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As filed with the Securities and Exchange Commission on September 27 , 2000
Registration No. 333-42530
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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eSYLVAN, INC.
(Exact Name of Registrant as Specified in its Charter)
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Maryland 2299 52-2257470
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
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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)
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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)
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Copy to:
MICHAEL W. CONRON, ESQ.
Venable, Baetjer and Howard, LLP
2 Hopkins Plaza, Suite 1800
Baltimore, Maryland 21201
(410) 244-7424
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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. [_]
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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 2000
eSylvan, Inc.
Class A Convertible Common Stock
We are a development stage company and a majority-owned subsidiary of Sylvan
Ventures, LLC. Sylvan Ventures, LLC is a majority-owned subsidiary of Sylvan
Learning Systems, Inc. This offering is a best efforts direct offering by us
and does not involve an underwriter.
We are offering to certain holders of Sylvan Learning Systems, Inc. franchise
license agreements or area development agreements the opportunity to make
irrevocable offers to invest in our Class A convertible common stock and to
receive a cash payment in the amount of $0.35 per share in exchange for their
execution of the subscription agreement attached hereto as Annex A and the
participation agreement attached hereto as Annex B. The subscription agreement
and the participation agreement require you to make certain warranties to us
regarding your investment in this offering and to support our business plan. We
will receive no cash consideration for this offering of Class A stock. The
specific number of shares of Class A stock and the amount of the cash payment
in which you may offer to invest under this prospectus is set forth in an
accompanying prospectus supplement. 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 offering will commence on the date of this prospectus and the termination
date will 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 are under no obligation to accept any offers or issue
any shares of our Class A stock and we currently do not intend to do so unless
we receive offers to invest in at least 2,700,000 shares; however, we may waive
or lower this requirement at any time.
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 and it will
be extremely difficult for you to sell your shares of Class A stock.
Investing in our Class A stock involves a high degree of risk. See "Risk
Factors" on Page 4.
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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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............................................................. 4
Forward-Looking Statements .............................................. 16
The Offering............................................................. 16
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Plan of
Operation............................................................... 26
Business................................................................. 28
Management............................................................... 38
Related Party Transactions............................................... 41
Principal Stockholders................................................... 43
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 50
Plan of Distribution..................................................... 51
Transfer Agent and Registrar............................................. 53
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 53
Index to Financial Statements............................................ F-1
Annex A Subscription Agreement........................................... A-1
Annex B Participation Agreement.......................................... B-1
Annex C Charter of eSylvan, Inc. ........................................ C-1
Annex D Tax Valuation Report............................................. D-1
</TABLE>
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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 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 and the testing of
that infrastructure. 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. In order to commence operations, we
will need to complete development and testing of our technology and content for
the online delivery of tutoring services. 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. We intend to
commence offering services to the public before the end of 2000.
Our relationships with our controlling stockholders, Sylvan and Sylvan
Ventures, are essential to the successful implementation of our business plan.
Most of our executive officers and each of our directors is an officer and/or a
director of Sylvan or Sylvan Ventures. Sylvan provides us with the facilities,
services and intellectual property necessary to implement our business plan.
Specifically, pursuant to agreements, Sylvan provides us:
. Management services--provided on an independent contractor basis at fees
that are intended to be fair and reasonable for the services provided
based on our utilization of such services.
. Facilities--office space is provided in existing Sylvan facilities for a
quarterly use fee and separate overhead fee based upon Sylvan's good
faith estimate of our use of such facilities. If Sylvan owns a facility,
the fee is based on market rent. If Sylvan leases a facility, the fee is
based on Sylvan's lease payments.
. Intellectual property--Sylvan licenses us the right to use the Sylvan
name and its other trademarks and various tutoring content for an initial
license fee of $1 million and 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. The initial license fee of $1
million was agreed to be an initial contribution by Sylvan, and no cash
was paid for the initial license fee. During the first year of this
agreement we will pay royalties; however, there will be no guaranteed
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 agreed to reduce future royalty payments due
under the terms of the license agreement by any amounts that we pay to
persons who invest in this offering.
. Tutoring services--prior to assigning a tutor to a student for a
diagnostic and prescriptive program, we must request Sylvan to provide a
tutor for a committed period for which we reimburse Sylvan for the salary
of such tutor at an hourly rate based on the base compensation such
person receives, and pay Sylvan a 30% management fee per hour of service.
If Sylvan refers instructors to us, we will pay Sylvan a $100 referral
fee.
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. Co-marketing arrangements--We and Sylvan will receive payments for each
student referred to each other in 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.
. Website link--We will provide a link to Sylvan's website on our website
and Sylvan will provide a link to our website on its website.
We have entered into agreements with Sylvan Ventures under which Sylvan
Ventures will 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 beginning on September 30, 2000 and ending on
December 31, 2001.
. A written commitment under which Sylvan and Sylvan Ventures agree to fund
the cash requirements of our business at least through September 30,
2001.
The Offering
We are offering up to 3,000,000 shares of Class A 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. We will
pay to each person that invests in shares of our Class A stock an amount in
cash equal to $0.35 multiplied by the number of shares of Class A stock that we
are offering to that person.
As consideration for your investment in our Class A stock, you must execute
and return to us two counterpart copies of each of the subscription agreement
attached hereto as Annex A and the participation agreement attached hereto as
Annex B.
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
. we have no present source of revenues and for us to generate revenues,
we will need to 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 and significant customer bases and broader
online product and service offerings than we have
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. 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.
. we need additional financing
. our class A stock is redeemable under certain circumstances at a price
that may not reflect to value of the shares of common stock into which
it converts on the occurence of certain events
. our class A stock is subject to transfer restrictions
. if you invest in our Class A stock, you will likely recognize ordinary
income for tax purposes at the time you receive the shares
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RISK FACTORS
Investing in our Class A stock involves a high degree of risk. We intend to
deliver supplemental education to families and children though a variety of
applications on the Internet via our website. At the present time, our website
is not publicly available. 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
Our technology for the online delivery of tutoring services is new and
untested.
Our online program includes live, voice-based, interactive, three student
to one teacher instruction with tutoring curriculum individualized to the
student based upon a needs assessment supplemented by rewards for student
performance. Although some other companies deliver tutoring services over the
Internet, their programs may rely upon chat or message board homework help and
generally do not include one or more of these features of our program.
Accordingly their existing technology is not sufficient for our program. The
key elements of our technology is new, has been internally developed and has
not been tested in a commercial environment. This new and untested technology
includes our voice-based interactive instruction, our diagnostic and
assessment software and our content search engine. If we fail to integrate
such technology to provide reliable service to our customers or if the
reliability of our technology decreases as the number of customers in our
program increases, we may fail to become profitable, which could result in a
complete loss in the value of the Class A stock offered by this prospectus.
We have no current source of revenues, our accumulated operating losses and
accumulated deficit were $4.5 million and $2.3 million, respectively, as of
June 30, 2000, and we expect to generate operating losses and to experience
negative cash flow for the foreseeable future.
As of June 30, 2000, we have generated no revenues, our financial
statements show a net loss, and we have incurred expenses and an accumulated
operating loss of approximately $4.5 million from inception, consisting
primarily of legal, accounting, consulting, development, personnel and
facilities costs. Our ability to generate revenue will depend on our ability
to implement appropriate technology to deliver online 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 technology for the online delivery of our
services. During the period from July 2000 to December 2001, we currently
estimate that we will expend $5 million on software and computer hardware and
$2 million on online tutoring content. The costs above include forward looking
statements about certain of our estimated costs through December 31, 2001.
Because we are a new entrant to the Internet market, these expenditures may be
significantly higher than we anticipate. We will incur other costs during this
period, including, but not limited to marketing and advertising, personnel and
legal, accounting and investment banking fees, so these costs do not include
an estimate of our total costs or expenses through December 31, 2001. Our
expenses generally will precede revenues. If these expenses are not followed
by sufficient revenues, our business may not become profitable which could
result in a complete loss in the value of the Class A stock offered by this
prospectus. If online tutoring fails to gain acceptance, it is unlikely that
eSylvan will ever become a viable business.
We have been operated as a separate entity for less than one year, and for the
foreseeable future we will remain substantially dependent upon our majority
stockholder for operational support and financing.
From inception on October 1, 1999 through February 2, 2000 we operated as
an unincorporated division of Sylvan, from February 3, 2000 to June 29, 2000
we operated as a subsidiary of Sylvan, and since June 30 we have operated as a
majority-owned subsidiary of Sylvan Ventures. Pursuant to separate agreements,
Sylvan provides us with facilities, management services, the intellectual
property, including the eSylvan name marketing referrals and a website link to
the Sylvan website. Sylvan Ventures has met our estimated financing needs
through December 31, 2001 with a $10 million line of credit, which expires on
that date, its agreement to invest $20
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million in our Series A preferred stock and its commitment, with Sylvan, to
fund the cash requirements of our business at least through September 30,
2001. We believe that we cannot replace the services and intellectual property
that Sylvan provides to us or the financing that Sylvan Ventures provides to
us on reasonable terms, if at all. Accordingly, if Sylvan or Sylvan Ventures
terminates its support of our business plan, we may not be able to commence
operations, or if we commence operations, we may not become profitable. See
"Related Party Transactions."
We will need additional financing.
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 after
December 31, 2001. Accordingly, we will need to raise additional funds prior
to December 31, 2001. 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. If we fail to
raise necessary financing, we may not be able to continue operations which
could result in a complete loss in the value of the Class A stock offered by
this prospectus.
Our business strategy is new, evolving, unproven and subject to change and
may not generate revenue opportunities.
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 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 online consumers. Some
factors that could prevent consumer acceptance of online tutoring services,
and consequently our ability to generate 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 retain and integrate key personnel.
Our success depends on our senior management. Loss of the services of our
senior management would harm our business. 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,
including trained instructors and information technology specialists.
Competition for these skilled employees is intense. We expect to experience
difficulty in hiring and retaining skilled employees. We have no employment
contracts with our employees.
Quarterly operating results may fluctuate significantly.
Once we commence operations, we expect our revenues and operating results
to vary significantly from quarter to quarter due to a number of factors.
These factors include:
. our ability to attract customers at a steady rate, retain them once the
relationship is established and maintain customer satisfaction
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. our ability to establish and 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 establishment and
expansion of our operations
. improvements to our computer systems from time to time
. costs of compliance with increased government regulation of the Internet
. general economic and market conditions
Some factors that may affect our operating results are outside of our
control, such as the growth rate of Internet usage, the expenses of compliance
with increased government regulation of the Internet and economic 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 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:
. students must, among other things, perceive our content as relevant and
reliable
. companies that provide complementary or related services 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 pursue an aggressive online direct response marketing campaign
to establish, maintain and grow our brand. Our other advertising efforts will
also be designed to strengthen our brand. If our promotional efforts are
unsuccessful, we may fail to generate traffic on our website or sufficient
revenues to become profitable which could result in a complete loss in the
value of the Class A stock offered by this prospectus.
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.
Sylvan, our controlling stockholder, is a bricks and mortar provider of
tutoring services through company-owned and franchised learning centers and,
to the extent that its customers find online tutoring to be more convenient,
we may compete with Sylvan. 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 than competition will continue to increase because of the
relative ease with which new websites may be developed. Individual tutors, for
example, can easily and at low cost establish a rudimentary web presence and
compete with us on the Internet in their local markets. Traditional media
companies and existing bricks and mortar companies can also establish a web
presence with relative ease. 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,
decrease the value of the
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eSylvan brand, prevent us from generating revenues and becoming profitable and
result in a complete loss in the value of the Class A stock offered by this
prospectus.
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 expect to incur 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. Specifically, prior to assigning a tutor to a student for a
diagnostic and prescriptive program, we must request Sylvan to provide a tutor
for a committed period for which we reimburse Sylvan for the salary of such
tutor at an hourly rate based on the base compensation such person receives,
and pay Sylvan a 30% management fee per hour of service. If Sylvan refers
instructors to us, we will pay Sylvan a $100 referral fee. The amount of these
fees was not determined through arms length negotiation and such fees may be
in excess, perhaps substantially so, 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 provide quality customer
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. Systems interruptions that last more
than a few hours would harm our business.
We are substantially dependent upon Sylvan for our use of the eSylvan brand.
Sylvan licenses us the right to use the eSylvan name and its other
trademarks and various tutoring content for an initial license fee of $1
million and 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. The initial license fee of $1 million was agreed to be an initial
capital contribution by Sylvan, and no cash was paid for the initial license
fee. During the first year of this agreement, there will be no guaranteed
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 agreed to reduce future royalty payments due under the terms of the
license agreement by any amounts that we pay to persons who invest in this
offering. This agreement has an initial term of five years and it will
terminate on the fifth anniversary of
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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. We believe that we cannot replace the intellectual property that Sylvan
has licensed to us under this agreement on reasonable terms if at all.
Accordingly, if Sylvan terminates the license agreement, we may not be able to
commence operations, or if we commence operations, we may not become
profitable which could result in a complete loss in the value of the Class A
stock offered by this prospectus. See "Related Party Transactions."
Others may infringe upon or misappropriate our intellectual property rights.
The intellectual property rights that we license from Sylvan for use on the
Internet are critical to our success. These intellectual property rights
include the use of the eSylvan name, the eSylvan.com website and the Sylvan
tutoring content that we have adapted for the online delivery of tutoring
services. We believe that our ability to leverage Sylvan's existing reputation
with respect to the provision of tutoring services in bricks and mortar
centers to generate brand recognition and loyalty for our online tutoring
business is the key to our marketing plans and will save us substantial
amounts in advertising expenses. Further, our rights to Sylvan's proven
tutoring content has permitted us to adapt existing content to the needs of
our online business at a savings to us of both time and development expense.
We will rely on trademark and copyright law, trade secret protection and
confidentiality, license and other agreements with customers, other companies
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. Our efforts to protect our
intellectual property rights may result in litigation. Intellectual property
litigation is expensive and can divert management's attention from the
operation of our business.
The market data upon which we have based our business plan may not be accurate
and has not been verified independently.
Much of the market and related data upon which we have based our business
plan including our estimates of future revenues, expenses and required
financing, was obtained from industry publications and reports prepared by
independent sources. We have not independently verified the accuracy of such
information. We have not independently generated or verified this market data
because we do not currently have the capacity to do so, nor do we currently
have the resources to acquire the capacity to do so. 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. If the market data upon which we
have relied in developing our business plan is materially inaccurate our
estimates with respect to future revenues, the expenses necessary to generate
future revenues, need for and timing of future financing and profitability are
likely to be inaccurate which, depending on the nature of such inaccuracies,
could affect the viability of our business plan and result in a complete loss
in the value of the Class A stock offered by this prospectus.
Sylvan Ventures' and Sylvan's ownership of over 70% of our outstanding voting
stock on a fully diluted basis and the presence of interlocking directors and
officers could prevent a change of control.
Sylvan Ventures owns a substantial majority of our outstanding voting stock
on a fully diluted basis. Sylvan Ventures is a majority-owned subsidiary of
Sylvan. Christopher Hoehn-Saric, our chairman, chief executive officer and
director is a director and former co-chief executive officer and chairman of
Sylvan and chairman, president and a manager of Sylvan Ventures. 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 Ventures. Robert Zentz, our secretary, assistant
treasurer and director is vice president and general counsel of Sylvan and
secretary of Sylvan Ventures. Peter Cohen, our director and assistant
secretary, is president of Sylvan. Other officers and employees also have
relationships with Sylvan or Sylvan Ventures. As a result, the directors and
officers of Sylvan and Sylvan Ventures will be able to control our day-to-day
operations and the
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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."
Our control by Sylvan Ventures and Sylvan and the presence of interlocking
directors and officers could create potential conflicts of interest.
Christopher Hoehn-Saric, our chairman, chief executive officer and director
is a director and former co-chief executive officer and chairman of Sylvan and
chairman, president and a manager of Sylvan Ventures. B. Lee McGee, our senior
vice president, chief financial officer, treasurer, assistant secretary and
director is executive vice president, and chief financial officer and
treasurer of Sylvan Ventures. Robert Zentz, our secretary, assistant treasurer
and director is vice president and general counsel of Sylvan and secretary of
Sylvan Ventures. Peter Cohen, our director, is president of Sylvan. Other
officers and employees also have relationships with Sylvan or Sylvan Ventures.
Because of these relationships and the fact that several of our officers own
equity interests in Sylvan or Sylvan Ventures, our directors and officers have
conflicts of interest when making decisions related to transactions between us
and Sylvan Ventures or Sylvan. These conflicts of interest include possible
competition between Sylvan and us for tutoring customers, the demands for
management attention placed upon our executive team by the other companies
they serve, whether another company or we should be presented business or
financing opportunities that present themselves to our management team and the
extent of Sylvan resources that will be made available to us under our
agreements with Sylvan for implementation of our business plan. The ability of
Sylvan Ventures and Sylvan to control the outcome of matters submitted to
stockholders 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 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 the members of our management team, or other
personnel, or lost access to these services altogether, we may not be able to
meet the objectives set forth in our business plan which could result in a
complete loss in the value of the Class A stock offered by this prospectus.
See "Related Party Transactions."
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 equipment
malfunctions, human error and physical 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.
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
encryption software that we use to protect consumer transaction
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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. Any claims that may be brought against us
would be expensive to defend even if these claims are determined to be without
merit.
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, state and foreign regulations relating to the Internet
and online commerce are evolving. Due to the increasing popularity of the
Internet, it is probable that new laws and regulations will 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
Internet, which could potentially decrease the usage of our website and could
otherwise harm our business. In addition, many existing laws governing issues
such as advertising, property ownership, copyrights and other intellectual
property issues, libel, obscenity and personal privacy are now being applied
to the Internet. Most of these laws were adopted prior to the advent of the
Internet and do not necessarily apply easily to 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 has already prompted calls for more
stringent consumer protection laws in the United States and abroad. As one
example, the European Union has adopted a privacy directive that may well have
an effect on websites in the United States. Compliance with that directive, or
other regulatory activities of foreign governments, could have a significant
effect on our business.
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.
The Federal Trade Commission has already promulgated a number of
regulations and proposed regulations that are designed specifically to deal
with e-commerce and has several on-going industry studies that might result in
further regulation.
Historically the use of encryption on the Internet has provoked national
security concerns among certain governments. While the current posture of the
United States is to permit the use and export of strong encryption, law
enforcement agencies here and abroad are pressing for changes that could have
an adverse effect on our ability to protect customer privacy through
encryption.
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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.
Any claims that may be brought against us would be expensive to defend even if
these claims are determined to be without merit.
Registration of similar domain names may result in a diversion of our
potential customers to other websites.
For the foreseeable future, we will substantially rely on the eSylvan.com
domain name as a significant means of attracting potential customers to our
website. Domain names are registered by a growing number of organizations
around the world. Governing authorities 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 be able to prevent others
from adopting and using domain names that might result in a diversion of our
potential customers to competing websites. While there is a growing number of
cases in which "domain name piracy" has been redressed, the law in this area
is evolving and not totally effective in preventing use of confusingly similar
domain names. While it is possible that others might claim that our own domain
name--eSylvan.com--infringes their rights, we are not aware of any such claim
and believe we have the right to maintain and use that domain name. However,
if we were subsequently unable to continue using that domain name, we might
experience a significant loss of business.
Risks Related to this Offering
The value of the shares of Class A common stock offered by this prospectus and
the benefits set forth in the participation agreement may not equal or exceed
the value of the obligations undertaken by Sylvan franchisees in the
participation agreement in exchange for the shares and benefits.
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, cash payment and the benefits set forth in the participation
agreement and the value of these obligations may be greater than, and possibly
much greater than, the value of our Class A stock, the cash payment and the
benefits. Under the participation agreement, you will agree to adhere to
Sylvan's directives concerning promotion of our business, that our business is
distinct from Sylvan and your rights under your agreement with Sylvan, that
your agreement with Sylvan does not prevent it from starting our business,
seeking investors in our business or licensing its intellectual property to us
and that you will not assert any claim against Sylvan or us with respect to
our business or the offering of our services to the public. In the event that
you invest in this offering, Sylvan will pay you a reverse royalty based on
the revenues we generate in the areas covered by your agreement with Sylvan.
The reverse royalty will be 75% of royalty revenues we pay to Sylvan derived
from your areas. You will not receive a reverse royalty until we pay Sylvan an
amount based on the revenues we generate in areas covered by your 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. Other
obligations under the participation agreement and the benefits connected with
those obligations are voluntary on your part. The formulas determining the
number of shares, the amount of the cash payment and the amount of the reverse
royalty that you will receive if you invest in this offering will be the same
for all investors in the offering.
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.
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If your franchise license agreement or area development agreement with Sylvan
terminates, you will continue to have certain obligations under the
participation agreement.
If the participation agreement terminates, your representations,
warranties, and agreements as described below will remain in effect unless the
participation agreement terminates as a result of a material default by
Sylvan:
. 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 and the Program Agreement
. 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.
. If more than one person signs a participation agreement as participant,
all such persons will be jointly and severally liable for the liabilities
and obligations of the participant under the participation agreement.
Sylvan may condition its consent to the transfer of your franchise license
agreement or area development agreement upon the acceptance by the transferee
of the representations, warranties, and agreements as described above and may
require that you assign your rights to the reverse royalty and optional
benefits under the participation agreement to the transferee.
We do not intend to register under the Securities Exchange Act of 1934 and
accordingly we will not be subject to the requirements of such law.
We do not currently intend to register our Class A stock with the
Securities Exchange Commission under the Securities Exchange Act of 1934, as
amended. Accordingly, we will not be required to comply with a number of
requirements of the Exchange Act, including the proxy rules. Specifically, in
the event we solicit proxies for any stockholder action, the disclosure and
substantive requirements of the proxy rules will not apply to that
solicitation. Furthermore, our officers and directors, and holders of 10% or
more of our capital stock, will not be subject to the provisions of the
Exchange Act relating to short-swing profits and the reporting of their
purchases and sales. Further, acquirers of more than five percent of our
outstanding capital stock will not be subject to disclosure requirements under
Section 13(d) of the Exchange Act. In the event that after the beginning of
our next fiscal year, our Class A stock is held of record by less than 300
persons, we may be entitled to terminate our obligation to comply with the
periodic reporting requirements of the Exchange Act. In the event we terminate
our obligation to comply with the periodic reporting requirements of the
Exchange Act, any reports that we furnish to our stockholders may not include
all of the information that would be included in periodic reports filed under
the Exchange Act. Termination of our reporting obligations under the Exchange
Act therefore would reduce the information available to stockholders about our
business and financial condition.
Our Class A Convertible Common Stock is not a liquid investment.
No market exists for our Class A 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
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charter contains provisions that restrict the transfer of our Class A stock
for the foreseeable future. See "Description of Capital Stock--Class A
Convertible 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 Convertible 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 at our option 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 (under certain circumstances). 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.
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 our fiscal quarters through December 31,
2001 at an aggregate price of $20 million which represents a price per share
of $1.90. Sylvan Ventures was initially capitalized on June 30, 2000. 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 (of which, currently over 80
million shares may be issued as part of future sales), 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.
If you invest in our Class A Convertible Common Stock, you will be likely to
recognize ordinary income for tax purposes at the time you receive your
shares.
If you invest in this offering you will be likely to recognize ordinary
income equal to the amount of cash you receive and the fair market value of
the stock received. This income generally will be recognized at the time you
receive the stock and will generally be subject to tax at ordinary income tax
rates. Such income will also
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generally be subject to applicable employment taxes, and may also be subject
to applicable state and local income taxes. Our board of directors in reliance
upon the tax valuation report of [ ], an investment banking firm, attached
as Annex D to 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 $0.875. 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."
Holders of our Series A Preferred Stock are entitled to five votes for each
share of common stock into which the Series A Preferred Stock may be converted
and is entitled to anti-dilution protection not available to holders of our
Class A stock.
The terms of our Series A Preferred Stock are listed under the heading
"Description of Capital Stock--Series A Preferred Stock." The holders of our
Series A Preferred Stock are entitled to certain voting rights, conversion
rights and anti-dilution protection. Dilution in percentage ownership may be
experienced by you upon the conversion of our Series A Preferred Stock. In
addition, Sylvan Ventures, the holder of our Series A Preferred Stock is
entitled to five votes for each share of common stock into which the Series A
Preferred Stock held of record by Sylvan Ventures may be converted on all
matters submitted to a vote of stockholders.
FORWARD-LOOKING STATEMENTS
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. Except as required by applicable securities laws, we disclaim any
obligation to update or revise any forward-looking statements, whether as a
result of new information or future events or otherwise.
THE OFFERING
<TABLE>
<S> <C>
Class A Convertible Common Stock offered by this
prospectus......................................... 3,000,000
Use of proceeds..................................... There will be no proceeds
to us from this offering
</TABLE>
Shares Offered
We are offering up to 3,000,000 shares of Class A convertible 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 Sylvan franchise territories in the United States
(exclusive of its territories) and Canada and certain potential franchise
licensees under area development agreements with Sylvan relating to Sylvan
franchise 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
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agreement is excluded from this offering. We currently do not intend to sell
any shares of our Class A stock unless we receive offers to invest in at least
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
requirement at any time.
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 stock an amount in cash equal to $0.35 multiplied by
the number of shares of Class A 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 a 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 a 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 up
to 2,850,000 shares and up to 150,000 shares with respect to franchise license
agreements or area development agreement territories located in the United
States and Canada, respectively. The basis for determining how many shares we
offer you is the same for all persons being offered shares of our Class A
Common Stock in this offering.
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.
If we receive offers to invest in at least 2,700,000 shares, or such lesser
number of shares as we may determine, prior to the termination of the
offering, at the final closing, we will offer one half of the shares offered
by this prospectus that remain unsubscribed, up to a maximum of 150,000
shares, to the SLC National Advertising Fund, Inc. ("SNAF") on substantially
the terms set forth in the subscription agreement attached hereto as Annex A
and at a price equal to the par value of such shares. SNAF oversees a fund
contributed by Sylvan and its franchisees which is used for the purpose of
preparing and placing national advertising materials, programs and public
relations activities for Sylvan Learning Centers. SNAF is a non-stock
corporation of which Sylvan and the FOA are the sole members and it is
operated by a four-member board of directors, two members of which are
appointed by each of Sylvan and the FOA.
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Transfer Restrictions
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,
. in the event a holder of Class A stock that is party to a franchise
license agreement or area development agreement with Sylvan dies, for a
period of 30 days following the death of such holder, such restrictions
on transfer willl 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 shares remain subject to the transfer
restrictions set forth in the deceased holder's subscription agreement,
or
. in the event a holder of Class A stock that is party to a franchise
license agreement or area development agreement with Sylvan transfers its
franchise license agreement or its area development rights with respect
to a specific territory, such restrictions on transfer will not apply
solely with respect to a simultaneous transfer to the transferee of the
franchise license agreement or area development rights if such transferee
receives all shares of Class A stock issued under the subscription
agreement that sets forth the transferred franchise license agreement
number or area development agreement territory for the which the
development rights have been transferred, such transferee becomes a party
to a franchise license agreement or area development agreement with
Sylvan, and such transferee acknowledges in writing that the transferred
shares of Class A stock remain subject to the transfer restrictions set
forth in the transferor's subscription agreement.
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 of $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. We have not yet determined the lock-up period applicable to securities
to be issued pursuant to our omnibus stock plan; however we expect that such
period will not be more than 180 days. This written agreement shall apply to
shares of Class A stock purchased 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. See "Annex A;" "Annex C."
We currently estimate that this offering will cost us approximately
$350,000. We will pay the expenses of this offering with our existing capital
or by drawing upon our line of credit with Sylvan Ventures.
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 and the material terms and conditions
18
<PAGE>
of which are described below. 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 to go
forward with the offering. 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
. 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 Convertible 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 $0.875 per share.
. You are receiving shares of our Class A stock and cash from the Company
in compensation for services (these services and the period over which
they will be provided are described below under the caption
"Participation Agreement"), 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.
. If more than one person signs a subscription agreement as subscriber, all
such persons will be jointly and severally liable for the liabilities and
obligations of the subscriber under the subscription agreement.
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<PAGE>
Participation Agreement (See Annex B, hereto)
Sylvan is offering you the opportunity to participate in our eSylvan
business on the terms and conditions set forth in the participation agreement,
a form of which is attached and made part of this prospectus and the material
terms of which are described below. 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."
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--
Relationship 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.
. If more than one person signs a participation agreement as participant,
all such persons will be jointly and severally liable for the liabilities
and obligations of the participant under the participation agreement.
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<PAGE>
If the participation agreement terminates, your representations,
warranties, and agreements as described in the fourth, fifth, sixth, seventh,
eighth, tenth, and eleventh bullets above will remain in effect unless the
participation agreement terminates as a result of a material default by
Sylvan. Sylvan may condition its consent to the transfer of your franchise
license agreement or area development agreement upon the acceptance by the
transferee of the representations, warranties, and agreements as described in
the fourth, fifth, sixth, seventh and eighth bullets above, and may require
that you assign your rights to the reverse royalty and other benefits
described below to the transferee.
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 or accrue 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. Under our license agreement with Sylvan, we pay Sylvan
a periodic running royalty equal to 4% of our net revenues (gross revenues
less discounts and refunds) and an additional amount equal to any sales, gross
receipts or similar tax imposed on Sylvan. During the first year of the
license agreement, there will be no guaranteed 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. See "Business--Relationship 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%). If Sylvan
refers instructors to us, we will pay Sylvan a $100 referral fee.
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. The eSylvan
Committee is comprised of two officers of Sylvan and two representatives
of the Sylvan Franchise Owners Association, Inc., or FOA, an
organization that represents the interests of the Sylvan franchise
community, that supervises certain aspects of the Sylvan-eSylvan
relationship as described in the program agreement between Sylvan and
the FOA. 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
21
<PAGE>
maximum of $100, of the revenues 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
We have been advised by Sylvan that Sylvan will not offer any of its
franchisees the opportunity to participate in our eSylvan business on terms
that are more favorable to a franchisee than the terms of the participation
agreement.
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 stock
pursuant to this offering. Although this summary describes the material US
federal income tax consequences of an investment and ownership interest in our
Class A stock, 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 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 cash and 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 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 in reliance upon the tax valuation report of [ ],
an investment banking firm, attached hereto as Annex D, has determined that,
as of the date of this prospectus, the per share value of the Class A stock to
be issued under this prospectus is $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 stock, in determining the value of
the shares of our Class A 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
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.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the offering of shares of our Class A
stock under this prospectus. The primary purpose of the offering is to build
and maintain the support and goodwill of the existing Sylvan franchise
community.
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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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on an
actual basis and on an as adjusted basis to give effect to the issuance of (a)
2,700,000 shares of our Class A Convertible Common Stock, our best estimate of
the level of participation in this offering, at an assumed value of $0.875 per
share and the related cash payment of $945,000 ($0.35 per share) to the
investors in connection with this offering and the payment of the estimated
offering expenses; and, (b) 3,000,000 shares of our Class A Convertible Common
Stock, the maximum number of shares that can be issued in this offering, 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 and the
payment of the estimated offering expenses. We will record an intangible asset
in an amount equal to the estimated fair value of the Class A Convertible
Common Stock at the date of issuance, based upon an independent appraisal. We
will amortize this asset over six years, the estimated average useful life of
the participation agreements, using the straight-line method. The
capitalization table below assumes that the Class A Convertible Common Stock
value is $0.875 per share, or the estimated fair value of our Class A
Convertible Common Stock on June 30, 2000 as determined by our board of
directors in consultation with an investment banking firm. We will record
prepaid royalty expense for the cash payment as our license agreement with
Sylvan allows us to offset this amount against future royalty payments. The
capitalization table also assumes that the cash payment to the investors and
the estimated offering expenses are paid with proceeds from our line of credit
with Sylvan Ventures.
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 June 30, 2000
----------------------------------------
As Adjusted As Adjusted
for Issuance for Issuance
of 2,700,000 of 3,000,000
Actual Shares Shares
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders' equity:
Series A Convertible Preferred
Stock, par value $0.001 per share;
20,000,000 shares authorized;
10,526,316 shares subscribed and
unissued actual and as adjusted.... $ 10,526 $ 10,526 $ 10,526
Class A Convertible Common Stock,
par value $0.001 per share;
10,000,000 shares authorized; no
shares issued and outstanding
actual; 2,700,000 and 3,000,000
shares issued and outstanding as
adjusted, respectively............. -- 2,700 3,000
Common Stock, par value $0.001 per
share; 70,000,000 shares
authorized; 14,000,000 shares
issued and outstanding actual and
as adjusted........................ 14,000 14,000 14,000
Additional paid-in capital.......... 22,755,913 24,030,018 24,292,218
Less: Subscription receivable for
Series A Convertible Preferred
Stock.............................. (20,000,000) (20,000,000) (20,000,000)
Less: Amounts receivable from sale
of Common Stock.................... (348,009) (348,009) (348,009)
------------ ------------ ------------
2,432,430 3,709,235 3,971,735
Accumulated deficit................. (2,318,426) (2,318,426) (2,318,426)
------------ ------------ ------------
Total stockholders' equity and
capitalization...................... $ 114,004 $ 1,390,809 $ 1,653,309
============ ============ ============
</TABLE>
We are offering up to 3,000,000 shares of Class A Convertible Common Stock
under this prospectus. However, we are under no obligation to accept any
offers or sell any shares of our Class A Convertible Common Stock and we
currently do not intend to do so unless we receive offers to invest in at
least 2,700,000 shares. In addition to these shares, 3,000,000 shares of our
Common Stock are reserved for issuance upon the exercise of options granted
under the eSylvan, Inc. Omnibus stock plan. No shares have been granted under
this plan.
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<PAGE>
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
June 30, 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
June 30, 2000
---------------
<S> <C>
Statement of Operations:
Revenues........................................................ $ --
Costs and expenses:
Sales and marketing............................................ 87,427
General and administrative..................................... 2,101,465
Research and development....................................... 1,924,278
Allocated indirect overhead costs.............................. 424,817
-----------
Total costs and expenses........................................ 4,537,987
-----------
Operating loss.................................................. (4,537,987)
Allocated income tax benefit.................................... 1,768,454
-----------
Net loss........................................................ $(2,769,533)
===========
Basic and diluted loss per common share......................... $ (54.01)
===========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------------
As Adjusted As Adjusted
for for
Issuance of Issuance of
2,700,000 3,000,000
Actual Shares Shares
----------- ----------- -----------
<S> <C> <C> <C>
Balance Sheet Data (at end of
period)(1):
Cash and cash equivalents............. $ -- $ -- $ --
Working capital deficit............... (1,829,409) (3,860,104) (5,995,799)
Total assets.......................... 1,943,413 5,250,913 5,618,413
Stockholders' equity.................. 114,004 1,390,809 1,653,309
</TABLE>
(1) The table sets forth our balance sheet data as of June 30, 2000 on an
actual basis and on an as adjusted basis to give effect to the issuance
of (a) 2,700,000 shares of our common stock, our best estimate of the
level of participation in this offering, at an assumed value of $0.875
per share and the related cash payment of $945,000 ($0.35 per share) to
the investors in connection with this offering and the payment of the
estimated offering expenses; and, (b) 3,000,000 shares of our common
stock, the maximum number of shares that can be issued in this offering,
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 and the payment of the estimated offering expenses. We will
record an intangible asset in an amount equal to the estimated fair value
of our common stock at the date of issuance, based upon an independent
appraisal. We will amortize this asset over six years, the estimated
average useful life of the participation agreements, using the straight-
line method. The as adjusted basis data assumes that the common stock
value is $0.875 per share, or the estimated fair value of our common
stock on June 30, 2000 as determined by our board of directors in
consultation with an investment banking firm. We will record prepaid
royalty expense for the cash payment as our license agreement with Sylvan
allows us to offset this amount against future royalty payments. The as
adjusted basis data also assumes that the cash payment to the investors
and the estimated offering expenses are paid with proceeds from our line
of credit with Sylvan Ventures.
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<PAGE>
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 3, 2000 to June 29, 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,
development of our website and identifying and testing key technology. As of
June 30, 2000, we have generated no revenues and have incurred expenses and a
cumulative operating loss of approximately $4.5 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 of development and testing of our technology
for the online delivery of tutoring services. This technology has been
substantially developed and we are currently testing its reliability and
presentation. Our 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 completed and ready for visitors
before the end of 2000.
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. We also intend to
develop 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 and college entrance examination
preparation services before the end of 2000. 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:
. Completion of our website
. Completion of technical infrastructure for online delivery of tutoring
services
. Completion 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
. Administration
. Legal, accounting and investment banking fees
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<PAGE>
Certain Estimated Costs During the Period of July, 2000 Through December,
2001
<TABLE>
<CAPTION>
Type of Cost Estimated Cost
------------ --------------
<S> <C>
Software and Computer Hardware................................... $5,000,000
Tutoring Content................................................. $2,000,000
</TABLE>
The table above includes forward looking statements about certain of our
estimated costs through December 31, 2001. Because we are a new entrant to the
Internet market, these costs may be significantly higher than we anticipate.
We will incur other costs during this period, including, but not limited to
marketing and advertising, personnel, legal, accounting and investment banking
fees, so the table does not include an estimate of our total costs or expenses
through December 31, 2001.
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."
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. No amounts have been borrowed under the note
as of June 30, 2000.
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 closings on the last day of each fiscal quarter through
December 31, 2001 for an aggregate price of $20 million which represents a
price per share of $1.90. See "Related Party Transactions."
We have also received a written commitment from Sylvan and Sylvan Ventures
to provide additional funding to support our operations through at least
September 30, 2001. There is currently no agreed-upon limitation on the
funding to be provided by Sylvan and Sylvan Ventures.
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. At that time, service charges will be hourly for
diagnostic/prescriptive instructional programs. Revenue from these services
will be recognized as hours of instruction are completed. For some courses,
such as SAT preparation courses, a flat program cost will be charged. Revenue
from these courses will be recognized pro rata over the course delivery
period. We expect to incur significant negative cash flow from operations for
the foreseeable future. Although we believe that our line of credit with
Sylvan Ventures, the other funding commitments from Sylvan and Sylvan
Ventures, and the closings on our sale of Series A preferred stock to Sylvan
Ventures will satisfy our cash needs through the end of 2001, we do not expect
that our current resources will be sufficient to support our growth and
operations until we are profitable. We expect that we will need to raise
additional capital or other financing prior to the termination of our line of
credit on December 31, 2001. 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 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 individualized
supplemental education to families and children via a variety of applications
on the Internet. We intend to devote our resources to:
. Delivery of online tutoring for Grade K-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 right to use
Sylvan intellectual property, including tutoring content and the eSylvan
brand, and our marketing arrangements 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, and the development of technical and
operational infrastructure. 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 in its report, "The Knowledge Web," dated May
23, 2000, the general population of the United States, including the
government and private sector, 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 (on-line training and educational services)
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 (the incorporation of learning, technology and
electronic commerce) 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. According to Merrill
Lynch, in 1999, venture capitalists invested $469 million in the K-12
educational services (teaching, tutoring, training and educating) industry. We
intend to operate in the e-learning, e-knowledge and educational services
industries.
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
personal computers to students has improved from one personal computer for
every 16 students in 1992 to one personal computer 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.
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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 (i.e.,
online 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 (high speed connection lines which increase access to data)
market will expand to 2.3 million homes in 2000, 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 broadband
technology 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
. 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. 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. 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--
Relationship with Sylvan and Sylvan Ventures."
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SAT/ACT Preparation Courses
The 1.8 million annual participants in the Scholastic Aptitude TestTM (SAT)
and approximately 1 million participants in the American College TestTM (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. By offering preparation
courses over the Internet, we intend to make the courses convenient for
students and their parents. We intend to offer our online tutoring programs at
prices that are comparable to the prices of similar programs offered in
Sylvan's bricks and mortar centers.
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 our tutoring
delivery platform. Our content will be managed by software which is
currently available in the market place. We have a relationship with a
third-party content provider to create some content. We have developed
other content internally and do not expect to be dependent upon third
parties for tutoring content.
. Test Preparation. We intend to capitalize upon the content developed by
Sylvan's Ivy Prep division. Also, we will seek to establish
relationships 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:
. Direct Response Marketing. We will seek to leverage Sylvan's experience
in using parent and student targeted media to obtain 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.
. Marketing Relationships. 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 the K through 12th grade
market, 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 other companies on a customer acquisition basis, awarding a
percentage of revenues of captured customers back to the originating
site. Although we have identified potential companies for such
relationships, we have not signed any agreements with these companies.
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. 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 8th grade
student enrolled in advanced math or reading may be offered our
standardized test preparation programs as the student enters 11th grade.
Technology
We intend to leverage our management team's experience with Sylvan's
student interface and assessment system in our Internet-based tutoring
program.
. Teach 2000. Our management team has five years of experience with Teach
2000, a system that delivers content on demand to students in a center-
based environment. The Teach 2000 software tracks the instructional
delivery process as teachers and students work through a personalized
instruction plan. Based on this software which is licensed from Sylvan,
we have developed a software application to provide a complete learning
environment for students and instructors that can be accessed through
the Internet.
. Shortcut to Success/Sylvan Automated Assessment System. STS/SAAS
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. We have licensed this program from Sylvan and adopted
it for use on the Internet.
Together, these two pieces of software allow us to create unique programs
for each student and to track student progress as the programs are delivered
to students. U.S. patents are pending for these proprietary software programs.
Sylvan will hold the patents and the software will be used under license from
Sylvan.
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 common commercial
technologies that have been integrated by our technology staff with some
outsourcing to consulting firms.
The primary interface to our learning environment is a personal computer
equipped with a 56K modem connection to the Internet. We supply each student
and instructor with an audio headset, a microphone and a special pen-shaped
mouse. All these components are commonly available retail products. 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.
We have substantially completed development of our technology for the
delivery of online tutoring services and are currently testing its reliability
and presentation.
Competition
We believe that the key competitive factors in our market will be:
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. 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.
Sylvan, our controlling stockholder, is a bricks and mortar provider of
tutoring services through company-owned and franchised learning centers
and, to the extent that its customers find online tutoring to be more
convenient, we may compete with Sylvan.
. Online Providers. We expect to compete with several companies that
currently participate in the online tutoring market. 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. We believe that our services differ from those offered by these
companies. Other online providers generally do not charge hourly rates
for a service which provides assessment, unique content and live
instruction. Instead, they may provide either a chat-only homework help
service, or provide only a whiteboard for instruction with no available
content. Others may provide asynchronous access to content, but no live
instruction. A variety of models like these, though they differ from
ours, will compete with ours for market share.
. 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.
Relationship 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, 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,
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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.
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," eSYLVAN.COM, and the associated Internet domain name,
"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 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
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. new materials, modifications, enhancements and improvements related to
the above (subject to an additional license fee)
The licenses of Sylvan's trademarks and content as described in the bullets
above are limited to use in connection with our Internet business in the
United States and Canada. 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 (gross revenues less discounts and refunds) and an additional amount
equal to any sales, gross receipts or similar tax imposed on Sylvan. The
initial license fee of $1 million was agreed to be an initial capital
contribution by Sylvan, and no cash was paid for the initial license fee.
During the first year of this agreement, there will be no guaranteed minimum
royalty, but for each calendar year thereafter, there will be a guaranteed
minimun royalty equal to 120% of the prior year's minimum royalty, with the
guaranteed minimum royalty for the first calendar year of $400,000. As part of
our arrangement with Sylvan, Sylvan has agreed to reduce future royalty
payments due under the terms of the license agreement by any amounts that we
pay to persons who invest in this offering. We will account for any payments
to investors in this offering as prepaid royalties under our agreement with
Sylvan.
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
serially renew the agreement for unlimited consecutive five-year terms and no
initial license fee will be owed for such renewal terms.
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
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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, as jointly determined
by us and Sylvan 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. We currently occupy office
space pursuant to this agreement. 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
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 on the last day of each fiscal quarter beginning on September 30,
2000 and ending on December 31, 2001.
. A written commitment under which Sylvan and Sylvan Ventures agree to fund
the cash requirements of our business at least through September 30,
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 and local 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
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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 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 has issued 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 conducted investigations into the privacy practices of companies that
collect information on the Internet.
Internet Taxation
A number of legislative proposals have been made at the federal, state and
local level 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 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
services in multiple states and Canada, these jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each of
these states or Canada. 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 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 42 full-time and
30 part-time employees. Six employees work in our management department, 17
employees work in our technical area, six full-time employees and 15 part-time
employees work in product development, one employee works in our financial
area, three full-time employees work in our marketing department, one employee
works in sales, 21 employees work in operations, and one employee works in
human resources. 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
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<PAGE>
skilled employees in the Internet and education industries is intense, we do
not now foresee problems in hiring qualified employees to meet our needs. None
of our employees is represented by a union.
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 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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<PAGE>
MANAGEMENT
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Principal Positions
---- --- -------------------
<S> <C> <C>
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
Susannah Bennett........ 35 Assistant Secretary
Patricia B. Miller...... 50 Assistant Secretary
Kelly Hodge-Williams.... 32 Assistant Secretary
Barry Miller............ 50 Nominee for Director
</TABLE>
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 has been
president, chief executive officer and director of Sylvan Ventures, LLC, our
majority stockholder, since 2000, and a principal in Sterling Capital, Ltd.
("Sterling"), the investment partnership that led the 1986 acquisition of the
predecessor to Sylvan Learning Systems, Inc., since prior to 1986.
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.
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 under our services agreement with
Sylvan. See "Related Party Transactions," "Business--Services provided to us
by Sylvan--Services Agreement."
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. Until 2000, he
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 under our
services agreement with Sylvan. See "Related Party Transactions," "Business--
Services provided to us by Sylvan--Services Agreement."
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 has been chief financial officer and treasurer of Sylvan
Ventures, LLC, our majority stockholder, since 2000. Mr. McGee serves as an
officer and director at the request of Sylvan and Sylvan Ventures under our
services agreement with Sylvan. See "Related Party Transactions," "Business--
Services provided to us by Sylvan--Services Agreement."
Robert Zentz has been our secretary, assistant treasurer and director since
inception. He has been secretary of Sylvan Ventures, LLC, our majority
stockholder since 2000 and since 1998, has been vice president and
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<PAGE>
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 under our services agreement with
Sylvan. See "Related Party Transactions," "Business--Services provided to us
by Sylvan--Services Agreement."
Peter Cohen has been our assistant secretary and 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 under our
services agreement with Sylvan. See "Related Party Transactions;" "Business--
Services provided to us by Sylvan--Services Agreement."
Susannah Bennett has been our assistant secretary since June 30, 2000. Ms.
Bennett has been vice president and assistant general counsel of Sylvan
Learning Systems, Inc. since 1999 and 1995, respectively. Ms. Bennett serves
as an officer at the request of Sylvan under our services agreement with
Sylvan. See "Related Party Transactions," "Business-- Services provided to us
by Sylvan--Services Agreement."
Patricia B. Miller has been our assistant secretary since June 30, 2000.
Ms. Miller has been senior vice president and vice president of franchise
operations for Sylvan Learning Systems, Inc. since 1998 and 1995,
respectively. Ms. Miller serves as an officer at the request of Sylvan under
our services agreement with Sylvan. See "Related Party Transactions,"
"Business--Services provided to us by Sylvan--Services Agreement."
Kelly Hodge-Williams has been our assistant secretary since June 30, 2000.
Ms. Hodge-Williams has been executive director of the Sylvan Foundation since
1999. Ms. Hodge-Williams served as an investment representative and broker at
DB Alex Brown, Inc. from 1990 to 1999. Ms. Hodge-Williams serves as an officer
at the request of Sylvan under our services agreement with Sylvan. See
"Related Party Transactions," "Business--Services provided to us by Sylvan--
Services Agreement."
Barry Miller has been elected as a member of our board of directors
effective upon the first closing of this offering. See "Plan of Distribution."
Mr. Miller has served 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 1985. 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.
Series A Preferred Stock Director
Under our charter, holders of our Series A preferred stock have the right
to elect one member of our board of directors.
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<PAGE>
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--Relationship with Sylvan and Sylvan
Ventures"), Sylvan has agreed to:
. 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 (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.
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. Our
executive officers are eligible to receive grants of securities pursuant to
our 2000 Omnibus Stock Plan.
Director Compensation
We did not pay compensation to our directors during 1999. In addition, we
have not entered into any agreements or other arrangements with respect to
such payments. Our directors are eligible to receive grants of securities
pursuant to our 2000 Omnibus Stock Plan.
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. We intend to issue options under
this plan at an exercise price of fair market value on the date of grant.
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<PAGE>
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 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. Other officers and employees also have
relationships with Sylvan or Sylvan Ventures. Several of our officers or
employees also hold equity interests in Sylvan or Sylvan Ventures.
Our 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. We believe, however, that
the agreements and financing described below would not be available to us from
an unaffiliated third party. We currently have no independent members of our
board of directors; however, the transactions described below were unanimously
approved by our stockholders. Upon closing of this offering, we intend to add
at least one independent member to our board of directors. Following this
offering, we intend that all affiliated transactions and any loans to
affiliates be made or entered into on terms that are no less favorable to us
than those that can be obtained from unaffiliated third parties and we intend
to have all such transactions and/or loans approved by a majority of the
independent disinterested directors.
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. See "Business--Relationship with Sylvan and Sylvan Ventures."
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 (gross revenues less discounts and refunds) and an additional amount
equal to any sales, gross receipts or similar tax imposed on Sylvan. The
initial license fee of $1 million was agreed to be an initial capital
contribution by Sylvan, and no cash was paid for the initial license fee.
During the first year of this agreement, there will be no guaranteed minimum
royalty, but for each calendar year thereafter, there will be a guaranteed
minimun royalty equal to 120% of the prior year's minimum royalty, with the
guaranteed minimum royalty for the first calendar year of $400,000. As part of
our arrangement with Sylvan, Sylvan has agreed to reduce future royalty
payments due under the terms of the license agreement by any amounts that we
pay to persons who invest in this offering; accordingly we will not accrue or
pay royalties to Sylvan under this agreement until the amount of royalties
that would otherwise be payable under this agreement exceeds this amount.
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 as follows:
. 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.
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<PAGE>
. 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. As of June 30, 2000, we have paid no amounts
under this agreement.
On June 30, 2000, we entered into a services agreement with Sylvan pursuant
to which 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, as jointly determined
by us and Sylvan 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. As of June 30,
2000, we have paid no amounts under this agreement.
On June 30, 2000, we entered into a facility use agreement with Sylvan
pursuant to which 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. We
currently occupy office space pursuant to this agreement. This agreement has a
one-year term, is renewable for an additional year and is terminable by either
party on 60 days notice. As of June 30, 2000, we have paid no amounts under
this agreement.
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 unpaid principal balance equal at the prime lending rate
and terminates on December 31, 2001. No amounts have been borrowed under the
note as of June 30, 2000.
On June 30, 2000, we entered into a contribution agreement with Sylvan
Learning Systems, Inc. under which we agreed to issue 14,000,000 shares of our
common stock to Sylvan (of which 285,714 shares of our common stock were
directed to Ivy West Educational Services, Inc.) in exchange for $5 million in
cash, Sylvan's agreement to enter into the following contracts: (i) eSylvan
license agreement, (ii) facilities use agreement; (iii) services agreement;
and (iv) program agreement, and Sylvan's contribution of the following
trademarks: 24-7 TUTORS; 24-7TUTORS.COM; ANYTIMETUTORS.COM; and ANYTIME
TUTORS.
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 closings on the last day of each fiscal
quarter through 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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<PAGE>
During the period from October 1, 1999 through June 30, 2000, we incurred a
net operating loss that was used by Sylvan to reduce consolidated income taxes
payable. Because the income tax benefit resulting from these losses was
utilized by Sylvan. We entered into an oral tax sharing agreement with Sylvan
that provided that income tax benefits attributable to our operations that
were realized by Sylvan would be treated as distributions to Sylvan. During
the period from inception through June 30, 2000. We and Sylvan estimated that
the tax benefits realized by Sylvan arising from our operations equaled
approximately $1,768,454, summarized as follows:
<TABLE>
<S> <C>
Tax benefit at U.S. statutory rate of 35%.................. $(1,588,295)
Effect of permanent differences............................ 1,508
State income taxes, net of federal benefit................. (181,667)
-----------
Total...................................................... $(1,768,454)
</TABLE>
Sylvan will not realize income tax benefits in future periods attributable to
our operations as a result of the transfer of Sylvan's ownership in our
company to Sylvan Ventures on June 30, 2000. Sylvan Ventures is organized as a
limited liability company, and under applicable income tax regulations, is
unable to utilize or pass through losses to its members result from its
investment in our company.
As of July 14, 2000, Sylvan and Sylvan Ventures have committed to fund the
cash requirements of our business at least through September 30, 2001.
Under the terms of the offering set forth in this prospectus, Barry Miller,
who has been elected as our director upon closing of this offering, will have
the opportunity to invest in 17,204 shares and a cash payment in the amount of
$5,832. Mr. Miller is the holder of a Sylvan franchise and may participate in
the offering solely on that basis.
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 and
executive officers, (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 convertible common stock were 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-- *
Susannah Bennett........ --0-- * --0-- *
Patricia B. Miller...... --0-- * --0-- *
Kelly Hodge-Williams.... --0-- * --0-- *
Barry Miller............ --0-- * --0-- *
All directors and
Executive Officers
as a group (9 persons).. --0-- * --0-- *
</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
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<PAGE>
agreement, eSylvan, Inc. has agreed to issue an aggregate of 10,526,316
shares of Series A preferred stock in closings of 1,754,386 each on the
last day of each fiscal quarter through December 31, 2001. See "Related
Party Transactions."
(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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<PAGE>
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 as attached
hereto as Annex C 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 Convertible Common Stock
As of the date of this prospectus, we have no shares of Class A stock
issued and outstanding. Following the closing of this offering, we expect that
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. Our Class A stock
differs from our common stock in that the common stock is not convertible and
it is not subject to the redemption provisions and transfer restrictions
described below, unless imposed by contract.
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 stuck 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 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:
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<PAGE>
. 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,
. 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, unless
simultaneously with such transfer:
. such stockholder transfers all shares of Class A stock issued under
such subscription agreement to the transferee of the franchise license
agreement or area development rights,
. such transferee becomes a party to a franchise license agreement or
area development agreement with Sylvan, and
. such transferee acknowledges in writing that he is subject to the
transfer restrictions set forth in the transferor's subscription
agreement.
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.
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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. The redemption
provisions described above will not be applicable to the common stock received
on conversion of the Class A stock.
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,
. 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, or
. in the event a holder of Class A stock that is party to a franchise
license agreement or area development agreement with Sylvan transfers its
franchise license agreement or its area development rights with respect
to a specific territory, such restrictions on transfer will not apply
solely with respect to a simultaneous transfer to the transferee of the
franchise license agreement or area development rights if such transferee
receives all shares of Class A stock issued under the subscription
agreement that sets forth the transferred franchise license agreement
number or area development agreement territory for the which the
development rights have been transferred, such transferee becomes a party
to a franchise license agreement or area development agreement with
Sylvan, and such transferee acknowledges in writing that the transferred
shares of Class A stock remain subject to the transfer restrictions set
forth in the transferor's subscription agreement.
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. We have not yet determined the lock-up period applicable to securities
to be issued pursuant to our omnibus stock plan; however we expect that such
period will not be more than 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.
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<PAGE>
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 closings on
the last day of each fiscal quarter through December 31, 2001 for an aggregate
price of $20 million which represents a price per share of $1.90.
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
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<PAGE>
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 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 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.
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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.
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 up to 3 million 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. We have
no provisions in our agreements that restrict future sales of securities to
Sylvan franchisees; however we have no intention of making any future
securities offering to Sylvan franchisees that do not participate in this
offering.
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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 franchise 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 primary purpose of
this offering is to build and maintain the support and goodwill of the
existing Sylvan franchise community. The costs of the offering, which we
currently estimate at $350,000, will be borne by us.
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 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.
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 May 15, 2000,
by multiplying the number of shares that we are offering in your country by a
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 to total K-12
student age population in all Sylvan licensed territories in your country
which was 31,799,085 for the United States and 2,672,879 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 a
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 up to
2,850,00 shares and up to 150,000 shares with respect to franchise license
agreement or area development agreement territories located in the United
States and Canada, respectively. The basis for determining how many shares we
offer you is the same for all persons being offered shares of our Class A
Common Stock, or this offering.
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 four
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 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.
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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 at least 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 requirement at any time.
If we receive offers to invest in 2,700,000 shares prior to the termination
date, we will hold a closing. At the closing, we will accept the offers of
investors that have submitted executed counterparts of the subscription and
participation agreements, issue stock certificates and cash payments to these
investors and these investors will become our stockholders. Until the closing,
investors 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 closing.
In the event you make an offer to invest in shares by returning a
counterpart subscription and participation agreement prior to the closing,
such offer will be irrevocable and you will not be entitled to withdraw your
offer. We will hold your offer pending the closing. We will mail you a written
confirmation of receipt of your counterpart subscription and participation
agreements. If the 2,700,000 shares, or if such requirement is waived or
lowered, the number of shares we determine, 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 closing, following the closing we may sell
shares of our Class A stock in any number of additional closings until the
offering termination date. We intend to hold these additional closings on an
ongoing basis as offers are received until the termination of the offering.
If we receive offers to invest in at least 2,700,000 shares, or such lesser
number of shares as we may determine, prior to the termination of the
offering, at the final closing, we will offer one half of the shares offered
by this prospectus that remain unsubscribed, up to a maximum of 150,000
shares, to the SLC National Advertising Fund, Inc. ("SNAF") on substantially
the terms set forth in the subscription agreement attached hereto as Annex A
and at a price equal to the par value of such shares. SNAF oversees a fund
contributed by Sylvan and its franchisees which is used for the purpose of
preparing and placing national advertising materials, programs and public
relations activities for Sylvan Learning Centers. SNAF is a non-stock
corporation of which Sylvan and the FOA are the sole members and it is
operated by a four-member board of directors, two members of which are
appointed by each of Sylvan and the FOA.
We will only effect transactions in shares of our Class A stock through our
designated issuer-agent and assistant secretary, Kelly Hodge-Williams. Only
Ms. Hodge-Williams will sign subscription agreements on our behalf. Ms. Hodge-
Williams has successfully passed the Series 63--Uniform Securities Agent State
Law Examination.
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 be subject to certain restrictions on
resale set forth in our charter and the
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subscription agreement. See "Description of Capital Stock--Class A Convertible
Common Stock;" "The Offering--Subscription Agreement;" "Annex C."
TRANSFER AGENT AND REGISTRAR
First Union National Bank, 1525 W. WT Harris Blvd., 3C3, Charlotte, North
Carolina 28288-1153, (704) 590-0394 or (800) 829-8432 will act as transfer
agent and registrar for our Class A convertible common stock.
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 June 30, 2000 and for the period October 1, 1999 (date of
inception) through June 30, 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.
[ ], an investment banking firm, has provided a valuation report,
attached hereto as Annex D, as to the value of the Class A stock offered by
this prospectus, solely for tax purposes.
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.
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eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Enterprise)
Audited Financial Statements
For the period October 1, 1999 (date of inception)
through June 30, 2000
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Audited Financial Statements
Balance Sheet............................................................... F-3
Statement of Operations..................................................... F-4
Statement of Stockholders' Equity........................................... F-5
Statement of Cash Flows..................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
eSylvan, Inc.
We have audited the accompanying balance sheet of eSylvan, Inc. (a
subsidiary of Sylvan Ventures, LLC), a development stage company, as of June
30, 2000, and the related statements of operations, stockholders' equity and
cash flows for the period October 1, 1999 (date of inception) through June 30,
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 June 30,
2000, and the results of its operations and its cash flows for the period
October 1, 1999 (date of inception) through June 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young, LLP
Baltimore, Maryland
September 11, 2000
F-2
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Balance Sheet
June 30, 2000
<TABLE>
<S> <C>
Assets
Property and equipment:
Furniture and equipment......................................... $ 894,798
Software........................................................ 275,625
Educational content............................................. 351,702
Leasehold improvements.......................................... 156,218
------------
1,678,343
Accumulated depreciation........................................ (39,224)
------------
1,639,119
Deferred costs and other assets.................................. 304,294
------------
Total assets..................................................... $ 1,943,413
============
Liabilities and stockholders' equity
Accounts payable and accrued expenses............................ $ 1,829,409
Commitments and contingent liabilities........................... --
Stockholders' equity:
Series A Convertible Preferred Stock, par value $.001 per
share--authorized 20,000,000 shares, 10,526,316 shares
subscribed and unissued........................................ 10,526
Class A Convertible Common Stock, par value $.001 per share--
authorized 10,000,000 shares, no shares issued and
outstanding.................................................... --
Common stock, par value $.001 per share--authorized 70,000,000
shares, 14,000,000 shares issued and outstanding............... 14,000
Additional paid-in capital...................................... 22,755,913
Less: Subscription receivable for Series A Convertible Preferred
Stock.......................................................... (20,000,000)
Amounts receivable from sale of common stock................. (348,009)
------------
2,432,430
Accumulated deficit............................................. (2,318,426)
------------
Total stockholders' equity....................................... 114,004
------------
Total liabilities and stockholders' equity....................... $ 1,943,413
============
</TABLE>
See accompanying notes.
F-3
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Statement of Operations
For the period October 1, 1999 (date of inception)
through June 30, 2000
<TABLE>
<S> <C>
Revenues.......................................................... $ --
Cost and expenses:
Sales and marketing............................................... 87,427
General and administrative........................................ 2,101,465
Research and development.......................................... 1,924,278
Allocated indirect overhead costs................................. 424,817
-----------
Total costs and expenses.......................................... 4,537,987
-----------
Operating loss accumulated during the development stage........... (4,537,987)
Allocated income tax benefit...................................... 1,768,454
-----------
Net loss accumulated during the development stage................. $(2,769,533)
===========
Basic and diluted loss per common share........................... $ (54.01)
===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Statement of Stockholders' Equity
For the period October 1, 1999 (date of inception)
through June 30, 2000
<TABLE>
<CAPTION>
Subscription
Receivable Amounts
Series A Class A for Series A Receivable
Owner's Convertible Convertible Additional Convertible from Sale
Net Preferred Common Common Paid-In Preferred of Common Accumulated
Investment Stock Stock Stock Capital Stock Stock Deficit Total
---------- ----------- ----------- ------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contributions
from Sylvan for
the period
October 1, 1999
through
February 2,
2000 (see Note
2)............. $994,047 $ -- $-- $ -- $ -- $ -- $ -- $ -- $ 994,047
Non-cash
distributions
to Sylvan for
the period
October 1, 1999
through
February 2,
2000 (see Note
5)............. (298,863) -- -- -- -- -- -- -- (298,863)
Net loss for the
period October
1, 1999 (date
of inception)
through
February 2,
2000........... (451,107) -- -- -- -- -- -- -- (451,107)
Incorporation
and
reorganization
on February 3,
2000........... (244,077) -- -- -- 244,077 -- -- -- --
Contributions
from Sylvan for
the period
February 3,
2000 through
June 30, 2000
(see Note 2)... -- -- -- -- 3,657,944 -- -- -- 3,657,944
Non-cash
distributions
to Sylvan for
the period
February 3,
2000 through
June 30, 2000
(see Note 5)... -- -- -- -- (1,469,591) -- -- -- (1,469,591)
Sale of
14,000,000
shares of
common stock to
Sylvan (see
Note 8)........ -- -- -- 14,000 334,009 -- (348,009) -- --
Subscription to
purchase
10,526,316
shares of
Series A
Preferred Stock
by Sylvan
Ventures (see
Note 6)........ -- 10,526 -- -- 19,989,474 (20,000,000) -- -- --
Net loss for the
period February
3, 2000 (date
of
incorporation)
through June
30, 2000....... -- -- -- -- -- -- -- (2,318,426) (2,318,426)
-------- ------- --- ------- ----------- ------------ --------- ----------- -----------
Balance at June
30, 2000....... $ -- $10,526 $-- $14,000 $22,755,913 $(20,000,000) $(348,009) $(2,318,426) $ 114,004
======== ======= === ======= =========== ============ ========= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Statement of Cash Flows
For the period October 1, 1999 (date of inception)
through June 30, 2000
<TABLE>
<S> <C>
Operating activities
Net loss accumulated during the development stage................ $(2,769,533)
Adjustments to reconcile net loss accumulated during the
development stage to net cash used in operating activities:
Depreciation and amortization .................................. 39,224
Allocated income tax benefit.................................... (1,768,454)
Changes in operating assets and liabilities:
Accounts payable and accrued expenses.......................... 1,253,784
Other assets................................................... (4,294)
-----------
Net cash used in operating activities............................ (3,249,273)
Investing activities
Purchase of property and equipment............................... (1,402,718)
-----------
Net cash used in investing activities............................ (1,402,718)
Financing activities
Cash expenditures by Sylvan made on the Company's behalf and
accounted for as capital contributions.......................... 4,651,991
-----------
Net cash provided by financing activities........................ 4,651,991
-----------
Net change in cash............................................... --
Cash at beginning of period...................................... --
-----------
Cash at end of period............................................ $ --
===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
June 30, 2000
1. Summary of Significant Accounting Policies
Organization and Operations
eSylvan, Inc., (the "Company") was incorporated by Sylvan Learning Systems,
Inc. ("Sylvan") 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. Prior to incorporation and upon
inception on October 1, 1999, the Company operated as an unincorporated
division of Sylvan. On June 30, 2000, Sylvan contributed substantially all of
its ownership in the Company to a newly formed majority-owned subsidiary of
Sylvan, Sylvan Ventures, LLC ("Sylvan Ventures").
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 June 30, 2000.
The Company has adopted a fiscal year ending on December 31st.
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 additional 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 the
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.
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, computer software, and educational content range
from three to seven years. Leasehold improvements are depreciated over the
lesser of the lease term or the useful life of the asset.
Educational content consists of payments made to vendors to acquire
educational content to be delivered to the Company's customers through its
Internet-based applications.
F-7
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
1. Summary of Significant Accounting Policies (continued)
Deferred Costs
Deferred costs at June 30, 2000 includes $300,000 of costs incurred in
connection with the proposed sale of 3,000,000 shares of Class A Common Stock.
All costs will be accounted for as a reduction of additional paid-in capital
upon the completion of the offering, or charged to expense upon the
determination that the completion of the offering will likely not occur.
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
The Company accounts for web site development costs in accordance with
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. 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 $87,427 for the period October 1, 1999 through June 30, 2000.
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 additional paid-in capital.
Effect of Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivatives 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 Ventures, LLC
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 June 30, 2000 were satisfied by Sylvan and accounted for as
contributions to capital. These obligations included all expenditures for
property and equipment and all expenses directly attributable to the Company's
operations and paid through Sylvan's cash management systems, as the Company
does not maintain any cash accounts. 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
The Company has received a written commitment from Sylvan and Sylvan
Ventures to provide additional funding to support its operations through at
least September 30, 2001. As of June 30, 2000, there is no agreed-upon
limitation on the amount of funding to be provided by Sylvan and Sylvan
Ventures.
On June 30, 2000 the Company entered into a management and facility use
agreement with Sylvan under which Sylvan will provide certain management,
financial, legal, management information and human resources services and
other management or administrative services upon request. The Company will
also 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 services and facilities. This agreement has a one-year term, is renewable
for an additional year, and is terminable by either party with 60 days notice.
On June 30, 2000, 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 $1,000,000 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 $1,000,000 due to Sylvan was agreed to be an
initial capital contribution by Sylvan, and no cash was paid for the initial
license fee. Because this was a nonmonetary transaction between a parent and
its subsidiary prior to an initial public offering, the Company was required
by accounting regulations to record the license at its historical cost basis
to Sylvan. Because Sylvan had no basis in the transferred assets, the Company
recorded no amount as the value of the license.
F-9
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
3. Line of Credit
On June 30, 2000, the Company entered into a revolving credit facility with
Sylvan Ventures, under which it may borrow up to $10,000,000. All borrowings
under this facility bear interest at the prime rate of interest and are due on
December 31, 2001. No amounts had been borrowed under the facility as of June
30, 2000.
4. 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 $85,591.
5. Income Taxes
During the period from October 1, 1999 through June 30, 2000, the Company
incurred a net operating loss that was used by Sylvan to reduce consolidated
income taxes payable. Because the income tax benefit resulting from these
losses was utilized by Sylvan, the Company entered into a tax sharing
agreement with Sylvan that provided that income tax benefits attributable to
the Company's operations that were realized by Sylvan would be treated as
distributions to Sylvan. During the period from inception through June 30,
2000, the Company and Sylvan estimated that the tax benefits realized by
Sylvan arising from the Company's operations equaled approximately $1,768,454,
summarized as follows:
<TABLE>
<S> <C>
Tax benefit at U.S. statutory rate of 35%.................... $(1,588,295)
Effect of permanent differences.............................. 1,508
State income taxes, net of federal benefit................... (181,667)
-----------
Total........................................................ $(1,768,454)
===========
</TABLE>
Sylvan will not realize income tax benefits in future periods attributable
to the Company's operations as a result of the transfer of Sylvan's ownership
in the Company to Sylvan Ventures on June 30, 2000. Sylvan Ventures is
organized as a limited liability company, and under applicable income tax
regulations, is unable to utilize or pass through losses to its members
resulting from its investment in the Company.
Had the Company been unable to realize the income tax benefit attributable
to its operating losses for the period ended June 30, 2000, the recorded net
loss since inception would have been $1,768,454 higher, or $4,537,987, and the
reported net loss per share would have been $(88.49).
6. Preferred Stock
On June 30, 2000, the Company entered into a stock purchase agreement with
Sylvan Ventures under which it will sell 10,526,316 shares of Series A
Convertible Preferred Stock ("Preferred Stock") during the period from
September 2000 through December 2001 for aggregate proceeds of $20,000,000.
The subscription will be paid in six separate closings that will occur at the
end of each calendar quarter between September 30, 2000 and December 31, 2001.
The Preferred Stock will be issued with the following terms:
F-10
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
6. Preferred Stock (continued)
Conversion Rights
The Preferred Stock is convertible into common stock at the option of the
holder at any time. In addition, the Preferred Stock will convert
automatically into shares of common stock upon the closing of an underwritten
public offering of at least $10,000,000 of gross proceeds to the Company with
a price to the public that reflects a preoffering valuation of $40,000,000.
Each share of Preferred Stock is initially convertible into one share of
common stock. Additionally, prior to conversion, if the Company issues any
shares of stock for less then the conversion price, the conversion ratio will
be adjusted based upon a predetermined formula.
Dividend
The holders of the Preferred Stock are entitled to share ratably in any
dividends declared by the Board of Directors, assuming the conversion of all
outstanding convertible securities.
Liquidation
In the event of liquidation, the holders of Preferred Stock are entitled to
share any remaining net assets ratably with holders of all common stock.
Voting Rights
Each holder of Preferred Stock is entitled to five votes for each share of
common stock that the holder could obtain assuming the exercise of conversion
rights. In addition, the holders of Preferred Stock are entitled to elect one
director acting as a separate class.
7. Class A Convertible Common Stock
The Company has authorized the issuance of 10,000,000 shares of $0.001 par
value common stock. The Class A Convertible Common Stock was issued with the
following terms:
Redemption Rights
The Class A Convertible Common Stock is redeemable upon the occurrence of
certain events or transactions solely at the discretion of the Company. The
redemption amount is equal to the greater of $0.875 per share or the appraised
value per share.
Conversion Rights
The Class A Convertible Common Stock will automatically convert into shares
of common stock upon the sale of the Company or upon the closing of an
underwritten public offering of at least $10,000,000 of gross proceeds to the
Company with a price to the public that reflects a preoffering valuation of
$40,000,000. Each share of Class A Convertible Common Stock is convertible
into one share of common stock.
F-11
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
7. Class A Convertible Common Stock (continued)
Dividends
The holders of the Class A Convertible Common Stock are entitled to share
ratably in any dividends declared by the Board of Directors, assuming the
conversion of all outstanding convertible securities.
Liquidation
In the event of liquidation, the holders of Class A Convertible Common
Stock are entitled to share any remaining net assets ratably with all
stockholders, assuming conversion of all convertible securities.
Voting Rights
Each share of the Class A Convertible Common Stock has substantially the
same voting rights as the number of shares of common stock into which it can
be converted.
Restrictions on Transfer
The transfer of Class A Convertible Common Stock (other than to the
Company) is restricted until September 30, 2010.
8. Common Stock
On June 30, 2000, 14,000,000 shares of common stock were sold to Sylvan in
exchange for cash of $5,000,000. In connection with the sale, Sylvan also
agreed to transfer or license specified intangible assets to the Company (see
Note 2). In satisfying the purchase price, Sylvan was allowed to reduce the
amount due by $4,641,991 of prior capital contributions in the form of
expenses and expenditures paid on the Company's behalf. The remaining amount
due of $348,009 was paid in July 2000. Subsequent to the purchase by Sylvan of
14,000,000 shares of common stock, 13,714,286 of those shares were contributed
by Sylvan to its majority-owned subsidiary, Sylvan Ventures.
9. Stock Option Plan
On June 30, 2000, the Company adopted the eSylvan, Inc. 2000 Omnibus Stock
Plan. The plan allows for the grant of up to 3,000,000 shares of common stock
to employees, directors, and consultants in the form of incentive and non-
qualified stock options, stock appreciation rights, stock awards, phantom
stock awards, convertible securities and performance awards. No awards have
been granted as of September 11, 2000.
F-12
<PAGE>
eSylvan, Inc.
(a Subsidiary of Sylvan Ventures, LLC
and a Development Stage Company)
Notes to Financial Statements
10. Loss Per Share
The following table sets forth the computation of basic and diluted loss
per common share:
<TABLE>
<S> <C>
Net loss accumulated during the development stage............ $(2,769,533)
===========
Weighted-average shares outstanding during the period........ 51,282
Dilutive effect of subscribed and unissued preferred stock... --
-----------
Shares used in computations.................................. 51,282
===========
Basic and diluted loss per common share...................... $ (54.01)
===========
</TABLE>
The partially paid shares issued to Sylvan on June 30, 2000 (as described
in Note 8) have been included in the weighted-average calculation because
those shares were entitled to dividends, if declared, at June 30, 2000. The
subscribed and unissued shares of Series A Convertible Preferred Stock are not
eligible to share in dividends until the consideration is paid, and are
therefore considered for purposes of computing loss per share the equivalent
of warrants. The dilutive effect of these subscriptions are computed using the
treasury stock method, whereby the unpaid balance is assumed to be proceeds
used to purchase stock under the treasury stock method. At June 30, 2000 no
additional dilution from preferred stock resulted from the computation.
11. Defined Contribution Retirement Plan
Sylvan sponsors a defined contribution retirement plan under section 401(k)
of the Internal Revenue Code. The provisions of this plan allow for voluntary
employee contributions, subject to certain annual limitations, and
discretionary contributions which are allocated to eligible participants based
upon compensation. All employees of the Company are eligible after meeting
certain service requirements. No discretionary contributions have been made to
this plan on behalf of the Company.
12. Supplemental Cash Flow Information
The Company purchased property and equipment totaling $276,000 during the
period for which payment has not been made.
The Company at June 30, 2000 accrued $300,000 of costs related to the
pending sale of 3,000,000 shares of Class A Common Stock that have not been
paid as of June 30, 2000. The amount accrued is included in deferred costs and
other assets.
F-13
<PAGE>
ANNEX A
Subscription Agreement
[Insert name and address of Franchisee]
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 ("Investment Offers")
in 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 is hereinafter referred to as 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: 333-42530) under the
Securities Act of 1933, as amended (the "Securities Act"), which registration
statement, as amended, was declared 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 the name and franchise
license agreement number or area development agreement territory of and the
number of shares of Class A Common Stock in which the undersigned, as
subscriber (the "Subscriber") 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 the Subscriber's name and
franchise license agreement number or area development agreement territory
shall be delivered to the Subscriber 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.
A-1
<PAGE>
eSylvan, Inc.
Page 2
SECTION 1. Investment in the Shares
The Subscriber hereby irrevocably offers (a valid offer is referred to
herein as the "Offer") to invest in the Shares, on the terms and conditions
set forth in this Agreement and the Prospectus and has forwarded an executed
copy of the Participation Agreement, which sets forth the number of the
Subscriber's License Agreement or the Subscriber's 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 earlier to occur of
the Termination Date or the closing on the Shares. If the Company does not
receive Investment Offers representing the Minimum by the Termination Date,
the Company will return the Subscriber's 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.
The date of the Offer is the date the Offer is received by the Company, and
the date of this Agreement shall be the date the Offer is accepted by the
Company.
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 the Subscriber, the
Subscriber warrants and represents as follows:
2.1 As of June 28, 2000 and as of the date of this Agreement, the
Subscriber is 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, the Subscriber represents and warrants that, as of July 28, 2000
and as of the date of this Agreement, the Subscriber was in compliance with
the development schedule set forth in the Area Development Agreement with
respect to such Area Development Agreement territory. The Subscriber has duly
authorized the execution and performance of this Agreement and the
Participation Agreement. The Subscriber requires 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
the Subscriber's obligations.
2.2 The Subscriber is acquiring the Shares for investment, for the
Subscriber's 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 The Subscriber is exercising its own business judgment in determining
whether to make an Offer using such tax, financial and legal advice as the
Subscriber deems appropriate, and the Subscriber has received and reviewed the
Prospectus.
2.4 The Subscriber acknowledges that it is free to enter into the
Participation Agreement without making an Investment Offer.
2.5 Each of the Subscriber's representations, warranties, acknowledgements
and agreements set forth in the Participation Agreement is true and correct.
2.6 By executing this agreement, the subscriber does not waive any rights
under the federal securities laws.
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 the Subscriber, the
Subscriber agrees as follows:
3.1 The continued ownership of Stock of the Company by the Subscriber will
encourage the Subscriber's support and participation in the Company's business
pursuant to the Participation Agreement and perpetuate
A-2
<PAGE>
eSylvan, Inc.
Page 3
harmony in the Company's management, policies and operations, and the Company
and the Subscriber deem it in the 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 the Subscriber 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 the Subscriber 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
the Subscriber in any other manner.
3.3 The Subscriber hereby acknowledges that it has been provided a copy of
and has 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
Dollars ($40,000,000) or more, the Subscriber 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 the
Subscriber's 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 the Subscriber to execute
and deliver a Lock-up Agreement, whether or not the Subscriber actually
executes 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
Subscriber's 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.
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eSylvan, Inc.
Page 4
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 the Subscriber, the
Subscriber agrees as follows:
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, the Subscriber
acknowledges and agrees that the per share value of the Shares is $0.875.
4.2 The Subscriber is receiving the Shares and the cash from the Company in
compensation for services, the Shares and cash will be taxable to the
Subscriber as ordinary income and the Subscriber 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. STATE SECURITIES LAW REQUIREMENTS
If the Prospectus indicates that the Shares have not been registered under
the securities laws of any state and/or that the Shares have been issued
pursuant to an exemption from registration under the securities laws of any
state, the Subscriber hereby agrees that it will not sell the Shares without
registration under the securities laws of such state or some exemption from
registration and that it will hold the Shares for no less than one year from
the date of this Agreement.
6. MISCELLANEOUS
6.1 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.
6.2 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].
6.3 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 the Subscriber at its
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.
6.4 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 be effective as
of the date of such unanimous consent, shall be in writing, and shall be
provided to each of the parties.
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eSylvan, Inc.
Page 5
6.5 Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
6.6 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.
6.7 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 proceeding referred to in the preceding sentence may be served on
any party anywhere in the world.
6.8 In the event that the Subscriber consists of more than one person, all
such persons will be jointly and severally liable for the liabilities and
obligations of the Subscriber under this Agreement. For purposes of this
Section 6.8, the term "person" means an individual, a corporation, a
partnership, a limited liability company, an association, a joint-stock
company, a trust or any unincorporated organization.
Please confirm that the foregoing correctly sets forth the agreement
between the parties.
Very truly yours,
By:
Title:
Number of License Agreement:
OR
Area Development Agreement Territory:
Accepted, as of , 200
eSYLVAN, INC.
By:
Title:
A-5
<PAGE>
Annex B
Participation Agreement
PARTICIPATION AGREEMENT
This Participation Agreement (the "Agreement") by and between Sylvan
Learning Systems, Inc., a Maryland corporation ("Sylvan") and the undersigned
(collectively, the "Participant") is made and entered into the date it is
executed by Sylvan.
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").
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.
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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.
(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.
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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 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 Licensee under the 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.
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<PAGE>
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 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 lo 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 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.
4.5 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.
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4.6 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.
4.7 Liability. In the event that the Participant consists of more than one
person, all such persons will be jointly and severally liable for the
liabilities and obligations of the Participant under this Agreement. For
purposes of this Section 4.7, the term "person" means an individual, a
corporation, a partnership, a limited liability company, an association, a
joint-stock company, a trust or any unincorporated organization.
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: _________________________________________
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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.
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.
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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 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-2
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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 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-3
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ANNEX C
Charter of eSylvan, Inc.
eSYLVAN, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
eSylvan, Inc., a Maryland corporation (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended and as so amended
is restated by striking out in its entirety the existing Charter and inserting
in lieu thereof the following:
ARTICLE I
NAME
The name of the corporation (which is hereinafter called the "Corporation")
is: eSylvan, Inc.
ARTICLE II
PURPOSES FOR WHICH CORPORATION FORMED
The purpose for which the Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the Maryland
General Corporation Law (the "MGCL").
ARTICLE III
RESIDENT AGENT AND PRINCIPAL OFFICE
The post office address of the principal office of the Corporation in this
State is 34 Market Place, Baltimore, Maryland 21202. The resident agent of the
Corporation in this State is Robert Zentz, whose post office address is 1000
Lancaster Street, Baltimore, Maryland 21202. Said resident agent is a citizen
of the State of Maryland, and actually resides therein.
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of stock of all classes which the Corporation
has authority to issue is One Hundred Million (100,000,000) shares, of which
Seventy Million (70,000,000) shares shall be of a class designated as Common
Stock, with a par value of One Mill ($0.001) per share (the "Common Stock"),
Ten Million (10,000,000) shares shall be of a class designated as Class A
Common Stock, with a par value of One Mill ($0.001) per share (the "Class A
Common Stock"), and Twenty Million (20,000,000) shares shall be of a class
designated as Series A Preferred Stock, with a par value of One Mill ($0.001)
per share (the "Series A Preferred Stock"). The aggregate par value of all
shares having par value is One Hundred Thousand Dollars ($100,000).
Subject to the authority of the Board of Directors under Article V, Section
4, the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions
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of redemption of the Common Stock, the Class A Common Stock and the Series A
Preferred Stock are as follows:
A.COMMON STOCK.
1.Dividends and Distributions. Subject to the provisions of law and
this charter, the holders of Common Stock shall be entitled to receive,
together with the holders of any and all classes or series of stock or
securities of the Corporation convertible into or exchangeable for Common
Stock (such convertible or exchangeable stock or securities being called
"Convertible Securities") that are entitled to receive dividends or
distributions on or with respect to the Common Stock under the provisions of
law or this charter, 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 such outstanding 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, in the event of the dissolution, liquidation or winding up of the
Corporation (a "Liquidation Event"), the assets of the Corporation available
for distribution to its stockholders shall be distributed to the holders of
Common Stock, together with the holders of Convertible Securities entitled to
participate in such distribution under the provisions of law or this charter,
on a pro rata basis (assuming the conversion of all such outstanding
Convertible Securities).
3.Voting Rights. Except as otherwise required by law or provided
herein, the holders of Common Stock, together with the holders of 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 Common Stock shall be entitled to cast one (1) vote for each share
of Common Stock held of record by such holder. Except as otherwise required by
law, holders of Common Stock shall not have cumulative voting rights.
B.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
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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 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 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.
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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 "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, 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
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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 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 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 Stock, the shares of 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 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 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.
(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 Stock payable under this Section B.5
shall be an amount equal to the product obtained by multiplying (i) the number
of shares of 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 Stock under this Section B.5.
(e)On the Redemption Date, the certificates representing shares of
Stock to be redeemed shall be delivered by the Holder to the Corporation. If
the certificates representing any shares of Stock to be redeemed have not been
surrendered by the Holder, all rights of the Holder with respect to said 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
or Development 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.
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(b)Each certificate of Class A Common Stock shall be endorsed by the
Secretary of Corporation as follows:
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.
C.SERIES A PREFERRED STOCK.
1.Dividends and Distributions. Subject to the provisions of law and
this charter, the holders of Series A Preferred Stock (i) 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 Series A Preferred Stock and such other Convertible
Securities that are entitled to receive such dividends or distributions) of
any such dividend or distribution; and (ii) together with the holders of other
Convertible Securities entitled to receive dividends or distributions on or
with respect to the Series A Preferred 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 Series A Preferred Stock, with each such holder receiving its
pro rata portion (assuming the conversion of all outstanding Series A
Preferred 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 Series
A Preferred 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 Series A Preferred Stock and such other
Convertible Securities).
3.Voting Rights; Directors.
(a)Except as otherwise required by law or provided herein, the
holders of Series A Preferred 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 Series A Preferred Stock shall be
entitled to cast five (5) votes for each share of Common Stock into which such
shares of Series A Preferred Stock then held of record by such holder may be
converted in accordance with Section C.4 of this Article IV. Except as
otherwise required by law, holders of Series A Preferred Stock shall not have
cumulative voting rights.
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(b)The holders of the Series A Preferred Stock, voting as a separate
class, shall be entitled to elect one (1) director of the Corporation by a
plurality vote of the Series A Preferred Stock.
4.Conversion of Series A Preferred Stock.
(a)Voluntary Conversion.
(i)At any time and from time to time prior to the consummation
of a "Qualified IPO" (as defined in Section B.4 of this Article IV), any
holder of Series A Preferred Stock may convert all or any of the shares of
Series A Preferred Stock then held by such holder into a number of shares of
Common Stock computed by multiplying the number of shares of Series A
Preferred Stock proposed to be converted by $1.90, and dividing the result by
the applicable "Conversion Price" (as defined herein) then in effect. The
initial conversion rate for Series A Preferred Stock surrendered for
conversion shall be one share of Common Stock for each share of Series A
Preferred Stock surrendered for conversion, representing an initial
"Conversion Price" of $1.90 per share of Common Stock, subject to adjustment
as hereinafter provided.
(ii)Any holder of shares of Series A Preferred Stock desiring to
convert any portion thereof into Common Stock under this Section C.4(a) shall
surrender the certificate or certificates for such shares of Series A
Preferred Stock at the principal office of the Corporation, together with
written notice that such holder elects to convert all or any number of the
shares of Series A Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or the names of the
nominees in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. If reasonably required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney-in-fact duly authorized in writing. The date of receipt of
such certificates and notice by the Corporation shall be the conversion date
(the "Conversion Date"). The Corporation shall, as soon as practicable after
the Conversion Date, issue and deliver at such office to such holder of shares
of Series A Preferred Stock, or to his or its nominees, a certificate or
certificates for the number of whole shares of Common Stock to which such
holder or such nominees shall be entitled, together with any payment in lieu
of fractional shares to which such holder may be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of business
on the Conversion Date, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as of
such date.
(iii)In case of any Liquidation Event, the conversion rights set
forth in this Section C.4 shall cease and terminate at the close of business
on the business day fixed for payment of the amount distributable to the
holders of shares of Series A Preferred Stock pursuant to Section C.2 of this
Article IV.
(b)Automatic Conversion. All outstanding shares of Series A
Preferred Stock shall automatically convert to fully paid and nonassessable
shares of Common Stock at the then effective Conversion Price immediately
prior to the consummation of a "Qualified IPO" (as defined in Section B.4 of
this Article IV). Holders of shares of Series A Preferred 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 Series A Preferred 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.
(c)No fractional shares shall be issued upon conversion of Series A
Preferred Stock into Common Stock. If any fractional share of Common Stock
would, except for the provisions of the preceding
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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 Series A Preferred 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 assist and cooperate with any holder of
Series A Preferred Stock required to make any governmental filings or obtain
any governmental approval prior to or in connection with any conversion of
shares of Series A Preferred Stock hereunder (including, without limitation,
making any filings required to be made by the Corporation). The Corporation
shall take all such actions as may be reasonably necessary to ensure that all
such Common Stock may be so issued without violation of any applicable law or
governmental regulation.
(e)Subdivision or Combination of Common Units. 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 Price in effect immediately prior to such subdivision
shall be proportionately decreased to account for such subdivision, and if the
Corporation combines (by reverse stock split or otherwise) the outstanding
Common Stock into a smaller number of shares, the applicable Conversion Price
in effect immediately prior to such combination shall be proportionately
increased.
(f)Adjustment of Conversion Price Upon Certain Issuances of
Stock. If the Corporation shall issue or sell, or is, in accordance with
subparagraphs (i) through (vi), deemed to have issued or sold, any shares of
stock (including Common Stock and all Options and Convertible Securities) for
a consideration per share less than the applicable Conversion Price for the
shares of Series A Preferred Stock in effect immediately prior to the time of
such issue or sale (a "Dilutive Event"), then, forthwith upon such Dilutive
Event, such applicable Conversion Price shall be reduced concurrently with
such issue to an amount equal to the quotient of (i) (A) the Conversion Price
immediately prior to such Dilutive Event, multiplied by (B) the number of
shares of Common Stock outstanding immediately prior to such Dilutive Event
determined on a fully-diluted basis assuming the conversion or exercise of all
outstanding shares of Series A Preferred Stock, Class A Common Stock and all
other Options (as that term is defined in subsection (f)(i) below) or
Convertible Securities ("Fully-Diluted Basis"), plus (C) the aggregate
consideration, if any, received or to be received by the Corporation upon such
Dilutive Event, divided by (ii) the sum of the number of shares of Common
Stock outstanding immediately after such Dilutive Event, determined on a
Fully-Diluted Basis. The Conversion Price shall be determined in accordance
with the foregoing formula and shall be rounded to the nearest one tenth of
one cent ($0.001).
For purposes of this Section C.4(f) of Article IV, the following subparagraphs
(i) to (vi) shall also be applicable:
(i)Issuance of Rights or Options. In case the Corporation shall
in any manner grant (whether directly or by assumption in a merger or
otherwise) any warrants or other rights to subscribe for or to purchase, or
any options for the purchase of, shares of Common Stock (such warrants, rights
or options being called "Options") or any Convertible Securities, whether or
not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
shares of Common Stock are issuable upon the exercise of such Options or upon
the conversion or exchange of such Convertible Securities (determined, by
dividing (a) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount
of additional consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by (b) the
total maximum number of shares of Common Stock issuable upon the exercise of
all such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options) shall be less than the
applicable Conversion Price for the Series A Preferred Stock immediately prior
to the time of the granting of such Options or Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such Options shall
be deemed to have been issued
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for such price per share as of the date of granting of such Options or the
issuance of such Convertible Securities and thereafter shall be deemed to be
outstanding. Except as otherwise provided in subparagraph (iii), no adjustment
of any Conversion Price shall be made upon the actual issue of such shares of
Common Stock or of such Convertible Securities upon exercise of such Options
or upon the actual issue of such shares of Common Stock upon conversion or
exchange of such Convertible Securities.
(ii)Issuance of Convertible Securities. In case the Corporation
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which shares of Common Stock are
issuable upon such conversion or exchange (determined by dividing (a) the
total amount received or receivable by the Corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon
the conversion or exchange thereof, by (b) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the applicable Conversion Price for
the Series A Preferred Stock immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
be outstanding, provided that (a) except as otherwise provided in subparagraph
(iii), no adjustment of any Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities, and (b) if any such issue or sale of such Convertible Securities
is made upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of any Conversion Price have been or are to
be made pursuant to other provisions of this Section C.4(f) of Article IV, no
further adjustment of such Conversion Price shall be made by reason of such
issue or sale.
(iii)Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subparagraph (i), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph (i) or (ii), or the rate at
which Convertible Securities referred to in subparagraph (i) or (ii) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the applicable Conversion Price for the
Series A Preferred Stock at the time of such event shall forthwith be
readjusted to the Conversion Price which would have been in effect at such
time had such Options or Convertible Securities still outstanding included
such changed purchase price, additional consideration or conversion rate, as
the case may be, at the time initially granted, issued or sold, but in no
event will the applicable Conversion Price be readjusted to an amount greater
than the applicable Conversion Price which would have been in effect had the
Options or Convertible Securities subject to the above described consideration
changes never been granted, issued or sold. In addition, on the expiration or
exchange of any Option or Convertible Securities prior to the conversion of
the Series A Preferred, the applicable Conversion Price then in effect
hereunder shall forthwith be adjusted to the applicable Conversion Price which
would have been in effect had such Options or Convertible Securities never
been issued; provided, that any consideration which was actually received by
the Corporation in connection with the issuance or sale of such Options or
Convertible Securities shall be included in the readjustment computation even
though such Options or Convertible Securities shall have expired or
terminated; provided, further, that no such readjustment to the Conversion
Price shall affect any Common Stock previously issued upon conversion of the
Series A Preferred Stock.
(iv)Distribution of Stock. In case the Corporation shall make
any distribution upon any Common Stock of the Corporation payable in Common
Stock, Options or Convertible Securities, any such securities issued in
payment of such distribution shall be deemed to have been issued or sold at a
consideration equal to $.01 per share.
(v)Consideration. In case any Common Stock, Options or
Convertible Securities shall be issued or sold for cash, the consideration
received therefor shall be deemed to be the amount received by the Corporation
therefor, without deduction therefrom of any amounts paid or receivable for
accrued interest,
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expenses incurred or any underwriting commissions or concessions paid or
allowed by the Corporation in connection therewith. In case any Common Stock,
Options or Convertible Securities shall be issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by
the Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors, without deduction of any
amounts paid or receivable for accrued interest and any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any Options shall be issued in connection
with the issue and sale of other securities of the Corporation, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, the consideration shall be
allocated between the Options and such other securities as determined in good
faith by the Board of Directors.
(vi)In case any event shall occur as to which the provisions of
this Section C.4(f) are not strictly applicable but the failure to make any
adjustment would not fairly protect the conversion rights of the holders of
the Series A Preferred Stock in accordance with the essential intent and
principles of such provisions, then, in each such case, the Corporation shall
make a good faith adjustment to the Conversion Price in accordance with the
intent of this Section C.4(f) and, upon the written request of the holders of
a majority of the issued and outstanding shares of Series A Preferred Stock,
shall appoint a firm of independent certified public accountants of recognized
national standing (which may be the regular auditors of the Corporation),
which shall give their opinion upon the adjustment, if any, on a basis
consistent with the essential intent and principles established in this
Section C.4(f), necessary to preserve, without dilution, the conversion rights
associated with the Series A Preferred Stock. Upon receipt of such opinion,
the Corporation shall promptly mail a copy thereof to the holders of each
share of Series A Preferred Stock and shall make the adjustments described
therein.
(g)Notification. Immediately upon any adjustment of the applicable
Conversion Price, the Corporation shall give written notice thereof to all
holders of Series A Preferred Stock, setting forth in reasonable detail, and
certifying, the calculation of such adjustment.
(h)Certain Issues of Common Stock Excepted. The Corporation shall
not be required to make any adjustment of the applicable Conversion Price in
the case of the issuance of:
(i)Stock issued or issuable upon conversion of Series A Preferred
Stock;
(ii)Stock issued or issuable as a distribution on Series A
Preferred Stock;
(iii)Stock issued or issuable by reason of a dividend, split, or
other distribution on Stock excluded from adjustment of the applicable
Conversion Price pursuant to the preceding clauses (i) and (ii);
(iv)Up to 3,600,000 shares of Class A Common Stock which number
includes without limitation shares of Class A Common Stock issued or issuable
under the Corporation's Registration Statement on Form S-1 (File No.: 333-
42530) as filed with the Securities and Exchange Commission on July 28, 2000,
as amended;
(v)Up to 3,000,000 shares of Common Stock issued or issuable, or
issued or issuable upon exercise of Options or conversion of Convertible
Securities issued or issuable, under the Corporation's 2000 Omnibus Stock
Plan;
(vi)Common Stock issued or issuable to Ivy West Educational
Services, Inc., under that certain Asset Purchase Agreement dated May 18,
2000.
(i)Reservation of Stock Issuable Upon Conversion. 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 Series A Preferred 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 Series A Preferred 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
Series A Preferred Stock, the Corporation will take such
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corporate action as may, in the opinion of its counsel, be 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.
ARTICLE V
BOARD OF DIRECTORS
Section 1. Number of Directors.
The Corporation shall have four (4) directors, which number may be
increased or decreased pursuant to the Bylaws, but the number of directors
shall not be less than the lesser of three (3) or the number of stockholders.
Section 2. Directors.
R. Christopher Hoehn-Saric, B. Lee McGee, Peter Cohen and Robert Zentz
shall act as directors of the Corporation until their successors are duly
chosen and qualified.
Section 3. Board Authorization of Stock Issuance.
The Board of Directors of the Corporation is hereby empowered to
authorize the issuance from time to time of shares of its stock of any class,
whether now or hereafter authorized, and securities convertible into shares of
its stock of any class or classes, whether now or hereafter authorized, for
such consideration as the Board of Directors may deem advisable.
Section 4. Classification of Stock.
The Board of Directors shall have the power to classify or reclassify
any unissued stock, whether now or hereafter authorized, by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such stock.
Section 5. Board Authority to Increase or Decrease Authorized Stock
The Board of Directors of the Corporation, with the approval of a
majority of the entire Board of Directors, and without action by the
stockholders, may 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.
Section 6. Conflict of Interest.
No contract or other transaction between this Corporation and any other
corporation, partnership, individual or other entity and no act of this
Corporation shall in any way be affected or invalidated by the fact that any
of the directors of this Corporation are directors, principals, partners or
officers of such other entity, or are pecuniarily or otherwise interested in
such contract, transaction or act; provided that (i) the existence of such
relationship or such interest shall be disclosed or known to the Board of
Directors or to a committee of the Board of Directors if the matter involves a
committee decision, and the contract, transaction or act shall be authorized,
approved or ratified by a majority of disinterested directors on the Board or
on such committee, as the case may be, even if the number of disinterested
directors constitutes less than a quorum or (ii) the contract, transaction or
act shall be authorized, ratified or approved in any other manner permitted by
the MGCL.
Section 7. Permissible Considerations by Board of Directors.
The Board of Directors, in considering a potential acquisition of
control of the Corporation, is permitted, but is not required, to consider the
effect of the potential acquisition on the stockholders, employees,
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suppliers, customers, and creditors of the corporation and the communities in
which offices or other establishments of the Corporation are located.
ARTICLE VI
PROVISIONS CONCERNING CERTAIN RIGHTS
OF THE CORPORATION AND THE STOCKHOLDERS
Section 1. Right to Amend Charter.
The Corporation reserves the right to make, from time to time, any
amendments of its Charter which may now or hereafter be authorized by law,
including any amendments which alter the contract rights of any class of
outstanding stock as expressly set forth in the Charter; provided, however,
that as long as there are any shares of Series A Preferred Stock issued and
outstanding, no amendment of the Charter that affects the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of Series A
Preferred Stock shall be effective unless approved by the holders of the
Series A Preferred Stock, voting as a separate class.
Section 2. Elimination of Preemptive Rights.
Unless otherwise provided by the Board of Directors, no holder of stock
of any class shall be entitled to preemptive rights to subscribe for or
purchase or receive any part of any new or additional issue of stock of any
class of the Corporation or securities convertible into stock of any class of
the Corporation.
Section 3. Required Stockholder Vote.
Notwithstanding any provision of law requiring any action to be taken
or authorized by the affirmative vote of the holders of a greater proportion
of the votes of all classes or of any class of stock of the Corporation, such
action shall be effective and valid if taken or authorized by the affirmative
vote of a majority of the total number of votes entitled to be cast thereon,
except as otherwise provided in this Charter.
Section 4. Bylaws.
The Board of Directors, and not the stockholders, shall have the
exclusive power to make, alter, amend or repeal the Bylaws of the Corporation.
Any amendment to, repeal of or adoption of any provision inconsistent with
this Section 4 shall be effective only if it is approved by the affirmative
vote of the holders of at least 80% of the aggregate combined voting power of
all classes of capital stock entitled to vote thereon, voting as one class.
Section 5. Availability of Appraisal Rights
The holders of shares of stock of any class of the Corporation are not
entitled to exercise the rights of an objecting stockholder under Subtitle 2
of Title 3 of the MGCL.
Section 6. Applicability of the Maryland Control Share and Business
Combination Statutes.
The Corporation elects not to be governed by Subtitle 6 of Title 3 of
the MGCL with respect to any "business combination" as defined in such
Subtitle. In addition, any acquisition of any shares of stock of the
Corporation, including any acquisition of voting rights or other interests in
any such stock, shall be exempt from the provisions of Title 3, Subtitle 7 of
the MGCL. Accordingly, the provisions of the Maryland Business Combination Act
and the Maryland Control Share Acquisition Act shall not apply to this
Corporation.
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ARTICLE VII
INDEMNIFICATION AND LIMITATION OF LIABILITY
Section 1. Mandatory Indemnification.
The Corporation 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.
Section 2. Discretionary Indemnification.
If approved by the Board of Directors, the Corporation 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 or employee
benefit plan to the extent determined to be appropriate by the Board of
Directors.
Section 3. Advancing Expenses Prior to a Decision.
The Corporation 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.
Section 4. Other Provisions for Indemnification.
The Board of Directors may, by bylaw, resolution or agreement, make
further provision for indemnification of directors, officers, employees and
agents.
Section 5. Limitation of Liability of Directors and Officers.
To the maximum extent that limitations on the liability of directors
and officers are permitted by the MGCL, as from time to time amended, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This limitation on
liability applies to events occurring at the time a person serves as a
director or officer of the Corporation whether or not such person is a
director or officer at the time of any proceeding in which liability is
asserted.
Section 6. Effect of Amendment or Repeal.
No amendment or repeal of any section of this Article, or the adoption
of any provision of the Corporation's Charter inconsistent with this Article,
shall apply to or affect in any respect the rights to indemnification or
limitation of liability of any director or officer of the Corporation with
respect to any alleged act or omission which occurred prior to such amendment,
repeal or adoption.
SECOND: The Corporation desires to amend and restate its Charter as
currently in effect. The provisions set forth in the above Articles of
Amendment and Restatement are all of the provisions of the Corporation's
Charter currently in effect as hereby amended.
THIRD: The amendment and restatement of the Charter of the Corporation
herein made was recommended and advised by the Board of Directors of the
Corporation by a unanimous written consent dated July 28, 2000 and was
approved by the stockholders of the Corporation by a unanimous written consent
dated August 7, 2000.
FOURTH: The current address of the principal office of the Corporation
is 34 Market Place, Baltimore, Maryland 21202 and the Corporation's current
resident agent is Robert Zentz, whose post office address is 1000 Lancaster
Street, Baltimore, Maryland 21202.
FIFTH: The Corporation currently has four directors; the directors
currently in office are R. Christopher Hoehn-Saric, B. Lee McGee, Peter Cohen
and Robert Zentz.
SIXTH: (a) The total number of shares of all classes of stock which the
Corporation heretofore had authority to issue was Fifty Million (50,000,000)
shares, having a par value of One Mill ($.001) per share, all of which shares
were of one class and were designated Common Stock.
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(b)The total number of authorized shares of all classes of stock
of the Corporation as increased, and the number and par value of the shares of
each class, are as follows:
One Hundred Million (100,000,000) shares of capital stock,
consisting of Seventy Million (70,000,000) shares of Common Stock,
having a par value of One Mill ($.001) per share, Ten Million
(10,000,000) shares of Class A Common Stock, having a par value of One
Mill ($.001) per share, and Twenty Million (20,000,000) shares of
Series A Preferred Stock, having a par value of One Mill ($.001) per
share.
(c)The aggregate par value of all shares of all classes of stock
of the Corporation heretofore authorized was Fifty Thousand Dollars ($50,000).
The aggregate par value of all authorized shares of all classes of stock as
amended by the Articles of Amendment and Restatement is One Hundred Thousand
Dollars ($100,000). These Articles of Amendment and Restatement have the
effect of increasing the aggregate par value of all shares of all classes of
stock of the Corporation by Fifty Thousand Dollars ($50,000).
SEVENTH: A description, as amended, of each class of stock which the
Corporation is authorized to issue, including the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, is set forth in Article
IV of the Charter of the Corporation, as set forth herein.
IN WITNESS WHEREOF, eSylvan, Inc. has caused these Articles to be
signed in its name and on its behalf by its President and attested by its
Secretary as of the 14th day of August 2000.
THE UNDERSIGNED, President of eSylvan, Inc., acknowledges these
Articles of Amendment and Restatement to be the corporate act of the
Corporation and states that, to the best of his knowledge, information and
belief, the matters and facts set forth herein with respect to the
authorization and approval hereof are true in all material respects and that
this statement is made under the penalties of perjury.
ATTEST: eSYLVAN, INC.
/S/ ROBERT ZENTZ By: /s/ DAVID GRAVES (SEAL)
------------------------------------- ----------------------------------
Robert Zentz, Secretary David Graves, President
<TABLE>
<CAPTION>
---
<S> <C>
</TABLE>
I hereby accept my designation as resident agent of eSylvan, Inc.
/S/ ROBERT ZENTZ
-------------------------------------
Robert Zentz
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ANNEX D
[ ], 2000
Board of Directors of eSylvan, Inc.
34 Market Place
Suite 323
Baltimore, MD 21202
Members of the Board:
You have requested that we provide a valuation report regarding the value
of certain shares of Class A common stock, par value $.001 per share (the
"Offered Shares"), of eSylvan, Inc. ("eSylvan") to be offered (the "Offering")
by eSylvan to certain holders of franchise license agreements and/or area
development agreements ("franchisees") with Sylvan Learning Systems, Inc.
("Sylvan Learning Systems") as such transaction is more fully described in
eSylvan's registration statement on Form S-1 filed with the Securities and
Exchange Commission on July 18, 2000, as amended (the "Form S-1"). Sylvan
Learning Systems and eSylvan have agreed to enter into certain agreements to
facilitate the development and rollout of eSylvan's proprietary programs,
systems and teaching and management techniques (the "Proposed Transaction").
In rendering our report we have, among other things:
(i) reviewed and analyzed publicly available financial data and stock
market performance data of certain publicly traded companies
engaged in the on-line education industry and with operations that
we deemed comparable to eSylvan's business;
(ii) reviewed certain operating and financial information, including
projections and budgets, provided to us by eSylvan with respect to
the operations and prospects of eSylvan's business;
(iii) performed a discounted cash flow analysis of eSylvan based on
projections and other financial information provided to us by
eSylvan;
(iv) reviewed a draft of the Form S-1 dated September 25, 2000;
(v) reviewed certain documentation related to the Proposed Transaction
and the Offering, including, without limitation, certain transfer
restrictions and redemption rights described in the Form S-1;
(vi) reviewed certain agreements to be entered into between eSylvan and
Sylvan Learning Systems, as described in the Form S-1;
(vii) reviewed the material terms of prior and contemporaneous sales of
eSylvan securities;
(viii) met with certain members of management of eSylvan to discuss its
business, prospects and financial projections; and
(ix) conducted such other studies, analyses, inquiries and
investigations as we deemed necessary for the purposes of this
report.
In analyzing the data of comparable public companies, we reviewed
transactions of several public companies engaged in the on-line education
industry. We believe that these companies are comparable to eSylvan because
they provide educational services over the Internet and have revenues that are
relatively similar in size as compared to eSylvan's projected revenues.
However, no individual company or business used in our analysis as a
comparison is identical to eSylvan. Accordingly, an analysis of comparable
companies and businesses is not entirely mathematical; rather it involves
complex considerations and adjustments concerning differences in financial and
operating characteristics and other factors that could affect the public
trading and other values of the comparable companies which we used in our
comparison.
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Board of Directors of eSylvan, Inc.
, 2000
Page 2
In connection with our review, we have assumed and relied upon the accuracy
and completeness of all financial and other information supplied to us by the
management of eSylvan, or publicly available, and we have not independently
verified such information. We also relied upon the management of eSylvan as to
the reasonableness of the financial projections (and the assumptions and bases
described therein) provided to us, and assumed that such projections were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of management as to the future operating performance of eSylvan.
We have no reason to believe that the bases on which the projections were
based are other than reasonable. eSylvan does not publicly disclose internal
management projections of the type provided to us. Such projections were not
prepared with the expectation of public disclosure. The projections were based
on numerous variables and assumptions that are inherently uncertain, including
without limitation, factors related to general economic and competitive
conditions. Accordingly, actual results could vary significantly from those
set forth in such projections.
We have not been requested to make, and we have not made, an independent
appraisal or evaluation of any assets of eSylvan and have not been furnished
with any such appraisals or valuations. The estimates of values of companies
and assets used in the course of developing our report are not appraisals, and
should not be misconstrued as appraisals, nor should such estimates be
expected to reflect the prices at which companies and assets may actually be
sold. Because such estimates are inherently subject to uncertainty, we assume
no responsibility for their accuracy.
In addition, we have not been requested to make, and we have not made, any
appraisal or evaluation of the value of any services to be provided by or any
other obligations of franchisees of Sylvan Learning Systems under the
participation agreements or any other agreements to be entered into by and
between such franchisees and eSylvan or any other assets or rights held by any
franchisees of Sylvan Learning Systems, whether or not such franchisees
participate in the Offering, which may be exchanged by the participating
franchisees as consideration for receiving the Offered Shares, as described in
the Form S-1. Accordingly, our report does not address either (1) the
consideration given by participating Sylvan Learning Systems franchisees in
exchange for the Offered Shares or (2) the merits of entering into, or the
fairness of, the Proposed Transaction, and is not intended to be and does not
constitute a recommendation to any franchisee of Sylvan Learning Systems as to
whether such franchisee should or should not participate in the Offering.
We have acted as financial advisor to eSylvan and will receive a fee for
our services, which include the delivery of this report. We have not provided,
and this report does not constitute, any advice or comment to the board of
directors of eSylvan as to the underlying business decision to effect the
Proposed Transaction or the Offering. We have in the past provided certain
investment banking services to Sylvan Learning Systems, for which we received
customary fees.
It is understood that this report is directed only to the board of
directors of eSylvan and may not be relied upon by any other person or entity,
except those franchisees of Sylvan Learning Systems who participate in the
Offering, who may rely on this report only for the limited purpose of
assisting them, in consultation with their tax advisors, in determining the
value of the Offered Shares for tax purposes and may not be relied upon by
such franchisees for any other purpose. Further, no other person or entity,
including shareholders of Sylvan Learning Systems, franchisees of Sylvan
Learning Systems who elect not to participate in the Offering and subsequent
purchasers of the Offered Shares, may rely on this report, or any advice or
assistance given by us, for any purpose. Other than as set forth below with
respect to the Form S-1 and any amendment thereof, this report is not to be
quoted or referred to, in whole or in part, in any registration statement,
prospectus or proxy statement, or in any other document used in connection
with any offering or sale of securities, nor shall this report be used for any
other purposes, without our prior written consent. We are not passing upon the
tax consequences to eSylvan, Sylvan Learning Systems or the franchisees of
Sylvan Learning Systems that may arise from the
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Board of Directors of eSylvan, Inc.
, 2000
Page 3
Proposed Transaction or the Offering. No assurance can be given that the
United States Internal Revenue Service or any other tax authority will agree
with the conclusions of our report. Franchisees of Sylvan Learning Systems
should consult with their own tax and other advisors regarding an investment
in, and the value for tax purposes and otherwise of, the Offered Shares.
Based upon and subject to the foregoing, it is our view that, as of the
date of this letter, the value of the Offered Shares is [ ] per share.
We acknowledge that our report will be included as an attachment or annex
to the prospectus that forms a part of the Form S-1 and referred to in the
sections entitled "The Offering--Certain Income Tax Consequences" and
"Experts" contained in the prospectus that forms a part of the Form S-1. We
consent to the reference to our firm under the caption "Experts" in the
prospectus that forms a part of the Form S-1 and to the inclusion of this
report as an attachment or annex to the prospectus that forms a part of the
Form S-1.
Our report is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of , 2000.
It is understood that subsequent developments may affect the conclusions
reached in this report and that we do not have any obligation to update,
revise or reaffirm this report.
Very truly yours,
BY:
[ ]
Managing Director
D-3
<PAGE>
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No dealer, salesperson or any other person is authorized to give any infor-
mation 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 com-
pany 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 so-
licitation is not authorized or is unlawful. The delivery of this prospectus
shall not, under any circumstances, create any implication that the informa-
tion herein is correct as of any time subsequent to the date of this prospec-
tus.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
The Offering............................................................. 16
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Selected Financial Data.................................................. 25
Management's Discussion and Analysis of Financial Condition and Plan of
Operation............................................................... 26
Business................................................................. 28
Management............................................................... 38
Related Party Transactions............................................... 41
Principal Stockholders................................................... 43
Description of Capital Stock............................................. 45
Shares Eligible for Future Sale.......................................... 50
Plan of Distribution..................................................... 51
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 53
Index to Financial Statements............................................ F-1
Annex A Subscription Agreement........................................... A-1
Annex B Participation Agreement.......................................... B-1
Annex C Charter of eSylvan, Inc.......................................... C-1
Annex D Tax Valuation Report............................................. D-1
</TABLE>
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3,000,000 Shares
eSylvan, Inc.
Class A Convertible Common Stock
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PROSPECTUS
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2000
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<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:
<TABLE>
<S> <C>
SEC registration fee............................................ $ 695
Printing and engraving expenses................................. 130,000
Accounting fees and expenses.................................... 175,000
Legal fees and expenses (including Blue Sky and Canadian
compliance).................................................... 460,000
Investment banking fees and expenses............................ 320,000
----------
Total......................................................... $1,085,695
==========
</TABLE>
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 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.
1
<PAGE>
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 14,000,000 shares of our common stock to Sylvan
Learning Systems, Inc. (of which 285,714 shares of our common stock were
directed 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 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.
2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
The following exhibits are filed as part of the registration statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 (3)
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)
10.9 Services Agreement by and between the Company and Sylvan Learning
Systems, Inc. dated June 30, 2000 (1)
10.10 Program Agreement by and between Sylvan Learning Systems, Inc. and
Sylvan Franchise Owners Association, Inc. dated June 30, 2000 (1)
10.11 Written Commitment to provide funding of Sylvan Learning Systems, Inc.
and Sylvan Ventures, LLC dated as of July 14, 2000 (3)
21 Subsidiaries of the Company (2)
23.1 Consent of Ernst & Young, LLP (1)
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 (1)
</TABLE>
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(1) Filed herewith.
(2) Filed previously.
(3) To be filed by amendment.
3
<PAGE>
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-effec-
tive 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 securi-
ties 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.
(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.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused pre-effective amendment no. 1 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Baltimore, state of Maryland, on September 25, 2000.
eSylvan, Inc.
/s/ David Graves
By: _________________________________
David Graves
President
Pursuant to the requirements of the Securities Act, pre-effective amendment
no. 1 to 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>
/s/ David Graves President (Principal September 25, 2000
______________________________________ Executive Officer)
David Graves
/s/ B. Lee McGee Treasurer and Chief September 25, 2000
______________________________________ Financial Officer
B. Lee McGee (Principal Financial
Officer and Principal
Accounting Officer)
The Entire Board of Directors
-----------------------------
Christopher Hoehn-Saric Peter Cohen
B. Lee McGee Robert Zentz
/s/ David Graves September 25, 2000
______________________________________
David Graves
Attorney-in-fact
</TABLE>
5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
3.1 Articles of Amendment and Restatement (1)
3.2 By-laws (1)
4.1 Form of common stock certificate (1)
10.1 eSylvan, Inc. 2000 Omnibus Stock Plan (1)
10.2 Facilities 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)
10.9 Services Agreement by and between the Company and Sylvan
Learning Systems, Inc. dated June 30, 2000 (1)
10.10 Program Agreement by and between Sylvan Learning Systems, Inc.
and Sylvan Franchise Owners Association, Inc. dated June 30,
2000 (1)
10.11 Written Commitment to provide funding of Sylvan Learning
Systems, Inc. and Sylvan Ventures, LLC dated as of July 14,
2000 (3)
21 Subsidiaries of the Company (2)
23.1 Consent of Ernst & Young, LLP
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
</TABLE>
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(1) Filed herewith.
(2) Filed previously.
(3) To be filed by amendment.
