Internet. Students will be able to review difficult material as
often as they need, and they will drill and take practice exams on their
computers so that they can receive immediate feedback as well as practice taking
the exam in conditions similar to the real exam. Teachers will be available via
email and chat rooms to answer questions. Students will start courses whenever
they desire and work at their own pace.
Content
We intend to meet our needs for content by licensing proprietary materials
from Sylvan, developing new content internally and purchasing content from third
party sources as follows:
. Diagnostic Tutoring. We intend to use tutoring content for our core reading,
math, study skills, and language skills programs based upon Sylvan's
Individual Learning Objectives (ILO) tutoring curricula. The ILO tutoring
curricula provide a measurable academic outcome from a series of activities
or curriculum based programs. We intend to incorporate appropriate Internet-
based content into the "content-push" features of the tutoring delivery
platform. We also intend to purchase curriculum support materials, text, and
exercises from vendors which can provide subject specific curricula which
best support the ILOs in interactive Internet delivery.
. Test Preparation. We intend to capitalize upon the content developed by
Sylvan's Ivy Prep division. Also, we will seek to partner with appropriate
curriculum developers whose curricula are easily transitioned to Internet
delivery, or which has already been successfully converted for Internet
delivery.
Marketing
Our customer acquisition and retention strategy includes the following
marketing activities:
. Strategic Alliances. Once implemented, we will seek to leverage our services
to establish ourselves as the educational services provider of choice for
other websites that also target our selected demographic. We will track new
customer origination in order to:
. evaluate the effectiveness of our strategy to become the exclusive
educational services provider linked to and promoted by selected
education oriented sites
. remunerate strategic partners on a customer acquisition basis, awarding
a percentage of revenues of captured customers back to the originating
site
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Although we have identified potential partners, we have not signed
any agreements with these companies.
. Direct Response Marketing. We will seek to leverage Sylvan's experience in
using parent and student targeted media to achieve student leads. Utilizing
Sylvan's Internet-based marketing experience, we will place and manage
Internet-based advertisements in appropriate content areas, national media
advertisements, and direct mail to drive traffic to our website.
. Sylvan Referrals and Cross Marketing. We will seek to capitalize upon the
distribution strengths of Sylvan to pursue referrals from Sylvan's system
of products and services. We intend to pursue cross-promotion opportunities
with existing and former Sylvan customers. For example, Sylvan believes
that one of the main reasons that students leave a Sylvan program prior to
completion is inconvenience. With the convenience of electronic tutoring,
we will seek to retain such students for a longer period of time.
. Targeted Retention. Our services will be designed to capitalize on our
future relationships with students and their parents. We intend to target
our services to a student's or parent's area of interest through the
progression of the student's education. For example, an 8/th/ grade student
enrolled in advanced math or reading may be offered our standardized test
preparation programs as the student enters 11/th/ grade.
Technology
We intend to leverage our management team's experience with Sylvan's
Teach 2000 digitized student interface and Shortcut to Success (STS) in our
Internet-based tutoring product development.
. Teach 2000. Sylvan has gained five years experience with Teach 2000, a
student management and instructional delivery system. The Teach 2000
software tracks the instructional delivery process as teachers and students
work through an STS-generated, personalized instruction plan.
. Shortcut to Success (STS). STS delivers and scores a variety of tests for
students that enroll at Sylvan. These software systems are seamlessly
integrated to deliver diagnostic and prescriptive tests that pinpoint a
student's skill gaps, analyze a student's test results to prepare a
personalized instruction profile, and create initial and on-going parent
conference reports to monitor progress.
Our interactive service offerings will be supported by a technical
infrastructure to provide effective interaction over the Internet for students
and instructors and an operational support environment for effective business
operation. Our technical infrastructure includes a combination of technologies,
primarily acquired from the commercial marketplace and integrated by our
technology staff with some outsourcing to consulting firms.
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The primary interface to our learning environment is the web-enabled
personal computer. Students will gain access to our online program by entering
our website where information on learning programs is presented. When registered
for a learning program, students will interact with instructors in real time
through an audio/visual session, where new technologies permit simultaneous
voice and data transmission over the Internet connection. This learning
environment permits the instructor to control a tutoring session for up to three
students per session. Instructors can present curriculum associated content on a
whiteboard on the student's computer which both parties can simultaneously
reference and markup or annotate. The whiteboard may also be used without
content so that either party in the session can use freeform drawing tools for
illustration purposes.
We are developing several back-end applications to support our learning
environment. These applications are designed to permit us to prepare, maintain,
retrieve and present our tutoring content. Our customer relationship management
system permits us to retrieve student-specific data including specific tutoring
session schedules. Our administrative back-end applications permit billing,
payroll and account payment and provide support to our student incentive
program.
Competition
We believe that the key competitive factors in our market will be:
. technology, expertise and capabilities
. brand recognition
. content and instructional methodology
. access to capital
We expect to compete in the tutoring and college entrance exam
preparation market against both traditional bricks and mortar providers of
educational services and companies that are implementing an online business
plan.
. Bricks and Mortar Providers. We expect to compete with several companies that
provide tutoring and other educational services through their physical sites.
In most geographic areas that we intend to provide our online services, we
expect to compete also with individual tutors and state and local education
agencies that fund individual tutoring.
. Online Providers. We expect to compete with several companies that currently
participate in the online tutoring market. Although their models differ from
ours, we expect to compete for market share with several companies that offer
online services. Further, we expect that many existing bricks and mortar
tutoring companies, and others, will begin to distribute their services over
the Internet in the near future.
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. New Entrants. As Internet and broadband services become more widely deployed
in the K-12 market, we believe new and as yet unidentified companies will
enter the market. Traditional media companies and rapidly expanding Internet
companies are likely to present new competition.
Many of our current and potential competitors have operating histories and
greater customer or user bases, brand recognition and greater financial,
marketing and other resources than we do. In addition, many of these current
and potential competitors can devote substantially greater resources to product
development, marketing and promotional campaigns and website and systems
development than we can.
Strategic Alliance with Sylvan and Sylvan Ventures
Our operations to date have consisted primarily of organizational
activities, research and analysis with respect to the Internet educational
services industry, exploration of strategic relationships, development of our
website and the technical infrastructure necessary for the online delivery of
tutoring services and identifying and testing key technology. These operations
have been carried out as a division of Sylvan. Prior to this offering, we have
had few employees and most operational and administrative functions have been
performed by Sylvan personnel. Sylvan has created eSylvan as a stand-alone
corporation to separate our online educational services business plan from
Sylvan's other businesses and to facilitate this offering and capital raising.
Accordingly, we will be substantially dependent for the foreseeable future upon
the resources provided by Sylvan and Sylvan Ventures for the execution of our
business plan.
Sylvan Learning Centers
Sylvan seeks to provide high quality educational services with consistent,
quantifiable results, and has delivered its core educational service to more
than 1.2 million students primarily in grades three through eight over the past
19 years. In 1999, Sylvan provided services to over 130,000 students through its
770 centers in North America. Sylvan offers programs for students of all ages
and skill-levels who want to catch up, keep up or get ahead. Sylvan's range of
programs includes beginning, academic and accelerated reading; basic math,
algebra 1 and 2 and geometry; writing and composition; study skills; and SAT/ACT
preparation. In addition, Sylvan offers certified high school courses for
credit in geometry, algebra 1 and 2, trigonometry, pre-calculus and English 9,
10 and 11.
On May 19, 2000, Sylvan acquired substantially all of the assets of Ivy
West Educational Services, Inc. Ivy West is a California-based provider of
individualized one-to-one standardized test preparation and other general
tutoring services. In addition, Ivy West provides curriculum materials and
training to educators throughout the country. Ivy West currently offers programs
for standardized college admissions tests, including the PSAT, SAT and ACT and
for standardized high school admissions tests, including the ISEE (ERB), SSAT
and HSPT.
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Services provided to us by Sylvan
Professional Services Agreement
Student Referrals We may elect to participate in a cross referral program
whereby we and Sylvan receive payments for each student referred to each other.
Under the referral program, we will receive or pay amounts equal to 5%, up to a
maximum of $100, of all revenues received by Sylvan or us, respectively, for the
programs to which each referred student initially subscribes, including testing
and registration fees. For each student enrollment a Sylvan franchisee
generates for us, we will pay Sylvan a sales commission of 5%, up to a maximum
of $100, of the revenues we receive for the first programs to which such student
initially subscribes through the franchisee's center.
Professional Services Prior to assigning a diagnostic and prescriptive
instructor to a student, we must request Sylvan to provide an instructor for a
committed period. In the event Sylvan does not provide an instructor, we may use
instructors that are not provided by Sylvan. In the event Sylvan makes personnel
available for committed periods, we shall reimburse Sylvan for the salary of
such instructors or other personnel at an hourly rate based on the base
compensation such person receives from Sylvan. In addition to salary
reimbursement, Sylvan shall receive a 30% management fee for each hour of direct
instruction or test administration, including some specified preparation time,
or parent conferences (calculated as a salary reimbursement multiplied by 30%).
Additional services to be provided to us by center personnel and corresponding
fees may be arranged subsequently. If Sylvan refers instructors to us on an
independent contractor basis, we will pay Sylvan a referral fee of $100.
Co-Marketing We have agreed with Sylvan that we will provide a link to Sylvan's
website on our website and Sylvan will provide a link to our website on its
website. Sylvan has agreed to adhere to our reasonable directives concerning
promotion of our business including displaying posters or other promotional
materials in Sylvan-owned centers and requesting its franchisees to display
posters or other promotional materials in their centers.
License Agreement
We have entered into a license agreement with Sylvan under which we have
licensed the materials that we believe are necessary to implement our business
plan as follows:
. "eSYLVAN," "SYLVAN", "SYLVAN LEARNING CENTER," "SYLVAN LEARNING CENTERS,"
"SYLVAN LEARNING SYSTEMS" and such other trade names, trademarks, service
marks, associated logos and symbols as may be designated by Sylvan in
writing.
. The Sylvan system which includes, but is not limited to, Sylvan's proprietary
programs, systems and techniques and certain copyrighted materials, all
software and
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computer programs necessary to offer the online educational services and such
other content as may be designated by Sylvan in writing.
. Sylvan Ivy Prep materials for the online delivery of college entrance
examination preparation courses
. new materials, modifications, enhancements and improvements related to the
above (subject to an additional license fee)
For the duration of this agreement and for one year thereafter, we have
agreed not, directly or indirectly, to engage in or compete with any of Sylvan's
site based businesses or centers offering certain educational services. For the
duration of this agreement and for one year thereafter, Sylvan has agreed not,
directly or indirectly, to engage in or compete with any of our fee-based
educational services that are provided online to students, other than those
services provided online to students at any of Sylvan's site based businesses or
centers.
Under this agreement, we have agreed to co-develop with Sylvan a
confidential operations manual, which may be revised by Sylvan from time to
time, to govern the use of Sylvan's intellectual property in our business. We
have agreed that in order to promote Sylvan's intellectual property in
connection with our business, we will expend quarterly at least 6% of our prior
quarter's gross revenues on advertising approved by Sylvan.
Under this agreement, we have the right to modify Sylvan's intellectual
property or create derivative works and Sylvan has the right to modify any
software or materials that we create or develop for our business or create
derivative works from our software and materials. We will own any copyright in
the derivative works created by us and we have agreed to license to Sylvan these
derivative works for no additional consideration. We have agreed that Sylvan
will own any copyright in the derivative works created by it from our
intellectual property and that Sylvan will license to us these derivative works
for no additional consideration. With respect to certain other intellectual
property that we develop for our business, including software and other
materials, Sylvan will have 30 days from the date it receives notice that we
have developed this material to notify us of its desire to license it. Any
license will be for a reasonable fee designed to permit us to recoup our
development costs on a proportional basis across all the products or services in
which we will commercialize the material. We will have 30 days from the date we
receive notice that Sylvan has developed or created any new intellectual
property, including software or other materials, related to its learning center
business to notify Sylvan if we desire to obtain a license of that content. Any
license will be for a fee based on financial terms offered to all of its
franchise licensees.
We have agreed to pay Sylvan an initial license fee of $1 million and we
have agreed to pay Sylvan a periodic, running royalty equal to 4% of our net
revenues and an additional amount equal to any sales, gross receipts or similar
tax imposed on Sylvan. Sylvan has contributed the $1 million that we owed under
the license agreement to us as additional capital. During the first year of
this agreement, there will be no guaranteed
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minimum royalty, but for each calendar year thereafter, there will be a
guaranteed minimum royalty equal to 120% of the prior year's minimum royalty,
with the guaranteed minimum royalty for the first calendar year of $400,000.
Sylvan has credited us for future royalty payments under this agreement in the
amount of $1,050,000.
This agreement has an initial term of five years and it will terminate on
the fifth anniversary of the effective date; provided, however, that the license
with respect to content is perpetual for the duration of the applicable
copyrights and will not otherwise terminate. We have the option to renew the
agreement for an additional five years and no initial license fee will be owed
for that renewal term. At the end of the second term, if we do not terminate
this agreement, it will continue for consecutive five-year periods until
termination by either party upon three months written notice.
We have agreed to cooperate with Sylvan for the protection of the
intellectual property licensed to us. Sylvan has agreed, at its expense, to
defend and indemnify us from certain claims brought against us in the United
States based upon any infringement of United States intellectual property rights
with respect to only the licensed trademarks and service marks and not the
licensed content; provided, however, that Sylvan's liability is limited to the
amount of royalties paid by us within the one year preceding the date upon which
we make a demand for indemnification. We have agreed to defend any action, suit
or proceeding brought against Sylvan based upon or arising out of our operation
of our business.
Services Agreement
Sylvan has agreed to provide MIS support services, corporate accounting
department services, PeopleSoft (database management) services, human
resources/payroll services and legal services to us on an independent contractor
basis at fees that are fair and reasonable for the services provided based on
our utilization of such services. Fees that have not been paid shall accrue
simple interest at the prime rate plus one percent per annum. This agreement has
a one-year term and we can terminate the agreement at any time on 90 days
notice.
Facility Use Agreement
Sylvan has agreed to provide us with the use of its facilities for a
quarterly use fee and separate overhead fee based upon Sylvan's good faith
estimate of our use of such facilities. In the event Sylvan owns a facility, the
use fee is based on market rent. In the event Sylvan leases a facility, the use
fee is based on Sylvan's lease payments. This agreement has a one-year term, is
renewable for an additional year and is terminable by either party on 60 days
notice.
Sylvan Ventures, LLC
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Founded in February 2000, Sylvan Ventures develops and invests in
educational technology companies, providing them with access to brands, content
and resources of its parent company Sylvan.
Services provided to us by Sylvan Ventures
. A revolving line of credit in the amount of $10 million which terminates on
December 31, 2001.
. An investment of $20 million in our Series A preferred stock to be issued in
six separate closings ending on December 31, 2001.
Government Regulation And Legal Uncertainties
There is an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Recently, the United States Congress enacted Internet legislation
regarding children's privacy, copyrights and taxation. Other laws or regulations
may be adopted with respect to online content regulation, user privacy, pricing,
taxation and quality of products and services. Any new legislation or
regulation, or the application or interpretation of existing laws, may decrease
the growth in the use of the Internet, which could in turn decrease the demand
for our service, increase our cost of doing business or otherwise have a
material adverse effect on our prospects and revenues.
Liability for information retrieved from our website and other websites
Content may be accessed on our website or on other Internet sites that are
linked to our website. This content may be downloaded by users and subsequently
transmitted to others over the Internet. By providing those links, we may be
exposed to claims that we are liable for wrongful actions by the owners of these
sites. Claims of this nature have been brought, sometimes successfully, against
providers of Internet services. We could also be exposed to liability with
respect to third-party content that may be posted by users in chat rooms or
bulletin boards which may be offered on our website. We also may be subject to
claims, alleging that we, by directly or indirectly providing links to other
websites, are liable for copyright or trademark infringement or the wrongful
actions of third parties through their respective websites. The Digital
Millennium Copyright Act of 1998 established limited liability for online
copyright infringement by online service providers for listing or linking to
third party websites that include copyright-infringing materials. Although we
intend to obtain general liability insurance, that insurance may not cover all
potential claims to which we are exposed and may not be adequate to indemnify us
for all liability that may be imposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could result in
significant expense and cash demands which would adversely affect operating
results and financial condition. Even to the extent that these claims do not
result in liability, we could incur
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significant costs in investigating and defending against these claims which
would also adversely affect our operating results and financial condition.
Privacy Concerns
The Children's Online Privacy Protection Act of 1998 makes it unlawful for
an operator of a website or online service directed to children under 13 to
collect, use or distribute personal information from a child under 13 in a
manner which violates regulations to be proscribed by the Federal Trade
Commission. The FTC is in the process of issuing final regulations, which
concern the scope of this Act's parental consent requirements. The FTC is also
considering adopting regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing websites.
Further, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree in which an Internet company agreed to establish programs to
implement the principles contemplated in the FTC regulations that are under
consideration.
Internet Taxation
A number of legislative proposals have been made at the federal, state and
local level, and by various foreign governments, that would impose additional
taxes on the sale of goods and services over the Internet and some states have
taken measures to tax Internet-related activities. Although Congress recently
placed a three-year moratorium on state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. This legislation, or other attempts at regulating commerce over the
Internet, may substantially impede the growth of commerce on the Internet and,
as a result, adversely affect our opportunity to derive financial benefit from
those activities.
Jurisdictions
It is possible that, although our transmissions over the Internet will
originate primarily in Maryland, the governments of other states and foreign
countries might attempt to regulate our transmissions or prosecute us for
violations of their laws. These laws may be modified, or new laws enacted, in
the future. Any of these developments could have a material adverse effect on
our prospects, operating results and financial condition. In addition, as we
expect to offer our products and services in multiple states and foreign
countries, these jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each of these states or foreign countries.
As of the date of this prospectus, we are not qualified to do business in any
state other than Maryland, and our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties and could result in our inability to enforce contracts in these
jurisdictions. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply
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to our business, or the application of existing laws and regulations to the
Internet and other online services could have a material adverse effect on our
prospects, operating results and financial condition.
Employees
As of the date of this prospectus, we have approximately 30 full and 30
part time employees. Each of our officers is an officer or employee of Sylvan
and currently devotes a portion of his or her business time and attention to
Sylvan and a portion to us. We expect to hire full-time employees to assist in
the operation of our business. Although the competition for skilled employees in
the Internet and education industries is intense, we do not now foresee problems
in hiring qualified employees to meet our needs.
Our senior management does not possess experience in operating an online
educational services business. Therefore, we have relied, and expect to continue
to rely, on consultants, employees of Sylvan and other professionals with
Internet expertise and experience to assist us in executing our business model.
We will compensate these consultants and other professionals at competitive
rates and currently there is no way to estimate the term of their service.
Legal Proceedings
Since the date of our inception through the date of this prospectus, we
have not been involved in any legal proceedings. We cannot guarantee that we
will successfully avoid litigation incidental to the conduct of our business in
the future.
Properties
Our headquarters is located in Baltimore, Maryland. We currently lease our
facilities from Sylvan pursuant to a management and facilities use agreement.
See "Related Party Transactions." We expect to expand our facilities as our
operations grow. We believe that additional space will be available on
commercially acceptable terms.
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Management
Our directors and executive officers are as follows:
Name Age Principal Positions
---- --- -------------------
Christopher Hoehn-Saric 37 Chairman and Chief Executive Officer and
Director
David Graves 43 President and Chief Operating Officer
B. Lee McGee 44 Senior Vice President, Chief Financial Officer,
Treasurer, Assistant Secretary and Director
Robert Zentz 47 Secretary, Assistant Treasurer and Director
Peter Cohen 45 Director
Barry Miller 50 Nominee for Director
Following the closing of this offering, we intend to hire a chief executive
officer. We expect that chief executive officer to be elected to the board of
directors.
Christopher Hoehn-Saric has served as our chairman and chief executive officer
since inception and as a director since June 30, 2000. He is president, chief
executive officer and director of Sylvan Ventures, LLC, our majority
stockholder, and a principal in Sterling Capital, Ltd. ("Sterling"), the
investment partnership that led the 1986 acquisition of the predecessor to
Sylvan Learning Systems, Inc. Mr. Hoehn-Saric was co-chief executive officer of
Sylvan Learning Systems, Inc. from 1993 to June 2000 and was president of Sylvan
from 1988 until 1992. He is also a co-founder of Health Management Corporation,
a health services company. Before becoming Sylvan's president, Mr. Hoehn-Saric
was involved in Sterling's acquisition of several distribution, broadcasting and
photography businesses. Mr. Hoehn-Saric also serves as a director of Sylvan
Learning Systems, Inc. and Caliber Learning Network, Inc. Mr. Hoehn-Saric
serves as an officer and director at the request of Sylvan Ventures.
David Graves has been our president since inception. He has been vice president
of marketing for Sylvan since 1997. In that role, he has served as president of
the SLC National Advertising Fund, Inc. a cooperative advertising fund managed
with the input and support of Sylvan franchisees. He has also served as
executive director of Book Adventure, launching this new interactive, online
reading program (www.bookadventure.com) with his team in 1999. From 1996 to 1997
he was vice president/general manager for the Franklin Mint jewelry and
collector plates divisions. From 1988 to 1996, he held positions of increasing
responsibility in brand marketing for Colgate-Palmolive Company's Hill's Pet
Foods division (Science Diet brand), including marketing manager for all US
marketing, director of marketing for Europe, and managing director/general
manager of northern European subsidiaries (UK, Ireland, Belgium, Luxembourg, and
Netherlands). He began his marketing career at the Quaker Oats Company, working
on the Gatorade brand and Quaker frozen foods. Mr. Graves serves as an officer
at the request of Sylvan.
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B. Lee McGee has been our senior vice president, chief financial officer,
treasurer and assistant secretary since inception and a director since June 30,
2000. He has served as chief financial officer of Sylvan Learning Systems, Inc.
or its predecessor entities since 1987 and executive vice president since 1997.
Mr. McGee is chief financial officer and treasurer of Sylvan Ventures, LLC, our
majority stockholder. Mr. McGee serves as an officer and director at the
request of Sylvan and Sylvan Ventures.
Robert Zentz has been our secretary, assistant treasurer and director since
inception. He is secretary of Sylvan Ventures, LLC, our majority stockholder
and since 1998 has been vice president and general counsel to Sylvan Learning
Systems, Inc. From 1997 to 1998, Mr. Zentz was a partner of the law firm of
Frank & Kraft. From 1996 to 1997, Mr. Zentz served as campaign manager in the
political campaign of Jack O'Malley. From 1990 to 1996, he was vice president
and general counsel of A.C. Nielsen, Inc., a marketing research firm. Mr. Zentz
serves as an officer and director at the request of Sylvan and Sylvan Ventures.
Peter Cohen has been a director since inception. He has been president of
Sylvan Learning Systems, Inc. since February 2000. From 1996 to February 2000,
Mr. Cohen was president of the learning center division of Sylvan. Prior to
joining Sylvan, he was the chief executive officer of The Pet Practice, an 85
hospital veterinary business. He also served as vice president of sales for
National Media Corporation and senior vice president of corporate operations for
Nutri-System Weight Loss Centers. Mr. Cohen serves as a director at the request
of Sylvan.
Barry Miller has been elected as a member of our board of directors effective
upon the closing of the minimum offering. See "Plan of Distribution." Mr.
Miller currently serves as president of NBM Management, a company which owns and
operates Sylvan Learning Centers and Thomson Prometric, Computer Based Testing
Centers in Northeast Ohio and Western Pennsylvania. Since 1991 Mr. Miller has
served four terms as president of Sylvan Franchise Owners Association, Inc. and
was a founding director and officer of SLC National Advertising Fund, Inc. Mr.
Miller is currently a director of Sylvan Franchise Owners Association, Inc.,
serving as ex-officio president. He also serves as a director of the Sylvan
National Advertising Fund. Mr. Miller was designated by the FOA and approved by
Sylvan as the FOA's representative to our board of directors under the program
agreement between Sylvan and the FOA.
Committees of the Board of Directors
Our board of directors has no committees.
Program Agreement
Sylvan has entered into a program agreement with the Sylvan Franchise
Owners Association, Inc., or FOA, under which, during the term of our license
agreement with Sylvan (see "Business--Strategic Alliance with Sylvan and Sylvan
Ventures"), Sylvan has agreed to:
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. cause us to elect a person designated by the FOA and approved by Sylvan to
our board of directors
. establish a committee, the eSylvan Committee, comprised of two officers of
Sylvan and two representatives of the FOA to:
. negotiate with us regarding service fees and other modifications to the
franchise benefits under the participation agreement between Sylvan and
participating Sylvan franchisees (please see "The Offering--Participation
Agreement")
. To review with Sylvan the exploitation of technology and content
developed by us and which we now or hereafter license to Sylvan, pursuant
to the license agreement, and to review our schedule and priorities for
Internet technology transfer to Sylvan franchisees, either through direct
marketing by us (i.e., wholesaling) or through acquisition from us and
distribution of technology products
. To review and approve proposed modifications to the license agreement
which may have a material effect on Sylvan franchisees
. To review methodology for population analysis by territory for purposes
of distributing our stock, or for payments of reverse royalties as
contemplated in the form of participation agreement
. To analyze Sylvan franchisee participation levels in our business and to
develop strategies for increasing participation and benefits to Sylvan
franchisees
. To analyze efficacy data on our programs and determine areas where the
SYLVAN brand may be negatively impacted, and to propose strategies to deal
with any related areas of concern
. To review audit data and verify proper payments have been made to Sylvan
franchisees and other relevant financial matters
. To provide such other guidance to Sylvan as the eSylvan Committee deems
appropriate
Deadlocks on the eSylvan Committee shall be resolved by the chief executive
officer of Sylvan. Sylvan has agreed not to consent to certain material
amendments to the license agreement without the affirmative vote of at least
three-quarters of the members of the eSylvan Committee.
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Executive Compensation
We did not pay compensation to our chief executive officer or any of our
other executive officers during 1999. In addition, we have not entered into any
agreements or other arrangements with respect to such payments.
2000 eSylvan, Inc. Omnibus Stock Plan
Our board of directors has established the 2000 eSylvan, Inc. Omnibus Stock
Plan to enable us to grant equity compensation to our directors, officers,
employees and consultants. Our stock plan will be administered by our board of
directors. There are currently 3,000,000 shares of our common stock reserved and
authorized for issuance under the plan.
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Related Party Transactions
Christopher Hoehn-Saric, our chairman, chief executive officer and director
is a director and former co-chief executive officer and chairman of Sylvan
Learning Systems, Inc. and chairman, president and a manager of Sylvan Ventures,
LLC. B. Lee McGee, our senior vice president, chief financial officer,
treasurer, assistant secretary and director is executive vice president, chief
financial officer and treasurer of Sylvan Learning Systems, Inc. and chief
financial officer and treasurer of Sylvan Ventures, LLC. Robert Zentz, our
secretary, assistant treasurer and director is vice president and general
counsel of Sylvan Learning Systems, Inc. and secretary of Sylvan Ventures, LLC.
Peter Cohen, our director, is president of Sylvan Learning Systems, Inc. Sylvan
Ventures, LLC is a majority owned subsidiary of Sylvan Learning Systems, Inc.
Our strategic relationships with Sylvan and Sylvan Ventures are key
elements of our business plan. These relationships are set forth in various
contracts between us that require compensation to Sylvan or Sylvan Ventures in
exchange for certain assets and services. The terms and conditions of these
agreements were not negotiated on an arms-length basis with Sylvan or Sylvan
Ventures and, accordingly, we expect that these terms and conditions may be less
favorable to us than the terms and conditions that might have been negotiated on
an arms-length basis with an unaffiliated third party.
On June 30, 2000, we entered into a license agreement with Sylvan pursuant
to which we have licensed the materials we deem necessary to implement our
business plan. For a description of this agreement, see "Business--Strategic
Alliance with Sylvan and Sylvan Ventures."
On June 30, 2000, we entered into professional services agreement with
Sylvan which sets forth the terms by which we will obtain referrals of students
from Sylvan and its franchisees, make referrals to Sylvan and its franchisees,
compensate Sylvan for providing tutors and other professionals to us and
undertake certain co-marketing arrangements with Sylvan. For a description of
this agreement, see "Business--Strategic Alliance with Sylvan and Sylvan
Ventures."
On June 30, 2000, we entered into a services agreement with Sylvan pursuant
to which Sylvan will provide us with certain business services necessary to the
operation of our business. For a description of this agreement, see "Business--
Strategic Alliance with Sylvan and Sylvan Ventures."
On June 30, 2000, we entered into a facility use agreement with Sylvan
pursuant to which Sylvan will provide us with certain facilities necessary to
the operation of our business. For a description of this agreement, see
"Business--Strategic Alliance with Sylvan and Sylvan Ventures."
On June 30, 2000, we entered into revolving credit note with Sylvan
Ventures, LLC pursuant to which we may borrow up to $10 million. The note bears
interest on the
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unpaid principal balance equal at the prime lending rate and terminates on
December 31, 2001. As of June 30, 2000, the principal balance on this note was
$0.
On June 30, 2000, we entered into a contribution agreement with Sylvan
Learning Systems, Inc. under which we agreed to issue 13,714,286 shares of our
common stock to Sylvan and 285,714 shares of our common stock to Ivy West
Educational Services, Inc. in exchange for the assets that we deem necessary to
implement our business plan and $5 million in cash.
On June 30, 2000, we entered into a stock purchase agreement with Sylvan
Ventures, LLC under which we have agreed to issue an aggregate of 10,526,316
shares of Series A preferred stock in six separate closings on September 30,
2000, December 31, 2000, March 31, 2001, June 30, 2001, September 30, 2001 and
December 31, 2001 for an aggregate price of $20 million which represents a price
per share of $1.90. In connection with this transaction, we have also entered
into a registration rights agreement under which we have agreed to register the
shares of common stock to be issued on conversion of the Series A preferred
stock under certain circumstances. See "Description of Capital Stock--Series A
Preferred Stock."
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Principal Stockholders
The following tables set forth certain information regarding the beneficial
ownership of shares of our common stock and our Series A preferred stock as of
July 21, 2000 by (i) each person known by us to own beneficially 5% or more of
the outstanding shares prior to this offering, (ii) each of our directors, (iii)
our Chief Executive Officer, and (iv) all of our directors and executive
officers as a group. Except as otherwise indicated, we believe that the
beneficial owners of stock listed below, based on information furnished by such
owners, have sole voting and investment power with respect to such shares,
subject to community property laws where applicable. The percentages of
beneficial ownership of common stock are based on 14 million shares of common
stock outstanding as of July 21, 2000. No shares of our Class A common stock
where outstanding as of such date.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Name and Address of Common Stock Series A Preferred Stock
Beneficial Holder/(1)/ Beneficially Owned Beneficially Owned
---------------------- ------------------ ------------------
Number Percentage Number Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Sylvan Ventures, LLC 13,714,286 97.96% 1,754,386/(2)/ 100%
Sylvan Learning Systems, Inc. 13,714,286/(3)/ 97.96% 1,754,386/(3)/ 100%
Christopher Hoehn-Saric -0- * -0- *
David Graves -0- * -0- *
B. Lee McGee -0- * -0- *
Robert Zentz -0- * -0- *
Peter Cohen -0- * -0- *
Barry Miller -0- * -0- *
All directors and Executive -0- * -0- *
Officers as a group (6 persons)
----------------------------------------------------------------------------------------------
</TABLE>
* Represents beneficial ownership of not more than one percent of the
outstanding common stock.
(1) The address of each stockholder listed in this table is c/o eSylvan, Inc.,
34 Market Place, Baltimore, MD 21202.
(2) Represents shares to be issued to Sylvan Ventures, LLC on September 30,
2000 pursuant to a stock purchase agreement by and between eSylvan, Inc. and
Sylvan Ventures, LLC dated as of June 30, 2000. Under this agreement, eSylvan,
Inc. has agreed to issue an aggregate of 10,526,316 shares of Series A preferred
stock in six separate closings of 1,754,386 each on September 30, 2000, December
31, 2000, March 31, 2001, June 30, 2001, September 30, 2001 and December 31,
2001. See "Related Party Transactions."
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(3) Represents shares held by Sylvan Ventures, LLC. Sylvan Learning Systems,
Inc. is a controlling security holder of Sylvan Ventures, LLC and certain
officers and/or directors of Sylvan Learning Systems, Inc. also serve as
officers and/or managers of Sylvan Ventures, LLC. See "Related Party
Transactions."
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Description of Capital Stock
The following is a description of our capital stock and the rights
associated with our capital stock. A complete description of our capital stock
and the rights associated therewith is set forth in our charter and our bylaws
which have been filed with the Securities and Exchange Commission as an exhibit
to our registration statement. See "Additional Information."
Class A Common Stock
As of the date of this prospectus, we have no shares of Class A common
stock issued and outstanding. Following the closing of this offering, at least
2,700,000 shares of our Class A stock will be issued and outstanding.
General. Holders of Class A stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Stockholders do
not have cumulative voting rights. Holders of our Class A stock are entitled (on
an as-converted basis) to receive ratably such dividends as may be declared from
time to time by our board of directors on common stock out of funds legally
available therefor. See "Dividend Policy." In the event of a dissolution,
liquidation or winding-up, holders of Class A stock are entitled to share
ratably with holders of common stock (on an as-converted basis) in all assets
remaining after payment of liabilities and subject to the rights of any holders
of other classes or series of stock that are then outstanding. In the event we
combine by reverse stock split the outstanding Class A stock into a smaller
number of shares, and as a result of such combination the holders of Class A
stock are entitled to receive cash, the shares of Class A stock so combined will
be valued as though such shares had been converted to common stock immediately
prior to such combination. Our Class A stock has no preemptive or other
subscription rights and no sinking fund provisions are applicable to our Class A
stock. All shares of Class A stock to be outstanding upon completion of this
offering will be duly authorized, validly issued, fully paid and nonassessable.
Conversion. All outstanding shares of our Class A stock shall automatically
convert to common stock on the basis of one share of common stock for each share
of Class A stock (subject to adjustment upon the occurrence of stock splits or
reverse stock splits):
. upon a determination of our board of directors,
. upon the closing of a firm commitment underwritten public offering of
shares of our capital stock in which:
. the aggregate price paid for the shares by the public shall be
$10,000,000 or more in cash, and
. the price paid by the public for the shares reflects a preoffering
valuation of $40,000,000 or more,
. immediately prior to the consummation of a sale of all or a substantial
portion of our assets, or any reorganization, consolidation, merger or
statutory share exchange
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which is to be effected in such a way that holders of our stock shall be
entitled to receive cash, assets or securities of another entity in
exchange for our stock, or
. upon the listing of shares of a class of our stock on the New York Stock
Exchange, Inc, the American Stock Exchange, Inc. or the Nasdaq National
Market or any successor markets or exchanges.
Redemption. For a period beginning on the occurrence of any event listed below
and ending 180 days after we receive written notice that any event listed below
has occurred, we will have the right to redeem any or all shares of Class A
stock then registered in the relevant stockholder's name:
. in the event a holder of Class A stock is party to a franchise license
agreement or area development agreement with Sylvan, upon the death of the
holder, unless within 30 days following the death of the holder:
. a member or members of the immediate family of the deceased holder
becomes a party to the deceased holder's franchise license agreement
or area development agreement with Sylvan,
. the member or members of the immediate family of the deceased holder
that becomes party to the deceased holder's franchise license
agreement or area development agreement with Sylvan becomes the holder
of the shares of Class A stock formerly held by that deceased holder,
and
. the member or members of the immediate family of the deceased holder
that becomes party to the deceased holder's franchise license
agreement or area development agreement with Sylvan acknowledges in
writing that he is subject to the transfer restrictions set forth in
the deceased holder's subscription agreement,
. the dissolution of a holder of any shares of Class A stock,
. an involuntary transfer of any shares of Class A stock, which may be due to
bankruptcy, divorce, an attachment of the shares or otherwise, or
. if the transfer restrictions set forth in our charter and applicable to the
Class A stock are determined to be invalid and a stockholder makes a
transfer to any transferee other than us of any shares of Class A stock.
For a period of 180 days after any event listed below, we will have
the right to redeem shares of Class A stock then registered in the relevant
stockholder's name as follows:
. in the event a stockholder's franchise license agreement terminates, we
will have the right to redeem any or all shares of Class A stock issued
under the subscription agreement that sets forth the number of that
franchise license agreement or the area development agreement territory
covered by that franchise license agreement,
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. in the event a stockholder's rights under any area development agreement
expire or terminate with respect to a specific territory and prior to the
expiration or termination of those rights, the holder does not enter into a
franchise license agreement pertaining to that territory, we will have the
right to redeem any or all shares of Class A stock issued under the
subscription agreement that sets forth that area development agreement
territory, or
. in the event a stockholder transfers its franchise license agreement or its
area development rights with respect to a specific territory we will have
the right to redeem any or all shares of Class A stock issued under the
subscription agreement that sets forth that franchise license agreement
number or area development agreement territory.
For purposes of this paragraph, a transfer as discussed above occurs
when (i) a franchisee or potential franchisee directly or indirectly sells,
assigns, transfers, conveys, gives away, pledges, mortgages or otherwise
encumbers any interest in a franchise license agreement or area development
agreement or any portion or aspect thereof, or (ii) a franchisee or potential
franchisee or any holder of equity or voting interests in a franchisee or
potential franchisee, directly or indirectly, in a single transaction or a
series of related transactions, sells, assigns, transfers, conveys, gives away,
pledges, mortgages or otherwise encumbers any equity or voting interest in the
franchisee or potential franchisee if the effect of the transaction is to reduce
the aggregate percentage of equity interests or voting interests of all equity
holders or holders of voting interests of the franchisee or potential franchisee
prior to the transfer to less than fifty-one percent.
The redemption price per share of Class A stock redeemed as discussed
above will be the greater of (i) $0.875 (as adjusted for stock splits, stock
dividends, recapitalizations or similar transactions with respect to the Class A
stock) or (ii) the most recently appraised value per share of the Class A stock
as determined or approved by our Board of Directors.
Restrictions on Transfer Any transfer of shares of Class A stock except to us
shall be null and void and the intended transferee of the shares shall be deemed
never to have had an interest in the shares. The restrictions on transfer
described in the preceding sentence shall terminate upon the earlier to occur of
September 30, 2010 or any of the following events:
. a determination of our board of directors,
. the cessation of our business,
. our bankruptcy, liquidation, receivership, or dissolution, or assignment
for the benefit of creditors, or
. in the event a holder of Class A stock that is party to a franchise license
agreement or area development agreement with Sylvan dies, then for a
period of 30 days following the death of such holder, such restrictions on
transfer will not apply solely with respect to a transfer to a member or
members of the immediate family of the deceased holder that becomes a party
to the deceased holder's franchise license agreement or area development
agreement with Sylvan if the new holder or holders acknowledge in writing
that the transferred shares remain subject to the transfer restrictions set
forth in the deceased holder's subscription agreement.
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As a condition to this offering, you must agree that if requested by
the underwriter for our first firm commitment underwritten public offering of
shares of our stock in which:
. the aggregate price paid for such shares by the public is $10,000,000 or
more in cash, and
. the price paid by the public for such shares reflects a preoffering
valuation $40,000,000 or more
you will execute and deliver to the underwriter a written agreement that
restricts the transfer of your stock, without the prior written consent of the
underwriter, for a period not in excess of the lesser of the lock-up period
applicable to securities issued pursuant to our omnibus stock plan or 180 days.
This written agreement shall apply to shares of Class A stock in which you
invest under this prospectus and all other shares of stock and all other equity
securities that you now own or which may be issued to you in consequence of any
additional issuance, purchase, conversion, exchange or reclassification of
shares, corporate reorganization, or any other form of recapitalization,
consolidation, merger, share split, share dividend, or which you acquire in any
other manner.
Common Stock
As of the date of this prospectus, we have 14 million shares of common
stock issued and outstanding. Holders of common stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. Stockholders do not have cumulative voting rights. Holders of our
common stock are entitled to receive ratably such dividends as may be declared
from time to time on our common stock by our board of directors out of funds
legally available therefor. See "Dividend Policy." In the event of a
dissolution, liquidation or winding-up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and subject
to the rights of any holders of other classes or series of stock that are then
outstanding. Holders of common stock have no right to convert their common stock
into any other securities. The common stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are, and
will be upon completion of this offering, duly authorized, validly issued, fully
paid and nonassessable.
Series A Preferred Stock
As of the date of this prospectus, we have no shares of Series A
preferred stock issued and outstanding. On June 30, 2000, we entered into a
stock purchase agreement with Sylvan Ventures under which we agreed to issue an
aggregate of 10,526,316 shares of Series A preferred stock in six separate
closings on September 30, 2000, December 31, 2000, March 31, 2001, June 30,
2001, September 30, 2001 and December 31, 2001 for an aggregate price of $20
million which represents a price per share of $1.90.
56
<PAGE>
General. Holders of Series A preferred stock are entitled to five votes for
each share of common stock into which the Series A preferred stock held of
record by such holder may be converted on all matters submitted to a vote of
stockholders. Stockholders do not have cumulative voting rights. Holders of our
Series A preferred stock, voting as a separate class, are entitled to elect one
(1) director to our board of directors by a plurality vote. Holders of our
Series A preferred stock are entitled to receive ratably such dividends as may
be declared from time to time by our board of directors on common stock (on an
as-converted basis) and/or on Series A preferred stock out of funds legally
available therefor. See "Dividend Policy." In the event of a dissolution,
liquidation or winding-up, holders of Series A preferred stock are entitled to
share ratably (on an as-converted basis) with holders of common stock in all
assets remaining after payment of liabilities and subject to the rights of any
holders of other classes or series of stock that are then outstanding. Our
Series A preferred stock has no preemptive or other subscription rights and no
sinking fund provisions are applicable to our Series A preferred stock.
Conversion. Any holder of our Series A preferred stock is entitled to convert
to common stock all or any of the shares of Series A preferred stock held by
such holder at any time. All outstanding shares of our Series A preferred stock
will automatically convert to common stock upon the closing of a firm commitment
underwritten public offering of shares of our capital stock in which:
. the aggregate price paid for the shares by the public is $10,000,000 or
more, and
. the price paid by the public for the shares reflects a preoffering
valuation of $40,000,000 or more.
The total number of shares of our common stock into which the Series A preferred
stock is convertible will be equal to the number of shares of Series A preferred
stock being converted multiplied by a conversion ratio, which ratio is
determined by dividing $1.90 by the conversion price in effect at the time of
such conversion. The initial conversion price is $1.90. The conversion price
will be subject to adjustment as described in the anti-dilution provisions
below.
Anti-dilution. If at any time prior to a firm commitment underwritten public
offering of shares of our capital stock satisfying the criteria set forth above,
we issue additional shares of our common stock, or other securities or rights
convertible into or exercisable for our common stock, at a purchase price per
share that is or is subsequently adjusted to be less than the then-applicable
conversion price (other than the issuance of (i) Class A stock under this
offering, (ii) common stock options under our omnibus stock plan, or (iii)
common stock to former stockholders of Ivy West Educational Services, Inc. in
connection with our acquisition of its assets), the conversion price will be
reduced on a weighted average basis to diminish the dilutive effect of such
issuance on our Series A preferred stock. Similarly, the conversion price will
be adjusted to prevent dilution upon
57
<PAGE>
the occurrence of stock splits, stock dividends, combinations,
reclassifications, and other similar transactions.
Registration Rights In connection with the Series A preferred stock purchase
agreement, we entered into a registration rights agreement with Sylvan Ventures
under which we granted Sylvan Ventures and its transferees the right to request
registration under the Securities Act of shares of common stock into which the
Series A preferred stock is convertible, conversion shares, on two separate
occasions upon the request of the holders of not less than 50% of the then
outstanding Series A preferred stock. This right becomes effective upon the
earlier of the effective date of a registration statement pertaining to our
initial firm commitment public offering for cash or the date a class of our
capital stock is listed on a national securities exchange, the Nasdaq National
Market or the Nasdaq SmallCap Market. Further, we have agreed that upon the
request of the holders of Series A preferred stock, we will include conversion
shares in any registration statement we file to offer our common stock. Also,
if we become eligible to offer securities on Form S-3, an abbreviated
registration form under the Securities Act, we have agreed to register the
conversion shares on Form S-3 upon request of the holders of the Series A
preferred stock. The registration fees in connection with each of the
registrations discussed above will be paid by us. Also we have agreed to
indemnify the holders of the Series A preferred stock and the underwriters of
any offering of conversion shares for certain claims that arise in connection
with any registration statement.
Indemnification
Our charter provides that we shall indemnify our currently acting and
former directors and officers against any and all liabilities and expenses
incurred in connection with their services in such capacities to the maximum
extent permitted by the Maryland General Corporation Law, as from time to time
amended. If approved by our board of directors, we may indemnify our employees,
agents and persons who serve or have served, at our request as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture or other enterprise to the extent determined to be
appropriate by our board of directors. We shall advance expenses to our
directors and officers entitled to mandatory indemnification to the maximum
extent permitted by the Maryland General Corporation Law and may in the
discretion of our board of directors advance expenses to employees, agents and
others who may be granted indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been informed 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.
Our charter provides that, to the fullest extent permitted by the
Maryland General Corporation Law as it may be amended from time to time, none of
our directors or officers shall be liable to us or our stockholders for monetary
damages arising out of events occurring at the time that person is serving as a
director or officer, regardless of whether that person is a director or officer
at the time of a proceeding in which liability is
58
<PAGE>
asserted. Under current Maryland law, the effect of this provision is to
eliminate our right and the right of our stockholders to recover monetary
damages from a director or officer except:
. to the extent that it is proved that the director or officer actually
received an improper benefit, or profit in money, property, or services for
the amount of the benefit or profit in money, property or services actually
received
. to the extent that a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding that
the person's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated
in the proceeding
In situations to which this charter provision applies, the remedies available to
us or our stockholders are limited to equitable remedies such as injunction or
rescission.
Anti-takeover effect of charter provisions
The charter provisions discussed below may reduce our vulnerability to
an unsolicited proposal for takeover if and when our capital stock commences
trading on a public market. In some circumstances, some stockholders may
consider these provisions to have disadvantageous effects. Takeover offers are
frequently made at prices above the market price of the target company's stock.
In addition, acquisitions of stock by persons attempting to acquire control
through market purchases may cause the market price of the target company's
stock to reach levels that are higher than would otherwise be the case. Our
charter provisions, as well as the statutory and regulatory provisions mentioned
above, may discourage any of these acquisitions, even though these acquisitions
might be beneficial to us or our stockholders. Accordingly, stockholders could
be deprived of the opportunity to sell their stock at prices in excess of
current market prices, which often prevail as the result of such occurrences.
Constituency Provision Maryland law permits a corporation to include in its
charter a provision that allows the board of directors of the corporation, in
considering a potential acquisition of control of the corporation, to consider
the effect of the potential acquisition of control on stockholders, employees,
suppliers, customers, and creditors of the corporation and the communities in
which offices or other establishments of the corporation are located. Our
charter includes a provision to this effect.
Board Authority to Increase Authorized Stock Maryland law permits a corporation
to include in its charter a provision that allows the board of directors of the
corporation, by a majority of the entire board of directors and without action
by the stockholders, to amend the charter of the corporation to increase or
decrease the aggregate number of shares of stock of the corporation or the
number of shares of stock of any class that the corporation has authority to
issue. Our charter includes a provision to this effect.
59
<PAGE>
Availability of Appraisal Rights A stockholder of a Maryland corporation is
generally entitled to demand and receive payment of the fair value of the
stockholder's stock if the corporation consolidates or merges with another
corporation, the stockholder's stock is acquired in a share exchange or in
certain other situations. This right is generally referred to as appraisal.
Maryland law permits a corporation to include in its charter a provision that
the holders of shares of stock of any class of the corporation are not entitled
to exercise appraisal rights. Our charter includes a provision to this effect.
Amendment of Bylaws Our charter provides that the board of directors, and not
the stockholders, shall have the exclusive power to make, alter, amend or repeal
our Bylaws.
Shares Eligible for Future Sale
There is and following this offering there will be no trading market
for any class of our stock. As of the date of the closing of this offering, we
will have a minimum of 2,700,000 outstanding shares of Class A stock and 14
million outstanding shares of common stock none of which will be freely
transferable. Further we have agreed to issue 10,526,316 shares of Series A
preferred stock which shares will entitle to holder thereof to the right to
require us to register shares issuable on conversion of such shares for sale
under the Securities Act under certain circumstances. See "Description of
Capital Stock." As of the date of the closing of this offering, our outstanding
shares of common stock and Series A preferred stock will not be registered under
the Securities Act of 1933, as amended, or under the securities laws of any
state. Certificates for such shares will contain a legend to the effect that
such shares may not be transferred without an opinion of counsel that such
transfer will not violate the registration requirements of the securities laws.
Plan of Distribution
Under this prospectus, we are soliciting solely from holders of Sylvan
franchise license agreements or area development agreements (dated prior to July
28, 2000) pertaining to Sylvan territories located in the United States
(exclusive of its territories) and Canada, offers to invest in up to a maximum
of 3,000,000 shares of Class A stock and a cash payment in exchange for the
execution and delivery to us and Sylvan of subscription agreements in the form
attached hereto as Annex A and participation agreements, in the form attached
hereto as Annex B, respectively. Any potential franchise licensee under an area
development agreement relating to a territory in which the potential franchise
licensee was not, as of July 28, 2000, in compliance with the development
schedule set forth in such area development agreement is excluded from this
offering.
The specific number of shares of Class A stock in which you may offer
to invest is set forth in a prospectus supplement accompanying this prospectus
that sets forth your name and the number of your franchise license agreement
with Sylvan or your area development agreement territory. Your cash payment is
calculated by multiplying $0.35 by the number of shares of Class A stock in
which you may offer to invest. No one may use this prospectus to consummate
sales of shares of our Class A stock unless it is accompanied by a prospectus
supplement. The delivery in any jurisdiction of this prospectus together with a
prospectus supplement relating to a specific offering of our Class A stock shall
not constitute an offer in that jurisdiction of any other securities covered by
this prospectus but not described in the prospectus supplement. To make an offer
to invest in shares of our Class A stock, you
60
<PAGE>
must deliver to us an executed counterpart of the subscription agreement and
deliver to Sylvan an executed counterpart of the participation agreement prior
to the close of business on the termination date of the offering. A copy of the
subscription agreement and the participation agreement, together with a
preaddressed return envelope, is included with this prospectus. You are free to
enter into the participation agreement with Sylvan without making an offer;
however, delivery of executed counterparts to the participation agreement and
the subscription agreement is a condition to any offer to invest in shares of
our Class A stock.
Please note that if you are party to more than one franchise license
agreement with Sylvan or if you are party to an area development agreement with
Sylvan pertaining to more than one Sylvan franchise territory, you will receive
a separate solicitation for each franchise license agreement and each area
development agreement territory.
In the event you make an offer to invest in shares of our Class A
stock, we can accept that offer by delivering an executed counterpart of the
subscription agreement and the participation agreement to you. The subscription
agreement and the participation agreement will be dated as of the date of our
acceptance of your offer. We reserve the right to withdraw, cancel, modify or
suspend the solicitation of an offer at any time and to accept or reject an
offer in our sole discretion; provided, however, that if we accept an offer to
invest in shares of Class A stock pursuant to the prospectus from any Sylvan
franchisee prior to the termination date, we must accept your offer if you
comply with the representations, warranties, acknowledgements and agreements set
forth in the subscription agreement and the participation agreement.
The offering will commence on the date of this prospectus and the
termination date shall be 60 days after the date of this prospectus, unless we
extend the termination date for one or more additional periods not to exceed an
additional year in the aggregate.
We currently do not intend to sell any shares of our Class A stock
unless we receive offers to invest in a minimum of 2,700,000 shares which number
represents 90% of the shares offered by this prospectus. In our sole discretion,
however, we may lower or eliminate this minimum requirement at any time. If we
receive offers to invest in the minimum prior to the termination date, we will
hold a minimum closing. At the minimum closing we will accept the offers of
Sylvan franchisees that have submitted executed counterparts of the subscription
and participation agreements, issue stock certificates and cash payments to
these Sylvan franchisees and these Sylvan franchisees will become our
stockholders. Until the minimum closing, Sylvan franchisees that make offers to
invest in our Class A stock will not be stockholders and will not have the
rights of stockholders. Stock certificates will not be issued until the minimum
closing.
In the event you make an offer to invest in shares by returning a
counterpart subscription and participation agreement prior to the minimum
closing, such offer will be irrevocable and you will not be entitled to withdraw
your offer. We will hold your offer pending the minimum closing. We will mail
you a written confirmation of receipt of your counterpart subscription and
participation agreements. If the minimum is not sold by the termination date, we
will return your executed counterpart participation agreement and subscription
agreement, thereby declining your offer. In the event the offering continues
beyond the minimum closing, following the minimum closing we may sell shares of
our Class A stock in any number of closings until the offering termination date.
The shares of our Class A stock issued hereunder will be new issues of
securities with no established trading market. We do not intend to apply for
listing of our Class A stock on any securities exchange. The shares of our Class
A stock issued hereunder will
61
<PAGE>
be subject to certain restrictions on resale set forth in our charter and the
subscription agreement. See "Description of Capital Stock--Class A Common
Stock;" "The Offering--Subscription Agreement;" "Annex C."
Legal Matters
Venable, Baetjer and Howard, LLP, Baltimore, Maryland will pass upon
the validity of the shares of common stock offered by this prospectus for us.
Experts
Ernst & Young LLP, independent auditors, have audited our financial
statements at March 31, 2000 and for the period October 1, 1999 (date of
inception) through March 31, 2000, as set forth in their report. We have
included our financial statements in the 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.
Additional Information
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act, with respect to the
common stock offered by this prospectus. As permitted by the rules and
regulations of the Commission, this prospectus, which is a part of the
registration statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
pertaining to us and the Class A stock offered hereby, reference is made to the
registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents or provisions of any contract or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. A copy of the registration statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any part of the registration
statement may be obtained from such office upon the payment of the fees
prescribed by the Commission. In addition, registration statements and certain
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system, including our registration statement
and all exhibits and amendments to our registration statement, are publicly
available through the Commission's website at http://www.sec.gov.
------------------
62
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Enterprise)
Audited Financial Statements
For the period October 1, 1999 (date of inception) through March 31, 2000
Contents
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F1
Audited Financial Statements
Balance Sheet ........................................................... F2
Statement of Operations.................................................. F3
Statement of Equity (Deficit)............................................ F4
Statement of Cash Flows.................................................. F5
Notes to Financial Statements............................................ F6
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the accompanying balance sheet of eSylvan, Inc. (a subsidiary of
Sylvan Learning Systems, Inc.), a development stage company, as of March 31,
2000, and the related statements of operations, equity (deficit) and cash flows
for the period October 1, 1999 (date of inception) through March 31, 2000.
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSylvan, Inc. at March 31,
2000, and the results of its operations and its cash flows for the period
October 1, 1999 (date of inception) through March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
---------------------
Baltimore, Maryland
June 27, 2000,
except for Note 7, as to which the date is
July 20, 2000
F-1
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Balance Sheet
March 31, 2000
Assets
Property and equipment:
Furniture, computer equipment and software $ 485,859
Leasehold improvements 19,040
---------
504,899
Accumulated depreciation (6,137)
---------
498,762
---------
Total assets $ 498,762
=========
Liabilities and equity
Accounts payable and accrued expenses 720,983
Commitments and contingent liabilities -
Equity (Deficit):
Common stock, par value $.001 per share - authorized 50,000,000
shares, no shares issued and outstanding -
Paid-in capital 545,490
Accumulated deficit (767,711)
Total equity (deficit) (222,221)
---------
Total liabilities and equity (deficit) $ 498,762
=========
See accompanying notes.
F-2
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Statement of Operations
For the period October 1, 1999 (date of inception)
through March 31, 2000
Revenues $ -
Cost and expenses
Sales and marketing 79,265
General and administrative 1,255,023
Research and development 344,316
Allocated indirect overhead costs 327,079
Total costs and expenses 2,005,683
-----------
Operating loss (2,005,683)
Allocated income tax benefit 786,865
-----------
Net loss $(1,218,818)
===========
See accompanying notes.
F-3
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Statement of Equity (Deficit)
For the period October 1, 1999 (date of inception)
through March 31, 2000
<TABLE>
<CAPTION>
Owner's Paid-
Net Common In Accumulated
Investment Stock Capital Deficit Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contributions from Sylvan for the period October
1, 1999 (date of inception) through February 2,
2000 (date of incorporation) $ 695,184 $ $ - $ - $ 695,184
Net loss for the period October 1, 1999 (date of
inception) through February 2, 2000 (451,107) - - - (451,107)
Incorporation and reorganization (244,077) - 244,077 - -
Contributions from Sylvan for the period February 3,
2000 (date of incorporation) through March 31, 2000 - - 301,413 - 301,413
Net loss for the period February 3, 2000 (date of
incorporation) through March 31, 2000 - - - (767,711) (767,711
---------------------------------------------------------------------------
Balance at March 31, 2000 $ - $ - $ 545,490 $(767,711) $(222,221)
===========================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Statement of Cash Flows
For the period October 1, 1999 (date of inception)
through March 31, 2000
Operating activities
Net loss $(1,218,818)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 6,137
Allocated income tax benefit from Sylvan (786,865)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 720,983
-----------
Net cash used in operating activities (1,278,563)
Investing activities
Purchase of property and equipment (504,899)
-----------
Net cash used in investing activities (504,899)
Financing activities
Cash contributions from Sylvan 1,783,462
-----------
Net cash provided by financing activities 1,783,462
Net change in cash -
Cash at beginning of period -
-----------
Cash at end of period $ -
===========
See accompanying notes.
F-5
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
December 31, 1999
1. Summary of Significant Accounting Policies
Organization and Operations
eSylvan, Inc., (the "Company"), a subsidiary of Sylvan Learning Systems, Inc.
("Sylvan"), was incorporated on February 3, 2000 under the laws of the state of
Maryland for the purpose of delivering through Internet-based applications high
quality supplemental education programs to families. Upon incorporation by
Sylvan, no shares of common stock were issued. Prior to incorporation and upon
inception on October 1, 1999, the Company operated as an unincorporated division
of Sylvan.
Since inception, the Company's activities have consisted primarily of
organizational and research and development activities for its planned principal
operations. Accordingly, no revenue has been earned, and the Company is
considered a development stage company at March 31, 2000.
Basis of Financial Statement Presentation
As more fully discussed in Note 2, the accompanying statement of operations
includes an allocation of Sylvan's corporate expenses. The allocated expenses
and contributions of Sylvan prior to incorporation were accumulated into a
single caption on the balance sheet entitled "owner's net investment."
Subsequent to incorporation on February 3, 2000, these allocations and
contributions were accounted for as paid-in capital.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
All of the accounting judgments, estimates and allocations used in preparation
of the financial statements are based on assumptions that management believes
are reasonable under the circumstances. However, these allocation and estimates
are not necessarily indicative of the costs that would have resulted if the
Company operated as a separate entity.
F-6
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
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.
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.
Research and Development
Costs incurred in planning the development of the Company's web site have been
expensed as research and development costs. After completion of the planning
stage and the establishment of the plan's technological feasibility as evidenced
by a detailed program design, the Company will capitalize the costs of
developing software to operate the web site, until such time as the web site is
available for use by customers.
Advertising Costs
The Company expenses advertising as incurred. Advertising expense totaled
approximately $79,269 for the period October 1, 1999 through March 31, 2000.
F-7
<PAGE>
eSylvan, Inc.
(a subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
1. Summary of Significant Accounting Policies, continued
Income Taxes
The operations of the Company are included in the consolidated federal income
tax return of Sylvan Learning Systems, Inc. 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. The federal income tax benefit attributable to
the Company's operations during the period presented was realized by Sylvan, and
was therefore accounted for as a distribution to Sylvan that reduced paid-in
capital.
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. Management does not
anticipate that the adoption of the new Statement will have a significant effect
on the financial position of the Company.
F-8
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
2. Related Party Transactions and Corporate Allocations
All obligations of the Company during the period October 1, 1999 (date of
inception) through March 31, 2000 were satisfied by Sylvan and accounted for
through an intercompany account. These obligations included certain research
and development costs and overhead costs directly attributable to the Company's
operations and paid through Sylvan's cash management systems. In addition,
management has allocated corporate 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 expenses consist principally of
corporate payroll and were allocated considering the estimated efforts of
individual employees. Management believes that the method used to allocate these
expenses is reasonable.
Allocated indirect overhead costs consist principally of the following:
. Corporate human resources, including labor relations, payroll and
training
. Executive, finance, accounting and legal and administration
. Tax services, including tax return preparation
. Information management services
Intercompany account balances have been treated as permanent contributions and
have been reflected as a component of paid-in capital in the accompanying
financial statements.
F-9
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
2. Related Party Transactions and Corporate Allocations (continued)
The following table summarizes the components of the paid-in capital during the
period October 1, 1999 (date of inception) through March 31, 2000:
<TABLE>
<S> <C>
Contributions:
Cash paid by Sylvan for:
Property and equipment $ 504,900
Other contributions 1,278,562
-----------
Total cash contributions 1,783,462
Non-cash distributions for:
Allocated income taxes (786,865)
-----------
Total contributions from Sylvan 996,597
Reclassification of net loss during period prior to incorporation to
paid-in capital (451,107)
-----------
Total paid-in capital at March 31, 2000 $ 545,490
===========
</TABLE>
The Company has received a written commitment from Sylvan to provide additional
funding to support its operations through at least September 30, 2001.
3. Leases
The Company conducts all of its operations from Sylvan's administrative offices.
A pro rata portion of Sylvan's administrative lease expense is charged to the
Company based on an estimate of square footage occupied by the Company's
personnel. Rent expense for the period presented was $16,472.
F-10
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
4. Income Taxes
Significant components of the income tax benefit are as follows:
Current benefit:
Federal $(663,681)
State (123,184)
-----------
(786,865)
Deferred -
-----------
$(786,865)
===========
The reconciliation of the reported income tax benefit to the amount that would
be result by applying the U.S. federal statutory tax rate to net loss is as
follows:
Tax benefit at U.S. statutory rate of 35% $(707,822)
Effect of permanent differences 1,027
State income taxes, net of federal benefit (80,070)
-----------
Total $(786,865)
===========
5. Common Stock
The Company has authorized the issuance of 50,000,000 shares of $0.001 par value
common stock. Each holder of the common stock is entitled to one vote for each
share of stock held for the election of directors and all matters submitted to a
vote of stockholders of the Company. No common stock was issued and outstanding
as of March 31, 2000.
6. 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 are meeting certain
service requirements. No discretionary contributions have been made to this
plan on behalf of the Company.
F-11
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
7. Subsequent Events
On June 30, 2000, the Company entered into a contribution agreement with Sylvan
that established the initial capitalization of the Company. Under the
agreement, 14.0 million shares of common stock were issued to Sylvan in exchange
for a commitment to contribute $5.0 million of cash and enter into certain
agreements that provided for the transfer or license of specified intangible
assets. The $5.0 million cash commitment included all prior contributions, which
totaled $1.7 million at March 31, 2000 and $4.6 million at June 30, 2000.
In connection with the initial Sylvan contribution, the Company entered into a
license agreement with Sylvan to license specified trademarks, service marks and
educational content in connection with its business. In consideration for this
license, the Company was obligated to pay an initial license fee of $1.0 million
and will pay quarterly royalties in an amount equal to 4% of net revenues of the
Company derived from internet service delivery. A minimum annual royalty of
$400,000 will be payable commencing in 2002, and the minimum royalty will
increase by 20% each year until the expiration of the agreement. The term of the
agreement is 5 years, except for the content license, which is perpetual during
the duration of the applicable copyrights. The Company at its option may renew
the license for consecutive five-year terms. The initial license fee of $1.0
million due to Sylvan was agreed to be an initial capital contribution by
Sylvan.
F-12
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Learning Systems, Inc.
and a Development Stage Company)
Notes to Financial Statements
7. Subsequent Events (continued)
The Company on June 30, 2000 entered into a revolving credit facility with
Sylvan Ventures, LLC, a majority-owned subsidiary of Sylvan, under which it may
borrow up to $10.0 million. All borrowings under this facility bear interest at
the prime rate of interest and are due on December 31, 2001. The Company also
entered into a stock purchase agreement with Sylvan Ventures LLC under which it
will sell 10,526,315 shares of Series A Preferred Stock during the period from
September 2000 through December 2001 for aggregate proceeds of $20.0 million.
On June 30, 2000 the Company entered into a facility use agreement with Sylvan
under which the Company will use certain facilities of Sylvan. The Company will
pay a quarterly fee that will be based on Sylvan's good faith estimate of the
cost of the use of such facilities. This agreement has a one-year term, is
renewable for an additional year and is terminable by either party with 60 days
notice.
F-13
<PAGE>
Annex A
Subscription Agreement
[Insert name and address of Franchisee]
[ ], 2000
eSylvan, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
eSylvan, Inc., a Maryland corporation (the "Company") is soliciting
(the "Offering"), in separate offerings, from franchise licensees under numbered
license agreements with Sylvan Learning Systems, Inc. ("Sylvan") dated prior to
July 28, 2000 pertaining to territories in the United States (exclusive of its
territories) and Canada (each a "License Agreement") and certain potential
franchise licensees under area development agreements with Sylvan pertaining to
territories in the United States (exclusive of its territories) and Canada (each
an "Area Development Agreement"), offers to invest in ("Investment Offers") up
to a maximum of 3,000,000 shares of its Class A Common Stock and an amount in
cash equal to $0.35 multiplied by the number of shares offered in exchange for
the execution of this Agreement and the form of participation agreement attached
as Annex B to the Prospectus (as defined below). The Company does not currently
intend to accept any Investment Offers unless it receives Investment Offers with
respect to a minimum of 2,700,000 shares of Class A Common Stock (the
"Minimum") prior to the close of business on the later of the day which is 60
days after the Effective Date (as defined below) or, if the Company, in its sole
discretion, determines to extend the termination of the Offering for one or more
additional periods not to exceed an additional year in the aggregate, the last
day of the last such additional period (the "Termination Date"). If the Company
receives offers to invest in the Minimum prior to the Termination Date, it will
hold a Minimum closing. At the Minimum closing the Company will accept the
Investment Offers that it has received prior to the Minimum closing. In the
event the Offering continues beyond the Minimum closing, following the Minimum
closing, the Company may accept Investment Offers in any number of closings
until the Termination Date. The Company reserves the right to withdraw, cancel,
modify or suspend the solicitation of Investment Offers at any time and to
accept or reject any Investment Offer in its sole discretion; provided, however,
that if the Company accepts any Investment Offer, it must accept all valid
Investment Offers it actually receives on or prior to the Termination Date. In
addition to any other requirements, to be a valid Investment Offer, the offeror
must comply with the representations, warranties, acknowledgements and
agreements set forth in this Agreement and the Participation Agreement.
In connection with the solicitation of Investment Offers, the Company
has filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (Registration No. 333-[ ]) under the
Securities Act of 1933, as amended (the "Securities Act"), which registration
statement, as amended, was declared
<PAGE>
eSylan, Inc.
Page 2
effective by the Commission on [ ], 2000 (the "Effective Date"). The
prospectus relating to the Class A Common Stock and the supplement to such
prospectus that sets forth my name, my franchise license agreement number or
area development agreement territory and the number of shares of Class A Common
Stock in which I may offer to invest (the "Shares"), in the form in which they
were filed with the Commission pursuant to Rule 424(b) of the rules and
regulations of the Commission under the Securities Act (the "Securities Act
Regulations") are hereinafter collectively referred to as the "Prospectus,"
except that, if any revised prospectus or prospectus supplement of general
applicability or that sets forth my name and my franchise license agreement
number or area development agreement territory shall be delivered to me by the
Company which differs from the Prospectus (whether or not such revised
prospectus or prospectus supplement is required to be filed by the Company
pursuant to Rule 424(b) of the Securities Act Regulations), the term
"Prospectus" shall refer to such revised prospectus or prospectus supplement, as
the case may be.
SECTION 1. INVESTMENT IN THE SHARES
I hereby irrevocably offer (the "Offer") to invest in the Shares, on
the terms and conditions set forth in this Agreement and the Prospectus and have
forwarded an executed copy of the participation agreement, which sets forth the
number of my License Agreement or my Area Development Agreement territory as set
forth on the signature page of this Agreement (the "Participation Agreement"),
to Sylvan. The Company will rely on the Offer to determine if the Minimum has
been sold and in accepting the Investment Offers that represent the Minimum and,
due to such reliance on the Offer, the Offer is irrevocable and will be held by
the Company pending the Minimum closing. If the Company does not receive
Investment Offers representing the Minimum by the Termination Date, the Company
will return my executed counterpart of this Agreement and the Participation
Agreement, thereby declining the Offer. In its sole discretion the Company may
lower or eliminate the Minimum at any time.
SECTION 2. REPRESENTATIONS OF THE SUBSCRIBER
To induce the Company to sell and issue the Shares, and understanding
that the Company will rely thereon in selling the Shares to me, I warrant and
represent as follows:
2.1 As of July 28, 2000 and as of the date of this Agreement, I am
the same party as is party to the numbered License Agreement or Area Development
Agreement pertaining to the territory set forth in the Prospectus and on the
signature page to this Agreement. In the event an Area Development Agreement
territory is set forth on the signature page of this Agreement, Participant
represents and warrants that, as of July 28, 2000 and as of the date of this
Agreement, Participant was in compliance with the development schedule set forth
in the Area Development Agreement with respect to such Area Development
Agreement territory. I have duly authorized the execution and performance of
this Agreement and the Participation Agreement. I require no consents or
approvals for the execution of this Agreement or the Participation Agreement,
and this Agreement and the Participation Agreement will not conflict with any
other of my obligations.
<PAGE>
eSylan, Inc.
Page 3
2.2 I am acquiring the Shares for investment, for my own account and
not with a view to or for sale in connection with any distribution thereof or
with any intention of disposing of the same or any interest therein.
2.3 I am exercising my own business judgment in determining whether
to make an Offer using such tax, financial and legal advice as I deem
appropriate, and I have received and reviewed the Prospectus.
2.4 I acknowledge that I am free to enter into the Participation
Agreement without making an Investment Offer.
2.5 Each of my representations, warranties, acknowledgements and
agreements set forth in the Participation Agreement is true and correct.
SECTION 3. TRANSFER RESTRICTION
To induce the Company to sell and issue the Shares, and understanding
that the Company will rely thereon in selling the Shares to me, I agree as
follows:
3.1 The continued ownership of Stock of the Company by me will
encourage my support and participation in the Company's business pursuant to the
Participation Agreement and perpetuate harmony in the Company's management,
policies and operations and the Company and I deem it in our best interests to
impose the restrictions and obligations set forth in this Section 3 and in the
Company's charter as set forth in Annex D to the Prospectus on me in order to
effectuate the foregoing purposes.
3.2 Except as otherwise provided herein, all of the provisions of
this Section 3 shall apply to, and the term "Stock" shall include, the Shares
and all other shares of capital stock and all other equity securities now owned
or which may be issued hereafter to me in consequence of any additional
issuance, purchase, conversion, exchange or reclassification of shares,
corporate reorganization, or any other form of recapitalization, consolidation,
merger, share split, share dividend, or which are acquired by me in any other
manner.
3.3 I hereby acknowledge that I have been provided a copy of and have
reviewed the transfer restrictions set forth in the charter of the Company and
Annex D to the Prospectus and applicable to the Shares and will abide by such
transfer restrictions.
3.4 If requested by the underwriter(s) (the "Underwriter") for the
Company's first firm commitment underwritten public offering (pursuant to an
effective registration statement under the Securities Act of 1933, as then in
effect, or any comparable statement under any similar Federal statute then in
force) of shares of capital stock of the Company in which (a) the aggregate
price paid for such shares by the public shall be Ten Million Dollars
($10,000,000) or more in cash, and (b) the price paid by the public for such
shares reflects a preoffering valuation of the Company of Forty Million
<PAGE>
eSylan, Inc.
Page 4
Dollars ($40,000,000) or more, I will execute and deliver to the Underwriter a
written agreement (a "Lock-up Agreement") in such form as may be satisfactory to
the Underwriter that restricts the transfer of any of my Stock, without the
prior written consent of the Underwriter, for a period following the effective
date of the registration statement relating to such offering, as agreed upon by
the Board of Directors and which period shall not be in excess of the lesser of
the lock-up period applicable to securities of the Company issued pursuant to
the Company's omnibus stock plan or 180 days.
3.5 In the event that the Underwriter requests me to execute and
deliver a Lock-up Agreement, whether or not I actually execute such Lock-up
Agreement:
(a) any purported transfer of Stock other than in accordance
with the terms of such Lock-up Agreement shall be null and void, and the Company
shall refuse to recognize any such transfer and shall not reflect on its records
any change in record ownership of the Stock pursuant to any such transfer.
(b) each certificate of Stock of the Company then registered in
the my name and subject hereto shall be endorsed as follows:
This certificate is transferable only upon compliance with the
provisions of a restrictive agreement, by and among eSylvan, Inc.
and the holder hereof, a copy of which is on file in the office
of the Secretary of the Company and is available upon request of
any stockholder without charge.
(c) the Company may note upon its stock transfer records a "stop
transfer order" with respect to the Stock in order to enforce the restrictions
on transfer set forth in such Lock-up Agreement. The Company or its agent shall
not be liable for any refusal to transfer the Stock upon the books of the
Company, except in compliance with the terms and conditions of such Lock-up
Agreement.
3.6 Irreparable damage would result in the event this Section 3 is
not specifically enforced. Therefore, the rights to, or obligations of, any
party under this Section 3 shall be enforceable in a court by a decree of
specific performance, and appropriate injunctive relief may be applied for and
granted in connection therewith. Such remedies, and all other remedies provided
for in this Agreement, shall, however, be cumulative and not exclusive and shall
be in addition to any other remedies which any party may have under this
Agreement or otherwise.
4. TAX CONSEQUENCES
To induce the Company to sell and issue the Shares, and understanding
that the Company will rely thereon in selling the Shares to me, I agree as
follows:
<PAGE>
eSylan, Inc.
Page 5
4.1 To the extent that determining the value of the stock of the
Company is necessary for any federal, state, local or foreign tax purpose, I
acknowledge and agree that the per share value of the Shares is not less than
$0.875.
4.2 I am receiving the Shares and the cash from the Company in
compensation for services, the Shares and cash will be taxable to me as ordinary
income and I will not take any action or position (including in connection with
the filing of any federal, state, local or foreign tax return of any kind)
inconsistent with this Section 4.
5. MISCELLANEOUS
5.1 It is the express intention of the parties that the agreements
contained herein shall have the widest application possible. If any agreement
contained herein is found by a court having jurisdiction to be unreasonable in
scope or character, the agreement shall not be rendered unenforceable thereby,
but rather the scope or character of such agreement shall be deemed reduced or
modified with retroactive effect to render such agreement reasonable and such
agreement shall be enforced as thus modified. If the court having jurisdiction
will not review the agreement, then the parties shall mutually agree to a
revision having an effect as close as permitted by law to the provision declared
unenforceable. The parties further agree that in the event a court having
jurisdiction determines, despite the express intent of the parties, that any
portion of any covenant or agreement contained herein is not enforceable, the
remaining provisions of this Agreement shall nonetheless remain valid and
enforceable.
5.2 Anything contained herein to the contrary notwithstanding, this
Agreement shall terminate, and all rights and obligations shall cease, except
for rights and obligations under any Lock-up Agreement, on September 30, 2010.
5.3 All notices, offers, acceptances, requests and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered or mailed by certified or registered mail to me at my
address on the Company's records, and to the Company at the Company's principal
place of business. Any party hereto may change his/her or its address for notice
by giving notice thereof in the manner hereinabove provided.
5.4 Any term or condition set forth in this Agreement may be amended,
modified or altered, and additional terms and conditions may be incorporated
into this Agreement with the express written consent of the parties. All of
such amendments, modifications, alterations or additions shall effective as of
the date of such unanimous consent, shall be in writing, and shall be provided
to each of the parties.
<PAGE>
eSylan, Inc.
Page 6
5.5 Section headings in this Agreement are included for convenience
only and are not to be used to construe or interpret this Agreement.
5.6 This Agreement embodies the entire agreement and understanding
among the parties with respect to the subject matter hereof. This Agreement
shall be binding upon, and inure to the benefit of, and shall be enforceable by,
the heirs, successors, assigns, and personal representatives of the parties.
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of Maryland, without regard to principles of conflicts of law. In
case any term of this Agreement shall be held invalid, illegal or unenforceable
in whole or in part, neither the validity of the remaining part of such term nor
the validity of the remaining terms of this Agreement shall in any way be
affected thereby. Nothing set forth or referred to herein expressed or implied
is intended or shall be construed to convey upon or give to any person other
than the parties and their successors or permitted assigns, any rights or
remedies under or by reason of this Agreement.
5.7 Any action or proceeding seeking to enforce any provision of, or
based on any rights arising out of, this Agreement may be brought against any of
the parties in the courts of the State of Maryland, City of Baltimore, or, if it
has or can acquire jurisdiction, in the United States District Court for the
District of Maryland and each of the parties consents to the jurisdiction of
such courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or preceding referred to in the preceding sentence may be served on any party
anywhere in the world.
Please confirm that the foregoing correctly sets forth the agreement
between us.
Very truly yours,
____________________________
By: ________________________
Title: _____________________
Number of License Agreement: _______________________
OR
<PAGE>
eSylan, Inc.
Page 7
Area Development Agreement Territory: ___________________
Accepted, as of the date first above written,
eSYLVAN, INC.
By: ________________________
Title: _____________________
<PAGE>
Annex B
Participation Agreement
PARTICIPATION AGREEMENT
This Participation Agreement (the "Agreement") is made and entered into
this _____ day of ____________ 2000 by and between Sylvan Learning Systems,
Inc., a Maryland corporation ("Sylvan") and____________________ ("Participant").
Recitals
--------
A. Sylvan is the licensor of a franchise system pursuant to which it licenses
to each "Licensee" the right to offer the Sylvan-proprietary system of
programs, systems, teaching and management techniques, individualized
diagnostic tests and academic and educational courses or programs designed
to be personally taught, supervised or administered to students who come to
the Licensee's location(s) (each a "Center") for in-person instruction, or
such rights as are specifically described in Participant's License
Agreement (such system of licensed Centers, Sylvan's company-owned Centers
and the services Centers offer, the "Sylvan Learning Center System").
B. Participant became a Licensee under the Sylvan Learning Center System
pursuant to the numbered license agreement listed on the signature page of
this Agreement (the "License Agreement") or Participant became a potential
Licensee under the Sylvan Learning Center System pursuant to the area
development agreement pertaining to the territory listed on the signature
page of this Agreement (the "Area Development Agreement"). As of the date
of this Agreement, the License Agreement or the Area Development Agreement
remains in effect between Participant (as Licensee or potential Licensee,
respectively) and Sylvan. Hereinafter, the term "License Agreement"
includes any license agreement entered into by the Participant with Sylvan
that pertains to the Area Development Agreement territory set forth on the
signature page of this Agreement.
C. Sylvan has determined that to respond to the actual and anticipated actions
of its competitors and to take advantage of new means of making educational
services available to the public, Sylvan must and should develop, in
addition to the Sylvan Learning Center System, an Internet version of
Sylvan's proprietary programs, system and teaching and management
techniques (the "Sylvan On-Line System").
D. Sylvan has concluded that the most effective way to develop and roll-out
the Sylvan On-Line System is to establish a separate company, eSylvan,
Inc., a Maryland corporation ("eSylvan"). Sylvan has granted to eSylvan
the exclusive right to develop and offer the Sylvan On-Line System,
pursuant to a license agreement with eSylvan (the "eSylvan License
Agreement").
E. Sylvan desires Participant's support of the development of the Sylvan On-
Line System and desires to facilitate eSylvan's cooperation in support of
the Sylvan Learning Center System. To this end, Sylvan is offering
Participant the opportunity to participate in its program for Center
participation in the Sylvan On-Line System, as described herein and as duly
hereinafter modified from time to time (the "eSylvan Program").
<PAGE>
F. Participant desires to participate in the opportunity being offered by
Sylvan to participate in the eSylvan Program.
Agreement
---------
1. eSylvan Program.
---------------
1.1 eSylvan Program Features. Participant hereby agrees to participate in
------------------------
the eSylvan Program, if Sylvan elects to proceed in the implementation of the
eSylvan Program. In such event, Participant shall be entitled to the benefits
described on Exhibit A ("eSylvan Program benefits"), as duly modified from time
to time as set forth below.
1.2. eSylvan Committee. Sylvan shall, in cooperation with the Sylvan
-----------------
Franchise Owners Association, Inc. (the "FOA"), form an oversight committee (the
"eSylvan Committee") to review and monitor the eSylvan Program as it affects
Sylvan franchisees, pursuant to an agreement between Sylvan and the FOA (the
"Program Agreement").
1.3 Modification. With respect to any portion of the eSylvan Program as
------------
described in Paragraph B, C, D or E of Exhibit A, Sylvan shall not modify the
terms of such portion of the eSylvan Program during the first 12 months after
the date on which such portion of the eSylvan Program becomes operational.
Following the end of such period, Sylvan may in its discretion implement changes
to the terms of that portion of the eSylvan Program that it considers
commercially necessary, so long as (i) such changes apply to all participants in
that portion of the eSylvan Program (or if various levels of participation are
established, all participants at Participant's level), (ii) any such changes
have been reviewed and approved by the eSylvan Committee, and (iii) Sylvan
provides Participant not less than 60 days prior written notice. Notwithstanding
anything contained herein to the contrary, in no event shall any changes be made
to Paragraphs D(2) or D(3) of Exhibit A.
1.4 Levels of Participation.
-----------------------
(A) Upon acceptance of this Agreement by Sylvan, Participant shall:
(1) automatically be entitled to the eSylvan Program benefits set forth in
Paragraph A of Exhibit A so long as this Agreement is in effect and has not
terminated or expired pursuant to Section 4.3 below. In the event this
Agreement is transferred by Participant to a third party who assumes all the
obligations of Participant hereunder, the transferee shall be entitled to the
eSylvan Program benefits set forth in Paragraph A of Exhibit A and such benefits
shall terminate as to Participant.
(B) Upon acceptance of this Agreement by Sylvan, Participant may
elect to participate in the eSylvan Program benefits set forth in Paragraphs B,
C, D and E of Exhibit A, but if such an election is made, Participant will be
obligated to perform the corresponding obligations as set forth in such
paragraphs. Participant may withdraw from such eSylvan Program benefits at any
time upon giving 60 days written notice to Sylvan and shall thereafter no longer
be subject to the obligations described in any of those paragraphs. Such
withdrawal shall not release Participant from its obligations under Sections 2
or 3 below.
2
<PAGE>
(C) Sylvan may require Participant to make a binding commitment with
respect to any eSylvan Program benefit (other than the eSylvan Program benefits
described in Paragraph A of Exhibit A) by executing a written agreement with
respect to those items. The form of any such agreements shall first be
submitted to the eSylvan Committee for review, and shall not be submitted to any
Participant for signature unless it has been reviewed and approved by the
eSylvan Committee.
2. Co-Marketing.
------------
2.1 Support of Sylvan Learning Center System. During the term of the
----------------------------------------
eSylvan License Agreement, Sylvan shall cause eSylvan to include on its website
a prominent link to the Sylvan Learning Center System website and such other
promotional initiatives similar to those described in Section 2.2 below as may
be approved by the SLC National Advertising Fund, Inc.
2.2 Support of Sylvan On-Line System. Participant shall adhere to
--------------------------------
Sylvan's reasonable directives concerning promotion of the Sylvan On-Line
System, including displaying posters or other promotional materials at
Participant's Center(s) that promote the Sylvan On-Line System. All such
promotional materials and their deployment must be approved by SLC National
Advertising Fund, Inc. prior to use in Centers. Sylvan may combine its
directives with respect to promotion of the Sylvan On-Line System together with
its directives given to Participant with respect to promotion of the Sylvan
Learning Center System.
3. Representations, Acknowledgment & Releases.
------------------------------------------
3.1 General Representations of Participant. Participant represents and
--------------------------------------
warrants to Sylvan that, as of July 28, 2000 and as of date of this Agreement,
Participant is the same party as is party to the License Agreement or the Area
Development Agreement and that Participant has duly authorized the execution and
performance of this Agreement and its participation in the eSylvan Program. In
the event an Area Development Agreement territory is set forth on the signature
page of this Agreement, Participant represents and warrants that, as of July 28,
2000 and as of the date of this Agreement, Participant was in compliance with
the development schedule set forth in the Area Development Agreement with
respect to such Area Development Agreement territory. Participant requires no
consents or approvals for the execution of this Agreement, and this Agreement
will not conflict with any other obligation of Participant.
3.2 Representations and Covenants of Sylvan. Sylvan represents and
---------------------------------------
warrants to Participant that Sylvan is duly authorized to execute and perform
this Agreement. Sylvan represents and warrants to Participant that as of the
date of this Agreement it exercises sufficient control over eSylvan to effect
eSylvan's cooperation and compliance with the eSylvan Program as of the date
hereof. Sylvan covenants that (i) after the date of this Agreement and until
the expiration or other termination of the eSylvan License Agreement it will
exercise commercially reasonable efforts to include in any future agreements,
arrangements or understandings it enters into with eSylvan provisions requiring
eSylvan's cooperation with the eSylvan Program as in
3
<PAGE>
effect from time to time (and Sylvan will exercise any voting control it has as
a shareholder of eSylvan to attempt to effect the same); (ii) during the term of
the eSylvan License Agreement, Sylvan shall not license to eSylvan the right to
operate Centers or offer in-person tutoring (except that Sylvan may, and intends
to, license to eSylvan the right to offer tutoring services by use of
telecommunication or other electronic technologies); and (iii) Sylvan has
provided to the FOA the eSylvan License Agreement, and may amend, modify, or
supplement the executed eSylvan License Agreement except as and to the extent
limited by the provisions of the Program Agreement.
3.3 Acknowledgment Concerning License Agreement Claims. Participant
--------------------------------------------------
acknowledges and agrees that the Sylvan On-Line System is separate and distinct
from the Sylvan Learning Center System and the rights granted to Participant, as
Licensee or potential License under License Agreement or Area Development
Agreement, respectively, and that nothing in the License Agreement or Area
Development Agreement or the relationship created thereby prevents or restricts
Sylvan from establishing eSylvan, seeking independent investors in eSylvan,
licensing to eSylvan the right to use Sylvan proprietary rights, including all
Sylvan trademarks, service marks, copyrighted materials, know how, programs,
systems, teaching techniques, diagnostic tests and academic and prescriptive
educational courses or programs for eSylvan to use in developing the Sylvan On-
Line System. Participant also acknowledges and agrees that Sylvan may contract
with eSylvan to provide eSylvan administrative or other services and may jointly
promote and advertise the Sylvan Learning Center System and Sylvan On-Line
System.
Sylvan agrees that Participant's acknowledgments made in this Section
3.3 shall apply only with respect to the development of the Sylvan On-Line
System by eSylvan, and not with respect to (i) any other initiatives by Sylvan
to develop, or have developed, derivatives of the Sylvan System other than
through eSylvan, or (ii) any separate initiative by Sylvan to develop, or have
developed, the Sylvan On-Line System through other than eSylvan or any successor
in interest to eSylvan.
3.4 No Claims. Participant agrees that it shall not assert any claim it
---------
may now or in the future have at law or in equity based on any contract, tort or
other theory against Sylvan or eSylvan with respect to Sylvan's establishment of
eSylvan, the development by Sylvan or eSylvan of the Sylvan On-Line System or
the offering of the Sylvan On-Line System products and services to the public in
accordance with the provisions of this Agreement, the eSylvan License Agreement
(as in effect as of the date of this Agreement or as amended in accordance with
the procedure set forth in the Program Agreement) and the Program Agreement.
Participant acknowledges and agrees that eSylvan is an express, intended third-
party beneficiary of the waiver given by Participant hereunder and that eSylvan
shall have the right directly to enforce its rights created by this provision.
4. Miscellaneous.
-------------
4.1 Governing Law and Disputes. This Agreement shall be governed by and
--------------------------
construed in accordance with the laws of the State of Maryland but not including
its provisions concerning conflicts of law. Any dispute between the parties
concerning this Agreement, its
4
<PAGE>
validity or the relationship created hereunder shall be settled in accordance
with the procedures set forth in the License Agreement or the Area Development
Agreement.
4.2 Entire Agreement. Except as provided below in this Section 4.2, this
----------------
Agreement, including its exhibits, which form an integral part of this
Agreement, constitute the entire agreement between the parties hereto with
respect to the eSylvan Program, Participant's participation in the eSylvan
Program and the rights and obligations of the parties hereto and under the
License Agreement or Area Development Agreement with respect to Sylvan's
establishment, funding and licensing of eSylvan and the establishment and
operation of the Sylvan On-Line System. Except as provided below in this
Section 4.2, the License Agreement or Area Development Agreement remains in
effect in accordance with its terms provided that to the extent of any conflict
between the License Agreement or the Area Development Agreement, on the one
hand, and this Agreement, on the other hand, this Agreement shall control. The
parties expressly acknowledge that pursuant and subject to the provisions of the
Program Agreement, the eSylvan Program benefits and the eSylvan License
Agreement may be modified in certain respects, all as set forth herein or in the
Program Agreement, and such modifications may affect the rights of Participant
hereunder.
4.3 Term. In the event a License Agreement number or an Area Development
----
Agreement territory, with respect to which the Participant has subsequently
entered into a License Agreement, is set forth on the signature page of this
Agreement, this Agreement shall remain in effect with respect to the territory
set forth in the License Agreement until the earlier to occur of: (i) the
termination or expiration and non-renewal of the eSylvan License Agreement or
(ii) the termination or expiration and non-renewal of the License Agreement.
Except as set forth in the preceding sentence, in the event an Area Development
Agreement territory is set forth on the signature page of this Agreement, this
Agreement shall remain in effect with respect to such Area Development Agreement
territory until the earlier to occur of: (i) the termination or expiration and
non-renewal of the eSylvan License Agreement or (ii) the termination or
expiration and non-renewal of the Area Development Agreement with respect to
such territory, if prior to such termination or expiration and non-renewal, the
Participant does not enter into a License Agreement pertaining to such
territory. Sections 3.3, 3.4 and 4 shall survive the termination or expiration
of this Agreement unless this Agreement has been terminated as a result of a
material default by Sylvan. Except where this Agreement has been terminated as
provided in the preceding sentence, Sylvan may condition its consent to the
transfer of any License Agreement or Area Development Agreement upon the
acceptance by the transferee of the provisions of Sections 3.3 and 3.4 of this
Agreement, and may require that the transferor assign its rights under
Paragraphs A through E of Exhibit A to the transferee.
4.4 Severability; Interpretation. Should any provision of this Agreement
----------------------------
be for any reason held invalid, illegal or unenforceable by a court of competent
jurisdiction, such provision shall be deemed restricted in application to the
extent required to render it valid; and the remainder of this Agreement shall in
no way be affected and shall remain valid and enforceable for all purposes, both
parties hereto declaring that they would have executed this Agreement without
inclusion of such provision. In the event such total or partial invalidity or
unenforceability of any provision of this Agreement exists only with respect to
the laws of a particular jurisdiction, this Section 4.4 shall operate upon such
provision only to the extent that
5
<PAGE>
the laws of such jurisdiction are applicable to such provision. All uses of
forms of the word "including" in this Agreement mean "including without
limitation." The headings and captions contained herein are for the purposes of
convenience and reference only and are not to be construed as a part of this
Agreement. All terms and words used herein shall be construed to include the
number and gender as the context of this Agreement may require. The parties
agree that each section of this Agreement shall be construed independently of
any other section or provision of this Agreement.
5.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed an
original, but such counterparts together shall constitute one and the same
instrument.
5.6 Additional Acknowledgments. Each of the parties hereto acknowledges
--------------------------
that (a) it has read this Agreement in its entirety and understands all of its
terms and conditions; (b) it has had the opportunity to consult with any
individuals of its choice regarding its agreement to the provisions contained
herein, including legal counsel and tax advisers of its choice, and any decision
not to do so was its alone; and (c) it is entering into this Agreement of its
own free will, without coercion from any source. The Participant acknowledges
that it has not received or relied upon any advice from Sylvan or its affiliates
with respect to the legal or tax consequences to the Participant of this
Agreement.
Each of the Parties hereto has caused this Participation Agreement to be
executed by a duly authorized representative as of the dates set forth below.
PARTICIPANT: SYLVAN:
_____________________________ Sylvan Learning Systems, Inc.
By:__________________________ By:__________________________
Its:_________________________ Its:_________________________
Date:________________________ Date:________________________
Number of License Agreement:__________________________
OR
Area Development Agreement Territory:__________________________
6
<PAGE>
Exhibit A
eSylvan Program Benefits
------------------------
A. Reverse Royalty.
---------------
1. Participant will receive from Sylvan an amount (the "Reverse Royalty")
equal to 75% of Sylvan's periodic royalty revenues which Sylvan receives
from eSylvan pursuant to Paragraph 4(b) of the eSylvan License Agreement
(but in no event less than 3% of eSylvan's net revenues) which are
generated from payments of revenues received by eSylvan from customers
residing in the ZIP codes in the territory set forth in the License
Agreement or Area Development Agreement. Sylvan will allocate jointly
held ZIP code areas as equitably as practicable, in its sole discretion.
If the territory set forth in the License Agreement or Area Development
Agreement includes a portion but not all of an entire ZIP code and there
is no other Sylvan licensee within that ZIP code, the entire ZIP code
shall be deemed within the territory set forth in the License Agreement
or Area Development Agreement for purposes of this Agreement; provided,
however, that if the territory set forth in the License Agreement or
Area Development Agreement includes, in Sylvan's reasonable judgment,
only a minimal portion of a ZIP code, Sylvan may exclude such ZIP code
from the Reverse Royalty, subject to review and approval by the eSylvan
Committee.
2. Participant will not accrue any Reverse Royalty until Sylvan is entitled
to receive an amount from eSylvan pursuant to Paragraph 4(b) of the
eSylvan License Agreement which are generated from payments of revenues
received by eSylvan from customers residing in the ZIP codes in the
territory set forth in the License Agreement or Area Development
Agreement equal to $0.47 multiplied by the number of shares of eSylvan
Class A stock held by Participant as of the date of this Agreement.
3. Reverse Royalties will be paid quarterly not later than 30 days after
the end of each calendar quarter.
4. The Reverse Royalty to Participant shall terminate upon expiration or
termination of this Agreement.
B. Referral of Students to Sylvan On-Line System.
---------------------------------------------
1. For each student that Participant refers (which term shall include
referrals to Sylvan and referrals directly to eSylvan) for participation
in the Sylvan On-line System, during the period in which Participant
remains in the eSylvan Program, Participant shall receive 5% (to a
maximum of $100) of all revenues received by eSylvan for the program(s)
to which such student initially subscribes, including without limitation
related testing and registration fees.
<PAGE>
2. Referred students are not required to be existing enrolled students at a
Participant Center. So long as (i) a prospective Sylvan On-Line System
student uses Participant's Center number or location when initially
enrolling for the Sylvan On-Line System, or (ii) Participant sends an
email referral to Sylvan or directly to eSylvan, the Sylvan On-Line
System prospective student will count as a Participant referred student.
When completing an on-line enrollment application, each prospective
student will be asked to indicate the number or location of the Center,
if any, that referred the prospective Sylvan On-Line System student.
Participant may include its Center number on promotional materials it
displays at its Center, in pamphlets it distributes and in any
advertising it does.
3. Sylvan is obligated to pay Participant only to the extent eSylvan
actually receives revenues from a referred student (e.g., if a student
enrolls and pays a 25% deposit but then drops out and no more is
collected from the student), Participant receives 5% (to a maximum of
$100) of the 25% portion of the course fee collected by eSylvan).
4. Sylvan will not modify the referral fees provided in this Paragraph B
without making a commensurate adjustment in the referral fees in
Paragraph C below.
C. Referral of Students to Participant.
-----------------------------------
1. For each student that eSylvan refers to Participant who enrolls in and
pays for a Sylvan diagnostic/prescriptive program, during the period
Participant remains in the eSylvan Program, Participant will pay Sylvan
5% (to a maximum of $100) of all revenues received by Participant for
such program, including without limitation, testing and registration
fees. For each student eSylvan refers to Participant for programs other
than diagnostic/prescriptive programs, Participant shall pay Sylvan 5%
(to a maximum of $100) of the revenues received by Participant for the
first program(s) to which such student initially subscribes.
2. Participant is obligated to pay Sylvan only to the extent Participant
actually receives revenues from a referred student (e.g., if a student
enrolls and pays a 25% deposit but then drops out and no more is
collected from the student, Sylvan receives 5% of the 25% portion of the
course fee collected by Participant).
D. Recruitment of On-Line Diagnostic/Prescriptive Instructors,
Test Administrators, Education Directors and Sales Personnel.
------------------------------------------------------------
1. Fees.
----
a. Management Fees. During the period Participant remains in the
---------------
eSylvan Program, Sylvan may request Participant (and other
participants) to nominate and manage Sylvan-certified
diagnostic/prescriptive instructors, other instructors,
Education Directors and sales personnel in the Sylvan On-Line
Program. Participant is not required to respond to such request.
However, to the extent Participant makes its personnel available
to Sylvan in connection with the Sylvan On-Line Program for
A-2
<PAGE>
committed periods, Sylvan shall reimburse Participant for Base Salary*
plus a 30% Management Fee for each hour of direct instruction or test
administration (including any preparation time specified by Sylvan),
or, for Education Directors, to conduct parent conferences. In
addition, other services (as for example, school conferences) may be
required and authorized by Sylvan and corresponding fees payable, all
as approved from time to time by the eSylvan Committee. Such fees
shall be payable monthly not later than 30 days after the end of the
month during which such services were delivered.
b. Referral Fees. During the period Participant remains in the eSylvan
-------------
Program, if Participant refers personnel to Sylvan for engagement in
the Sylvan On-line System on an independent contractor basis, Sylvan
shall pay Participant a Referral Fee, as set forth below. Once a
Participant-nominated independent contractor has provided 40 hours of
service on behalf of the Sylvan On-line System, Sylvan will pay to
Participant the Referral Fee irrespective of the number of additional
times such tutor is used with the initial student or other students.
Such fees shall be payable quarterly not later than 30 days after the
end of the quarter during which such fees accrued.
<TABLE>
<CAPTION>
Management Fees Referral Fees
--------------- -------------
<S> <C> <C>
Diagnostic/Prescriptive Instructors Base salary* x 1.3 $100
Test Administrators Base salary* x 1.3 $100
Education Directors Base salary* x 1.3 $100
</TABLE>
* Base salary shall mean the base hourly salary paid by Participant to the
tutor or director, exclusive of taxes and benefits.
2. Assignment of Diagnostic/Prescriptive Instructors. Sylvan shall use
-------------------------------------------------
commercially reasonable efforts to cause eSylvan to assign
diagnostic/prescriptive instructors as follows:
a. For students referred by a Participant Center,
diagnostic/prescriptive instructors shall be assigned from the
referring Center, subject to: (i) availability at the time and in
the discipline requested by the student; (ii) proper
qualifications of the tutor; and (iii) the Sylvan On-Line System's
requirement to maintain student-teacher ratios of 3:1;
b. For all other students, diagnostic/prescriptive instructors shall
be assigned from the pool of Center-managed
diagnostic/prescriptive instructors, subject to availability and
proper qualifications, as determined by the Sylvan On-Line System
and the Sylvan On-Line System's requirement to maintain student-
teacher ratios of 3:1; the Sylvan On-Line System shall not
intentionally discriminate as
A-3
<PAGE>
between diagnostic/prescriptive instructors of licensee Centers
and diagnostic/prescriptive instructors of Sylvan-owned Centers;
and
c. If no Center-managed diagnostic/prescriptive instructors are
available, the Sylvan On-Line System may use non-center managed
diagnostic/prescriptive instructors.
3. Non-Solicitation. Sylvan shall use reasonable efforts to ensure that
----------------
eSylvan does not solicit Participant's employees or independent
contractors to become employees or independent contractors of eSylvan,
and that eSylvan confirms that Participant employees or independent
contractors seeking employment with eSylvan have given notice to
Participant of such intention.
E. Sales Commission. For each student enrollment that Participant generates
----------------
for the Sylvan On-Line System from its Center, in addition to the Referral
Fees set forth in Paragraph B above, Participant shall receive a sales
commission from Sylvan equal to five percent (5%) (up to a maximum of $100)
of the revenues received by eSylvan for the first program(s) to which such
student initially subscribes through the Center. For the purposes of this
paragraph E, a "student enrollment" shall be defined as the on-line
submission by Participant to Sylvan or directly to eSylvan for engagement
in the Sylvan On-line System of an enrollment form and payment in the form
of a credit card number or electronic fund transfer check number or other
acceptable payment method.
A-4
<PAGE>
Annex C
Terms of Class A Stock
CLASS A COMMON STOCK.
--------------------
1. Dividends and Distributions. Subject to the provisions of law and
---------------------------
this charter, the holders of Class A Common Stock, together with the holders of
Common Stock and the holders of other Convertible Securities entitled to receive
dividends or distributions on or with respect to the Common Stock under the
provisions of law and this charter, shall be entitled to receive as, if and when
declared by the Board of Directors, out of funds legally available for such
purpose, any and all dividends or distributions declared and paid by the
Corporation on or with respect to the Common Stock, with each such holder
receiving its pro rata portion (assuming the conversion of all outstanding Class
A Common Stock and such other Convertible Securities that are entitled to
receive such dividends or distributions) of any such dividend or distribution.
2. Liquidation Rights. Subject to the provisions of law and this
------------------
charter, upon a Liquidation Event, the assets of the Corporation available for
distribution to its stockholders shall be distributed to the holders of Class A
Common Stock, together with the holders of Common Stock and the holders of other
Convertible Securities entitled to participate in such distribution under the
provisions of law and this charter, on a pro rata basis (assuming the conversion
of all outstanding Class A Common Stock and such other Convertible Securities).
3. Voting Rights. Except as otherwise required by law or provided
-------------
herein, the holders of Class A Common Stock, together with the holders of Common
Stock and the holders of other Convertible Securities entitled to vote on
matters submitted to stockholders of the Corporation, shall vote together, as a
single class, on all matters submitted to stockholders of the Corporation for
their action or consideration. Each holder of Class A Common Stock shall be
entitled to cast one (1) vote for each share of Common Stock into which such
shares of Class A Common Stock then held of record by such holder may be
converted in accordance with Section B.4 of this Article IV. Except as
otherwise required by law, holders of Class A Common Stock shall not have
cumulative voting rights.
4. Conversion of Class A Common Stock.
----------------------------------
(a) All outstanding shares of Class A Common Stock shall
automatically convert to fully paid and nonassessable shares of Common Stock on
the basis of one share of Common Stock for each share of Class A Common Stock
(the "Conversion Ratio") (i) upon a determination of the Board of Directors of
the Corporation, (ii) upon the closing of a firm commitment underwritten public
offering (pursuant to an effective registration statement under the Securities
Act of 1933, as then in effect, or any comparable statement under any similar
Federal statute then in force) of shares of capital stock of the Corporation in
which (a) the aggregate price paid for such shares by the public shall be Ten
Million Dollars ($10,000,000) or more, and (b) the price
<PAGE>
paid by the public for such shares reflects a preoffering valuation of the
Corporation of Forty Million Dollars ($40,000,000) or more (a "Qualified IPO"),
(iii) upon the listing of shares of a class of the Corporation's capital stock
on the New York Stock Exchange, Inc, the American Stock Exchange, Inc. or the
Nasdaq National Market or any successor markets or exchanges, or (iv)
immediately prior to the consummation of a sale or other disposition (or series
thereof) of all or a substantial portion of the Corporation's assets, or of any
reorganization, consolidation, merger or statutory share exchange of the
Corporation which is to be effected in such a way that holders of the
Corporation's capital stock shall be entitled to receive cash, assets or
securities of another entity in exchange for the capital stock of the
Corporation. Holders of shares of Class A Common Stock so converted shall
deliver to the Corporation, at its principal office (or such other office or
agency of the Corporation as the Corporation may designate by notice in writing
to such holders) during its usual business hours, the certificate or
certificates for the shares so converted. As promptly as practicable thereafter,
the Corporation shall issue and deliver to such holder a certificate or
certificates for the number of whole shares of Common Stock to which such holder
is entitled, together with any payment in lieu of fractional shares to which
such holder may be entitled. Until such time as a holder of shares of Class A
Common Stock shall surrender the certificates therefor as provided above, such
certificates shall be deemed to represent the shares of Common Stock to which
such holder shall be entitled upon the surrender thereof.
(b) If the Corporation subdivides (by any stock split, dividend,
distribution, recapitalization or otherwise) the outstanding Common Stock into a
greater number of shares, the applicable Conversion Ratio in effect immediately
prior to such subdivision shall be proportionately increased to account for such
subdivision; provided, however, that notwithstanding the foregoing, the
Conversion Ratio shall not be increased if the holders of Class A Common Stock
participate in such subdivision under the provisions of law or this charter. If
the Corporation combines (by reverse stock split or otherwise) the outstanding
Common Stock into a smaller number of shares, the applicable Conversion Ratio in
effect immediately prior to such combination shall be proportionately decreased.
(c) No fractional shares shall be issued upon conversion of
Class A Common Stock into Common Stock. If any fractional share of Common Stock
would, except for the provisions of the preceding sentence, be delivered upon
such conversion, the Corporation, in lieu of delivering such fractional share,
shall pay to the holder of the fractional share of Class A Common Stock that has
converted into a fractional share of Common Stock an amount in cash equal to the
current market price of such fractional share as determined in good faith by the
Board of Directors of the Corporation.
(d) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Class A Common
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Class A Common
Stock; and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then outstanding
shares of Class A Common Stock, the Corporation will take such corporate action
as may, in the opinion of its counsel, be
<PAGE>
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to this Certificate.
(e) In the event the Corporation combines (by reverse stock
split) the outstanding Class A Common Stock into a smaller number of shares, and
as a result of such combination the holders of Class A Common Stock are entitled
to receive cash, the shares of Class A Common Stock so combined shall be valued
as though such shares had been converted to Common Stock immediately prior to
such combination.
5. Redemption of Class A Common Stock.
----------------------------------
(a) Upon (i) the death or dissolution of a holder of any shares
of Class A Common Stock (a "Holder"); (ii) an Involuntary Transfer, as defined
in Section B.5(c) of this Article IV, of any shares of Class A Common Stock held
by a Holder; (iii) a Voluntary Transfer, as defined in Section B.6(a) of this
Article IV, of any shares of Class A Common Stock held by a Holder; (iv) the
termination of any license agreement (a "License Agreement"), between a Holder
and Sylvan Learning Systems, Inc., or any of its Affiliates or Associates (as
such terms are defined in Section 3-801 of the MGCL), pursuant to which such
Holder is licensed the right to offer a proprietary system of programs, systems,
teaching and management techniques, individualized diagnostic tests and academic
and educational courses or programs, for any or no reason by any party to such
License Agreement; (v) the termination or expiration of the rights granted to a
Holder by Sylvan Learning Systems, Inc., or any of its Affiliates or Associates,
under an area development agreement (a "Development Agreement"), with respect to
a specific territory, if prior to the termination or expiration of such rights,
such Holder has not entered into a License Agreement pertaining to the territory
for which such rights have terminated or expired; or (vi) the Transfer, as
defined below, by a Holder of its License Agreement or its rights under a
Development Agreement with respect to a specific territory, then for a period
beginning on the occurrence of any such event and ending One Hundred Eighty
(180) days following the date on which the Corporation receives written notice
of the occurrence of any such event (the "Redemption Period"), the Corporation
shall have the right, but not the obligation, to redeem, at the price and upon
the terms contained in this Section B.5, (A) in the case of (i), (ii), and (iii)
above, any or all shares of Class A Common Stock then registered in such
Holder's name; (B) in the case of (iv) above, any or all shares of Class A
Common Stock issued to such Holder under that certain subscription agreement
between such Holder and the Corporation that sets forth the terminated License
Agreement number or the territory covered by the terminated License Agreement;
(C) in the case of (v) above, any or all shares of Class A Common Stock issued
to such Holder under that certain subscription agreement between such Holder and
the Corporation that sets forth the territory for which the rights granted under
a Development Agreement have terminated or expired; and (D) in the case of (vi)
above, any or all shares of Class A Common Stock issued to such Holder under
that certain subscription agreement between such Holder and the Corporation that
sets forth the transferred License Agreement number or the territory for which
the rights granted under a Development Agreement have been transferred. All
shares of the Class A Common Stock redeemable under this Section B.5 are
hereinafter referred to as the "Redeemable Stock." For purposes of Section
B.5(a), a "Transfer" shall be deemed to occur when (x) a licensee under a
License Agreement or potential licensee under a Development Agreement directly
or indirectly sells, assigns, transfers, conveys, gives away, pledges,
<PAGE>
mortgages or otherwise encumbers any interest in a License Agreement or
Development Agreement or any portion or aspect thereof, or (y) a licensee under
a License Agreement, a potential licensee under a Development Agreement or any
holder of equity or voting interests in such licensee or potential licensee,
directly or indirectly, in a single transaction or a series of related
transactions, sells, assigns, transfers, conveys, gives away, pledges, mortgages
or otherwise encumbers any equity or voting interest in the licensee or
potential licensee if the effect of the transaction is to reduce the aggregate
percentage of equity interests or voting interests of all equity holders or
holders of voting interests of the licensee or potential licensee prior to the
Transfer to less than fifty-one percent. Notwithstanding anything to the
contrary contained in this Section B.5(a), shares of Class A Common Stock of a
deceased Holder shall not be redeemable under this Section B.5(a) in the event,
within thirty (30) days following the death of such Holder, (x) such Holder's
spouse or lineal descendant(s) becomes a party to such Holder's License
Agreement or Development Agreement, (y) such Holder's spouse or lineal
descendant(s) that becomes a party to such Holder's License Agreement or
Development Agreement becomes the holder of the shares of Class A Common Stock
formerly held by such deceased Holder, and (z) such Holder's spouse or lineal
descendant(s) that becomes a party to such Holder's License Agreement or
Development Agreement acknowledges in writing that he is subject to the transfer
restrictions set forth in that certain subscription agreement between the
Corporation and such deceased Holder. Further, the restrictions on transfer set
forth in Section B.6 of this Article IV shall not apply to a transfer from a
deceased Holder to such deceased Holder's spouse or lineal descendants pursuant
to and in accordance with the terms of the immediately preceding sentence.
Notwithstanding anything to the contrary contained in this Section B.5(a), the
Redemption Period upon a Voluntary Transfer shall commence on the later to occur
of the effective date of any determination that the provision set forth in the
first two sentences of Section B.6(a) of this Article IV is void, invalid or
unenforceable by virtue of any legal decision, statute, rule or regulation, or
the date upon which the Corporation receives written notice of a Voluntary
Transfer.
(b) At any time during the applicable Redemption Period, the
Corporation may exercise its right to redeem any shares of Redeemable Stock held
by a Holder by sending written notice (the "Redemption Notice") to such Holder
specifying the Redemption Price, as defined below, the date upon which the
Redemption Price shall be payable (the "Redemption Date"), the number of shares
of Redeemable Stock to be redeemed and the place where the Redemption Price
shall be payable. The Redemption Notice shall be addressed to such Holder at the
address of such Holder shown upon the records of the Corporation. At the close
of business on the Redemption Date, without any action on the part of the Holder
of such Redeemable Stock, the shares of Redeemable Stock to be redeemed on such
Redemption Date shall automatically become and be converted into the right to
receive cash in the amount of the Redemption Price, without interest, upon
surrender of the certificates representing such shares of Redeemable Stock. From
and after the close of business on the Redemption Date, all rights of the Holder
(except the right to receive the Redemption Price) shall cease with respect to
the shares of Redeemable Stock to be redeemed on such Redemption Date, except
the right to receive the Redemption Price from the Corporation, and such shares
shall not thereafter be transferred on the books of the Corporation or be deemed
to be outstanding for any purpose whatsoever.
<PAGE>
(c) For purposes of this Section B.5, the occurrence of any of
the following events shall constitute an "Involuntary Transfer" of Class A
Common Stock: (i) if any shares of Class A Common Stock are attached or taken in
execution; (ii) if a Holder applies for the benefit of, or files a case under,
any provision of the federal bankruptcy law or any other law relating to
insolvency or relief of debtors; (iii) if a case or proceeding is brought
against a Holder under any provision of the federal bankruptcy law or any other
law relating to insolvency or relief of debtors which is not dismissed within
thirty (30) days after the commencement thereof; (iv) if a Holder makes an
assignment for the benefit of creditors; (v) if any shares of Class A Common
Stock are made subject to a charging order; or (vi) if any shares of Class A
Common Stock are transferred pursuant to a divorce decree.
(d) The Redemption Price of Redeemable Stock payable under this
Section B.5 shall be an amount equal to the product obtained by multiplying (i)
the number of shares of Redeemable Stock being redeemed, by (ii) the greater of
(x) $0.875 (as adjusted for stock splits, stock dividends, recapitalizations or
similar transactions with respect to the Class A Common Stock) or (y) the most
recently appraised value per share of the Class A Common Stock as determined or
approved by the Board of Directors of the Corporation. The Redemption Price
determined in accordance with this Section B.5(d) shall constitute the full and
exclusive price for redemption of Redeemable Stock under this Section B.5.
(e) On the Redemption Date, the certificates representing shares
of Redeemable Stock to be redeemed shall be delivered by the Holder to the
Corporation. If the certificates representing any shares of Redeemable Stock to
be redeemed have not been surrendered by the Holder, all rights of the Holder
with respect to said Redeemable Stock (including voting rights) nonetheless
shall cease and terminate.
6. Restrictions on Transfer of Class A Common Stock.
------------------------------------------------
(a) The Corporation has determined that the continued ownership
of Class A Common Stock only by Holders that have entered into License
Agreements will encourage such Holders to support and participate in the
Corporation's business plan and perpetuate harmony in the Corporation's
management, policies and operations. Accordingly, any transfer of shares of
Class A Common Stock except to the Corporation shall be null and void, and the
Corporation shall refuse to recognize any such transfer and shall not reflect on
its records any change in record ownership of the Class A Common Stock pursuant
to any such transfer and the intended transferee of such shares shall be deemed
never to have had an interest therein. If the foregoing provision is determined
to be void, invalid or otherwise unenforceable by virtue of any legal decision,
statute, rule or regulation, then any such transfer of shares of Class A Common
Stock except to the Corporation, whether voluntary, involuntary or otherwise,
shall be deemed a "Voluntary Transfer" for purposes of Section B.5 of this
Article IV.
(b) Each certificate of Class A Common Stock shall be endorsed
by the Secretary of Corporation as follows:
<PAGE>
The Class A Common Stock evidenced by this certificate is subject
to restrictions on transfer set forth in the Charter of the
Corporation. The Corporation will furnish information about the
restrictions to any stockholder upon request and without charge.
(c) The Corporation may note upon its stock transfer records a
"stop transfer order" with respect to the Class A Common Stock in order to
enforce the restrictions on transfer hereinabove described. The Corporation or
its agent shall not be liable for any refusal to transfer the Class A Common
Stock upon the books of the Corporation, except in compliance with the terms and
conditions of such restrictions.
(d) The restrictions on transfer set forth in this Section 6
shall terminate upon the earlier to occur of September 30, 2010 or any of the
following events:
(i) A determination of the Board of Directors;
(ii) The cessation of the Corporation's business; or
(iii) The bankruptcy, liquidation, receivership, or
dissolution of, or assignment for the benefit of creditors by, the Corporation.
<PAGE>
[BACK COVER]
No dealer, salesperson or any other person is authorized to give any information
or make any representations in connection with this offering other than those
contained in this prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the company
or the underwriter. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
by this prospectus, or an offer to sell or a solicitation of an offer to buy any
securities by anyone in any jurisdiction in which such offer or solicitation is
not authorized or is unlawful. The delivery of this prospectus shall not, under
any circumstances, create any implication that the information herein is correct
as of any time subsequent to the date of this prospectus.
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward-Looking Statements; Market Data.................................. 18
The Offering............................................................. 19
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Selected Financial Statements............................................ 28
Management's Discussion and Analysis of Financial Condition and
Plan of Operation....................................................... 29
Business................................................................. 32
Management............................................................... 45
Related Party Transactions............................................... 49
Principal Stockholders................................................... 51
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 60
Plan of Distribution..................................................... 60
Transfer Agent and Registrar.............................................
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
Annex A Subscription Agreement........................................... A-1
Annex B Participation Agreement.......................................... B-1
Annex C Terms of Class A Stock........................................... D-1
</TABLE>
3,000,000 Shares
eSylvan, Inc.
Class A Common Stock
______________
PROSPECTUS
______________
, 2000
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
offering described in the registration statement will be as follows:
SEC registration fee $ 695
Printing and engraving expenses 130,000
Accounting fees and expenses 100,000
Legal fees and expenses (including Blue Sky) 100,000
Miscellaneous 20,000
Total $350,695
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the Maryland General Corporation Law (the "MGCL")
provides that the Company may indemnify any director who was, is or is
threatened to be made a named defendant or respondent to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that he is or was a director of the
Company, or while a director, is or was serving at the request of the Company as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, against reasonable expenses (including attorneys' fees),
judgments, penalties, fines and settlements, actually incurred by the director
in connection with such action, suit or proceeding, unless it is established
that: (i) the act or omission of the director was material to the matter giving
rise to such action, suit or proceeding, and was committed in bad faith or was
the result of active and deliberate dishonesty; (ii) the director actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director had reasonable cause to
believe that the act or omission was unlawful. If the action, suit or
proceeding was one by or in the right of the Company, no indemnification shall
be made with respect to any action, suit or proceeding in which the director
shall have been adjudged to be liable to the Company. A director also may not
be indemnified with respect to any action, suit or proceeding charging improper
personal benefit to the director, whether or not involving action in the
director's official capacity, in which the director is adjudged to be liable on
the basis that a personal benefit was improperly received. Unless limited by
the Company's Charter: (i) a court of appropriate jurisdiction, upon
application of a director, may order such indemnification as the court shall
deem proper if it determines that the director is fairly and reasonably entitled
to indemnification in view of all of the relevant circumstances, regardless of
whether the director has met the standards of conduct required by MGCL Section
2-418; and (ii) the Company shall indemnify a director if such director is
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above. However, with respect to any action, suit or
proceeding by or in the right of the Company or in which the
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<PAGE>
director was adjudged to be liable on the basis that a personal benefit was
improperly received, the Company may only indemnify the director for any
expenses (including attorneys' fees) incurred in connection with such action,
suit or proceeding.
MGCL Section 2-418 further provides that unless limited by the
Company's Charter, the Company: (i) shall (a) indemnify an officer of the
Company if such officer is successful on the merits or otherwise in defense of
any action, suit or proceeding referred to above, and (b) indemnify an officer
of the Company if a court of appropriate jurisdiction, upon application of an
officer, shall order indemnification; (ii) may indemnify and advance expenses to
an officer, employee or agent of the Company to the same extent that it may
indemnify directors; and (iii) may indemnify and advance expenses to an officer,
employee or agent who is not a director to such further extent, consistent with
law, as may be provided by the Charter, Bylaws, general or specific action of
the Company's Board of Directors or contract.
The Charter of the Company, provides that the Company shall indemnify
its currently acting and its former directors and officers against any and all
liabilities and expenses incurred in connection with their services in such
capacities to the maximum extent permitted by the MGCL, as from time to time
amended. If approved by the Board of Directors, the Company may indemnify its
employees, agents and persons who serve and have served, at its request as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture or other enterprise to the extent determined to be
appropriate by the Board of Directors. The Company shall advance expenses to
its directors and officers entitled to mandatory indemnification to the maximum
extent permitted by the MGCL and may in the discretion of the Board of Directors
advance expenses to employees, agents and others who may be granted
indemnification.
The Company's Charter provides that, to the fullest extent permitted
by the MGCL, as amended or interpreted, no director or officer of the Company
shall be personally liable to the Company or its stockholders for monetary
damages in connection with events occurring at the time such person served as a
director or officer.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 30, 2000, we issued 13,714,286 shares of our common stock to Sylvan
Learning Systems, Inc. and 285,714 shares of our common stock to Ivy West
Educational Services, Inc. in exchange for the assets that we deem necessary to
implement our business plan and $5 million in cash. This issuance was exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
and did not involve an underwriter.
On June 30, 2000, we agreed to issue an aggregate of 10,526,316 shares of
Series A Preferred Stock to Sylvan Ventures, LLC in six separate closings on
September 30, 2000, December 31, 2000, March 31, 2001, June 30, 2001, September
30, 2001 and December 31, 2001 for an aggregate price of $20 million which
represents a price per
2
<PAGE>
share of $1.90. This issuance is exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and did not involve an underwriter.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of the registration statement:
EXHIBIT NO. DESCRIPTION
3.1 Articles of Amendment and Restatement (1)
3.2 By-laws (1)
4.1 Form of common stock certificate (1)
5 Opinion of Venable, Baetjer and Howard, LLP (1)
10.1 eSylvan, Inc. 2000 Omnibus Stock Plan (1)
10.2 Facility Use Agreement by and between the Company and Sylvan
Learning Systems, Inc. dated June 30, 2000 (1)
10.3 Professional Services Agreement by and between the Company
and Sylvan Learning Systems, Inc. dated June 30, 2000 (1)
10.4 License Agreement by and between the Company and Sylvan
Learning Systems, Inc. dated June 30, 2000 (1)
10.5 Contribution Agreement by and between the Company and Sylvan
Learning Systems, Inc. dated June 30, 2000 (1)
10.6 $10 Million Revolving Credit Note by and between the Company
and Sylvan Ventures, LLC dated June 30, 2000 (1)
10.7 Series A Preferred Stock Purchase Agreement by and between
the Company and Sylvan Ventures, LLC dated June 30, 2000 (1)
10.8 Registration Rights Agreement by and between the Company and
Sylvan Ventures, LLC dated June 30, 2000 (1)
3
<PAGE>
10.9 Services Agreement by and between the Company and Sylvan
Learning Systems, Inc. dated June 30, 2000 (1)
21 Subsidiaries of the Company (2)
23.1 Consent of Ernst & Young, LLP (2)
23.2 Consent of Venable, Baetjer and Howard, LLP (included in
Exhibit 5)
23.3 Consent of Barry Miller to serve as director (2)
24 Power of Attorney (2)
27 Financial Data Schedule (2)
____________________
(1) To be filed by amendment.
(2) Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of Prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represents no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement.
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<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) 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 foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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 or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Baltimore, state of Maryland, on July
28, 2000.
eSYLVAN, INC.
By: /S/ DAVID GRAVES
-----------------
David Graves
President
Pursuant to the requirements of the Securities Act, the registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
President (Principal
/S/ DAVID GRAVES Executive Officer) July 28, 2000
----------------
David Graves
Treasurer and Chief
Financial Officer
/S/ B. LEE MCGEE (Principal Financial July 28, 2000
----------------
B. Lee McGee Officer and Principal
Accounting Officer)
The Entire Board of Directors
Christopher Hoehn-Saric Peter Cohen
B. Lee McGee Robert Zentz
By: /S/ DAVID GRAVES July 28, 2000
--------------------
David Graves
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
22 Subsidiaries of the Company
23.1 Consent of Ernst & Young, LLP
23.3 Consent of Barry Miller to serve as director
24 Power of Attorney
27 Financial Data Schedule
99 Form of Prospectus Supplement
