<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997
================================================================================
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1492296
(State or other jurisdiction (Primary SIC Code Number) of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 LANCASTER STREET
BALTIMORE, MARYLAND 21202
410-843-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
COPY TO:
DOUGLAS L. BECKER RICHARD C. TILGHMAN, JR., ESQUIRE
SYLVAN LEARNING SYSTEMS, INC. PIPER & MARBURY L.L.P.
1000 LANCASTER STREET 36 SOUTH CHARLES STREET
BALTIMORE, MARYLAND 21202 BALTIMORE, MARYLAND 21201
410-843-8000 410 539-2530
(Name, address, including zip code, and telephone number, including area code,
of agents for service)
_______________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.
IF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH
GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX. !
______________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AMOUNT OF
SHARES TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT REGISTRATION FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK,
$.01 PAR VALUE, including
the attached preferred
stock purchase rights.... 24,516,622 $ 28.00 $ 208,020
========================================================================================
</TABLE>
(1) CALCULATED IN ACCORDANCE WITH RULE 457(O) OF THE SECURITIES ACT OF 1933, AS
AMENDED.
______________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SYLVAN LEARNING SYSTEMS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-4 LOCATION IN
ITEM NUMBER AND HEADING PROXY STATEMENT/PROSPECTUS
----------------------- --------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover
Prospectus............................................ Page
3. Risk Factors, Ratio of Earnings to Fixed Charges, Outside Front Cover Page; Summary of the
and Other Information................................. Transaction; Investment Considerations;
Proposed Merger of Sylvan and NEC; Voting
Information; Business of Sylvan; Business of
NEC; Comparative Rights of Stockholders --
Dissenters' Rights
4. Terms of Transaction.................................... Summary of the Transaction; Proposed Merger
of Sylvan and NEC; Description of Sylvan
Capital Stock; Comparative Rights of
Stockholders
5. Pro Forma Financial Information......................... Historical and Pro Forma Combined Selected
Financial Information
6. Material Contacts With the Company Being Acquired....... Proposed Merger of Sylvan and NEC --
Background of the Merger
7. Additional Information Required For Reoffering by
Persons and Parties Deemed to be Underwriters......... Not Applicable
8. Interests of Named Experts and Counsel.................. Experts; Legal Matters
9. Disclosure of Commission Position on Indemnification For Comparative Rights of Stockholders --
Securities Act Liabilities............................ Indemnification
10. Information With Respect to S-3 Registrants............. Business of Sylvan
11. Incorporation of Certain Information by Reference....... Incorporation of Certain Documents by Reference
12. Information With Respect to S-2 or S-3 Registrants...... Not Applicable
13. Incorporation of Certain Information by Reference....... Not Applicable
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants................................ Not Applicable
15. Information With Respect to S-3 Companies............... Business of NEC
16. Information With Respect to S-2 or S-3 Companies........ Not Applicable
17. Information With Respect to Companies Other Than
S-2 or S-3 Companies.................................. Not Applicable
18. Information if Proxies, Consents or Authorizations
Are to be Solicited.................................. Voting Information
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer...... Not Applicable
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
[_] Confidential For Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
Joint Filing By:
SYLVAN LEARNING SYSTEMS, INC. (FILE NO. 0-22844)
NATIONAL EDUCATION CORPORATION (FILE NO. 1-6981)
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[_] No Fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
====================================================================================================================================
PER UNIT PRICE OR OTHER
UNDERLYING VALUE OF
AGGREGATE NUMBER OF TRANSACTION COMPLETED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO SECURITIES TO WHICH PURSUANT TO EXCHANGE ACT AGGREGATE VALUE OF
WHICH TRANSACTION APPLIES TRANSACTION APPLIES (1) RULE 0-11 (2) TRANSACTION (2) TOTAL FEE PAID
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sylvan Learning Systems, Inc. Common 24,516,622 $28.00 $686,465,416 $208,020
Stock, $.01 par value, including the shares
attached preferred stock purchase rights
====================================================================================================================================
</TABLE>
(1) The estimated number of shares of Sylvan Learning Systems, Inc. ("Sylvan")
Common Stock to which the Proxy Statement relates.
(2) Estimated pursuant to Rule 0-11(c)(1) and 0-11(a)(4) under the Exchange Act
solely for the purpose of calculating the filing fee, based on the average
of the high and low sale prices for shares of Sylvan Common Stock on the
Nasdaq Stock Market on April , 1997.
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $_____________
________________________________________________________________________________
(2) Form Schedule or Registration Statement No.: Schedule 14A
________________________________________________________________________________
(3) Filing Party: Sylvan Learning Systems, Inc.
National Education Corporation
________________________________________________________________________________
(4) Date Filed: ________________
________________________________________________________________________________
<PAGE>
[LETTERHEAD OF SYLVAN LEARNING SYSTEMS, INC.]
April , 1997
Dear Stockholder:
You are cordially invited to attend an Annual Meeting of Stockholders (the
"Sylvan Annual Meeting") of Sylvan Learning Systems, Inc. ("Sylvan") to be held
at 10:00 am., local time, on June 26, 1997 at 1000 Lancaster Street, Baltimore,
Maryland 21202. At the Sylvan Annual Meeting, you will be asked to consider and
vote upon proposals to: (i) approve the issuance by Sylvan of up to a number of
shares of Sylvan Common Stock equal to one fewer than 50% of the total number of
shares of Sylvan Common Stock to be outstanding immediately following the merger
of [Newco, Inc.], a Delaware corporation and a wholly-owned subsidiary of Sylvan
("Merger Sub") with and into National Education Corporation, a Delaware
corporation ("NEC") (the "Merger") (24,516,622 shares based on the number of
shares of Sylvan Common Stock outstanding on March 17, 1997) (the "Share
Issuance"), pursuant to the Agreement and Plan of Reorganization dated as of
March 12, 1997 (the "Merger Agreement") by and between Sylvan and NEC; (ii)
amend Sylvan's Charter to reduce the term served by directors of Sylvan from
three years to one year and to eliminate separate classes of Sylvan directors
(the "Directors Amendment"); (iii) amend Sylvan's Charter to increase the number
of authorized shares of Sylvan Common Stock from 40,000,000 shares to 90,000,000
shares (the "Common Shares Amendment"); (iv) amend Sylvan's Charter to increase
from 250,000 shares to 400,000 shares the number of shares of Preferred Stock of
Sylvan, $.01 par value per share, which are designated as Junior Participating
Preferred Stock (the "Preferred Shares Amendment" and, together with the
Directors Amendment and the Common Shares Amendment, the "Charter Amendments");
(v) amend Sylvan's Amended and Restated 1993 Stock Option Plan (the "1993 Plan")
to provide for an increase of 2,575,000 shares in the total number of shares of
Sylvan Common Stock currently authorized for issuance under the 1993 Plan (which
would increase the total number of shares authorized for issuance pursuant to
the 1993 Plan from 2,625,000 to 5,200,000) (the "1993 Plan Amendment"); (vi)
amend Sylvan's 1996 Senior Management Stock Option Plan (the "Management Plan")
to provide for an increase of 1,000,000 shares in the total number of shares of
Sylvan Common Stock currently authorized for issuance under the Management Plan
(which would increase the total number of shares authorized for issuance
pursuant to the Management Plan from 2,250,000 to 3,250,000) (the "Management
Plan Amendment" and, together with the 1993 Plan Amendment, the "Plan
Amendments"); (vii) elect to the Sylvan Board of Directors, effective upon the
consummation of the Merger, each of Sam Yau, Richard C. Blum, David C. Jones,
and Michael R. Klein (each of whom is currently an NEC director), and R.
Christopher Hoehn-Saric, Douglas L. Becker, R. William Pollock, Nancy A. Cole,
Donald V. Berlanti and J. Phillip Samper (collectively, the "Merger Nominees"),
to serve until the next Annual Meeting of Sylvan stockholders and until their
successors are elected and qualify; (viii) elect to the Sylvan Board of
Directors, in the event the Merger is terminated, or the Merger Nominees are not
elected, each of R. Christopher Hoehn-Saric, Douglas L. Becker, J. Phillip
Samper, Donald V. Berlanti, Nancy A. Cole, James H. McGuire and R. William
Pollock (the "Contingent Nominees" and, together with the Merger Nominees, the
"Sylvan Board Nominees"), to serve until the next Annual Meeting of Sylvan
stockholders and until their successors are elected and qualify; (ix) ratify and
confirm the selection of Ernst & Young LLP as Sylvan's independent auditors for
the year ending December 31, 1997 (the "Auditor Confirmation"); and (x) transact
such other matters as may properly come before the Sylvan stockholders at the
Sylvan Annual Meeting. Approval of the Share Issuance by Sylvan stockholders is
a condition to consummation of the Merger. Only holders of record of Sylvan
Common Stock at the close of business on May 9, 1997 (the "Sylvan Record Date")
are entitled to notice of, and to vote at, the Sylvan Annual Meeting or any
adjournment or postponement thereof. At the close of business on the Sylvan
Record Date, ____________ shares of Sylvan Common Stock were outstanding (the
"Sylvan Record Shares"), which constituted the only outstanding voting
securities of Sylvan.
In the Merger, among other things, each outstanding share of NEC Common
Stock, other than NEC Common Stock held by NEC or held by Sylvan, Merger Sub or
any other wholly-owned subsidiary of Sylvan, will be converted into the right to
receive 0.58 of a share of Sylvan Common Stock (the "Initial Conversion Ratio");
provided, however, that the Initial Conversion Ratio may be adjusted upward in
the event (i) the average closing
<PAGE>
price of Sylvan Common Stock over a period of ten (10) trading days immediately
preceding the consummation of the Merger (the "Average Share Price") is less
than $29.86 per share (the "Trigger Price"), (ii) NEC has exercised its option
(a "Termination Option") to terminate the Merger Agreement because the Average
Share Price is less than the Trigger Price and (iii) Sylvan has elected to
exercise its option (the "Adjustment Option") to adjust the Initial Conversion
Ratio to equal the quotient of (A) the Trigger Price multiplied by the Initial
Conversion Ratio divided by (B) the Average Share Price (the "Adjusted
------- --
Conversion Ratio"). Assuming the number of shares of Sylvan Common Stock
outstanding on the Closing Date is no greater than the number of shares of
Sylvan Common Stock outstanding on March 17, 1997, Sylvan will not, in any
event, exercise its Adjustment Option to increase the Adjusted Conversion Ratio
above 0.5945. Approval of the Share Issuance by Sylvan stockholders is a
condition precedent to consummation of the Merger. Upon consummation of the
Merger, NEC will become a wholly-owned subsidiary of Sylvan. If the Sylvan
stockholders fail to approve the Share Issuance at the Sylvan Annual Meeting,
Sylvan will be required to pay NEC a $10 million termination fee unless NEC were
to otherwise give Sylvan cause to terminate the Merger.
The Sylvan Board of Directors has carefully reviewed and considered the
terms and conditions of the proposed Merger, as well as a number of other
factors, including the opinion of Alex. Brown & Sons Incorporated ("Alex.
Brown") to the effect that, from a financial point of view, the Initial
Conversion Ratio in the Merger is fair to Sylvan. The full text of the written
opinion of Alex. Brown, which sets forth a description of the matters
considered, assumptions made and limits on review undertaken by Alex. Brown, is
attached to the accompanying Joint Proxy Statement/Prospectus as Annex II. The
Sylvan Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Merger, the Merger Agreement, the Share Issuance and
the other transactions contemplated thereby. THE SYLVAN BOARD OF DIRECTORS HAS
APPROVED THE SHARE ISSUANCE PURSUANT TO THE MERGER AGREEMENT AND THE OTHER
TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS THAT SYLVAN STOCKHOLDERS VOTE
FOR APPROVAL OF THE (I) SHARE ISSUANCE, (II) CHARTER AMENDMENTS AND (III) PLAN
AMENDMENTS PROPOSALS AND FOR ELECTION OF THE MERGER NOMINEES.
THE SYLVAN BOARD OF DIRECTORS ALSO RECOMMENDS THAT SYLVAN STOCKHOLDERS VOTE
FOR (I) ELECTION OF THE CONTINGENT NOMINEES AND (II) AUDITOR CONFIRMATION
PROPOSALS.
The accompanying Notice of Annual Meeting and Joint Proxy
Statement/Prospectus more fully describe the matters to be acted on at the
Sylvan Annual Meeting and include other information about Sylvan and NEC.
Please give this information your careful attention.
WHETHER OR NOT YOU PLAN TO ATTEND THE SYLVAN ANNUAL MEETING IN PERSON, IT
IS IMPORTANT THAT YOUR SHARES OF SYLVAN COMMON STOCK BE REPRESENTED AT THE
SYLVAN ANNUAL MEETING. PLEASE DATE AND SIGN YOUR PROXY CARD AND RETURN IT IN
THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. THIS WILL NOT PREVENT YOU FROM
ATTENDING THE SYLVAN ANNUAL MEETING IN PERSON.
Very truly yours,
SYLVAN LEARNING SYSTEMS, INC.
___________________________________________________________
R. Christopher Hoehn-Saric
Chairman of the Board and Co-Chief Executive Officer
___________________________________________________________
Douglas L. Becker
Co-Chief Executive Officer, President and Secretary
<PAGE>
[LETTERHEAD OF SYLVAN LEARNING SYSTEMS, INC.]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF SYLVAN LEARNING SYSTEMS, INC.:
An Annual Meeting of Stockholders (the "Sylvan Annual Meeting") of Sylvan
Learning Systems, Inc. ("Sylvan") will be held at 10:00 a.m., local time, on
June 26, 1997, at 1000 Lancaster Street, Baltimore, Maryland 21202 to consider
and vote on proposals to:
(i) approve the issuance by Sylvan of up to a number of shares of
Sylvan Common Stock equal to one fewer than 50% of the total
number of shares of Sylvan Common Stock to be outstanding
immediately following the merger of [Newco, Inc.], a Delaware
corporation and a wholly-owned subsidiary of Sylvan ("Merger
Sub") with and into National Education Corporation ("NEC") (the
"Merger") (24,516,522 shares based on the number of shares of
Sylvan Common Stock outstanding on March 17, 1997) (the "Share
Issuance"), pursuant to the Agreement and Plan of Reorganization
dated as of March 12, 1997 (the "Merger Agreement") by and
between Sylvan and NEC;
(ii) amend Sylvan's Charter to reduce the term served by Sylvan
directors from three years to one year and to eliminate separate
classes of Sylvan directors (the "Directors Amendment");
(iii) amend Sylvan's Charter to increase the number of authorized
shares of Sylvan Common Stock from 40,000,000 shares to
90,000,000 shares (the "Common Shares Amendment");
(iv) amend Sylvan's Charter to increase from 250,000 shares to 400,000
shares the number of shares of Preferred Stock of Sylvan, $.01
par value per share, which are designated as Junior Participating
Preferred Stock (the "Preferred Shares Amendment" and, together
with the Directors Amendment and the Common Shares Amendment, the
"Charter Amendments");
(v) amend Sylvan's Amended and Restated 1993 Stock Option Plan (the
"1993 Plan") to provide for an increase of 2,575,000 shares in
the total number of shares of Sylvan Common Stock currently
authorized for issuance under the 1993 Plan (which would increase
the total number of shares authorized for issuance pursuant to
the 1993 Plan from 2,625,000 to 5,200,000) (the "1993 Plan
Amendment");
(vi) amend Sylvan's 1996 Senior Management Stock Option Plan (the
"Management Plan") to provide for an increase of 1,000,000 shares
in the total number of shares of Sylvan Common Stock currently
authorized for issuance under the Management Plan (which would
increase the total number of shares authorized for issuance
pursuant to the Management Plan from 2,250,000 to 3,250,000) (the
"Management Plan Amendment" and, together with the 1993 Plan
Amendment, the "Plan Amendments");
(vii) elect to the Sylvan Board of Directors, effective upon the
consummation of the Merger, each of Sam Yau, Richard C. Blum,
David C. Jones, and Michael R. Klein (each of whom is currently
an NEC director), and R. Christopher Hoehn-Saric, Douglas L.
Becker, R. William Pollock, Nancy A. Cole, Donald V. Berlanti and
J. Phillip Samper (collectively, the "Merger Nominees"), to serve
until the next Annual Meeting of Sylvan stockholders and until
their successors are elected and qualify;
<PAGE>
(viii) to elect to the Sylvan Board of Directors, in the event the
Merger is terminated or the Merger Nominees are not elected, each
of R. Christopher Hoehn-Saric, Douglas L. Becker, J. Phillip
Samper, Donald V. Berlanti, Nancy A. Cole, James H. McGuire and
R. William Pollock (the "Contingent Nominees" and, together with
the Merger Nominees, the "Sylvan Board Nominees"), to serve until
the next Annual Meeting of Sylvan stockholders and until their
successors are elected and qualify;
(ix) ratify and confirm the selection of Ernst & Young LLP as Sylvan's
independent auditors for the year ending December 31, 1997 (the
"Auditor Confirmation"); and
(x) transact such other business as may properly come before the
Sylvan Annual Meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on May 9, 1997, the
record date set for the Sylvan Annual Meeting, are entitled to notice of, and to
vote at, the Sylvan Annual Meeting or any adjournment or postponement thereof.
Sylvan stockholders will not be entitled to objecting stockholders' appraisal
rights in connection with the Share Issuance or the other matters to be
considered at the Sylvan Annual Meeting.
By Order of the Board of Directors,
________________________________________________
Douglas L. Becker
Secretary
April __, 1997
YOU ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN
IT IN THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE
YOUR PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS AT ANY TIME BEFORE THE PROXY HAS BEEN VOTED
AT THE SYLVAN ANNUAL MEETING.
<PAGE>
[LETTERHEAD OF NATIONAL EDUCATION CORPORATION]
April __, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"NEC Special Meeting") of National Education Corporation ("NEC") to be held at
10:00 am., local time, on June 25, 1997, at the ________. At the NEC Special
Meeting, you will be asked to consider and vote upon a proposal (the "Merger
Proposal") to approve the merger of [Newco, Inc.], a Delaware corporation
("Merger Sub"), a wholly-owned subsidiary of Sylvan Learning Systems, Inc., a
Maryland corporation ("Sylvan"), with and into NEC (the "Merger") pursuant to
the Agreement and Plan of Reorganization dated as of March 12, 1997, by and
between Sylvan and NEC (the "Merger Agreement").
In the Merger, among other things, each outstanding share of NEC Common
Stock (other than NEC Common Stock held by NEC or held by Sylvan, Merger Sub or
any other wholly-owned subsidiary of Sylvan) will be converted into the right to
receive 0.58 of a share of Sylvan Common Stock (the "Initial Conversion Ratio");
provided, however, that the Initial Conversion Ratio may be adjusted upward in
the event (i) the Average Share Price is less than the Trigger Price, (ii) NEC
has exercised its option (a "Termination Option") to terminate the Merger
Agreement because the Average Share Price is less than the Trigger Price and
(iii) Sylvan has elected to exercise its option (the "Adjustment Option") to
adjust the Initial Conversion Ratio to equal the quotient of (A) the Trigger
Price multiplied by the Initial Conversion Ratio divided by (B) the Average
------- --
Share Price (the "Adjusted Conversion Ratio"). Assuming the number of shares of
Sylvan Common Stock outstanding on the Closing Date is no greater than the
number of shares of Sylvan Common Stock outstanding on March 17, 1997, Sylvan
will not, in any event, exercise its Adjustment Option to increase the Adjusted
Conversion Ratio above 0.5945, a ratio above which NEC would own greater than
50% of the outstanding stock of the combined company. Approval of the Merger
Proposal by NEC stockholders is a condition to consummation of the Merger. Upon
consummation of the Merger, NEC will become a wholly-owned subsidiary of Sylvan.
If the NEC Stockholders do not approve the Merger Proposal at the NEC Special
Meeting, NEC will be required to pay Sylvan a $10 million termination fee unless
Sylvan were to otherwise give NEC cause to terminate the Merger.
The NEC Board of Directors has received the written opinion of BZW, the
investment banking division of Barclays Bank PLC ("BZW") to the effect that the
consideration to be received by holders of NEC Common Stock in the Merger is
fair to stockholders of NEC other than Sylvan, Merger Sub or any other wholly-
owned subsidiary of Sylvan. The full text of the written opinion of BZW, which
sets forth a description of the matters considered, assumptions made and limits
on review undertaken by BZW, is attached to the accompanying Joint Proxy
Statement/Prospectus as Annex III. The Board of Directors of NEC has carefully
reviewed and considered the terms and conditions of the proposed Merger, the
Merger Agreement and the other transactions contemplated thereby. THE NEC BOARD
OF DIRECTORS HAS APPROVED THE MERGER PURSUANT TO THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS THAT NEC STOCKHOLDERS VOTE FOR
APPROVAL OF THE MERGER PROPOSAL.
The accompanying Notice of Special Meeting and Joint Proxy
Statement/Prospectus more fully describe the matters to be acted on at the NEC
Special Meeting and include other information about Sylvan and NEC. Please give
this information your careful attention.
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THE NEC SPECIAL MEETING IN PERSON, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE NEC SPECIAL MEETING. PLEASE
DATE AND SIGN YOUR PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS
POSSIBLE. THIS WILL NOT PREVENT YOU FROM ATTENDING THE NEC SPECIAL MEETING IN
PERSON.
Very truly yours,
NATIONAL EDUCATION CORPORATION
________________________________________________
Sam Yau
President and Chief Executive Officer
<PAGE>
[LETTERHEAD OF NATIONAL EDUCATION CORPORATION]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF NATIONAL EDUCATION CORPORATION
A Special Meeting of Stockholders (the "NEC Special Meeting") of National
Education Corporation ("NEC") will be held at 10:00 a.m., local time, on June
25, 1997, at ________________________________ for the following purpose:
To consider and vote upon a proposal (the "Merger Proposal") to
approve the merger of [Newco, Inc.], a Delaware corporation ("Merger
Sub"), a wholly-owned subsidiary of Sylvan Learning Systems, Inc., a
Maryland corporation ("Sylvan"), with and into NEC (the "Merger")
pursuant to the Agreement and Plan of Reorganization dated as of March
12, 1997, by and between Sylvan and NEC (the "Merger Agreement") and
the transactions contemplated thereby. The Merger Proposal, the Merger
and the Merger Agreement are more fully described in the accompanying
Joint Proxy Statement/Prospectus and a copy of the Merger Agreement is
attached as Annex I thereto.
Only stockholders of record at the close of business on May 9, 1997, the
record date set for the NEC Special Meeting, are entitled to notice of, and to
vote at, the NEC Special Meeting or any adjournment or postponement thereof.
NEC stockholders will not be entitled to dissenters' appraisal rights in
connection with the Merger Proposal.
By Order of the Board of Directors,
________________________________________________
Philip C. Maynard
Secretary
_______________, 1997
YOU ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
IN THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. YOU MAY REVOKE YOUR PROXY IN
THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT ANY
TIME BEFORE THE PROXY HAS BEEN VOTED AT THE NEC SPECIAL MEETING.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SYLVAN LEARNING SYSTEMS, INC.
NATIONAL EDUCATION CORPORATION
JOINT PROXY STATEMENT
__________________________________________________
SYLVAN LEARNING SYSTEMS, INC.
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Sylvan Learning Systems, Inc. ("Sylvan") in connection with the solicitation of
proxies by the Sylvan Board of Directors of Sylvan from holders of shares of
common stock, par value $.01 per share, including the attached preferred stock
purchase rights ("Sylvan Common Stock"), for use at the 1997 Annual Meeting of
Sylvan stockholders (the "Sylvan Annual Meeting") to be held to consider and
vote upon proposals to:
(i) approve the issuance by Sylvan of up to a number of shares of Sylvan
Common Stock equal to one fewer than 50% of the total number of
shares of Sylvan Common Stock to be outstanding immediately
following the merger of [Newco, Inc.], a Delaware corporation and a
wholly-owned subsidiary of Sylvan ("Merger Sub") with and into
National Education Corporation, a Delaware corporation ("NEC") (the
"Merger") (24,516,622 shares based on the number of shares of Sylvan
Common Stock outstanding on March 17, 1997) (the "Share Issuance"),
pursuant to the Agreement and Plan of Reorganization dated as of
March 12, 1997 (the "Merger Agreement") by and between Sylvan and
NEC, which provides for the merger of [Newco, Inc.], a Delaware
corporation and a wholly-owned subsidiary of Sylvan ("Merger Sub")
with and into NEC (the "Merger");
(ii) amend Sylvan's Charter to reduce the term served by Sylvan directors
from three years to one year and to eliminate separate classes of
Sylvan directors (the "Directors Amendment");
(iii) amend Sylvan's Charter to increase the number of authorized shares
of Sylvan Common Stock from 40,000,000 shares to 90,000,000 shares
(the "Common Shares Amendment");
(iv) amend Sylvan's Charter to increase from 250,000 shares to 400,000
shares the number of shares of Preferred Stock of Sylvan, $.01 par
value per share, which are designated as Junior Participating
Preferred Stock (the "Preferred Shares Amendment" and, together with
the Directors Amendment and the Common Shares Amendment, the
"Charter Amendments");
(v) amend Sylvan's Amended and Restated 1993 Stock Option Plan (the
"1993 Plan") to provide for an increase of 2,575,000 shares in the
total number of shares of Sylvan Common Stock currently authorized
for issuance under the 1993 Plan (which would increase the total
number of shares authorized for issuance pursuant to the 1993 Plan
from 2,625,000 to 5,200,000) (the "1993 Plan Amendment");
<PAGE>
(vi) amend Sylvan's 1996 Senior Management Stock Option Plan (the
"Management Plan") to provide for an increase of 1,000,000 shares in
the total number of shares of Sylvan Common Stock currently
authorized for issuance under the Management Plan (which would
increase the total number of shares authorized for issuance pursuant
to the Management Plan from 2,250,000 to 3,250,000) (the "Management
Plan Amendment" and, together with the 1993 Plan Amendment, the
"Plan Amendments");
(vii) elect to the Sylvan Board of Directors, effective upon the
consummation of the Merger, each of Sam Yau, Richard C. Blum, David
C. Jones, and Michael R. Klein (each of whom is currently an NEC
director), and R. Christopher Hoehn-Saric, Douglas L. Becker, R.
William Pollock, Nancy A. Cole, Donald V. Berlanti and J. Phillip
Samper (collectively, the "Merger Nominees"), to serve until the
next Annual Meeting of Sylvan stockholders and until their
successors are elected and qualify;
(viii) elect to the Sylvan Board of Directors in the event the Merger is
terminated or the Merger Nominees are not elected, each of R.
Christopher Hoehn-Saric, Douglas L. Becker, J. Phillip Samper,
Donald V. Berlanti, Nancy A. Cole, James H. McGuire and R. William
Pollock (the "Contingent Nominees" and, together with the Merger
Nominees, the "Sylvan Board Nominees"), to serve until the next
Annual Meeting of Sylvan stockholders and until their successors are
elected and qualify;
(ix) ratify and confirm the selection of Ernst & Young LLP as Sylvan's
independent auditors for the year ending December 31, 1997 (the
"Auditor Confirmation"); and
(x) transact such other matters as may properly come before the Sylvan
stockholders at the Sylvan Annual Meeting.
Approval of the Share Issuance by Sylvan stockholders is a condition to
consummation of the Merger. See "PROPOSAL I: THE SHARE ISSUANCE AND THE
MERGER--The Merger Agreement--Conditions Precedent to the Merger." Only holders
of record of Sylvan Common Stock at the close of business on May 9, 1997 (the
"Sylvan Record Date") are entitled to notice of, and to vote at, the Sylvan
Annual Meeting or any adjournment or postponement thereof. At the close of
business on the Sylvan Record Date, ______________ shares of Sylvan Common Stock
were outstanding, which constituted the only outstanding voting securities of
Sylvan. See "INFORMATION CONCERNING THE SYLVAN ANNUAL MEETING."
This Joint Proxy Statement/Prospectus also is being furnished to the
stockholders of NEC in connection with the solicitation of proxies by the NEC
Board from holders of shares of common stock, par value $.01 per share ("NEC
Common Stock"), for use at a special meeting of stockholders of NEC (the "NEC
Special Meeting," and together with the Sylvan Annual Meeting, the "Meetings")
to be held to consider and vote upon a proposal to approve the Merger, the
Merger Agreement and the transactions contemplated thereby. UPON CONSUMMATION
OF THE MERGER, NEC WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF SYLVAN. Approval of
the Merger by NEC stockholders is a condition to consummation of the Merger.
See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--The Merger
Agreement--Conditions Precedent to the Merger." Only holders of record of NEC
Common Stock at the close of business on May 9, 1997 (the "NEC Record Date"),
are entitled to notice of, and to vote at, the NEC Special Meeting or any
adjournment or postponement thereof. At the close of business on the NEC Record
Date, _____________ shares of NEC Common Stock were outstanding, which
constituted the only outstanding voting securities of NEC. See "INFORMATION
CONCERNING THE NEC SPECIAL MEETING."
In the Merger, each outstanding share of NEC Common Stock (other than NEC
Common Stock held by NEC or held by Sylvan, Merger Sub or any other wholly-owned
subsidiary of Sylvan) will be converted into the right to receive 0.58 of a
share of Sylvan Common Stock (the "Initial Conversion Ratio"); provided,
however, that
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the Initial Conversion Ratio may be adjusted upward in the event (i) the average
closing price of Sylvan Common Stock over a period of ten (10) trading days
preceding the consummation of the Merger (the "Average Share Price") is less
than $29.86 per share (the "Trigger Price"), (ii) NEC has exercised its option
(the "Termination Option") to terminate the Merger Agreement because the Average
Share Price is less than the Trigger Price and (iii) Sylvan has elected to
exercise its option (the "Adjustment Option") to adjust the Initial Conversion
Ratio to equal the quotient of (A) the Trigger Price multiplied by the Initial
Conversion Ratio divided by (B) the Average Share Price (the "Adjusted
------- --
Conversion Ratio"). Assuming the number of shares of Sylvan Common Stock
outstanding on the Closing Date is no greater than the number of shares of
Sylvan Common Stock outstanding on March 17, 1997, Sylvan will not, in any
event, exercise its Adjustment Option to increase the Adjusted Conversion Ratio
above 0.5945. A copy of the Merger Agreement is attached to this Joint Proxy
Statement/Prospectus as Annex I and is incorporated by reference herein. See
"RISK FACTORS" BEGINNING ON PAGE 26 FOR A DISCUSSION OF CERTAIN FACTORS WHICH
SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF SYLVAN AND NEC.
In the event that either the NEC stockholders or the Sylvan stockholders do
not approve the Merger or the Share Issuance, as the case may be, the party
whose stockholders fail to approve the applicable proposal (the "Non-Approving
Party") will be required to pay a $10 million termination fee to the party whose
stockholders did approve the transaction (the "Approving Party") assuming the
Approving Party did not otherwise give the Non-Approving Party cause to
terminate the Merger Agreement. See "PROPOSAL I: THE SHARE ISSUANCE AND THE
MERGER--The Merger Agreement--Termination" and "--Termination Fee."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Sylvan with respect to the shares of Sylvan Common Stock to be issued in
exchange for all of the outstanding shares of NEC Common Stock in connection
with the Merger, as described herein. Sylvan Common Stock is listed and traded
on the Nasdaq National Market ("Nasdaq") under the symbol "SLVN". NEC Common
Stock is listed and traded on the New York Stock Exchange ("NYSE") and the
Pacific Stock Exchange ("PSE") under the symbol "NEC". This Joint Proxy
Statement/Prospectus and the accompanying forms of proxy are first being sent to
holders of Sylvan Common Stock and NEC Common Stock on or about May 20, 1997.
_______________________________________
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________________________________
The date of this Joint Proxy Statement/Prospectus is ____________, 1997.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SYLVAN OR
NEC. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION IN WHICH, OR TO OR FROM ANY PERSON TO WHOM OR FROM
WHOM, SUCH OFFER, SOLICITATION OF AN OFFER OR SOLICITATION OF A PROXY IS NOT
AUTHORIZED OR IS UNLAWFUL. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR IN THE AFFAIRS OF SYLVAN OR NEC
SINCE THE DATE HEREOF.
THE INFORMATION CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH
RESPECT TO SYLVAN AND ITS SUBSIDIARIES HAS BEEN PROVIDED BY SYLVAN. THE
INFORMATION CONTAINED (OR INCORPORATED BY REFERENCE) HEREIN WITH RESPECT TO NEC
AND ITS SUBSIDIARIES HAS BEEN PROVIDED BY NEC.
AVAILABLE INFORMATION
Sylvan and NEC are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, and, in accordance therewith, file
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "Commission"). These reports, proxy and
information statements and other information concerning Sylvan and NEC can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
should be available at the Commission's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7
World Trade Center, 13th Floor, New York, New York 10048, and copies of such
material can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
site on the World Wide Web (at http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. In addition, information filed by Sylvan
with Nasdaq may be obtained by written request to Nasdaq at 1735 K Street, N.W.,
Washington, D.C. 20006; and information filed by NEC with (i) the NYSE may be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005 and (ii) the PSE may be obtained by written request to PSE at 301 Pine
Street, San Francisco, California 94104.
Sylvan has filed with the Commission a Registration Statement on Form S-4
(including all amendments and supplements thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), and the
rules and regulations promulgated thereunder, with respect to the shares of
Sylvan Common Stock to be issued pursuant to the Merger Agreement. This Joint
Proxy Statement/Prospectus, which forms a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. Such additional information
may be obtained from the Commission's principal office in Washington, D.C.
Statements contained herein, or in any document incorporated herein by
reference, concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copies of such
documents filed as exhibits to the Registration Statement or otherwise filed
with the Commission, each such statement being qualified in its entirety by such
reference.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INCORPORATION BY REFERENCE............................................................................ x
FORWARD-LOOKING STATEMENTS............................................................................ xi
SUMMARY............................................................................................... 1
The Merger and the Companies........................................................................ 1
The Merger....................................................................................... 1
Sylvan Learning Systems, Inc..................................................................... 1
National Education Corporation................................................................... 2
Reasons for the Merger.............................................................................. 2
The Sylvan Annual Meeting........................................................................... 2
The NEC Special Meeting............................................................................. 4
Risk Factors........................................................................................ 5
Summary Historical and Pro Forma Combined Financial Information..................................... 6
The Merger.......................................................................................... 7
Charter Amendments.................................................................................. 10
Plan Amendments..................................................................................... 10
Sylvan Board Nominees............................................................................... 10
RECENT EVENTS......................................................................................... 11
Sylvan's Agreement to Acquire Inroads............................................................... 11
Harcourt Tender Offer Announcement.................................................................. 11
HISTORICAL AND PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION...................................... 12
Historical Selected Consolidated Financial Information.............................................. 12
Sylvan........................................................................................... 12
National Education Corporation................................................................... 14
Unaudited Pro Forma Condensed Combined Financial Statements......................................... 16
Comparative Per Share Data.......................................................................... 23
COMPARATIVE STOCK PRICES.............................................................................. 25
RISK FACTORS.......................................................................................... 26
Fluctuation in Value of Merger Consideration........................................................ 26
Uncertainties in Integrating Business Operations and Achieving Cost Savings......................... 26
Competition......................................................................................... 26
Foreign Exchange Risk............................................................................... 27
Proprietary Rights.................................................................................. 27
Dependence on Key Personnel......................................................................... 27
Risks Related to Sylvan's Operations................................................................ 28
Risks Related to NEC's Operations................................................................... 29
No Dividends........................................................................................ 31
Potential Effects of Certain Sylvan Anti-Takeover Provisions........................................ 31
Certain Litigation.................................................................................. 31
Conflicts of Interest............................................................................... 32
</TABLE>
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<TABLE>
<S> <C>
INFORMATION CONCERNING THE SYLVAN ANNUAL MEETING...................................................... 33
Purpose, Time and Place............................................................................ 33
Record Date; Quorum; Required Vote................................................................. 33
Proxies............................................................................................ 34
Appraisal Rights................................................................................... 35
INFORMATION CONCERNING THE NEC SPECIAL MEETING........................................................ 36
Purpose, Time and Place............................................................................ 36
Record Date; Quorum; Vote Required................................................................. 36
Proxies............................................................................................ 36
Appraisal Rights................................................................................... 37
PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER........................................................ 38
Background of the Merger........................................................................... 38
Reasons of Sylvan for the Merger; Recommendation of the Sylvan Board............................... 40
Sylvan Financial Advisor........................................................................... 41
Reasons of NEC for the Merger; Recommendation of the NEC Board..................................... 48
NEC Financial Advisor.............................................................................. 51
Certain Federal Income Tax Consequences............................................................ 55
Accounting Treatment............................................................................... 56
Appraisal Rights................................................................................... 57
Interests of Certain Persons in the Merger......................................................... 57
Regulatory Matters................................................................................. 60
NASDAQ Stock Market Listing........................................................................ 60
Delisting and Deregistration of NEC Common Shares.................................................. 60
Certain Federal Securities Laws Consequences....................................................... 60
The Merger Agreement............................................................................... 61
General.......................................................................................... 61
Conversion Shares................................................................................ 61
Exchange Procedures.............................................................................. 62
Effective Time................................................................................... 63
Representations and Warranties................................................................... 63
Conduct of Business of NEC and Sylvan Pending the Merger......................................... 64
Directors' and Officers' Indemnification and Insurance........................................... 65
Appointment of Directors......................................................................... 65
No Solicitation.................................................................................. 65
Conditions Precedent to the Merger............................................................... 66
Termination...................................................................................... 67
Termination Fee.................................................................................. 67
Amendment; Waiver................................................................................ 68
Expenses......................................................................................... 68
</TABLE>
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<TABLE>
<S> <C>
Description Of Sylvan Capital Stock................................................................ 68
General.......................................................................................... 68
Common Stock..................................................................................... 69
Preferred Stock.................................................................................. 69
Business Combinations and Control Share Acquisition Provisions of Maryland General Corporation
Law............................................................................................ 69
Limitations on Change of Control................................................................. 70
Transfer Agent................................................................................... 70
Comparative Rights Of Stockholders Of Sylvan And NEC............................................... 71
Action by Written Consent of Stockholders........................................................ 71
Amendment of Charter Documents and By-Laws....................................................... 71
Business Combinations............................................................................ 71
Appraisal Rights................................................................................. 73
Preemptive Rights................................................................................ 73
Indemnification.................................................................................. 73
Limitation of Personal Liability of Directors.................................................... 74
Classified Board of Directors.................................................................... 75
Cumulative Voting for Directors.................................................................. 75
Removal of Directors............................................................................. 75
Newly Created Directorships and Vacancies........................................................ 75
Special Meetings................................................................................. 76
Inspection Rights................................................................................ 76
Dividends and Distributions...................................................................... 76
Rights Agreement................................................................................. 76
PROPOSALS II, III and IV: CHARTER AMENDMENTS......................................................... 77
Common Shares Amendment............................................................................ 77
Preferred Shares Amendment......................................................................... 77
Directors Amendment................................................................................ 77
PROPOSALS V AND VI: PLAN AMENDMENTS.................................................................. 78
1993 Plan Amendment................................................................................ 78
Management Plan Amendment.......................................................................... 78
Interests of Certain Persons in the Plan Amendments................................................ 79
PROPOSALS VII AND VIII: ELECTIONS OF SYLVAN BOARD NOMINEES........................................... 80
Information Concerning Merger Nominees............................................................. 80
Information Concerning Contingent Nominees......................................................... 81
Information Regarding the Sylvan Board, Committees and Remuneration................................ 82
Compensation Committee Interlocks and Insider Participation in Compensation Decisions.............. 82
Compensation of Executive Officers and Directors................................................... 84
Sylvan Management.................................................................................. 88
Stock Ownership of Certain Beneficial Owners, Directors and Management............................. 90
Certain Relationships And Related Transactions..................................................... 91
</TABLE>
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<TABLE>
<S> <C>
PROPOSAL IX: AUDITOR CONFIRMATION.................................................................... 92
PROPOSAL X: OTHER MATTERS............................................................................ 92
LEGAL MATTERS AND EXPERTS............................................................................. 93
STOCKHOLDER PROPOSALS................................................................................. 93
</TABLE>
ANNEX I: AGREEMENT AND PLAN OF REORGANIZATION
ANNEX II: ALEX. BROWN & SONS INCORPORATED OPINION
ANNEX III: BZW OPINION
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INCORPORATION BY REFERENCE
Sylvan incorporates by reference herein the following documents filed
pursuant to the Exchange Act:
(1) Annual Report on Form 10-K for the year ended December 31, 1996 filed
on March 31, 1997, as amended by its Annual Report on Form 10-K/A filed on April
__, 1997;
(2) The description of Sylvan's capital stock which is contained in its
Registration Statements on Form 8-A dated ______________, 1993 and October 29,
1996, including any amendment or report filed for the purpose of updating such
description.
(3) Forms 8-K/A, filed on April 4, 1997 and April 10, 1997, amending Form
8-K filed on February 4, 1997.
NEC incorporates by reference herein the following documents filed pursuant
to the Exchange Act:
(1) Annual Report on Form 10-K for the year ended December 31, 1996 filed
on March 27, 1997, as amended by its Annual Report on Form 10-K/A, filed on
April __, 1997;
(2) The description of NEC's capital stock which is contained in its
Registration Statement on Form S-3 dated May 9, 1986.
All documents and reports filed by Sylvan or NEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the Meetings shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be a
part hereof from the date of such filing. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Joint Proxy Statement/Prospectus
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Joint Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO
SYLVAN, TO B. LEE MCGEE, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
SYLVAN LEARNING SYSTEMS, INC., 1000 LANCASTER STREET, BALTIMORE, MARYLAND 21202,
410-843-8000; OR, IN THE CASE OF DOCUMENTS RELATING TO NEC, TO PHILIP C.
MAYNARD, ESQ., VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, NATIONAL EDUCATION
CORPORATION, 2601 MAIN STREET, SUITE 700IRVINE, CALIFORNIA 92614, 714-474-9400.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE MEETINGS,
REQUESTS SHOULD BE MADE BY JUNE 10, 1997.
_______________________________________
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FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under the captions "RISK FACTORS,"
"PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Reasons of Sylvan for the
Merger; Recommendations of the Sylvan Board," "--Reasons of NEC for the Merger;
Recommendations of the NEC Board" and "HISTORICAL AND PRO FORMA COMBINED
SELECTED FINANCIAL INFORMATION" elsewhere in this Joint Proxy
Statement/Prospectus, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the combined
company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous important assumptions and other important factors that could
cause actual results to differ materially from those in the forward-looking
statements. Important assumptions and other important factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: uncertainty as to the combined company's future
profitability; the combined company's ability to develop and implement
operational and financial systems to manage rapidly growing operations;
competition in Sylvan's and NEC's existing and potential future lines of
business; the combined company's ability to integrate and successfully operate
acquired businesses and the risks associated with such businesses; the combined
company's ability to obtain financing on acceptable terms to finance the
combined company's growth strategy and for the combined company to operate
within the limitations imposed by financing arrangements; uncertainty as to the
future profitability of acquired businesses; trends in the education services
market; competitive pressures; new product development and technological change;
changes in relationships with customers, academic institutions or other business
associates; changes in the regulatory environment; outcome of pending litigation
and regulatory inquiries; and the impact of accounting policies required to be
adopted in the near future. Other factors and assumptions not identified above
were also involved in the derivation of these forward-looking statements, and
the failure of such other assumptions to be realized as well as other factors
may also cause actual results to differ materially from those projected.
Neither Sylvan nor NEC assume any obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. This summary is not intended to be
complete and reference is made to, and this summary is qualified in its entirety
by, the more detailed information contained in this Joint Proxy
Statement/Prospectus, the Annexes hereto and the documents incorporated herein
by reference. Stockholders of both Sylvan and NEC are encouraged to review
carefully this Joint Proxy Statement/Prospectus and the Annexes hereto, and the
documents incorporated herein by reference, in their entirety. On September 27,
1996, the Sylvan Board of Directors declared a three-for-two stock split in the
form of a stock dividend to stockholders of record on October 7, 1996, which was
distributed on November 7, 1996 (the "Sylvan Stock Split"). All references in
this Joint Proxy Statement/Prospectus to historical share and per share data for
Sylvan have been retroactively adjusted to reflect the Sylvan Stock Split.
Capitalized terms used in this Summary and not defined shall have the meanings
ascribed to them elsewhere in this Joint Proxy Statement/Prospectus.
THE MERGER AND THE COMPANIES
THE MERGER
Under the terms of the Merger Agreement, Sylvan will acquire NEC in a
stock-for-stock transaction to be accounted for as a pooling-of-interests.
Sylvan will issue 0.58 shares of its Common Stock for each share of NEC Common
Stock outstanding (the "Initial Conversion Ratio"); provided, however, that if
the Average Share Price is less than $29.86 per share, each of NEC and Sylvan
can exercise an option (the "Termination Option") to terminate the Merger
Agreement and the Merger; and provided, further, that should NEC exercise its
Termination Option, Sylvan can exercise an option (the "Adjustment Option") to
force NEC to revoke the exercise of its Termination Option if Sylvan increases
the Initial Conversion Ratio to the Adjusted Conversion Ratio. For example, if
the Average Share Price is $29.13 ($____ higher than the per share closing price
of the Sylvan Common Stock on the trading day preceding the date of this Joint
Proxy Statement/Prospectus), the Adjusted Conversion Ratio would be 0.5945.
Assuming that the number of shares of Sylvan Common Stock outstanding on the
Closing Date equals the number of shares of Sylvan Common Stock outstanding on
March 17, 1997, Sylvan will not, in any event, increase the Adjusted Conversion
Ratio above 0.5945. Assuming the Initial Conversion Ratio is used, following the
Merger, stockholders of NEC would hold approximately 46% of the outstanding
common stock of Sylvan. The Merger Agreement contemplates that the Sylvan Board
of Directors following the Merger would be comprised of 10 persons, including
Messrs. Douglas L. Becker and R. Christopher Hoehn-Saric, the current Co-Chief
Executive Officers of Sylvan, Mr. Sam Yau, the current Chief Executive Officer
of NEC, three additional NEC directors and four other current members of the
Sylvan Board of Directors. See "PROPOSALS VII AND VIII: ELECTIONS OF SYLVAN
BOARD NOMINEES."
SYLVAN LEARNING SYSTEMS, INC.
Sylvan delivers computer-based testing for academic admissions,
professional licensure and certification programs at more than 1,300 Sylvan
Prometric testing centers, provides personalized instructional services to
students at more than 650 Sylvan Learning Centers, provides educational services
under contract to school systems, operates Wall Street Institute, a franchisor
of learning centers teaching English in foreign countries. Sylvan reported
revenue of $157.1 million and net income of $14.7 million, or $0.60 per share,
less approximately $.10 per share of non-recurring prior acquisition related
changes, in 1996.
Sylvan's principal executive offices are located at 1000 Lancaster Street,
Baltimore, Maryland 21202 and its telephone number is (410) 843-8000.
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NATIONAL EDUCATION CORPORATION
NEC (NYSE: NEC) is a leading provider of distance education in vocational,
academic and professional studies and interactive media-based products (through
wholly-owned subsidiaries, ICS Learning Systems, Inc. ("ICS") and National
Education Training Group, Inc. ("NETG")) and is a leading publisher of
supplemental education materials that address instructional needs from childhood
through adulthood (through its 83%-owned subsidiary Steck-Vaughn Publishing
Corporation ("SVPC" and, together with ICS and NETG, the "NEC Subsidiaries").
SVPC is publicly traded on Nasdaq under the symbol "STEK". NEC reported revenue
of $288.8 million and net income of $21.4 million, or $0.58 per share, in 1996.
NEC's 1996 net income before unusual and non-recurring items was $22.6 million,
or $0.62 per share.
NEC's principal executive offices are located at 2601 Main Street, Suite
700, Irvine, California 92614 and its telephone number is (714) 474-9400.
REASONS FOR THE MERGER
After consulting with management and its advisors and considering various
factors, each of the Sylvan Board of Directors and the NEC Board of Directors
(collectively, the "Boards") unanimously concluded that the transactions
contemplated by the Merger Agreement, including the Merger and, in Sylvan's
case, the Share Issuance, are fair to and in the best interests of their
respective companies and stockholders. The Boards believe that the strategic fit
and strengths of Sylvan and NEC will enhance the competitive position of, offer
potential cost savings and opportunities for other synergies to, and provide a
platform for continued growth, both internally and through acquisitions, for the
combined company. See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Reasons of
Sylvan for the Merger; Recommendation of the Sylvan Board and "--Reasons of NEC
for the Merger; Recommendation of the NEC Board."
THE SYLVAN ANNUAL MEETING
Purpose, Time and Place. The Sylvan Annual Meeting will be held on June 26,
1997 at 10:00 a.m., local time, at 1000 Lancaster Street, Baltimore, Maryland
21202. At the Sylvan Annual Meeting, the stockholders of Sylvan will be asked to
consider and vote upon proposals (collectively, the "Sylvan Proposals") to:
(i) approve the issuance by Sylvan of up to a number of shares of Sylvan
Common Stock equal to one fewer than 50% of the total number of shares
of Sylvan Common Stock to be outstanding immediately following the
merger of [Newco, Inc.], a Delaware corporation and a wholly-owned
subsidiary of Sylvan ("Merger Sub") with and into National Education
Corporation ("NEC") (the "Merger") (24,516,622 shares based on the
number of shares of Sylvan Common Stock outstanding on March 17, 1997)
(the "Share Issuance"), pursuant to the Agreement and Plan of
Reorganization dated as of March 12, 1997 (the "Merger Agreement") by
and between Sylvan and NEC;
(ii) amend Sylvan's Charter to reduce the term served by Sylvan directors
from three years to one year and to eliminate separate classes of
Sylvan directors (the "Directors Amendment");
(iii) amend Sylvan's Charter to increase the number of authorized shares of
Sylvan Common Stock from 40,000,000 shares to 90,000,000 shares (the
"Common Shares Amendment");
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(iv) amend Sylvan's Charter to increase from 250,000 shares to 400,000
shares the number of shares of Preferred Stock of Sylvan, $.01 par
value per share, which are designated as Junior Participating
Preferred Stock (the "Preferred Shares Amendment" and, together with
the Directors Amendment and the Common Shares Amendment, the "Charter
Amendments");
(v) amend Sylvan's Amended and Restated 1993 Stock Option Plan (the "1993
Plan") to provide for an increase of 2,575,000 shares in the total
number of shares of Sylvan Common Stock currently authorized for
issuance under the 1993 Plan (which would increase the total number of
shares authorized for issuance pursuant to the 1993 Plan from
2,625,000 to 5,200,000) (the "1993 Plan Amendment"); (vi) amend
Sylvan's 1996 Senior Management Stock Option Plan (the "Management
Plan") to provide for an increase of 1,000,000 shares in the total
number of shares of Sylvan Common Stock currently authorized for
issuance under the Management Plan (which would increase the total
number of shares authorized for issuance pursuant to the Management
Plan from 2,250,000 to 3,250,000) (the "Management Plan Amendment"
and, together with the 1993 Plan Amendment, the "Plan Amendments");
(vii) elect to the Sylvan Board of Directors effective upon the consummation
of the Merger, each of Sam Yau, Richard C. Blum, David C. Jones, and
Michael R. Klein (each of whom is currently an NEC director), and R.
Christopher Hoehn-Saric, Douglas L. Becker, R. William Pollock, Nancy
A. Cole, Donald V. Berlanti and J. Phillip Samper (the "Merger
Nominees"), to serve until the next Annual Meeting of Sylvan
stockholders and until their successors are elected and qualify;
(viii) elect to the Sylvan Board of Directors, in the event the Merger is
terminated or if the Merger Nominees are not elected, each of R.
Christopher Hoehn-Saric, Douglas L. Becker, J. Phillip Samper, Donald
V. Berlanti, Nancy A. Cole, James H. McGuire and R. William Pollock
(the "Contingent Nominees" and, together with the Merger Nominees, the
"Sylvan Board Nominees"), to serve until the next Annual Meeting of
Sylvan stockholders and until their successors are elected and
qualify);
(ix) ratify and confirm the selection of Ernst & Young LLP as Sylvan's
independent auditors for the year ending December 31, 1997 (the
"Auditor Confirmation")
(ix) transact such other business as may properly come before the Sylvan
Annual Meeting or any adjournment or postponement thereof.
See "INFORMATION CONCERNING THE SYLVAN ANNUAL MEETING--Purpose, Time and
Place."
Record Date; Quorum; Required Vote. The record date for the Sylvan Annual
Meeting is the close of business on May 9, 1997 (the "Sylvan Record Date"). Only
holders of record of Sylvan Common Stock at the close of business on the Sylvan
Record Date are entitled to notice of, and to vote at, the Sylvan Annual Meeting
or any adjournment or postponement thereof. As of the Sylvan Record Date, there
were ______________ outstanding shares of Sylvan Common Stock, held of record by
_________ persons. Each share of Sylvan Common Stock is entitled to one vote on
each of the Sylvan Proposals. The presence at the Sylvan Annual Meeting, either
in person or by proxy, of a majority of the issued and outstanding shares of
Sylvan Common Stock entitled to vote will constitute a quorum. The affirmative
vote of the holders of a majority of the shares of
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Sylvan Common Stock voting on each of the Share Issuance and the Plan Amendments
(where the total number of votes cast on the respective proposal represents over
50% of all outstanding shares of Sylvan Common Stock outstanding on the Sylvan
Record Date and entitled to vote) is required to approve each of these Sylvan
Proposals. The affirmative vote of the holders of at least a majority of the
total outstanding shares of Sylvan Common Stock is required to approve the
Charter Amendments. A plurality of all votes cast at the Sylvan Annual Meeting
is required for the election of the Sylvan Board Nominees.
It is expected that all of the ___________ outstanding shares of Sylvan
Common Stock beneficially owned by directors and executive officers of Sylvan at
the close of business on the Sylvan Record Date (___% of the total number of
outstanding shares of Sylvan Common Stock at such date) will be voted for
approval of each of the Sylvan Proposals. See "INFORMATION CONCERNING THE SYLVAN
ANNUAL MEETING--Record Date; Quorum; Required Vote."
Proxies. The proxy card enclosed with copies of this Joint Proxy
Statement/Prospectus delivered to Sylvan stockholders provides that each Sylvan
stockholder may specify that such stockholder's shares of Sylvan Common Stock be
voted "for" or "against" approval of each of the Sylvan Proposals or that the
designated proxy holders be directed to "abstain" from voting with respect
thereto. If properly executed and returned in time for the Sylvan Annual
Meeting, the enclosed proxy will be voted in accordance with the choice
specified. If a properly executed proxy is returned, but no choice is specified,
the corresponding shares of Sylvan Common Stock will be voted FOR approval of
the Share Issuance, FOR approval of the Charter Amendments, FOR approval of the
Plan Amendments, FOR election of the Merger Nominees, FOR election of the
Contingent Nominees and FOR the Auditor Confirmation. It is not expected that
any matter other than those contemplated by the Sylvan Proposals will be brought
before the Sylvan Annual Meeting; however, if other matters are properly
presented, the persons named in such proxy will have authority to vote in
accordance with their judgment on any other such matter, including without
limitation, any proposal to adjourn or postpone the Sylvan Annual Meeting. If a
proxy is returned which specifies a vote against the Share Issuance, such
discretionary authority will not be used to adjourn the Sylvan Annual Meeting in
order to solicit additional votes in favor of the Share Issuance.
Any stockholder who executes and returns a proxy may revoke it at any time
before it is voted at the Sylvan Annual Meeting by (i) delivering to the
Secretary of Sylvan at Sylvan's principal offices (before the Sylvan Annual
Meeting) an instrument of revocation bearing a later date or time than the date
or time of the proxy being revoked; (ii) submitting, prior to the vote, a duly
executed proxy bearing a later date or time than the date or time of the proxy
being revoked; or (iii) voting in person at the Sylvan Annual Meeting. A
stockholder's attendance at the Sylvan Annual Meeting will not by itself revoke
a proxy given by such stockholder. See "INFORMATION CONCERNING THE SYLVAN ANNUAL
MEETING--Proxies."
THE NEC SPECIAL MEETING
Purpose, Time and Place. The NEC Special Meeting will be held on June 25,
1997 at 10:00 a.m., local time, at ______________________________________. At
the NEC Special Meeting, the stockholders of NEC will be asked to consider and
vote upon a proposal to approve the Merger and to adopt the Merger Agreement
(the "Merger Proposal").
See "INFORMATION CONCERNING THE NEC ANNUAL MEETING--Purpose, Time and
Place."
Record Date; Quorum; Required Vote. The record date for the NEC Special
Meeting is the close of business on May 9, 1997 (the "NEC Record Date"). Only
holders of record of NEC Common Stock at the close of business on the NEC Record
Date are entitled to notice of and to vote at the NEC Special Meeting or any
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adjournment or postponement thereof. As of the NEC Record Date, there were
_________________ outstanding shares of NEC Common Stock, held by _______
holders of record. Each share of NEC Common Stock is entitled to one vote on the
Merger Proposal. The presence at the NEC Special Meeting, either in person or by
proxy, of NEC stockholders holding not less than one-half of the outstanding
shares of NEC Common Stock entitled to be voted thereat will constitute a quorum
at the NEC Special Meeting. The affirmative vote of the holders of at least a
majority of the total outstanding shares of NEC Common Stock entitled to vote
thereon is required to approve and adopt the Merger Proposal.
It is expected that all of the _____________ outstanding shares of NEC
Common Stock beneficially owned by directors and executive officers of NEC at
the close of business on the NEC Record Date (____% of the total number of
outstanding shares of NEC Common Stock at such date) will be voted for approval
of the Merger Proposal. See "INFORMATION CONCERNING THE NEC ANNUAL
MEETING--Record Date; Quorum; Required Vote."
Proxies. The proxy card enclosed with copies of this Joint Proxy
Statement/Prospectus delivered to NEC stockholders provides that each
stockholder of NEC may specify that such stockholder's shares of NEC Common
Stock be voted "for" or "against" approval of the Merger Proposal or that the
designated proxy holders be directed to "abstain" from voting with respect
thereto. If properly executed and returned in time for the NEC Special Meeting,
the enclosed proxy will be voted in accordance with the choice specified. If a
properly executed proxy is returned, but no choice is specified, the
corresponding shares of NEC Common Stock will be voted FOR approval of the
Merger Proposal. No matter other than that contemplated by the Merger Proposal
will be brought before the NEC Special Meeting. If a proxy is returned which
specifies a vote against the Merger Proposal, such discretionary authority will
not be used to adjourn the NEC Special Meeting in order to solicit additional
votes in favor of the Merger Proposal.
Any stockholder who executes and returns a proxy may revoke it at any time
before it is voted at the NEC Special Meeting by (i) delivering to the Secretary
of NEC at NEC's principal offices (before the NEC Special Meeting) an instrument
of revocation bearing a later date or time than the date or time of the proxy
being revoked; (ii) submitting, prior to the vote, a duly executed proxy bearing
a later date or time than the date or time of the proxy being revoked; or (iii)
voting in person at the NEC Special Meeting. A stockholder's attendance at the
NEC Special Meeting will not by itself revoke a proxy given by such stockholder.
See "INFORMATION CONCERNING THE NEC ANNUAL MEETING--Proxies."
RISK FACTORS
Stockholders of Sylvan and of NEC should carefully evaluate the matters set
forth under "RISK FACTORS." Factors to be considered, among other things,
include the potential for fluctuation in value of Sylvan Common Stock to be
issued in the Merger as well as certain risks associated with the business and
operations of the combined company and its subsidiaries. See "RISK FACTORS."
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents summary historical and pro forma combined
financial information of Sylvan as of and for the year ended December 31, 1996
and as of and for the three months ended March 31, 1997. "Pro Forma Combined
Companies" reflects the combination of the historical Sylvan financial
statements, as adjusted for the pro forma effects of the acquisition of Wall
Street Institute Group on December 1, 1996, with the historical financial
statements of NEC, accounted for as a pooling-of-interests.
The following summary historical and pro forma combined financial data
should be read in conjunction with the (i) Unaudited Pro Forma Condensed
Combined Financial Statements; (ii) Historical Selected Consolidated Financial
Information and related notes thereto of Sylvan; and (iii) Historical Selected
Consolidated Financial Information and related notes thereto of NEC, all
included elsewhere or incorporated by reference in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF AND AS OF AND FOR THE THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1996 MARCH 31,1997
------------------------------------ --------------------------------------
SYLVAN PRO FORMA PRO FORMA
PRO FORMA (1) COMBINED COMPANIES SYLVAN HISTORICAL COMBINED COMPANIES
-------------- -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues...................... $169,777 $458,578
Net income.......................... 16,905 39,615
PER SHARE INFORMATION (FULLY DILUTED):
Net income per common share......... $0.67 $0.85 (2)
BALANCE SHEET DATA:
Total assets........................ $250,579 $429,337 (3)
Total long-term debt................ 1,575 88,778
Total stockholders' equity.......... 179,591 170,278 (3)
</TABLE>
______________
(1) The pro forma statement of operations of Sylvan for the year ended December
31, 1996 includes the pro forma effects of the acquisition of Wall Street
Institute Group ("WSI"). WSI was acquired by Sylvan on December 1, 1996 in
a transaction accounted for as a purchase. See the Current Report on Form
8-K/A of Sylvan dated April 10, 1997 and incorporated herein by reference
in this Joint Proxy/Prospectus.
(2) Pro forma combined earnings (loss) per share amounts are based on the
weighted average number of shares assumed to be outstanding during the
period, adjusted to give effect to the issuance of approximately 20.7
million shares of Sylvan Common Stock constituting the Share Issuance and
the conversion of other outstanding dilutive securities using the Initial
Conversion Ratio. In computing earnings per share in 1996, pro forma net
income is reduced by the estimated additional amortization that would
result from the payment of certain contingent consideration related to the
acquisition by Sylvan of PACE in 1995, as discussed in Note 6 to the
Unaudited Pro Forma Condensed Combined Financial Statements.
(3) As discussed further in the introduction to Unaudited Pro Forma Condensed
Combined Financial Statements, the pro forma condensed combined balance
sheet includes, in accordance with the Commission's reporting rules, the
estimated effects of events that are directly attributable to the Merger.
Therefore, the pro forma condensed combined balance sheet reflects a pro
forma adjustment, net of related taxes, of $43.3 million, for the estimated
amount of transaction costs, termination benefits, and restructuring
charges, as discussed in Note 1 to the Unaudited Pro Forma Condensed
Combined Financial Statements.
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THE MERGER
General. If the Sylvan stockholders approve the Share Issuance and the NEC
stockholders approve the terms of the Merger Agreement, including the Merger,
and all other conditions to the Merger are satisfied or waived, Merger Sub will
be merged with and into NEC, with NEC being the surviving corporation after the
Merger (the "Surviving Corporation") and becoming a wholly-owned subsidiary of
Sylvan, effective at the time the Certificate of Merger is filed with the
Secretary of State of the State of Delaware (the "Effective Time").
Upon consummation of the Merger pursuant to the Merger Agreement, each
outstanding share of NEC Common Stock, other than NEC Common Stock held by NEC
or held by Sylvan, Merger Sub or any other wholly-owned subsidiary of Sylvan,
will be converted into the right to receive 0.58 of a share of Sylvan Common
Stock (the "Initial Conversion Ratio"); provided, however, that the Initial
Conversion Ratio may be increased to the Adjusted Conversion Ratio if (i) the
Average Share Price is less than the Trigger Price, (ii) NEC has exercised its
Termination Option and (iii) Sylvan has exercised its Adjustment Option. An
Average Share Price of $29.13 ($___ higher than the per share closing price of
the Sylvan Common Stock on the trading day immediately preceding the printing of
this Joint Proxy Statement/Prospectus) would yield an Adjusted Conversion Ratio
of 0.5945, resulting in the issuance by Sylvan of an aggregate of ______ shares
of Sylvan Common Stock to the holders of NEC Common Stock outstanding on the
Record Date. Assuming the number of shares of Sylvan Common Stock outstanding on
the Closing Date is no greater than the number of shares of Common Stock
outstanding on March 17, 1996, Sylvan will not, in any event, exercise its
Adjustment Option if the Average Share Price is below $29.13. See "PROPOSAL I:
THE SHARE ISSUANCE AND THE MERGER--The Merger Agreement--Conversion of Shares."
ALTHOUGH THE INITIAL CONVERSION RATIO MAY BE INCREASED DEPENDING ON THE
EXTENT THE AVERAGE SHARE PRICE IS LESS THAN $29.86, THE MARKET PRICE OF SYLVAN
COMMON STOCK MAY FLUCTUATE AND, ON THE CLOSING DATE, THE DATE SHARES OF SYLVAN
COMMON STOCK ARE RECEIVED BY HOLDERS OF NEC COMMON STOCK, OR THE DATE ON WHICH
SUCH SHARES OF SYLVAN COMMON STOCK ARE EVENTUALLY SOLD, MAY BE MORE OR LESS THAN
THE PRICE OF SYLVAN COMMON STOCK AS OF THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
In lieu of any fractional shares of Sylvan Common Stock, each holder of NEC
Common Stock who otherwise would be entitled to receive a fractional share of
Sylvan Common Stock will be paid an amount in cash equal to the Average Share
Price of Sylvan Common Stock as of _____________ multiplied by the fractional
share interest to which such NEC stockholder is entitled. See "PROPOSAL I: THE
SHARE ISSUANCE AND THE MERGER--The Merger Agreement--Exchange Procedures."
Background of the Merger. For information concerning the background of the
Merger, see "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Background of the
Merger."
Recommendations of the Sylvan Board of Directors. The Sylvan Board of
Directors has unanimously concluded that the terms of the Merger Agreement,
including the Merger and the Share Issuance, are fair to, and in the best
interests of, Sylvan and its stockholders and unanimously recommends that Sylvan
stockholders vote FOR approval of the Share Issuance. For a discussion of the
factors considered by the Sylvan Board of Directors in reaching its decision to
approve and recommend to Sylvan stockholders the Share Issuance, see "PROPOSAL
I: THE SHARE ISSUANCE AND THE MERGER--Reasons of Sylvan for the Merger;
Recommendation of the Sylvan Board."
Financial Advisor to Sylvan. Alex. Brown & Sons Incorporated ("Alex.
Brown") acted as financial advisor to Sylvan in connection with the Merger. On
March 11, 1997, Alex. Brown delivered its oral opinion to the Sylvan Board of
Directors to the effect that, as of the date of such opinion, from a financial
point of view, the
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Initial Conversion Ratio in the Merger is fair to Sylvan. Alex. Brown
subsequently confirmed its earlier opinion by delivery of its written opinion
dated as of March 12, 1997. A copy of the written opinion of Alex. Brown, which
sets forth a discussion of the assumptions made, matters considered and
limitations on the review undertaken by Alex. Brown, is attached hereto as Annex
II and is incorporated herein by reference. See "PROPOSAL I: THE SHARE ISSUANCE
AND THE MERGER--Sylvan Financial Advisor."
Recommendations of the NEC Board. The NEC Board has unanimously concluded
that the Merger is advisable and in the best interests of NEC and its
stockholders and unanimously recommends that NEC stockholders vote FOR approval
of the Merger Proposal. See "PROPOSAL I: THE SHARE ISSUANCE AND THE
MERGER--Reasons of NEC for the Merger; Recommendation of the NEC Board."
Financial Advisors to NEC. BZW, the investment banking division of Barclays
Bank PLC ("BZW"), acted as financial advisor to NEC in connection with NEC's
consideration of the Merger, the Merger Agreement and the other transactions
contemplated thereby. On March 11, 1997, BZW delivered its oral opinion to the
NEC Board that as of the date of such opinion, the Initial Conversion Ratio
pursuant to the Merger Agreement was fair to the holders of NEC Stock other than
Sylvan, Merger Sub or any other wholly-owned subsidiary of Sylvan. BZW
subsequently confirmed its earlier opinion by delivery of its written opinion
dated as of March 12, 1997.
The full text of the written opinion of BZW, which sets forth assumptions
made, matters considered and limitations on the review undertaken in connection
with the opinion is attached hereto as Annex III and is incorporated herein by
reference. Holders of NEC Common Stock are urged to, and should, read such
opinion in its entirety. See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--NEC
Financial Advisor."
Conditions to the Merger. The obligations of Sylvan and NEC to consummate
the Merger are subject to the satisfaction or waiver (where permissible) of
various conditions, including, among others, (i) approval of the Share Issuance
by the holders of the outstanding shares of Sylvan Common Stock and approval of
the Merger Proposal by the holders of the outstanding shares of NEC Common
Stock, each by the requisite vote under applicable law, (ii) receipt by Sylvan
of a letter from Ernst & Young LLP, its independent auditors, and receipt by NEC
of a letter from Price Waterhouse LLP, its independent accountants, each to the
effect that subject to customary qualifications, no event has occurred with
respect to Sylvan or NEC, as applicable, which would preclude the Merger from
being treated as a pooling-of-interests under Accounting Principles Board
Opinion No. 16 (in each case, a "Pooling Letter"), (iii) receipt by Sylvan and
NEC of opinions of their respective tax counsel to the effect that, inter alia,
on the basis of representations made by Sylvan and NEC and referred to therein,
for U.S. federal income tax purposes, the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that Sylvan, Merger Sub and NEC will each
be a party to the reorganization and (iv) certain other conditions. See
"PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--The Merger Agreement--Conditions
Precedent to the Merger."
Termination of the Merger Agreement. The Merger Agreement may be terminated
by Sylvan or NEC under certain circumstances, including either Sylvan's or NEC's
exercise of the Termination Option; provided, however, that Sylvan can prevent
termination after NEC has exercised the Termination Option if Sylvan elects to
exercise its Adjustment Option. If the Merger is terminated due to a material
breach of the Merger Agreement or failure to obtain stockholder approval by
either Sylvan or NEC, the breaching or non-approving party may be required to
pay to the other a termination fee of $10,000,000 assuming the non-breaching or
approving party did not otherwise give the non-approving party cause to
terminate the Merger Agreement. Under certain other circumstances, NEC may be
required to pay Sylvan an additional amount of liquidated damages of
$20,000,000, or an aggregate termination fee of $30,000,000. See "PROPOSAL I:
THE SHARE ISSUANCE AND THE MERGER--The Merger Agreement--Termination" and
"--Termination Fee."
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Regulatory Matters. Under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, (the "HSR Act"), and the rules that have been promulgated
thereunder by the Federal Trade Commission ("FTC"), the Merger may not be
consummated unless certain filings have been submitted to the Antitrust Division
of the United States Department of Justice (the "Antitrust Division") and the
FTC and certain waiting period requirements have been satisfied. On March 26,
1997, Sylvan and NEC submitted the required filings to the FTC and the Antitrust
Division relating to the Merger. On April __, 1997, Richard C. Blum, a Director
of NEC and an affiliate of a principal stockholder of NEC ("Blum"), submitted
the required filings to the FTC and the Antitrust Division relating to Blum's
acquisition of more than $15 million of Sylvan Common Stock in the proposed
Merger. On April 25, 1997 and May __, 1997, the respective waiting periods under
the HSR Act expired. See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--
Regulatory Matters."
Certain Federal Income Tax Consequences. Each of Sylvan and NEC has
received an opinion from its tax counsel to the effect that, among other things,
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Code and no gain or loss will be recognized by the stockholders of
NEC upon the exchange of their shares of NEC Common Stock solely for shares of
Sylvan Common Stock pursuant to the Merger, except with respect to cash, if any,
received in lieu of fractional shares of Sylvan Common Stock. It is a condition
to the consummation of the Merger that each such opinion of tax counsel be
confirmed on and as of the Closing Date. NEC stockholders are urged to consult
their own tax advisors as to the specific tax consequences of the Merger. See
"PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Certain Federal Income Tax
Consequences" and "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--The Merger
Agreement--Conditions Precedent to the Merger."
Accounting Treatment. It is intended that the Merger will be accounted for
as a pooling-of-interests under generally accepted accounting principles.
Consummation of the Merger is conditioned upon receipt by each of Sylvan and NEC
of a Pooling Letter from its independent auditors. See "PROPOSAL I: THE SHARE
ISSUANCE AND THE MERGER--Accounting Treatment."
Appraisal Rights. Under the Delaware General Corporation Law ("DGCL"), the
holders of NEC Common Stock will not have dissenters' appraisal rights in
connection with the Merger Agreement and the consummation of the Merger. Under
the Maryland General Corporation Law ("MGCL"), the holders of Sylvan Common
Stock will not have objecting stockholders' appraisal rights in connection with
the Share Issuance and the consummation of the Merger. See "PROPOSAL I: THE
SHARE ISSUANCE AND THE MERGER--Appraisal Rights" and "PROPOSAL I: THE SHARE
ISSUANCE AND THE MERGER--Comparative Rights of Stockholders of Sylvan and
NEC--Appraisal Rights."
Interests of Certain Persons in the Merger. Stockholders of NEC should be
aware that certain directors and officers of NEC have interests in the Merger
that are in addition to and potentially in conflict with the interests of
stockholders of NEC. See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--
Interests of Certain Persons in the Merger" and "PROPOSALS VII AND VIII:
ELECTIONS OF SYLVAN BOARD NOMINEES--Merger Nominees."
Comparative Rights of Stockholders of Sylvan and NEC. As a result of the
Merger, shares of NEC Common Stock, which are issued by a Delaware corporation,
will be converted into the right to receive shares of Sylvan Common Stock, which
are issued by a Maryland corporation. There are differences between the rights
of NEC stockholders and the rights of Sylvan stockholders. These differences
result from (i) differences between the MGCL and the DGCL and (ii) differences
between the governing instruments of NEC and Sylvan. For a discussion of certain
differences between the rights of NEC stockholders and the rights of Sylvan
stockholders, see "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Comparative
Rights of Stockholders of Sylvan and NEC."
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CHARTER AMENDMENTS
At the Sylvan Annual Meeting, Sylvan stockholders will be asked to consider
and vote upon proposals to amend Sylvan's Charter to (i) reduce the term served
by Sylvan directors from three years to one year and to eliminate separate
classes of Sylvan directors (the "Directors Amendment"), (ii) increase from
40,000,000 to 90,000,000 the number of authorized shares of Sylvan Common Stock
(the "Common Shares Amendment") and (iii) increase from 250,000 to 400,000 the
number of shares of Preferred Stock of Sylvan, $.01 par value per share, which
are designated as Junior Participating Preferred Stock (the "Preferred Shares
Amendment" and, together with the Directors Amendment and the Common Shares
Amendment, the "Charter Amendments"). Stockholders of Sylvan should carefully
evaluate the matters set forth under "PROPOSALS II, III AND IV: CHARTER
AMENDMENTS."
PLAN AMENDMENTS
At the Sylvan Annual Meeting, Sylvan stockholders will be asked to consider
and vote upon proposals to amend (i) the 1993 Plan to provide for an increase of
2,575,000 shares in the total number of shares of Sylvan Common Stock currently
authorized for issuance under the 1993 Plan and (ii) the Management Plan to
provide for an increase of 1,000,000 shares in the total number of shares of
Sylvan Common Stock currently authorized for issuance under the Management Plan.
Approval of each of the Plan Amendments would increase to 5,200,000 and
3,250,000 the total number of shares authorized for issuance under the 1993 Plan
and the Management Plan, respectively. As of April 1, 1997, 129,597 shares and
1,215,000 shares remained available for grant pursuant to the 1993 Plan and the
Management Plan, respectively. Stockholders of Sylvan should carefully evaluate
the matters set forth under "PROPOSALS V AND VI: PLAN AMENDMENTS."
SYLVAN BOARD NOMINEES
At the Sylvan Annual Meeting, Sylvan stockholders will be asked to consider
and vote upon proposals to elect the Merger Nominees, with such elections to
become effective upon consummation of the Merger, and to elect to the Sylvan
Board of Directors the Contingent Nominees in the event the Merger is terminated
or the Merger Nominees are not elected at the Sylvan Annual Meeting.
Stockholders of Sylvan should carefully evaluate the matters set forth under
"PROPOSAL FOR PLAN AMENDMENTS" and "PROPOSALS VII AND VIII: ELECTIONS OF SYLVAN
BOARD NOMINEES."
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RECENT EVENTS
Sylvan's Agreement to Acquire Inroads
On April 17, 1997, Sylvan entered into a definitive agreement to
acquire 100% of the stock of I-R, Inc. and Independent Child Study Teams, Inc.
(collectively "Inroads") in two merger transactions that would be accounted for
as poolings-of-interests. Inroads, which is privately held, had revenues of
approximately $24 million in 1996. To consummate the transaction, Sylvan will
issue approximately 1.4 million shares of Common Stock. The transaction is
expected to close by the end of May 1997. If the average price of Sylvan's
Common Stock is less than $22 for the 15 trading days prior to closing, Sylvan
may either adjust the number of shares issuable to equal $31.1 million in then
market value or terminate the agreement.
Inroads provides remedial educational services to non-public school
systems, funded by the Federal Title I program and similar state funded
programs. Inroads has school contracts in New Jersey, Maryland, Louisiana, and
Washington, D.C., among others.
Harcourt Tender Offer Announcement for NEC Common Stock
On April 16, 1997, Harcourt General, Inc. ("Harcourt") announced that
it would commence an all-cash tender offer for all of the outstanding NEC Common
Stock at a price of $19.50 per share. Harcourt indicated that its offer has a
total transaction value of approximately $740 million. Harcourt also announced
that the tender offer will be subject to customary conditions and the
termination of the Merger Agreement but is not subject to any financing
contingencies. The complete terms and conditions of the tender offer are
expected to be set forth in offering documents which will be filed by Harcourt
with the Securities and Exchange Commission. Harcourt further stated that it
intends to effect a merger in which holders of all shares of NEC Common Stock
that are not tendered would receive the same cash price paid in the tender
offer.
Harcourt also announced its intention, subject to its ability to
effectuate a merger with NEC, to seek to acquire the outstanding shares of
common stock of Steck-Vaughn Publishing Corporation ("SVPC") not currently owned
by NEC at a price per share of $14.00. Harcourt, however, did not disclose the
manner by which it would seek to acquire the SVPC shares or the timing of any
such acquisition.
-11-
<PAGE>
HISTORICAL AND PRO FORMA COMBINED SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The information below sets forth selected historical and unaudited pro
forma combined financial information. The results of operations for interim
periods are not necessarily indicative of the results for a full year. The
selected financial data set forth below should be read in conjunction with the
(i) Consolidated Financial Statements and related notes thereto of Sylvan; and
(ii) Consolidated Financial Statements and related notes thereto of NEC, each
incorporated by reference in this Joint Proxy Statement/Prospectus.
HISTORICAL SELECTED CONSOLIDATED FINANCIAL INFORMATION
The historical selected consolidated financial data of Sylvan and NEC for
each of the years in the five year period ended December 31, 1996 set forth
below have been derived from audited financial statements and those for the
three-month period ended March 31, 1997 and 1996 have been derived from
unaudited financial statements.
SYLVAN
<TABLE>
<CAPTION>
PARTNERSHIP
AND SYLVAN
PARTNERSHIP COMBINED SYLVAN
------------- ------------ -----------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------------------- ----------------
1992 (1) 1993 (1) 1994 (1) 1995 1996 (6) 1996 1997
-------------- ------------ ----------- ----------- ------------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (2):
Revenues
Franchise royalties............ $ 5,695 $ 6,510 $ 7,921 $ 9,223 $ 11,160 $ 2,522
Franchise sales fees........... 352 1,008 1,256 2,132 3,184 213
Company-owned learning
center services............... 3,692 7,246 8,605 11,520 18,528 3,368
Product sales.................. 1,537 1,297 2,234 3,188 3,927 1,110
Contract educational
services...................... 7,124 9,989 13,563 27,362 33,366 9,544
Testing services............... 1,300 3,572 13,665 34,566 86,951 17,800
Other.......................... 481 -- -- -- -- --
--------- --------- ---------- ---------- ----------- ---------- --------
Total revenues............. 20,181 29,622 47,244 87,991 157,116 34,557
Cost and expenses
Franchise services............. 2,195 2,778 3,841 5,875 6,532 1,667
Company-owned learning
center expense................ 3,400 6,873 7,655 10,369 16,073 3,034
Cost of product sales.......... 1,782 1,009 1,759 2,431 2,952 904
Contract educational
services expense.............. 6,316 8,751 11,880 25,120 29,071 8,528
Testing services expense....... 2,022 3,052 14,025 30,348 71,518 15,487
General and administrative
expense (3)................... 5,433 6,255 4,998 6,206 8,755 2,069
Loss on impairment of
assets........................ -- -- -- 3,316 -- --
--------- --------- --------- ---------- ----------- ---------- --------
Total expenses............. 21,148 28,718 44,158 83,665 134,901 31,689
--------- --------- --------- ---------- ----------- ---------- --------
Operating income (loss)......... (967) 904 3,086 4,326 22,215 2,868
Interest income (expense),
net............................ (307) (999) 152 (960) 1,015 288
Other non-operating income
(expense)...................... (112) (171) 224 391 363 92
---------- --------- --------- -------- ----------- ---------- --------
Income (loss) from
continuing operations
before income taxes and
extraordinary items............ (1,386) (266) 3,462 3,757 23,593 3,248
Income taxes.................... (8) (7) (76) (209) (8,850) (1,469)
Income (loss) from
discontinued operations (4).... (1,273) 205 -- -- -- --
Extraordinary items (5)......... -- (177) -- -- -- --
---------- --------- --------- -------- ----------- ---------- --------
Net income (loss)............... $ (2,667) $ (245) $ 3,386 $ 3,548 $ 14,743 $ 1,779
========== ========= ========= ======== =========== ========== ========
Income (loss) from continuing
operations per share........... $(0.02) $0.23 $0.22 $0.60 $0.11
========= ========= ======== =========== ========== ========
Net income (loss) per share..... $(0.02) $0.23 $0.22 $0.60 $0.11
========= ========= ======== =========== ========== ========
Weighted shares outstanding..... 11,553 15,119 15,972 23,582 23,607
========= ========= ======== =========== ========== ========
BALANCE SHEET DATA (AT
PERIOD END):
Working capital (deficit)....... $ (2,559) $ 12,869 $ 11,530 $ 38,317 $ 28,387 $ 42,719
Intangible assets and
deferred contract costs........ 149 7,000 7,932 82,849 122,932 81,173
Total assets.................... 9,979 32,242 42,499 165,407 250,579 164,609
Long-term debt and capital
leases......................... 1,690 2,899 6,168 4,416 4,049 2,131
Stockholders' or partners'
equity (deficit)............... (210) 23,971 31,834 136,464 179,591 139,772
</TABLE>
_____________________
-12-
<PAGE>
(1) Prior to February 1, 1991, the Sylvan Learning Centers business was
conducted by Sylvan Learning Corporation (the "Predecessor"). On February
1, 1991, the Predecessor contributed the Sylvan Learning Centers business
to Sylvan KEE Systems, a Maryland general partnership (the "Partnership")
in exchange for a 50% partnership interest, and Sylvan contributed its
computer training software development business to the Partnership in
exchange for the other 50% partnership interest. On January 26, 1993,
Sylvan acquired the Predecessor and dissolved the Partnership. On September
3, 1993, Sylvan sold its computer training software development business.
During 1994, Sylvan acquired by merger all of the outstanding stock of
Learning Services, Inc. ("LSI") and all of the outstanding stock of Loralex
Corporation ("Loralex"). These companies owned and operated a total of nine
Sylvan Learning Centers located in the Northeast United States and Florida.
On February 17, 1995, Sylvan acquired by merger all of the outstanding
stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc.
(collectively, "READS"). READS is based in Philadelphia, Pennsylvania and
provides remedial and education services, psychological, diagnostic and
counseling services, career awareness training, and a variety of consulting
services. Services are delivered under contracts with school districts,
county-wide educational agencies and municipalities in the Eastern United
States.
The READS, Loralex and LSI acquisitions have been accounted for by Sylvan
as poolings-of-interests and, accordingly, Sylvan's financial statements
have been restated for all periods presented to include the results of
operations of READS, LSI and Loralex.
(2) All share and per share data have been restated to retroactively reflect a
3-for-2 stock split of the Sylvan Common Stock effected at the close of
business on November 7, 1996.
(3) Sylvan has reclassified certain operating expenses previously included in
general and administrative expense to division-specific expense categories.
This change has been reflected for all periods presented.
(4) Represents Sylvan's computer training software development business which
was sold in September 1993 and a Canadian computer training business, 80.1%
of which was sold in 1992.
(5) Represents the $350,000 gain on extinguishment of a $3.5 million debt to
Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0
million of notes payable to stockholders.
(6) On December 1, 1996, Sylvan acquired Wall Street Institute Group ("WSI") in
a transaction accounted for as a purchase. For information regarding the
pro forma effects of this transaction on the 1996 Statement of Operations
of Sylvan, see Sylvan's Current Report on Form 8-K/A dated April 10, 1997,
incorporated by reference herein.
-13-
<PAGE>
NATIONAL EDUCATION CORPORATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
----------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Tuition and contract revenues................. $173,145 $171,016 $188,006 $200,372 $203,296 $ 43,908
Publishing revenues........................... 45,124 53,156 53,608 58,226 85,505 15,461
----------- --------- --------- --------- --------- -------- --------
Total net revenues....................... 218,269 224,172 241,614 258,598 288,801 59,369
Costs and Expenses:
Contract course materials and service costs... 56,882 57,332 60,428 73,003 65,652 16,210
Publishing costs and materials................ 10,758 12,721 13,595 14,867 25,965 5,157
Product development........................... 19,882 22,328 19,934 23,026 24,239 5,437
Selling and marketing......................... 89,275 93,046 111,058 111,112 110,454 21,937
General and administrative.................... 37,063 36,905 28,665 31,775 26,080 7,639
Amortization of acquired intangible assets.... 6,155 4,901 2,191 1,961 2,847 378
Amortization of prior period deferred
marketing (2)................................ -- -- 19,836 1,470 -- --
Unusual items, net (3)........................ 2,506 9,232 -- 81,730 4,100 --
Interest expense.............................. 5,816 5,723 6,336 8,650 8,113 2,021
Investment income............................. (2,541) (2,560) (3,234) (2,621) (2,362) (412)
Other expense (income)........................ 1,866 (138) (492) (307) (421) 61
Gain on sale of stock (4)..................... -- (21,120) (3,247) -- -- --
----------- --------- --------- --------- --------- -------- --------
Income (loss) before income taxes (benefit),
minority interest and discontinued
operations.................................... (9,393) 5,802 (13,456) (86,068) 24,134 941
Income taxes (benefit)......................... (3,109) (4,889) (555) -- 2,236 141
----------- --------- --------- --------- --------- -------- --------
Income (loss) before minority interest and
discontinued operations....................... (6,284) 10,691 (12,901) (86,068) 21,898 800
Minority interest in consolidated subsidiary... -- 599 1,192 1,155 538 135
----------- --------- --------- --------- --------- -------- --------
Income (loss) from continuing operations....... (6,284) 10,092 (14,093) (87,223) 21,360 665
Income (loss) from discontinued
operations (5).............................. 6,799 (19,757) (9,420) -- -- --
Loss from disposal of discontinued
operations (5).............................. -- -- (40,032) -- -- --
----------- --------- --------- --------- --------- -------- --------
Net income (loss).............................. $515 $(9,665) $(63,545) $(87,223) $21,360 $665
=========== ========= ========= ========= ========= ======== ========
Earnings (loss) per share from continuing
operations.................................... $(.21) $.32 $(.48) $(2.73) $.58 $.02
=========== ========= ========= ========= ========= ======== ========
Earnings (loss) per share...................... $.02 $(.32) $(2.14) $(2.73) $.58 $.02
=========== ========= ========= ========= ========= ======== ========
Weighted average number of shares
outstanding :
Primary :................................... 30,296 29,855 29,640 31,893 36,691 36,265
Fully-diluted............................... 37,596 34,855 36,940 38,025 38,647 38,697
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................... $ 71,383 $ 65,406 $ 54,882 $ 31,693 $ 56,667 $ 45,124
Total assets.................................. 334,881 325,005 270,245 185,262 222,089 188,871
Long-term debt and capital lease obligations.. 80,715 80,050 83,883 66,333 87,203 75,824
Total stockholders' equity.................... 151,930 136,233 73,016 7,481 34,018 9,117
</TABLE>
______________________
(1) NEC acquired the assets or common stock of the following entities on the
dates set forth as follows:
Edunetics Ltd., an Israel corporation engaged in the sale and development
of educational software, and California College for Health Sciences, a
provider of healthcare self-study courses and four-year and master degree
distance learning programs, in 1996; Summit Learning, Inc., a direct
response marketer of educational products, and Educational Development
Laboratories, Inc., a developer and publisher of reading and writing
instructional material based in both software and print products in 1995;
MicroMash, a provider of computer-based, interactive courses for accounting
professionals and students, and Berrent Publications, Inc., a publisher of
test preparation and assessment materials in 1994; and Magnetic Way product
line of educational products and materials for the elementary and secondary
school marketplace in 1993.
-14-
<PAGE>
(2) Represents the adoption by NEC in 1994 of a new accounting pronouncement at
ICS Learning Systems, Inc. which resulted in the amortization of the
deferred marketing balance as of December 31, 1993 into 1994 of
$19,836,000, and a charge of $7,574,000 resulting from increased selling
and marketing spending above the amortization that would have been expensed
in accordance with NEC's previous accounting policy. The remaining deferred
marketing balance at December 31, 1994 was amortized in 1995.
(3) Represents the write-off of in-process research and development due to the
acquisition of Edunetics by Steck-Vaughn Publishing Corporation ("SVPC") in
1996; a $47,509,000 write-off of intangible assets of National Education
Training Group ("NETG"), restructuring charges of $32,248,000 at NETG and
NEC, a $4,549,000 write-off of course computer hardware and related costs
at ICS and net credits of $2,576,000 from litigation settlements by NETG
and SVPC in 1995; the write-off of certain intangible assets of NETG in
1993; and severance payments to individuals and lease termination charges
of NETG in 1992.
(4) Represents the sale in 1994 of an interest in a partnership venture and the
sale in 1993 of 18.3% of the stock of SVPC.
(5) In 1994, NEC adopted a plan to discontinue the operations of the Education
Centers subsidiary. The results of operations for 1992 through 1994 reflect
the results of the Education Centers as discontinued operations.
-15-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are presented to reflect the estimated impact on the historical consolidated
financial statements of Sylvan of the Merger and the issuance of approximately
20.7 million shares of Sylvan Common Stock based on the Initial Conversion Ratio
multiplied by the 35,647,483 shares of NEC Common Stock outstanding as of March
31, 1997, constituting the Share Issuance. The Merger will be accounted for as a
pooling-of-interests.
The unaudited pro forma condensed combined statements of operations for
each of the three years in the period ended December 31, 1996 and for the three
month periods ended March 31, 1996 and 1997 assume that the Merger had been
consummated at the beginning of the earliest year presented (January 1, 1994).
The unaudited pro forma condensed combined statements of operations for the year
ended December 31, 1996 and the three months ended March 31, 1996 also give
effect to Sylvan's acquisition of Wall Street Institute Group on December 1,
1996 as if this acquisition, which was accounted for as a purchase, occurred on
January 1, 1996. The pro forma condensed combined balance sheet at December 31,
1996 assumes that the Merger had been consummated on December 31, 1996.
The pro forma condensed combined statements of operations include pro forma
adjustments that give effect to factually supportable recurring reductions of
expenses resulting from the consolidation of operations of the combining
companies. These pro forma condensed combined statements of operations exclude
(i) the positive effects of potential increased revenues or operating synergies
and cost savings which may be achieved upon combining the resources of the
companies, (ii) investment banking, legal, and miscellaneous transaction costs
of the Merger, currently estimated to be $10.8 million on a pre-tax and after-
tax basis, (iii) costs associated with termination benefits of certain employees
and directors of NEC, currently estimated to be $8.7 million on a pre-tax basis
and $5.2 million on an after-tax basis, and (iv) costs associated with the
consolidation and restructuring of combined operations, currently estimated to
be $40.8 million on a pre-tax basis and $27.3 million on an after-tax basis. The
total charges of $60.3 million ($43.3 million after-tax) for these non-recurring
items directly attributable to the Merger will be recorded in the quarter in
which the Merger is consummated, which is expected to occur in the second
quarter of 1997.
The pro forma condensed combined balance sheet at December 31, 1996
includes, in accordance with the Commission's reporting rules, the estimated
effects of events that are directly attributable to the Merger, whether of a
recurring or non-recurring nature, that can be reasonably estimated and are
factually supportable. Therefore, the pro forma condensed combined balance sheet
reflects a pro forma adjustment, net of related taxes, of $43.3 million, for the
estimated amounts of transaction costs, termination benefits, and restructuring
charges, as discussed above.
The historical statement of operations classifications for Sylvan and NEC
have been reclassified to present the expected classifications upon consummation
of the Merger. Sylvan's revenues have primarily been service related
(educational and testing), while NEC's revenues are primarily related to
education and training contracts which include the offering of training
materials and related support services and supplemental educational products.
Sylvan does not expect any material adjustments of historical financial
statements from conforming accounting policies of Sylvan and NEC.
The unaudited pro forma condensed combined financial statements are based
on the estimates and assumptions set forth in the notes to such statements. The
pro forma adjustments made in connection with the development of the pro forma
information are preliminary and have been made solely for purposes of developing
the pro forma information necessary to comply with the disclosure requirements
of the Commission. The unaudited pro forma condensed combined financial
statements do not purport to be indicative of the consolidated results of
operations of future periods or the consolidated financial position or the
results that actually would have been reported had Sylvan and NEC been a single
entity during the periods presented. Further, there can be no assurance that
Sylvan will not incur non-recurring charges in excess of the $43.3 million of
after-tax charges currently estimated, as discussed above.
-16-
<PAGE>
The unaudited pro forma condensed combined financial information should be
read in conjunction with the historical consolidated financial statements of
Sylvan and NEC incorporated by reference in this Joint Proxy
Statement/Prospectus. See "INCORPORATION BY REFERENCE."
-17-
<PAGE>
Pro Forma Condensed Combined Balance Sheet (Unaudited)
As of December 31, 1996
<TABLE>
<CAPTION>
Sylvan National Pro Forma Sylvan/NEC
Learning Education Adjustments Pro Forma
Systems, Inc. Corporation (1) Combined
---------------- -------------- -------------- ------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 11,082 $ 17,682 ($28,518) $ 246
Available-for-sale securities........................ 16,299 1,447 17,746
Accounts and notes receivable, net................... 36,705 56,857 93,562
Inventory............................................ 4,470 35,902 (1,600) 38,772
Prepaid expenses and other current assets............ 3,264 20,188 23,452
---------------- -------------- -------------- ------------
Total current assets............................ 71,820 132,076 (30,118) 173,778
Net property and equipment............................. 24,713 30,800 (3,329) 52,184
Net contract rights and other intangibles.............. 10,519 -- 10,519
Goodwill, net.......................................... 99,183 26,626 (15,000) 110,809
Deferred income taxes.................................. -- 24,728 17,004 41,732
Net deferred contract costs and other long-term assets. 44,344 7,859 (11,888) 40,315
---------------- -------------- -------------- ------------
Total assets.................................... $250,579 $ 222,089 ($43,331) $ 429,337
================ ============== ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 25,962 $ 61,125 $ 87,087
Current portion of long-term debt and capital lease
obligations........................................ 2,475 8,260 10,735
Other current liabilities............................ 14,995 6,024 21,019
---------------- -------------- -------------- ------------
Total current liabilities....................... 43,432 75,409 118,841
Long-term debt, less current portion................... 1,575 87,203 88,778
Other long-term liabilities and minority interest...... 25,981 25,459 51,440
Stockholders' equity:
Common stock........................................... 226 2,170 ($1,963) (2) 433
Additional paid-in capital............................. 168,555 157,710 1,963 (2) 328,228
Translation adjustments................................ (4) (5,317) (5,321)
Other stockholders' equity............................. -- (513) (513)
Treasury stock......................................... -- (4,908) (4,908)
Retained earnings (accumulated deficit)................ 10,814 (115,124) (43,331) (147,641)
---------------- -------------- ---------------- ------------
Total stockholders' equity...................... 179,591 34,018 (43,331) 170,278
---------------- -------------- ---------------- ------------
Total liabilities and stockholders' equity...... $250,579 $ 222,089 ($43,331) $ 429,337
================ ============== ============== ============
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
-18-
<PAGE>
Pro Forma Condensed Combined Statements of Operations (Unaudited)
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma Sylvan National Education Sylvan/NEC Pro
Learning Systems, Inc. Corporation Forma Combined
for the year ended for the year ended Pro for the year ended
December 31, December 31, Forma December 31,
1996 (3) 1996 Adjustments 1996
---------------------- --------------------- ------------------- ------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Service-related.......................... $169,777 --- $ 169,777
Product-related.......................... --- $288,801 288,801
---------------------- --------------------- ------------------- ------------------
Total revenues........................ 169,777 288,801 458,578
COST AND EXPENSES:
Services................................. 136,545 --- 136,545
Cost of product sales.................... --- 233,257 233,257
General and administrative expenses...... 8,755 26,080 ($1,500)(4) 33,335
---------------------- --------------------- ------------------- ------------------
Total expenses........................ 145,300 259,337 (1,500) 403,137
---------------------- --------------------- ------------------- ------------------
Operating income........................... 24,477 29,464 1,500 55,441
Other income (expense)..................... 1,599 (5,868) (4,269)
---------------------- --------------------- ------------------- ------------------
Income before income taxes................. 26,076 23,596 1,500 51,172
Income taxes............................... (9,171) (2,236) (150)(5) (11,557)
---------------------- --------------------- ------------------- -------------------
Net income................................. $ 16,905 $ 21,360 $ 1,350 $ 39,615
====================== ===================== =================== ==================
PER COMMON AND
COMMON EQUIVALENT SHARE
Net income............................... $ 0.67 $ 0.58 $0.85 (6)
====================== ===================== ==================
PER COMMON SHARE,
ASSUMING FULL DILUTION
Net income............................... $ 0.67 $0.58 $0.85 (6)
====================== ===================== ==================
COMMON AND COMMON EQUIVALENT
SHARES USED IN CALCULATION
OF EARNINGS PER SHARE:
Primary.................................. 24,155 36,691 45,732 (6)
====================== ===================== ==================
Fully diluted............................ 24,297 38,647 45,874 (6)
====================== ===================== ==================
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
-19-
<PAGE>
Pro Forma Condensed Combined Statements of Operations (Unaudited)
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Sylvan Learning National Education Sylvan/NEC Pro
Systems, Inc. Corporation Pro Forma Combined
for the year ended for the year ended Forma for the year ended
December 31, 1995 December 31, 1995 Adjustments December 31, 1995
--------------------- ----------------------- --------------- ----------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Service-related........................ $87,991 --- $ 87,991
Product-related........................ --- $ 258,598 258,598
--------------------- ----------------------- --------------- ----------------------
Total revenues.................... 87,991 258,598 346,589
COST AND EXPENSES:
Services............................... 77,459 77,459
Cost of product sales.................. --- 307,169 307,169
General and administrative expenses.... 6,206 31,775 ($2,000)(4) 35,981
--------------------- ----------------------- --------------- ----------------------
Total expenses.................... 83,665 338,944 (2,000) 420,609
--------------------- ----------------------- --------------- ----------------------
Operating income (loss).................. 4,326 (80,346) 2,000 (74,020)
Other income (expense)................... (569) (6,877) (7,446)
--------------------- ----------------------- --------------- ----------------------
Income (loss) before income taxes........ 3,757 (87,223) 2,000 (81,466)
Income taxes............................. (209) (200)(5) (409)
--------------------- ----------------------- --------------- ----------------------
Net income (loss)........................ $ 3,548 ($87,223) $ 1,800 ($81,875)
===================== ======================= =============== ======================
PER COMMON AND
COMMON EQUIVALENT SHARE
Net income (loss)...................... $0.22 ($2.73) ($2.26)(6)
====================== ===================== ==================
PER COMMON SHARE,
ASSUMING FULL DILUTION
Net income (loss)...................... $0.21 ($2.73) ($2.26)(6)
====================== ===================== ==================
COMMON AND COMMON EQUIVALENT
SHARES USED IN CALCULATION
OF EARNINGS PER SHARE:
Primary................................ 15,665 31,893 36,340 (6)
====================== ===================== ==================
Fully diluted.......................... 15,972 38,025 36,647 (6)
====================== ===================== ==================
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
-20-
<PAGE>
Pro Forma Condensed Combined Statements of Operations (Unaudited)
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
Sylvan Learning National Education Sylvan/NEC Pro
Systems, Inc. Corporation Pro Forma Combined
for the year ended for the year ended Forma for the year ended
December 31, 1994 December 31, 1994 Adjustments December 31, 1994
-------------------- -------------------- ------------- ---------------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Service-related..................... $47,244 $ 47,244
Product-related..................... $ 241,614 241,614
-------------------- -------------------- ------------- ---------------------
Total revenues.............. 47,244 241,614 288,858
COST AND EXPENSES:
Services............................ 39,160 --- 39,160
Cost of product sales............... --- 227,042 227,042
General and administrative expenses. 4,998 28,665 ($2,000)(4) 31,663
-------------------- -------------------- ------------- ---------------------
Total expenses.............. 44,158 255,707 (2,000) 297,865
-------------------- -------------------- ------------- ---------------------
Operating income (loss)............... 3,086 (14,093) 2,000 (9,007)
Other income (expense)................ 376 (555) (179)
--------------------- -------------------- ------------- ---------------------
Income (loss) before income taxes..... 3,462 (14,648) 2,000 (9,186)
Income taxes (benefit)................ (76) 555 (200)(5) 279
-------------------- -------------------- ------------- ---------------------
Income (loss) from continuing
operations............................ $ 3,386 ($14,093) $1,800 ($8,907)
==================== ==================== ============= =====================
PER COMMON AND
COMMON EQUIVALENT SHARE
Income (loss) from continuing
operations.......................... $0.23 ($0.48) ($0.25) (6)
==================== ==================== =====================
PER COMMON SHARE,
ASSUMING FULL DILUTION
Income (loss) from continuing
operations.......................... $0.22 ($0.48) ($0.25) (6)
==================== ==================== =====================
COMMON AND COMMON EQUIVALENT
SHARES USED IN CALCULATION OF
EARNINGS PER SHARE:
Primary............................. 14,872 29,640 35,547 (6)
==================== ==================== =====================
Fully diluted....................... 15,119 36,940 35,795 (6)
==================== ==================== =====================
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
-21-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Merger-Related Non-Recurring Charges. In connection with the acquisition of
------------------------------------
NEC, Sylvan expects to incur certain non-recurring charges of $60.3 million,
with an after-tax effect of $43.3 million. These charges include estimated
transaction costs of Sylvan and NEC of $10.8 million pre-tax and after-tax,
costs associated with termination benefits of certain employees and
directors of NEC of $8.7 million pre-tax and $5.2 million after-tax, and
costs associated with the consolidation and restructuring of combined
operations of $40.8 million pre-tax and $27.3 million after tax.
Consolidation and restructuring charges consist of asset impairment charges
and estimated obligations resulting from the Merger. Impairment charges
relate primarily to inventory, property and equipment, goodwill, and
deferred contract costs. A pre-tax impairment of inventory, property and
equipment and other assets of $6.8 million is expected to result from the
loss from abandonment or sale of certain inventory, equipment, leasehold
improvements, capitalized internal use software, and other assets of Sylvan
and NEC. Sylvan expects to write-down goodwill by approximately $15.0
million to record impairments related to certain businesses that are
expected to be restructured as a result of the Merger. Sylvan also expects,
as a result of the Merger, to renegotiate or cancel certain contracts with
non-affiliated computer-based testing centers for which advance payments of
$10.0 million were recorded as deferred contract costs at December 31, 1996.
Sylvan also expects to incur pre-tax obligations of $9.0 million related to
lease and contract terminations and payments to certain franchisees for
potential infringement of franchise rights as a result of the Merger.
The pre-tax amount of all estimated non-recurring charges of $60.3 million
was reduced by the estimated tax effect of $17.0 million. The tax effect was
determined by estimating the effective tax rate associated with these
charges at the consummation date.
(2) Pooling Adjustment. Adjustment to properly reflect the par value of
------------------
outstanding shares after the Merger.
(3) Sylvan 1996 Pro Forma Statement of Operations. The statement of operations
---------------------------------------------
of Sylvan for the year ended December 31, 1996 includes the pro forma
effects of the acquisition of Wall Street Institute Group ("WSI"). WSI was
acquired by Sylvan on December 1, 1996 in a transaction accounted for as a
purchase. See the Current Report on Form 8-K/A of Sylvan dated April 10,
1997 and incorporated by reference in this Joint Proxy Statement/Prospectus.
(4) Compensation and Facility Cost Adjustments. Upon the consummation of the
------------------------------------------
merger, Sylvan will terminate certain identified employees of NEC and close
NEC's corporate headquarters in Irvine, California. These factually
supportable expense reductions will be offset by expense increases caused
by the relocation of certain functions to Sylvan's headquarters in
Baltimore, Maryland. The pro forma adjustments adjust the statement of
operations for the estimated effects of these actions as if they occurred on
January 1, 1994.
(5) Income Taxes. All pro forma adjustments relate to expenses incurred by NEC.
------------
Accordingly, the provision for income taxes has been adjusted for the
estimated effect of pro forma adjustments using the 1996 effective rate of
NEC of approximately 10%. This effective rate is substantially lower than
the federal statutory tax rate of 34% due primarily to the existence of
significant operating loss carry forwards and related valuation allowances.
See the 1996 Annual Report on Form 10-K of NEC incorporated by reference
herein.
(6) Earnings (Loss) Per Share. Pro forma combined earnings (loss) per share
--------------------------
amounts are based on the weighted average number of shares assumed to be
outstanding during the period, adjusted to give effect to the Share Issuance
and the conversion of other outstanding dilutive securities using the
Initial Conversion Ratio. In computing earnings (loss) per share in 1995
and 1996, pro forma net income (loss) is reduced by the estimated additional
amortization that would result from the payment of certain contingent
consideration to the former shareholders of PACE, acquired by Sylvan in
1995. See the 1996 Annual Report on Form 10-K of Sylvan incorporated by
reference herein.
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<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are earnings (loss) per share data and unaudited book value
per common share of NEC and Sylvan on both historical and unaudited pro forma
combined bases. In addition, the following information sets forth the earnings
and book value for NEC on an unaudited per share equivalent pro forma basis.
Pro forma combined earnings per share is derived from the pro forma condensed
combined financial statements presented elsewhere herein, which gives effect to
the Merger on the pooling of interests accounting method as if the Merger had
occurred on January 1, 1994 and combines the results of NEC and Sylvan for each
of the periods presented. The equivalent pro forma combined per NEC share data
is calculated by multiplying the pro forma combined per Sylvan share amounts by
the Initial Conversion Ratio of 0.58:1.0. Book value per share has been adjusted
to include the shares of Sylvan Common Stock to be issued in the Merger, and
assumes that the Merger had been effective at the end of the period presented.
The information set forth below should be read in conjunction with the
consolidated financial statements of NEC and Sylvan incorporated by referenced
in this Joint Proxy Statement/Prospectus and the "Unaudited Pro Forma Condensed
Combined Financial Statements," in each case including the notes thereto. The
pro forma information presented herein is for illustrative purposes only and
does not purport to be indicative of the consolidated results of operations of
future periods, the consolidated financial position or the results that would
have actually been reported had Sylvan and NEC been a single entity during the
periods presented.
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
------------------------------ ----------------------
1994 1995 1996 1997
--------- -------- --------- ----------------------
<S> <C> <C> <C> <C>
NEC Historical:
Earnings (loss)--Primary...................... ($2.14) ($2.73) $0.58
Earnings (loss)--Fully-diluted................ (2.14) (2.73) 0.58
Book value (1)................................ 2.41 0.21 0.94
Sylvan Historical:
Earnings--Primary............................. $ 0.23 $ 0.22 $0.67 (2)
Earnings--Fully-diluted....................... 0.22 0.21 0.67 (2)
Book value (1)................................ 2.42 6.52 7.96
Pro Forma Combined Per Sylvan Share (3):
Earnings (loss)--Primary...................... ($0.25) ($2.26) $0.85
Earnings (loss)--Fully-diluted................ (0.25) (2.26) 0.85
Book value (4)................................ -- -- 3.94
Equivalent Pro Forma Combined Per NEC Share (5):
Earnings (loss)--Primary...................... ($0.15) ($1.31) $0.49
Earnings (loss)--Fully-diluted................ (0.15) (1.31) 0.49
Book value.................................... -- -- 2.28
- ----------------------
</TABLE>
(1) The historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of the
respective period.
(2) The pro forma statement of operations of Sylvan for the year ended December
31,1996 includes the pro forma effects of Wall Street Institute Group
("WSI"). WSI was acquired by Sylvan on December 1, 1996 in a transaction
accounted for as a purchase. See the Current Report on Form 8-K/A of Sylvan
dated April 10, 1997 and incorporated herein by reference in this Joint
Proxy Statement/Prospectus.
(3) Pro forma combined earnings (loss) per share amounts are based on the
weighted average number of shares assumed to be outstanding during the
period, adjusted to give effect to the Share Issuance and the conversion of
other outstanding dilutive securities using the Initial Conversion Ratio.
In computing earnings (loss) per share
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<PAGE>
in 1995 and 1996, pro forma net income (loss) is reduced by the estimated
additional amortization that would result from the payment of certain
contingent consideration as discussed in Note 6 to the Unaudited Pro Forma
Condensed Combined Financial Statements.
(4) As discussed further in the introduction to Unaudited Pro Forma Condensed
Combined Financial Statements, the pro forma condensed combined balance
sheet includes, in accordance with the Commission's reporting rules, the
estimated effects of events that are directly attributable to the Merger.
Therefore, the pro forma condensed combined balance sheet reflects a pro
forma adjustment, net of related taxes, of $43.3 million, for the estimated
amounts of transaction costs, termination benefits, and restructuring
charges, as discussed in Note 1 to the Unaudited Pro Forma Condensed
Combined Financial Statements. The pro forma book value per share is
computed by dividing pro forma stockholders' equity, including the effects
of these adjustments, by the pro forma number of shares of common stock
outstanding at the end of each period.
(5) The equivalent pro forma combined NEC share amounts are calculated by
multiplying the pro forma combined per Sylvan share by the Initial
Conversion Ratio of 0.5800 share of NEC Common Stock for each share of
Sylvan Common Stock.
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<PAGE>
COMPARATIVE STOCK PRICES
Sylvan Common Stock is listed and traded on the Nasdaq under the symbol
"SLVN." NEC Common Stock is listed and traded on the NYSE under the symbol
"NEC." The following table sets forth, for the periods indicated, the high and
low reported sales prices per share of Sylvan Common Stock and NEC Common Stock,
as reported by Nasdaq and the NYSE Composite Tape. Dividends have not been
declared during the indicated periods on Sylvan Common Stock.
<TABLE>
<CAPTION>
SYLVAN COMMON STOCK/(a)/ NEC COMMON STOCK
---------------------------- ----------------------
CALENDAR QUARTERS HIGH LOW HIGH LOW
- ----------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
1995
First Quarter....................... $13.17 $11.17 $ 4.63 $ 2.50
Second Quarter...................... 14.33 11.09 5.75 3.13
Third Quarter....................... 21.67 14.33 8.38 4.88
Fourth Quarter...................... 21.17 15.33 8.75 6.38
1996
First Quarter....................... 26.17 18.00 11.75 7.63
Second Quarter...................... 27.50 21.33 22.75 11.75
Third Quarter....................... 27.50 18.67 20.75 13.00
Fourth Quarter...................... 33.00 24.25 19.25 11.63
1997
First Quarter....................... 37.13 24.75
Second Quarter (through April 15)... 29.25 24.25
</TABLE>
________________
(a) Price information on Sylvan Common Stock reflects the impact of the Sylvan
Stock Split.
On March 11, 1997, the last trading day before the announcement of the
Merger Agreement, the last reported per share sales price of the Sylvan Common
Stock as reported on Nasdaq and the NEC Common Stock as reported on the NYSE
Composite Tape was $35.125 and $17.125 per share, respectively. Assuming the NEC
Special Meeting and the Merger had occurred on such date, the equivalent market
value per share of NEC Common Stock would have been $20.37 on such date. On
April __, 1997, the last trading day before the printing of this Joint Proxy
Statement/Prospectus, the last reported per share sales price of Sylvan Common
Stock and NEC Common Stock was $______ and $__________, respectively. Assuming
the Closing Date were _________, 1997, the Average Share Price would have been
$______, triggering either party's Termination Option and Sylvan's Adjustment
Option. Sylvan will not exercise its Adjustment Option if the Average Per Share
Price is lower than $29.13. See "THE MERGER AGREEMENT--Termination." The market
prices of shares of Sylvan Common Stock and NEC Common Stock are subject to
fluctuation. As a result, Sylvan and NEC stockholders are encouraged to obtain
current market quotations.
Neither Sylvan nor NEC has declared or paid any cash dividends on the
Common Stock. Sylvan currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying cash dividends in the foreseeable
future.
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<PAGE>
RISK FACTORS
FLUCTUATION IN VALUE OF MERGER CONSIDERATION
The number of shares of Sylvan Common Stock to be issued in the Merger is
subject to increase, at the option of Sylvan (subject to NEC's right to
terminate the Merger if Sylvan does not adjust the Initial Conversion Ratio).
Assuming the Merger were scheduled to have occurred on _________, 1997, the date
prior to the printing of this Joint Proxy Statement/Prospectus, the Average
Share Price would have been $_____, triggering NEC's option to terminate the
Merger Agreement unless Sylvan increases the Conversion Ratio from 0.58 to
__________. If the Conversion Ratio were to be so adjusted, the maximum number
of shares of Sylvan Common Stock issuable to NEC stockholders would be
________________.
ALTHOUGH THE INITIAL CONVERSION RATIO WILL BE BASED ON THE AVERAGE SHARE
PRICE OF SYLVAN COMMON STOCK, THE MARKET PRICE OF SYLVAN COMMON STOCK MAY
FLUCTUATE AND, ON THE DATE OF THE EFFECTIVE TIME, THE DATE OF RECEIPT OF SHARES
OF SYLVAN COMMON STOCK BY HOLDERS OF NEC COMMON STOCK, OR THE DATE ON WHICH SUCH
SHARES OF SYLVAN COMMON STOCK ARE EVENTUALLY SOLD, MAY BE MORE OR LESS THAN THE
AVERAGE SHARE PRICE OF SYLVAN COMMON STOCK OVER THE PRICING PERIOD.
In addition, a portion of the shares of Sylvan Common Stock issued in
connection with Sylvan's December 1995 acquisition of Drake Prometric, L.P. will
be freely transferable beginning in April 1997 and additional shares will become
salable at that time, subject to the volume and manner of sale limitations of
Rule 144 of the Securities Act of 1933, as amended. One-year registration rights
relating to all of these shares begins on October 31, 1997. Public availability
of these shares of Sylvan Common Stock may adversely affect the market price of
the Sylvan Common Stock before the Merger, with or without triggering the above-
described rights to terminate the Merger or adjust the Initial Conversion Ratio,
and after the Merger.
UNCERTAINTIES IN INTEGRATING BUSINESS OPERATIONS AND ACHIEVING COST SAVINGS
In determining that the Merger is in the best interests of its
stockholders, each of the Sylvan Board and the NEC Board considered potential
synergies, efficiencies and cost savings as a result of the combination of
Sylvan's and NEC's operations. The integration of operations following the
Merger will present significant management challenges. Specifically, the
integration of operations will require the dedication of management resources
which will temporarily detract from attention to the day-to-day business of the
combined company. Also, the process of combining the two organizations may
cause an interruption of, or a loss of momentum in, the activities of either or
both of the companies' businesses, which could have a material adverse effect on
the operating results of the combined company. Thus, there can be no assurance
that the combined company will be able to manage the combined operations
effectively or realize any of the anticipated benefits of the Merger, including
synergies of operations or efficiencies from the elimination of duplicative
functions. Nor can there can be any assurance as to when, if ever, the
successful integration of operations will be accomplished.
COMPETITION
There is significant and increasing competition in the remedial,
supplemental and distance learning and professional education marketplaces. In
addition, an increasing number of private, for-profit organizations; public and
non-public schools; and existing colleges and universities are establishing or
may hereafter establish their own supplemental education programs. Many of
these organizations have greater financial resources than the combined company.
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<PAGE>
FOREIGN EXCHANGE RISK
A significant portion of the combined company's revenues are generated from
operations outside of the United States, and are billed and collected in
denominations other than the U.S. dollar. Accordingly, significant fluctuations
in exchange rates between the U.S. dollar and other currencies in which the
combined company does business could have an adverse effect on the combined
company's financial performance.
PROPRIETARY RIGHTS
The success of Sylvan and NEC and, after the Merger, the combined company,
and their ability to compete are dependent in major part upon their creation of
proprietary products and properties. Sylvan and NEC rely upon trademark,
service marks, trade secret, patent and copyright laws, in addition to
confidentiality and licensing agreements, to establish and protect their
proprietary rights in intellectual property. The policy of Sylvan and NEC and,
after the Merger, the combined company, is and will continue to be to seek to
control access to and distribution of proprietary information through
confidentiality agreements with relevant third parties. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the proprietary products and documentation without authorization, or to
develop similar products and documentation independently. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain venues. To license its products, Sylvan and NEC and, after the Merger,
the combined company, intend to continue to rely on the license agreements, the
legal efficacy of which may not prove to protect them fully, and which may be
unenforceable under the laws of certain jurisdictions. Despite efforts to
protect aspects of the products of Sylvan and NEC and, after the Merger, the
combined company, unauthorized parties may attempt to copy aspects of the
products of Sylvan and NEC and, after the Merger, the combined company, or to
obtain and use information that they, or any of the them, regard as proprietary.
Unauthorized use of such products and information is difficult to detect and
police, and there can be no assurance that the steps taken will prevent
misappropriation of products and information of Sylvan and NEC and, after the
Merger, the combined company. In addition, litigation may be necessary in the
future to enforce the combined company's intellectual property rights, to
protect its trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the business, operating
results and financial condition of Sylvan or NEC or, after the Merger, the
combined company. There can be no assurance that any patents, trademarks,
service marks or copyrights issued to Sylvan and NEC or, after the Merger, the
combined company will not be invalidated or circumvented or otherwise be
insufficient to protect their proprietary rights.
NEC relies and, after the Merger, the combined company will continue to
rely upon certain technology and intellectual property rights that they license
from third parties. There can be no assurance that these third-party licenses
are or will continue to be available on commercially reasonable terms or at all.
The loss of or inability to obtain or to retain any of these technology or
intellectual property rights could materially adversely affect the business,
operating results and financial condition of Sylvan or NEC or, after the Merger,
the combined company.
DEPENDENCE ON KEY PERSONNEL
The combined company is dependent in large part on the experience and
knowledge of key personnel including R. Christopher Hoehn-Saric and Douglas L.
Becker (the Co-Chief Executive Officers of Sylvan), Sam Yau (the Chief Executive
Officer of NEC), B. Lee McGee (the Chief Financial Officer of Sylvan) and the
Presidents of the three operating divisions of each of Sylvan and NEC. The
loss of services of these key individuals could have a material adverse effect
on the combined company. The success of the combined company is also dependent
upon the continued service of, and its ability to attract and retain highly
qualified technical, marketing, sales and management personnel. The competition
for such personnel is intense. The failure to recruit and retain additional or
substitute key personnel in a timely manner could have an adverse effect on the
performance of the combined company. Sylvan maintains an aggregate of $4.5
million of key man life insurance for each of Messrs. Hoehn-Saric
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<PAGE>
and Becker and $3.0 million of key man life insurance for Mr. McGee. NEC
maintains $5.0 million of key man life insurance for Mr. Yau.
RISKS RELATED TO SYLVAN'S OPERATIONS
Dependence on Profitable Franchise Operations; Dependence on Franchisees
for Technology Centers. More than 90% of Sylvan Learning Centers are currently
operated by franchisees. Sylvan's revenues from franchised Learning Centers
depend on the franchisees' ability to operate their Learning Centers profitably
and adhere to Sylvan's standards. Although Sylvan has a quality review process,
it cannot be certain that franchisees will conduct their operations profitably
or in accordance with Sylvan's guidelines. The closing of unprofitable Learning
Centers or the failure of franchisees to comply with Sylvan policies could
adversely affect its reputation and business prospects.
If Sylvan is unable to attract new franchisees meeting its standards or to
convince existing franchisees to open additional Learning Centers, any growth in
royalties from franchised Learning Centers will depend solely upon increases in
revenues at existing Learning Centers.
Limitations from Franchise Regulation. Sylvan is subject to federal and
state laws regulating the offer and sale of franchises. These laws impose
registration and extensive disclosure requirements on the offer and sale of
franchises. These laws frequently apply substantive standards to the
relationship between franchisor and franchisee and limit the ability of a
franchisor to terminate or refuse to renew a franchise. State franchise laws
may delay or prevent Sylvan from terminating a franchise or withholding consent
to renewal or transfer of a franchise, and Sylvan may, therefore, be required to
retain a poorly performing franchisee and may be unable to replace the
franchisee, which could have an adverse effect on franchise royalties. In
addition, the nature and effect of any future legislation or regulation on
Sylvan's franchise operations cannot be predicted.
Importance of Computer-Based Testing. A significant amount of the growth
in Sylvan's revenues and profits is projected to result from computer-based
testing services. The termination, nonrenewal or material modification of
Sylvan's contracts with ETS, Novell or Microsoft or any other significant
agreements to provide computer-based testing services would have a materially
adverse effect on Sylvan's results of operations and prospects for growth.
Sylvan only began providing computer-based testing services in late 1991,
and there can be no assurance that computer-based testing will receive
sufficient market acceptance to cause test administrators to continue to offer
computer-based tests or convert additional tests to computer-based versions in
the near future. Furthermore, there can be no assurance that events beyond the
control of both Sylvan and test administrators, such as testing security
concerns, will not reduce or limit market acceptance of computer-based testing
or discourage test administrators from continuing to offer computer-based tests
or converting additional tests to a computer-based format.
Limited Title I Experience. A significant amount of Sylvan's growth also
is projected to result from its contract educational services. Sylvan has
provided educational services funded under federal Title I and similar state
programs only since the spring of 1993, when Sylvan's Title I program was first
offered in public schools in Baltimore, Maryland. Since 1993, the number of
public schools in Baltimore in which Sylvan's services are offered has increased
significantly. Sylvan also currently provides Title I services to students
attending non-public schools, pursuant to contracts between local public school
authorities and entities recently acquired by Sylvan. There can be no assurance
that contracts with existing school districts will be renewed or that Sylvan
will obtain contracts with other school districts. The majority of Sylvan's
contracts contain provisions for cancellation by school district officials based
on certain factors, including funding constraints.
Limited Title I Market for Federal-Funded Contract Services; Possible
Opposition to Services; Legislative Reauthorization of Title I. The market for
Sylvan's Title I services is effectively limited to the nation's larger school
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<PAGE>
districts, in which the population of students eligible for Title I services and
per pupil Title I expenditures make Sylvan's services cost-effective. Many
educators and policy makers have criticized the "pullout" approach, whereby
Title I or similar services are provided in a separate classroom during regular
school hours. This approach is the method currently prescribed by the Baltimore
City Schools, as well as by other school districts in which Sylvan currently
provides Title I services, and also is the method prescribed by many other
school districts that are potential clients of Sylvan. School districts to
which Sylvan now provides educational services under contract may decide not to
renew existing contracts, and other school districts may decide not to use
Sylvan's services because government agencies, parents and collective bargaining
units representing teachers and aides may oppose Sylvan's Title I or similar
programs based on the nature of Sylvan's teaching method or the potential threat
to teacher and aide employment.
Enactment of the Improving America's School Act of 1994 reauthorized the
Chapter I program for an additional five years, effective July 1, 1995, under
the name Title I of the Elementary and Secondary Education Act ("Title I").
Title I includes at least three substantive changes which potentially could
have a material adverse effect on Sylvan. First, Title I provides greater
impetus for school districts to implement schoolwide programs aimed at boosting
achievement of disadvantaged children by improving a school's overall program.
Sylvan currently provides "pullout" as opposed to schoolwide services. Second,
Title I may reduce the reliance of school districts on standardized tests as a
means of measuring student performance, by requiring states to develop and apply
assessments involving multiple measures of student performance. Sylvan's
services now include the provision of standardized tests to measure student
performance. Third, Title I may cause reductions in the extent of services
available to disadvantaged students attending non-public schools, rather than
(as under Chapter I) reduction in the number of disadvantaged students attending
non-public schools who are entitled to receive services. Sylvan cannot
accurately predict the likely impact these substantive changes will have on
Sylvan's contracts to provide Title I services or Sylvan's ability to have those
contracts renewed or its ability to enter into contracts with additional school
districts.
RISKS RELATED TO NEC'S OPERATIONS
Product Development and Distribution; Dependence on New, Updated and
Licensed Products. Revenue growth for NEC is dependent upon the successful
development and distribution of a substantial number of new courses and products
each year, as well as the successful revision and updating of existing products.
While NEC has entered into certain arrangements to provide for the timely
development of new products and for the licensing of courses and products from
third parties and NEC makes substantial investments in product development and
product acquisition, and is constantly looking for new product opportunities,
there is no assurance that it will be successful in these efforts in the future.
Failure to timely obtain or develop competitive new products, the loss of access
to third party courses and products, and the loss of relationships with
distributors likely would have a material adverse effect on NEC's financial
performance and prospects for growth.
Shifts in the Marketplace and Technology. The market for media-based
training products is growing. However, no assurance can be given this market
will continue to grow. A reversal in this trend toward media-based training
products with a shift toward instructor-led training or otherwise could have an
adverse effect on NEC's financial performance. In addition, many of NEC's
products are technology-based and are delivered to the learner in a computer-
based format using currently available technology, such as CD-ROM. Although NEC
believes that it is well positioned to incorporate advances in technology into
its products and the delivery of its products, there can be no assurance that
changes in technology, such as rapid development of internet, satellite or other
electronically deployable products, will not cause NEC's products or the methods
of delivery of its products to become obsolete, and thereby require a
significant investment to keep NEC's products and methods of delivery current.
Failure to timely and effectively respond to such technology changes could have
an adverse effect on NEC's operating results.
Volatility of Media Costs. The ability of ICS Learning Systems, Inc.
("ICS") to attract new students is dependent, in large part, on the success of
its advertising efforts. The cost of television time, in particular, which
represents approximately 30% of ICS's annual advertising expenditures, is more
volatile than the advertising cost of
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<PAGE>
other media. To date, ICS has been able to purchase favorably priced
"preemptive" television time, "remnant" print space, and other advertising at
attractively negotiated rates. From time to time, ICS has faced increased
competition for such advertising outlets. Higher costs and reduced advertising
availability resulting from such competition, as well as general rate increases,
would raise the cost of attracting new students and could have an adverse effect
on ICS's operating results.
Regulation of Home Study Schools. ICS is subject to the regulations of the
Federal Trade Commission, certain licensing standards, including the regulations
of the State of Pennsylvania State Board of Private Licensed Schools, the
accreditation standards of the Distance Education Training Council and various
foreign, federal and state laws and regulations, including the Council for the
Accreditation of Correspondence Colleges of the United Kingdom. Failure to
maintain these required licenses and accreditations would have a material
adverse effect on ICS's business. To date, ICS has been successful in
addressing inquiries; however, an adverse action by an entity with regulatory,
licensing or accreditation authority would have a material adverse effect on
ICS's business. To the extent that other states are successful in subjecting
ICS to their regulatory framework, such regulation could significantly increase
the administration and operating costs of ICS. ICS cannot predict the nature or
effect of future legislation or regulation on its business operations or
financial condition.
Conversion of Sales Leads and Course Completion. ICS's sales and
profitability depend, in significant part, on its ability to convert sales leads
(i.e., inquiries prompted by its advertising and promotional materials) into
enrollments and to motivate its students to progress in and complete courses.
While ICS believes it has developed a cost- effective direct marketing system
and that its course materials and multiple media instruction, testing and
delivery methods are designed to encourage its students to maintain a continued
relationship with ICS through course progression and completion, there can be no
assurance that ICS will be able to maintain or improve its conversion and/or its
course completion rates. A decline in conversion or completion rates would have
an adverse effect on ICS's financial performance.
Sales and Use Taxes; Interstate Commerce. Various states are seeking to
impose sales or use taxes on interstate activities of direct response marketers.
Legal issues relate, among other things, to the required nexus of a business
with a particular state, which may permit the state to require a business to
collect such taxes. ICS's correspondence school business does not maintain any
domestic offices or sales representatives for its programs outside the
Commonwealth of Pennsylvania and does not collect sales tax on its tuition
payments from its students outside of Pennsylvania. The imposition of sales tax
on program tuition would have a negative effect on enrollment levels and would
increase administrative expenses. There can be no assurance that in the future,
ICS will not be required to collect such taxes.
Product Development; Dependence on New and Updated Products. ICS's revenue
growth is dependent in significant part on ICS's expansion into new market
niches, particularly technology and professional market segments. Successful
expansion into new market segments, such as the technology and professional
market segments, is dependent upon ICS's successful development of a number of
new courses and products each year and the successful revision and updating of
existing products. There can be no assurance that new courses will be timely
developed or that existing courses will be timely revised or updated. Also,
there can be no assurance that new and revised or updated courses will compete
effectively with products offered by ICS's competitors. Failure to timely
develop new products or revise or update existing products will have a material
adverse effect on ICS's financial performance.
Government Budgets. Most funding of educational materials is dependent on
government support from one or more sources. The purchase of educational
materials in the elementary, high school and library markets is generally funded
via state and local taxation revenues. Many special education and adult
education programs are dependent to a significant extent on federal funding.
Budget deficits affecting federal, state and local governments may limit the
availability of funding for educational programs and libraries. Future
constraints on educational funding could have an adverse effect on the business
of Steck-Vaughn Publishing Corporation ("SVPC").
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Decentralization of Purchasing Decisions. Previously, most decisions for
the purchase of educational materials were made at the school district level.
In recent years, the purchasing decision for many types of educational
materials, particularly supplemental educational materials, has been
increasingly delegated to the school level and the individual teacher level.
Although SVPC believes it is well positioned to compete effectively in the
decentralized environment, failure to effectively identify and reach the
purchasing decision makers could adversely affect SVPC's business.
Additionally, in large part because of the decentralization of educational
product purchasing decision, there is an increasing need to develop new or
alternate channels of distribution to reach effectively the ultimate purchasing
decision makers. Failure by SVPC to develop such new or alternate channels of
distribution would likely adversely affect its financial performance.
Seasonality of Revenues. A disproportionate amount of SVPC's revenues are
generated in the third quarter because most of SVPC's customers purchase
educational materials in the summer months in anticipation of classes commencing
in the fall; and a disproportionate amount of the revenues of National Education
Training Group, Inc. ("NETG") are generated in the fourth quarter principally
because of renewal of annual contracts concentrated during that period. Failure
of SVPC and NETG to achieve anticipated third and fourth quarter revenues in a
particular year, respectively, would likely adversely affect the operating
results of NEC for that year.
NO DIVIDENDS
Sylvan has never declared or paid cash dividends. Sylvan currently expects
to retain its earnings for its business and does not anticipate paying dividends
at any time in the foreseeable future. The decision whether to apply legally
available funds to the payment of dividends on Sylvan Common Stock will be made
by the Sylvan Board of Directors from time to time in the exercise of its
business judgment. See "COMPARATIVE STOCK PRICES."
POTENTIAL EFFECTS OF CERTAIN SYLVAN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Sylvan Charter and By-Laws may have the effect of
making more difficult an acquisition of Sylvan in a transaction that is not
approved by the Sylvan Board of Directors. For example, the Sylvan Board of
Directors is given the power to issue up to 10,000,000 shares of Preferred Stock
of Sylvan in one or more series, and to fix the rights and preferences as to any
such series, without further authorization of the holders of Sylvan Common
Stock. In addition, unless the Directors Amendment is approved, the Sylvan
Board of Directors will continue to be divided into three classes, each of which
serves for a staggered three-year term, making it more difficult for a third
party to gain control of the Sylvan Board of Directors. Also, in September
1996, the Sylvan Board of Directors adopted a shareholders rights plan. These
Charter and By-Laws provisions and adoption of a "poison pill" generally are
designed to permit Sylvan to develop its businesses and foster its long-term
growth without the disruption caused by the threat of a takeover not deemed by
the Sylvan Board of Directors to be in the best interests of Sylvan and its
stockholders. They may also have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of Sylvan even
though such an attempt might be economically beneficial to Sylvan and its
stockholders. See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Comparative
Rights of Stockholders of Sylvan and NEC," and "--Description of Sylvan Capital
Stock--Preferred Stock."
CERTAIN LITIGATION
On March 13, 1997, a purported class action complaint was filed in Orange
Country Superior Court in Santa Ana, California, seeking to enjoin the Merger
and alleging breach of fiduciary duty by NEC's directors in connection with
their approval of the Merger Agreement and the Merger. There can be no
assurance that such plaintiffs will not be successful, and neither NEC nor
Sylvan can estimate, based on facts available as of the date of this Joint Proxy
Statement/Prospectus, the possible adverse effects if such plaintiffs are
successful, which could include the inability to consummate the Merger,
rescission of the Merger and monetary damages.
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CONFLICTS OF INTEREST
Certain members of the NEC management and NEC Board of Directors have
interests in the Merger that are in addition to and potentially in conflict with
the interests of the NEC stockholders generally. The NEC Board of Directors was
aware of these interests and considered them, among other things, in approving
the Merger Agreement and the Merger. See "PROPOSAL I: THE SHARE ISSUANCE AND
THE MERGER--Interests of Certain Persons in the Merger."
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INFORMATION CONCERNING THE SYLVAN ANNUAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Sylvan in connection with the solicitation of proxies by the Sylvan Board from
holders of Sylvan Common Stock for use at the Annual Meeting to be held on June
26, 1997 at 10:00 a.m., local time, at 1000 Lancaster Street, Baltimore,
Maryland 21202 or at any adjournments or postponements thereof. At the Sylvan
Annual Meeting, holders of Sylvan Common Stock will be asked to consider and
vote upon proposals to approve the: (i) Share Issuance pursuant to the Merger
Agreement; (ii) Directors Amendment; (iii) Common Shares Amendment; (iv)
Preferred Shares Amendment; (v) 1993 Plan Amendment; (vi) Management Plan
Amendment; (vii) election of the Merger Nominees; (viii) election of the
Contingent Nominees; (ix) Auditor Confirmation; and (x) such other matters as
may properly come before the Sylvan stockholders at the Sylvan Annual Meeting.
Approval of the Share Issuance by Sylvan stockholders is a condition to
consummation of the Merger. See "PROPOSAL I: THE SHARE ISSUANCE AND THE
MERGER--The Merger Agreement--Conditions Precedent to the Merger." Only holders
of record of Sylvan Common Stock at the close of business on the Sylvan Record
Date are entitled to notice of, and to vote at, the Sylvan Annual Meeting. At
the close of business on the Sylvan Record Date, ____________ shares of Sylvan
Common Stock were outstanding, which constituted the only outstanding voting
securities of Sylvan.
RECORD DATE; QUORUM; REQUIRED VOTE
The Sylvan Record Date has been fixed at the close of business on May 9,
1997. Only holders of record of Sylvan Common Stock at the close of business on
the Sylvan Record Date will be entitled to notice of, and to vote at, the Sylvan
Annual Meeting or any adjournment or postponement thereof. At the close of
business on the Sylvan Record Date, ______________ shares of Sylvan Common Stock
were issued and outstanding and were held by approximately _________ holders of
record. The Sylvan Common Stock constitutes the only outstanding class of
voting securities of Sylvan, and each share of Sylvan Common Stock is entitled
to one vote on each matter to be acted upon or which may come before the Sylvan
Annual Meeting. Votes may be cast at the Sylvan Annual Meeting in person or by
proxy. See "--Proxies."
The presence at the Sylvan Annual Meeting, either in person or by proxy, of
stockholders entitled to a majority of all votes entitled to be cast will
constitute a quorum to transact business at the Sylvan Annual Meeting. If a
quorum is not present at the Sylvan Annual Meeting, the stockholders who are
present and entitled to vote at the Sylvan Annual Meeting may adjourn the Sylvan
Annual Meeting from time to time to a date nor more than 120 days after the
original record date without notice other than announcement at the Sylvan Annual
Meeting until a quorum is present.
The affirmative vote of the holders of a majority of the shares of Sylvan
Common Stock voting on each of the Share Issuance and the Plan Amendments (where
the total number of votes cast on the respective proposal represents over 50% of
all shares of Sylvan Common Stock outstanding on the Sylvan Record Date and
entitled to vote) is required to approve these Sylvan Proposals. Abstentions
will have the same effect as votes cast against the Share Issuance or either of
the Plan Amendments, as the case may be. However, broker non-votes (i.e.,
shares held by brokers in street name that are not entitled to vote at the
Sylvan Annual Meeting due to the absence of specific instructions from the
beneficial owners of such shares) will be disregarded and will have no effect on
the votes on the Share Issuance or either of the Plan Amendments.
The affirmative vote of the holders of at least a majority of the total
outstanding shares of Sylvan Common Stock on the Sylvan Record Date is required
to approve each of the Charter Amendments. Under the MGCL, in determining
whether the proposal to approve each of the Charter Amendments has received the
requisite number of affirmative votes, abstentions and broker non-votes will be
counted and will have the same effect as a vote against such proposal.
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A plurality of votes cast in the election for the Sylvan Board Nominees is
necessary for their election. Broker non-votes will not be counted as shares
present and voting at the Sylvan Annual Meeting for purposes of determining
whether the Sylvan Board Nominees received a plurality.
As of the close of business on the Sylvan Record Date, Sylvan directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of ____ outstanding shares (excluding shares underlying stock options) of
Sylvan Common Stock, or approximately __% of the then outstanding shares of
Sylvan Common Stock. It is expected that such executive officers and directors
of Sylvan will vote for approval of each of the Sylvan Proposals. See
"PROPOSALS VII AND VIII: ELECTIONS OF SYLVAN BOARD NOMINEES--STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT--Sylvan."
THE SYLVAN BOARD UNANIMOUSLY RECOMMENDS THAT SYLVAN STOCKHOLDERS VOTE FOR
APPROVAL OF EACH OF THE SYLVAN PROPOSALS.
PROXIES
Shares of Sylvan Common Stock represented by properly executed proxies
received in time for the Sylvan Annual Meeting will be voted at the Sylvan
Annual Meeting in the manner specified on such proxies. Proxies which are
properly executed but which do not contain voting instructions will be voted FOR
approval for each of the Sylvan Proposals. It is not expected that any matter
other than those contemplated by the Sylvan Proposals will be brought before the
Sylvan Annual Meeting; however, if other matters are properly presented, the
persons named in such proxy will have authority to vote in accordance with their
judgment on any other such matter, including without limitation, any proposal to
adjourn or postpone the meeting or otherwise concerning the conduct of the
meeting. If a proxy is returned which specifies a vote against the Share
Issuance, such discretionary authority will not be used to adjourn the Sylvan
Annual Meeting in order to solicit additional votes in favor of the Share
Issuance.
The grant of a proxy on the enclosed Sylvan proxy card does not preclude a
stockholder from voting in person at the Sylvan Annual Meeting. A stockholder
may revoke a proxy at any time prior to its exercise by (i) delivering, prior to
the Sylvan Annual Meeting, to Douglas L. Becker, Secretary, Sylvan Learning
Systems, Inc., 1000 Lancaster Street, Baltimore, Maryland 21202, a written
notice of revocation bearing a later date or time than the proxy; (ii)
delivering to the Secretary of Sylvan a duly executed proxy bearing a later date
or time than the revoked proxy; or (iii) attending the Sylvan Annual Meeting and
voting in person. Attendance at the Sylvan Annual Meeting will not by itself
constitute revocation of a proxy.
Sylvan will bear the cost of solicitation of proxies from its stockholders,
except that Sylvan and NEC intend to share equally the cost of preparing and
printing this Joint Proxy Statement/Prospectus relating to the Share Issuance
and the Merger, including related filing fees. In addition to solicitation by
mail, the directors, officers and employees of Sylvan and its subsidiaries may
solicit proxies from stockholders of Sylvan by telephone, telegram or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and Sylvan will
reimburse such custodians, nominees and fiduciaries for their reasonable out-of-
pocket expenses in connection therewith.
In addition, Sylvan has retained D.F. King & Company, Inc. ("D.F. King") to
assist Sylvan in the solicitation of proxies from stockholders in connection
with the Sylvan Annual Meeting. D.F. King will receive a fee of $________
as compensation for its services and reimbursement of its out-of-pocket expenses
in connection therewith. Sylvan has agreed to indemnify D.F. King against
certain liabilities arising out of or in connection with its engagement.
Representatives of Ernst & Young LLP are expected to be present at the
Sylvan Annual Meeting, where they will have the opportunity to make a statement
if they desire to do so and will be available to respond to appropriate
questions.
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APPRAISAL RIGHTS
Stockholders of Sylvan will have no objecting stockholders' appraisal
rights under the MGCL in connection with the Share Issuance. See "PROPOSAL I:
THE SHARE ISSUANCE AND THE MERGER--Comparative Rights of Stockholders of Sylvan
and NEC--Appraisal Rights."
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INFORMATION CONCERNING THE NEC SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
NEC in connection with the solicitation of proxies by the NEC Board from holders
of NEC Common Stock for use at the NEC Special Meeting to be held on June 25,
1997 at 10:00 a.m., local time, at [_______________________________________],
and at any adjournments or postponements thereof. At the NEC Special Meeting,
holders of NEC Common Stock will be asked to consider and vote upon a proposal
to approve the terms of the Merger Agreement and the transactions contemplated
thereby, including the Merger.
RECORD DATE; QUORUM; VOTE REQUIRED
The NEC Record Date has been fixed at the close of business on May 9, 1997.
Only holders of record of NEC Common Stock at the close of business on the NEC
Record Date will be entitled to notice of, and to vote at, the NEC Special
Meeting and at any adjournment or postponement thereof. At the close of
business on the NEC Record Date, ______________ shares of NEC Common Stock were
outstanding and were held by approximately _________ holders of record. The NEC
Common Stock constitutes the only outstanding class of voting securities of NEC,
and each share of NEC Common Stock is entitled to one vote on each matter to be
acted upon or which may come before the NEC Special Meeting. Votes may be cast
at the NEC Special Meeting in person or by proxy. See"--Proxies."
The presence at the NEC Special Meeting, either in person or by proxy, of
the holders of not less than 50% of the issued and outstanding shares of NEC
Common Stock entitled to vote will constitute a quorum to transact business at
the NEC Special Meeting. Both abstentions and broker non-votes will be counted
for purposes of determining whether a quorum is present. If a quorum is not
present at the NEC Special Meeting, the stockholders who are present and
entitled to vote at the NEC Special Meeting may, by a majority vote, adjourn the
NEC Special Meeting from time to time until a quorum is present without notice
or other announcement; provided however, that if the adjournment lasts more than
30 days or a new record date is set for the adjourned meeting, a notice of the
adjourned meeting must be given to each stockholder entitled to vote at such
adjourned meeting.
The affirmative vote of at least a majority of the total outstanding shares
of NEC Common Stock entitled to vote thereon is required to approve the Merger
Proposal. Under applicable Delaware law, in determining whether the Merger
Proposal has received the requisite number of affirmative votes, abstentions and
broker non-votes will be counted and will have the same effect as a vote against
the Merger Proposal.
As of the close of business on the NEC Record Date, NEC directors and
executive officers and their affiliates may be deemed to be the beneficial
owners of _________ outstanding shares (excluding shares underlying stock
options) of NEC Common Stock, or approximately __% of the then outstanding
shares of NEC Common Stock. It is expected that such executive officers and
directors of NEC will vote for approval of the Merger Proposal. See "PROPOSAL
I: THE SHARE ISSUANCE AND THE MERGER--Interest of Certain Persons in the
Merger."
THE NEC BOARD UNANIMOUSLY RECOMMENDS THAT NEC STOCKHOLDERS VOTE FOR APPROVAL OF
THE MERGER.
PROXIES
Shares of NEC Common Stock represented by properly executed proxies
received in time for the NEC Special Meeting will be voted at the NEC Special
Meeting in the manner specified by the holder thereof. Proxies which are
properly executed but which do not contain voting instructions will be voted FOR
approval of the
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Merger. It is not expected that any matter other than that contemplated by the
Merger Proposal will be brought before the NEC Special Meeting; however, if
other matters are properly presented, the persons named in such proxy will have
authority to vote in accordance with their judgment on any other such matter,
including without limitation, any proposal to adjourn or postpone the meeting or
otherwise concerning the conduct of the meeting. If a proxy is returned which
specifies a vote against the Merger, such discretionary authority will not be
used to adjourn the NEC Special Meeting in order to solicit additional votes in
favor of the Merger.
The grant of a proxy on the enclosed NEC proxy card does not preclude a
stockholder from voting in person at the NEC Special Meeting. A stockholder may
revoke a proxy at any time prior to its exercise by (i) delivering, prior to the
NEC Special Meeting, to Philip C. Maynard, Secretary, National Education
Corporation, 2601 Main Street, Suite 700, Irvine, California 92614, a written
notice of revocation bearing a later date or time than the proxy; (ii)
delivering to the Secretary of NEC a duly executed proxy bearing a later date or
time than the revoked proxy; or (iii) attending the NEC Special Meeting and
voting in person. Attendance at the NEC Special Meeting will not by itself
constitute revocation of a proxy.
NEC will bear the cost of solicitation of proxies from its stockholders,
except that Sylvan and NEC intend to share equally the cost of preparing and
printing this Joint Proxy Statement/Prospectus relating to the Share Issuance
and the Merger, including related filing fees. In addition to solicitation by
mail, the directors, officers and employees of NEC and its subsidiaries may
solicit proxies from stockholders of NEC by telephone, telegram or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and NEC will
reimburse such custodians, nominees and fiduciaries for their reasonable out-of-
pocket expenses in connection therewith.
In addition, NEC has retained D. F. King & Company, Inc. ("D. F. King") to
assist NEC in the solicitation of proxies from stockholders in connection with
the NEC Special Meeting. D. F. King will receive a fee of $7,500 as
compensation for its services and reimbursement of its out-of-pocket expenses in
connection therewith. NEC has agreed to indemnify D. F. King against certain
liabilities arising out of or in connection with its engagement.
Representatives of Price Waterhouse LLP are expected to be present at the
NEC Special Meeting, where they will have the opportunity to make a statement if
they desire to do so and will be available to respond to appropriate questions.
APPRAISAL RIGHTS
Stockholders of NEC will have no dissenters' appraisal rights under the
DGCL in connection with the Merger Agreement and the consummation of the Merger.
See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Comparative Rights of
Stockholders of Sylvan and NEC--Appraisal Rights."
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PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER
The discussion in this Joint Proxy Statement/Prospectus of the Merger and
the description of the principal terms of the Merger Agreement are subject to
and qualified in their entirety by reference to the Merger Agreement, a copy of
which is attached to this Joint Proxy Statement/Prospectus as Annex I and is
incorporated herein by reference.
BACKGROUND OF THE MERGER
During the past two years, NEC, with the assistance of BZW, has engaged in
a continued review of various strategic alternatives in each of its three major
business segments. The review centered on growth opportunities, potential joint
venture partners, acquisitions and start-up opportunities. From time to time
during this period, representatives of various companies approached NEC on an
informal basis to express interest in exploring various strategic alternatives
with NEC or one of the various operating subsidiaries of NEC.
Beginning in January 1996, Mr. Sam Yau, President and Chief Executive
Officer of NEC, had several discussions with Douglas L. Becker, President and
Co-Chief Executive Officer of Sylvan, regarding various strategic alternatives
between ICS Learning Systems, Inc. ("ICS") and Sylvan, at which time Sylvan
executed a confidentiality agreement with NEC. On January 30, 1996, BZW
delivered a private placement memorandum to Sylvan in response to Sylvan's
interest in a possible investment in NEC. After reviewing this private
placement memorandum, Sylvan concluded its interest was mainly in ICS. On
February 8, 1996, a meeting attended by BZW, Messrs. Yau and Keisling of NEC,
and Messrs. Hoehn-Saric and Becker of Sylvan was held in Dallas, Texas regarding
a possible investment by Sylvan in ICS. On February 16, 1996, Sylvan sent an
initial proposal letter to NEC regarding an investment by Sylvan in ICS. During
the next several months, Messrs. Becker and Yau exchanged correspondence and met
informally in New York on May 15, 1996 to continue those discussions. On July
25, 1996, a meeting was held in Dallas, Texas between Messrs. Yau and Becker,
Sylvan's Co-Chief Executive Officer where possible strategic alternatives
between Sylvan and ICS and Sylvan and NETG were explored in general terms. On
that date, the companies executed confidentiality agreements. However, neither
party found the strategic alternatives suggested by the other to have enough
merit to pursue negotiations on a more formal basis after September 1996. Based
on those discussions, neither party took any further actions relating to an
investment by Sylvan in NEC, ICS or NETG. On October 2, 1996, Mr. Yau wrote to
Mr. Becker formally terminating discussions between NEC and Sylvan relating to a
possible investment by Sylvan in ICS.
To further evaluate the alternatives available to NEC, the management of
NEC made various contacts with third parties to test the level of market
interest in a strategic transaction involving NEC, as well as an ongoing review
of strategic alternatives. NEC management and its financial advisors solicited
preliminary indications of interest from several companies for a strategic
alliance with NEC to compare the value indicated by this market test against
NEC's ability to realize value for its stockholders by pursuing other
alternatives. NEC's financial advisors and management identified companies that
they believed would be possible strategic partners, and prepared an analysis of
NEC and the market for its securities to provide a basis for evaluating any
indications of interest that might be received by NEC.
Mr. Yau contacted Mr. Becker in early December, suggesting another meeting
to discuss possible synergistic marketing opportunities between Sylvan and ICS
and NETG. On December 12, 1996, Messrs. Becker and Yau met with the Presidents
of NETG and ICS to discuss these matters.
On January 3, 1997, Messrs. Yau and Becker discussed for the first time the
possibility of a business combination between Sylvan and NEC, which discussion
was followed by a letter on January 13, 1997 from Mr. Becker to Mr. Yau
formalizing Sylvan's proposal to combine the businesses of NEC and Sylvan. On
January 23, 1997, the NEC Board of Directors was informed of the results of
several exploratory meetings and discussions regarding the possibility of
certain strategic transactions involving NEC and Sylvan and authorized and
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directed management to continue discussions with Sylvan regarding a business
combination between the two companies. On January 24, 1997, Mr. Becker met with
Mr. Yau in California. Mr. Becker indicated at this meeting that Sylvan was
interested in continuing discussions only if Sylvan's stockholders were to
retain majority voting power of any combined entity.
Sylvan retained Alex. Brown on January 10, 1997 to act as Sylvan's
financial advisor in connection with Sylvan's review and negotiation of possible
business combinations with certain businesses, including the possible merger
with NEC and the rendering of its opinion to Sylvan's Board as to the fairness,
from a financial point of view, to Sylvan in connection with any such
transactions. During the month of January 1997, Alex. Brown held discussions
with Sylvan senior management and delivered to them various analyses relating to
NEC and a possible business combination with NEC.
On January 28, 1997, NEC senior management and BZW met by telephone
conference with Sylvan senior management and Alex. Brown to evaluate more
thoroughly a potential acquisition of NEC by Sylvan. During the week following
this conference call, negotiations and preliminary due diligence continued. On
January 31, 1997, NEC executed mutual confidentiality agreements with Sylvan. On
February 3 and 4, 1997, NEC and Sylvan and legal counsel exchanged due diligence
documents. On February 4, 1997, Alex. Brown and BZW met in New York to discuss
the potential merger. On February 6, 1997, Mr. Philip C. Maynard, Vice
President, General Counsel and Secretary of NEC, reviewed due diligence
materials in Baltimore provided by Sylvan and its legal counsel. On the weekend
of February 7, 1997, members of Sylvan and NEC management met in Baltimore to
give divisional management presentations and discussed possible synergies if the
businesses were combined. On February 9, 1997, representatives of Alex. Brown
met with members of Sylvan's senior management to review various analyses of
NEC. On February 10, 1997, those joint management presentations were delivered
at a combined meeting of representatives of the Boards of Directors of both
companies. During the weekend of February 7, 1997, NEC senior management and BZW
and Sylvan senior management and Alex. Brown met in Baltimore to discuss
financial due diligence. Negotiations continued, with Alex. Brown and BZW
meeting in New York to discuss specific terms on February 12, 1997. On February
17, 1997, Alex. Brown, on behalf of Sylvan, submitted a formal proposal to
acquire NEC in a stock-for-stock, tax-free transaction to be accounted for as a
pooling-of-interests. From February 24, 1997 through March 11, 1997, Sylvan and
NEC and their independent auditors conducted vigorous financial and accounting
due diligence in Austin, Baltimore, Irvine, Scranton and Chicago. During this
time, General Counsel and outside legal counsel for each of NEC and Sylvan
conducted in-depth legal due diligence. On February 25, 1997, Sylvan's legal
counsel delivered a draft merger agreement to NEC.
From February 12 to March 12, 1997, there continued to be extensive arm's-
length negotiations regarding, among other things, the Initial Conversion Ratio,
the circumstances under which a termination fee would be payable and the price
of Sylvan Common Stock at which either party could terminate the Merger
Agreement.
On February 19, 1997 at a regularly scheduled NEC Board Meeting, the NEC
Board discussed a number of issues, including the potential merger.
At an NEC Board of Directors meeting held on March 6, 1997, NEC's
management reported on the status of discussions with Sylvan. At the same NEC
Board meeting, BZW discussed its views on the business and operations of Sylvan,
discussed various analyses relating to the Merger and answered questions
regarding such analyses and prior analyses that had been discussed with the NEC
Board of Directors. Additionally, on March 6, 1997, representatives of Alex.
Brown made a presentation to senior management and members of the Board of
Directors and discussed with them various analyses relating to the Merger.
Management of each of NEC and Sylvan, along with their respective legal and
financial advisors, continued negotiations until March 11, 1997, including a
meeting on March 9, 1997 in Baltimore, at which time the draft Merger Agreement
was presented to the Boards of Directors of NEC and Sylvan for their respective
reviews.
On March 11, 1997, each of Sylvan and NEC held a Board of Directors
meeting. Representatives of Alex. Brown attended by telephone the Sylvan Board
Meeting and orally opined to the Sylvan Board of Directors that, as
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of such date and subject to the review of the definitive agreement, the Initial
Conversation Ratio pursuant to the draft Merger Agreement was fair from a
financial viewpoint to Sylvan. A partner of Piper & Marbury L.L.P. also attended
the meeting by conference call and answered questions of the Board relating to
the terms of the Merger Agreement. At this meeting, the Sylvan Board of
Directors approved the Merger and the draft Merger Agreement, subject to
finalization by Sylvan's senior management and advisors. At the NEC Board of
Directors meeting, NEC's legal advisors reported to the NEC Board of Directors
that NEC and Sylvan had negotiated a nearly final draft of the Merger Agreement
and reviewed its terms with the NEC Board of Directors. The NEC Board of
Directors received the oral opinion of BZW that, as of such date and subject to
review of the definitive Merger Agreement, the Initial Conversion Ratio pursuant
to the draft Merger Agreement was fair, from a financial point of view, to the
holders of shares of NEC Common Stock (other than Sylvan, Merger Sub or any
other wholly-owned subsidiary of Sylvan). The NEC Board of Directors objected
to the termination fee and certain other provisions of the draft Merger
Agreement. The NEC Board of Directors agreed to adjourn for several hours to
give its management and advisors an opportunity to renegotiate with Sylvan the
terms in the draft Merger Agreement unacceptable to the NEC Board of Directors.
NEC's legal counsel related to Sylvan's legal counsel the objections of the NEC
Board of Directors to the draft Merger Agreement. After consultation with its
outside counsel and Alex. Brown, Sylvan agreed to revise certain provisions of
the draft Merger Agreement and very early on the morning of the March 12, 1997
presented a final draft Merger Agreement to NEC. The NEC Board of Directors
reconvened upon receipt of the revised draft Merger Agreement. Upon discussion
with its outside legal counsel and BZW about the impact of the revisions, the
NEC Board of Directors approved the Merger and the revised draft Merger
Agreement. The definitive Merger Agreement was executed and delivered by NEC
and Sylvan at approximately 7:00 a.m., eastern time, on March 12, 1997. On
March 12, 1997, Alex. Brown and BZW confirmed in writing the oral opinions they
had given on March 11, 1997 to Sylvan and NEC, respectively.
REASONS OF SYLVAN FOR THE MERGER; RECOMMENDATION OF THE SYLVAN BOARD
THE SYLVAN BOARD OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF SYLVAN AND ITS STOCKHOLDERS AND RECOMMENDS
THAT SYLVAN'S STOCKHOLDERS VOTE TO APPROVE THE SHARE ISSUANCE. As discussed
below, Sylvan believes that the strategic fit and strengths of Sylvan and NEC
will enhance Sylvan's competitive position, offer potential cost savings and
opportunities for other synergies, and provide a platform for continued growth,
both internally and through acquisitions. In reaching its determination, the
Sylvan Board of Directors consulted with management, as well as its advisors,
and considered various factors, including:
(1) the business, assets, management, competitive position and prospects of
Sylvan and NEC, including the analysis, judgment and advice of Sylvan management
with respect thereto, the synergy opportunities for a combined Sylvan-NEC, the
quality of NEC's assets, the complementary management teams, and the expected
strong competitive position of the combined entity;
(2) the financial condition, cash flows and results of operations of Sylvan
and NEC, both on a historical and a prospective basis, including the strong
results of operations and cash flows of the combined entity and the accretive
nature of the Merger;
(3) NEC's strengths in the educational services industry, including but not
limited to its expertise in direct marketing, product development and marketing
of educational products and computer-based training products;
(4) the significant potential enhancement of the strategic and market
position of the combined entity beyond that achievable by Sylvan alone,
particularly in computer-based training and direct marketing of educational
products and services, both of which offer significant new growth opportunities
for the combined company, and the increase in international business
opportunities expected to result from the combination of the two companies;
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(5) historical market prices and trading information with respect to Sylvan
Common Stock and NEC Common Stock and the Initial Conversion Ratio to be used as
a basis for converting NEC Common Stock into Sylvan Common Stock;
(6) the terms and conditions of the Merger Agreement, including the form
and amount of consideration, that the consideration was fair to Sylvan, that
although the Initial Conversion Ratio was subject to increase, Sylvan was
entitled to terminate the Agreement if the Average Share Price is below $29.86,
that the transaction was structured as a stock-for-stock merger and that the
representations and warranties given by NEC were reasonable (See "PROPOSAL I:
THE SHARE ISSUANCE AND THE MERGER The Merger Agreement");
(7) detailed financial analyses and presentations of Alex. Brown, Sylvan's
financial advisor in connection with the Merger, and its opinion that the
Initial Conversion Ratio in the Merger is fair, from a financial point of view,
to Sylvan (See PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER Sylvan Financial
Advisor");
(8) the intended treatment of the Merger as a tax-free reorganization under
the Code and the condition to Sylvan's obligation under the Merger Agreement
that Sylvan receive an opinion from its tax counsel as to the tax-free nature of
the Merger (See "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER Certain Federal
Income Tax Consequences" and "PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER The
Merger Agreement Conditions Precedent to the Merger");
(9) the intended treatment of the Merger as a pooling-of-interests for
financial reporting and accounting purposes and the condition to Sylvan's
obligation under the Merger Agreement that Sylvan and NEC receive Pooling
Letters from their respective independent auditors. (See "PROPOSAL I: THE
SHARE ISSUANCE AND THE MERGER The Merger Agreement Conditions Precedent to the
Merger");
(10) the increased asset and earnings base and diversification of
businesses of the combined company, which should mitigate the risk of earnings
instability; and
(11) the opportunity to achieve a larger and more stable platform to
continue to make strategic acquisitions.
The foregoing discussion of the factors considered by the Sylvan Board of
Directors is not intended to be exhaustive. In view of the wide variety of
factors considered in connection with its evaluation of the Merger, the Sylvan
Board did not quantify or assign any relative weights to the factors considered
in reaching its determination, although its individual members may have given
different weights to different factors.
THE SYLVAN BOARD HAS UNANIMOUSLY CONCLUDED THAT THE MERGER IS FAIR TO,
AND IN THE BEST INTERESTS OF, SYLVAN AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT SYLVAN STOCKHOLDERS VOTE
FOR APPROVAL OF THE SHARE ISSUANCE.
SYLVAN FINANCIAL ADVISOR
Sylvan retained Alex. Brown on January 10, 1997 to act as Sylvan's
financial advisor in connection with Sylvan's review and negotiation of possible
business combinations with certain businesses, including the possible merger
with NEC and the rendering of its opinion to Sylvan's board as to the fairness,
from a financial point of view, to Sylvan, in connection with any such
transaction.
At the March 11, 1997 meeting of the Sylvan Board of Directors,
representatives of Alex. Brown made a presentation by telephone with respect to
the Merger and rendered to Sylvan's Board its oral opinion, confirmed in writing
on March 12, 1997 (the "Alex. Brown opinion"), that, as of such date, and
subject to the assumptions made,
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matters considered and limitations set forth in such opinion and summarized
below, the initial Conversion Ratio was fair, from a financial point of view, to
Sylvan. All information and analyses, other than the Merger Agreement dated as
of March 12, 1997, were as of March 10, 1997. No limitations were imposed by
Sylvan on the scope of Alex. Brown's investigation or the procedures to be
followed by Alex. Brown in rendering its opinion.
THE FULL TEXT OF THE ALEX. BROWN OPINION IS ATTACHED AS ANNEX II TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
SYLVAN SHAREHOLDERS ARE URGED TO READ THE ALEX. BROWN OPINION IN ITS ENTIRETY
FOR A DISCUSSION OF ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS PLACED
ON THE REVIEW UNDERTAKEN BY ALEX. BROWN IN RENDERING ITS OPINION. ALEX. BROWN
WAS NOT REQUESTED TO AND DID NOT MAKE ANY RECOMMENDATION TO THE SYLVAN BOARD AS
TO THE FORM OR AMOUNT OF THE CONSIDERATION TO BE PAID BY SYLVAN IN THE MERGER,
WHICH WAS DETERMINED THROUGH ARM'S-LENGTH NEGOTIATIONS BETWEEN THE PARTIES. IN
ARRIVING AT ITS OPINION, ALEX. BROWN DID NOT ASCRIBE A SPECIFIC RANGE OF VALUE
TO NEC, BUT RATHER MADE ITS DETERMINATION AS TO THE FAIRNESS, FROM THE FINANCIAL
POINT OF VIEW TO SYLVAN, OF THE INITIAL CONVERSION RATIO ON THE BASIS OF THE
FINANCIAL AND COMPARATIVE ANALYSES DESCRIBED BELOW. THE ALEX. BROWN OPINION IS
FOR THE USE AND BENEFIT OF THE SYLVAN BOARD AND WAS RENDERED TO THE SYLVAN BOARD
IN CONNECTION WITH THE SYLVAN BOARD'S CONSIDERATION OF THE MERGER. THE ALEX.
BROWN OPINION IS NOT INTENDED TO BE AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER OF SYLVAN OR NEC AS TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH
RESPECT TO THE SHARE ISSUANCE OR THE MERGER PROPOSAL. ALEX. BROWN WAS NOT
REQUESTED TO OPINE AS TO, AND ITS OPINION DOES NOT ADDRESS, SYLVAN'S UNDERLYING
BUSINESS DECISION TO PROCEED WITH OR EFFECT THE MERGER. THE SUMMARY OF THE ALEX.
BROWN OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ALEX. BROWN OPINION.
It should be understood that, although subsequent developments may affect
the Alex. Brown Opinion, Alex. Brown does not have any obligation to update,
revise, or reaffirm its opinion, and Sylvan's obligation to consummate the
Merger is not conditioned upon an update of the Alex. Brown Opinion. However,
Sylvan's obligation to consummate the Merger is conditioned upon the Alex. Brown
Opinion not having been withdrawn.
In connection with its opinion, Alex. Brown reviewed and analyzed: (i) the
Merger Agreement and specific terms of the Merger, (ii) certain publicly
available financial and other information concerning NEC and Sylvan that Alex.
Brown believed to be relevant to its analysis, (iii) certain financial and other
information with respect to the business, operations and prospects of NEC
furnished to Alex. Brown by NEC, including certain presentations made by NEC
management to Sylvan, certain internal analyses prepared by NEC, and projections
of future financial performance of NEC prepared by NEC management, (iv) certain
financial and other information with respect to the business, operations and
prospects of Sylvan furnished to Alex. Brown by Sylvan, including certain
internal analyses prepared by Sylvan and projections of future financial
performance of Sylvan prepared by Sylvan management, (v) the publicly reported
prices and trading activity for the Common Stock of both Sylvan and NEC, (vi) a
comparison of certain publicly-available financial and stock market information
for Sylvan and NEC with similar information for certain other educational
services companies whose securities are publicly traded, (vii) the potential pro
forma impact on Sylvan of the Merger, (viii) a comparison of the financial terms
of the Merger with the publicly-reported financial terms of certain other
business combinations in the educational services industry, and (ix) other
studies, analyses and factors as Alex. Brown deemed appropriate. In addition,
Alex. Brown had discussions with the management of NEC and Sylvan concerning the
respective businesses, operations, assets, financial conditions and prospects of
their respective companies and the strategic benefits expected to result from a
combination of their businesses and considered such other matters as Alex. Brown
deemed appropriate. Alex. Brown also considered general economic, market, and
financial conditions as of March 10, 1997.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon the accuracy, completeness and fairness of the financial and
other information used by Alex. Brown, including publicly available information,
without assuming any responsibility for the independent verification of such
information and further relied upon the assurances of the management of NEC and
Sylvan that they are not aware of any omitted material facts that would make
such information inaccurate or misleading.
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With respect to the financial projections of NEC, with the consent of
Sylvan, Alex. Brown assumed that such projections were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of NEC as to the future financial performance of NEC and that NEC
will perform substantially in accordance with such projections. With respect to
the financial projections for Sylvan, upon advice of Sylvan, Alex. Brown assumed
that such projections were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of Sylvan as to
the future financial performance of Sylvan and that Sylvan will perform
substantially in accordance with such projections. The financial projections of
Sylvan and NEC that were provided to Alex. Brown were utilized and relied upon
by Alex. Brown in the Contribution Analysis, Discounted Cash Flow Analysis, and
the Pro Forma Earnings Analysis summarized below. In performing its analysis,
Alex. Brown made adjustments to certain historical periods for unusual, one-time
and nonrecurring items.
In arriving at its opinion, Alex. Brown did not conduct a physical
inspection of the properties or facilities of NEC or Sylvan and did not make or
obtain any evaluations or appraisals of the assets or liabilities of NEC or
Sylvan. Upon the advice of Sylvan and its legal and accounting advisors, Alex.
Brown assumed that the Merger would qualify (i) for pooling-of-interests
accounting treatment and (ii) as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended, and therefore as a tax-
free transaction to the stockholders of NEC. Alex. Brown's opinion necessarily
is based upon market, economic and other conditions as they existed on, and
could be evaluated as of, March 10, 1997.
In connection with the preparation and delivery of its opinion to the
Sylvan Board, Alex. Brown performed a variety of financial and comparative
analyses as summarized below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial, and comparative analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible of summary description. Furthermore, in arriving at its opinion,
Alex. Brown did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Alex. Brown believes
that its analyses must be considered as a whole and that considering any portion
of such analyses and factors, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying its
opinion. In performing its analyses, Alex. Brown considered general economic,
market and financial conditions and other matters, many of which are beyond the
control of Sylvan and NEC. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. In addition, analyses relating to the value of
businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold. Furthermore, no opinion is being expressed as
to the prices at which shares of Sylvan or NEC Common Stock may trade at any
future time.
Historical Financial Position. In rendering its opinion, Alex. Brown
reviewed and analyzed the historical and current financial condition of Sylvan
and NEC which included (i) an assessment of each of Sylvan's and NEC's recent
financial statements; (ii) an analysis of each of Sylvan's and NEC's revenue,
growth and operating performance trends; and (iii) an assessment of each of
Sylvan's and NEC's margin changes and leverage based on the audited financial
statements for each company for the fiscal years ended December 31, 1994 and
1995, and unaudited financial statements for the 12 months ended December 31,
1996.
Historical Stock Price Performance. Alex. Brown reported to the Sylvan
Board that it reviewed and analyzed the daily closing per share market prices
and trading volume, for each of Sylvan's and NEC's Common Stock, from January 1,
1996 through March 7, 1997. Alex. Brown also reported that it reviewed the
daily closing per share market prices of the Sylvan Common Stock and NEC Common
Stock and compared the movement of such daily closing prices with the movement
of the S&P 500 average over the period from January 1, 1996 through March 7,
1997. Alex. Brown noted and reported that, on a relative basis, both Sylvan and
NEC outperformed the S&P 500 during that period. Alex. Brown further noted
that, on a relative basis, and for the period January 1, 1996 to March 7, 1997
taken as a whole, the Common Stock of NEC and Sylvan performed in a comparable
manner.
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Alex. Brown also reviewed the daily closing per share market prices of Sylvan
Common Stock and NEC Common Stock and compared the movement of such closing
prices with the movement of a composite average of selected educational services
companies (consisting of Apollo Group, Inc., CBT Group plc, DeVry, Inc., ITT
Education Services, Inc., Learning Tree International, Inc., and Nobel Education
Dynamics, Inc. (collectively, the "Selected Companies")) over the period from
January 1, 1996 through March 7, 1997. Alex. Brown noted and reported that, on a
relative basis, and for the period taken as a whole, both Sylvan and NEC
performed in a comparable manner to the composite average of the Selected
Companies.
Contribution Analysis. Alex. Brown reported to the Sylvan Board its
analysis of the relative contribution of Sylvan and NEC, as compared to Sylvan's
relative fully-diluted ownership of approximately 52.7% of the fully diluted
equity capital of the combined company, to the estimated pro forma income
statement of the combined company. This analysis showed that on an estimated
pro forma combined basis (excluding (i) the effect of any synergies that may be
realized as a result of the Merger, and (ii) any non-recurring expenses relating
to the Merger, and after adjusting for the effect of any one-time, unusual and
nonrecurring charges at both companies for the twelve months ended December 31,
1996), based on the twelve-month period ending December 31, 1996, Sylvan and NEC
would account for approximately 35.2% and 64.8%, respectively, of the combined
company's estimated pro forma 1996 revenue, approximately 41.7% and 58.3%,
respectively, of the combined company's estimated pro forma adjusted 1996
operating income, and approximately 48.0% and 52.0%, respectively, of the
combined company's estimated pro forma adjusted 1996 net income, after assuming
(i) full taxation of NEC's results and (ii) the conversion of NEC's outstanding
convertible debentures as of January 1, 1996.
Based on management estimates for Sylvan and the average estimate of
selected brokers' reports for NEC for the twelve month period ending December
31, 1997, this analysis showed that on an estimated pro forma combined basis
(excluding (i) the effect of any synergies that may be realized as a result of
the Merger, and (ii) any non-recurring expenses relating to the Merger), based
on the twelve-month period ending December 31, 1997, Sylvan and NEC would
account for approximately 39.5% and 60.5%, respectively, of the company's
estimated pro forma 1997 revenue, and approximately 42.2% and 57.8%,
respectively, of the combined company's estimated pro forma 1997 operating
income.
In its analysis of contributions to estimated pro forma net income for the
twelve month periods ending December 31, 1997 and December 31, 1998, Alex. Brown
calculated the estimated pro forma net income of the combined company in two
manners. First it calculated the net income of the combined company based on
mean the Institutional Brokers Estimating System ("IBES") estimates for the net
income for Sylvan and NEC. This analysis showed that on an estimated pro forma
combined basis (excluding (i) the effect of any synergies that may be realized
as a result of the Merger, and (ii) any non-recurring expenses relating to the
Merger), based on the twelve-month periods ending December 31, 1997 and December
31, 1998, Sylvan and NEC would account for approximately 44.6% and 55.4%,
respectively, of the combined company's estimated pro forma 1997 net income, and
approximately 48.3% and 51.7%, respectively, of the company's estimated pro
forma 1998 net income.
Alex. Brown also calculated the combined company's estimated pro forma net
income for the twelve month periods ending December 31, 1997 and December 31,
1998 based on mean IBES estimates for Sylvan and on management projections for
NEC, adjusted for the effect of the full taxation of NEC's results, and assuming
the conversion of NEC's outstanding convertible debentures on January 1 of each
year. This analysis showed that on an estimated pro forma combined basis
(excluding (i) the effect of any synergies that may be realized as a result of
the Merger, and (ii) any non-recurring expenses relating to the Merger), based
on the twelve-month periods ending December 31, 1997 and December 31, 1998,
Sylvan and NEC would account for approximately 48.3% and 51.7%, respectively, of
the combined company's pro forma 1997 net income, and approximately 50.1% and
49.9%, respectively, of the company's estimated pro forma 1998 net income.
Analysis of Certain Other Publicly Traded Companies. This analysis
examines a company's valuation in the public market as compared to the valuation
in the public market of other selected publicly traded companies. Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements
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described below) relating to Sylvan and NEC to certain corresponding information
from the Selected Companies. Such financial information included, among other
things, (i) common equity market valuation; (ii) operating performance; (iii)
ratios of common equity market value as adjusted for debt and cash ("Enterprise
Value") to revenues, earnings before interest expense and income taxes ("EBIT"),
and earnings before interest expense, income taxes and depreciation and
amortization ("EBITDA"), each for the latest reported twelve month period as
derived from publicly available information; and (iv) ratios of common equity
market prices per share ("Equity Value") to historical and estimated earnings
per share ("EPS"). The financial information used in connection with the
multiples provided below with respect to Sylvan, NEC and the Selected Companies
was based on the latest reported twelve month period for each company as derived
from publicly available information and on estimated EPS for calendar years 1997
and 1998 as reported by IBES.
Alex. Brown noted that, on a trailing twelve month basis, the multiple of
Enterprise Value to revenues was 5.6x for Sylvan and 2.4x for NEC, compared to a
range of 1.2x to 18.5x, with a mean of 3.4x, for the Selected Companies; the
multiple of Enterprise Value to EBIT was 35.9x for Sylvan and 19.7x for NEC,
compared to a range of 11.1x to 93.9x, with a mean of 26.4x, for the Selected
Companies. The mean multiples of Enterprise Value to revenues and EBIT excluded
the Enterprise Value multiples of CBT Group plc.
Alex. Brown further noted that the multiple of Equity Value to trailing
twelve month EPS was 52.3x for Sylvan and 26.0x for NEC, compared to a range of
25.6x to 86.7x, with a mean of 42.1x, for the Selected Companies; the multiple
of Equity Value to estimated calendar year 1997 EPS was 38.8x for Sylvan and
20.1x for NEC, compared to a range of 23.0x to 56.1x, with a mean of 39.0x, for
the Selected Companies; and the multiple of Equity Value to estimated calendar
year 1998 EPS was 28.5x for Sylvan and 16.3x for NEC, compared to a range of
17.0x to 38.0x, with a mean of 29.1x, for the Selected Companies. The mean
multiples of Equity Value to trailing twelve month EPS excluded the Equity Value
multiples of CBT Group plc.
As a result of the foregoing procedures, Alex. Brown reported to the Sylvan
Board that the multiples for Sylvan and NEC were generally within the range of
the multiples for the Selected Companies. EPS projections for the Selected
Companies, Sylvan and NEC were based on IBES estimates as of March 10, 1997.
The IBES EPS estimates, as of March 10, 1997, for the calendar year 1997 for
Sylvan was $0.90 and for NEC was $0.80 and for the calendar year 1998 for Sylvan
was $1.23 and for NEC was $0.98.
Analysis of Selected Mergers and Acquisitions. Alex. Brown reviewed with
the Sylvan Board the financial terms, to the extent publicly available, of 25
proposed, pending or completed mergers and acquisitions since April 1, 1992 in
the educational services industry (the "Selected Transactions"). Alex. Brown
calculated various financial multiples based on certain publicly available
information for each of the Selected Transactions, and compared them to
corresponding financial multiples for the Merger, based on the Initial
Conversion Ratio of 0.58. The Selected Transactions reviewed, in reverse
chronological order of public announcement, were: Educateif/NEC (January 1997),
Wall Street Institute/Sylvan (January 1997), Edmark Corporation/IBM (November
1996), True North Corporation/Franklin Quest Co. (August 1996), CRT
Group/Education Technology LLC (August 1996), Becker CPA Review/DeVry, Inc.
(June 1996), Edunetics/NEC (April 1996), Westcott Communications, Inc./K-III
Communications, Inc. (April 1996), J3 Learning Corporation/Gartner Group (April
1996), NTC Publishing Group/Tribune Co. (February 1996), Educational Publishing
Corp./Tribune Co. (January 1996), Dataquest/Gartner Group (December 1995),
Personal Training Systems, Inc./CBT Group plc (November 1995), Drake
Prometric/Sylvan (August 1995), Time Systems Inc./Franklin Quest Co. (March
1995), The PACE Group/Sylvan (February 1995), READS, Inc./Sylvan (February
1995), Whittle Communications/K-III Communications (August 1994), The Wright
Group/Tribune Co. (January 1994), McDougal Littel & Co./Houghton Mifflin Co.
(January 1994), Shipley Associates/Franklin Quest Co. (December 1993), Macmillan
Inc./Paramount Communications (November 1993), TI-IN Network/Westcott
Communications (April 1993), Berlitz International/Fukutake Publishing Co.
(August 1992), and Wicat Systems/Jostens Inc. (April 1992). Alex. Brown noted
that the multiple of adjusted purchase price (value of consideration paid for
common equity adjusted for debt, preferred stock and cash) to NEC's trailing
twelve month revenues was 2.9x for the Merger versus a range of 0.6x to 5.0x,
with a mean of 2.0x, for the Selected Transactions, and the multiple of adjusted
purchase price to NEC's trailing twelve month
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adjusted EBIT was 24.2x for the Merger versus a range of 5.9x to 46.0x, with a
mean of 18.1x, for the Selected Transactions. Alex. Brown further noted that the
multiple of the equity purchase price to NEC's adjusted and fully-taxed trailing
twelve month net income (after assuming the conversion of NEC's outstanding
convertible debentures as of January 1, 1996) was 46.2x for the Merger versus a
range of 8.2x to 73.6x, with a mean of 31.2x, for the Selected Transactions. All
multiples for the Selected Transactions were based on public information
available at the time of announcement of such transaction, without taking into
account differing economic, market and other conditions during the five year
period during which the Selected Transactions occurred, or the facts and
circumstances of any of the companies involved.
Historical Exchange Ratio and Premium Analysis. Alex. Brown reported to
the Sylvan Board that it reviewed and analyzed the historical ratio of the daily
per share market closing prices of NEC Common Stock divided by the corresponding
prices of the Sylvan Common Stock over the 30, 60 and 90 trading day periods
prior to, and as of March 10, 1997. Such average exchange ratios for the
aforementioned time periods and as of such date were 0.418, 0.469, 0.483, and
0.459, respectively. Alex. Brown then calculated the respective premiums over
such average daily exchange ratios represented by the Initial Conversion Ratio
of 0.58, which for the same time periods and as of such date were 38.7%, 23.7%,
20.1%, and 26.4%, respectively.
Alex. Brown also reviewed the premiums received by target shareholders in
62 selected stock-for-stock transactions accounted for as pooling-of-interests,
with a value of over $250 million, and which occurred in the period January 1,
1996 through March 3, 1997. The data for this analysis was obtained from
Securities Data Corporation. Alex. Brown noted that the average premiums
received compared to the reported closing market per share prices for the target
companies four weeks and one day prior to the transaction announcement dates
were 40.0% and 30.9% respectively. Alex. Brown also noted, that based on the
reported closing market per share prices of Sylvan and NEC stock on March 10,
1997, the price premium represented by the Initial Conversion Ratio was 26.4%.
Discounted Cash Flow Analysis. Alex. Brown reported to the Sylvan Board
that it performed a discounted cash flow analysis for NEC. The discounted cash
flow approach values a business based on the current value of the future cash
flow that the business will generate. To establish a current value under this
approach, future cash flow must be estimated and an appropriate discount rate
determined. Alex. Brown used estimates of projected financial performance for
NEC for the years 1997 through 2001 prepared in the following manner: (i)
projections for the years 1997 and 1998 were provided by NEC management, and
were adjusted to give effect to the full taxation of NEC's results and the
conversion of NEC's outstanding convertible debentures; (ii) projections for the
years 1999 through 2001 were prepared by Alex. Brown in a manner consistent with
the 1997 and 1998 projections, which were then reviewed by and consented to by
the management of Sylvan. Alex. Brown aggregated the present value of the cash
flows through 2001 with the present value of a range of terminal values. Alex.
Brown discounted these cash flows at discount rates ranging from 12.0% to 16.0%.
The terminal value was computed based on projected EBITDA in calendar year 2001
and a range of terminal multiples of 15.0x to 17.0x. Alex. Brown arrived at
such discount rates based on its judgment of the weighted average cost of
capital of publicly traded educational services companies, and arrived at such
terminal values based on its review of the trading characteristics of the Common
Stock of the Selected Companies. This analysis indicated a range of values of
$22.52 to $30.04 per share, based on NEC's fully diluted shares outstanding.
Pro Forma Combined Earnings Analysis. Alex. Brown reported to the Sylvan
Board that it analyzed certain estimated pro forma effects of the Merger. Based
on such analysis, Alex. Brown computed the resulting estimated
accretion/dilution to the combined company's EPS estimate for the fiscal year
ending 1997 and 1998, pursuant to the Merger before taking into account any
potential cost savings and other synergies that Sylvan and NEC could achieve if
the Merger were consummated and before any non-recurring costs relating to the
Merger. On this basis, Alex. Brown estimated that on this basis the Merger would
be approximately 10.1% accretive and 8.9% accretive to the combined company's
fully diluted EPS for the fiscal years ending 1997 and 1998, respectively,
calculated based on IBES estimates for net income of Sylvan and IBES estimates
for net income of NEC fully taxed and assuming the conversion of NEC's
outstanding convertible debentures. Alex. Brown also estimated that before
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taking into account any potential cost savings and other synergies and before
certain non-recurring costs relating to the Merger, the Merger would be
approximately 19.4% and 13.1% accretive to the combined company's fully diluted
estimated pro forma EPS for the fiscal years ending 1997 and 1998, respectively,
calculated based on unadjusted IBES estimates for Sylvan and NEC.
Relevant Market and Economic Factors. In rendering its opinion, Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the educational services sector, and the current level of
economic activity.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to Sylvan, NEC or the Merger. Accordingly, Alex. Brown's
analyses do not take into account differences in the financial and operating
characteristics of the Selected Companies and the companies in the Selected
Transactions and other factors that would affect the public trading value of the
Selected Companies and the Selected Transactions, respectively.
While the foregoing summary describes the analyses and factors that Alex.
Brown deemed material in its presentation to the Sylvan Board of Directors, it
is not a comprehensive description of all analyses and factors considered by
Alex. Brown. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances, and, therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Alex. Brown did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Alex. Brown believes that its analyses
must be considered as a whole and that selecting portions of its analyses and of
the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Alex.
Brown Opinion. In performing its analyses, Alex. Brown considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of Sylvan and NEC. The analyses performed by Alex. Brown are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold. Furthermore, no opinion is being expressed as to the prices at
which shares of Sylvan or NEC Common Stock may trade at any future time.
Alex. Brown is an internationally recognized investment banking firm and,
as a customary part of its investment banking activities, is regularly engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Sylvan Board selected Alex.
Brown based upon its qualifications, reputation, experience and expertise with
respect to merger transactions in general and the valuation of educational
services companies in particular.
As compensation for its services in connection with the Merger, Sylvan has
paid Alex. Brown a retainer fee of $100,000 (the "Retainer Fee") and has agreed
to pay Alex. Brown a fee of $250,000 upon delivery of its opinion (an "Opinion
Fee"). The fee for Alex. Brown's services is not contingent upon Alex. Brown's
conclusions. Additionally, Sylvan has agreed to pay Alex. Brown a fee
(including the Retainer Fee and the Opinion Fee), upon consummation of the
Merger, of approximately $3.9 million. In addition, Sylvan has agreed to
reimburse Alex. Brown for reasonable out-of-pocket expenses incurred in
connection with the Merger, excluding the fees and disbursements of its legal
counsel. Sylvan has agreed to indemnify Alex. Brown for certain costs,
expenses, losses, claims, damages, and liabilities that may arise out of its
engagement by Sylvan as financial advisor and the rendering of its opinion.
Alex. Brown is acting as financial advisor to Sylvan in connection with the
Merger. Alex. Brown has also performed various investment banking services for
Sylvan in the past and has received customary fees for such
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services. The terms of such fee arrangements with Alex. Brown, which are
customary in transactions of this nature, were negotiated at arm's length
between Sylvan's Board of Directors and Alex. Brown. Alex. Brown has acted as
financial advisor to Sylvan in connection with various capital raising
transactions and other matters, including serving as the lead-managing
underwriter in the December, 1993 initial public offering of the Common Stock of
Sylvan, as the lead managing underwriter in the December, 1995 follow-on
offering of the Common Stock of Sylvan, and as financial advisor to Sylvan in
its December, 1995 acquisition of Drake Prometric, L.P. In the ordinary course
of its business, Alex. Brown may actively trade in the debt and equity
securities of Sylvan and NEC for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. Alex. Brown maintains a market in the Common Stock of Sylvan
and regularly publishes research reports regarding the educational services
industry and the businesses and securities of Sylvan and other publicly traded
companies in the educational services industry.
REASONS OF NEC FOR THE MERGER; RECOMMENDATION OF THE NEC BOARD
THE NEC BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, HAS DETERMINED
UNANIMOUSLY THAT THE MERGER AND THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT
ARE ADVISABLE AND FAIR AND IN THE BEST INTERESTS OF NEC AND ITS STOCKHOLDERS AND
RECOMMENDS THAT HOLDERS OF SHARES OF NEC COMMON STOCK VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
On March 12, 1997, the Board of Directors of NEC unanimously approved the
Merger Agreement and the Merger, determined that the terms of the Merger
Agreement are fair to, and that the Merger is in the best interests of NEC and
its stockholders and, therefore, recommends that the holders of NEC Common Stock
VOTE FOR approval of the Merger Agreement.
In reaching its determination to approve the Merger, the NEC Board has
identified the following potential benefits of the Merger that it believes will
contribute to the success of the combined company and will benefit NEC
stockholders:
(1) the combination of Sylvan and NEC should create a company with
greater financial strength and stability and with operating units that
should be able to leverage the strengths of one another to a greater extent
than would be possible on a standalone or looser strategic alliance basis.
For example, Sylvan's consumer operations provide an attractive opportunity
to market content created by NEC's ICS, SVPC and NETG units. Similarly,
ICS may provide an outlet for Sylvan to market its supplemental education
programs though new channels of distribution (e.g., direct response
marketing) not currently being exploited by Sylvan.
(2) the combined company may be able to achieve synergistic benefits
through the complement of existing and planned products and services.
Additionally, the Merger may result in significant financial and
administrative synergies, including elimination of maintaining NEC's status
as a public reporting company and overhead reductions.
(3) the combined company will be a strong market leader in the
supplemental education business. As a result, the Sylvan brand name should
achieve even greater recognition and provide opportunities to leverage that
name recognition and stature to continue to grow and expand, both through
internal growth and acquisitions.
(4) the management of the combined company will have greater depth
and expertise. Additionally, the Merger Agreement contemplates that Sam
Yau, Chief Executive Officer of NEC, and each of the operating heads of
NEC's business units would remain in place in charge of their respective
businesses.
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In reaching its decision to approve the Merger Agreement, and to recommend
that NEC's stockholders vote to approve the Merger and adopt the Merger
Agreement, the NEC Board considered a number of other factors, including, among
other things, the following:
(1) the business, operations, properties, assets, financial condition
and operating results of NEC and NEC's future prospects as an independent
entity, compared to the effect of a combination with Sylvan, in light of
the financial condition and prospects of NEC and the current economic and
business environment, including, but not limited to (i) other possible
strategic alternatives for NEC, including continuing to execute its stand-
alone business plan or engaging in various restructuring strategies
involving the disposition of all or parts of certain of NEC's businesses,
and (ii) the potential for increased value in the combined Sylvan/NEC
enterprise, as compared to NEC alone, including synergies and enhanced
capabilities for entering new educational market niches;
(2) reports, analyses and opinions of NEC's management and NEC's
financial advisor with respect to their due diligence investigations and
analysis of publicly available information concerning the businesses,
technology, products, operations, financial condition and prospects of
Sylvan and that on a combined basis with Sylvan, the companies could create
new avenues for earnings growth;
(3) the presentation by BZW with respect to its financial analysis of
NEC and Sylvan and the oral opinion of BZW as to the fairness, from a
financial point of view, of the Initial Conversion Ratio pursuant to the
Merger Agreement to the holders of shares of NEC Common Stock (see "---
Opinion of NEC Financial Advisor");
(4) the fact that the Initial Conversion Ratio represented a premium
of approximately 20% to the market value of NEC Common Stock on March 11,
1997, the last NYSE trading day prior to the decision of the NEC Board to
authorize execution of the definitive Merger Agreement;
(5) recent and current market prices of the Sylvan Common Stock,
including factors affecting the trading range for Sylvan Common Stock prior
to the announcement of the transaction and the belief that the Merger
presented an opportunity for NEC's stockholders to realize future equity
appreciation based on the NEC Board's perception of the more favorable
prospects of the combined entity;
(6) the fact that the $17.32 value of each share of NEC Common Stock
would be maintained so long as the average price of Sylvan Common Stock
during the Pricing Period did not fall below $29.86 per share, that the
$17.32 value could be increased if the price increase of Sylvan Common
Stock prior to the Merger exceeded $29.86 per share and that the NEC Board
reserved the right, but is not obligated, to terminate the Merger Agreement
if the Average Share Price of Sylvan Common Stock falls below $29.86;
(7) the terms and conditions of the Merger Agreement, which were the
product of extensive arm's-length negotiations, including the circumstances
of reaching the Initial Conversion Ratio, the conditions to closing and
rights to termination and certain protections for employees of NEC (see
"---The Merger Agreement");
(8) the compatibility of the respective business philosophies of
Sylvan and NEC, including the apparent compatibility of senior officers at
the various operating subsidiaries of Sylvan and NEC;
(9) the provisions of the Merger Agreement that permit NEC to
consider additional bona fide third party offers to acquire NEC and permit
NEC to provide information to and negotiate with such parties and to
terminate the Merger Agreement, subject to the payment of significant fees
and expenses to Sylvan, if prior to the effective time of the Merger the
NEC Board terminates the Merger Agreement or withdraws or modifies in a
manner adverse to Sylvan its recommendation pursuant to the NEC Board's
fiduciary duties (see "---The Merger Agreement---No Solicitation,"
"---Termination" and "---Termination Fee");
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(10) the opportunity for NEC stockholders to participate, as holders
of Sylvan Common Stock, in a larger company of which former NEC
stockholders would hold approximately 46%, of the outstanding common stock
of the combined company following the Merger (assuming the Initial
Conversion Ratio), and to do so by means of a transaction which is designed
to be tax-free to NEC's stockholders and which would be treated as a
pooling-of-interests transaction for accounting purposes; and
(11) the conditions to consummation of the Merger, including the
requirement that the Merger Agreement is approved by the holders of a
majority of the outstanding voting power of the NEC Common Stock and that
the issuance of Sylvan Common Stock in the Merger is conditioned upon the
requisite vote of the Sylvan stockholders pursuant to the Nasdaq rules or
applicable law.
The Board also considered a variety of negative factors in its
deliberations concerning the Merger, including the following factors:
(1) the risk that the Average Share Price of Sylvan Common Stock
prior to the Merger could fall to as low as $29.86, without a right to
terminate the Merger Agreement and without an adjustment to the Initial
Conversion Ratio per share, resulting in decreased value of each share of
NEC Common Stock;
(2) the risk that the Average Share Price of Sylvan Common Stock
during the Pricing Period could fall below $29.86 and either (i) the NEC
Board may elect not to terminate the Merger Agreement in which case the
Initial Conversion Ratio will remain in place and the implied value per
share of NEC Common Stock will be less than $17.32, or (ii) the NEC Board
may elect to terminate the Merger Agreement in which case either (a) the
Sylvan Board may allow the Merger Agreement to terminate, or (b) the Sylvan
Board may increase the Initial Conversion Ratio, provided however, the
Sylvan Board will not increase the Initial Conversion Ratio beyond .5945
regardless of the Average Share Price for the Sylvan Common Stock during
the Pricing Period;
(3) the potential impact of the Merger on the interests of NEC's
customers, suppliers, employees, and the communities in which NEC has
operated, including the negative impact resulting from cost saving
initiatives and the impact resulting from being a stockholder in a larger,
more dynamic combined company;
(4) the degree of risk that the synergies and cost savings
anticipated to be achieved in the Merger would not be achieved, and that
the operations of the two companies would not be successfully integrated;
(5) the risk that key NEC management personnel might not remain with
NEC after announcement of the Merger;
(6) the risk that Sylvan would be unable to maintain its recent level
of earnings growth;
(7) the adverse effects on NEC's business, operations and financial
condition should it not be possible to consummate the Merger following
public announcement that the Merger Agreement had been entered into;
(8) the interests that the NEC management and the NEC Board of
Directors may be deemed to have in the Merger that are in addition to their
interests as stockholders of NEC generally (see "---Interests of Certain
Persons in the Merger"); and
(9) the other risks associated with Sylvan's businesses described
above under "RISK FACTORS."
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The foregoing discussion of the information and factors considered by the
NEC Board of Directors is not intended to be exhaustive. In view of the wide
variety of factors considered in connection with its evaluation of the Merger,
the NEC Board of Directors did not quantify or otherwise assign relative weights
to the specific factors considered in reaching its determination, although
individual members of the NEC Board of Directors may have given different
weights to different factors. In the course of its deliberations, the NEC Board
of Directors did not establish a range of value for NEC; however, based on the
factors outlined above, including the advice of its financial advisor, BZW, the
NEC Board of Directors determined that the Merger is advisable and in the best
interests of NEC and its stockholders. The NEC Board of Directors voted
unanimously to recommend to the holders of NEC Common Stock that the Merger
Agreement be approved. For a discussion of the interests of certain members of
NEC's management and the NEC Board of Directors in the Merger, see "---Interests
of Certain Persons in the Merger."
NEC FINANCIAL ADVISOR
NEC retained BZW to act as its financial advisor in connection with the
Merger and to render an opinion as to the fairness of the Initial Conversion
Ratio to the holders of NEC Common Stock from a financial point of view. The
full text of BZW's written opinion dated March 12, 1997 (the "BZW Opinion") is
attached to this Joint Proxy Statement/Prospectus as Annex III and is
incorporated herein by reference, and the summary of the opinion set forth below
is qualified in its entirety by reference to the full text of such opinion.
Stockholders of NEC are urged to read such opinion carefully and in its entirety
for a description of the procedures followed, the factors considered, the
assumptions made and the scope of review undertaken, as well as the limitations
on the review undertaken, by BZW in rendering its opinion.
At the March 11, 1997 meeting of NEC's Board of Directors, BZW delivered
its oral opinion, which subsequently was confirmed by the BZW Opinion, that, as
of such date and based on the matters described therein, the Initial Conversion
Ratio was fair to the holders of NEC Common Stock from a financial point of
view. BZW did not recommend to NEC's Board of Directors that any specific
exchange ratio should constitute the Initial Conversion Ratio. No limitations
were imposed by NEC's Board of Directors on BZW with respect to the
investigations made or procedures followed by it in furnishing its opinion. The
BZW Opinion addresses only the fairness of the Initial Conversion Ratio to the
holders of NEC Common Stock, from a financial point of view, and does not
constitute a recommendation to any such holder of NEC Common Stock as to how
such holder should vote at the Special Meeting. BZW expressed no opinion as to
the tax consequences of the Merger, and the BZW Opinion does not take into
account the particular tax status or position of any holder of NEC Common Stock.
BZW did not express any opinion as to what the value of the Sylvan Common Stock
actually will be when issued to holders of NEC Common Stock pursuant to the
Merger or the price at which the Sylvan Common Stock will trade subsequent to
the Merger. In furnishing its opinion, BZW was not engaged as an agent or
fiduciary of NEC's stockholders or any other third party.
In connection with the preparation of the BZW Opinion, BZW, among other
things: (i) reviewed financial information concerning NEC and Sylvan furnished
to it by both companies, including certain internal financial analyses and
forecasts prepared by the management of NEC and Sylvan; (ii) reviewed publicly
available information concerning NEC, including NEC's Annual Report on Form 10-K
for the year ended December 31, 1995, NEC's Quarterly Reports on Form 10-Q for
the fiscal quarters ended March 31, 1996, June 30, 1996, and September 30, 1996,
respectively, NEC's 1995 Proxy Statement and Annual Report to Stockholders,
various earnings and other public announcements made by NEC and various
published industry and market analyst reports concerning NEC and the NEC Common
Stock; (iii) reviewed publicly available information concerning Sylvan,
including the Sylvan Annual Report on Form 10-K for the year ended December 31,
1995, Sylvan's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1996, June 30, 1996, and September 30, 1996, Sylvan's 1995 Proxy
Statement and Annual Report to Stockholders, various earnings and other public
announcements made by Sylvan and various published industry and market analyst
reports concerning Sylvan and the Sylvan Common Stock; (iv) held discussions
with the senior management of NEC and Sylvan concerning the businesses, past and
current business operations, financial condition and future prospects of both
companies,
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independently and combined; (v) reviewed the stock price and trading history of
the NEC Common Stock and the Sylvan Common Stock; (vi) reviewed the valuation of
selected publicly traded companies which BZW deemed comparable to NEC and
Sylvan; (vii) compared the financial terms of the Merger with selected other
transactions which BZW deemed relevant; (viii) analyzed the pro forma earnings
per share of the combined company; (ix) prepared discounted cash flow analyses
of NEC and Sylvan; (x) reviewed the Merger Agreement; and (xi) made such other
studies and inquiries, and reviewed such other data, as BZW deemed relevant. It
should be noted, however, that BZW did not consider Sylvan's pending acquisition
of Independent Child Study Teams, Inc. and I-R, Inc. in connection with the
preparation of the BZW Opinion.
As noted above, certain internal management projections were provided by
NEC and Sylvan to BZW for purposes of its analysis in arriving at the BZW
Opinion. As a matter of course, neither NEC nor Sylvan publishes or makes
generally available internal projections or forecasts as to its future
performance, earnings or financial condition, and such information was not
prepared with a view to public disclosure or in accordance with applicable
accounting guidelines. These forecasts were based on numerous variables and
assumptions which are inherently uncertain, difficult to predict and may not be
within the control of NEC or Sylvan, including without limitation economic and
competitive conditions. Consequently, actual results may differ materially from
those set forth in such forecasts.
The following paragraphs summarize the material quantitative and
qualitative analyses performed by BZW in arriving at the BZW Opinion but do not
purport to be a complete description of the analyses performed by BZW. BZW
reviewed information that was based on the financial condition of NEC and Sylvan
as of a date or dates shortly before the Merger Agreement was executed as of
March 12, 1997 and based on available stock price information through the close
of trading on the NYSE and the NASDAQ Stock Market, respectively, on March 7,
1997.
Exchange Ratio Analysis. BZW reviewed the exchange ratio of each share of
Sylvan Common Stock for each share of NEC Common Stock implied by the daily
closing sale prices of NEC Common Stock and Sylvan Common Stock since March 8,
1995. BZW noted that the average implied exchange ratio since March 8, 1995 was
0.4875, with a high of 0.8484 on May 17, 1996, a low of 0.2292 on March 9, 1995,
and a current ratio of 0.4270 at March 7, 1997. BZW also noted that the average
implied exchange ratio since January 3, 1997 was 0.4467. In addition, BZW
reviewed the premiums represented by the Initial Conversion Ratio compared to
the implied exchange ratios based on the average closing sale prices of the NEC
Common Stock and the Sylvan Common Stock for the trailing one, two, six, twelve
and twenty-four month periods prior to March 7, 1997. Such premiums (discounts)
were 46%, 32%, 7%, (2%), and 19%, respectively.
Stock Price and Trading Analysis. BZW reviewed the trading activity,
including price and volume, of the NEC Common Stock and the Sylvan Common Stock
since March 8, 1995. With respect to NEC, BZW noted that, since March 8, 1995,
the daily closing sale prices of the NEC Common Stock ranged from a high of
$22.13 on May 17, 1996 to a low of $2.75 on March 9, 1995. With respect to
Sylvan, BZW noted that, since March 8, 1995, the daily closing sale prices of
the Sylvan Common Stock ranged from a high of $37.13 on February 21, 1997 to a
low of $11.08 on April 20, 1995. BZW also reviewed the premium represented by
the Initial Conversion Ratio of 0.5800 in the Merger and the implied $20.37 per
share value of NEC based on Sylvan's closing stock price of $35.13 on March 7,
1997, compared to simple average historical closing share prices for the NEC
Common Stock for the trailing one, two, six, twelve and twenty-four month
periods prior to such date. Such premiums were 43%, 44%, 31%, 31% and 85%.
Contribution Analysis. BZW compared the relative contributions of NEC and
Sylvan to the pro forma historical and estimated combined revenue, operating
income, and net income of the combined company for the years ended December
1996, 1997 and 1998. For such periods, BZW noted that NEC would contribute:
65%, 62% and 58%, respectively, of pro forma combined revenue; 58%, 57% and 54%,
respectively, of pro forma combined operating income; 57%, 65% and 53%,
respectively, of pro forma combined net income, including the utilization
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of NEC's net operating losses and certain other non-recurring tax benefits and
excluding other nonrecurring items; and 50%, 48% and 48%, respectively, of pro
forma combined net income on a "fully taxed" basis and excluding other
nonrecurring items. BZW noted that, immediately following consummation of the
Merger, stockholders of NEC and Sylvan would own approximately 46% and 54%,
respectively, of the common stock of the pro forma combined company.
Selected Comparable Company Analysis. BZW compared certain income
statement parameters of NEC with those pertaining to companies deemed by BZW to
be comparable to NEC for the most recent trailing 12-month period. BZW also
compared estimated earnings per share for the 12-month period ending December
31, 1997 ("Calendar 1997") . The companies examined included Apollo Group,
Inc., CBT Group PLC, Computer Learning Centers, Inc., DeVry, Inc., Education
Management Corp., Houghton Mifflin Co., ITT Educational Services, Inc., Learning
Tree International, Inc., Nobel Education Dynamics, Scholastic Corp., Strayer
Education, Inc., Sylvan and Youth Services International, Inc. (collectively,
the "NEC Comparable Companies"). Financial data compared, for the most recent
trailing 12-month period, included equity market capitalization, enterprise
value (i.e., equity market capitalization plus debt plus preferred shares plus
minority interest less cash and cash equivalents), revenues, operating income,
net income, earnings per share, operating margin, and net margin. Financial
data compared for Calendar 1997 were projected earnings per share as reported by
third party sources. Multiples compared for the most recent trailing 12-month
period included enterprise value to revenue, enterprise value to operating
income, and price per share to earnings per share. For calendar 1997, BZW
compared multiples of price per share to projected earnings per share.
Based on enterprise value to revenue multiples ranging from 5.6x to 0.7x
for the most recent trailing 12-month period obtained for the NEC Comparable
Companies, and after adjusting for NEC's net debt, BZW determined a range of
reference values for the NEC Common Stock of $41.20 to $2.70 with a median of
$15.27. Based on enterprise value to operating income multiples, for the most
recent trailing 12-month period, ranging from 43.2x to 8.5x for the NEC
Comparable Companies, and after adjusting for NEC's net debt, BZW determined a
range of reference values for the NEC Common Stock of $36.65 to $4.96 with a
median of $16.74. Based on the NEC Comparable Companies' price per share to
earnings per share multiples ranging from 58.1x to 10.2x for the most recent
trailing 12-month period, and the NEC Comparable Companies' estimated price per
share to earnings per share multiples ranging from 57.1x to 18.3x for estimated
Calendar 1997, BZW determined a range of reference values for the NEC Common
Stock of $24.98 to $4.39 with a median of $17.97, and a range of $33.12 to
$10.61 with a median of $17.57, respectively. By comparison, based on Sylvan's
$35.13 closing stock price on March 7, 1997, BZW noted that the Initial
Conversion Ratio would represent a value of approximately $20.37 per share of
NEC Common Stock.
Component Valuation. BZW derived a reference value range for the NEC
Common Stock based on the three primary components of NEC's operations:
educational publishing, educational services and software training and
development. BZW's analysis was based on internal estimates of NEC's projected
1997 financial performance by business component. To value NEC's respective
components, BZW applied a range of share price to Calendar 1997 earnings per
share multiples to the estimated 1997 net income of NEC's respective components.
The estimated calendar 1997 earnings per share amounts for the selected
comparable company multiples utilized in this analysis were as reported by third
party sources. Selected educational publishing companies deemed comparable by
BZW included Houghton Mifflin Co., John Wiley & Sons, Inc., Plenum Publishing,
and Scholastic Corp. Selected educational services companies deemed comparable
by BZW included Apollo Group, Computer Learning Centers, Inc. DeVry, Inc.,
Educational Management Corp., ITT Educational Services, Inc., Scholastic Corp.,
Strayer Education, Inc., TRO Learning Inc. and Sylvan. Selected software and
training development companies deemed comparable by BZW included CBT Group plc,
Computer Learning Centers, Inc. Gartner Group, Inc. and Learning Tree
International, Inc. Based on the analysis described above, BZW determined a
range of reference values for the NEC Common Stock of $26.60 to $13.11 with a
median of $19.61. In addition, BZW conducted a theoretical break-up analysis
based on the component valuation described above, adjusted to include estimated
acquisition premiums and the subsequent estimated tax liabilities that would be
incurred by NEC upon liquidation of NEC on a component basis. Based on this
analysis, BZW determined a range of reference values for the NEC Common Stock
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of $21.38 to $12.90 with a median of $17.00. By comparison, based on Sylvan's
$35.13 closing stock price on March 7, 1997, BZW noted that the Initial
Conversion Ratio would represent a value of approximately $20.37 per share of
NEC Common Stock.
Selected Comparable Transaction Analysis. BZW analyzed publicly available
information for selected pending or completed mergers and acquisitions within
the education industry (including educational publishing, educational services,
and software training and development). In examining these transactions, BZW
analyzed certain financial parameters of the acquired company relative to the
consideration offered. Financial parameters compared included consideration
offered plus net debt assumed ("total consideration") to the trailing 12-months'
revenue prior to the date of the transaction. The acquisitions reviewed
included Houghton Mifflin Co./McDougal Littel & Co. (March 1994), Pearson
PLC/Software Toolworks, Inc. (May 1994), Bain Capital, L.P./Jostens Learning
Corp. (June 1995), National Education Corp./Edunetics (December 1995), Softkey
International Inc./Learning Co. (December 1995), Softkey International Inc./MECC
(December 1995), ADP Corp./Sandy Corp. (December 1995), Tribune Co./NTC
Publishing Group (March 1996), Pearson PLC/Harper Collins Education (April
1996), DeVry Inc./Becker CPA Review (June 1996), Thomson Corp./West Publishing
Co. (June 1996), CUC International Inc./Davidson Associates, Inc. (July 1996),
CUC International Inc./Sierra On-Line Inc. (July 1996), Gartner Group/J3
Learning Corp. (August 1996), Educational Technology/CRT Group (August 1996),
IBM Corp./Edmark (December 1996), Sylvan/Wall Street Institute (January 1997)
and Kohlberg Kravis Roberts & Co./KinderCare Learning Centers Inc. (February
1997) (collectively, the "Education Transactions").
Based on total consideration to the trailing 12-month revenue multiples
obtained with respect to the selected transactions, ranging from 2.1x to 4.1x,
BZW determined a range of reference values for NEC Common Stock of $28.48 to
$13.58, with a median of $20.29. By comparison, based on Sylvan's $35.13
closing stock price on March 7, 1997, BZW noted that the Initial Conversion
Ratio would represent a value of approximately $20.37 per share of NEC Common
Stock.
Discounted Cash Flow Analysis. BZW performed certain discounted cash flow
analyses to estimate the present value of the stand-alone, unlevered (before
interest expense), after-tax cash flows of the financial projections prepared by
the management of NEC. BZW first discounted the projected, unlevered, after-tax
cash flows from January 1, 1997 through December 31, 2001, using a range of
discount rates from 12.7% to 16.7%. The range of discount rates was based on
NEC's weighted average cost of capital as estimated by BZW. NEC's unlevered
after-tax cash flows were calculated as the after-tax operating earnings of NEC
after adding back non-cash expenses and deducting uses of cash not reflected in
the income statement. BZW then added to the present value of the cash flows an
assumed terminal value of NEC at December 31, 2001, discounted to present value
using the same range of discount rates. The terminal value was computed by
multiplying NEC's projected tax effected earnings before interest in the fiscal
year ending December 31, 2001 by terminal multiples ranging from 20.0x to 25.0x.
The range of terminal multiples was selected by BZW based on its judgment and
experience. Based on this analysis, BZW obtained a range of reference values
for NEC Common Stock, as of December 31, 1996, of $27.95 to $18.83 with a median
of $23.15. By comparison, based on Sylvan's $35.13 closing stock price on March
7, 1997, BZW noted that the Initial Conversion Ratio would represent a value of
approximately $20.37 per share of NEC Common Stock.
Pro Forma Earnings Analysis. BZW analyzed estimated 1997 and 1998 earnings
per share of NEC Common Stock and Sylvan Common Stock, based on financial
projections provided by the respective managements, and estimated the 1997 and
1998 pro forma earnings per share of the combined company based on the Initial
Conversion Ratio and excluding non-recurring items. This analysis indicated
that, in the absence of synergies and before utilization of NEC's net operating
losses and certain other non-recurring tax benefits, the pro forma earnings per
share of the combined company, as compared to Sylvan as a stand-alone entity,
would increase.
General. The preparation of fairness opinions involves various
determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analysis and the application of those methods
to the particular circumstances; therefore, such opinions are not readily
susceptible to summary description. In arriving at
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its opinion, BZW did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, BZW
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and current factors could create a misleading or
incomplete view of the process underlying its opinion. In its analyses, BZW made
numerous assumptions with respect to industry performance, general business and
other conditions and matters, many of which are beyond the control of NEC and
Sylvan. Any estimates contained in these analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
BZW's opinion and financial analyses were only one of many factors considered by
the NEC Board in its evaluation of the Merger and should not be viewed as
determinative of the views of the NEC Board or management with respect to the
Initial Conversion Ratio or the Merger.
In arriving at its opinion, BZW did not independently verify any of the
foregoing information and relied on all such information being complete and
accurate in all material respects. Furthermore, BZW did not obtain any
independent appraisal of the properties or assets of NEC or Sylvan. With respect
to the financial and operating forecasts (and the assumptions and bases
therefore), estimates and analyses provided to BZW by NEC and Sylvan, BZW
assumed that such projections, estimates and analyses were reasonably prepared
in good faith and represent the best currently available estimates and judgments
of the respective management of NEC and Sylvan as to the future financial
performance of both companies. BZW noted, among other things, that its opinion
is necessarily based upon market, economic and other conditions existing as of
the date of the opinion and information available to BZW as of the date thereof.
While BZW selected the NEC Comparable Companies and the Sylvan Comparable
Companies based on the similarities in markets served and businesses conducted,
no company examined in the analysis of selected publicly traded companies is
identical to NEC or Sylvan. Similarly, no transaction examined in the
Educational Transactions is identical to the Merger.
BZW was retained based on BZW's experience as a financial advisor in
connection with mergers and acquisitions and in securities valuations generally,
as well as BZW's investment banking relationship and familiarity with NEC. BZW,
and certain of its affiliates, have provided investment banking and commercial
banking services to NEC from time to time and have received fees for those
services. Among other things, Barclays Bank PLC, of which BZW is a division, is
the lender under NEC's $50 million revolving credit facility. In connection
with the Merger, Barclays Bank PLC will be entitled to receive a termination fee
of $250,000 in respect of the early termination of the revolving credit
facility.
NEC engaged BZW pursuant to a letter agreement dated February 26, 1997 (the
"Advisory Agreement"). The Advisory Agreement provides that, for its services,
BZW is entitled to receive a monthly retainer, reimbursement of its out-of-
pocket expenses and, contingent upon consummation of the Merger, a fee of $4.0
million less the aggregate amount of fees paid to BZW as retainer under the
Advisory Agreement and an engagement letter dated November 21, 1995 regarding
certain investment banking services provided to NEC. The aggregate amount of
such retainer fees as of March 12, 1997 was $390,000.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material Federal income tax consequences
of the Merger. The discussion set forth below is based on currently existing
provisions of the Code, Treasury Regulations thereunder, current administrative
rulings and court decisions. All of the foregoing are subject to change and any
such change could affect the continuing validity of this discussion. The
discussion does not purport to address all of the tax consequences applicable to
a particular stockholder. In particular, the discussion does not address the
special tax rules that may apply to particular categories of stockholders of NEC
Common Stock subject to special treatment
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under the Code, such as foreign holders or holders whose stock was acquired in
connection with stock option plans, stock purchase plans or other compensation
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws or the tax
consequences of transactions effected prior to or subsequent to the Merger
(whether or not such transactions are in connection with the Merger). EACH NEC
STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN HIS, HER OR ITS PARTICULAR
CIRCUMSTANCES.
Sylvan has received an opinion from Ernst & Young LLP, its independent
auditors, and NEC has received an opinion from its outside legal counsel, Irell
& Manella LLP, each dated as of the date of this Joint Proxy
Statement/Prospectus, to the effect that, on the basis of facts, representations
and assumptions set forth in such opinions, for federal income tax purposes: (i)
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Code, and Sylvan, Merger Sub and NEC will each be a party to such
reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or
loss will be recognized by Sylvan or NEC as a result of the Merger; (iii) no
gain or loss will be recognized by the stockholders of NEC upon the exchange of
their shares of NEC Common Stock solely for shares of Sylvan Common Stock
pursuant to the Merger, except with respect to cash, if any, received in lieu of
fractional shares of Sylvan Common Stock; (iv) the aggregate tax basis of the
shares of Sylvan Common Stock received solely in exchange for shares of NEC
Common Stock pursuant to the Merger (including fractional shares of Sylvan
Common Stock for which cash is received) will be the same as the aggregate tax
basis of the shares of NEC Common Stock exchanged therefor; (v) the holding
period for shares of Sylvan Common Stock received in exchange for shares of NEC
Common Stock pursuant to the Merger will include the holding period of the
shares of NEC Common Stock exchanged therefor, provided such shares of NEC
Common Stock were held as capital assets by the stockholder at the Effective
Time; and (vi) a stockholder of NEC who receives cash in lieu of a fractional
share of Sylvan Common Stock will recognize a gain or loss equal to the
difference, if any, between such stockholder's tax basis in such fractional
share (as described in clause (iv) above) and the amount of cash received. It
is a condition to the consummation of the Merger that each opinion of counsel be
confirmed on and as of the Closing Date.
In rendering and confirming such opinions, Ernst & Young LLP and Irell &
Manella LLP may receive and rely upon representations contained in certificates
(and confirmations thereof) of Sylvan, NEC and others.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling-of-interests" transaction
for accounting and financial reporting purposes. The Merger Agreement provides
that it is a condition to each of Sylvan's and NEC's respective obligations to
consummate the Merger that Sylvan and NEC receive Pooling Letters from Ernst &
Young LLP and Price Waterhouse LLP, respectively, at the Effective Time. See
"--The Merger Agreement--Conditions to the Merger." Under "pooling-of-interests"
accounting, as of the Effective Time, the assets and liabilities of NEC would be
added to those of Sylvan at their recorded book values and the stockholders'
equity accounts of NEC would be combined on Sylvan's consolidated balance sheet.
On a pooling-of-interests accounting basis, income and other financial
statements of Sylvan issued after consummation of the Merger would be restated
retroactively to reflect the consolidated combined financial position and
results of operations of Sylvan and NEC as if the Merger had
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taken place prior to the periods covered by such financial statements. The
unaudited pro forma financial information contained in this Joint Proxy
Statement/Prospectus has been prepared using the pooling-of-interests accounting
method to account for the Merger. See "HISTORICAL AND PRO FORMA SELECTED
FINANCIAL INFORMATION."
APPRAISAL RIGHTS
Under the MGCL, the holders of Sylvan Common Stock will not have objecting
stockholders' appraisal rights in connection with the Share Issuance, the Merger
Agreement and the consummation of the Merger. Under the DGCL, the holders of
NEC Common Stock will not have dissenters' appraisal rights in connection with
the Merger Agreement and the consummation of the Merger. See "Comparative
Rights of Stockholders of Sylvan and NEC--Appraisal Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of NEC management and the NEC Board have certain interests
in the Merger that are in addition to and potentially in conflict with the
interests of stockholders of NEC generally. The NEC Board of Directors was
fully aware of these interests of management and the NEC Board of Directors and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Merger Nominees. Pursuant to the Merger Agreement, Sylvan has nominated
each of Sam Yau, Chief Executive Officer and President of NEC, David C. Jones,
Chairman of the Board of NEC, Richard C. Blum, Chairman of Richard C. Blum and
Associates, L.P., a merchant banking firm, and a director of NEC and Michael R.
Klein, a partner at the law firm of Wilmer, Cutler & Pickering and a director of
NEC, for election to the Sylvan Board of Directors effective upon the
consummation of the Merger. In addition, upon consummation of the Merger, Mr.
Yau will serve as Co-Chief Executive Officer of Sylvan.
Directors' and Officers' Insurance; Limitation of Liability of NEC
Directors and Officers. The Merger Agreement requires NEC and Sylvan, after the
Effective Date (the "Indemnifying Parties") to indemnify, defend and hold
harmless, as and to the fullest extent permitted by law, each present and former
director or officer of NEC and its subsidiaries (each an "Indemnified Party")
against any losses, claims, damages, liabilities, costs, expenses (including
reasonable attorneys' fees and expenses in advance of the final disposition of
any claim, suit, proceeding or investigation to each Indemnified Party to the
fullest extent permitted by law upon receipt of an undertaking from such
Indemnified Party to repay such advanced expenses if it is finally and
unappealably determined that such Indemnified Party was not entitled to such
indemnification), judgments, fines and amounts paid in settlement with approval
of the Indemnifying Parties (which approval shall not be unreasonably withheld
of or in connection with any such claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
(i) his or her actions as such a director or officer or (ii) the Merger
Agreement or the transactions contemplated thereby. In the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Date), (i) the Indemnifying Parties shall
pay all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefore are received, and (ii) the Indemnified Parties
will use all reasonable efforts to assist in the defense of any such matter,
provided that no settlement for which the Indemnified Parties would be liable
will be effected without prior written consent. The by-laws of NEC also provide
for the indemnification of NEC directors and officers to the fullest extent
permitted by law.
The Merger Agreement requires that Sylvan shall, to the extent such
insurance is available, cause the persons serving as officers and directors of
NEC immediately prior to the Effective Date to be covered for a period of five
years from the Effective Date by the directors' and officers' liability
insurance policy maintained by NEC (provided that Sylvan and NEC may substitute
therefor policies of at least the same coverage and amounts containing terms and
conditions which are not less advantageous to such directors and officers of NEC
than the terms and conditions of such existing policy); provided, however, that
the surviving corporation will not be
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obligated to make annual premium payments for such insurance to the extent such
annual premiums exceed 125% of the annual premiums payable in 1996 (on an
annualized basis) by NEC for such insurance. The Merger Agreement also provides
that in the event Sylvan is not the surviving corporation of a merger or
consolidation with, or transfers all or substantially all of its assets to,
another entity, Sylvan will make proper provisions so that its successors and
assigns assume the foregoing indemnification and insurance obligations.
Employment, Non-Competition and Continuity Agreements. As a condition to
the Merger, Mr. Sam Yau, and the Presidents of ICS, NETG and SVPC must enter
into employment agreements with Sylvan replacing their current agreements with
NEC. Mr. Yau's replacement employment agreement will provide for employment for
a period commencing at the Effective Time and will include customary non-compete
and non-solicitation provisions extending for a certain period after termination
of his employment with Sylvan. Mr. Yau's initial annual salary under this
agreement will be $375,000. Messrs. Keisling and Moran and Ms. Kopec, the
Presidents of the NEC Subsidiaries have agreed to enter into employment
agreements with Sylvan on terms satisfactory to such individuals and to Sylvan,
including customary non-solicitation and non-compete provisions. In addition,
Sylvan and Messrs. Keith Ogata, NEC's Vice President and Chief Financial
Officer, and Philip C. Maynard, NEC's Vice President and General Counsel both of
whose employment will terminate following a reasonable and mutually agreeable
transition period following consummation of the Merger, have agreed to enter
into continuity agreements with respect to their provision of services during
the transition period and continuation of certain of their benefits after the
Merger.
Although still under discussion, Mr. Yau will be granted a long-term
incentive compensation package, including stock options, that will be designed
to align Mr. Yau's financial interests with the interests of the Sylvan
stockholders and to provide Mr. Yau an opportunity for value creation based upon
performance similar to the value creation opportunities received by Messrs. Yau,
Becker and Hoehn-Saric in their prior assignments and positions. Thereafter,
Mr. Yau will be considered for further option awards and participation in other
equity programs when and as other Sylvan executives are considered for and
granted such option awards and other equity participation opportunities.
NEC Stock Option Plans. Upon the consummation of the Merger, the NEC Stock
Option Plans and the options granted thereunder shall be deemed to have been
adopted by Sylvan and shall continue as separate plans and options of Sylvan.
Holders of outstanding options to purchase shares of NEC Common Stock ("NEC
Stock Options") shall be entitled to exercise those NEC Stock Options for a
number of shares of Sylvan Common Stock equal to the product of (A) the number
of shares of NEC Common Stock underlying the NEC Stock Option and (B) the
Initial Conversion Ratio or the Adjusted Conversion Ratio, as applicable (the
"Sylvan Option Shares"). The per share exercise price of the Sylvan Options
Shares shall be equal in value to the NEC Stock Option exercise price set forth
in the agreement pursuant to which the NEC Stock Option was granted divided by
the Initial Conversion Ratio or the Adjusted Conversion Ratio, as applicable.
After the Effective Time, no further grants shall be made under the NEC Stock
Option Plans.
NETG Stock Option Plans. The NETG Stock Option Plans provide that upon a
change of control, all options granted pursuant to such plans shall immediately
terminate. However, Sylvan has agreed that, from and after the Effective Time,
then outstanding NETG Stock Options and the related NETG Stock Option Plans
shall continue.
SVPC Stock Option Plans. The SVPC stock options and the related SVPC Stock
Option Plans will remain in effect upon consummation of the Merger.
Options Granted Pursuant to Employment Agreements. Pursuant to the
employment agreement entered into between Mr. Yau and NEC as of March 1, 1995,
Mr. Yau was granted certain options to acquire shares of NEC Common Stock. Mr.
Yau was granted an initial option to purchase 500,000 shares of NEC Common Stock
at the March 17, 1995 closing price (the "Initial Option"). The Initial Option
vests in 36 equal monthly installments commencing on June 1, 1995. In addition,
for a period of 30 days commencing on May 8, 1995, Mr. Yau was
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granted the opportunity to purchase up to 240,000 shares of NEC Common Stock at
the March 17, 1995 closing price with a concomitant grant of options by NEC for
Mr. Yau to purchase two and one-half shares of NEC Common Stock for every share
of NEC Common Stock purchased during the 30 day period (the "Additional
Options"). Pursuant to this agreement, Mr. Yau purchased 240,000 shares of NEC
Common Stock and was granted 600,000 Additional Options, all of which had vested
by the end of the second quarter of 1996.
Upon the consummation of the Merger, the unvested portion of the Initial
Options will vest. Accordingly, Mr. Yau will be entitled to exercise
approximately 153,000 Initial Options not otherwise exercisable until July 1,
1997 and monthly thereafter until May 1, 1998, all such options having an
exercise price of $3.00 per share. Exercise of these Initial and Additional
Options will be settled by delivery of Sylvan Common Stock in the same manner as
the settlement of NEC Stock Options described above. As of the Effective Time,
Initial and Additional Options will have an estimated aggregate value of
$15,751,000 (exclusive of the exercise price), assuming the Initial Conversion
Ratio is applicable and assuming the per share value of the Sylvan Common Stock
at the Effective Time is $29.86.
Officer, Key Employee and Inside Director Stock Options and Restricted
Stock Awards. Executive and key employees, including employee-directors, of NEC
are eligible to receive stock options and shares of Restricted Stock (the
"Incentive Awards") pursuant to the NEC Amended and Restated 1990 Stock Option
and Incentive Plan (the "Executives Award Plan"). Upon approval of the Merger
by the NEC stockholders, all outstanding Incentive Awards become immediately
vested or otherwise free from restrictions in their entirety. Accordingly,
immediately after the NEC Stockholders approve the Merger, NEC option plan
participants will be entitled to exercise 965,390 options to purchase shares of
NEC Common Stock, (which will be converted to Sylvan Options as described above)
at a weighted average per share exercise price of $8.47 which would not
otherwise have become exercisable until various times after the Closing.
Specifically, of the 965,390 options that will vest on an accelerated basis,
142,022, 339,755, 192,188, 174,015 and 57,410 would otherwise have become
exercisable during 1997, 1998, 1999, 2000, and 2001, respectively. These
options will be settled by delivery of Sylvan Common Stock in the same manner as
the settlement of NEC Stock Options as described above.
Outside Directors' Stock Options. Options to purchase an aggregate of
142,000 shares of NEC Common Stock, at a weighted average exercise price of
$7.76 per share, have been granted to NEC's non-employee directors pursuant to
the NEC Amended and Restated 1991 Directors' Stock Option and Award Plan (the
"NEC Directors Option Plan"). Upon approval of the Merger by the NEC
stockholders, all outstanding but unvested options granted under the Directors
Option Plan (22,500 options having a weighted average exercise price of $14.16
per share) become immediately exercisable in full. In the event the Merger is
consummated, these options will be settled by delivery of Sylvan Common Stock in
the same manner as the settlement of NEC Stock Options, as described above.
Supplemental Executive Retirement Plan. NEC has in effect an unfunded
Supplemental Executive Retirement Plan ("SERP") which provides for supplemental
retirement income benefits as early as age 60 after completing at least six
years of service for certain of its current and former executive officers
including Messrs. Yau, Ogata, and Maynard. A participant in the SERP will
receive maximum lifetime retirement income benefits in the amount of 60% of
average earnings (reduced by the amount of a participant's primary social
security benefits) multiplied by the participant's credited service percentage
under the SERP. The credited service percentage vests at a rate of 10% per year
beginning with the sixth year of credited service and become fully vested after
15 years of credited service.
In the event of a change of control, the SERP provides that, if a
participant's employment is terminated voluntarily or involuntarily within two
years of such change of control of NEC ("Timely Termination"), the participant
is entitled to receive accelerated vesting and payout of SERP retirement
benefits in a single lump sum. Such lump sum settlement shall be equal to the
actuarial present value of full retirement benefits, assuming that the
participant's employment had continued to age 65, the participant's earnings had
remained unchanged to age 65 and the participant was 65 for purposes of
calculating social security benefits. The participant's earnings are determined
by using the participant's highest annual earnings during the three year period
prior to the change of control. Sylvan
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has agreed that executives will be eligible for benefits under the SERP without
Timely Termination; provided, that (i) SERP participants who remain employees
after the Merger will be entitled to payment of SERP retirement benefits, with
interest from the Effective Date, only upon termination of such participant's
employment and (ii) there will be no further accrual of additional benefits from
and after the Merger. Estimated lump sum payments to which Messrs. Yau, Ogata,
and Maynard are expected to be entitled are approximately: $2,171,000, $805,000
and $586,000, respectively; and all participants as a group (five persons in
total), $5,323,000.
REGULATORY MATTERS
Under the HSR Act, and the rules that have been promulgated thereunder by
the FTC, the Merger may not be consummated unless certain filings have been
submitted to the Antitrust Division and the FTC and certain waiting period
requirements have been satisfied. On March 26, 1997, Sylvan and NEC submitted
the to the FTC and the Antitrust Division the filings required to be made in
connection with the Merger. On April 25, 1997, the waiting period under the HSR
Act relating to the Sylvan and NEC filing will expire. Richard C. Blum, a
director and principal stockholder of NEC is deemed under the HSR Act to be
"acquiring" Sylvan by virtue of the expected value of the Sylvan Common Stock as
to which he would acquire beneficial ownership as a result of the Merger and
because he is a Merger Nominee. Accordingly, Mr. Blum was required to make, and
on April __, 1997 made, certain filings with the FTC and Antitrust Division. On
May __, 1997, the waiting period relating to Mr. Blum's filing will expire under
the HSR Act.
Under the Merger Agreement, Sylvan and NEC have agreed to use all
reasonable efforts to obtain all necessary material permits, licenses,
franchises and other governmental authorizations necessary or advisable to
complete or effect the Merger. It is a condition to the parties' respective
obligations to consummate the Merger that all necessary material consents,
approvals, actions of, filings with and notice to any governmental authority or
public or private third parties be obtained.
NASDAQ STOCK MARKET LISTING
Sylvan has filed an application to list the shares of Sylvan Common Stock
to be issued in connection with the Merger on Nasdaq.
DELISTING AND DEREGISTRATION OF NEC COMMON SHARES
If the Merger is consummated, the shares of NEC Common Stock will be
delisted from the NYSE and PSE and those shares will be deregistered under the
Exchange Act.
CERTAIN FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Sylvan Common Stock issued in connection with the Merger will
have been registered under the Securities Act. Such shares will be freely
transferable, except that shares received by any person who may be deemed to be
an affiliate within the meaning of Rule 145 of the rules and regulations
promulgated under the Securities Act (each such person being an "Affiliate") of
NEC may not be resold except in transactions permitted by such Rule 145 or as
otherwise permitted under the Securities Act.
Pursuant to the Merger Agreement, NEC and Sylvan agreed to deliver to each
other a list of those persons who were, in their respective reasonable judgment,
on the date of execution of the Merger Agreement, Affiliates of NEC and Sylvan,
respectively. NEC and Sylvan have agreed to provide each other with such
information and documents as Sylvan shall reasonably request for purposes of
reviewing such list. NEC is obligated under the Merger Agreement to use its
best efforts to deliver or cause to be delivered to Sylvan, prior to the
Effective Time, a written agreement substantially in the form agreed to by NEC
and Sylvan, executed by each of the Affiliates of NEC identified in the
foregoing list and by any person who shall have become an Affiliate of NEC
subsequent to the delivery of such list, to the effect that such Affiliate of
NEC will not sell, transfer, exchange, pledge or otherwise
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dispose of, or make any offer or agreement relating to any of the foregoing with
respect to, any shares of Sylvan Common Stock such person acquires in connection
with the Merger except as permitted under Rule 145 of the Securities Act.
THE MERGER AGREEMENT
The following is a summary of certain material terms of the Merger
Agreement. The following summary does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is
attached as Annex I to this Joint Proxy Statement/Prospectus and is incorporated
herein by reference.
GENERAL
If the respective approval of (i) Sylvan's stockholders with respect to the
Share Issuance by the requisite vote under applicable law and (ii) NEC's
stockholders with respect to the Merger and the Merger Agreement are obtained,
and all other conditions to the Merger are satisfied or waived, Merger Sub will
be merged with and into NEC, with NEC being the surviving corporation after the
Merger and a wholly-owned subsidiary of Sylvan. The date on which the closing
of the Merger occurs is referred to herein as the "Closing Date."
CONVERSION SHARES
Conversion Ratio. In the Merger, among other things, each outstanding
share of NEC Common Stock, other than NEC Common Stock held by NEC or held by
Sylvan, Merger Sub or any other wholly-owned subsidiary of Sylvan, will be
converted into the right to receive 0.58 of a share of Sylvan Common Stock (the
"Initial Conversion Ratio"); provided, however, that the Initial Conversion
Ratio may be adjusted upward in the event (i) the average closing price of
Sylvan Common Stock (the "Average Share Price") over a period of ten (10)
trading days preceding the consummation of the Merger (the "Pricing Period") is
less than $29.86 per share (the "Trigger Price"), (ii) the NEC Board has
exercised its option (the "Termination Option") to terminate the Merger
Agreement because the Average Share Price is less than the Trigger Price and
(iii) Sylvan has exercised its option (the "Adjustment Option") to adjust the
Initial Conversion Ratio to equal the quotient of (A) the Trigger Price
multiplied by the Initial Conversion Ratio divided by (B) the Average Share
------- --
Price (the "Adjusted Conversion Ratio"). Assuming the number of shares of
Sylvan Common Stock outstanding on the Closing Date equals the number of shares
of Sylvan Common Stock outstanding on March 17, 1997, Sylvan will not, in any
event, increase the Adjusted Conversion ratio above 0.5945.
The following table illustrates the effect on the Conversion Ratio using a
range of assumed Average Share Prices:
<TABLE>
<CAPTION>
SYLVAN
AVERAGE SHARE PRICE CONVERSION RATIO
------------------- ----------------
<S> <C>
$29.86 and above 0.5800
$29.63 0.5845
$29.38 0.5895
$29.13 0.5945
</TABLE>
Fractional Shares. No certificates for fractional shares of Sylvan Common
Stock will be issued in the Merger, and to the extent that an outstanding share
of NEC Common Stock would otherwise have become a fractional share of Sylvan
Common Stock, the holder thereof, upon presentation of such fractional share
interest represented by an appropriate certificate for NEC Common Stock to the
Exchange Agent as described under "Exchange Procedures" below, will be entitled
to receive a cash payment therefor in an amount equal to the product of (i) the
Average Share Price and (ii) the fractional share interest to which the holder
would otherwise be entitled.
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NEC Stock Options. The Merger Agreement provides that following the
Effective Time, each holder of outstanding options to purchase shares of NEC
Common Stock (a "NEC Stock Option") under the NEC option plans, whether vested
or unvested, shall be entitled to exercise such NEC Stock Options at such time
as the holder thereof would otherwise have been entitled to exercise such NEC
Stock Options for a number of shares of Sylvan Common Stock equal to (A) the
number of shares of NEC Common Stock underlying the NEC Stock Options multiplied
by the Conversion Ratio ("Sylvan Option Shares") by payment of consideration
equal in value to the per share NEC Stock Option exercise price set forth in the
agreement pursuant to which the NEC Stock Option was granted divided by the
Conversion Ratio multiplied by the number of Sylvan Option Shares being issued.
NEC Convertible Debentures. NEC is a party to an Indenture, dated as of
May 15, 1986, with Continental Illinois National Bank and Trust Company of
Chicago, pursuant to which NEC issued $57.5 million, 6 1/2% Convertible
Subordinated Debentures (the "NEC Convertible Debentures") of which $54.6
million is currently outstanding. The debentures are convertible to NEC Common
Stock at $25.00 per share. The Merger Agreement provides that each of NEC and
Sylvan will use their best efforts to cause the Trustee of the Indenture to
amend the Indenture, effective at the Effective Time, so that Sylvan assumes
NEC's rights and obligations thereunder and, so that NEC's obligations in
respect of outstanding NEC Convertible Debentures may be canceled. In the event
that the Indenture is amended as described, upon the consummation of the Merger,
each holder of the outstanding NEC Convertible Debentures ($_____ principal
amount on the NEC Record Date) will have the right to convert such NEC
Convertible Debentures into a number of shares of Sylvan Common Stock equal to
the product of (A) the number of shares of NEC Common Stock into which the NEC
Convertible Debentures would have been convertible had the Merger not occurred
(which is equal to the value of the NEC Convertible Debentures divided by
$25.00, the per share conversion price) multiplied by (B) the Initial Conversion
---------- --
Ratio or the Adjusted Conversion Ratio, as applicable.
NEC does not believe that the change in conversion rights on the NEC
Convertible Debentures will constitute an "exchange" within the meaning of the
applicable regulations promulgated under the Internal Revenue Code. Were the
modification to constitute an exchange, NEC could recognize discharge of
indebtedness income in an amount equal to the excess of the original issue price
of the NEC Convertible Debentures over their fair market value on the date of
consummation of the Merger. Such discharge of indebtedness income would have no
immediate tax impact, but would reduce NEC's net operating loss carryovers. NEC
would, however, be entitled to additional interest deductions over the remaining
life of such debentures in an amount equal to any discharge of indebtedness
income.
Pursuant to a Debenture Purchase Agreement dated February 15, 1991, NEC
issued $20 million senior subordinated convertible debentures, which in
September of 1995 were converted into 5,020,636 shares of NEC Common Stock (the
"Debentures Shares"). Pursuant to its obligations under the Debenture Purchase
Agreement as amended, NEC has filed, and maintained the effectiveness of, a
Registration Statement with the SEC with respect to the Debentures Shares. No
later than 90 days after the Effective Time, Sylvan has agreed to file a
Registration Statement on Form S-3 relating to the shares of Sylvan Common Stock
which will be issued in respect of shares of NEC Common Stock issued upon
conversion of the Debentures in the fall of 1995, replacing the NEC Form S-3
registration statement on file for such shares.
Conversion of Merger Sub Common Stock. Each share of common stock, par
value $.01 per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time will be converted into one share of common stock, without par
value, of NEC as the Surviving Corporation. Such newly issued shares will
thereupon constitute all of the issued and outstanding capital stock of the
Surviving Corporation.
EXCHANGE PROCEDURES
Promptly following the Effective Time, Sylvan will make available to the
Surviving Corporation for deposit with __________________ (the "Exchange
Agent"), for the benefit of and to be distributed to the holders of certificates
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of NEC Common Stock, certificates representing the number of duly authorized
shares of Sylvan Common Stock to be issued in connection with the Merger (and
cash in lieu of fractional shares of Sylvan Common Stock).
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail a form of transmittal letter to the holders of certificates
representing shares of NEC Common Stock. The form of transmittal letter will
contain instructions with respect to the surrender of such certificates in
exchange for shares of Sylvan Common Stock (and cash in lieu of fractional
shares of Sylvan Common Stock, if applicable).
NEC STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY CARD AND
SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT EXCEPT WITH A TRANSMITTAL FORM
WHICH WILL BE PROVIDED TO HOLDERS FOLLOWING THE EFFECTIVE TIME.
After the Effective Time, there will be no further transfers on the records
of NEC of certificates representing shares of NEC Common Stock, and if such
certificates are presented to the Surviving Corporation for transfer, they shall
be canceled and exchanged for the consideration properly payable pursuant to the
Merger Agreement. The rights of the NEC stockholders to cause the Surviving
Corporation to exchange their shares of NEC Common Stock for shares of Sylvan
Common Stock (and cash in lieu of fractional shares) expires one year from the
Effective Time. Thereafter, these NEC stockholders are required to request
exchange from Sylvan.
No dividends or other distributions declared or made with respect to Sylvan
Common Stock with a record date after the Effective Time will be paid to the
holder of any certificate representing shares of NEC Common Stock until such
certificate has been surrendered for exchange. Holders of certificates
representing shares of NEC Common Stock will be paid the amount of dividends or
other distributions with a record date after the Effective Time, which dividends
or distributions theretofore had been payable, after surrender of such
certificates, without any interest thereon.
Neither Sylvan nor the Surviving Corporation will be liable to any former
holder of shares of NEC Common Stock for any number of shares or amount of cash
payable in lieu of fractional share interests delivered to a public official
pursuant to any applicable abandoned property, escheat or similar laws.
For a description of the differences between the rights of the holders of
Sylvan Common Stock and NEC Common Stock, see "COMPARATIVE RIGHTS OF
STOCKHOLDERS OF SYLVAN AND NEC."
EFFECTIVE TIME
On the Closing Date, the parties shall file a Certificate of Merger with
the Secretary of State of the State of Delaware, and the Merger will become
effective at the time of such filing (the "Effective Time").
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of the parties, none of which will survive the consummation of the
Merger, made as of the date of the Merger Agreement and to be made as of the
Effective Time, including, among other things, representations from all parties
relating to (i) each party's organization and similar corporate matters, (ii)
the authorization, execution, delivery, performance and enforceability of the
Merger Agreement and the consummation of the transactions contemplated thereby,
(iii) the consents or approvals required to enter into the Merger Agreement and
to consummate the transactions contemplated thereby and (iv) the absence of
pending or threatened legal proceedings.
The Merger Agreement also includes representations from NEC and Sylvan
relating to (i) each of NEC and Sylvan's capital structure, (ii) the absence of
any violation of corporate documents or applicable law in connection with
entering into the Merger Agreement, (iii) certain documents and reports filed by
NEC and Sylvan with the
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Securities and Exchange Commission (the "SEC") and the accuracy of the
information contained therein, (iv) the absence of certain changes or events
having a material adverse effect on each company and its subsidiaries taken as a
whole, (v) the absence of undisclosed liabilities, (vi) the accuracy of the
information each party has supplied with respect to the filings required with
the SEC in order to consummate the Merger and the transactions contemplated by
the Merger Agreement, (vii) certain tax matters, (viii) matters concerning the
benefit plans of NEC and Sylvan and their subsidiaries, (ix) certain
environmental matters, (x) matters concerning patents, copyrights, trademarks
and other intellectual property rights, (xi) matters relating to insurance
coverage, (xii) the accuracy of corporate records, (xiii) the stockholder vote
required to approve the transactions contemplated by the Merger Agreement, (xiv)
certain matters concerning contracts and agreements of each company and its
subsidiaries and (xv) certain accounting matters. In addition, the Merger
Agreement contains representations from NEC regarding the inapplicability of
Section 203 of the DGCL to the Merger Agreement or any of the transactions or
agreements contemplated thereby.
CONDUCT OF BUSINESS OF NEC AND SYLVAN PENDING THE MERGER
Pursuant to the terms of the Merger Agreement, each of Sylvan and NEC has
agreed that prior to the Effective Time, unless otherwise consented to by the
other, it will, and will cause its subsidiaries to (unless expressly provided
for in the Merger Agreement): (i) conduct their respective businesses only in
the ordinary course consistent with past practice and (ii) use all reasonable
efforts to preserve intact in all material respects their present business
organizations and reputation, keep available the services of their key officers
and employees and preserve their relationships with customers and suppliers and
others having significant business dealings with them.
Each of Sylvan and NEC has further agreed that, unless otherwise consented
to by the other, prior to the Effective Time it will not, and will not permit
any of its subsidiaries to, except as otherwise expressly provided for in the
Merger Agreement: (a) amend or propose to amend its Charter or Certificate of
Incorporation or By-Laws; (b) authorize for issuance, issue, sell, deliver or
agree or commit to issue, sell or deliver (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity equivalents
(including, without limitation, any stock options or stock appreciation rights),
except (i) in the case of NEC, shares of its Common Stock issuable upon
conversion of the Outstanding Debentures (at a conversion rate of one
share of its Common Stock for every $25.00 of Outstanding Debentures), (ii)
shares of its Common Stock issuable upon exercise of the outstanding options,
and in the case of Sylvan, outstanding warrants and shares issuable in
connection with other acquisitions or Sylvan's Employee Stock Purchase Plan, or
amend any of the terms of any such securities or agreements outstanding as of
the date hereof, except as specifically contemplated by the Merger Agreement,
and (iii) in the case of NEC, for amendments to the NETG Stock Option Plan in
order to provide that such plan and the options granted thereunder survive the
Merger; (c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
or redeem or otherwise acquire any of its securities or any securities of its
material subsidiaries, except that NEC may repurchase Outstanding Debentures to
the extent necessary to satisfy its 1997 sinking fund obligation under the
Indenture by which the Debentures were issued; (d)(i) incur or assume any long-
term or short-term debt or issue any debt securities except for borrowings under
existing lines of credit in the ordinary course of business or, in the case of
Sylvan, pursuant to other acquisitions; (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity except in the
ordinary course of business consistent with past practice, and except for
obligations of wholly-owned subsidiaries of it; (iii) make any loans, advances
or capital contributions to, or investments in, any other person or entity
(other than to subsidiaries of it or advances to employees in the ordinary
course of business consistent with past practice and in amounts not material to
the maker of such loan or advance); (iv) pledge or otherwise encumber shares of
its capital stock or any of its material subsidiaries; or (v) mortgage or pledge
any of its material assets, tangible or intangible, or create or suffer to exist
any material lien thereupon; (e) except as may be required by law or as
contemplated by the Merger Agreement or other specified acquisitions, enter
into, adopt or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance or other employee
benefit agreement, trust, plan, fund or other arrangement for the benefit or
welfare of
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any director, officer or employee in any manner, or (except for normal increases
in the ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to it, and as required under existing agreements or in the ordinary
course of business generally consistent with past practice) increase in any
manner the compensation or fringe benefits of any director, officer or employee
or pay any benefit not required by any plan and arrangement as in effect as of
the date hereof (including, without limitation, the granting of stock
appreciation rights or performance units); (f) acquire, sell, lease, license to
others or dispose of any assets outside the ordinary course of business which
individually or in the aggregate are material to it, or enter into any
commitment or transaction outside the ordinary course of business consistent
with past practice which would be material to it; (g) except as may be required
as a result of a change in law or in generally accepted accounting principles,
change any of the accounting principles or practices used by it; (h) revalue in
any material respect any of its assets, including, without limitation, writing
down the value of inventory or writing-off notes or accounts receivable other
than in the ordinary course of business; (i) acquire or agree to acquire (by
merger, consolidation, acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization or division thereof or
any equity interest therein, other than specified acquisitions approved in the
Merger Agreement, enter into any contract or agreement other than in the
ordinary course of business consistent with past practice which would be
material to it or, in the case of NEC, authorize any new capital expenditure or
expenditures which, individually, is in excess of $250,000 or, in the aggregate,
are in excess of $2,500,000, or enter into or amend any contract, agreement,
commitment or arrangement providing for the taking of any action that would be
prohibited under the Merger Agreement; (j) make any tax election or settle or
compromise any income tax liability material to it; (k) pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in, or contemplated by, the consolidated financial statements
(or the notes thereto) of it or its material subsidiaries or incurred in the
ordinary course of business consistent with past practice; (l) settle or
compromise any pending or threatened suit, action or claim relating to the
transactions contemplated by the Merger Agreement; or (m) take, or agree in
writing or otherwise to take, any of the actions described above or any action
which would make any of its representations or warranties contained in the
Merger Agreement untrue or incorrect as of the date when made.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that NEC, and from and after the Effective
Time, Sylvan will maintain all rights of indemnification existing in favor of
directors, officers and employees of NEC or any of its subsidiaries or any
person who becomes an officer or director of NEC or any of its subsidiaries
prior to the Effective Time, to the full extent permitted by applicable law.
In addition, Sylvan has agreed that directors' and officers' liability
insurance policies maintained by NEC and its subsidiaries on the date of the
Merger Agreement will be maintained in effect until the fifth anniversary of the
Effective Time; provided, however, that Sylvan or the Surviving Corporation will
not be obligated to expend any amount per annum in excess of one hundred and
twenty-five percent (125%) of the aggregate premiums payable by NEC and its
subsidiaries in 1996 in order to maintain or procure such insurance coverage.
APPOINTMENT OF DIRECTORS
The Merger Agreement provides that Sylvan will use its best efforts to
cause the Sylvan Board to invite Mr. Sam Yau and three other NEC directors to
become members of the Sylvan Board, effective upon consummation of the Merger.
NO SOLICITATION
Pursuant to the Merger Agreement, NEC has agreed that, prior to the
Effective Time, NEC, its affiliates and their respective officers, directors,
employees, representatives and agents shall immediately cease existing
discussions or negotiations, if any, with any parties with respect to any
acquisition (other than the transactions
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contemplated by the Merger Agreement or by any acquisition agreements or
negotiations described in NEC's Disclosure Statement or in its SEC reports) of
all or any material portion of the assets of, or any equity interest in, NEC or
any of its material subsidiaries or any business combination with NEC or any of
its material subsidiaries. Additionally, NEC agreed that, prior to the Effective
Time, neither NEC nor any of its affiliates nor the respective officers,
directors, employees, representatives or agents of either, will (i) solicit,
initiate, encourage, or furnish information in response to any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock (including without
limitation by way of a tender offer or similar transactions involving NEC, other
than the transactions contemplated by the Merger Agreement) (any of the
foregoing transactions being referred to as an "Acquisition Transaction"), (ii)
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Transaction, or
(iii) agree to approve or recommend any Acquisition Transaction; except, with
respect to clauses (i) (as to the furnishing of information only) (ii) and
(iii), where the NEC Board has received the written opinion of Irell & Manella
LLP to the effect that the failure of the NEC Board to so act would constitute a
violation of the NEC Board's fiduciary responsibilities to the holders of the
NEC Common Stock under the DGCL (it being understood that for this purpose, the
failure to respond to an acquisition proposal which in the judgment of the NEC
Board and BZW is superior, from a financial point of view, to the NEC
stockholders may be deemed to be a breach of such fiduciary duty). The Merger
Agreement provides that if NEC shall nevertheless receive any indications of
interest or proposals with respect to any Acquisition Transactions, it shall
provide a copy of any such written proposal to Sylvan immediately after receipt
thereof by NEC or any of its representatives or agents.
CONDITIONS PRECEDENT TO THE MERGER
In addition to the approval of the Share Issuance by the stockholders of
Sylvan by the requisite vote under applicable law, and the approval of the
Merger Proposal by the stockholders of NEC, the obligations of NEC and Sylvan to
effect the Merger are subject to the fulfillment or waiver of certain conditions
specified in the Merger Agreement, including, among others: (i) the continuing
accuracy of the representations and warranties of the respective parties
contained in the Merger Agreement; (ii) the performance and compliance in all
material respects by the respective parties of all obligations under the Merger
Agreement required to be performed on or prior to the consummation of the
Merger; (iii) the absence of any injunction or other order by any federal or
state court preventing consummation of the Merger, (iv) the applicable period
under the HSR Act having expired or been terminated; (v) authorization of the
shares of Sylvan Common Stock issuable to NEC's stockholders for listing on
Nasdaq and the acceptance of the Listing Application by Nasdaq; (vi) the receipt
of Pooling Letters from Ernst & Young LLP and Price Waterhouse LLP and (viii)
the receipt of an opinion from Ernst & Young LLP by Sylvan and from Irell &
Manella LLP by NEC relating to the tax-free status of the Merger.
Furthermore, the obligation of Sylvan to effect the Merger is subject to
the fulfillment or waiver of additional conditions specified in the Merger
Agreement, including (i) Sylvan shall have received all state securities or
"blue sky" permits and other authorizations necessary to issue shares of Sylvan
Common Stock pursuant to the Merger, (ii) the prior employment agreements
between NEC or any of the NEC Subsidiaries and each of Sam Yau, Anita Kopec,
President of SVPC, Gary Keisling, President of ICS and Chuck Moran, President of
NETG, shall have been terminated in such a manner that no such person shall be
entitled to any severance payments on account of the Merger, (iii) Mr. Yau shall
have entered into a replacement employment agreement which includes customary
non-compete and non-solicitation provisions, (iv) each of Messrs. Keisling and
Moran and Ms. Kopec shall have entered into replacement employment agreements in
form and substance satisfactory to Sylvan, which employment agreements shall
include customary non-solicitation agreements, (v) Keith Ogata and Philip
Maynard shall have entered into continuity agreements in form and substance
satisfactory to Sylvan with respect to continuation of their right to benefits
under NEC's SERP Plan and other benefits theretofore provided to such
individuals by NEC, (vi) waiver of the condition in NEC's SERP Plan that a
participant's employment with the Company must be terminated voluntarily or
involuntarily within two years of a change of control in order to receive
accelerated vesting and payout of SERP retirement benefits for those NEC SERP
participants who are currently active employees of NEC or a NEC subsidiary and
who otherwise would be entitled to accelerated vesting if they did terminate
their employment
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within two years of a change of control, (vii) SVPC and Anita Kopec shall have
amended the option agreements between them so that the options thereunder shall
not vest as a result of the Merger, (viii) NEC shall have taken or caused to be
taken all steps and actions reasonably required by Sylvan, on advice of its
counsel, with respect to the termination or amendment of NEC Employee Plans,
including delivering notices and filing such documents as counsel to Sylvan
deems reasonably necessary and (ix) NEC shall have obtained a letter of credit,
performance bond or other substantial evidence of financial security, in each
instance in form and substance reasonably acceptable to Sylvan regarding
performance obligations of Kaleidoscope Inc. to NEC.
TERMINATION
The Merger Agreement may be terminated by mutual written consent of the
parties. NEC and Sylvan each has the option to terminate the Merger Agreement
if the Average Share Price is less than the Trigger Price; provided however,
that NEC may not exercise its Termination Option if Sylvan exercises its
Adjustment Option to increase the Initial Conversion Ratio to the Adjusted
Conversion Ratio. Assuming the number of shares of Sylvan Common Stock
outstanding on the Closing Date is no greater than the number of shares
outstanding on the Sylvan Record Date, Sylvan will not exercise its Adjustment
Option if such exercise would result in an Adjusted Conversion Ratio which is
higher than 0.5945.
The Merger Agreement may also be terminated by either NEC or Sylvan if (i)
the Merger shall not have been consummated by September 30, 1997 (provided that
the right to terminate the Merger Agreement under this provision shall not be
available to any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of, or resulted in, the failure of the Merger to
occur on or before such date); (ii) a court of competent jurisdiction or other
governmental entity shall have issued a nonappealable final order, decree or
ruling or taken any other action, in each case having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger, except, if the party
relying on such order, decree or ruling or other action has not complied with
its obligations under the Merger Agreement; (iii) at the NEC Special Meeting
(including any adjournment or postponement thereof), the requisite vote of the
stockholders of NEC in favor of the Merger Agreement and the Merger shall not
have been obtained, or if at the Sylvan Annual Meeting (including any
adjournment or postponement thereof), the requisite vote of the stockholders of
Sylvan in favor of the Share Issuance shall not have been obtained; (iv) if
there has been a material breach of any representation, warranty, covenant or
agreement on the part of the other party set forth in the Merger Agreement,
which breach shall not have been cured in the case of a representation or
warranty, prior to the Closing or, in the case of a covenant or agreement,
within 20 business days following receipt by the breaching party of written
notice of such breach from the other party.
Sylvan can terminate the Merger Agreement if the NEC Board shall have
withdrawn or modified its recommendation of the Merger Agreement or the Merger,
or shall have resolved to do any of the foregoing, for any reason other than the
occurrence of an event relating to Sylvan which has a Material Adverse Effect on
Sylvan, or if NEC fails to call and hold the NEC Special Meeting within forty
(40) days after the SEC declares effective the Registration Statement of which
this Joint Proxy Statement/Prospectus forms a part.
NEC can terminate the Merger Agreement if the Sylvan Board shall have
withdrawn or modified its recommendation of the Share Issuance or shall have
resolved to do any of the foregoing, for any reason other than the occurrence of
an event relating to NEC which has a Material Adverse Effect on NEC or Sylvan
fails to call and hold the Sylvan Annual Meeting within forty (40) days after
the SEC declares effective the Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part.
TERMINATION FEE
The Merger Agreement provides that if the Merger Agreement is terminated by
NEC due to Sylvan's failure to receive the requisite vote for approval of the
Merger Agreement and the Merger at the Sylvan Annual Meeting or if Sylvan has
materially breached any representation, warranty, covenant or agreement set
forth in the Merger Agreement, which breach shall not have been cured in the
case of a representation or warranty, prior to the
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Closing Date or, in the case of a covenant or agreement, within 20 business days
following receipt by Sylvan of written notice of such breach from NEC, then
Sylvan shall pay NEC a termination fee of $10,000,000.
In the event that the Merger Agreement is terminated by Sylvan due to (i)
NEC's Board of Directors having withdrawn or modified its recommendation of the
Merger Agreement or the Merger, or shall have resolved to do any of the
foregoing, for any reason other than the occurrence of an event relating to
Sylvan which has a Material Adverse Effect on Sylvan or (ii) NEC's failure to
call and hold the NEC Special Meeting within 40 days after the SEC declares the
S-4 effective, then NEC shall pay Sylvan a termination fee of $30,000,000.
If Sylvan terminates the Merger Agreement (i) as a result of the failure to
receive the requisite vote for approval of the Merger Agreement and the Merger
by the stockholders of NEC at the NEC Special Meeting or (ii) after a material
breach by NEC of the Merger Agreement; then NEC shall pay Sylvan $10,000,000
provided, however, in the event that NEC shall have consummated an Acquisition
Transaction in which NEC or substantially all of its assets are acquired (even
if the acquisition is structured so that NEC or one of its subsidiaries is the
survivor in the transaction) by a party other than Sylvan or any of its
affiliates at any time on or before the expiration of eight calendar months from
Sylvan's termination under clauses (i) and (ii) above, NEC shall, or shall cause
its successor to pay Sylvan an additional amount of liquidated damages equal to
$20,000,000 for a total termination fee of $30,000,000.
AMENDMENT; WAIVER
The Merger Agreement may be amended by action taken by or on behalf of the
respective boards of directors of the parties thereto at any time prior to or
after the approval of the stockholders of NEC and Sylvan has been obtained, but
after such approval, no amendment shall be made which requires the further
approval of such stockholders under applicable law without such further
approval. The Merger Agreement may not be amended except by an instrument in
writing signed on behalf of the parties thereto.
At any time prior to the Effective Time, any of the parties to the Merger
Agreement may, to the extent permitted by applicable law: (i) extend the time
for the performance of any of the obligations or other acts of the other party;
(ii) waive any inaccuracies in the representations and warranties of the other
party thereto or in any document delivered pursuant to the Merger Agreement; or
(iii) waive compliance with any of the covenants, agreements or conditions of
the other party contained in the Merger Agreement.
EXPENSES
Subject to the termination fee provisions, the Merger Agreement provides
that each party thereto will pay its own expenses in connection with the Merger
except that Sylvan and NEC shall share equally all fees and expenses, other than
attorneys' fees, incurred in relation to the printing and filing of this Joint
Proxy Statement/Prospectus (including any related preliminary materials) and the
S-4 (including financial statements and exhibits) and any amendments or
supplements. Sylvan shall pay the filing fees applicable to the S-4, and NEC
shall pay the filing fees applicable to this Joint Proxy Statement Prospectus.
DESCRIPTION OF SYLVAN CAPITAL STOCK
GENERAL
The authorized capital stock of Sylvan consists of 50,000,000 shares,
40,000,000 of which are classified as Common Stock, $.01 par value, and
10,000,000 of which are classified as preferred stock, par value $.01 per share,
with 250,000 shares designated as Series A Junior Participating Preferred Stock.
If the Common Shares Amendment is adopted at the Sylvan Annual Meeting, and
Articles of Amendment are filed with the Maryland State Department of
Assessments and Taxation (the "SDAT"), the number of shares of authorized Sylvan
Common Stock will increase to 90,000,000 shares. If the Preferred Shares
Amendment is adopted at the Sylvan Annual Meeting
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and Articles Supplementary are filed with the SDAT, the number of shares of
Preferred Stock designated as Series A Junior Participating Preferred Stock will
increase to 400,000 shares. As of the Sylvan Record Date, __________ shares of
Sylvan Common Stock were outstanding and held of record by ______ stockholders.
There were no shares of Preferred Stock outstanding on the Sylvan Record Date.
COMMON STOCK
Holders of Sylvan Common Stock are entitled to one vote for each share held
of record on all matters on which stockholders are entitled to vote. There are
no cumulative voting rights and holders of Sylvan Common Stock have no
preemptive rights. All issued and outstanding shares of Sylvan Common Stock are
validly issued, fully paid and non-assessable. Holders of Common Stock are
entitled to such dividends as may be declared from time to time by the Sylvan
Board out of funds legally available for that purpose. Upon liquidation,
dissolution or winding up, whether voluntary or involuntary, holders of Sylvan
Common Stock are entitled to share pro rata in the assets of Sylvan remaining
after payment in full of all its liabilities and obligations, including payment
of the liquidation preference, if any, of any preferred stock then outstanding.
PREFERRED STOCK
Blank Check Preferred Stock. The Sylvan Board, without further action by
the stockholders, is authorized to issue preferred stock in one or more series
and to designate as to any such series the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption. The rights of the holders
of Sylvan Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
Issuance of a new series of preferred stock, while providing desirable
flexibility in connection with possible acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of Sylvan. Sylvan has no present plans to issue any
new series of preferred stock.
Series A Junior Participating Preferred Stock. Holders of Series A Junior
Participating Preferred Stock ("Series A Preferred Stock") are entitled to
receive in preference to holders of Sylvan Common Stock and of any other junior
stock, when, as and if declared by the Sylvan Board, quarterly cash dividends,
if such dividends are in arrears for six consecutive quarters, holders of Series
A Preferred Stock may remove two members of the Sylvan Board and elect their
replacements. Each share of Series A Preferred Stock is entitled to 100 votes
on all matters submitted to a shareholder vote, voting together as a single
class with holders of Sylvan Common Stock. Upon liquidation, dissolution or
winding up, holders of Series A Preferred Stock shall receive $100 per share
plus accrued and unpaid dividends, provided that such holders are entitled to
receive an aggregate amount per share equal to 100 times the aggregate amount to
be distributed to holders of priority stock or Sylvan Common Stock, subject to
adjustment in certain circumstances. If Sylvan should consolidate, merge, or
enter into any other transaction in which shares of Sylvan Common Stock are
exchanged for or changed into other consideration, the Series A Preferred Stock
shall be similarly exchanged or changed in an amount per share equal to 100
times such consideration. The Series A Preferred Stock ranks junior to all
other Sylvan Preferred Stock unless the terms of such other Sylvan Preferred
Stock provide otherwise.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITION PROVISIONS OF MARYLAND
GENERAL CORPORATION LAW
Section 3-602 of the MGCL provides that, subject to certain exceptions
specified therein, any holder of 10% or more of the voting stock of a Maryland
corporation after the corporation has 100 or more beneficial owners (an
"interested stockholder") may not engage in any business combination with the
corporation for a five-year period following the date that such stockholder
becomes an interested stockholder unless prior to such date, the board of
directors of the corporation approved the 10% acquisition. After such five-year
period, any such business combination must be recommended by the board of
directors of the corporation and approved by the affirmative
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vote of at least 80% of the outstanding voting stock and 662/3% of the
outstanding voting stock which is not owned by the interested stockholder,
unless certain fair price and other conditions are met. Under certain
circumstances, Section 3-602 makes it more difficult for a person who would be
an interested stockholder to effect various business combinations with a
corporation for a five-year period. Such provisions could make it more difficult
to accomplish transactions which Sylvan's stockholders may otherwise deem to be
in their best interests. Such provisions may also have the effect of preventing
changes in the management of Sylvan.
Subtitle 7 of Title 3 of the MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by the officers or directors who are also employees of the
corporation. Control shares are voting shares of stock which, if aggregated
with all other shares of stock previously acquired by such a person, would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) 20% or more but less than 33 1/3%;
(ii) 33 1/3% or more but less than a majority; or (iii) a majority of all voting
power. Control Shares do not include shares of stock an acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A control share acquisition means, subject to certain exceptions, the
acquisition of, ownership of or the power to direct the exercise of voting power
with respect to, control shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand therefor to consider the voting rights of the
shares. If no request for a meeting is made, the corporation may itself present
the question at any stockholders' meeting. Subject to certain conditions and
limitations, the corporation may redeem any or all of the control shares (except
those for which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights, as of the date of
the last control share acquisition by the acquiring person or of any meeting of
stockholders at which the voting rights of such shares are considered. If
voting rights for control shares are approved at a stockholders' meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the stock
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of objecting
stockholders' rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the Charter or By-Laws of the corporation. The application of the Control
Share Acquisition Statute to Sylvan could have the effect of discouraging offers
to acquire Sylvan and of increasing the difficulty of consummating any such
offer.
LIMITATIONS ON CHANGE OF CONTROL
Sylvan is a party to certain employment agreements, each of which contain
provisions with respect to a change in control of Sylvan. In addition, certain
provisions of Sylvan's Charter may inhibit changes in control of Sylvan. See
"PROPOSAL I: THE SHARE ISSUANCE AND THE MERGER--Description Of Sylvan Capital
Stock--Limitations on Change of Control" and "RISK FACTORS--Potential Effects of
Certain Anti-Takeover Provisions."
TRANSFER AGENT
Boston EquiServ is the Registrar and Transfer Agent for Sylvan Common
Stock.
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COMPARATIVE RIGHTS OF STOCKHOLDERS OF SYLVAN AND NEC
Upon consummation of the Merger, the stockholders of NEC, a Delaware
corporation, will become stockholders of Sylvan, a Maryland corporation.
Accordingly, the rights of stockholders of NEC following the Merger will be
governed by Maryland law, as well as the Sylvan Amended and Restated Charter and
Amended & Restated By-Laws.
The following is a summary of the material differences between the rights
and privileges of NEC stockholders and those of Sylvan stockholders. References
to the "DGCL" are to the General Corporation Law of Delaware, while references
to the "MGCL" are to the General Corporation Law of Maryland. This summary is
not meant to be relied upon as an exhaustive description of such differences and
is qualified in its entirety by reference to the Sylvan Amended and Restated
Charter (the "Sylvan Charter") and Amended & Restated By-Laws, the NEC Restated
Certificate of Incorporation (the "NEC Charter") and By-Laws, the DGCL and the
MGCL.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Sylvan. Consistent with Sylvan's By-Laws, any action required or permitted
to be taken at a meeting of stockholders may be taken without a meeting if all
stockholders entitled to vote consent to the action in writing and any
stockholder entitled to notice of the meeting but not entitled to vote at the
meeting provides a written waiver of any right to dissent.
NEC. Under the NEC Charter, any action required or permitted to be taken
by the stockholders must be taken at an annual or special meeting of
stockholders and may not be taken by consent in writing.
AMENDMENT OF CHARTER DOCUMENTS AND BY-LAWS
Sylvan. Under the MGCL, unless otherwise provided in a corporation's
charter, a proposed charter amendment requires an affirmative vote of two-thirds
of all the votes entitled to be cast on the matter. However, the Sylvan Charter
provides that the affirmative vote of the holders of a majority of the total
number of shares of outstanding Sylvan stock entitled to vote thereon is
sufficient to amend the Sylvan Charter. Under the MGCL, the power to adopt,
alter, and repeal the by-laws is vested in the stockholders, except to the
extent that the charter or the by-laws vest such power in the board of
directors. The Sylvan By-Laws provide that they may be amended by the Sylvan
Board without the approval or consent of the stockholders, but shall be subject
to repeal by the affirmative vote of the holders of a majority of the common
stock then entitled to vote and may be amended by the stockholders by the
affirmative vote of the holders of a majority of the common stock then entitled
to vote.
NEC. The DGCL provides that an amendment to a corporation's certificate of
incorporation requires the recommendation of the corporation's board of
directors, the approval of a majority of all shares entitled to vote thereon
unless a higher vote is required in the corporation's certificate of
incorporation, voting together as a single class, and the approval of a majority
of the outstanding stock of each class entitled to vote thereon. Article 11 of
NEC's Charter, relating to certain business combinations, may only be amended by
the affirmative vote of the holders of NEC capital stock representing 75% of all
votes entitled to be cast in the election of directors. The NEC By-Laws may be
amended by a majority of the whole NEC Board and may also be amended by the
affirmative vote of the holders of not less than two-thirds of the issued and
outstanding shares of NEC.
BUSINESS COMBINATIONS
Sylvan. Generally, under the MGCL, the approval by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter is required for
mergers, consolidations, share exchanges, and any transfers of all or
substantially all of the assets of a corporation, unless the charter increases
or reduces the vote to not less than a majority. The Sylvan Charter alters the
two-thirds vote requirement by providing that the affirmative vote of the
holders of a majority of the total number of shares of outstanding Sylvan stock
entitled to vote thereon is sufficient.
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Subtitle 6 of Title 3 of the MGCL prohibits any business combination
(defined to include a variety of transactions, including mergers,
consolidations, share exchanges, sales or dispositions of assets, issuances of
stock, liquidations, reclassification and benefits from the corporation,
including loans or guarantees) between a Maryland corporation and any interested
stockholder (defined generally as any person who, directly or indirectly,
beneficially owns 10% or more of the outstanding voting stock of the
corporation) for a period of five years after the date in which the interested
stockholder became an interested stockholder. After such five-year period, a
business combination between a Maryland corporation and such interested
stockholder is prohibited unless either certain "fair-price" provisions are
complied with or the business combination is approved by certain supermajority
stockholder votes. The MGCL restrictions do not apply to a business combination
with an interested stockholder if such business combination is approved or
exempted from the MGCL by a resolution of the board of directors adopted prior
to the date on which the interested stockholder became an interested
stockholder. The Sylvan Board did not adopt such a resolution prior to the
execution of the Merger Agreement [confirm this].
A Maryland corporation also may adopt an amendment to its charter electing
not to be subject to the business combination provisions of the MGCL in whole or
in part. Any such amendment generally must be approved by the affirmative vote
of at least 80% of the votes entitled to be cast by all holders of outstanding
shares of voting stock and two-thirds of the votes entitled to be cast by
holders of outstanding shares of voting stock who are not interested
stockholders. No such amendment to the Sylvan Charter has been adopted.
NEC. Section 203 of the DGCL ("Section 203") prohibits a Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" (as defined below) for three years following the time that such
person becomes an interested stockholder. With certain exceptions, an
interested stockholder is a person or group who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15% or more of the corporation's voting stock
at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to 10% or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or such
subsidiary to the interested stockholder (except for transfers in a conversion
or exchange or a pro rata distribution or certain other transactions, none of
which increase the interested stockholder's proportionate ownership of any class
or series of the corporation's or such subsidiary's stock); and receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time on which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder, (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
an interested stockholder (excluding shares held by certain affiliates of the
corporation and certain employee stock plans); or (iii) at or subsequent to the
time such person becomes an interested stockholder, the business combination is
approved by both the board of directors and 66 2/3% of the outstanding voting
stock of the corporation (excluding shares held by the interested stockholder).
Section 203 only applies to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, is quoted on
Nasdaq or is held of record by more than 2,000 stockholders. A Delaware
corporation may elect in its original certificate of incorporation, or by
amending its certificate of incorporation or bylaws, that it will not be
governed by Section 203. Any such amendment must be approved by the
stockholders
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and, in the case of a bylaw amendment, may not be further amended by the board
of directors. NEC is subject to the provisions of Section 203 and has not
elected to opt out from being governed by Section 203.
APPRAISAL RIGHTS
Sylvan. Under the MGCL, except as otherwise provided by the MGCL,
objecting stockholders have the right to demand and receive payment of the "fair
value" of their stock in the event of (i) a merger or consolidation, (ii) a
share exchange, (iii) a transfer of all or substantially all assets not in the
ordinary course of business, (iv) an amendment to the charter which alters the
contract rights, as expressly set forth in the charter, of any outstanding stock
and which substantially adversely affects the stockholder's rights, unless the
right to do so is preserved by the charter (which it is not, in the case of
Sylvan), (v) certain business combinations or (vi) after an approval by the
stockholders of voting rights for control shares which constitute a majority of
the voting power of the corporation. However, except as otherwise provided by
the MGCL, stockholders do not have appraisal rights if, among other things, the
stock is listed on a national securities exchange: (i) with respect to a merger
of a 90% or more owned subsidiary into its parent, on the date notice of such
merger is given or waived, or (ii) with respect to any other transaction, on the
record date for determining stockholders entitled to vote on the transaction.
NEC. The DGCL provides for dissenters' appraisal rights only in the case
of a statutory merger or consolidation of the corporation where the petitioning
stockholder has neither voted in favor of nor consented in writing to the
transaction. In addition, under DGCL Section 262, no dissenters' appraisal
rights are available where the corporation is to be the surviving corporation
and a vote of its stockholders is not required under DGCL Section 251(f). There
are no dissenters' appraisal rights for shares of stock listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system or held by more than 2,000 holders of record,
unless such stockholders would be required to accept anything other than shares
of stock of the surviving corporation, shares of another corporation so listed
or designated or held by such number of holders of record, cash in lieu of
fractional shares of such stock or any combination thereof.
PREEMPTIVE RIGHTS
Neither NEC nor Sylvan stockholders have preemptive rights with respect to
issuances of capital stock.
INDEMNIFICATION
Sylvan. Under the MGCL, a corporation may indemnify any director or
officer made a party to any proceeding unless it is established that (i) the
director's or officer's act or omission was material to the cause of action and
was committed in bad faith or resulted from active and deliberate dishonesty,
(ii) the director or officer actually received an improper personal benefit in
money, property or services, or (iii) in the case of criminal proceedings, the
director or officer had reasonable cause to believe the act or omission was
unlawful. The Sylvan Charter provides that Sylvan will indemnify its directors
and its officers to the full extent required or permitted by Maryland law.
The MGCL states that a determination must be made that a director or
officer has met the required standard of conduct before the director or officer
may be indemnified. The determination may be made by a majority vote of
disinterested directors, by special legal counsel (selected by the disinterested
directors) or by the stockholders.
The MGCL also establishes several mandatory rules requiring and prohibiting
indemnification. A director or officer who is successful, on the merits or
otherwise, in any proceeding must be indemnified by the corporation for
reasonable expenses (including attorneys' fees). In a stockholder derivative
suit, a corporation may not indemnify a director or officer if he or she is
adjudged liable to the corporation. Moreover, a corporation may not indemnify a
director or officer who is adjudged to be liable, in any proceeding, for a
personal benefit that was improperly received.
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The MGCL permits a corporation to advance reasonable expenses to directors
and officers upon the director's or officer's written affirmation of his or her
good faith belief that he or she has met the required standard of conduct and
after undertaking to repay the corporation if it is determined that the standard
has not been met. Under the Sylvan Charter, a director or officer is entitled
to payment of expenses in advance of the final disposition of a proceeding to
the full extent permitted by Maryland law.
NEC. Section 145 of the DGCL authorizes a Delaware corporation to
indemnify any person who was, is, or is threatened to be made, a party in any
civil, criminal, administrative or investigative threatened, pending or
completed action, suit or proceeding (other than an action by or in the right of
a corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity, for
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
any threatened, pending or completed action, suit or proceeding. With respect
to actions by or in the right of a corporation, the DGCL authorizes
indemnification of such person for expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit. To be entitled to indemnification, a person must have
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such conduct
was unlawful. With respect to actions by or in the right of the corporation,
court approval is required for indemnification relating to any claim as to which
a person has been adjudged liable to the corporation.
The DGCL requires indemnification for expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with a
proceeding against such person for actions in such capacity to the extent that
the person has been successful on the merits or otherwise. Advancement of
expenses is permitted, but not required, by the DGCL. A director or officer
must undertake to repay such expenses if it is ultimately determined that he or
she is not entitled to indemnification. The disinterested members of the board
(or independent legal counsel or stockholders) must determine, in each instance
where indemnification is not required by the DGCL, that such director, officer,
employee or agent is entitled to indemnification. The DGCL provides that the
statutory indemnification is not exclusive.
The NEC By-Laws provide for indemnification of officers and directors as
permitted by Section 145 of the DGCL provided that such proceeding for which
indemnification is sought was authorized by the NEC Board of Directors. NEC has
also entered into Indemnification Agreements with its officers and directors
providing for indemnification to the maximum extent permitted by law.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
Sylvan. The MGCL provides that a corporation's charter may include a
provision eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for money damages except (i) to
the extent that it is proved that the person actually received an improper
benefit or profit in money, property or services, for the amount of the benefit
or profit in money, property, or services actually received or (ii) to the
extent that a court finds that the person's action, or failure to act, was the
result of active and deliberate dishonesty and was material to the cause of
action adjudicated in the proceeding. The Sylvan Charter provides that its
directors and officers shall have no personal liability to Sylvan or its
stockholders for money damages to the fullest extent permitted by Maryland law.
NEC. Section 102(b)(7) of the DGCL allows a Delaware corporation to limit
or eliminate the personal liability of directors to a corporation and its
stockholders for monetary damages for breach of fiduciary duty as a director
subject to certain limitations. The NEC Charter provides for the limitation of
liability as permitted by Section 102(b)(7) of the DGCL.
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CLASSIFIED BOARD OF DIRECTORS
Sylvan. The MGCL permits, but does not require, a classified board of
directors. The Sylvan Charter and By-Laws provide for three classes of
directors, with each class elected for a term of three years and consisting, as
nearly as possible, of one-third of the total number of directors on the Board.
The Sylvan By-Laws provide that Sylvan shall have nine directors, a number which
may be amended in accordance with the By-Laws or Charter. At each annual
meeting of Sylvan stockholders one class of directors is elected for a three-
year term. Classification of directors has the effect of making it more
difficult for stockholders to change the composition of a board of directors.
At least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in the majority of a classified board. Such a delay
may help ensure that incumbent directors, if confronted by a holder attempting
to force a proxy contest, a tender or exchange offer or other extraordinary
corporate transaction, would have sufficient time to review the proposal as well
as any available alternatives to the proposal and to act in what they believe to
be the best interests of the stockholders. On the other hand, the
classification of directors may delay, defer or prevent a takeover attempt that
a stockholder might consider in its best interest. If the Directors Amendment
is approved at the Sylvan Annual Meeting, Sylvan directors will serve one-year
terms and the Sylvan Board of Directors will no longer be classified.
NEC. The DGCL permits, but does not require, a classified board of
directors. The NEC Board is divided into three classes, with each class elected
for a term of three years and consisting, as nearly as possible, of one-third of
the total number of directors on the Board. The NEC By-laws provide that NEC
shall have ten directors, a number which may be amended by the Board of
Directors. Currently, pursuant to NEC Board resolutions, NEC has 11 directors.
CUMULATIVE VOTING FOR DIRECTORS
Neither NEC nor Sylvan uses cumulative voting in the election of directors.
REMOVAL OF DIRECTORS
Sylvan. Under the MGCL, except as otherwise provided in a corporation's
charter or by-laws, the stockholders generally may remove any director, with or
without cause, by the affirmative vote of a majority of all the votes entitled
to be cast for the election of the directors. The Sylvan By-Laws provide that a
director may only be removed for cause.
NEC. Under the DGCL, the affirmative vote of a majority of the shares
entitled to vote at the election of directors is required to remove directors,
with or without cause.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Sylvan. Consistent with the MGCL, the Sylvan By-Laws provide that any
vacancy on the Board of Directors may be filled by vote of a majority of the
remaining directors then in office, although less than a quorum, or by a sole
remaining director or by the stockholders, if not filled by the directors. Any
vacancy on the Board of Directors that results from an increase in the number of
directors may be filled only by the stockholders at an annual meeting or a
special meeting called for that purpose. Any director elected by the directors
then in office to fill a vacancy shall serve until the next annual meeting of
stockholders, and until his successor is elected and qualifies. A director
elected by the Board of Directors to fill a vacancy serves until the next annual
meeting of stockholders and until his successor is elected and qualified. A
director elected by the stockholders to fill a vacancy which results from the
removal of a director serves for the balance of the term of the removed
director.
NEC. If the position of any director of NEC is or becomes vacant or if the
number of directors shall be increased, a majority of the directors of NEC
remaining in office, although less than a quorum or the stockholders may fill
the vacancy or newly created directorship. Any director chosen shall hold
office until the next election of
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the class for which such direction shall have been chosen, and until his
successor shall be elected and qualified. If the Board is expanded, the new
positions shall be allocated among the various classes of directors, so that
such classes shall remain as nearly equal in number as possible.
SPECIAL MEETINGS
Sylvan. The Sylvan By-Laws provide that special meetings of stockholders
may be called by the Board of Directors, the President, the Chief Executive
Officer, or by the Secretary upon the written request of stockholders entitled
to cast at least 25% of all votes entitled to be cast at the meeting.
NEC. A special meeting of stockholders of NEC may be called by the Chief
Executive Officer, and shall be called by the Chief Executive Officer, the
Chairman of the Board, or Secretary upon the order of the Board.
INSPECTION RIGHTS
Sylvan. Under the MGCL any stockholder has the right to inspect and copy
by-laws, minutes of stockholder proceedings, annual statements of affairs,
voting trust agreements on file, and statements showing all stock and securities
issued by the corporation during a specified period of not more than twelve
months before the date of the request. In addition, one or more persons who
together are and for at least the last six (6) months have been stockholders of
record of at least 5% of the outstanding stock of any class may inspect and copy
the corporation's books of account and stock ledger.
NEC. Under the DGCL, any stockholder, following a written request, has the
right to inspect and copy the corporation's books and records, including the
stock ledger and stockholder list, during normal business hours for a proper
purpose reasonably related to such person's interest as a stockholder.
DIVIDENDS AND DISTRIBUTIONS
Sylvan. Under the MGCL, a board of directors may authorize a corporation
to make distributions to its stockholders, subject to any restrictions in its
charter and as provided under the MGCL. Under the MGCL, no distribution is
permitted, however, if, after giving effect to the distribution, the corporation
would not be able to pay its indebtedness as the indebtedness becomes due in the
ordinary course of business or the corporation's total assets would be less than
the sum of its total liabilities plus, unless the charter permits otherwise, the
amount needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution.
NEC. The DGCL provides that, subject to any restrictions in a
corporation's certificate of incorporation, dividends may be declared from a
corporation's surplus or, if there is no surplus, from its net profits for the
fiscal year in which the dividend is declared and the preceding fiscal year.
However, if the corporation's capital (generally defined in the DGCL as the sum
of the aggregate par value of all shares of the corporation's capital stock,
where all such shares have a par value and the board of directors has not
established a higher level of capital) has been diminished to an amount less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net profits until the
deficiency in such capital has been repaired.
RIGHTS AGREEMENT
Sylvan. On September 27, 1996, the Sylvan Board adopted the Rights
Agreement dated October 7, 1996. The "Rights" provided for thereunder represent
the right to purchase one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $.01 per share, of Sylvan.
NEC. NEC does not have a shareholder rights or similar plan.
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PROPOSALS II, III AND IV: CHARTER AMENDMENTS
On _____________, 1997, the Sylvan Board unanimously approved a resolution
to amend the Sylvan Charter to increase the number of authorized shares of
Sylvan Common Stock from 40,000,000 shares to 90,000,000 shares, to increase
from 250,000 to 400,000 the number of shares of Preferred Stock designated as
Series A Junior Preferred Stock and to amend the Sylvan Charter to decrease the
term served by directors from three years to one year and eliminating classes of
directors. Sylvan has currently authorized 50,000,000 shares of capital stock,
of which 40,000,000 are classified as common stock and 10,000,000 are classified
as preferred stock. If the Shares Amendment is approved, Sylvan would be
authorized to issue up to 90,000,000 shares of common stock.
COMMON SHARES AMENDMENT
The Common Shares Amendment would revise Article Fifth of the Sylvan
Charter to read, in its entirety, as follows:
"The total number of shares of stock of all classes which the
Corporation has authority to issue is 100,000,000 shares, having an
aggregate par value of $1,000,000, of which 90,000,000 shares, par value of
$.01 per share, amounting in aggregate par value to $900,000, shall be
Common Stock, and 10,000,000 shares, par value of $.01 per share, amounting
in aggregate par value to $100,000, shall be Preferred Stock."
The increase in the number of authorized shares of Sylvan Common Stock will
provide additional shares for issuance, without the delay and expense of further
stockholder approval at such time or times and for such proper corporate
purposes as the Sylvan Board may in the future deem advisable. Such shares may
be issued if and when the Sylvan Board decides it is in the best interest of
Sylvan to do so which may include, without limitation, issuances (i) as part of
an acquisition transaction (as in the case of the Merger); (ii) to obtain funds
through the sale of Sylvan Common Stock; (iii) to declare a stock split or stock
dividend; (iv) in respect of the 1993 Plan, the Management Plan or other
employee benefit or stock plan; or (v) for other purposes. Unless required by
applicable law, the rules of Nasdaq, the Sylvan Charter or the Sylvan By-Laws,
it is not anticipated that Sylvan will solicit the votes of stockholders prior
to the issuance of Sylvan Common Stock for any of the purposes described above.
PREFERRED SHARES AMENDMENT
The Shares Amendment would revise Article Second of the Articles
Supplementary of the Sylvan Charter to read, in its entirety, as follows:
"1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Junior Participating Preferred Stock" (the "Series
A Preferred Stock") and the number of shares constituting such series shall
be 400,000, subject to increase or decrease by action of the Board of
Directors effectuated by further Articles Supplementary."
DIRECTORS AMENDMENT
The Directors Amendment would revise Article Seventh of the Sylvan Charter
to read, in its entirety, as follows:
"The number of directors of the Corporation shall be seven, which
number may be increased or decreased pursuant to the Charter of the
Corporation or the By-Laws of the Corporation, but shall never be less than
the minimum number permitted by the General Laws of the State of Maryland
now or hereafter in force."
THE SYLVAN BOARD UNANIMOUSLY RECOMMENDS THAT SYLVAN STOCKHOLDERS
VOTE FOR EACH OF THE CHARTER AMENDMENTS.
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PROPOSALS V AND VI: PLAN AMENDMENTS
1993 PLAN AMENDMENT
The Sylvan Board of Directors, pursuant to the recommendation of its
Compensation Committee, amended the 1993 Employee Stock Option Plan (the "1993
Plan") after the 1996 Annual Meeting on July 13, 1996, September 27, 1996, and
March 6, 1997, to increase the number of shares of Common Stock available for
award thereunder by 150,000, 225,000 and 200,000 shares, respectively
(collectively, the "1993 Plan Amendment"). Before these three amendments, the
total number of shares for award thereunder authorized under the 1993 Plan was
2,625,000 shares and, upon approval of the 1993 Plan Amendment, will be
5,200,000 shares. As of the Sylvan Record Date, options for ______________
shares were outstanding under the 1993 Plan. The Compensation Committee
recommended the increases for the primary purpose of rewarding key employees for
past performance and giving key employees, including those joining Sylvan as new
hires as a result of the Merger, acquisitions or otherwise, incentive to perform
at a high standard in the future.
All full-time employees, including executive officers, of Sylvan are
eligible to participate in the 1993 Plan. The Compensation Committee determines
which of the eligible employees should receive options and, in the Committee's
discretion associated stock appreciation rights, under the 1993 Plan based on
certain performance criteria determined by the Compensation Committee. In
addition, the Compensation Committee determines the type of option (incentive or
non-qualified, or both) to be granted, the number of shares subject to each
option, the rate of option exercisability and, subject to certain provisions,
the option price and duration of the option. The per share exercise price for
options granted under the 1993 Plan must be equal to at least 100% of the per
share fair market value of the Common Stock underlying the options on the date
of grant. The options granted under the 1993 Plan can be exercised through
payment of cash, or by a cashless exercise or a combination of both. On the
Sylvan Record Date, the aggregate market value of the ______________ shares of
Common Stock underlying outstanding options on that date under the 1993 Plan was
$_____________.
On the Sylvan Record Date, employees who were not executive officers of
Sylvan held ____________ of the ________ options outstanding at that date under
the 1993 Plan, with executive officers holding the remaining options outstanding
on that date.
MANAGEMENT PLAN AMENDMENT
The Sylvan Board of Directors, pursuant to the recommendation of its
Compensation Committee, amended the 1996 Senior Management Stock Option Plan
(the "Management Plan") on April __, 1997, to increase the number of shares of
Common Stock available for award thereunder by ___________ shares, the
"Management Plan Amendment"). Before the Management Plan Amendment, the total
number of shares for award thereunder authorized under the Management Plan was
2,250,000 shares and, upon approval, will be 3,250,000 shares. Pursuant to the
Management Plan, stock options may be granted which qualify under the Internal
Revenue Code as incentive stock options as well as stock options that do not
qualify as incentive stock options. Only Sylvan's Co-Chief Executive Officers
and Chairman of the Board, Chief Financial Officer, and other Senior Executive
Officers, currently a total of three individuals (and after the Merger a total
of seven individuals), are eligible to receive options under the Management
Plan. On _____________, 1997, the Board of Directors granted to the Co-Chief
Executive Officers and Chief Financial Officer _______, _______________ and
_____________ options, respectively under the Management Plan. As of the Sylvan
Record Date, options for ______________ shares were outstanding under the
Management Plan at a weighted average exercise price of $______ per share. The
Compensation Committee recommended the increases for the primary purpose of
rewarding Sylvan's senior executive officers for past performance and giving
them incentive to perform at a high standard in the future.
The Compensation Committee determines which of the eligible employees
should receive options and, in the Compensation Committee's discretion
associated stock appreciation rights, under the Management Plan based on
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<PAGE>
certain performance criteria determined by such Committee. In addition, the
Compensation Committee determines the type of option (incentive or non-
qualified, or both) to be granted, the number of shares subject to each option,
the rate of option exercisability and, subject to certain provisions, the option
price and duration of the option. The per share exercise price for incentive
stock options granted under the Management Plan must be equal to at least 100%
of the per share fair market value of the Common Stock underlying the options on
the date of grant. The option price for non-qualified options granted under the
Management Plan must be equal to at least 85% of the fair market value of the
Sylvan Common Stock as of the date the option is granted. The options granted
under the Management Plan can be exercised through payment of cash, or by a
cashless exercise or a combination of both. The Sylvan Board has interpreted the
terms of the Management Plan allowing payment of the option price in Sylvan
Common Stock to permit "pyramiding" of shares in successive exercises. On the
Sylvan Record Date, the aggregate market value of the 1,035,000 shares of Common
Stock underlying outstanding options on that date under the Management Plan was
$ ______________.
INTERESTS OF CERTAIN PERSONS IN THE PLAN AMENDMENTS
Except as set forth on the table below, awards under the 1993 Plan and the
Management Plan will be granted at the sole discretion of the Compensation
Committee of the Sylvan Board of Directors and performance criteria, if any, may
vary from year to year and from participant to participant. Therefore, benefits
under the 1993 Plan and the Management Plan are generally not determinable. In
the event that the Management Plan Amendment is approved at the Sylvan Annual
Meeting, the following table sets forth certain information regarding stock
option grants that Sylvan has agreed to make pursuant to employment contracts
with certain NEC executive officers:
<TABLE>
<CAPTION>
Name Number of Options Exercise Price
---- ----------------- --------------
<S> <C> <C>
1. Gary Keisling 112,500 Market Value
2. Chuck Moran 50,000 Market Value
3. Anita Kopec 25,000 Market Value
</TABLE>
THE SYLVAN BOARD UNANIMOUSLY RECOMMENDS THAT THE SYLVAN STOCKHOLDERS VOTE FOR
THE APPROVAL AND RATIFICATION OF EACH OF THE PLAN AMENDMENTS.
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<PAGE>
PROPOSALS VII AND VIII: ELECTIONS OF SYLVAN BOARD NOMINEES
INFORMATION CONCERNING MERGER NOMINEES
THE following table presents information concerning the persons nominated
by the Sylvan Board for election to the Sylvan Board of Directors for a term
expiring at the next annual meeting of Sylvan stockholders, effective upon
consummation of the Merger. Data with respect to the number of shares of Sylvan
Common Stock beneficially owned by each of the nominees, directly or indirectly,
as of the Sylvan Record Date, and at the Effective Time, Appears later in this
Joint Proxy Statement/Prospectus.
PRINCIPAL OCCUPATION, DIRECTORSHIPS WITH
NAME AND AGE PUBLIC COMPANIES, AND OTHER INFORMATION
- --------------------------------------------------------------------------------
Richard C. Blum (61) Mr. Blum is Chairman of Richard C. Blum &
Associates, L.P., a merchant banking firm. Mr. Blum
also serves as Vice Chairman of URS Corporation and
Director of Sumitomo Bank of California, Shaklee
Corporation, Northwest Airlines Corporation and
C.B. Commercial Holdings, Inc., Special foreign
advisor to Shanghai International Trust and
Investment Company (China). Mr. Blum has been NEC
director since 1987.
David C. Jones (75) Mr. Jones has been Chairman of the Board of NEC
since July 1989 and was Acting Chief Executive
Officer of NEC from July 1989 to April 1990. Mr.
Jones has been a consultant and lecturer since July
1982 and was Chairman of the Joint Chiefs of Staff
from June 1978 through June 1982. He is also a
member of the Board of Directors of SRA
International, Inc., an information technology
company, Chairman of the Board of Advisors of the
National Civilian Community Corps and a member of
the Board of Advisors of TF Purifiner, Inc.
Michael R. Klein (54) Mr. Klein has been a partner at the law firm of
Wilmer, Cutler & Pickering since 1974 and has
served as Chairman of Realty Information Group,
Inc. since 1987. Mr. Klein has been a director of
Steck-Vaughn Publishing Corporation since May 1993
and a director of Perini Corporation since January
1997.
Sam Yau (48) Mr. Yau has been President, Chief Executive Officer
and a director of NEC since May 1995. Prior to that
time, Mr. Yau served as the Chief Operating Officer
of Advacare, Inc., a medical management company,
from May 1993 to November 1994, and as Senior Vice
President of Finance and Administration for Archive
Corporation (now part of Seagate Technologies,
Inc.), a computer storage (tape) company, from May
1987 to May 1993. Mr. Yau is also a director of
Steck-Vaughn Publishing Corporation and Powerwave,
Inc.
R. Christopher Hoehn-Saric Mr. Hoehn-Saric has served as Chief Executive
(34) Officer since April 1993 and was President of
Sylvan from 1988 until 1993. He has been a Director
of Sylvan since 1986. He is a principal in Sterling
and was a co-founder of Health Management
Corporation, a health services company. Before
becoming Sylvan's President, Mr. Hoehn-Saric was
involved in Sterling's acquisition of several
distribution, broadcasting and photography
businesses.
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<PAGE>
Douglas L. Becker (31) Mr. Becker has been President of Sylvan since April
1993. From February 1991 until April 1993, Mr.
Becker was the Chief Executive Officer of the
Sylvan Learning Center Division of Sylvan. He has
been a Director of Sylvan since 1986. Mr. Becker
was a co-founder of Health Management Corporation
and is a co-founder of Sterling Capital, Ltd.
("Sterling"), the investment partnership that led
the acquisition of KEE Incorporated (the
Predecessor of Sylvan) in December 1986. From
January 1987 to February 1991, Mr. Becker directed
KEE's marketing and sales.
Nancy A. Cole (54) Ms. Cole has been employed by Educational Testing
Service ("ETS") since 1989, serving as President
since 1994 and previously as Executive Vice
President overseeing the program administration
process for ETS. Ms. Cole currently is on the ETS
Board of Trustees. Prior to joining ETS, Ms. Cole
served for four years as Dean of Education and
Professor at the University of Illinois at Urbana-
Champaign. Ms. Cole's background includes
previously serving as a member of the Graduate
Record Examination Board and as a member of the
College Board's SAT committee.
R. William Pollock (68) Mr. Pollock has been a Director of the Company
since December 1995. Mr. Pollock serves as the
Chairman of the Board of Drake Holdings Limited, a
company which owns interest in various businesses
throughout the world and also serves as a director
of Medox Limited.
Donald V. Berlanti (59) Mr. Berlanti has been a Director of Sylvan since
1987. Since 1975, Mr. Berlanti has been involved in
the ownership and management of several businesses,
including radio stations, a chain of convenience
and greeting card stores and real estate
development companies. Mr. Berlanti is the sole
general partner of Quince Associates Limited
Partnership, a stockholder of Sylvan.
J. Phillip Samper (62) Mr. Samper has been a Director of Sylvan since
1993. Mr. Samper currently serves as Chief
Executive Officer and Chairman of the Board of Cray
Research, Inc. Mr. Samper served as President of
Sun Microsystems, Inc. from 1994 to 1995, and as
President and Chief Executive Officer of Kinder-
Care Learning Centers, Inc. during 1990 and as Vice
Chairman of Eastman Kodak Company from 1986 to
1989. Mr. Samper is also a director of Armstrong
World Industries, Inc. and the Interpublic Group of
Companies.
INFORMATION CONCERNING CONTINGENT NOMINEES
In the event the Merger is not consummated or the Merger Nominees are not
elected for any other reason, the following persons have been nominated by the
Sylvan Board for election at the Sylvan Annual Meeting to serve as directors of
Sylvan for terms expiring at the next annual meeting of Sylvan stockholders: R.
Christopher Hoehn-Saric, Douglas L. Becker, Nancy A. Cole, James H. McGuire, R.
William Pollock, Donald V. Berlanti and J. Phillip Samper. The following table
sets forth certain information with respect to the only Contingent Nominee who
is not also a Merger Nominee. Data with respect to the number of shares of
Sylvan Common Stock beneficially owned by this Contingent Nominee, directly or
indirectly, as of the Sylvan Record Date and the Effective Time, appears later
in this Joint Proxy Statement/Prospectus.
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<PAGE>
PRINCIPAL OCCUPATION, DIRECTORSHIPS WITH
NAME AND AGE PUBLIC COMPANIES, AND OTHER INFORMATION
- ----------------------- -----------------------------------------------
James H. McGuire (53) Mr. McGuire has been a Director of the Company
since December 1995. Mr. McGuire serves as
President of NJK Holding Company, which controls
the interests of Nasser J. Kazeminy (one of the
prior owners of Drake Prometric, L.P., now owned by
the Company) in various businesses throughout the
country. Mr. McGuire also serves as a director of
Green Isle Environmental Services, Inc.
INFORMATION REGARDING THE SYLVAN BOARD, COMMITTEES AND REMUNERATION
During calendar year 1996, there were seven meetings of the Board of
Directors of Sylvan. Each director attended at least 80% of the combined total
number of meetings of the Board and Board committees of which he was a member
except for Richard P. Campbell who attended two meetings prior to his
resignation. The Sylvan Board has an Audit Committee and a Compensation
Committee.
The Audit Committee meets with Sylvan's independent accountants to review
whether satisfactory accounting procedures are being followed by Sylvan and
whether its internal accounting controls are adequate, to monitor non-audit
services performed by the independent accountants and review fees charged by the
independent accountants. The Audit Committee also recommends to the Board of
Directors the selection of independent accountants. During 1996, non-employee
directors, Richard P. Campbell, Jr., G. Cook Jordan, Jr. and Patrick A. Hopf,
were the members of the Audit Committee. Messrs. Samper and McGuire replaced
Messrs. Campbell and Jordan upon their resignations from the Sylvan Board during
1996. There were three meetings of the Committee during fiscal year 1996.
The Compensation Committee establishes the compensation for executive
officers of Sylvan and generally reviews benefits and compensation for all
officers and employees. It also administers Sylvan's stock option plans.
During 1996, non-employee directors, Richard P. Campbell, Jr., J. Phillip
Samper, and Donald V. Berlanti, were the members of the Compensation Committee,
which met on two occasions. The report of the Compensation Committee required
by the rules of the Securities and Exchange Commission (SEC) is included in this
Joint Proxy Statement/Prospectus.
Directors who are not employees of Sylvan receive options to purchase
common stock of the Company under the 1993 Director Stock Option Plan.
Otherwise, directors do not receive compensation for service on the Sylvan Board
or any committee thereof, but are reimbursed for their out-of-pocket expenses in
connection with attending meetings. Under the 1993 Director Stock Option Plan,
each non-employee director, upon appointment, election, or re-election to the
Sylvan Board, and who continues to serve on the Sylvan Board as of the date of
an annual meeting at which directors are elected or re-elected, is granted an
option to purchase 11,250 shares of Sylvan Common Stock at an exercise price
equal to the fair market value of the stock on the date of the grant. In 1996,
no options were granted under this plan, and no options are available for grant.
No director shall receive an option to purchase more than 11,250 shares in any
calendar year, and no director shall be granted options to purchase more than
33,750 shares in total under the plan.
All officers have made timely filings of all change in beneficial ownership
declarations required by the SEC during the year ended December 31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
None of the directors serving on the Compensation Committee are employees
of Sylvan, and neither the Chief Executive Officer nor any of the named
Executive Officers have served on the Compensation Committee. No
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<PAGE>
director or executive officer of Sylvan is a director or executive officer of
any other corporation that has a director or executive officer who is also a
director or board committee member of Sylvan.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Compensation of Executive Officers. The following table shows for the
years ended December 31, 1996, 1995 and 1994, compensation paid by Sylvan,
including salary, bonuses, stock options, and certain other compensation, to its
Co-Chief Executive Officers and each of its four other most highly compensated
executive officers at December 31, 1996 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term All
Compensation Other
Annual Compensation Awards Compensation
----------------------------------------------------- ------------ --------------
Name and Year Salary Bonus Other Annual
Principal Position $ $ $Compensation/(1)/ Options(#)
- ------------------ ------ -------- ------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
R. Christopher Hoehn-Saric, 1996 225,000 112,500 6,600 -- --
Chairman of the Board and 1995 200,000 112,500 6,600 465,000(3) --
Co-Chief Executive Officer 1994 200,000 90,400 5,500 70,500 --
Douglas L. Becker, 1996 225,000 112,500 6,600 -- --
President, Co-Chief Executive 1995 200,000 112,500 6,600 465,000(3) --
Officer and Director 1994 200,000 90,400 5,500 70,500 --
B. Lee McGee, 1996 150,000 75,000 6,600 -- --
Senior Vice President and 1995 120,000 75,000 6,600 105,000(3) --
Chief Financial Officer 1994 120,000 62,640 6,600 22,500 --
Steven Hoffman, 1996 57,211 58,000 15,058 112,500 --
President-- 1995 -- -- -- -- --
Sylvan Prometric Division(2) 1994 -- -- -- -- --
Peter Cohen, 1996 64,211 28,000 6,540 112,500 --
President-- 1995 -- -- -- -- --
Learning Services Division(2) 1994 -- -- -- -- --
Paula Singer, 1996 115,209 40,350 6,600 18,750 --
President--Contract 1995 96,875 5,704 6,600 -- --
Educational Services Division 1994 92,000 6,900 6,600 -- --
</TABLE>
- ---------------------
(1) The amounts in this column represent automobile allowances and moving
expense reimbursement for Messrs. Hoffman and Cohen.
(2) Mr. Hoffman was hired on September 16, 1996. Mr. Cohen was hired on August
22, 1996.
(3) These options were granted in early 1996 as part of the Named Executive
Officer's 1995 compensation package.
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<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth certain
information relating to options granted to the Named Executive Officers to
purchase shares of Sylvan Common Stock during 1996.
Individual Grants
<TABLE>
<CAPTION>
Percent of Potential Realized Value at
Total Options Assumed Annual Rates of Stock
Granted To Exercise or Price Appreciation for Option
Options Employees in Base Price Expiration Term
------------------------------
Name Granted Fiscal Year Per Share Date 5% 10%
- ------ ------- ------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
R. Christopher Hoehn-Saric 465,000 25% $20.33 March 29, 2006 $5,947,350(1) $15,066,000(1)
Douglas L. Becker 465,000 25% $20.33 March 29, 2006 $5,947,350(1) $15,066,000(1)
B. Lee McGee 105,000 6% $20.33 March 29, 2006 $1,342,950(1) $ 3,402,000(1)
Steven Hoffman 112,500 6% $24.00 September 16, 2002 $ 918,000(2) $ 2,083,500(2)
Peter Cohen 112,500 6% $24.00 August 22, 2002 $ 918,000(2) $ 2,083,500(2)
Paula Singer 18,750 1% $25.13 December 18, 2002 $ 160,313(3) $ 363,563(3)
</TABLE>
- ---------------------
(1) The assumed annual rates of appreciation of five and ten percent would
result in the price of Sylvan's stock increasing to $33.12 and $52.73,
respectively. The options expire ten years from date of grant.
(2) The assumed annual rates of appreciation of five and ten percent would
result in the price of Sylvan's stock increasing to $32.16 and $42.52,
respectively. The options expire six years from date of grant.
(3) The assumed annual rates of appreciation of five and ten percent would
result in the price of Sylvan's stock increasing to $33.68 and $44.52,
respectively. The options expire six years from date of grant.
Over the last two years, the market price of Sylvan's stock has
increased at a compounded annual rate of 48.54%.
The 5% and 10% assumed annual rates of stock price appreciation used
to calculate potential gains to optionees are mandated by the rules of the
Securities and Exchange Commission.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values. The following table sets forth certain information concerning the
exercise of stock options, the number of unexercised options and the value of
unexercised options at the end of 1996, for the Named Executive Officers. Value
is considered to be, in the case of exercised options, the difference between
exercise price and market price on the date of exercise, and, in the case of
unexercised options and exercisable options, the difference between exercise
price and market price at December 31, 1996.
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<PAGE>
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Shares Acquired Value Exercisable/Unexercisable In-the-Money Options
Name Upon Exercise Realized Options at Year-End/(1)/ at Year-End/(1)/
- -------------------------- --------------- ---------- --------------------------- ----------------------
<S> <C> <C> <C> <C>
504,095(E) $10,229,288(E)
R. Christopher Hoehn-Saric 0 -- 570,000(U) $ 7,186,800(U)
504,095(E) $10,229,288(E)
Douglas L. Becker 0 -- 570,000(U) $ 7,186,800(U)
69,450(E) $ 1,254,471(E)
B. Lee McGee 0 -- 112,500(U) $ 1,259,100(U)
-- (E) -- (E)
Steven Hoffman 0 -- 112,500(U) $ 412,875(U)
-- (E) -- (E)
Peter Cohen 0 -- 112,500(U) $ 506,250(U)
28,500(E) $ 663,480(E)
Paula Singer 0 -- 41,250(U) $ 586,988(U)
</TABLE>
- ---------------------
(1) (E) = Exercisable; (U) = Unexercisable.
Compensation Committee Report.
Introduction. The Compensation Committee consists of three outside
directors, none of whom has ever been an officer or employee of the Company.
The function of the Compensation Committee is to recommend to the Board of
Directors policies regarding the Company's compensation of, and to recommend
specific compensation for, the Company's executive officers. The Compensation
Committee's responsibilities also include administering the Company's stock
option plans and making decisions regarding option grants to officers and other
key employees. The Committee also periodically reviews the Company's employee
benefit plans that are intended to qualify under Section 401 of the Internal
Revenue Code to determine whether any changes to those plans may be appropriate.
The Compensation Committee meets at least once a year to review management
performance and compensation and to recommend to the Board bonuses and option
grants for current personnel. The Compensation Committee also meets on an as-
needed basis to recommend compensation for newly created or expanded executive
positions.
In February 1996, the Committee engaged an independent management
consulting firm to review the compensation of the Company's Co-CEOs and to
advise the Committee as to the appropriate level of base salary, short term and
long term incentive compensation, based on comparable public companies' plans
and the consultants' experience in assisting public companies to establish
management compensation plans.
Compensation Philosophy and Approach. The principal elements of the
Company's Executive Compensation Program consist of both annual and long-term
compensation, including base salary and annual incentive cash bonuses and, at
appropriate times, long-term incentive compensation in the form of stock
options. The Committee has put primary emphasis on long-term incentive stock
options based upon their belief that the Co-CEOs should have a significant
portion of their compensation contingent upon increases in the market price of
the Company's Common Stock. Aided by the review by the management consulting
firm, the Compensation Committee continues to believe that this approach and
philosophy is appropriate.
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<PAGE>
Base Salaries. The Company's executive officer base salary levels are
submitted for approval by the Board based on the Compensation Committee
recommendations. In establishing compensation for the Company's executive
officers, the Compensation Committee utilized recommendations of the management
consulting firm. Based on the management consulting firm's analysis of
executive compensation the salaries of the Co-CEOs was $250,000 in 1996.
Annual Incentive Cash Bonus. In addition to base salaries, executive
officers of the Company are eligible to receive annual cash bonuses, at the
discretion of the Board of Directors. Cash bonuses are determined on the basis
of (a) the overall financial performance of the Company, and (b) annual personal
performance objectives for each officer, established by the Compensation
Committee at the beginning of the year.
Long-term Incentive Stock Options. Options are granted to executive
officers and other key employees whom the Compensation Committee determines to
be essential to the future growth and profitability of the Company. Based upon
performance criteria similar to those applicable to the cash bonus payment, the
Compensation Committee determines the employees to whom options will be granted,
the number of shares covered by each grant, the exercise price and vesting
period for each grant. The Compensation Committee typically grants stock
options with relatively long vesting periods, creating strong incentives for
recipients of stock option grants to remain in the employ of the Company.
Messrs. Hoehn-Saric and Becker, the Co-Chief Executive Officers and
Mr. McGee, the Chief Financial Officer, have been entitled to annual stock
option grants under the Company's 1993 Management Stock Option Plan based on the
Company's performance as compared to profitability targets established by the
Compensation Committee and received grants in 1996 from the shareholder approved
1996 Senior Management Plan. No additional options have been granted from this
plan to date.
Equity Position in Caliber Learning Network, Inc. In July of 1996 the
Board of Directors approved the formation of an entity to pursue an opportunity
identified by Senior Management for establishing an international distribution
network of adult professional education services. The Board considered many
options for how to best structure the entity needed to pursue this opportunity.
Aided by the review of the independent management consulting firm of the Co-
CEOs' compensation it was concluded that the Co-CEOs receive an equity ownership
of 35% (17.5% each) of the entity as part of their overall compensation package.
Subsequently, the Board and Co-CEOs concluded that securing a strategic partner
for pursuing this opportunity was critical. In October 1996, Caliber Learning
Network, Inc. was established with MCI as the strategic partner and investor.
The Co-CEOs' equity ownership was diluted based on MCI's investment to 28% (14%
each) in October 1996. Messrs. Becker and Hoehn-Saric receive no additional
compensation as members of Caliber's board or for their executive position in
Caliber.
CEO's and President's Compensation. Mr. Hoehn-Saric has served as
Chief Executive Officer and Chairman of the Board since April 1993, and served
as President from 1988 to 1993. Mr. Becker has served as President of the
Company since April 1993, and served as CEO of the Sylvan Learning Center
division of the Company from February 1991 to April 1993. In December 1995, Mr.
Becker was named Co-Chief Executive Officer of the Company and continues to
serve as President of the Company.
Messrs. Becker and Hoehn-Saric executed employment agreements in 1996
with initial terms ending December 31, 1998.
Messrs. Hoehn-Saric and Becker, the Co-Chief Executive Officers, may
earn incentive cash bonuses based on the Company's actual annual financial
performance as compared to the annual operating budget and the accomplishment of
specific objectives established at the beginning of the year by the Compensation
Committee. Financial performance accounts for 80% of the potential bonus and
the remaining 20% is based on the
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<PAGE>
subjective determination by the Committee as to accomplishment of the specific
objectives. A financial performance bonus may be paid if at least 80% of the
financial performance objectives are achieved but is reduced from the target
bonus amount by a formula based on the percentage of the financial performance
objectives that are actually achieved. A bonus of up to 150% of the target bonus
amount can be earned if actual financial performance results were 200% of the
objectives.
In April 1997, the Compensation Committee recommended, and the Board
of Directors approved, cash bonuses for Messrs. Hoehn-Saric and Becker of
$112,500 each. These bonuses were based on financial performance and
accomplishment of specific objectives in 1996 as described above.
Mr. J. Phillip Samper
Mr. Donald V. Berlanti - Chairman
Stock Performance Table
COMPARISON OF 36 MONTH CUMULATIVE TOTAL RETURN*
AMONG SYLVAN LEARNING SYSTEMS, INC., THE NASDAQ STOCK MARKET-US INDEX
AND A PEER GROUP
<TABLE>
<CAPTION>
12/09/93 12/93 12/94 12/95 12/96
<S> <C> <C> <C> <C> <C>
Sylvan Learning
Systems, Inc. 100 117 168 253 364
Peer Group 100 99 78 113 187
Nasdaq Stock Market-US 100 102 100 141 173
</TABLE>
* $100 INVESTED ON 12/09/93 IN STOCK OR INDEX-
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
SYLVAN MANAGEMENT
Executive Officers and Directors. The executive officers and directors of
Sylvan are:
<TABLE>
<CAPTION>
Name Age Position
----- --- ---------
<S> <C> <C>
R. Christopher Hoehn-Saric.................. 34 Co-Chief Executive Officer
and Chairman of the Sylvan Board
Douglas L. Becker........................... 31 Co-Chief Executive Officer, President; Secretary; Director
B. Lee McGee................................ 41 Vice President and Chief Financial Officer; Treasurer
Steve Hoffman............................... 44 President--Sylvan Prometric Division
Peter Cohen................................. 42 President--Learning Services Division
Paula Singer................................ 42 President--Contract Educational Services Division
Donald V. Berlanti (1)(2)................... 59 Director
Nancy A. Cole............................... 54 Director
J. Phillip Samper (2)....................... 62 Director
James H. McGuire(1)......................... 53 Director
R. William Pollock.......................... 68 Director
</TABLE>
___________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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<PAGE>
Information relating to Sylvan's executive officers (other than Messrs.
Hoehn-Saric and Becker) is set forth below. See "Information Concerning
Contingent Nominees" above for information relating to Messrs. Hoehn-Saric and
Becker and the other Sylvan directors.
B. Lee McGee. Mr. McGee has been Chief Financial Officer of Sylvan or its
predecessor entities since 1987. Prior to that time, he held various positions
with Kinder-Care Learning Centers, Inc.
Paula Singer. Ms. Singer has been the President of the Contract
Educational Services Division since November 1996. Previously she served as
Vice President of the Division since 1993. Prior to joining Sylvan, Ms. Singer
held positions as General Manager of American Learning, Inc. and Vice President
Learning Corporation.
Steven Hoffman. Mr. Hoffman has been the President of Sylvan Prometric
since September 1996. Prior to joining Sylvan was the Vice President of
Operations for the Computer Task Group, a consulting and outsourcing firm
serving the IT industry. Prior to that he held various positions for
International Business Machines, Corp.
Peter Cohen. Mr. Cohen has been the President of the Learning Services
Division since September, 1996. Prior to joining Sylvan, he was the CEO 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.
There are no family relationships among any of the executive officers or
Directors of Sylvan. Executive officers of Sylvan are elected by the Sylvan
Board on an annual basis and serve at the discretion of the Sylvan Board.
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<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Sylvan Common Stock as of March 17, 1997 by (i) each person who
owns beneficially more than 5% of Sylvan Common Stock, (ii) each of the director
nominees and directors of Sylvan, (iii) the Co-Chief Executive Officers and each
of the Named Executive Officers, and (iv) all directors and executive officers
as a group. Unless otherwise indicated, the named persons exercise sole voting
and investment power over the shares that are shown as beneficially owned by
them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
PRIOR TO MERGER AFTER MERGER
---------------- ------------
NAME NUMBER PERCENT NUMBER PERCENT
----- ------ -------- ------ -------
<S> <C> <C> <C> <C>
Donald V. Berlanti (1)....................................... 1,435,319 5.8%
Douglas L. Becker (2)(3)(4).................................. 2,184,564 8.6%
R. Christopher Hoehn-Saric (2)(3)(4)......................... 2,191,941 8.6%
J. Phillip Samper............................................ 41,536 *
Nancy A. Cole (6)............................................ -- *
R. William Pollock (5)....................................... 3,485,715 14.2%
Nasser J. Kazeminy (5)....................................... 2,223,776 9.1%
James H. McGuire............................................. -- *
B. Lee McGee (2)............................................. 181,950 *
Steven Hoffman (2)........................................... 120,700 *
Paula Singer (2)............................................. 69,750 *
Peter Cohen (2).............................................. 112,500 *
T. Rowe Price (7)............................................ 1,365,751 5.6%
Denver Investment Partners (8)............................... 1,738,949 7.1%
Sam Yau .....................................................
David C. Jones ..............................................
Richard C. Blum .............................................
Michael R. Klein ............................................
All directors and executive officers as 7,707,366 31.2%
a group (11 persons)
</TABLE>
_____________
* Represents beneficial ownership of not more than one percent of the
outstanding Sylvan Common Stock.
(1) The address of this holder is 145 Barranca Road, Santa Fe, New Mexico 87501.
Includes shares held by Quince Associates Limited Partnership, of which Mr.
Berlanti is sole general partner, and shares held by trusts for the benefit
of Mr. Berlanti's children for which Mr. Berlanti serves as trustee.
Includes options and warrants to purchase 189,542 shares. Also included are
shares held by trusts for the benefit of Richard and Don Berlanti's children
for which Richard Berlanti, Don Berlanti's brother, is trustee.
(2) The address of Ms. Singer and Messrs. Becker, Hoehn-Saric, McGee, Hoffman
and Cohen is 1000 Lancaster Street, Baltimore, Maryland 21202.
(3) Includes options and warrants to purchase 1,024,095 shares.
(4) Includes the 810,961 shares issued to Messrs. Kazeminy and Pollock in
connection with Sylvan's acquisition of Drake Prometric, L.P. in December
1995 and subject to a Voting Trust Agreement pursuant to which Messrs.
Becker and Hoehn-Saric are voting trustees.
(5) Includes the shares subject to the Voting Trust Agreement (see note 4
above).
(6) Ms. Cole is the President of ETS and serves on its Board of Trustees. ETS
owns 425,810 shares of stock in the Company, as to which Ms. Cole disclaims
beneficial ownership.
(7) T. Rowe Price exercises sole voting and investment power over 198,901 of the
1,365,751 shares held.
(8) Denver Investment Partners exercises sole voting and investment power over
1,098,250 of the 1,738,949 shares held.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ms. Nancy Cole, director, is the President of Educational Testing Service
and serves on its Board of Trustees. Educational Testing Service owns 425,810
shares of stock in Sylvan Learning Systems, Inc. In the ordinary course of its
business, the Company entered into both a domestic and international contract
with Educational Testing Service for the delivery of testing domestically and
delivery and development of a testing network internationally. The Company
generated $19.6 million, $17.3 million and $10.3 million revenues in calendar
year 1996, 1995, and 1994 respectively, from these ETS contracts.
In July of 1996 the Board of Directors approved the formation of an entity
to pursue an opportunity identified by Senior Management for establishing an
international distribution network of adult professional education services. The
Board considered many options for how to best structure the entity needed to
pursue this opportunity. Aided by the review of the independent management
consulting firm of the Co-CEOs' compensation it was concluded that the Co-CEOs
receive an equity ownership of 35% (17.5% each) of the entity as part of their
overall compensation package. Subsequently, the Board and Co-CEOs concluded that
securing a strategic partner for pursuing this opportunity was critical. In
October 1996, Caliber Learning Network, Inc. was established with MCI as the
strategic partner and investor. The Co-CEOs' equity ownership was diluted based
on MCI's investment to 28% (14% each) in October 1996. Messrs. Becker and Hoehn-
Saric receive no additional compensation as members of Caliber's board or for
their executive position in Caliber.
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<PAGE>
PROPOSAL IX: AUDITOR CONFIRMATION
The Sylvan Board of Directors, pursuant to the recommendation of its Audit
Committee, has selected Ernst & Young LLP, independent auditors, to examine and
audit the financial statements of Sylvan for the fiscal year ending December 31,
1997. Ernst & Young LLP has served as independent auditors of Sylvan since 1991.
A partner of the firm will be present at the Sylvan Annual Meeting and available
to respond to appropriate questions, and will have an opportunity to make a
statement if he desires to do so.
In 1996, Ernst & Young LLP performed various professional services for
Sylvan. They included completion of the examination of 1995 financial statements
for Sylvan, other review work of required filings with the SEC, preliminary work
on the examination of fiscal year 1996 financial statements, preparation of
corporate tax returns and other consultation with Sylvan personnel on accounting
and related matters.
THE SYLVAN BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF ERNST & YOUNG LLP AS SYLVAN'S INDEPENDENT
AUDITORS.
PROPOSAL X: OTHER MATTERS
The Sylvan Board of Directors knows of no other matters to be presented for
action at the meeting other than those mentioned above; however, if any other
matters properly come before the meeting, it is intended that the persons named
in the accompanying proxy will vote on such matters in accordance with their
judgment as to the best interests of Sylvan.
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<PAGE>
LEGAL MATTERS AND EXPERTS
The validity of the Sylvan Common Stock offered hereby will be passed on
for Sylvan by Piper & Marbury L.L.P., 36 South Charles Street, Baltimore,
Maryland 21201.
The consolidated financial statements and the related financial statement
schedule of Sylvan at December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996 incorporated in this Joint Proxy
Statement/Prospectus by reference from the Sylvan Learning Systems, Inc. Annual
Report on Form 10-K for the year ended December 31, 1996 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such consolidated
financial statements and schedule are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Representatives of Ernst & Young LLP are expected to
attend the Sylvan Annual Meeting, respond to appropriate questions from
stockholders present at the Sylvan Annual Meeting, and if such representatives
desire, which is not now anticipated, they may make a statement.
The financial statements of NEC incorporated in this Prospectus by
reference to the NEC Annual Report on Form 10-K for the year ended December 31,
1996, have been so incorporated in reliance on the report (which contains an
explanatory paragraph relating to the change in the Company's method of
accounting for advertising costs in 1994 and its method of accounting for
impairment of long-lived and intangible assets in 1995) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Representatives of Price Waterhouse LLP are expected to
attend the NEC Special Meeting, respond to appropriate questions from
stockholders present at the NEC Special Meeting, and if such representatives
desire, which is not now anticipated, they may make a statement.
STOCKHOLDER PROPOSALS
Any proposals of Sylvan stockholders intended to be presented at Sylvan's
1998 Annual Meeting of Stockholders must have been received by Sylvan for
inclusion in the proxy statement and form of proxy relating to the meeting not
later than December 5, 1997.
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<PAGE>
ANNEX I: AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") dated as of March
12, 1997, by and among Sylvan Learning Systems, Inc., a Maryland corporation
(the "Purchaser") and National Education Corporation, a Delaware corporation
(the "Company").
W I T N E S S E T H:
- - - - - - - - - -
The Purchaser and the Company have reached an agreement to combine their
companies through a merger (the "Merger") of a wholly-owned Maryland subsidiary,
to be formed of the Purchaser ("Newco") with and into the Company in a
transaction qualifying as a pooling of interests under applicable accounting
rules and a tax-free reorganization under Sections 368(a) of the Internal
Revenue Code of 1986, as amended. As a result of the Merger, each outstanding
share of the Company's Common Stock shall be converted into 0.58 shares of the
Purchaser's Common Stock (the "Exchange Ratio"). The Purchaser and the Company
wish to enter into a definitive agreement setting forth the terms and conditions
of the Merger.
Accordingly, in consideration of the foregoing and of the covenants,
agreements, representations and warranties hereinafter contained, the Purchaser
and the Company hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
-----------------------------------------------
represents and warrants to the Company that the statements contained in this
Article I are true and correct, except as set forth in the disclosure schedule
delivered by the Purchaser to the Company on or before the date of this
Agreement (the "Purchaser Disclosure Schedule"). The Purchaser Disclosure
Schedule shall be arranged in sections corresponding to the numbered and
lettered sections contained in this Article I. The disclosure in any section,
however, shall be deemed to constitute disclosure for all sections in this
Article I.
1.1. Organization and Standing; Subsidiaries.
---------------------------------------
(a) Each of the Purchaser and its subsidiaries whose business or
assets are material to Purchaser, either individually or on a consolidated basis
(collectively, the "Purchaser Subsidiaries," and, together with the Purchaser,
collectively "Sylvan") is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its businesses as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power and authority would not, and reasonably could not be expected to,
individually or in the aggregate, have a material adverse effect on the
business, assets (whether tangible or intangible), financial condition, results
of operations or business prospects ("Material Adverse Effect") of Sylvan. The
Purchaser has heretofore delivered to the Company accurate and complete copies
of the Purchaser's Certificate of Incorporation and By-Laws, as currently in
effect, and promptly will
-1-
<PAGE>
deliver to the Company accurate and complete copies of the Articles or
Certificate of Incorporation and By-Laws, as currently in effect, of each of the
Purchaser Subsidiaries. The Purchaser Disclosure Schedule includes a list of
each of the Purchaser Subsidiaries.
(b) Each of the Purchaser and the Purchaser Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, individually or in aggregate, have a Material
Adverse Effect on Sylvan.
1.2. Capitalization of Purchaser.
---------------------------
(a) The Purchaser's entire authorized capital stock consists of
50,000,000 shares, 40,000,000 of which are classified as Common Stock, $.01 par
value ("Purchaser Common Stock"), and 10,000,000 of which are classified as
Preferred Stock, par value $.01 per share, with 200,000 shares designated as
Series A Junior Participating Preferred Stock; and, prior to the Effective Time
will consist of 100,000,000 shares, 90,000,000 of which will be classified as
Purchaser Common Stock. As of the date hereof, no shares of Preferred Stock are
issued or outstanding, 24,516,623 shares of Purchaser Common Stock are
outstanding and 4,433,943 shares of Purchaser Common Stock were reserved for
issuance upon exercise of options outstanding under the Purchaser's stock option
plans (the "Outstanding Purchaser Options"), 98,479 shares of Purchaser Common
Stock were reserved for issuance upon exercise of outstanding warrants (the
"Outstanding Purchaser Warrants"), 1,351,319 shares of Purchaser Common Stock
were reserved for issuance upon exercise of future option grants under the
Purchaser's stock option plans and 50,000 shares of Purchaser Common Stock were
reserved for issuance in connection with the Purchaser's employee stock purchase
plan. Except as set forth above or in the Purchaser Disclosure Schedule, there
are outstanding (i) no shares of capital stock or other voting securities of the
Purchaser, (ii) no securities of the Purchaser or any of the Purchaser
Subsidiaries convertible into or exchangeable for shares of capital stock or
voting securities of the Purchaser, (iii) no options, warrants or other rights
to acquire from the Purchaser or any of the Purchaser Subsidiaries (including
any rights issued or issuable under a shareholder rights plan or similar
arrangement), and no obligations of the Purchaser or any of the Purchaser
Subsidiaries to issue any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Purchaser, (iv) no equity equivalents, interests in the ownership or earnings of
the Purchaser or any of the Purchaser Subsidiaries or other similar rights (with
the securities listed in clauses (i) through (iv) referred to collectively as
the "Sylvan Securities"), and (v) no outstanding obligations of the Purchaser or
any of the Purchaser Subsidiaries to repurchase, redeem or otherwise acquire any
Sylvan Securities or to make any investment (by loan, capital contribution or
otherwise) in any other entity.
(b) All of the outstanding capital stock of, or other ownership
interests in, each Sylvan Subsidiary, is owned by the Purchaser, directly or
indirectly, free and clear of any Lien (as hereinafter defined) or any other
limitation or restriction (including any restriction
-2-
<PAGE>
on the right to vote or sell the same, except as may be provided as a matter of
law). There are no securities of the Purchaser or any of the Purchaser
Subsidiaries convertible into or exchangeable for, no options or other rights to
acquire from the Purchaser or any of the Purchaser Subsidiaries, and no other
contract, understanding, arrangement or obligation (whether or not contingent)
providing for the issuance or sale, directly or indirectly, of any capital stock
or other ownership interests in, or any other securities of, any Sylvan
Subsidiary. There are no outstanding contractual obligations of the Purchaser or
any of the Purchaser Subsidiaries to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other ownership interests in any
subsidiary of the Purchaser. For purposes of this Agreement, "Lien" means, with
respect to any asset (including, without limitation, any security) any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such asset.
(c) All issued and outstanding shares of the capital stock of the
Sylvan Securities and of the Purchaser Subsidiaries have been duly and validly
issued and are fully paid and non-assessable, free of any preemptive rights. The
Outstanding Purchaser Options and the Outstanding Purchaser Warrants have been
duly and validly issued and are in full force and effect.
1.3. Financial Statements; Exchange Act Filings.
------------------------------------------
(a) The Purchaser has heretofore delivered to the Company copies
of: (i) the Purchaser's consolidated financial statements as of and for the
years ended December 31, 1993, 1994 and 1995, which have been audited by Ernst &
Young LLP, independent auditors (the "Purchaser Audited Financial Statements"),
and (ii) the Purchaser's consolidated financial statements as of and for
the twelve months ended December 31, 1996, which are unaudited (the
"Purchaser Unaudited Financial Statements"). The Purchaser Audited Financial
Statements and Purchaser Unaudited Financial Statements (collectively, the
"Purchaser Financial Statements") fairly present, in conformity with generally
accepted accounting principles applied on a consistent basis by the Purchaser
(except as may be indicated in the notes thereto) and in conformity with the
Commission's Regulation S-X, the consolidated financial position of the
Purchaser and its consolidated subsidiaries as of the dates thereof and their
consolidated results of operations and cash flows for the periods then ended
(subject in the case of any unaudited financial statements to normal recurring
year-end audit adjustments, which are not expected to be material in amount).
Since January 1, 1996, the Purchaser has not made any material changes in the
accounting policies applied to the Purchaser Audited Financial Statements, and
no such changes are contemplated nor, to the best of the Purchaser's knowledge,
required under generally accepted accounting principles or the Commission's
Regulation S-X.
(b) The Purchaser has heretofore delivered to the Company
complete copies of all periodic reports, statements and other documents
(including exhibits thereto) that the Purchaser has filed with the U.S.
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") since becoming subject to
the reporting requirements of the Exchange Act on December 11, 1993
(collectively,
-3-
<PAGE>
the "Purchaser SEC Reports"). All Purchaser SEC Reports required to be filed
with the Commission by the Purchaser during the twelve months preceding the date
of this Agreement were filed in a timely manner and complied in all material
respects with the applicable requirements of the Exchange Act and the rules and
regulations promulgated thereunder. At the time filed with the SEC, no Purchaser
SEC Report contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
1.4. No Undisclosed Liabilities. Except as and to the extent reflected
--------------------------
or reserved against in the consolidated balance sheets included within the
Purchaser Financial Statements, at the date of such statements, Sylvan had no
material liabilities or obligations (whether accrued, absolute or contingent),
of the character which, under generally accepted accounting principles, should
be accrued, shown, disclosed or indicated in a consolidated balance sheet of the
Purchaser or explanatory notes or information supplementary thereto, including
without limitation, any liabilities resulting from failure to comply with any
law or any federal, state or local tax liabilities due or to become due whether
(a) incurred in respect of or measured by income for any period ending on or
prior to the close of business on such dates, or (b) arising out of transactions
entered into, or any state of facts existing, on or prior thereto.
1.5. Absence of Certain Changes, Events or Conditions. Since December
------------------------------------------------
31, 1996, (i) Sylvan has not incurred any liabilities of any nature, whether or
not accrued, contingent or otherwise, which would have a Material Adverse Effect
on the Purchaser, and (ii) there have been no events, changes or effects with
respect to the Purchaser and the Purchaser Subsidiaries having or which could
have, individually or in the aggregate, a Material Adverse Effect on the
Purchaser, and (iii) the Purchaser and the Purchaser Subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
prior practice.
1.6. No Default. Neither the Purchaser nor any of the Purchaser
----------
Subsidiaries is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation) of
any term, condition or provision of (i) its Charter or By-Laws (or similar
governing documents), (ii) any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Purchaser or
any of the Purchaser Subsidiaries is now a party or by which any of them or any
of their respective properties or assets may be bound, or (iii) any order, writ,
injunction, decree, law, statute, rule or regulation applicable to the
Purchaser, any of the Purchaser Subsidiaries or any of their respective
properties or assets, except in the case of (ii) or (iii) for violations,
breaches or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on Sylvan.
1.7. Litigation, Etc. (i) There is no suit, claim, action, proceeding
----------------
or investigation pending or, to the knowledge of the Purchaser, threatened
against the Purchaser or any of the Purchaser Subsidiaries or any of their
respective properties or assets before any court, administrative agency or
commission or other governmental authority or instrumentality
-4-
<PAGE>
("Governmental Entity") which, individually or in the aggregate, could have a
Material Adverse Effect on Sylvan if decided adversely to Sylvan or could
prevent or delay the consummation of the transactions contemplated by this
Agreement, and (ii) neither the Purchaser nor any of the Purchaser Subsidiaries
is subject to any outstanding order, writ, injunction or decree which, insofar
as can be reasonably foreseen, individually or in the aggregate, in the future
could have a Material Adverse Effect on Sylvan or could prevent or delay the
consummation of the transactions contemplated hereby. Except as noted on the
Purchaser Disclosure Schedule, all claims listed thereon are covered by the
Purchaser's liability insurance (subject to applicable deductibles not in excess
of $500,000) and are being defended by and at the cost of the Purchaser's
liability insurance carrier.
1.8. Intellectual Property.
---------------------
(a) The Purchaser or one of the Purchaser Subsidiaries owns, or
is licensed or otherwise possesses legally enforceable rights to use, all
patents, trademarks, trade names, service marks, copyrights, and any
applications for such patents, trademarks, trade names, service marks and
copyrights, processes, formulae, methods, schematics, technology, know-how,
computer software programs or applications and tangible or intangible
proprietary information or material that are necessary to conduct the business
of Sylvan as currently conducted, or proposed to be conducted, the absence of
which would be reasonably likely to have a Material Adverse Effect on Sylvan
(the "Purchaser Intellectual Property Rights"). The Purchaser Disclosure
Schedule lists (i) all patents and patent applications and all trademarks,
registered copyrights, trade names and service marks, which the Purchaser
considers to be material to the business of Sylvan and included in the Purchaser
Intellectual Property Rights, including the jurisdictions in which each such
Purchaser Intellectual Property Right has been issued or registered or in which
any such application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which the Purchaser or
any of the Purchaser Subsidiaries is a party and pursuant to which any person is
authorized to use any Purchaser Intellectual Property Rights, and (iii) all
material licenses, sublicenses and other agreements as to which the Purchaser or
any of the Purchaser Subsidiaries is a party and pursuant to which the Purchaser
or any of the Purchaser Subsidiaries is authorized to use any third party
patents, trademarks or copyrights, including software ("Purchaser Third Party
Intellectual Property Rights") which are incorporated in or form a part of any
Sylvan product that is material to its business.
(b) Neither the Purchaser nor any of the Purchaser Subsidiaries
is, nor will any of them be as a result of the execution and delivery of this
Agreement or the performance of its obligations under this Agreement, in breach
of any license, sublicense or other agreement relating to the Purchaser
Intellectual Property Rights or Purchaser Third Party Intellectual Property
Rights, the breach of which could have a Material Adverse Effect on Sylvan.
(c) To the Purchaser's knowledge, all patents, registered
trademarks, service marks and copyrights held by the Purchaser or any of the
Purchaser Subsidiaries are valid
-5-
<PAGE>
and subsisting. Neither the Purchaser nor any of the Purchaser Subsidiaries (i)
has been sued (or threatened with suit) in any suit, action or proceeding which
involves a claim of infringement of any patents, trademarks, service marks,
copyrights or violation of any trade secret or other proprietary right of any
third party; and (ii) has any knowledge that the manufacturing, marketing,
licensing or sale of its products or services infringes any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party, which such infringement could have a Material Adverse Effect on Sylvan.
1.9. Environmental Laws and Regulations. (i) The Purchaser and each of
----------------------------------
the Purchaser Subsidiaries is in material compliance with all applicable
federal, state and local laws and regulations relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata)
(collectively, "Environmental Laws"), except for non-compliance that
individually or in the aggregate would not have a Material Adverse Effect on
Sylvan, which compliance includes, but is not limited to the possession by the
Purchaser and the Purchaser Subsidiaries of all material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof; (ii) neither the Purchaser nor
any of the Purchaser Subsidiaries has received written notice of, or is the
subject of, any action, cause of action, claim, investigation, demand or notice
by any person or entity alleging liability under or non-compliance with any
Environmental Law (an "Environmental Claim") that individually or in the
aggregate could have a Material Adverse Effect on Sylvan; and (iii) there are no
circumstances that are reasonably likely to prevent or interfere with such
compliance in the future or give rise to an Environmental Claim in the future.
1.10. Compliance. (i) The Purchaser and each of the Purchaser
----------
Subsidiaries hold all licenses, permits, variances, exemptions, orders,
approvals and other authorizations of all Governmental Entities necessary for
the lawful conduct of their respective businesses (the "Purchaser Permits"),
except for failures to hold such permits, licenses, variances, exemptions,
orders, approvals and other authorizations which would not, individually or in
the aggregate, have a Material Adverse Effect on Sylvan; (ii) the Purchaser and
the Purchaser Subsidiaries are in compliance with the terms of each of the
Purchaser Permits, except where the failure so to comply would not have a
Material Adverse Effect on Sylvan, (iii) the businesses of the Purchaser and the
Purchaser Subsidiaries are not being conducted in violation of any law,
ordinance or regulation of any Governmental Entity, except for violations or
possible violations which individually or in the aggregate do not, and, insofar
as reasonably can be foreseen, in the future will not, have a Material Adverse
Effect on Sylvan, and (iv) no investigation or review by any Governmental Entity
with respect to the Purchaser or any of the Purchaser Subsidiaries is pending
or, to the best knowledge of the Purchaser, threatened, nor, to the best
knowledge of the Purchaser, has any Governmental Entity indicated an intention
to conduct the same, other than, in each case, those which the Purchaser
reasonably believes will not have a Material Adverse Effect on Sylvan.
1.11. Labor Matters. Neither the Purchaser nor any of the Purchaser
-------------
Subsidiaries is a party to any collective bargaining agreement relating to its
employees. No labor
-6-
<PAGE>
dispute, strike, work stoppage, employee action or labor relations problem of
any kind which has affected or may affect the Purchaser, any of the Purchaser
Subsidiaries or any of their respective businesses or operations has occurred
during the past five years or currently is pending or, to the knowledge of the
Purchaser, threatened.
1.12. Information for Proxy Statement. None of the information
-------------------------------
supplied or to be supplied by the Purchaser in writing for inclusion in (i) the
Registration Statement on Form S-4 to be filed by the Purchaser with the
Commission (the "S-4") in order to register the shares of Purchaser Common Stock
to be issued as a result of the Merger under the Securities Act of 1933, as
amended (the "Securities Act"); (ii) proxy materials relating to the meetings of
the Purchaser's and the Company's stockholders to be held in connection with the
Merger (the "Joint Proxy Statement"); (iii) reports filed under the Exchange Act
with the Commission by the Purchaser or the Company in connection with the
Merger or filed by the Purchaser with the Commission between the date of this
Agreement and the Effective Time as otherwise required under the Exchange Act
and the rules and regulations promulgated thereunder; or (iv) the Purchaser
Disclosure Schedule will, at the respective times that (A) the S-4 is filed with
the SEC(B) the S-4 is declared effective by the SEC, (C) the Joint Proxy
Statement is mailed to the stockholders of the Purchaser and the Purchaser, and
(D) any meeting of stockholders (including adjournments) is held to consider the
Merger, contains or will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
1.13. No Conflict With Other Documents. Neither the execution,
--------------------------------
delivery and performance of this Agreement by the Purchaser nor the consummation
by the Purchaser of the transactions contemplated hereby will (i) conflict with
or result in any breach of any provision of the respective Charter or By-Laws
(or similar governing documents) of the Purchaser or of any of the Purchaser
Subsidiaries; (ii) trigger the rights of the Purchaser or any Purchaser
Subsidiary or any holder of the Sylvan Securities under any shareholder rights
plan or similar arrangement; (iii) restrict any business combination between the
Company and the Purchaser or any of its subsidiaries; (iv) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, or result in the material modification of,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which the Purchaser or any of the Purchaser Subsidiaries is a party or by
which any of them or any of their respective properties or assets may be bound;
or (v) violate any order, writ, injunction, decree, law, statute, rule or
regulation applicable to the Purchaser or any of the Purchaser Subsidiaries or
any of their respective properties or assets, except in the case of (iv) or (v)
for violations, breaches or defaults which could not, individually or in the
aggregate, have a Material Adverse Effect on Sylvan.
1.14. Authority; Consents.
-------------------
(a) The Purchaser has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
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<PAGE>
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Purchaser's Board of Directors and no other corporate proceedings on the part of
the Purchaser or any of the Purchaser Subsidiaries are necessary to authorize
this Agreement or to consummate the transactions contemplated hereby (other
than, with respect to the Merger, the approval and adoption of this Agreement by
the holders of a majority of the then outstanding shares of Purchaser Common
Stock). This Agreement has been duly and validly executed and delivered by the
Purchaser and constitutes a valid, legal and binding agreement of the Purchaser,
enforceable against the Purchaser in accordance with its terms.
(b) Upon Purchaser Stockholder Approval (as defined below), the
satisfaction of all other conditions contained herein and the filing of the
Articles of Merger with the State Department of Assessments and Taxation of the
State of Maryland (the "SDAT") and the Certificate of Merger with the Secretary
of State of the State of Delaware, this Agreement will result in the valid,
legally binding and enforceable statutory merger of Newco with and into the
Purchaser.
(c) Under the Purchaser's Charter, By-Laws, rules of the Nasdaq
Stock Market (National Market) and other applicable laws and regulations to
which the Purchaser is subject (i) only the affirmative vote of the holders of
at least a majority of the outstanding shares of Purchaser Common Stock voting
together as a single class ("Purchaser Stockholder Approval") is required and
sufficient for the approval by the Purchaser's stockholders of the transactions
contemplated by this Agreement; and (ii) statutory appraisal rights will not be
available to the holders of any of Sylvan's Securities in connection with the
Merger.
(d) No consent, approval, order or authorization of, or
registration, declaration or filing with (i) any Governmental Entity or (ii) any
individual, corporation or other entity (including any holder of Sylvan
Securities) is required by or with respect to the Purchaser in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (A) the Purchaser Stockholder
Approval, (B) the declaration of effectiveness of the Form S-4 by the Commission
in accordance with the Securities Act, (C) the filing of the Articles of Merger
with the SDAT and the Certificate of Merger with the Delaware Secretary of
State, (D) the filing of the Joint Proxy Statement with the Commission in
accordance with the Exchange Act, (E) satisfaction of all information and
waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and any regulations promulgated thereunder, (F) such consents,
approvals, orders, authorizations, registrations declarations and filings as may
be required under applicable state "blue sky" or securities laws and the
securities laws of any foreign country, (G) those set forth in the Purchaser
Disclosure Schedule, and (H) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not be
reasonably likely to have a Material Adverse Effect on Sylvan.
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<PAGE>
1.15. Contracts.
---------
(a) Neither the Purchaser nor any of the Purchaser Subsidiaries
is a party to or subject to: (i) any employment contract with any officer,
consultant, director or employee; (ii) any plan or contract or arrangement
providing for bonuses, pensions, options, deferred compensation, retirement
payments, profit sharing, or the like; (iii) any contract or agreement with any
labor union; (iv) any contract, agreement, instrument or other document that
would be required to be filed as an exhibit to a Registration Statement on Form
S-1 were the Purchaser or any of the Purchaser Subsidiaries to file such a
Registration Statement on the date of this Agreement, (v) any contract,
agreement, instrument or other document not entered into by the Purchaser or any
of the Purchaser Subsidiaries in the ordinary course of business, under which
the Purchaser or any of the Purchaser Subsidiaries is required to make annual
payments to any third party in excess of $500,000 or (vi) any agreement, voting
trust, understanding or arrangement, written or oral, concerning the election of
directors. Neither the Purchaser nor any of the Purchaser Subsidiaries has
breached, or received in writing any claim or threat that it has breached, any
of the terms or conditions of any agreement, contract or commitment referred to
in the prior sentence ("Purchaser Material Contracts") in such a manner as would
permit any other party to cancel or terminate the same or would permit any other
party to seek material damages from the Purchaser or any of the Purchaser
Subsidiaries under any Purchaser Material Contract. Each Purchaser Material
Contract that has not expired or been terminated is in full force and effect and
is not subject to any material default thereunder of which the Purchaser is
aware by any party obligated to the Purchaser or any of the Purchaser
Subsidiaries pursuant to the Purchaser Material Contract.
(b) The consummation of the Merger and the transactions
contemplated by this Agreement will not cause a default under, or provide any
right of termination or modification with respect to, any Purchaser Material
Contract which default, termination or modification would have a Material
Adverse Effect on Sylvan.
1.16. Customers and Suppliers. Neither the Purchaser nor any of the
-----------------------
Purchaser Subsidiaries has received notice that, nor do any of them have
knowledge or any reason to believe that, any customer that represented 5% or
more of Purchaser's consolidated revenues in any of the past three years will
not continue to do business with the Purchaser or the Purchaser Subsidiaries at
volumes consistent with past practices subsequent to the Merger. Neither the
Purchaser nor any of the Purchaser Subsidiaries has any outstanding purchase
contracts or commitments or unaccepted purchase orders which are in excess of
the normal, ordinary and usual requirements of its business. No entity which is
now supplying, or during 1996 supplied, to the Purchaser or the Purchaser
Subsidiaries products and services has reduced or otherwise discontinued, or
threatened to reduced or discontinue, supplying such items to the Purchaser or
the Purchaser Subsidiaries on reasonable terms, except for such reductions or
discontinuations which would not have a Material Adverse Effect on Sylvan.
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<PAGE>
1.17. Tax Matters.
-----------
(a) For the purposes of this Agreement, a "Tax" or,
collectively, "Taxes," means any and all material federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or arrangements
with any other person or entity with respect to such amounts and including any
liability for taxes of a predecessor entity.
(b) The Purchaser and the Purchaser Subsidiaries have accurately
prepared and timely filed all material federal, state, local and foreign
returns, estimates, information statements and reports required to be filed at
or before the Effective Time ("Returns") relating to any and all Taxes
concerning or attributable to the Purchaser, any of the Purchaser Subsidiaries
or any of their operations or assets, and such Returns are true and correct in
all material respects and have been completed in all material respects in
accordance with applicable law; and copies of all Returns of the Purchaser and
the Purchaser Subsidiaries for the past three years have been or will be
provided by the Purchaser to the Company.
(c) The Purchaser and each of the Purchaser Subsidiaries as of
the Effective Time: (i) will have paid all Taxes any of them is required to pay
prior to the Effective Time, (ii) will have withheld with respect to their
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld, and (iii) will have collected all sales and use taxes
on account of sales by the Purchaser or any Purchaser Subsidiary or the use of
any of their products, except in each instance where any failure to make such
payment or withholding would not be reasonably likely to have a Material Adverse
Effect on Sylvan.
(d) There is no Tax deficiency outstanding, proposed or assessed
against the Purchaser or any of the Purchaser Subsidiaries that is not reflected
as a liability on the Purchaser Financial Statements nor has the Purchaser or
any of the Purchaser Subsidiaries executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
1.18. Title to Properties; Absence of Liens and Encumbrances, Etc. The
------------------------------------------------------------
Purchaser Disclosure Schedule includes a true and complete list of all real
property owned by the Purchaser or the Purchaser Subsidiaries and real property
leased by the Purchaser or the Purchaser Subsidiaries pursuant to leases
providing for the occupancy, in each case, of not less than 20,000 square feet
("Material Leases") and the name of the lessor, the date of the Material Lease
and each amendment to the Material Lease and the aggregate annual rental or
other fee payable under any such Material Lease. The Purchaser and the Purchaser
Subsidiaries have good and marketable title to all their owned properties and
assets, real and personal, in each case free and clear of all liens,
encumbrances and imperfections of title, except those liens, encumbrances or
imperfections of title which individually or in the aggregate would not have a
Material
-10-
<PAGE>
Adverse Effect on Sylvan. Neither the Purchaser nor any of the Purchaser
Subsidiaries has received any notice of violation of any applicable zoning laws,
orders, regulations, or requirements relating to its operations or properties it
owns or leases which has not been complied with, nor any proposed changes in any
such laws, orders or regulations which might have a Material Adverse Effect on
Sylvan. The Purchaser has no knowledge of any threatened or impending
condemnation by any Government Entity of any properties owned or leased by the
Purchaser or the Purchaser Subsidiaries. All Material Leases are in good
standing, valid and effective in accordance with their respective terms, and
neither the Purchaser nor any Purchaser Subsidiary is in default under any of
such leases, except where the lack of such good standing, validity and
effectiveness or the existence of such default would not have a Material Adverse
Effect on Sylvan.
1.19. Pension and Employee Benefit Plans.
----------------------------------
(a) The Purchaser has set forth on the Purchaser Disclosure
Schedule all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus,
stock option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance and other similar employee benefit plans, and all
unexpired severance agreements, written or otherwise, for the benefit of, or
relating to, any current or former employee of the Purchaser or any of the
Purchaser Subsidiaries or any trade or business (whether or not incorporated)
which is a member or which is under common control with the Purchaser within the
meaning of Section 414 of the Code (an "ERISA Affiliate") (together, the
"Purchaser Employee Plans").
(b) With respect to each Purchaser Employee Plan, the Purchaser
has made or will make available to the Company, a true and correct copy of (i)
the most recent annual report (Form 5500) filed with the Internal Revenue
Service ("IRS"), (ii) such Purchaser Employee Plan, (iii) each trust agreement
and group annuity contract, if any, relating to such Purchaser Employee Plan and
(iv) the most recent actuarial report or valuation relating to a Purchaser
Employee Plan subject to Title IV of ERISA.
(c) With respect to the Purchaser Employee Plans, individually
and in the aggregate, no event has occurred, and to the knowledge of the
Purchaser there exists no condition or set of circumstances, in connection with
which the Purchaser could be subject to any liability under ERISA, the Code or
any other applicable law that is reasonably likely to have a Material Adverse
Effect on Sylvan.
(d) With respect to the Purchaser Employee Plans, individually
and in the aggregate, there are no funded benefit obligations for which
contributions have not been made or properly accrued and there are no unfunded
benefit obligations which have not been accounted for by reserves, or otherwise
properly footnoted in accordance with generally accepted accounting principles,
on the Purchaser Financial Statements, which obligations are reasonably expected
to have a Material Adverse Effect on Sylvan.
-11-
<PAGE>
(e) Except as provided for in this Agreement, neither the
Purchaser nor any of the Purchaser Subsidiaries is a party to any oral or
written (i) union or collective bargaining agreement, (ii) agreement with any
officer or other key employee of the Purchaser or any of the Purchaser
Subsidiaries, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving the Purchaser
of the nature contemplated by this Agreement, (iii) agreement with any officer
providing any term of employment or compensation guarantee extending for a
period longer than one year from the date hereof, providing for the payment of
compensation in excess of $100,000 per annum or providing for severance benefits
or other benefits upon or following termination of employment, or (iv) agreement
or plan, including any stock option plan, stock appreciation right plan,
restricted stock plan or stock purchase plan, any of the benefits of which will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
(f) Each of the Purchaser Employee Plans which is intended to
qualify under Section 401 of the Code is designated on the Purchaser Disclosure
Schedule as being a qualified plan (the Plans so designated being hereinafter
referred to as the "Purchaser Qualified Plans"). Each Purchaser Qualified Plan
is qualified under Section 401(a) of the Code and is the subject of a currently
effective determination letter from the Internal Revenue Service confirming such
qualification. True and correct copies of all determination letters from the
Internal Revenue Service with respect to the Purchaser Qualified Plans which
were issued after the effective date of ERISA have been or will be delivered to
the Purchaser. With respect to each Purchaser Qualified Plan, the Purchaser has
not obtained a waiver of any minimum funding requirements imposed by ERISA or
the Code in respect of such Purchaser Qualified Plan, and has not incurred any
liability to the Pension Benefit Guaranty Corporation in connection with any
such Purchaser Qualified Plan. As of the date hereof, the value of the assets in
each of the Purchaser Qualified Plans which is a defined benefit plan exceeds
the present value of accrued benefits of all participants in such Plan when such
benefits are valued on a termination basis using Pension Benefit Guaranty
Corporation interest and other assumptions. No "reportable event," as such term
is defined in ERISA and in regulations issued thereunder, has occurred with
respect to any of the Purchaser Qualified Plans since the effective date of
ERISA.
(g) The Purchaser has identified to the Company which, if any, of
the Purchaser Employee Plans are multi-employer pension plans (as defined by
ERISA) and the number of employees of Sylvan who participated in multi-employer
plans during the year ended December 31, 1996. Since April 29, 1980, neither the
Purchaser nor any of the Purchaser Subsidiaries has, with respect to any multi-
employer plan, suffered or otherwise caused a "complete withdrawal" or "partial
withdrawal" (as such terms are defined by ERISA).
1.20. Foreign Corrupt Practices Act. Neither the Purchaser nor any of
-----------------------------
the Purchaser Subsidiaries, nor any director, officer, agent, employee,
consultant, or any other person associated with or acting on behalf of any of
them, has engaged or is engaged in any course of conduct, or is a party to any
agreement or involved in any transaction, which has or would give
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<PAGE>
rise to a violation of the Foreign Corrupt Practices Act of 1977 or any other
United States statute or regulation governing the conduct of business abroad by
United States corporations and their subsidiaries.
1.21. Insurance. The Purchaser Disclosure Schedule lists the insurance
---------
currently carried by the Purchaser and the Purchaser Subsidiaries in respect of
their respective properties and operations, including, without limitation,
information as to limits of coverage, deductibles, annual premium requirements
and expiration dates with respect to product liability, general liability,
umbrella liability, contractual liability, employers' liability, automobile
liability, workers' compensation, property and casualty, business interruption
and other insurance carried by the Purchaser and the Purchaser Subsidiaries
(collectively, the "Purchaser Insurance"). All Purchaser Insurance continues to
be in full force and effect, and the Purchaser and the Purchaser Subsidiaries
are in compliance with all requirements and provisions thereof. None of the
Purchaser Insurance is subject to any retroactive rate or audit adjustments or
co-insurance arrangements. The Purchaser has no reason to believe that any such
Purchaser Insurance will not be renewed upon the expiration thereof at premiums
substantially equivalent to those currently being paid by the Purchaser and the
Purchaser Subsidiaries. The Purchaser Insurance heretofore and currently carried
by the Purchaser and the Purchaser Subsidiaries were and are consistent with
types and amounts of coverages customarily carried by similarly situated
companies.
1.22. No Pending Transactions. Except for the transactions
-----------------------
contemplated by this Agreement and the Other Acquisitions (as hereinafter
defined in Section 3.3), neither the Purchaser nor any of the Purchaser
Subsidiaries is a party to or bound by or the subject of any agreement,
undertaking, commitment or discussion with another party with respect to any
Acquisition Transaction (as hereinafter defined in Section 3.2).
1.23. Disclosure. No representation or warranty made by the Purchaser
----------
in this Agreement and no statement contained in a certificate, schedule, list or
other instrument or document specified in or delivered pursuant to this
Agreement, whether heretofore furnished to the Purchaser or hereafter required
to be furnished to the Purchaser, contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact necessary to
make the statements contained herein or therein not misleading.
1.24. Transactions with Affiliates. Neither the Purchaser nor any of
----------------------------
the Purchaser Subsidiaries is a party to any transaction with any (i) current or
former officer or director of the Purchaser or any of the Purchaser
Subsidiaries, or (ii) any parent, spouse, child, brother, sister or other family
relation of any such officer or director or (iii) any corporation, partnership
or other entity of which any such officer or director or any such family
relation is an officer, director, partner or greater than 10% stockholder (based
on percentage ownership of voting stock) or (iv) any "affiliate" or "associate"
of any such persons or entities (as such terms are defined in the rules and
regulations promulgated under the Securities Act), including, without
limitation, any transaction involving a contract, agreement or other arrangement
providing for the employment of, furnishing of materials, products or services
by, rental of real or personal property from, or otherwise requiring payments
to, any such person or entity.
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<PAGE>
1.25. Pooling of Interests. To the best of its knowledge, neither the
--------------------
Purchaser, any of the Purchaser Subsidiaries nor any affiliate of Sylvan has,
through the date of this Agreement, taken or agreed to take any action which
would prevent the Purchaser from accounting for the business combination to be
effected by the Merger as a pooling of interests.
1.26. Opinion of Financial Advisor. The financial advisor to the
----------------------------
Purchaser, Alex. Brown & Sons Incorporated, has delivered to the Purchaser an
opinion dated the date of this Agreement to the effect that the Exchange Ratio
is fair, from a financial point of view, to Purchaser.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Purchaser that the statements contained in this
Article II are true and correct, except as set forth in the disclosure schedule
delivered by the Company to the Purchaser on or before the date of this
Agreement (the "Company Disclosure Schedule"). The Company Disclosure Schedule
shall be arranged in sections corresponding to the numbered and lettered
sections contained in this Article II. The disclosure in any paragraph shall be
deemed to constitute disclosure for all sections in this Article II.
2.1. Organization and Standing; Subsidiaries.
---------------------------------------
(a) Each of the Company and its subsidiaries whose business or
assets are material to the Company either individually or on a consolidated
basis (collectively, the "Company Subsidiaries," and, together with the Company,
collectively the "Corporation") is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its businesses as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority would not, and reasonably could not
be expected to, individually or in the aggregate, have a Material Adverse Effect
on the Corporation. The Company has heretofore delivered to the Purchaser
accurate and complete copies of the Company's Certificate of Incorporation and
By-Laws, as currently in effect, and promptly will deliver to the Purchaser
accurate and complete copies of the Articles or Certificate of Incorporation and
By-Laws, as currently in effect, of each of the Company Subsidiaries. The
Company's Disclosure Schedule includes a list of each of the Company
Subsidiaries.
(b) Each of the Company and the Company Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, individually or in aggregate, have a Material
Adverse Effect on the Corporation.
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<PAGE>
2.2. Capitalization of the Company.
-----------------------------
(a) The Company's entire authorized capital stock consists of
70,000,000 shares, of which 65,000,000 shares are classified as Common Stock,
par value $.01 per share (the "Company Common Stock"), and 5,000,000 of which
are classified as Preferred Stock, par value $.10 per share. As of the date
hereof, there are no shares of Preferred Stock issued and outstanding,
36,239,254 shares of Company Common Stock issued and outstanding (including
697,556 shares of Company Common Stock held in the Company's treasury),
5,197,787 shares reserved for issuance in connection with the Company's stock
option plans (of which options to purchase 3,113,013 shares are outstanding (the
"Outstanding Options")); and 2,300,000 shares reserved for issuance upon
conversion of the Company's 6 1/2% Convertible Debentures (the "Debentures")
outstanding on the date hereof (the "Outstanding Debentures"). Except as set
forth above or in the Company Disclosure Schedule, there are outstanding (i) no
shares of capital stock or other voting securities of the Company, (ii) no
securities of the Company or any of the Company Subsidiaries convertible into or
exchangeable for shares of capital stock or voting securities of the Company,
(iii) no options, warrants or other rights to acquire from the Company or any of
the Company Subsidiaries (including any rights issued or issuable under a
shareholders rights plan or similar arrangement), and no obligations of the
Company or any of the Company Subsidiaries to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of the Company, (iv) no equity equivalents, interests in the
ownership or earnings of the Company or any of the Company Subsidiaries or other
similar rights (with the securities listed in clauses (i) through (iv) referred
to collectively as the "Corporation's Securities"), and (v) no outstanding
obligations of the Company or any of the Company Subsidiaries to repurchase,
redeem or otherwise acquire any of the Corporation's Securities or to make any
investment (by loan, capital contribution or otherwise) in any other entity.
The Company Disclosure Statement sets forth a list of all Outstanding Options,
including the shares of each holder thereof, which such options are currently
vested and which such options will vest as a result of the Merger.
(b) All of the outstanding capital stock of, or other ownership
interests in, each of the Company Subsidiaries, is owned by the Company,
directly or indirectly, free and clear of any Lien or any other limitation or
restriction (including any restriction on the right to vote or sell the same,
except as may be provided as a matter of law). There are no securities of the
Company or any of the Company Subsidiaries convertible into or exchangeable for,
no options or other rights to acquire from the Company or any of the Company
Subsidiaries, and no other contract, understanding, arrangement or obligation
(whether or not contingent) providing for the issuance or sale, directly or
indirectly, of any capital stock or other ownership interests in, or any other
securities of, any of the Company Subsidiaries. There are no outstanding
contractual obligations of the Company or any of the Company Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other ownership interests in any subsidiary of the Company.
(c) All issued and outstanding shares of the capital stock of the
Company or any of the Company Subsidiaries have been duly and validly issued and
are fully
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<PAGE>
paid and non-assessable, free of any preemptive rights. The Outstanding Options
and the Outstanding Debentures have been duly and validly issued and are in full
force and effect. As of the date hereof, there are $56,994,000 principal amount
of Outstanding Debentures; and $500,000 principal amount of Debentures have
heretofore been repurchased by the Company.
2.3. Financial Statements; Exchange Act Filings.
------------------------------------------
(a) The Company has heretofore delivered to the Purchaser copies
of: (i) the Company's consolidated financial statements as of and for the years
ended December 31, 1993, 1994 and 1995, which have been audited by Price
Waterhouse, independent public accountants (the "Company Audited Financial
Statements"), and (ii) the Company's unaudited consolidated financial statements
as of and for the twelve months ended December 31, 1996, which are unaudited
(the "Company Unaudited Financial Statements"). The Company Audited Financial
Statements and Company Unaudited Financial Statements (collectively, the
"Company Financial Statements") fairly present, in conformity with generally
accepted accounting principles applied on a consistent basis by the Company
(except as may be indicated in the notes thereto) and in conformity with the
Commission's Regulation S-X, the consolidated financial position of the Company
and its consolidated subsidiaries as of the dates thereof and their consolidated
results of operations and cash flows for the periods then ended (subject in the
case of any unaudited financial statements to normal recurring year-end audit
adjustments, which are not expected to be material in amount). Since January 1,
1996, the Company has not made any material changes in the accounting policies
applied to the Company Audited Financial Statements, and no such changes are
currently contemplated nor, to the best of the Company's knowledge, required
under generally accepted accounting principles or the Commission's Regulation
S-X. The restructuring charges and losses from discontinued operations shown on
the Company Financial Statements have been properly recorded in accordance with
generally accepted accounting principles, represent management's best estimate
of the cost of discontinuing the operations to which such charges relate, and,
to the best of the Company's knowledge, there will be no further charges other
than those already accrued on the Company Financial Statements as a result of
the discontinuation of such operations.
(b) The Company has heretofore delivered to the Purchaser copies
of: (i) the financial statements of Steck-Vaughn Publishing Corporation ("Steck-
Vaughn") as of and for the years ended December 31, 1993, 1994 and 1995, which
have been audited by Price Waterhouse, independent public accountants (the
"Steck-Vaughn Audited Financial Statements"), and (ii) Steck-Vaughn's unaudited
consolidated financial statements as of and for the twelve months ended December
31, 1996, (the "Steck-Vaughn Unaudited Financial Statements"). The Steck-Vaughn
Audited Financial Statements and Steck-Vaughn Unaudited Financial Statements
(collectively, the "Steck-Vaughn Financial Statements") fairly present, in
conformity with generally accepted accounting principles applied on a consistent
basis by the Company (except as may be indicated in the notes thereto), the
consolidated financial position of Steck-Vaughn and its consolidated
subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject in the case of any
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<PAGE>
unaudited interim financial statements to normal recurring year-end audit
adjustments, which are not expected to be material in amount).
(c) The Company has heretofore delivered to the Purchaser
complete copies of all periodic reports, statements and other documents
(including Exhibits thereto) that the Company and Steck-Vaughn have filed with
the Commission under the Exchange Act since January 1, 1992 (collectively, the
"Company SEC Reports"). All Company SEC Reports required to be filed with the
Commission by the Company and Steck-Vaughn during the twelve months preceding
the date of this Agreement were filed in a timely manner and complied in all
material respects with the applicable requirements of the Exchange Act and the
rules and regulations promulgated thereunder. At the time filed with the SEC, no
Company SEC Report contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
2.4. No Undisclosed Liabilities.
--------------------------
(a) Except as and to the extent reflected or reserved against in
the consolidated balance sheets included within the Company Financial
Statements, at the date of such statements, the Corporation had no material
liabilities or obligations (whether accrued, absolute or contingent), of the
character which, under generally accepted accounting principles, should be
accrued, shown, disclosed or indicated in a consolidated balance sheet of the
Company or explanatory notes or information supplementary thereto, including
without limitation, any liabilities resulting from failure to comply with any
law or any federal, state or local tax liabilities due or to become due whether
(a) incurred in respect of or measured by income for any period ending on or
prior to the close of business on such dates, or (b) arising out of transactions
entered into, or any state of facts existing, on or prior thereto.
(b) Except as and to the extent reflected or reserved against in
the consolidated balance sheets included within the Steck-Vaughn Financial
Statements, at the date of such statements, Steck-Vaughn had no material
liabilities or obligations (whether accrued, absolute or contingent), of the
character which, under generally accepted accounting principles, should be
accrued, shown, disclosed or indicated in a consolidated balance sheet of Steck-
Vaughn or explanatory notes or information supplementary thereto, including
without limitation, any liabilities resulting from failure to comply with any
law or any federal, state or local tax liabilities due or to become due whether
(a) incurred in respect of or measured by income for any period prior to the
close of business on such dates, or (b) arising out of transactions entered
into, or any state of facts existing, prior thereto.
2.5. Absence of Certain Changes, Events or Conditions. Since December
------------------------------------------------
31, 1996, (i) the Company has not incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, which would have a Material
Adverse Effect on the Company, and (ii) there have been no events, changes or
effects with respect to the Company and the Company Subsidiaries having or which
could have, individually or in the aggregate, a
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Material Adverse Effect on the Company, and (iii) the Company and the Company
Subsidiaries have conducted their businesses only in the ordinary course and in
a manner consistent with prior practice.
2.6. No Default. Neither the Company nor any of the Company
----------
Subsidiaries is in default or violation (and no event has occurred which with
notice or the lapse of time or both would constitute a default or violation) of
any term, condition or provision of (i) its Certificate of Incorporation or By-
Laws (or similar governing documents), (ii) any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
the Company or any of the Company Subsidiaries is now a party or by which any of
them or any of their respective properties or assets may be bound, or (iii) any
order, writ, injunction, decree, law, statute, rule or regulation applicable to
the Company, any of the Company Subsidiaries or any of their respective
properties or assets, except in the case of (ii) or (iii) for violations,
breaches or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on the Corporation.
2.7. Litigation, Etc. (i) There is no suit, claim, action, proceeding
----------------
or investigation pending or, to the knowledge of the Company, threatened against
the Company or any of the Company Subsidiaries or any of their respective
properties or assets before any Governmental Entity which, individually or in
the aggregate, could have a Material Adverse Effect on the Corporation if
decided adversely to the Corporation or could prevent or delay the consummation
of the transactions contemplated by this Agreement, and (ii) neither the Company
nor any of the Company Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen, individually
or in the aggregate, in the future could have a Material Adverse Effect on the
Corporation or could prevent or delay the consummation of the transactions
contemplated hereby. Except as noted on the Company Disclosure Schedule, all
claims listed thereon are covered by the Company's liability insurance (subject
to applicable deductibles not in excess of $500,000) and are being defended by
and at the cost of the Company's liability insurance carrier.
2.8. Intellectual Property.
---------------------
(a) The Company or one of the Company Subsidiaries owns, or is
licensed or otherwise possesses legally enforceable rights to use, all patents,
trademarks, trade names, service marks, copyrights, and any applications for
such patents, trademarks, trade names, service marks and copyrights, processes,
formulae, methods, schematics, technology, know-how, computer software programs
or applications and tangible or intangible proprietary information or material
that are necessary to conduct the business of the Corporation as currently
conducted, or proposed to be conducted, the absence of which would be reasonably
likely to have a Material Adverse Effect on the Corporation (the "Company
Intellectual Property Rights"). The Company Disclosure Schedule lists (i) all
patents and patent applications and all trademarks, registered copyrights, trade
names and service marks, which the Company considers to be material to the
business of the Corporation and included in the Company Intellectual Property
Rights, including the jurisdictions in which each such Company Intellectual
Property Right has
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<PAGE>
been issued or registered or in which any such application for such issuance and
registration has been filed, (ii) all material licenses, sublicenses and other
agreements as to which the Company or any of the Company Subsidiaries is a party
and pursuant to which any person is authorized to use any Company Intellectual
Property Rights, and (iii) all material licenses, sublicenses and other
agreements as to which the Company or any of the Company Subsidiaries is a party
and pursuant to which the Company or any of the Company Subsidiaries is
authorized to use any third party patents, trademarks or copyrights, including
software ("Company Third Party Intellectual Property Rights") which are
incorporated in or form a part of any Corporation product that is material to
its business.
(b) Neither the Company nor any of the Company Subsidiaries is,
nor will any of them be as a result of the execution and delivery of this
Agreement or the performance of its obligations under this Agreement, in breach
of any license, sublicense or other agreement relating to the Company
Intellectual Property Rights or Company Third Party Intellectual Property
Rights, the breach of which could have a Material Adverse Effect on the
Corporation.
(c) To the Company's knowledge, all patents, registered
trademarks, service marks and copyrights held by the Company or any of the
Company Subsidiaries are valid and subsisting. Neither the Company nor any of
the Company Subsidiaries (i) has been sued (or threatened with suit) in any
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other proprietary right of any third party; and (ii) has any knowledge that
the manufacturing, marketing, licensing or sale of its products or services
infringes any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party, which such infringement could have a
Material Adverse Effect on the Corporation.
2.9. Environmental Laws and Regulations. (i) The Company and each of
----------------------------------
the Company Subsidiaries is in material compliance with all applicable
Environmental Laws, except for non-compliance that individually or in the
aggregate would not have a Material Adverse Effect on the Corporation, which
compliance includes, but is not limited to the possession by the Company and the
Company Subsidiaries of all material permits and other governmental
authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof; (ii) neither the Company nor any of the
Company Subsidiaries has received written notice of, or is the subject of, any
Environmental Claim that individually or in the aggregate would have a Material
Adverse Effect on the Corporation; and (iii) there are no circumstances that are
reasonably likely to prevent or interfere with such compliance in the future or
give rise to an Environmental Claim in the future.
2.10. Compliance. (i) The Company and each of the Company Subsidiaries
----------
hold all licenses, permits, variances, exemptions, orders, approvals and other
authorizations of all Governmental Entities necessary for the lawful conduct of
their respective businesses (the "Company Permits"), except for failures to hold
such permits, licenses, variances, exemptions, orders, approvals and other
authorizations which would not, individually or in the aggregate,
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<PAGE>
have a Material Adverse Effect on the Corporation; (ii) the Company and the
Company Subsidiaries are in compliance with the terms of each of the Company
Permits, except where the failure so to comply would not have a Material Adverse
Effect on the Corporation, (iii) the businesses of the Company and the Company
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for violations or possible
violations which individually or in the aggregate do not, and, insofar as
reasonably can be foreseen, in the future will not, have a Material Adverse
Effect on the Corporation, and (iv) no investigation or review by any
Governmental Entity with respect to the Company or any of the Company
Subsidiaries is pending or, to the best knowledge of the Company, threatened,
nor, to the best knowledge of the Company, has any Governmental Entity indicated
an intention to conduct the same, other than, in each case, those which the
Company reasonably believes will not have a Material Adverse Effect on the
Corporation.
2.11. Labor Matters. Neither the Company nor any of the Company
-------------
Subsidiaries is a party to any collective bargaining agreement relating to its
employees. No labor dispute, strike, work stoppage, employee action or labor
relations problem of any kind which has affected or may affect the Company, any
of the Company Subsidiaries or any of their respective businesses or operations
has occurred during the past five years or currently is pending or, to the
knowledge of the Company, threatened.
2.12. Information for Proxy Statement. None of the information
-------------------------------
supplied or to be supplied by the Company in writing for inclusion in (i) the
S-4; (ii) the Joint Proxy Statement, (iii) reports filed under the Exchange Act
with the Commission by the Purchaser or the Company in connection with the
Merger, or filed by the Company or Steck-Vaughn with the Commission between the
date of this Agreement and the Effective Time as otherwise required under the
Exchange Act and the rules and regulations promulgated thereunder; or (iv) the
Company Disclosure Schedule will, at the respective times that (A) the S-4 is
filed with the SEC (B) the S-4 is declared effective by the SEC, (C) the Joint
Proxy Statement is mailed to the stockholders of the Company and the Purchaser,
and (D) any meeting of stockholders (including adjournments) is held to consider
the Merger, contains or will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
2.13. No Conflict With Other Documents. Neither the execution,
--------------------------------
delivery and performance of this Agreement by the Company nor the consummation
by the Company of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation or By-Laws (or similar governing documents) of the Company or of
any of the Company Subsidiaries; (ii) trigger the rights of the Company or any
of the Company Subsidiaries or any holder of the Corporation's Securities under
any shareholder rights plan or similar arrangement; (iii) restrict any business
combination between the Purchaser or any of its subsidiaries and the Company or
any of its subsidiaries; (iv) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration) under, or
result in the material modification of, any of the terms, conditions or
provisions of any note, bond, mortgage,
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<PAGE>
indenture, lease, license, contract, agreement or other instrument or obligation
to which the Company or any of the Company Subsidiaries is a party or by which
any of them or any of their respective properties or assets may be bound; or (v)
violate any order, writ, injunction, decree, law, statute, rule or regulation
applicable to the Company or any of the Company Subsidiaries or any of their
respective properties or assets, except in the case of (iv) or (v) for
violations, breaches or defaults which could not, individually or in the
aggregate, have a Material Adverse Effect on the Corporation.
2.14. Authority; Consents.
-------------------
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Company's Board of Directors and no other corporate
proceedings on the part of the Company or any of the Company Subsidiaries are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (other than, with respect to the Merger, the approval and
adoption of this Agreement by the holders of a majority of the then outstanding
shares of Company Common Stock). This Agreement has been duly and validly
executed and delivered by the Company and constitutes a valid, legal and binding
agreement of the Company, enforceable against the Company in accordance with its
terms.
(b) Upon Company Stockholder Approval (as defined below),
the satisfaction of all other conditions contained herein and the filing of the
Articles of Merger with the SDAT and the Certificate of Merger with the
Secretary of State of the State of Delaware, this Agreement will result in the
valid, legally binding and enforceable statutory merger of Newco with and into
the Purchaser.
(c) Under the Company's Charter, By-Laws, the regulations of
the New York Stock Exchange, Inc. and other laws and regulations applicable to
the Company and the Company Subsidiaries (i) only the affirmative vote of the
holders of at least a majority of the outstanding shares of Company Common Stock
voting together as a single class ("Company Stockholder Approval") is required
and sufficient for the approval by the Company's stockholders of the
transactions contemplated by this Agreement; and (ii) statutory appraisal rights
will not be available to the holders of any of the Corporation's Securities in
connection with the Merger.
(d) No consent, approval, order or authorization of, or
registration, declaration or filing with (i) any Governmental Entity or (ii) any
individual, corporation or other entity (including any holder of the
Corporation's Securities) is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (A) the Company Stockholder
Approval, (B) the declaration of effectiveness of the Form S-4 by the Commission
in accordance with the Securities Act, (C) the filing of the Articles of Merger
with the SDAT and the Certificate of
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<PAGE>
Merger with the Delaware Secretary of State, (D) the filing of the Joint Proxy
Statement with the Commission in accordance with the Exchange Act, (E)
satisfaction of all information and waiting period requirements of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 and any regulations promulgated
thereunder, (F) such consents, approvals, orders, authorizations, registrations
declarations and filings as may be required under applicable state "blue sky" or
securities laws and the securities laws of any foreign country, (G) those set
forth in the Company Disclosure Schedule ,and such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not be reasonably likely to have a Material Adverse Effect on the
Corporation.
2.15. Contracts.
---------
(a) Neither the Company nor any of the Company Subsidiaries
is a party to or subject to: (i) any employment contract with any officer,
consultant, director or employee; (ii) any plan or contract or arrangement
providing for bonuses, pensions, options, deferred compensation, retirement
payments, profit sharing, or the like; (iii) any contract or agreement with any
labor union; (iv) any contract, agreement, instrument or other document that
would be required to be filed as an exhibit to a Registration Statement on Form
S-1 were the Company or any of the Company Subsidiaries to file such a
Registration Statement on the date of this Agreement, (v) any contract,
agreement, instrument or other document not entered into by the Company or any
of the Company Subsidiaries in the ordinary course of business, under which the
Company or any of the Company Subsidiaries is required to make annual payments
to any third party in excess of $500,000 or (vi) any agreement, voting trust,
understanding or arrangement, written or oral, concerning the election of
directors. Neither the Company nor any of the Company Subsidiaries has breached,
or received in writing any claim or threat that it has breached, any of the
terms or conditions of any agreement, contract or commitment referred to in the
prior sentence ("Company Material Contracts") in such a manner as would permit
any other party to cancel or terminate the same or would permit any other party
to seek material damages from the Company or any of the Company Subsidiaries
under any Company Material Contract. Each Company Material Contract that has not
expired or been terminated is in full force and effect and is not subject to any
material default thereunder of which the Company is aware by any party obligated
to the Company or any of the Company Subsidiaries pursuant to the Company
Material Contract.
(b) The consummation of the Merger and the transactions
contemplated by this Agreement will not cause a default under, or provide any
right of termination or modification with respect to, any Company Material
Contract which default, termination or modification would have a Material
Adverse Effect on the Corporation.
2.16. Customers and Suppliers. Neither the Company nor any of the
-----------------------
Company Subsidiaries has received notice that, nor do any of them have knowledge
or any reason to believe that, any customer that represented 5% or more of
Company's consolidated revenues in any of the past three years will not continue
to do business with the Company or the Company Subsidiaries at volumes
consistent with past practices subsequent to the Merger. Neither the
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<PAGE>
Company nor any of the Company Subsidiaries has any outstanding purchase
contracts or commitments or unaccepted purchase orders which are in excess of
the normal, ordinary and usual requirements of its business. No entity which is
now supplying, or during 1996 supplied, to the Company or the Company
Subsidiaries products and services has reduced or otherwise discontinued, or
threatened to reduced or discontinue, supplying such items to the Company or the
Company Subsidiaries on reasonable terms, except for such reductions or
discontinuations which would not have a Material Adverse Effect on the
Corporation.
2.17. Tax Matters.
-----------
(a) For the purposes of this Agreement, a "Tax" or,
collectively, "Taxes," means any and all material federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or arrangements
with any other person or entity with respect to such amounts and including any
liability for taxes of a predecessor entity.
(b) The Company and the Company Subsidiaries have accurately
prepared and timely filed all material Returns relating to any and all Taxes
concerning or attributable to the Company, any of the Company Subsidiaries or
any of their operations or assets, and such Returns are true and correct in all
material respects and have been completed in all material respects in accordance
with applicable law; and copies of all Returns of the Company and the Company
Subsidiaries for the past three years have been or will be provided by Newco to
the Purchaser.
(c) The Company and each of the Company Subsidiaries as of
the Effective Time: (i) will have paid all Taxes any of them is required to pay
prior to the Effective Time, (ii) will have withheld with respect to their
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld, and (iii) will have collected all sales and use taxes
on account of sales by the Company or any Company Subsidiary or use of any of
their products, except in each instance where any failure to make such payment
or withholding would not be reasonably likely to have a Material Adverse Effect
on the Corporation.
(d) There is no Tax deficiency outstanding, proposed or
assessed against the Company or any of the Company Subsidiaries that is not
reflected as a liability on the Company Financial Statements nor has the Company
or any of the Company Subsidiaries executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
2.18. Title to Properties; Absence of Liens and Encumbrances, Etc.
------------------------------------------------------------
The Company Disclosure Schedule sets forth a true and complete list of all real
property owned by the Company or the Company Subsidiaries and real property
leased by the Company or the
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<PAGE>
Company Subsidiaries pursuant to Material Leases and the name of the lessor, the
date of the Material Lease and each amendment to the Material Lease and the
aggregate annual rental or other fee payable under any such Material Lease. The
Company and the Company Subsidiaries have good and marketable title to all their
owned properties and assets, real and personal, in each case free and clear of
all liens, encumbrances, and imperfections of title, except those liens,
encumbrances or imperfections of title which individually or in the aggregate
would not have a Material Adverse Effect on the Corporation. Neither the Company
nor any of the Company Subsidiaries has received any notice of violation of any
applicable zoning laws, orders, regulations, or requirements relating to its
operations or properties it owns or leases which has not been complied with, nor
any proposed changes in any such laws, orders or regulations which might have a
Material Adverse Effect on the Corporation. The Company has no knowledge of any
threatened or impending condemnation by any Government Entity of any properties
owned or leased by the Company or the Company Subsidiaries. All Material Leases
are in good standing, valid and effective in accordance with their respective
terms, and neither the Company nor any Company Subsidiary is in default under
any of such leases, except where the lack of such good standing, validity and
effectiveness or the existence of such default would not have a Material Adverse
Effect on the Corporation.
2.19. Pension and Employee Benefit Plans.
----------------------------------
(a) The Company has set forth on the Company Disclosure
Schedule all employee benefit plans (as defined in Section 3(3) of ERISA) and
all bonus, stock option, stock purchase, incentive, deferred compensation,
supplemental retirement, severance and other similar employee benefit plans, and
all unexpired severance agreements, written or otherwise, for the benefit of, or
relating to, any current or former employee of the Company or any of the Company
Subsidiaries or any ERISA Affiliate (together, the "Company Employee Plans").
(b) With respect to each Company Employee Plan, the Company
has made or will make available to Sylvan, a true and correct copy of (i) the
most recent annual report (Form 5500) filed with the IRS, (ii) such Company
Employee Plan, (iii) each trust agreement and group annuity contract, if any,
relating to such Company Employee Plan and (iv) the most recent actuarial report
or valuation relating to a Company Employee Plan subject to Title IV of ERISA.
(c) With respect to the Company Employee Plans, individually
and in the aggregate, no event has occurred, and to the knowledge of the Company
there exists no condition or set of circumstances, in connection with which the
Company could be subject to any liability under ERISA, the Code or any other
applicable law that is reasonably likely to have a Material Adverse Effect on
the Corporation.
(d) With respect to the Company Employee Plans, individually
and in the aggregate, there are no funded benefit obligations for which
contributions have not been made or properly accrued and there are no unfunded
benefit obligations which have not been accounted for by reserves, or otherwise
properly footnoted in accordance with generally accepted
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<PAGE>
accounting principles, on the Company Financial Statements, which obligations
are reasonably expected to have a Material Adverse Effect on the Corporation.
(e) Except as provided for in this Agreement, neither the
Company nor any of the Company Subsidiaries is a party to any oral or written
(i) union or collective bargaining agreement, (ii) agreement with any officer or
other key employee of the Company or any of the Company Subsidiaries, the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving the Company of the nature
contemplated by this Agreement, (iii) agreement with any officer providing any
term of employment or compensation guarantee extending for a period longer than
one year from the date hereof, providing for the payment of compensation in
excess of $100,000 per annum or providing for severance benefits or other
benefits upon or following termination of employment, or (iv) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
(f) Each of the Company Employee Plans which is intended to
qualify under Section 401 of the Code is designated on the Company Disclosure
Schedule as being a qualified plan (the Plans so designated being hereinafter
referred to as the "Company Qualified Plans"). Each Company Qualified Plan is
qualified under Section 401(a) of the Code and is the subject of a currently
effective determination letter from the Internal Revenue Service confirming such
qualification. True and correct copies of all determination letters from the
Internal Revenue Service with respect to the Company Qualified Plans which were
issued after the effective date of ERISA have been or will be delivered to the
Purchaser. With respect to each Company Qualified Plan, the Company has not
obtained a waiver of any minimum funding requirements imposed by ERISA or the
Code in respect of such Company Qualified Plan, and has not incurred any
liability to the Pension Benefit Guaranty Corporation in connection with any
such Company Qualified Plan. As of the date hereof, the value of the assets in
each of the Company Qualified Plans which is a defined benefit plan exceeds the
present value of accrued benefits of all participants in such Plan when such
benefits are valued on a termination basis using Pension Benefit Guaranty
Corporation interest and other assumptions. No "reportable event," as such term
is defined in ERISA and in regulations issued thereunder, has occurred with
respect to any of the Company Qualified Plans since the effective date of ERISA.
(g) The Company has identified to the Purchaser which, if
any, of the Company Employee Plans are multi-employer pension plans (as defined
by ERISA) and the number of employees of the Corporation who participated in
multi-employer plans during the year ended December 31, 1996. Since April 29,
1980, neither the Company nor any of the Company Subsidiaries has, with respect
to any multi-employer plan, suffered or otherwise caused a "complete withdrawal"
or "partial withdrawal" (as such terms are defined by ERISA).
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<PAGE>
2.20. Foreign Corrupt Practices Act. Neither the Company nor any
-----------------------------
of the Company Subsidiaries, nor any director, officer, agent, employee,
consultant, or any other person associated with or acting on behalf of any of
them, has engaged or is engaged in any course of conduct, or is a party to any
agreement or involved in any transaction, which has or would give rise to a
violation of the Foreign Corrupt Practices Act of 1977 or any other United
States statute or regulation governing the conduct of business abroad by United
States corporations and their subsidiaries.
2.21. Insurance. The Company Disclosure Schedule lists the
---------
insurance currently carried by the Company and the Company Subsidiaries in
respect of their respective properties and operations, including, without
limitation, information as to limits of coverage, deductibles, annual premium
requirements and expiration dates with respect to product liability, general
liability, umbrella liability, contractual liability, employers' liability,
automobile liability, workers' compensation, property and casualty, business
interruption and other insurance carried by the Company and the Company
Subsidiaries (collectively, the "Company Insurance"). All Company Insurance
continues to be in full force and effect, and the Company and the Company
Subsidiaries are in compliance with all requirements and provisions thereof.
None of the Company Insurance is subject to any retroactive rate or audit
adjustments or co-insurance arrangements. The Company has no reason to believe
that any such Company Insurance will not be renewed upon the expiration thereof
at premiums substantially equivalent to those currently being paid by the
Company and the Company Subsidiaries. The Company Insurance heretofore and
currently carried by the Company and the Company Subsidiaries were and are
consistent with types and amounts of coverages customarily carried by similarly
situated companies.
2.22. No Pending Transactions. Except for the transactions
-----------------------
contemplated by this Agreement and the Company Acquisitions (as hereinafter
defined in Section 3.1), neither the Company nor any of the Company Subsidiaries
is a party to or bound by or the subject of any agreement, undertaking,
commitment or discussion with another party with respect to an Acquisition
Transaction (as hereinafter defined in Section 3.2).
2.23. Disclosure. No representation or warranty made by the
----------
Company in this Agreement and no statement contained in a certificate, schedule,
list or other instrument or document specified in or delivered pursuant to this
Agreement, whether heretofore furnished to the Purchaser or hereafter required
to be furnished to the Purchaser, contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact necessary to
make the statements contained herein or therein not misleading.
2.24. Transactions with Affiliates. Neither the Company nor any
----------------------------
of the Company Subsidiaries is a party to any transaction with any (i) current
or former officer or director of the Company or any of the Company Subsidiaries,
or (ii) any parent, spouse, child, brother, sister or other family relation of
any such officer or director or (iii) any corporation, partnership or other
entity of which any such officer or director or any such family relation is an
officer, director, partner or greater than 10% stockholder (based on percentage
ownership of voting stock) or (iv) any "affiliate" or "associate" of any such
persons or entities (as such terms
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<PAGE>
are defined in the rules and regulations promulgated under the Securities Act),
including, without limitation, any transaction involving a contract, agreement
or other arrangement providing for the employment of, furnishing of materials,
products or services by, rental of real or personal property from, or otherwise
requiring payments to, any such person or entity.
2.25. Pooling of Interests. To the best of its knowledge, neither
--------------------
the Company, any of the Company Subsidiaries nor any affiliate of the
Corporation has, through the date of this Agreement, taken or agreed to take any
action which would prevent the Purchaser from accounting for the business
combination to be effected by the Merger as a pooling of interests.
2.26. Opinion of Financial Advisor. The financial advisor to the
----------------------------
Company, BZW, the investment banking division of Barclays Bank PLC ("BZW"), has
delivered to the Company an opinion dated the date of this Agreement to the
effect that the aggregate Merger consideration to be received by the holders of
the issued and outstanding shares of Company Common Stock is fair in the
aggregate from a financial point of view to the holders of the Company Common
Stock as a group.
2.27. Section 203 of the DGCL Not Applicable. The Boards of
--------------------------------------
Directors of the Company and the Company Subsidiaries have taken all action so
that the restrictions contained in Section 203 of the DGCL applicable to a
"business combination" (as defined in Section 203) will not apply to the
execution, delivery or performance of this Agreement or the consummation of the
Merger, the other transactions contemplated by this Agreement or any other
transaction between the Purchaser or any of its subsidiaries and the Company or
any of its subsidiaries.
SECTION 3. COVENANTS.
3.1 Conduct of Business of the Company. Except as contemplated
----------------------------------
by this Agreement or as contemplated by any acquisition agreements or
negotiations described on the Company Disclosure Statement or in the Company's
SEC Reports ("Company Acquisitions"), during the period from the date hereof to
the earlier of termination of this Agreement or the Effective Time, the Company
agrees to conduct its business and that of the Company Subsidiaries only in the
ordinary course of business consistent with past practice and to use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization (including the services of its existing
employees) and preserve its relationships with customers, suppliers and others
having business dealings with it, to the end that its goodwill and ongoing
business shall be unimpaired at the Effective Date. Without limiting the
generality of the foregoing, and except as otherwise expressly provided in this
Agreement, neither the Company nor any of the Company Subsidiaries will, without
the prior written consent of the Purchaser:
(a) amend or propose to amend its Certificate or Articles of
Incorporation or By-Laws;
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<PAGE>
(b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any stock of any class or any other securities or equity equivalents (including,
without limitation, any stock options or stock appreciation rights), except
(i) shares of Company Common Stock issuable upon conversion of the Outstanding
Debentures (at a conversion rate of one share of Company Common Stock for
every $25.00 of Outstanding Debentures), (ii) shares of Company Common Stock
issuable upon exercise of the Company Outstanding Options, or amend any of the
terms of any such securities or agreements outstanding as of the date hereof,
except as specifically contemplated by this Agreement, and (iii) for amendments
to the NETG Stock Option Plan in order to provide that such Plan and the options
granted thereunder survive the Merger;
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock, or redeem or otherwise acquire any of its securities or any securities of
the Company Subsidiaries, except that the Company may repurchase Outstanding
Debentures to the extent necessary to satisfy its 1997 sinking fund obligation
under the Indenture by which the Debentures were issued;
(d) (i) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of credit
in the ordinary course of business; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person or entity except in the ordinary course of
business consistent with past practice, and except for obligations of wholly-
owned subsidiaries of it; (iii) make any loans, advances or capital
contributions to, or investments in, any other person or entity (other than to
subsidiaries of it or advances to employees in the ordinary course of business
consistent with past practice and in amounts not material to the maker of such
loan or advance); (iv) pledge or otherwise encumber shares of its capital stock
or any of the Company Subsidiaries; or (v) mortgage or pledge any of its
material assets, tangible or intangible, or create or suffer to exist any
material Lien thereupon;
(e) except as may be required by law or as contemplated by
this Agreement or the Company Acquisitions, enter into, adopt or amend or
terminate any bonus, profit sharing, compensation, severance, termination, stock
option, stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement, trust,
plan, fund or other arrangement for the benefit or welfare of any director,
officer or employee in any manner, or (except for normal increases in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to it, and as required under existing agreements or in the ordinary
course of business generally consistent with past practice) increase in any
manner the compensation or fringe benefits of any director, officer or employee
or pay any benefit not required by any plan and arrangement as in effect as of
the date hereof (including, without limitation, the granting of stock
appreciation rights or performance units);
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(f) acquire, sell, lease, license to others or dispose of
any assets outside the ordinary course of business which individually or in the
aggregate are material to the Corporation, or enter into any commitment or
transaction outside the ordinary course of business consistent with past
practice which would be material to the Corporation;
(g) except as may be required as a result of a change in law
or in generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(h) revalue in any material respect any of its assets,
including, without limitation, writing down the value of inventory or writing-
off notes or accounts receivable other than in the ordinary course of business;
(i) (i) acquire or agree to acquire (by merger,
consolidation, acquisition of stock or assets or otherwise) any corporation,
partnership or other business organization or division thereof or any equity
interest therein, other than the Company Acquisitions; (ii) enter into any
contract or agreement other than in the ordinary course of business consistent
with past practice which would be material to it; (iii) authorize any new
capital expenditure or expenditures which, individually, is in excess of
$250,000 or, in the aggregate, are in excess of $2,500,000; or (iv) enter
into or amend any contract, agreement, commitment or arrangement providing for
the taking of any action that would be prohibited hereunder;
(j) make any tax election or settle or compromise any income
tax liability material to the Company;
(k) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes thereto) of
the Company and the Company Subsidiaries or incurred in the ordinary course of
business consistent with past practice;
(l) settle or compromise any pending or threatened suit,
action or claim relating to the transactions contemplated hereby; or
(m) take, or agree in writing or otherwise to take, any of
the actions described in this Section 4.1(a) through 4.1(l) or any action which
would make any of the representations or warranties of the Company contained in
this Agreement untrue or incorrect as of the date when made.
3.2. No Solicitation. The Company, its affiliates and their
---------------
respective officers, directors, employees, representatives and agents (i) shall
immediately cease any existing discussions or negotiations, if any, with any
parties with respect to any acquisition (other than the
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transactions contemplated by this Agreement or the Company Acquisitions) of all
or any material portion of the assets of, or any equity interest in, the Company
or any of the Company Subsidiaries or any business combination with the Company
or any of the Company Subsidiaries, (ii) shall not solicit, initiate, encourage,
or furnish information in response to any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock (including without limitation by way of a tender
offer or similar transactions involving the Company, other than the transactions
contemplated by this Agreement) (any of the foregoing transactions being
referred to in this Agreement as an "Acquisition Transaction") (iii) shall not
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Transaction, or
(iv) shall not agree to, approve or recommend any Acquisition Transaction;
except, with respect to clauses (ii) (as to the furnishing of information only)
(iii) and (iv), where the Board of Directors of the Company has received the
written opinion of Irell & Manella LLP to the effect that the failure of the
Board of Directors to so act would constitute a violation of the Board of
Directors' fiduciary responsibilities to the holders of the Company Common Stock
under the DGCL (it being understood that for this purpose, the failure to
respond to an Acquisition Proposal which in the judgment of the Company's Board
of Directors and BZW is superior, from a financial point of view, to the
Company's stockholders may be deemed to be a breach of such fiduciary duty). If
the Company shall nevertheless receive any indications of interests or proposals
with respect to any Acquisition Transactions, it shall provide a copy of any
such written proposal to the Purchaser immediately after receipt thereof by the
Company or any of its representatives or agents.
3.3. Conduct of Business of the Purchaser. Except as contemplated
------------------------------------
by this Agreement or as contemplated by any acquisition agreements or
negotiations described on the Purchaser Disclosure Statement or in the Purchaser
SEC Reports ("Other Acquisitions"), during the period from the date hereof to
the earlier of termination of this Agreement or the Effective Time, the
Purchaser agrees to conduct its business and that of the Purchaser Subsidiaries
only in the ordinary course of business consistent with past practice and to use
all reasonable efforts consistent with past practices and policies to preserve
intact its present business organization (including the services of its existing
employees) and preserve its relationships with customers, suppliers and others
having business dealings with it, to the end that its goodwill and ongoing
business shall be unimpaired at the Effective Date. Without limiting the
generality of the foregoing, and except as otherwise expressly provided in this
Agreement, neither the Purchaser nor any of the Purchaser Subsidiaries will,
without the prior written consent of the Company:
(a) amend or propose to amend its Charter or By-Laws;
(b) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any stock of any class or any other securities or equity equivalents (including,
without limitation, any stock options or stock appreciation rights), except
(i) shares of the Purchaser Common Stock issuable upon exercise of
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Purchaser Outstanding Options and Purchaser Outstanding Warrants, (ii) shares of
Common Stock issuable in connection with the Other Acquisitions, or (iii) shares
of Common Stock pursuant to the Purchaser's Employee Stock Purchase Plan.
(c) split, combine or reclassify any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its capital
stock, or redeem or otherwise acquire any of its securities or any securities of
the Purchaser Subsidiaries;
(d) (i) incur or assume any long-term or short-term debt or
issue any debt securities, except for borrowings under existing lines of credit
in the ordinary course of business or pursuant to the Other Acquisitions; (ii)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person or
entity except in the ordinary course of business consistent with past practice,
and except for obligations of wholly-owned subsidiaries of the Purchaser; (iii)
make any loans, advances or capital contributions to, or investments in, any
other person or entity (other than to subsidiaries of the Purchaser or advances
to employees in the ordinary course of business consistent with past practice
and in amounts not material to the maker of such loan or advance); (iv) pledge
or otherwise encumber shares of capital stock of the Purchaser or any of the
Purchaser Subsidiaries; or (v) mortgage or pledge any of its material assets,
tangible or intangible, or create or suffer to exist any material Lien
thereupon;
(e) except as may be required by law or as contemplated by
this Agreement or the Other Acquisitions, enter into, adopt or amend or
terminate any bonus, profit sharing, compensation, severance, termination, stock
option, stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement, trust,
plan, fund or other arrangement for the benefit or welfare of any director,
officer or employee in any manner, or (except for normal increases in the
ordinary course of business consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to the Purchaser, and as required under existing agreements or in the
ordinary course of business generally consistent with past practice) increase in
any manner the compensation or fringe benefits of any director, officer or
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date hereof (including, without limitation, the granting of
stock appreciation rights or performance units);
(f) acquire, sell, lease, license to others or dispose of
any assets outside the ordinary course of business which individually or in the
aggregate are material to Sylvan, or enter into any commitment or transaction
outside the ordinary course of business consistent with past practice which
would be material to Sylvan;
(g) except as may be required as a result of a change in law
or in generally accepted accounting principles, change any of the accounting
principles or practices used by it;
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(h) revalue in any material respect any of its assets,
including, without limitation, writing down the value of inventory or writing-
off notes or accounts receivable other than in the ordinary course of business;
(i) (i) acquire or agree to acquire (by merger,
consolidation, acquisition of stock or assets or otherwise) any corporation,
partnership or other business organization or division thereof or any equity
interest therein, other than the Other Acquisitions; (ii) enter into any
contract or agreement other than in the ordinary course of business consistent
with past practice which would be material to the Purchaser or (iii) enter into
or amend any contract, agreement, commitment or arrangement providing for the
taking of any action that would be prohibited hereunder;
(j) make any tax election or settle or compromise any income
tax liability material to the Purchaser;
(k) pay, discharge or satisfy any claim, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business of liabilities reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes thereto) of
the Purchaser and the Purchaser Subsidiaries or incurred in the ordinary course
of business consistent with past practice;
(l) settle or compromise any pending or threatened suit,
action or claim relating to the transactions contemplated hereby; and
(m) take, or agree in writing or otherwise to take, any of
the actions described in this Section 4.2(a) through 4.2(j) or any action which
would make any of the representations or warranties of the Purchaser and
Acquisition contained in this Agreement untrue or incorrect as of the date when
made.
3.4. Access to Information.
---------------------
(a) Between the date hereof and the Effective Time, the
Company and the Purchaser will give each other and their respective authorized
representatives reasonable access to all employees, plants, offices, warehouses
and other facilities and to the other's books and records and those of the
other's subsidiaries, will permit each other to make such inspections as the
requesting party may reasonably request and will cause each other's officers and
those of the other's subsidiaries to furnish the requesting party with such
financial and operating data and other information with respect to the other's
business and properties and any of the other's subsidiaries as the requesting
party may from time to time reasonably request.
(b) Each of the Company and the Purchaser will hold and will
cause its employees, agents and representatives to hold in confidence, unless
compelled to disclose by judicial or administrative process or, in the written
opinion of its legal counsel, by other
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requirements of law, all documents and information concerning the other party
and its subsidiaries furnished to it in connection with the transactions
contemplated by this Agreement, and will not release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors and other consultants and advisors in connection with this Agreement
who need to know such information. If the transactions contemplated by this
Agreement are not consummated, such confidence shall be maintained and, if
requested by or on behalf of the furnishing party, the other party will, and
will use all reasonable efforts to cause its auditors, attorneys, financial
advisors and other consultants, agents and representatives to, return to the
furnishing party or destroy all copies of written information so furnished to it
or its agents and representatives.
(c) No information or knowledge obtained in any
investigation pursuant to this Section 3.4 shall affect or be deemed to modify
any representation or warranty contained in this Agreement or any disclosure
schedule or the conditions to the obligations of the parties to consummate the
Merger.
3.5 Filings with the Governmental Entities.
--------------------------------------
(a) As promptly as practical after the execution of this
Agreement, the Purchaser and the Company shall prepare and shall cooperate with
the other in preparing and shall file with the Commission the Joint Proxy
Statement, and the Purchaser shall prepare and file with the Commission the S-4,
in which the Joint Proxy Statement will be included. The Purchaser and the
Company shall use all reasonable efforts and shall cooperate with each other in
causing the S-4 to become effective as soon after such filing as practical;
provided that the Purchaser shall not be obligated to agree to account for the
Merger as a "purchase" in order to have the S-4 declared effective by the
Commission. The Joint Proxy Statement shall include the recommendation of the
Board of Directors of the Company in favor of this Agreement and the Merger and
the recommendation of the Board of Directors of the Purchaser in favor of the
issuance of shares of the Purchaser Common Stock pursuant to the Merger.
(c) The Purchaser and the Company shall, and the Company
shall cause Steck-Vaughn to, file in a timely manner all periodic reports or
other documents required under the Exchange Act and the Rules and Regulations
promulgated thereunder to be filed by the Purchaser, the Company or Steck-
Vaughn, as applicable, between the date of this Agreement and the Effective
Time; and the form and content of all such filings shall be in material
compliance with the requirements of the Exchange Act and the Rules and
Regulations promulgated thereunder.
(b) The Purchaser and the Company shall make all necessary
filings with respect to the Merger under the Securities Act and the Exchange Act
and applicable state blue sky laws and the rules and regulations thereunder and
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and
regulations promulgated thereunder.
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3.6. Additional Agreement; Reasonable Efforts. Subject to the
----------------------------------------
terms and conditions herein provided, each of the parties hereto agrees to use
all reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation, (i)
the taking of all action reasonably necessary, proper or advisable to secure any
necessary approvals of any Governmental Entity and will cooperate and furnish
information to the other in connection with obtaining any such approvals; (ii)
using all reasonable efforts to obtain consents of all third parties necessary,
proper or advisable for the consummation of the transactions contemplated by
this Agreement; (iii) contesting any legal proceeding relating to the Merger;
and (iv) the execution of any additional instruments necessary to consummate the
transactions contemplated hereby.
3.7. Public Announcements. The Purchaser and the Company will
--------------------
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger or this Agreement, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law or pursuant to the
rules of the Commission or the Purchaser's listing agreement with the Nasdaq
Stock Market and the Company's listing agreement with the New York Stock
Exchange, Inc.
3.8. Stockholders Meetings.
---------------------
(a) The Company and the Purchaser each shall call a meeting
of its respective stockholders to be held as promptly as practicable for the
purpose of voting, in the case of the Company, upon this Agreement and the
Merger and, in the case of the Purchaser, upon (i) the issuance of shares of
Purchaser Common Stock pursuant to the Merger, (ii) amendment of the Purchaser's
Charter for the purpose of increasing the number of authorized shares of
Purchaser Common Stock to 90,000,000 and (iii) election of the four nominees
submitted by the Company to the Purchaser prior to the execution of this
Agreement to the Purchaser Board of Directors (collectively, the "Purchaser
Voting Proposal"). The Company and the Purchaser will, through their respective
Boards of Directors, recommend to their respective stockholders approval of such
matters and will coordinate and cooperate with respect to the timing of such
meetings and shall use their best efforts to hold such meetings on the same day
and as soon as practicable after the date hereof. Each party shall use all
reasonable efforts to solicit from its stockholders proxies in favor of such
matters.
(b) The Purchaser shall also propose to its stockholders at
the Purchaser Stockholders' Meeting, as a proposal separate from the Purchaser
Voting Proposal, an increase in the number of shares of the Purchaser Common
Stock reserved for issuance under one or more of the Purchaser's employee stock
option plans by an aggregate of 4,000,000 shares. The approval by the
Purchaser's stockholders of such additional proposal, however, shall not be a
condition to the closing of the Merger under this Agreement.
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3.9. Tax-Free Reorganization. The Purchaser and the Company shall
-----------------------
each use its best efforts to cause the Merger to be treated as a reorganization
within the meaning of Section 368(a) of the Code.
3.10 Pooling Accounting. The Purchaser and the Company shall each
------------------
use its best efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Each of the Purchaser and
the Company shall use its best efforts (i) to cause its respective Affiliates
(as defined in Section 3.11 below) not to take any action that would adversely
affect the ability of the Purchaser to account for the business combination to
be effected by the Merger as a pooling of interests and (ii) to cause its
respective Affiliates to sign and deliver to the Purchaser a customary "pooling
letter" in form and substance agreed upon by the Company and the Purchaser.
3.11. Affiliate Agreements. Upon the execution of this Agreement,
--------------------
the Purchaser and the Company will provide each other with a list of those
persons who are, in their respective reasonable judgment, "affiliates" of the
Purchaser or the Company, respectively, within the meaning of Commission Rule
145 (each such person who is such an "affiliate" is referred to as an
"Affiliate"). The Purchaser and the Company shall provide each other such
information and documents as the other shall reasonably request for purposes of
reviewing such list and shall notify the other party in writing regarding any
change in the identity of its Affiliates prior to the Effective Time. The
Company shall use its best efforts to deliver or cause to be delivered to the
Purchaser by April 15, 1997 (and in any case shall deliver to the
Purchaser prior to the Effective Time) from each of the Affiliates of the
Company, an executed Affiliate Agreement, in form and substance satisfactory to
the Purchaser and the Company, by which such Affiliate of the Company agrees to
comply with the applicable requirements of Rule 145 ("Affiliates Agreement").
The Purchaser shall be entitled to place appropriate legends on the certificates
evidencing any of the Purchaser Common Stock to be received by such Affiliates
of the Company pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Purchaser Common Stock,
consistent with the terms of the Affiliates Agreements.
3.12. NASDAQ Quotation. The Purchaser shall file an Application for
----------------
Listing of Additional Shares with the Nasdaq Stock Market (National Market)
prior to the Effective Time and will otherwise use its best efforts to cause the
shares of the Purchaser Common Stock to be issued in the Merger to be approved
for quotation on the Nasdaq Stock Market (National Market), subject to official
notice of issuance.
3.13 Brokers or Finders. Each of the Purchaser and the Company
------------------
represents, as to itself, and the Purchaser Subsidiaries and Affiliates of the
Purchaser, in the case of the Purchaser, and the Company Subsidiaries and
Affiliates of the Company, in the case of the Company, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any broker's or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement,
except BZW, whose fees and expenses will be paid by the Company in accordance
with the Company's agreement
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<PAGE>
with such firm (copies of which have been delivered by the Company to the
Purchaser prior to the date of this Agreement), and Alex. Brown & Sons
Incorporated, whose fees and expenses will be paid by the Purchaser in
accordance with the Purchaser's agreement with such firm (copies of which have
been delivered by the Purchaser to the Company prior to the date of this
Agreement), and each of the Purchaser and the Company agrees to indemnify and
hold the other harmless from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any agreement, act or statement alleged to have been
made by such party, its Affiliates and, in the case of the Purchaser, the
Purchaser Subsidiaries, and the Company Subsidiaries, in the case of the
Company.
3.14 Indemnification.
---------------
(a) The Company shall and, the Purchaser shall, from and after the
Effective Time, indemnify, defend and hold harmless each person who is now, or
has been at any time prior to the date of this Agreement or who becomes prior to
the Effective Time, an officer or director of the Company or any of the Company
Subsidiaries (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses, liabilities or judgments or amounts that are paid in settlement
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation based in whole or in part on or arising in whole or
in part out of the fact that such person is or was a director or officer, of the
Company or any of the Company Subsidiaries, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities")
including, without limitation, all losses, claims, damages, costs, expenses,
liabilities or judgments based in whole or in part on, or arising in whole or in
part out of, or pertaining to this Agreement or the transactions contemplated
hereby, in each case to the full extent a corporation is permitted under the
DGCL or the Maryland General Corporation Law, as the case may be, to indemnify
its own directors and officers. The Company or the Purchaser, as the case may
be, will pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law upon
receipt of any undertaking contemplated by Section 145(e) of the DGCL. Without
limiting the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Party (whether arising before
or after the Effective Time), (i) the Indemnified Parties may retain counsel
satisfactory to them and the Company (or them and the Purchaser after the
Effective Time), (ii) the Company (or, after the Effective Time, the Purchaser)
shall pay all reasonable fees and expenses of such counsel for the Indemnified
Parties promptly as statements therefor are received, and (iii) the Company (or,
after the Effective Time, the Purchaser) will use all reasonable efforts to
assist in the defense of any such matter, provided that neither the Company nor
the Purchaser shall be liable for any settlement of any claim effected without
its written consent, which consent shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 3.14, upon
learning of any such claim, action, suit, proceeding or investigation, shall
promptly notify the Company or the Purchaser (but the failure
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<PAGE>
so to notify an Indemnifying Party shall not relieve it from any liability which
it may have under this Section 3.14 except to the extent such failure prejudices
such party), and shall deliver to the Company (or, after the Effective Time, the
Purchaser) the undertaking contemplated by the DGCL or the Maryland General
Corporation Law, as the case may be. The Indemnified Parties as a group may
retain only one law firm to represent them with respect to each such matter
unless there is, under applicable standards of professional conduct, a conflict
on any significant issue between the positions of any two or more Indemnified
Parties.
(b) For a period of five years after the Effective Time, the Purchaser
shall use reasonable efforts to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who are currently covered
by the Company's directors' and officers' liability insurance policy (a copy of
which has heretofore been delivered to the Purchaser) on terms and in an amount
comparable to those now applicable to directors and officers of the Company;
provided, however, that in no event shall the Purchaser be required to expend in
any year in excess of 125% of the current premium being paid by the Company for
such coverage.
(c) In the event that the Purchaser or any of its respective
successors and assigns consolidates with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or transfers and conveys all or substantially all of its
property and assets to any person, then, and in each case, proper provisions
shall be made so that the successors and assigns of the Purchaser assume the
obligations set forth in this Section 3.14.
(d) The provisions of this Section 3.14 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives, and may not be amended, altered or repealed without
the written consent of any affected Indemnified Party.
3.15. Voting Agreements. The Company shall use its best efforts to cause
-----------------
each person who is identified as an Affiliate of the Company to execute and
deliver to the Purchaser a Voting Agreement substantially in the form attached
hereto as Exhibit within ten (10) days from the date that the Joint Proxy
Statement is mailed to the Company's and the Purchaser's stockholders. The
Purchaser shall use its best efforts to cause each person who is identified as
an Affiliate of the Purchaser to execute and deliver to the Company a Voting
Agreement substantially in the form attached hereto as Exhibit within ten
(10) days from the date that the Joint Proxy Statement is mailed to the
Company's and the Purchaser's stockholders.
3.16. Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to the Purchaser, and the Purchaser shall give prompt notice to the
Company, of (i) the occurrence or nonoccurrence of any event, the occurrence or
nonoccurrence of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time (as defined below), and (ii) any material
failure of the Company or the Purchaser, as the case may be, to comply with or
satisfy any
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<PAGE>
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 3.16 shall not cure such breach or non-compliance or limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
3.17 Election to the Purchaser Board of Directors. The Purchaser shall
--------------------------------------------
take such action as is necessary to cause the size of its Board of Directors to
increase to ten (10) persons, six (6) of which shall be: Douglas L. Becker, R.
Christopher Hoehn-Saric, William Pollock (or his designee), Nasser Kazeminy (or
his designee), Sam Yau and the designee of Educational Testing Services. Of the
remaining four (4) persons, three (3) will be selected by the Company from the
Company's existing Board of Directors and the final person will be selected by
the Purchaser from the Purchaser's existing Board of Directors. It is
understood that the Purchaser may decide to eliminate its classified Board of
Directors in connection with the Merger, in which event each director would
serve a one year term. However, if the Purchaser decides to maintain its
classified Board of Directors, the Company's nominees and Sam Yau shall be
elected to serve for varying terms corresponding to each of the three classes of
directors such that not more than two Company nominees are included in any one
class.
3.18 Registration Statement on Form S-3. As soon as practicable after the
----------------------------------
end of the thirtieth day following the Effective Date, but in no event later
than 90 days following the Effective Date, the Purchaser shall file with the
Commission a Registration Statement on Form S-3 (the "Form S-3") relating to the
shares of the Purchaser Common Stock issued in respect of those shares of
Company Common Stock issued upon conversion of the Debentures in the fall of
1995 which remain subject to an effective registration statement on Form S-3
filed with the SEC by the Company (the "Debenture Shares"). Further, the
Purchaser shall take all steps reasonably necessary to maintain the
effectiveness of the Form S-3 until such time as the holders of such Debenture
Shares are permitted to sell such Debenture Shares without regard to the volume
restrictions under Rule 144 or Rule 145 under the Securities Act.
3.19 Amendment to Indenture. Each of the Purchaser and the Company will
----------------------
use its best efforts to cause the Trustee under the Indenture relating to the
Debentures to amend the Indenture, effective at the Effective Time, such that
the Purchaser assumes the rights and obligations of the Company thereunder.
3.20 Employment, Non-Compete and Continuity Agreements. The Company will
-------------------------------------------------
use its best efforts to cause each of Jerry Nine, Roy Sunley and James L'Allier
to have entered into employment agreements in form and substance satisfactory to
the Purchaser, which employment agreements shall include non-competition
agreements during and following termination or expiration of such employment
agreements and which shall be replacement agreements to the employment
agreements between said individuals and the Company or a Company Subsidiary.
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<PAGE>
3.21. Cause Conditions to be Satisfied. Each of the Purchaser and the
--------------------------------
Company will use its best efforts to cause all of the conditions described in
Section 5 of this Agreement to be satisfied (to the extent such matters
reasonably are within its control).
3.22. Publication of Combined Results of Operations. As soon as
---------------------------------------------
practicable after the end of the thirtieth day following the Effective Date, the
Purchaser shall publish results of operations of the Purchaser, including those
of the Company, for such 30 day period sufficient to permit Affiliates to make
sales of the Purchaser's Common Stock received in the Merger without adversely
affecting the pooling of interests accounting treatment for the Merger.
4. MERGER OF THE PURCHASER AND NEWCO. Subject to the terms and conditions
of this Agreement, the Purchaser and the Company agree to effect the following
transactions at the closing:
4.1. Conditions. The Purchaser and the Company will deliver to the other
----------
appropriate evidence of the satisfaction of the conditions to their respective
obligations hereunder.
4.2. Merger. The Merger shall have the effects set forth under the
------
General Corporation Law of Maryland and the DGCL. Without limiting the
generality of the foregoing and subject thereto, at the Effective Time (the time
immediately after which the Articles of Merger have been accepted for record by
the SDAT and the Certificate of Merger has been accepted for record by the
Delaware Secretary of State), Newco will be merged with and into the Company,
which shall survive the Merger; and all the properties, rights, privileges,
powers and franchises of the Company and Newco shall vest in the Company, as the
surviving corporation in the Merger, and all debts, liabilities and duties of
the Company and Newco shall become the debts, liabilities and duties of the
Company, as the surviving corporation in the Merger.
4.3. Conversion of the Shares of Company and Newco Common Stock. (a) As
----------------------------------------------------------
a result of the Merger and without any action by the holders thereof, each share
of Company Common Stock issued and outstanding immediately prior to the Merger
(excluding shares held by the Company as treasury stock, if any, which shares
shall be canceled and extinguished), and all rights in respect thereof, shall be
converted into 0.58 shares of Purchaser Common Stock (the "Exchange Ratio").
Each share of Purchaser Common Stock issued pursuant to the Merger shall be
fully paid and non-assessable. From and after the Effective Time, each
certificate which theretofore represented shares of Company Common Stock shall
evidence ownership of shares of Purchaser Common Stock on the basis hereinabove
set forth, and the conversion shall be complete and effective at the Effective
Time without regard to the date or dates on which outstanding certificates
representing converted shares of Company Common Stock may be surrendered for
exchange for certificates representing shares of Purchaser Common Stock.
(b) As a result of the Merger and without any action by the holders
thereof, each share of Newco Common Stock issued and outstanding immediately
prior to the
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<PAGE>
Merger, and all rights in respect thereof, shall be converted into one share of
Common Stock of the Company, as the surviving corporation in the Merger.
4.4. Fractional Shares. No fractional shares of Purchaser Common Stock
-----------------
will be issued in connection with the Merger. As a mechanical device for
rounding fractional interests to whole shares, in any case where the conversion
ratio provided for in Section 6.4 indicates that any holder of Company Common
Stock would otherwise be entitled to delivery of a fractional share of Purchaser
Common Stock, such holder shall be entitled to receive a cash payment with
respect to such fraction of a share to which such holder otherwise would be
entitled. Such cash payment shall be equal to the product obtained by
multiplying the fraction of a share to which the holder thereof otherwise would
be entitled by the average closing price of the Purchaser Common Stock on the
Nasdaq Stock Market (National Market) for the ten (10) trading days immediately
preceding the Effective Time.
4.5 Exchange of Shares of Company Common Stock.
------------------------------------------
(a) Prior to the Effective Time, the Purchaser shall designate a bank
or trust company reasonably acceptable to the Company to act as Exchange Agent
in connection with the Merger (the "Exchange Agent") pursuant to an exchange
agency agreement providing for the matters set forth in this Section 4.5, and
otherwise reasonably satisfactory to the Company. At or prior to the Effective
Time, the Purchaser shall deposit with the Exchange Agent certificates
representing the shares of the Purchaser Common Stock issuable pursuant to
Section 4.3 in exchange for the shares of Company Common Stock (the "Exchange
Fund").
(b) Promptly after the Effective Time, the Exchange Agent shall mail
to each record holder, as of the Effective Time, of an outstanding certificate
or certificates which immediately prior to the Effective Time represented shares
of the Company Common Stock (the "Certificates"), a form letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent) and instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of the Purchaser
Common Stock. Upon surrender to the Exchange Agent of a Certificate, together
with a duly executed letter of transmittal and any other required documents, the
holder of such Certificate shall receive in exchange therefor (as promptly as
practicable) a certificate representing that number of whole shares of Purchaser
Common Stock which such holder has the right to receive pursuant to this Section
4, and the Certificate so surrendered shall forthwith be canceled. If a
transfer of ownership of shares of Company Common Stock which was not previously
registered on the Company's transfer records occurs or is requested, a
certificate representing the appropriate number of shares of Purchaser Common
Stock may be issued to the transferee if the Certificate so surrendered is
properly endorsed or otherwise in proper form for transfer, provided that the
signatures on the Certificate or any related stock power shall be properly
guaranteed and the person requesting such transfer shall pay any transfer or
other taxes required by reason of such transfer. Until surrendered in
accordance with the provisions of this Section 4.5(b), each Certificate (other
than Certificates representing shares of Company Common Stock held in the
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<PAGE>
Company's treasury or by the Purchaser or any subsidiary of the Company or the
Purchaser, shall represent for all purposes only the right to receive for each
share of Company Common Stock represented thereby shares of Purchaser Common
Stock and cash in lieu of fractional shares, all as provided for under this
Agreement.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of the Purchaser of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Purchaser, they shall be canceled and
exchanged as provided for, and in accordance with the procedures set forth, in
this Section 4.
(d) From and after the Effective Time, the holders of Certificates
evidencing ownership of shares of Company Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
shares of Company Common Stock, except as otherwise provided herein or by
applicable law. Such holders shall have no rights, after the Effective Time,
with respect to such shares of Company Common Stock except to surrender such
Certificates in exchange for shares of Purchaser Common Stock as provided for
under this Agreement.
(e) Any portion of the Exchange Fund which remains undistributed to
the stockholders of the Company for one year after the Effective Time shall be
delivered to the Purchaser, upon demand, and any stockholders of the Company who
have not previously complied with this Section 4.5 shall thereafter look only to
the Purchaser for delivery of shares of Purchaser Common Stock, any cash in lieu
of fractional shares of Purchaser Common Stock and any dividends or
distributions with respect to Purchaser Common Stock (without interest thereon).
(f) Neither the Purchaser nor the Company shall be liable to any
holder of shares of Company Common Stock or Purchaser Common Stock, as the case
may be, for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
4.6. Issuance of Shares in Another Name. If any certificate for shares of
----------------------------------
Purchaser Common Stock is to be issued in a name other than the exact name in
which the certificate surrendered is exchange therefore is registered, it shall
be a condition of the issuance thereof that the certificate so surrendered shall
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange pay to the Exchange Agent any transfer or other
taxes required by reason thereof or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
4.7. The Company Transfer Books Closed and Stock Delisted. At the
----------------------------------------------------
Effective Time, the stock transfer books of the Company shall be deemed closed,
and no transfer of shares of Company Common Stock shall be made thereafter. The
Company shall notify the National Association of Securities Dealers, Inc. and
the New York Stock Exchange, Inc., and
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<PAGE>
each transfer agent and registrar for the shares of Company Common Stock, at
least ten (10) days before the Effective Time that no transfer of shares will be
made after that date. In anticipation of the Effective Time, the Company shall
do all such things necessary to cause trading in its shares to be terminated
simultaneously with the Effective Time.
4.8. Stock Options. From and after the Effective Time, the Company Options
-------------
and the option plans related thereto shall be deemed to have been adopted by the
Purchaser and shall continue thereafter as separate stock options and separate
stock option plans of the Company, subject to amendment or termination as
provided therein, and to the following: (i) the then outstanding options to
purchase shares of Company Common Stock under such stock option plans shall
relate, without change in their terms and conditions, to the number of shares of
Purchaser Common Stock into which such Company shares would have been
convertible if the Company Options had been exercised prior to the Effective
Time, rounded to the nearest whole share, (ii) such stock options plans shall
continue in effect only with respect to the Company Options then outstanding,
and no further grants shall be made thereunder, and (iii) the exercise period of
all Company Options that would otherwise terminate earlier shall be extended
until the later of 90 days following satisfaction of the covenant specified in
Section 3.20 or 90 days following registration of Purchaser's Common Stock
underlying the Company Options on the Commission's Form S-8. From and after the
Effective Time, the then outstanding stock options and related stock option
plans of NETG shall continue. Holders of such outstanding NETG options shall
execute individual agreements confirming such continuation of such outstanding
options and plans.
4.9. Adjustments. If after the date of this Agreement and prior to the
-----------
Effective Time the Purchaser shall declare a stock dividend upon, or subdivide,
split up, reclassify or combine the Purchaser Common Stock, and the record date
for such action shall occur prior to the Effective Time, then upon the
effectiveness of the Merger, the number of shares of Purchaser Common Stock to
be delivered for each share of Company Common Stock shall be adjusted so that
each holder of shares of Company Common Stock shall be entitled to receive such
number of shares of Purchaser Common Stock that it would own, or be entitled to
own, if the Effective Time had occurred immediately prior to the occurrence of
the record date for such event.
4.10. Charter and By-Laws. The Charter and By-Laws of Newco, both as in
-------------------
effect at the Effective Time, shall be the Charter and By-Laws of the Company
(as survivor of the Merger) after the Effective Time.
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<PAGE>
4.11. Executive Officers of Purchaser and Company. As of the
-------------------------------------------
Effective Time, the following persons shall constitute the officers of Purchaser
and Company in the capacities set forth below:
<TABLE>
<CAPTION>
<S> <C>
R. Christopher Hoehn-Saric -- Chairman of the Board
Douglas L. Becker -- President, Co-Chief Executive
Officer and Secretary
Sam Yau -- Co-Chief Executive Officer
B. Lee McGee -- Executive Vice President and
Chief Financial Officer
John K. Hoey -- Vice President, Human Resources
O. Steven Jones -- Vice President and General
Counsel
</TABLE>
4.12. Closing. The closing on the transactions contemplated by this
-------
Agreement shall take place at the offices of Piper & Marbury, Charles Center
South, 36 South Charles Street, Baltimore, Maryland 21201 beginning at 10:00
a.m. on the 2nd business day after the later of the Company's or the Purchaser's
stockholders meeting to act upon the Merger, or at such other time and place as
may be agreed upon by the Purchaser and the Company; provided, that if all of
the conditions specified in this Agreement have not been satisfied or waived as
of such date, the closing shall be postponed until two (2) business days
following the satisfaction or waiver of all of the conditions of this Agreement.
SECTION 5. CONDITIONS TO CONSUMMATION OF THE MERGER.
5.1 Conditions to Each Party's Obligations to Effect the Merger.
-----------------------------------------------------------
The respective obligations of each party hereto to effect the Merger is subject
to the satisfaction at or prior to the Effective Time of the following
conditions, any of which may be waived in writing by both the Company and the
Purchaser:
(a) Stockholder Approval. This Agreement and the Merger shall
--------------------
have received Purchaser Stockholder Approval and Company Stockholder Approval;
(b) No Illegality or Injunctions. No statute, rule,
----------------------------
regulation, executive order, decree, ruling, injunction or restraining order
shall have been enacted, entered, promulgated or enforced by any Governmental
Entity which prohibits, restrains, enjoins or restricts the consummation of the
Merger or materially limits the Purchaser's or the Company's conduct of its
business nor shall any proceedings brought by any Governmental Entity seeking
any of the foregoing be pending;
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<PAGE>
(c) Approvals. Other than the filings of the Articles of Merger and
---------
the Certificate of Merger, all authorizations, consents, orders or approvals of,
or declarations or filings with, or expirations of waiting periods imposed by,
any Governmental Entity or any individual, corporation or other entity the
failure of which to obtain would be reasonably likely to have a Material Adverse
Effect on the Purchaser or the Company shall have been filed, occurred or been
obtained.
(d) Pooling Letters. The Purchaser and the Company shall have
---------------
received letters from Ernst & Young LLP and Price Waterhouse, respectively, each
dated the date of the Joint Proxy Statement and confirmed in writing at the
Effective Time and addressed to the Purchaser and the Company, respectively,
stating that the business combination to be effected by the Merger will qualify
as a pooling of interests transaction under generally accepted accounting
principles.
(e) NASDAQ. The Listing Application for the shares of Purchaser
------
Common Stock to be issued in the Merger shall have been filed with and accepted
by the Nasdaq Stock Market (National Market).
(f) Accountants' Letter. The Purchaser shall have received a letter
-------------------
from Price Waterhouse relating to the Company, and the Company shall have
received a letter from Ernst & Young LLP relating to the Purchaser, each dated
the day of the mailing of the Joint Proxy Statement and reconfirmed as of the
date of the closing, with respect to their independence as accountants and the
compliance as to form of the financial statements of the respective companies
contained in the Joint Proxy Statement with generally accepted accounting
principles and the accounting requirements of the Securities Act and the
Exchange Act, and giving certain negative assurances based upon limited reviews
but not audits with respect to the unaudited financial statements (including pro
forma financial statements) included in or incorporated by reference into the
Joint Proxy Statement, in a manner consistent with the provisions of the
Association of Independent Certified Public Accountants' Statement on Auditing
Standards No. 38.
(g) Accuracy of Prospectus and Joint Proxy Statement . On and as of
-------------------------------------------------
the dates of the respective meetings of the stockholders of the Purchaser and
the Company at which action is to be taken on the transactions contemplated
hereby, the Joint Proxy Statement and prospectus included in the S-4 shall
contain no statement which, at the time and in light of the circumstances under
which it is made, is false or misleading with respect to any material fact, or
which omits to state any material fact necessary in order to make the statements
made therein not misleading.
(h) Effectiveness of S-4. The S-4 shall have become effective, and no
--------------------
stop order suspending its effectiveness shall have been issued and no
proceedings for that purpose shall have been instituted, pending or threatened.
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<PAGE>
5.2. Additional Conditions to Obligations of the Purchaser. The
-----------------------------------------------------
obligations of the Purchaser to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by the Purchaser:
(a) Representation and Warranties; Absence of Changes. The
-------------------------------------------------
representations and warranties of the Company set forth in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date) as of the Effective Time as though made on and as of the Effective
Time, except for (i) changes contemplated by this Agreement and (ii) where the
failure to be so true and correct would not be reasonably likely to have a
Material Adverse Effect on the Company or a material adverse effect upon the
consummation of the transactions contemplated hereby. Since the date of this
Agreement, there shall have been no change in the business, results of
operations, financial condition or business prospects of the Company or the
Company Subsidiaries that is having, has had or reasonably could be expected to
have a Material Adverse Effect on the Corporation. The Purchaser shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer and the Chief Financial Officer of the Company to the foregoing effect,
it being understood that such certificates are being delivered by them in their
capacities as officers of the Company and that such individuals assume no
personal liability with respect thereto.
(b) Performance of Obligations of the Company. The Company shall
-----------------------------------------
have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time; and the Purchaser
shall have received a certificate signed on behalf of the Company by the Chief
Executive Officer and the Chief Financial Officer of the Company to such effect,
it being understood that such certificates are being delivered by them in their
capacities as officers of the Company and that such individuals assume no
personal liability with respect thereto.
(c) Blue Sky Laws. The Purchaser shall have received all state
-------------
securities or "blue sky" permits and other authorizations necessary to issue
shares of the Purchaser Common Stock pursuant to the Merger.
(d) Opinion of the Company's Counsel. The Purchaser shall have
--------------------------------
received the opinion of Irell & Manella LLP, counsel to the Company, in form and
substance reasonably satisfactory to the Purchaser and its counsel, to the
effect that: (i) the Company and each of the Company Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation, and each has full
corporate power to carry on its business as it is now being conducted and to own
or hold under lease the properties and assets it now owns or holds under lease;
(ii) the Company and each of the Company Subsidiaries are duly qualified to do
business in all jurisdictions where the character of their respective properties
or the nature of their respective activities makes such qualification necessary
and where the failure to qualify would be materially adverse to the Company or
the Company Subsidiaries, individually; (iii) to the actual best knowledge of
such counsel, the authorized, issued and outstanding capital stock of the
Company and the Company
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<PAGE>
Subsidiaries are as set forth in Section 2.2 of this Agreement and the Company
Disclosure Schedule or in such opinion, and to the actual best knowledge of such
counsel, each of the issued and outstanding shares of such stock has been duly
authorized and issued and is fully paid and non-assessable; (iv) the execution,
delivery and performance of this Agreement and all other documents to be
executed by the Company in connection with this Agreement (the "Company
Documents") have been duly authorized and approved by all requisite action of
the Board of Directors and stockholders of the Company, and this Agreement and
all other Company Documents have been duly executed and delivered by the Company
and constitute valid and legally binding obligations of the Company; (v) the
execution and delivery of this Agreement and the other Company Documents did
not, and the consummation of the transactions contemplated hereby or thereby
will not, violate any provision of any agreement, instrument, order, judgment or
decree, of which such counsel has actual knowledge, to which the Company or any
of the Company Subsidiaries is a party or by which it is bound; (vi) the holders
of the Company Common Stock are not entitled to statutory appraisal rights under
Section 262 of the DGCL; (vii) except as may be specified by such counsel, such
counsel does not know of any material suit or proceeding pending or threatened
against or affecting the Company or the Company Subsidiaries, its business or
properties or the consummation of the transactions contemplated hereunder;
(viii) the Articles of Merger and Certificate of Merger have been duly
authorized by all requisite action of the Board of Directors and stockholders of
the Company, have been duly executed and delivered by the Company and, upon the
filing thereof with the SDAT and the Secretary of State of the State of
Delaware, will be valid and effective as a statutory merger of the Purchaser and
the Company, in accordance with the terms thereof; (ix) all regulatory and
governmental approvals, consents and filings required of the Company and the
Company Subsidiaries for the consummation of the transactions contemplated by
this Agreement or any of the other Company Documents have been obtained or made,
and, to the best knowledge of such counsel, all such approvals, consents or
filings remain in full effect as of the date of such opinion; (x) the Joint
Proxy Statement complies as to form in all material respects with the
requirements of the Exchange Act and the applicable Rules and Regulations of the
Commission thereunder, except that such counsel need express no opinion as to
any financial statements, schedules and other financial or statistical
information included therein or as to any information relating to or supplied by
the Purchaser for inclusion therein; and (xi) to such further effect regarding
the validity and sufficiency of legal proceedings and matters relative to the
transactions contemplated by this Agreement as the Purchaser may reasonably
request. In rendering such opinion, such counsel may rely upon the opinion of
the Company's in-house counsel and may limit its opinion to matters of federal
law, the law of the State of California or the DGCL.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that the S-4, the Joint Proxy Statement, any
document incorporated by reference thereto or any amendment or supplement to any
of the foregoing, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading (except that such counsel need
express no view as to financial statements, schedules and other financial or
statistical information included or
-46-
<PAGE>
incorporated by reference therein or as to any information relating to or
supplied by the Purchaser for inclusion therein). With respect to such matters,
such counsel may state that their belief is based solely upon the actual
knowledge of lawyers at such firm who are actively involved in legal matters
involving the Company, but without independent check and verification.
(e) Fairness Opinion. The fairness opinion delivered to the
----------------
Purchaser's Board of Directors by Alex. Brown & Sons Incorporated in accordance
with Section 1.26 shall not have been withdrawn.
(f) Employment, Non-Compete and Continuity Agreements. The prior
-------------------------------------------------
employment agreements between the Company or any of the Company Subsidiaries and
each of Sam Yau, Anita Kopec, Gary Keisling and Charles Moran shall have been
terminated in such a manner that no such person shall be entitled to any
severance payments on account of the Merger. Additionally, each of Messrs. Yau,
Keisling and Moran and Ms. Kopec shall have entered into replacement employment
agreements in form and substance satisfactory to the Purchaser, which employment
agreements shall include non-competition agreements during and following
termination or expiration of such employment agreements. Keith Ogata and Philip
Maynard shall have entered into continuity agreements in form and substance
satisfactory to the Purchaser with respect to continuation of their right to
benefits under the Company's SERP Plan and other benefits theretofore provided
to such individuals by the Company.
(g) SERP Change of Control Provisions. Subject to more specific
---------------------------------
provisions that may be contained in the employment and continuity agreements to
be entered into pursuant to Section 5.2(f): (i) Purchaser and the Company agree
that the condition in Section 8 of the Company's SERP Plan that a participant's
employment with the Company must be terminated voluntarily or involuntarily
within two years of a change of control in order to receive accelerated vesting
and payout of SERP retirement benefits will be waived for those Company SERP
participants who are currently active employees of the Company or a Company
subsidiary and who otherwise would be entitled to accelerated vesting if they
did terminate their employment within two years of a change of control; (ii)
SERP participants who remain employees after the Merger will be entitled to
payment of SERP retirement benefits, with interest from the Effective Time, only
when their employment terminates and (iii) there shall be no further accrual of
additional benefits under the Company's SERP Plan from and after the Merger.
(h) Steck-Vaughn Options. Steck-Vaughn Publishing Company and Anita
--------------------
Kopec shall have amended the option agreements between them so that the options
thereunder shall not vest as a result of the Merger.
(i) Benefit Plans. The Company shall have taken or caused to be taken
-------------
all steps and actions reasonably required by the Purchaser, on advice of its
counsel, with respect to the termination or amendment of Company Employee Plans,
including delivering notices and filing such documents as counsel to the
Purchaser deems reasonably necessary.
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<PAGE>
(j) Kaleidoscope Inc. The Company shall have obtained a letter of
----------------
credit, performance bond or other substantial evidence of financial security, in
each instance in form and substance reasonably acceptable to Purchaser,
regarding performance obligations of Kaleidoscope Inc. to the Company.
(k) Tax Opinion. The Purchaser shall have received the opinion of
-----------
Ernst & Young L.L.P., in form and substance reasonably satisfactory to the
Purchaser, to the effect that the Merger will be treated for Federal income tax
purposes as a tax-free reorganization within the meaning of Section 368(a) of
the Code.
5.3. Additional Conditions to Obligations of the Company. The obligation
---------------------------------------------------
of the Company to effect the Merger is subject to the satisfaction of each of
the following conditions, any of which may be waived, in writing, exclusively by
the Company:
(a) Representations and Warranties; Absence of Changes. The
--------------------------------------------------
representations and warranties of the Purchaser set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and (except to the extent such representations speak as of an earlier
date) as of the Effective Time as though made on and as of the Effective Time,
except for (i) changes contemplated by this Agreement and (ii) where the failure
to be so true and correct would not be reasonably likely to have a Material
Adverse Effect on the Purchaser or a Material Adverse Effect upon the
consummation of the transactions contemplated hereby. Since the date of this
Agreement, there shall have been no change in the business, results of
operations, financial condition or business prospects of the Purchaser that is
having, has had or reasonably could be expected to have a Material Adverse
Effect on Sylvan. The Company shall have received a certificate signed on
behalf of the Purchaser by the chief executive officer and the chief financial
officer of the Purchaser to the foregoing effect, it being understood that such
certificates are being delivered by them in their capacities as officers of the
Purchaser and that such individuals assume no personal liability with respect
thereto.
(b) Performance of Obligations of the Purchaser. The Purchaser shall
-------------------------------------------
have performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time; and the Company
shall have received a certificate signed on behalf of the Purchaser by the Chief
Executive Officer and the Chief Financial Officer of the Purchaser to such
effect, it being understood that such certificates are being delivered by them
in their capacities as officers of the Purchaser and that such individuals
assume no personal liability with respect thereto.
(c) Tax Opinion. The Company shall have received the opinion of Irell
-----------
& Manella LLP, counsel to the Company, in form and substance reasonably
satisfactory to the Company, to the effect that the Merger will be treated for
Federal income tax purposes as a tax-free reorganization within the meaning of
Section 368 (a) of the Code.
(d) Opinion of the Purchaser's Counsel. The Company shall have
----------------------------------
received the opinion of Piper & Marbury L.L.P., counsel to the Purchaser, in
form and substance
-48-
<PAGE>
reasonably satisfactory to the Company and its counsel, to the effect that: (i)
the Purchaser and each of the Purchaser Subsidiaries are corporations duly
organized, validly existing and in good standing under the laws of their
respective jurisdictions of incorporation, and each has full corporate power to
carry on its business as it is now being conducted and to own or hold under
lease the properties and assets it now owns or holds under lease; (ii) the
Purchaser and each of the Purchaser Subsidiaries are duly qualified to do
business in all jurisdictions where the character of their respective properties
or the nature of their respective activities makes such qualification necessary
and where the failure to qualify would be materially adverse to the Purchaser or
the Purchaser Subsidiaries, individually; (iii) to the actual best knowledge of
such counsel, the authorized, issued and outstanding capital stock of the
Purchaser and the Purchaser Subsidiaries are as set forth in Section 1.2 of this
Agreement and the Purchaser Disclosure Schedule or in such opinion, and to the
actual best knowledge of such counsel, each of the issued and outstanding shares
of such stock has been duly authorized and issued and is fully paid and non-
assessable; (iv) the execution, delivery and performance of this Agreement and
all other documents to be executed by the Purchaser in connection with this
Agreement (the "Purchaser Documents") have been duly authorized and approved by
all requisite action of the Board of Directors and stockholders of the
Purchaser, and this Agreement and all other Purchaser Documents have been duly
executed and delivered by the Purchaser and constitute valid and legally binding
obligations of the Purchaser; (v) the execution and delivery of this Agreement
and the other Purchaser Documents did not, and the consummation of the
transactions contemplated hereby or thereby will not, violate any provision of
any agreement, instrument, order, judgment or decree, of which such counsel has
actual knowledge, to which the Purchaser or any of the Purchaser Subsidiaries is
be a party or by which it is bound; (vi) except as may be specified by such
counsel, such counsel does not know of any material suit or proceeding pending
or threatened against or affecting the Purchaser or the Purchaser Subsidiaries,
its business or properties or the consummation of the transactions contemplated
hereunder; (vii) the Articles of Merger and Certificate of Merger have been duly
authorized by all requisite action of the Board of Directors and stockholders of
the Purchaser, have been duly executed and delivered by the Purchaser and, upon
the filing thereof with the SDAT and the Secretary of State of the State of
Delaware, will be valid and effective as a statutory merger of the Purchaser and
the Company, in accordance with the terms thereof; (viii) all regulatory and
governmental approvals, consents and filings required of the Purchaser and the
Purchaser Subsidiaries for the consummation of the transactions contemplated by
this Agreement or any of the other Purchaser Documents have been obtained or
made, and, to the best knowledge of such counsel, all such approvals, consents
or filings remain in full effect as of the date of such opinion; (ix) the S-4
and the Joint Proxy Statement comply as to form in all material respects with
the requirements of the Securities Act and the Exchange Act, respectively, and,
in each case, to the applicable Rules and Regulations of the Commission
thereunder, except that such counsel need not express an opinion as to any
financial statements, schedules and other financial or statistical information
included therein or as to any information relating to or supplied by the Company
for inclusion therein; and (x) to such further effect regarding the validity and
sufficiency of legal proceedings and matters relative to the transactions
contemplated by this Agreement as the Company may reasonably
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request. In rendering such opinion, such counsel may rely upon Purchaser's in-
house counsel and may limit its opinion to matters of federal law, the law of
the State of Maryland or the DGCL.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that the S-4, the Joint Proxy Statement, any
document incorporated by reference thereto or any amendment or supplement to any
of the foregoing, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading (except that such counsel need
express no view as to financial statements, schedules and other financial or
statistical information included or incorporated by reference therein or as to
any information relating to or supplied by the Company for inclusion therein).
With respect to such matters, such counsel may state that their belief is based
solely upon the actual knowledge of lawyers at such firm who are actively
involved in legal matters involving the Purchaser, but without independent check
and verification.
(e) Fairness Opinion. The fairness opinion delivered to the Company's
----------------
Board of Directors by BZW in accordance with Section 2.26 shall not have been
withdrawn.
SECTION 6. TERMINATION AND AMENDMENT
6.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time (with respect to Sections 6.1(b) through 6.1(g), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company or the Purchaser:
(a) by mutual written consent of the Purchaser and the Company; or
(b) by either the Purchaser or the Company if the Merger shall not
have been consummated by September 30, 1997 (provided that the right to
terminate this Agreement under this Section 6.1(b) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Merger to occur on or before such
date); or
(c) by either the Purchaser or the Company, if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, except, if the party relying on such order, decree or ruling or other
action has not complied with its obligations under this Agreement; or
(d) by the Purchaser or the Company, if at the Company Stockholders'
Meeting (including any adjournment or postponement), the requisite vote of the
stockholders of the Company in favor of this Agreement and the Merger shall not
have been obtained, or if at the Purchaser Stockholders' Meeting (including any
adjournment or postponement), the requisite
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<PAGE>
vote of the stockholders of the Purchaser in favor of the Purchaser Voting
Proposal shall not have been obtained; or
(e) by the Purchaser, if (i) the Board of Directors of the Company
shall have withdrawn or modified its recommendation of this Agreement or the
Merger, or shall have resolved to do any of the foregoing, for any reason other
than the occurrence of an event relating to Sylvan which has a Material Adverse
Effect on Sylvan, or (ii) the Company fails to call and hold the Company
Stockholders' Meeting within forty (40) days after the Commission declares the
S-4 effective;
(f) by the Company, if (i) the Board of Directors of the Purchaser
shall have withdrawn or modified its recommendation of the Purchaser Voting
Proposal or shall have resolved to do any of the foregoing, for any reason other
than the occurrence of an event relating to the Company which has a Material
Adverse Effect on the Company or (ii) the Purchaser fails to call and hold the
Purchaser Stockholders' Meeting within forty (40) days after the Commission
declares the S-4 effective;
(g) by the Purchaser or the Company, as the case may be, if there has
been a material breach of any representation, warranty, covenant or agreement on
the part of the other party set forth in this Agreement, which breach shall not
have been cured in the case of a representation or warranty, prior to the
Closing or, in the case of a covenant or agreement, within 20 business days
following receipt by the breaching party of written notice of such breach from
the other party.
(h) by the Purchaser or the Company if the average last sale price for
the Purchaser's Common Stock, as reported by NASDAQ, for the ten (10) trading
days ending on the last trading day before the agreed upon Effective Time (the
"Average Share Price") shall be less than $29.86, provided however, that the
Company may not terminate this Agreement pursuant to this Paragraph (h) if the
Purchaser shall agree at the Effective Time to revise the Exchange Ratio to
equal the quotient of (i) $29.86 multiplied by the Exchange Ratio divided by
(ii) the Average Share Price.
6.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 6.1, this Agreement shall immediately become void and
there shall be no liability or obligation on the part of the Purchaser or the
Company or their respective officers, directors, stockholders or Affiliates,
except as set forth in Section 6.3 and further except to the extent that such
termination results from the willful breach by a party of any of its
representations, warranties or covenants set forth in this Agreement; provided
that, the provisions of Sections 3.4(b), 3.13 and 6.3 of this Agreement shall
remain in full force and effect and survive any termination of this Agreement.
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6.3. Fees and Expenses.
-----------------
(a) Except as set forth in this Section 6.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that the Purchaser and the Company
shall share equally all fees and expenses, other than attorneys' fees, incurred
in relation to the printing and filing of the Joint Proxy Statement (including
any related preliminary materials) and the S-4 (including financial statements
and exhibits) and any amendments or supplements. The Purchaser shall pay the
filing fees applicable to the S-4, and the Company shall pay the fees applicable
to the Proxy Statement.
(b) As reimbursement for expenses incurred by the Purchaser relating
to the transactions contemplated by this Agreement prior to termination and as
liquidated damages for the Purchaser's having terminated this Agreement (it
being understood that actual damages would be difficult, if not impossible to
determine with certainty in the event of such termination), the Company shall
pay the Purchaser a fee equal to:
(i) $30,000,000 upon the termination of this Agreement by the
Purchaser pursuant to Section 6.1(e).
(ii) $10,000,000 upon the termination of this Agreement by the
Purchaser pursuant to (A) Section 6.1(d) as a result of the failure to receive
the requisite vote for approval of this Agreement and the Merger by the
stockholders of the Company at the Company Stockholders' Meeting or (B) pursuant
to Section 6.1(g) after a material breach by the Company of this Agreement;
provided, however, in the event the Company shall have consummated an
Acquisition Transaction in which the Company or substantially all of its assets
are acquired (even if the acquisition is structured so that the Company or one
of its subsidiaries is the survivor in the transaction) by a party other than
the Purchaser or any of its affiliates (in any case, a "Third Party
Acquisition") at any time on or before the expiration of eight calendar months
from the Purchaser's termination under clauses (A) and (B) of this paragraph
6.3(b)(ii), the Company shall, or shall cause its successor to pay the Purchaser
an additional amount of liquidated damages equal to $20,000,000.
(c) As reimbursement for expenses incurred by the Company relating to
the transactions contemplated by this Agreement prior to termination and as
liquidated damages for the Company's having terminated this Agreement (it being
understood that actual damages would be difficult, if not impossible to
determine with certainty in the event of such termination), the Purchaser shall
pay the Company a fee equal to $10,000,000 upon the termination of this
Agreement by the Company pursuant to (i) Section 6.1(d) as a result of the
failure to receive the requisite vote for approval of this Agreement and the
Merger by the stockholders of the Purchaser at the Purchaser Stockholders'
Meeting or (ii) pursuant to Section 6.1(g) after a material breach by the
Purchaser of this Agreement.
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<PAGE>
(d) The expenses and fees, if applicable, payable pursuant to
Sections 6.3(b) and 6.3(c) shall be paid within five business days after the
first to occur of the events described therein; provided that, in no event shall
the Company (or its successor) or the Purchaser, as applicable, be required to
pay any expenses or termination fees, if applicable, to the other party, if,
immediately prior to the termination of this Agreement, the terminating party
was in breach of any of its material obligations under this Agreement. The
payments provided in this Section 6.3 shall be the exclusive remedy for any
breach of this Agreement.
6.4. Amendment. This Agreement may be amended by action taken by the
---------
Company and the Purchaser at any time before or after Purchaser Stockholder
Approval or Company Stockholder Approval but, after any such approval, no
amendment shall be made which requires the further approval of such shareholders
under applicable law without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of the parties
hereto.
6.5. Extension; Waiver. At any time prior to the Effective Time, each
-----------------
party hereto may but shall not be required to (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties of the other party
contained herein or in any document, certificate or writing delivered pursuant
hereto, or (iii) waive compliance by the other party with any of the agreements
or conditions contained herein. Any agreement on the part of either party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, and the failure of either
party hereto to assert any of its rights hereunder shall not constitute a waiver
of such rights absent such instrument in writing.
SECTION 7. MISCELLANEOUS
7.1. Nonsurvival of Representations and Warranties. The representations
---------------------------------------------
and warranties and agreements made herein shall not survive beyond the Effective
Time, except those contained in Sections 4, 3.14, 3.20, and 6.3(a).
7.2. Entire Agreement; Assignment. This Agreement (a) constitutes the
----------------------------
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof;
(b) except as provided in Sections 3.14, 3.15 and 3.19, is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder; and (c) shall not be assigned by operation of law or otherwise.
7.3. Validity. If any provision of this Agreement, or the application
--------
thereof to any person or circumstance, is held invalid or unenforceable, the
remainder of this Agreement, and the application of such provision to other
persons or circumstances, shall not be affected thereby, and to such end, the
provisions of this Agreement are agreed to be severable.
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<PAGE>
7.4. Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile
by reputable overnight express delivery service or by registered or certified
mail (postage prepaid, return receipt requested), to the other party as follows:
If to the Purchaser: Sylvan Learning Systems, Inc., 1000 Lancaster
Street, Baltimore, Maryland 21202, Attention: B. Lee McGee, with a copy to
Richard C. Tilghman, Jr., Esquire, Piper & Marbury L.L.P., 36 South Charles
Street, Baltimore, Maryland 21201.
If to the Company: National Education Corporation, 2601 Main Street,
Irvine, California 92714, Attention: Philip C. Maynard, Esquire, Vice
President, Secretary and General Counsel, with a copy to Alvin G. Segel,
Esquire, Irell & Manella LLP, 1800 Avenue of the Stars, Suite 500, Los
Angeles, CA 90067;
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
7.5. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of law thereof.
7.6. Descriptive Headings. The descriptive headings herein are inserted
--------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
7.7. Parties in Interest. This Agreement shall be binding upon and inure
-------------------
solely to the benefit of each party hereto and its successors and permitted
assigns, and except as provided in Sections 7.2, nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
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<PAGE>
7.8. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
SYLVAN LEARNING SYSTEMS, INC.
/s/
---------------------------------
By:
Title:
NATIONAL EDUCATION CORPORATION
/s/
---------------------------------
By:
Title:
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<PAGE>
ANNEX II: ALEX. BROWN & SONS INCORPORATED OPINION
March 12, 1997
Sylvan Learning Systems, Inc.
1000 Lancaster St.
Baltimore, MD 21202
Dear Members of the Board of Directors:
Sylvan Learning Systems, Inc. ("Sylvan" or the "Company") and National
Education Corporation ("NEC"), a Delaware Corporation, have entered into an
Agreement and Plan of Reorganization dated as of March 12, 1997 (the
"Agreement"). Pursuant to the Agreement, the implementation of which is
contingent on approval by both Sylvan's and NEC's stockholders, Sylvan and NEC
will combine their companies through a merger of a newly formed subsidiary of
Sylvan into NEC (the "Merger"). As a result of the Merger, each share of NEC
common stock issued and outstanding immediately prior to the effective time of
the Merger will be converted into 0.58 shares (the "Exchange Ratio") of common
stock of Sylvan. We have assumed, with your consent, that the Merger will
qualify for pooling-of-interests accounting treatment and as a tax free
reorganization for federal income tax purposes. You have requested our opinion
as to whether the Exchange Ratio is fair, from a financial point of view, to
Sylvan.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
Sylvan in connection with the transaction described above and will receive a fee
for our services, a portion of which is contingent upon the consummation of the
Merger and a portion of which becomes payable upon the delivery of this opinion.
We have acted as financial advisor to Sylvan in the past in connection with
various capital raising transactions and other matters, including serving as the
lead-managing underwriter in the December, 1993 initial public offering of the
common stock of Sylvan, as the lead managing underwriter in the December, 1995
follow-on offering of the common stock of Sylvan, and as financial advisor to
Sylvan in its December, 1995 acquisition of Drake Prometric, L.P. Alex. Brown
maintains a market in the common stock of Sylvan and regularly publishes
research reports regarding the educational services industry and the businesses
and securities of Sylvan and other publicly owned companies in the educational
services industry. In the ordinary course of business, Alex. Brown may actively
trade the securities of both the Company and NEC for our own account and the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning Sylvan and NEC
and certain internal analyses and other information furnished to us by Sylvan
and NEC. We have also held discussions with the members of the senior
managements of Sylvan and NEC regarding the businesses and prospects of their
respective companies and the joint prospects of a combined company. In
addition, we have (i) reviewed the reported prices and trading activity for the
common stock of both Sylvan and NEC, (ii) compared certain financial and stock
market information for Sylvan and NEC with similar information for certain other
companies in the educational services industry whose securities are publicly
traded, (iii) reviewed the financial terms of certain recent business
combinations in the educational services industry, (iv) reviewed the terms of
the Agreement, and (v) performed such other studies and analyses and considered
such other factors as we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of Sylvan
and NEC, we have assumed that such information reflects the best currently
available judgments and
<PAGE>
estimates of the managements of Sylvan and NEC as to the likely future financial
performances of their respective companies and of the combined entity. In
addition, we have not made nor been provided with an independent evaluation or
appraisal of the assets or liabilities of Sylvan and NEC, nor have we been
furnished with any such evaluations or appraisals. Our opinion is based on
market, economic and other conditions as they exist and can be evaluated as of
the date of this letter.
Our advisory services and the opinion expressed herein were prepared solely
for the use of the Board of Directors of Sylvan and do not constitute a
recommendation to any stockholder as to how such stockholder should vote in
connection with the Merger. We hereby consent, however, to the inclusion of
this opinion in its entirety as an exhibit to any proxy or registration
statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of view,
to Sylvan.
Very truly yours,
/s/ SCOTT A. WIELER
----------------------------------------
ALEX. BROWN & SONS INCORPORATED
<PAGE>
ANNEX III: BZW OPINION
March 12, 1997
Board of Directors
National Education Corporation
2601 Main Street/Suite 700
Irvine, CA 92614
Members of the Board of Directors:
You have asked our opinion with respect to the fairness to holders of National
Education Corporation ("NEC") common stock ("NEC Common Stock"), from a
financial point of view and as of the date hereof, of the exchange ratio (the
"Exchange Ratio") of .580 shares of Sylvan Learning Systems, Inc. ("Sylvan")
common stock ("Sylvan Common Stock") for each issued and outstanding share of
NEC Common Stock in the Merger described below, pursuant to the Agreement and
Plan of Reorganization, dated as of March 12, 1997, by and between NEC and
Sylvan (the "Agreement").
Under the terms of the Agreement, a wholly-owned subsidiary of Sylvan will merge
with and into NEC (the "Merger"), and upon consummation of the Merger, NEC will
become a wholly-owned subsidiary of Sylvan and the holders of NEC Common Stock
will become holders of Sylvan Common Stock. As a result of the Merger, each
issued and outstanding share of NEC Common Stock will be converted into .580 of
one fully paid and nonassessable share of Sylvan Common Stock. Outstanding
options to acquire NEC Common Stock will be converted into options to acquire
Sylvan Common Stock on similar terms. The Merger is intended to qualify as a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended. The terms and conditions of the Merger are
set out more fully in the Agreement.
For purposes of this opinion we have: (i) reviewed financial information on NEC
and Sylvan furnished to us by both companies, including certain internal
financial analyses and forecasts prepared by the management of NEC and Sylvan;
(ii) reviewed publicly available information with respect to each of NEC and
Sylvan; (iii) held discussions with the senior management of NEC and Sylvan
concerning the businesses, past and current business operations, financial
condition and future prospects of both companies, independently and combined;
(iv) reviewed the stock price and trading history of NEC and Sylvan; (v)
reviewed the valuations of publicly traded companies which we deemed comparable
to NEC and Sylvan; (vi) compared the financial terms of the Merger with other
transactions which we deemed relevant; (vii) analyzed the pro forma earnings per
share of the combined company; (viii) prepared discounted cash flow analyses of
NEC and Sylvan; (ix) reviewed the Agreement; and (x) made such other studies and
inquiries, and reviewed such other data, as we deemed relevant.
In connection with our opinion, we have not, however, independently verified any
of the foregoing information and have relied on all such information being
complete and accurate in all material respects. Furthermore, we did not obtain
any independent appraisal of the properties or assets and liabilities of NEC or
Sylvan. With respect to the financial and operating forecasts of NEC and Sylvan
which we have reviewed, we have assumed that such forecasts have been reasonably
prepared in good faith on the basis of reasonable assumptions, reflect the best
available estimates and judgments of such respective managements and that such
projections and forecasts will be realized in the amounts and in the time
periods currently estimated by the managements of NEC and Sylvan. We have also
assumed that the Merger will be accounted for as a "pooling of interests" under
generally accepted accounting
1
<PAGE>
principles. This opinion is necessarily based upon market, economic, and other
conditions that exist and can be evaluated as of the date of this letter, and on
information available to us as of the date hereof. We are not expressing any
opinion as to what the value of Sylvan Common Stock actually will be when issued
to NEC shareholders pursuant to the Merger or the price at which Sylvan Common
Stock will trade subsequent to the Merger.
BZW has provided certain investment banking and corporate banking services to
NEC from time to time, and has received fees for those services. Furthermore,
BZW has acted as financial advisor to NEC in connection with the Merger for fees
which are due and payable contingent upon the closing of the Merger.
Our opinion is directed to the Board of Directors of NEC and is not intended to
be and does not constitute a recommendation to any stockholder of NEC as to how
such stockholder should vote on the proposed Merger.
Based upon and subject to the foregoing considerations, it is our opinion that,
as of the date hereof, the Exchange Ratio is fair to holders of NEC Common Stock
from a financial point of view.
Very truly yours,
BZW
A division of Barclays Bank PLC
By: /s/ Richard J. Adubato
-----------------------
Richard J. Adubato
Director
2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Section 2-418 of the Corporations and Associations Article of the
Annotated Code of Maryland permits a corporation to indemnify its present and
former directors, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their services in
those or other capacities, unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to such
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty; or (b) the director or officer actually received an
improper personal benefit in money, property, or services; or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Maryland law permits a corporation to
indemnify a present and former officer to the same extent as a director, and to
provide additional indemnification to an officer who is not also a director. In
addition, Section 2-418(f) of the Corporations and Associations Article of the
Annotated Code of Maryland permits a corporation to pay or reimburse, in advance
of the final disposition of a proceeding, reasonable expenses (including
attorney's fees) incurred by a present or former director or officer made a
party to the proceeding by reason of his service in that capacity, provided that
the corporation shall have received (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the corporation; and (b) a written undertaking
by or on his behalf to repay the amount paid or reimbursed by the corporation if
it shall ultimately be determined that the standard of conduct was not met.
The Registrant has provided for indemnification of directors, officers,
employees, and agents in Article Eighth, Section (5) of its charter, as amended.
This provision reads as follows:
(5) The Corporation shall indemnify (a) its directors to the
full extent provided by the general laws of the State of Maryland now
or hereafter in force, including the advance of expenses under the
procedures provided by such laws; (b) its officers to the same extent
it shall indemnify its directors; and (c) its officers who are not
directors to such further extent as shall be authorized by the Board
of Directors and be consistent with law. The foregoing shall not limit
the authority of the Corporation to indemnify other employees and
agents consistent with law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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 of 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.
(b) Under Maryland law, a corporation is permitted to limit by provision
in its articles of incorporation the liability of directors and officers, so
that no director or officer of the corporation shall be liable to the
corporation or to any stockholder for money damages except to the extent that
(i) the director or officer actually received an improper benefit in money,
property, or services, for the amount of the benefit or profit in money,
property or services actually received, or (ii) a judgment or other final
adjudication adverse to the director or officer is entered in a proceeding based
on a finding in the proceeding that the director's or officer'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.
II-1
<PAGE>
The Registrant's charter and by-laws provide that to the fullest extent
permitted by Maryland statutory or decisional law, as amended or interpreted, no
director or officer of this Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment of the charter
of the Corporation or repeal of any of its provisions shall limit or eliminate
the benefits provided to directors and officers under this provision with
respect to any act or omission which occurred prior to such amendment or repeal.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
2. Agreement and Plan of Reorganization dated as of
March 12, 1997 by and among Sylvan Learning
Systems, Inc. and National Education Corporation.***
3.1. Amended and Restated Articles of Incorporation of
Sylvan Learning Systems, Inc., together with
amendments thereto.*
3.2. Amended and Restated By-Laws of Sylvan Learning
Systems, Inc.*
5. Opinion of Piper & Marbury L.L.P. regarding
Legality of Shares.**
8. Opinion of Ernst & Young LLP regarding Tax
Matters.**
20.1. Form of Proxy Card for Annual Meeting of the
Stockholders of Sylvan Learning Systems, Inc.**
20.2. Form of Proxy Card for Special Meeting of the
Stockholders of National Education Corporation.**
23.1. Consent of Ernst & Young LLP.
23.2. Consent of BZW, a division of Barclays Bank
23.4. Consent of Price Waterhouse LLP.
23.5. Consent of Piper & Marbury L.L.P.
23.6. Consent of Sam Yau.
23.7. Consent of David C. Jones.
23.8. Consent of Michael R. Klein.
23.9. Consent of Richard C. Blum.
24. Powers of Attorney (included on signature page).
_____________
* Incorporated by reference to previous SEC filings of Registrant.
** To be filed by amendment.
*** Incorporated by reference to Annex I to Joint Proxy Statement/
Prospectus forming a part of this Registration Statement.
ITEM 22. 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, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
II-2
<PAGE>
or in the aggregate, represent a fundamental change in the
information set forth in the 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;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that are incorporated by
reference in the registration statement.
(2) That for the purpose of determining any liability under the
Securities Act, 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) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, 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 Act and will
be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement or amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Baltimore, State of
Maryland, on April 17, 1997.
SYLVAN LEARNING SYSTEMS, INC.
By: /s/R. Christopher Hoehn-Saric,
---------------------------------------
R. Christopher Hoehn-Saric,
Chairman of the Board and Co-Chief
Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints R. Christopher Hoehn-Saric and Douglas L. Becker
(with full power to each of them to act alone) as his true and lawful attorney-
in-fact and agent, with full power of substitution, for him and in his name,
place and stead in any and all capacities to sign any or all amendments or post-
effective amendments to this Registration Statement, including post-effective
amendments filed pursuant to Rule 462(b) of the Securities Act of 1933, as
amended, and to file the same with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, to sign any
and all applications, registration statements, notices or other document
necessary or advisable to comply with the applicable state securities laws, and
to file the same, together with all other documents in connection therewith,
with the appropriate state securities authorities, granting unto said attorneys-
in-fact and agents or any of them, or their or his substitute or substitutes,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, thereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Christopher Hoehn-Saric Co-Chief Executive Officer and Chairman of the April 17, 1997
- --------------------------------
R. Christopher Hoehn-Saric Board of Directors (Principal Executive Officer)
/s/ Douglas L. Becker Co-Chief Executive Officer President, Secretary April 17, 1997
- --------------------------------
Douglas L. Becker and Director
/s/ B. Lee McGee Chief Financial Officer (Principal Financial and April 17, 1997
- --------------------------------
B. Lee McGee Accounting Officer)
/s/ Donald V. Berlanti Director April 17, 1997
- --------------------------------
Donald V. Berlanti
/s/ R. William Pollock Director April 17, 1997
- --------------------------------
R. William Pollock
/s/ J. Phillip Samper Director April 17, 1997
- --------------------------------
J. Phillip Samper
/s/ Nancy A. Cole Director April 17, 1997
- --------------------------------
Nancy A. Cole
/s/ James H. McGuire Director April 17, 1997
- --------------------------------
James H. McGuire
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT DOCUMENT NUMBERED PAGE
- ------- -------- -------------
<S> <C> <C>
2. Agreement and Plan of Reorganization dated as of
March 12, 1997 by and among Sylvan Learning
Systems, Inc. and National Education Corporation.
***
3.1. Amended and Restated Articles of Incorporation
of Sylvan Learning Systems, Inc., together with
amendments thereto. *
3.2. Amended and Restated By-Laws of Sylvan Learning
Systems, Inc. *
5. Opinion of Piper & Marbury L.L.P. regarding
Legality of Shares. **
8. Opinion of Ernst & Young LLP regarding Tax
Matters. **
20.1. Form of Proxy Card for Annual Meeting of the
Stockholders of Sylvan Learning Systems, Inc. **
20.2. Form of Proxy Card for Special Meeting of the
Stockholders of National Education Corporation. **
23.1. Consent of Ernst & Young LLP.
23.2. Consent of BZW, a division of Barclays Bank
23.4. Consent of Price Waterhouse LLP.
23.5. Consent of Piper & Marbury L.L.P.
23.6. Consent of Sam Yau.
23.7. Consent of David C. Jones.
23.8. Consent of Michael R. Klein.
23.9. Consent of Richard C. Blum.
24. Powers of Attorney (included on signature page).
</TABLE>
_________________
* Incorporated by reference to previous SEC filings of Registrant.
** To be filed by amendment.
*** Incorporated by reference to Annex I to the Joint Proxy Statement/
Prospectus forming a part of this Registration Statement.
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Legal Matters and
Experts" in the Registration Statement (Form S-4 No. 333____) and related Joint
Proxy Statement/Prospectus of Sylvan Learning Systems, Inc. dated April 17, 1997
and to the incorporation by reference therein of our report dated February 27,
1997, with respect to the consolidated financial statements and schedule of
Sylvan Learning Systems, Inc. and subsidiaries included in its Annual Report
(Form 10-K) for the year ended December 31, 1996, filed with the Securities and
Exchange Commission.
Ernst & Young, LLP
/s/ Ernst & Young, LLP
Baltimore, Maryland
April 14, 1997
<PAGE>
Exhibit 23.2
April 17, 1997
Sylvan Learning Systems, Inc.
1000 Lancaster St.
Baltimore, MD 21202
Gentlemen:
We consent to the reference in the Joint Proxy Statement/Prospectus which forms
a part of this Registration Statement on Form S-4 of our name as financial
advisor to National Education Corporation and to the reference to and inclusion
in as an Annex to the Joint Proxy Statement/Prospectus of our financial opinion.
By giving such consent we do not thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"expert" as used in, or that we come within the category of persons whose
consent is required under, the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
BZW
A division of Barclays Bank PLC
/s/ Richard J. Adubato
- --------------------------
By: Richard J. Adubato
Director
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Sylvan Learning
Systems, Inc. of our report dated January 28, 1997, except as to Note 17, which
is as of March 12, 1997, appearing on page F-1 of National Education
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
Costa Mesa, California
April 16, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF PIPER & MARBURY L.L.P
We hereby consent to the reference to Piper & Marbury L.L.P. under the
heading "Legal Matters and Experts" in the Joint Proxy Statement/Prospectus that
forms a part of this Registration Statement on Form S-4.
PIPER & MARBURY L.L.P.
/s/ Piper & Marbury L.L.P.
April 17, 1997
<PAGE>
EXHIBIT 23.6
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Re: Consent Pursuant to Rule 438
----------------------------
Gentlemen:
I hereby consent to the use of my name and the description of my principal
occupation, directorships with public companies and other information in the
Registration Statement on Form S-4 being filed by Sylvan Learning Systems, Inc.
("Sylvan"), under the Securities Act of 1933, as amended (the "Registration
Statement"). Specifically, I acknowledge and agree (i) that such information
shall be disclosed in connection with "Proposals VII and VIII: Election of
Sylvan Board Nominees" of the Joint Proxy Statement/Prospectus of Sylvan and
National Education Corporation, which is a party of the Registration Statement
and (ii) that this consent shall be filed with the Registration Statement in
accordance with Securities Act Rule 438.
Very truly yours,
Sam Yau
------------------------------------
(Print name of Merger Nominee)
By: /s/ Sam Yau
---------------------------------
<PAGE>
EXHIBIT 23.7
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Re: Consent Pursuant to Rule 438
----------------------------
Gentlemen:
I hereby consent to the use of my name and the description of my principal
occupation, directorships with public companies and other information in the
Registration Statement on Form S-4 being filed by Sylvan Learning Systems, Inc.
("Sylvan"), under the Securities Act of 1933, as amended (the "Registration
Statement"). Specifically, I acknowledge and agree (i) that such information
shall be disclosed in connection with "Proposals VII and VIII: Election of
Sylvan Board Nominees" of the Joint Proxy Statement/Prospectus of Sylvan and
National Education Corporation, which is a party of the Registration Statement
and (ii) that this consent shall be filed with the Registration Statement in
accordance with Securities Act Rule 438.
Very truly yours,
David C. Jones
------------------------------------
(Print name of Merger Nominee)
By: /s/ David C. Jones
---------------------------------
<PAGE>
EXHIBIT 23.8
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Re: Consent Pursuant to Rule 438
----------------------------
Gentlemen:
I hereby consent to the use of my name and the description of my principal
occupation, directorships with public companies and other information in the
Registration Statement on Form S-4 being filed by Sylvan Learning Systems, Inc.
("Sylvan"), under the Securities Act of 1933, as amended (the "Registration
Statement"). Specifically, I acknowledge and agree (i) that such information
shall be disclosed in connection with "Proposals VII and VIII: Election of
Sylvan Board Nominees" of the Joint Proxy Statement/Prospectus of Sylvan and
National Education Corporation, which is a party of the Registration Statement
and (ii) that this consent shall be filed with the Registration Statement in
accordance with Securities Act Rule 438.
Very truly yours,
Michael R. Klein
----------------------------------
(Print name of Merger Nominee)
By: /s/ Michael R. Klein
-------------------------------
<PAGE>
EXHIBIT 23.9
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Re: Consent Pursuant to Rule 438
----------------------------
Gentlemen:
I hereby consent to the use of my name and the description of my principal
occupation, directorships with public companies and other information in the
Registration Statement on Form S-4 being filed by Sylvan Learning Systems, Inc.
("Sylvan"), under the Securities Act of 1933, as amended (the "Registration
Statement"). Specifically, I acknowledge and agree (i) that such information
shall be disclosed in connection with "Proposals VII and VIII: Election of
Sylvan Board Nominees" of the Joint Proxy Statement/Prospectus of Sylvan and
National Education Corporation, which is a party of the Registration Statement
and (ii) that this consent shall be filed with the Registration Statement in
accordance with Securities Act Rule 438.
Very truly yours,
Richard C. Blum
------------------------------------
(Print name of Merger Nominee)
By: /s/ Richard C. Blum
---------------------------------
