<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-31273
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SYLVAN LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MARYLAND 52-1492296
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1000 LANCASTER STREET
BALTIMORE, MARYLAND 21202
(410) 843-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DOUGLAS L. BECKER
PRESIDENT, CO-CHIEF EXECUTIVE OFFICER AND SECRETARY
SYLVAN LEARNING SYSTEMS, INC.
1000 LANCASTER STREET
BALTIMORE, MARYLAND 21202
(410) 843-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS
SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO:
RICHARD C. TILGHMAN, JR., ESQUIRE MICHAEL J. SILVER, ESQUIRE
JILL CANTOR NORD, ESQUIRE HOGAN & HARTSON L.L.P.
PIPER & MARBURY L.L.P. 111 SOUTH CALVERT STREET
36 SOUTH CHARLES STREET BALTIMORE, MARYLAND 21202
BALTIMORE, MARYLAND 21201 (410) 659-2700
(410) 539-2530
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C>
5,485,500 shares of Common Stock,
$.01 par value..................... $215,991,563(1) $65,452(1)
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</TABLE>
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(1) Includes 715,500 shares subject to an Underwriters' over-allotment option.
Calculated in accordance with Rule 457(c) of the Securities Act of 1933,
as amended based on the average of the high and low prices on July 25,
1997. Of this amount, $56,591 was paid on July 15, 1997.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<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 STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JULY 31, 1997
[LOGO OF SYLVAN LEARNING APPEARS HERE]
4,770,000 Shares
SYLVAN LEARNING SYSTEMS, INC.
Common Stock
--------
Of the 4,770,000 shares of Common Stock offered hereby, 1,464,821 shares are
being sold by Sylvan Learning Systems, Inc. ("Sylvan" or the "Company"),
435,492 shares are being sold upon exercise of options (the "Options") that are
being acquired by the Underwriters from certain selling option holders (the
"Selling Optionholders"), 18,396 shares are being sold upon exercise of
warrants (the "Warrants") that are being acquired by the Underwriters from
certain warrant holders (the "Selling Warrantholders") and 2,851,291 shares are
being sold by certain stockholders of the Company (the "Selling Stockholders"
and together with the Selling Optionholders and the Selling Warrantholders, the
"Selling Securityholders"). The Company will not receive any proceeds from the
sale of the Common Stock by the Selling Stockholders or the sale of the Options
or the Warrants by the Selling Optionholders and Selling Warrantholders, except
the aggregate exercise price therefor. See "Principal and Selling
Securityholders" and "Underwriting." The Common Stock is quoted on The Nasdaq
National Market under the symbol "SLVN." On July 30, 1997 the last sale price
for the Common Stock as reported on The Nasdaq National Market was $38.875 per
share. See "Price Range of Common Stock and Dividend Policy."
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISKS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE .
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1)(2) SECURITYHOLDERS(3)
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<S> <C> <C> <C> <C>
Per Share.............. $ $ $ (3)
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Total(4)............... $ $ $ $
</TABLE>
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(1) Before deducting offering expenses payable by the Company estimated at
$274,804.
(2) Excludes payment to the Company of the aggregate exercise price of the
Options and Warrants, equaling $1,445,074 and $59,622, respectively.
(3) Includes proceeds to the Selling Stockholders, aggregating $ , proceeds
to the Selling Optionholders, aggregating $ (weighted average per share
proceeds of $ ), and proceeds to the Selling Warrantholders, aggregating
$ (weighted average per share proceeds of $ ), before deducting
aggregate offering expenses payable by the Selling Securityholders
estimated at $225,196.
(4) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 415,500 and 300,000 additional shares of
Common Stock, respectively, to cover over-allotments, if any. To the extent
that the Underwriters' option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the Underwriters'
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Securityholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
Alex. Brown & Sons
INCORPORATED
Merrill Lynch & Co.
Montgomery Securities
Morgan Stanley Dean Witter
Smith Barney Inc.
Robertson, Stephens & Company
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission, including the reports
and other information incorporated by reference into this Prospectus, can be
inspected and copied at the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at rates
prescribed by the Commission or from the Commission's Internet web site at
http:// www.sec.gov. The Common Stock of the Company is quoted on The Nasdaq
National Market. Reports, proxy statements and other information concerning
the Company can be inspected at the offices of The Nasdaq Stock Market, 1735 K
Street, Washington, D.C. 20006. This Prospectus does not contain all the
information set forth in the Registration Statement of which this Prospectus
is a part and exhibits relating thereto which the Company has filed with the
Commission. Copies of such information and exhibits are on file at the offices
of the Commission and may be obtained from the Public Reference Section of the
Commission upon payment of the fees prescribed by the Commission and may be
examined without charge at the offices of the Commission or through the
Commission's Internet web site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0- 22844) pursuant to the 1934 Act are incorporated herein by reference: (i)
the Company's Annual Report on Form 10-K for the year ended December 31, 1996,
as amended by its Annual Report on Form 10-K/A (with Items 6, 7 and 8 thereof
having been superseded by the information contained in the Company's Current
Report on Form 8-K dated July 15, 1997); (ii) the Company's Current Reports on
Forms 8-K and 8-K/A dated January 28, 1997, relating to the Company's
acquisition of Wall Street Institute; (iii) the Company's Current Report on
Form 8-K/A dated March 12, 1997 relating to the termination of the Company's
Merger Agreement with National Education Corporation; (iv) the Company's
Current Reports on Forms 8-K and 8-K/A dated April 17, 1997 and May 30, 1997
relating to the Company's acquisition of I-R, Inc. and Independent Child Study
Teams, Inc. (collectively, "Educational Inroads"); (v) the Company's Current
Report on Form 8-K dated July 15, 1997 restating certain historical financial
information to reflect the acquisition of Educational Inroads; (vi) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997;
(vii) the description of Common Stock contained in Item 1 of the Company's
Registration Statement on Form 8-A, filed with the Commission under the 1934
Act; and (viii) all other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of filing of
the Registration Statement of which this Prospectus is a part and prior to the
termination of the offering made hereby.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of
any or all of the documents which have been incorporated herein by reference,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be directed to Sylvan Learning Systems, Inc., 1000 Lancaster Street,
Baltimore, Maryland 21202, Attention: Chief Financial Officer, telephone:
(410) 843-8000. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE COMMON STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON
STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN PERSONS PARTICIPATING IN THIS
OFFERING MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto
incorporated by reference into this Prospectus. Except as otherwise indicated,
all information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) is derived from the Company's Consolidated
Financial Statements and related Notes thereto included in the Company's
Current Report on Form 8-K dated July 15, 1997, which is incorporated by
reference herein.
THE COMPANY
Sylvan Learning Systems, Inc. (the "Company" or "Sylvan") is a leading
international provider of educational and testing services. The Company
delivers a broad array of supplemental and remedial educational services and
computer-based testing through three principal divisions. The Core Educational
Services division designs and delivers individualized tutorial services to
school-age children and adults at 642 franchised and Company-owned Sylvan
Learning Centers. Sylvan Prometric, the Company's testing services division,
administers computer-based tests for major organizations, corporations,
professional associations and governmental agencies through its worldwide
network of Testing Centers. The Contract Educational Services division provides
Sylvan's core educational services under federal and state funding programs to
more than 9,500 students in 86 public schools and more than 40,000 students in
846 non-public schools (including Educational Inroads) and provides on-site
educational and training services to employees of large corporations. Since
1994, the Company has substantially expanded its business through a combination
of internal growth and acquisitions and has increased revenue and operating
income from $68.7 million and $3.4 million, respectively, in 1994 to $181.9
million and $22.7 million, respectively, in 1996. Sylvan's 1996 systemwide
revenues were approximately $310.3 million, consisting of $165.1 million from
core educational services ($139.5 million from franchised Learning Centers and
$25.6 million from Company-owned Learning Centers, product sales and franchise
sales fees), $87.0 million from testing services and $58.2 million from
contract educational services.
Core Educational Services. The Company's Core Educational Services division
provides supplemental instruction in reading, mathematics and reading readiness
and features an extensive series of standardized diagnostic tests,
individualized instruction, a student motivational system and continued
involvement from both parents and the child's regular school teacher. As of May
31, 1997, the Company or its franchisees operated 642 Learning Centers in 49
states, five Canadian provinces, Hong Kong, South Korea and Guam, with 450
franchisees owning and operating 601 Sylvan Learning Centers and Sylvan owning
and operating 41 Learning Centers.
Sylvan Prometric Testing Services. As of May 31, 1997, Sylvan or its
authorized representatives operated 1,616 Testing Centers, 1,001 of which were
located in North America and the remainder in 95 foreign countries. The Company
enters into contracts directly with various professional licensure, educational
and information technology ("IT") businesses, organizations and agencies, under
which Sylvan receives a fee based upon the number of tests given for those
customers. Principal customers for the Company's testing services are
Educational Testing Services ("ETS") and, in the IT industry, Microsoft Corp.
("Microsoft") and Novell, Inc. ("Novell"). IT customers sponsor worldwide
certification programs for various professionals such as network administrators
and engineers, service technicians and instructors. Sylvan has been designated
as the exclusive commercial provider of computer-based tests administered by
ETS (excluding the SAT and PSAT) and operates 47 testing centers in 33
countries to facilitate delivery of international testing for ETS. The Company
also provides testing services for organizations responsible for licensing
broker-dealers, pilots, aviation mechanics, computer professionals and medical
laboratory technicians. Through the Company's December 1996 acquisition of Wall
Street Institute International B.V. and its affiliates ("Wall Street"), Sylvan
now provides live and computer-based
3
<PAGE>
English instruction and testing in Europe and Latin America through a network
of more than 180 franchised and Company-owned centers.
Contract Educational Services; PACE; Sylvan-At-Work; Caliber Learning
Network, Inc. Sylvan provides educational services under federal and various
state funding programs to students in 86 public and 846 non-public schools.
Sylvan provides educational and training services to large corporations
throughout the United States, including racial and gender workplace diversity
training and skills improvement programs such as writing, advanced reading,
listening and public speaking, through its wholly-owned subsidiary, The PACE
Group ("PACE"), and the Company's Sylvan-At-Work program. In November 1996,
Caliber Learning Network, Inc. was formed as a joint initiative of Sylvan and
MCI Telecommunications Corporation to become a worldwide distribution network
of professional education centers equipped with satellite-based video
conferencing and computer network capabilities. Sylvan currently owns a 10
percent interest in Caliber Learning Network and has the option to acquire a
majority interest in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital Resources."
The Company's principal executive offices are located at 1000 Lancaster
Street, Baltimore, Maryland 21202, (410) 843-8000.
RECENT DEVELOPMENTS
SECOND QUARTER AND SIX MONTHS
On July 24, 1997, the Company reported preliminary second quarter 1997
operating results. Total revenues increased 22% from $47.2 million in the
second quarter of 1996 to $57.6 million in the second quarter of 1997. Net
income increased 123% from $3.0 million in the second quarter of 1996 to $6.7
million in the second quarter of 1997. Earnings per share for the second
quarter of 1997 were $0.24 on 27.1 million weighted average fully diluted
shares outstanding compared to $0.12 for the second quarter of 1996 on 25.2
million weighted average fully diluted shares outstanding.
Total revenues for the six months ended June 30, 1997 increased 23% to $109.5
million, compared with revenues of $88.7 million for the same period of 1996.
Net income for the first six months of 1997 was $10.1 million, or $0.36 per
share, on 27.1 million weighted average fully diluted shares outstanding,
compared to net income of $4.8 million, or $0.19 per share, on 25.0 million
weighted average fully diluted shares outstanding, for the same period in 1996.
Following are selected unaudited preliminary results of operations for each
of the Company's business divisions on a consolidated basis, for the quarters
ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
QUARTERS ENDED
JUNE 30,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Core educational services.................................. $ 8,045 $10,755
Contract educational services.............................. 15,908 18,326
Testing services........................................... 23,259 28,516
------- -------
Total revenue............................................ $47,212 $57,597
======= =======
Direct Costs:
Core educational services.................................. $ 5,263 $12,607(1)
Contract educational services.............................. 14,717 15,713
Testing services........................................... 19,740 33,610(1)
------- -------
Total direct costs....................................... $39,720 $61,930(1)
======= =======
</TABLE>
- --------
(1) Includes certain of the charges described below in "--Second Quarter
Contributions."
EDUCATIONAL INROADS ACQUISITION
On May 30, 1997, Sylvan acquired privately-held I-R, Inc. and Independent
Child Study Teams, Inc. (collectively, "Educational Inroads") in exchange for
the issuance of 1,414,000 shares of Sylvan Common
4
<PAGE>
Stock (the "IR Shares") to the two Educational Inroads stockholders.
Educational Inroads provided remedial and special education services to public
and non-public school systems, with current contracts in New Jersey, Maryland,
Louisiana, Washington, D.C. and other school districts. Sylvan believes the
acquisition of Educational Inroads will provide Sylvan's Contract Educational
Services division with the critical mass necessary for long-term growth in the
public and non-public school markets in addition to providing expertise in
special education, bolstering Sylvan's capability to serve a wide range of
educational needs. The aggregate market value for the IR Shares was
approximately $50.0 million, based on the price of the Common Stock when the
acquisition was consummated. In 1996, Educational Inroads generated $24.8
million in revenues. See "Selected Consolidated Financial Data" and related
Notes thereto.
NATIONAL EDUCATION CORPORATION $30 MILLION TERMINATION FEE
In March 1997, Sylvan and National Education Corporation ("NEC") executed a
definitive agreement pursuant to which Sylvan was to acquire NEC. In May 1997,
NEC accepted the offer of Harcourt General, Inc. to acquire all of the stock
of NEC which resulted in the termination of NEC's agreement with Sylvan and
NEC's payment to Sylvan of the $30.0 million termination fee required by that
agreement (the "Termination Fee"). Sylvan recorded an approximately $4.0
million impairment loss for the Sylvan Prometric division as a result of
certain strategic decisions made in contemplation of the NEC acquisition.
Sylvan also incurred $1.5 million of expenses in connection with the NEC
transaction. As a result, Sylvan recorded other income of approximately $24.5
million relating to the Termination Fee in the second quarter of 1997.
SECOND QUARTER CONTRIBUTIONS
In the second quarter of 1997, Sylvan made certain cash expenditures and
Common Stock contributions resulting in an aggregate expense to the Company of
approximately $21.5 million. The $21.5 million of recorded expense was
attributable to Sylvan's contributions of (i) approximately $3.0 million in
cash and Common Stock valued at $7.0 million to a nonprofit corporation whose
sole purpose is to fund promotional and channel support programs for the
Sylvan Prometric division (which contribution was recorded as a direct cost of
the Testing services division), (ii) Common Stock valued at $5.0 million to a
nonprofit corporation whose sole purpose is to develop and fund advertising
programs for the Sylvan Learning Centers (which contribution was recorded as a
direct cost of the Core Educational services division) and (iii) Common Stock
valued at $6.5 million to Sylvan Learning Foundation, Inc., a newly-formed,
nonprofit foundation formed to promote various educational pursuits (which
contribution was recorded as a general and administrative expense).
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 1,464,821 shares
Common Stock offered by the Selling 3,305,179 shares
Securityholders...................................
Common Stock to be outstanding after the 29,591,694 shares
offering(1).......................................
Use of proceeds by the Company..................... For general corporate pur-
poses, including possible
acquisitions
Nasdaq National Market Symbol...................... SLVN
</TABLE>
- -------
(1) Includes the 435,492 shares issuable upon exercise of the Options and the
18,396 shares issuable upon exercise of the Warrants in this offering. See
"Underwriting". Excludes 4,283,182 shares issuable upon exercise of all
other warrants and stock options outstanding on July 11, 1997. See
"Capitalization."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PARTNERSHIP
AND SYLVAN
PARTNERSHIP COMBINED SYLVAN
------------ ------------ -----------------------------------------
YEAR ENDED YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------ ------------ ------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total revenues.......... $33,821 $51,519 $68,748 $111,059 $181,936 $41,506 $51,944
Operating income
(loss)................. (452) 1,208 3,362 4,829 22,732 3,014 5,353
Income (loss) from
continuing operations
before extraordinary
items(2)............... (1,061) (205) 3,448 3,571 14,796 1,779 3,447
Income (loss) from
discontinued
operations(3).......... (1,273) 205 -- -- -- -- --
Net income (loss)(4).... (2,334) (177) 3,448 3,571 14,796 1,779 3,447
Income (loss) from
continuing operations
per share(4)(5)........ $ (0.02) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12
Weighted average shares
outstanding(5)......... 12,967 16,533 17,386 24,996 24,901 27,207
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED(6)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and available-for-sale
securities........................................... $ 23,519 $79,131
Net working capital................................... 40,228 95,840
Intangible assets and deferred contract costs......... 120,948 120,948
Total assets.......................................... 260,380 315,992
Long-term debt and capital leases..................... 22,524 22,524
Stockholders' equity.................................. 201,880 257,492
</TABLE>
- --------
(1) Prior to February 1, 1991, the Sylvan Learning Centers business was
conducted by Sylvan Learning Corporation (the "Predecessor"). On February
1, 1991, the Predecessor contributed the Sylvan Learning Centers business
to Sylvan KEE Systems, a Maryland general partnership (the "Partnership")
in exchange for a 50% partnership interest, and Sylvan contributed its
computer training software development business to the Partnership in
exchange for the other 50% partnership interest. On January 26, 1993,
Sylvan acquired the Predecessor and dissolved the Partnership. On September
3, 1993, Sylvan sold its computer training software development business.
During 1994, Sylvan acquired by mergers all of the outstanding stock of
Learning Services, Inc. ("LSI") and Loralex Corporation ("Loralex"). These
companies owned and operated a total of nine Sylvan Learning Centers located
in the Northeast United States and Florida. On February 17, 1995, Sylvan
acquired by merger all of the outstanding stock of Remedial Education and
Diagnostic Services, Inc. and READS, Inc. (collectively, "READS"), a
Philadelphia-based provider of remedial education and a variety of consulting
services to school districts, county-wide educational agencies and
municipalities in the Eastern United States. The READS, Loralex and LSI
acquisitions have been accounted for by Sylvan as poolings-of-interests and,
accordingly, Sylvan's financial statements have been restated for all periods
presented to include the results of operations of READS, Loralex and LSI.
Effective September 30, 1995 Sylvan acquired Drake Prometric, L.P. ("Drake"),
a leading provider of computer-based certification, licensure and assessment
testing. The transaction was accounted for using the purchase method of
accounting, and Sylvan's results of operations from October 1, 1995 include
the operations of Drake.
Effective December 1, 1996, Sylvan acquired Wall Street, a European-based
franchisor and operator of learning centers that teach the English language.
This transaction was accounted for using the purchase method of accounting
and Sylvan's results of operations from December 1, 1996 include the
operations of Wall Street. Sylvan paid $4.9 million of the $20.1 million
purchase price in cash and the remainder in 714,884 shares of Common Stock.
On May 30, 1997, the Company consummated its acquisition by merger of all of
the outstanding stock of Educational Inroads. Educational Inroads provided
contract educational services to school districts in New Jersey and several
other states. The Educational Inroads acquisition was accounted for by Sylvan
as a pooling-of-interests and, accordingly, Sylvan's financial statements
have been restated for all periods prior to the acquisition to include the
results of operations, financial position and cash flows of Educational
Inroads.
(2) Extraordinary items include a $350,000 gain on extinguishment of a $3.5
million debt to Learning Centers, Inc., and a $527,000 loss on an
extinguishment of $5.0 million of notes payable to stockholders, each
recorded in 1993.
(3) Represents Sylvan's computer training software development business, sold
in September 1993, and a Canadian computer training business, 80.1% of
which was sold in 1992.
(4) Reducing compensation expense relating to Educational Inroads stockholders
to reflect their post-acquisition contractual compensation levels and
eliminating non-recurring merger costs would result in pro forma net income
and net income per share of $16,266,000 and $0.65, respectively, in 1996
and $4,017,000 and $0.14, respectively in the first quarter of 1997. See
Note 3 to the Company's Consolidated Financial Statements incorporated by
reference herein.
(5) All share and per share data have been restated to retroactively reflect a
3-for-2 stock split of the Company's Common Stock for stockholders of
record on November 7, 1996.
(6) Adjusted for the sale of the 1,464,821 shares of Common Stock offered by
the Company hereby (at an assumed public offering price of $38.875 per
share), aggregate proceeds of approximately $1.5 million from the exercise
of 435,492 options and 18,396 warrants being offered by the Selling
Securityholders and application of the net proceeds therefrom. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the
Common Stock. This Prospectus contains certain forward-looking statements.
Actual results could differ materially from those projected in the forward-
looking statements as a result of any number of factors, including the risk
factors set forth below and elsewhere in this Prospectus.
Risks Associated with Acquisition Strategy. A primary element of the
Company's growth strategy is to continue to pursue strategic acquisitions that
expand and complement the Company's businesses. The Company regularly reviews
various strategic acquisition opportunities and periodically engages in
discussions regarding such possible acquisitions. Currently, the Company is
not a party to any agreements, understandings, arrangements or negotiations
regarding any material acquisitions; however, as the result of the Company's
process of regularly reviewing acquisition prospects, negotiations may occur
from time to time if appropriate opportunities arise. There can be no
assurance that the Company will be able to identify additional acquisition
candidates on terms favorable to the Company or in a timely manner, enter into
acceptable agreements or close any such transactions. There can also be no
assurance that the Company will be able to continue its acquisition strategy,
and any failure to do so could have a material adverse effect on the Company's
business, financial condition, results of operations and ability to sustain
growth. In addition, the Company believes that it will compete for attractive
acquisition candidates with other larger companies, consolidators or investors
in the educational services industry. Increased competition for such
acquisition candidates could have the effect of increasing the cost to the
Company of pursuing this growth strategy or could reduce the number of
attractive candidates to be acquired. Future acquisitions could divert
management's attention from the daily operations of the Company and otherwise
require additional management, operational and financial resources. Moreover,
there is no assurance that the Company will successfully integrate businesses
acquired in the future into its business or operate such acquired businesses
profitably. Acquisitions also may involve a number of additional risks
including: adverse short-term effects on the Company's operating results;
dependence on retaining key personnel; amortization of acquired intangible
assets; and risks associated with unanticipated problems, liabilities or
contingencies.
The Company may require additional debt or equity financing to fund any
future acquisitions, which may not be available on terms favorable to the
Company, if at all. To the extent the Company uses its capital stock for all
or a portion of the consideration to be paid for future acquisitions, dilution
may be experienced by existing shareholders, including the purchasers of
Common Stock in this offering. In the event that the Company's capital stock
does not maintain sufficient value or potential acquisition candidates are
unwilling to accept the Company's capital stock as consideration for the sale
of their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to continue its acquisition program. If the
Company does not have sufficient cash resources or is unable to use its
capital stock as consideration for acquisitions, its growth through
acquisitions could be limited.
Dependence on Profitable Franchise Operations; Dependence on Franchisees for
Technology Centers. More than 90% of Sylvan Learning Centers are currently
operated by franchisees. Sylvan's revenues from franchised Learning Centers
depend on the franchisees' ability to operate their Learning Centers
profitably and adhere to Sylvan's standards. Although Sylvan has a quality
review process, it cannot be certain that franchisees will conduct their
operations profitably or in accordance with Sylvan's guidelines. The closing
of unprofitable Learning Centers or the failure of franchisees to comply with
Sylvan policies could adversely affect Sylvan's reputation and business
prospects.
If Sylvan is unable to attract new franchisees meeting its standards or to
convince existing franchisees to open additional Learning Centers, any growth
in royalties from franchised Learning Centers will depend solely upon
increases in revenues at existing Learning Centers.
7
<PAGE>
Importance of Computer-Based Testing. A significant amount of the growth in
Sylvan's revenues and profits is expected to result from computer-based
testing services. The termination, nonrenewal or material modification of
Sylvan's NASD testing contracts, Sylvan's contracts with ETS, Novell or
Microsoft or any other significant agreements to provide computer-based
testing services would have a material adverse effect on Sylvan's results of
operations and prospects for growth. Sylvan only began providing computer-
based testing services in late 1991, and there can be no assurance that
computer-based testing will receive sufficient market acceptance to cause test
administrators to continue to offer computer-based tests or convert additional
tests to computer-based versions in the near future. Furthermore, there can be
no assurance that events beyond the control of both Sylvan and test
administrators, such as testing security concerns, will not reduce or limit
market acceptance of computer-based testing or discourage test administrators
from continuing to offer computer-based tests or converting additional tests
to a computer-based format.
Limited Title I Market for Federal-Funded Contract Services; Possible
Opposition to Services; Legislative Reauthorization of Title I. The majority
of Sylvan's contracts contain provisions for cancellation by school district
officials based on certain factors, including funding constraints. There can
be no assurance that contracts with existing school districts will be renewed
or that Sylvan will obtain contracts with other school districts. The market
for Sylvan's Title I (defined below) services is effectively limited to the
nation's larger school districts, in which the population of students eligible
for Title I services and per- pupil Title I expenditures make Sylvan's
services cost-effective. Many educators and policy makers have criticized the
"pullout" approach, whereby Title I or similar services are provided in a
separate classroom during regular school hours. This approach is the method
currently prescribed by the Baltimore City Schools, as well as by other school
districts in which Sylvan currently provides Title I services, and also is the
method prescribed by many other school districts that are potential clients of
Sylvan. School districts to which Sylvan now provides educational services
under contract may decide not to renew existing contracts, and other school
districts may decide not to use Sylvan's services because government agencies,
parents and collective bargaining units representing teachers and aides may
oppose Sylvan's Title I or similar programs based on the nature of Sylvan's
teaching method or the potential threat to teacher and aide employment.
Enactment of the Improving America's Schools Act of 1994 reauthorized the
Chapter I program for an additional five years, effective July 1, 1995, under
the name Title I of the Elementary and Secondary Education Act ("Title I").
Title I includes at least three substantive changes which potentially could
have a material adverse effect on Sylvan. First, Title I provides greater
impetus for school districts to implement schoolwide programs aimed at
boosting achievement of disadvantaged children by improving a school's overall
program. Sylvan currently provides "pullout" as opposed to schoolwide
services. Second, Title I may reduce the reliance of school districts on
standardized tests as a means of measuring student performance by requiring
states to develop and apply assessments involving multiple measures of student
performance. Sylvan's services now include the provision of standardized tests
to measure student performance. Third, Title I may cause reductions in the
extent of services available to disadvantaged students attending non-public
schools. Sylvan cannot accurately predict the likely impact these substantive
changes will have on Sylvan's contracts to provide Title I services or
Sylvan's ability to have those contracts renewed or its ability to enter into
contracts with additional school districts.
Impact of Recent Supreme Court Decision on Title I Services for Non-Public
School Students. On June 23, 1997, the Supreme Court, in Agostini v. Felton,
held that under Title I the provision of supplemental, remedial instruction to
disadvantaged children on the premises of sectarian schools by government
employees does not violate the Establishment Clause of the First Amendment.
The Court thus expanded the range of permissible means for delivering
publicly-funded services to students attending religious schools, by allowing
public teachers and counselors to provide such services. In light of the
Agostini decision, school districts may decide not to use the Company's
services because school districts may be able to provide similar services at a
lower cost.
8
<PAGE>
Dependence on Key Personnel. The Company is dependent in large part on the
experience and knowledge of key personnel including R. Christopher Hoehn-Saric
and Douglas L. Becker (Co-Chief Executive Officers), B. Lee McGee (Chief
Financial Officer) and the Presidents of its three operating divisions. The
loss of services of these key individuals could have a material adverse effect
on the Company. The success of the Company is also dependent upon the
continued service of, and its ability to attract and retain highly qualified
technical, marketing, sales and management personnel. The competition for such
personnel is intense. The failure to recruit and retain additional or
substitute key personnel in a timely manner could have an adverse effect on
the performance of the Company. Sylvan maintains an aggregate of $4.5 million
of key man life insurance for each of Messrs. Hoehn-Saric and Becker and $3.0
million of key man life insurance for Mr. McGee.
Competition. There is significant and increasing competition in the
computer-based testing and remedial, supplemental, distance learning and
professional education marketplaces. In addition, an increasing number of
private, for-profit organizations, public and non-public schools, and existing
colleges and universities are establishing or may hereafter establish their
own supplemental education programs. Many of these organizations have greater
financial resources than the Company.
Certain Litigation. The Company is the defendant in a legal proceeding
pending in the United States District Court for the Northern District of Iowa,
Civil Action No. C96-334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa
nonprofit corporation formerly known as American College Testing Program, Inc.
("ACT"). ACT's claim arises out of the Company's acquisition of the rights to
administer testing services for the NASD. ACT has asserted that the Company
tortiously interfered with ACT's relations, contractual and quasi-contractual,
with the NASD, caused ACT to suffer the loss of its advantageous economic
prospects with the NASD and other ACT clients and that the Company has
monopolized and attempted to monopolize the computer-based testing services
market. ACT has claimed unspecified amounts of compensatory, treble and
punitive damages, as well as injunctive relief. If ACT were awarded
significant compensatory or punitive damages, it could materially adversely
affect the Company's results of operations and financial condition.
Additionally, if ACT were granted significant injunctive relief, Sylvan may be
required to dispose, limit expansion or curtail existing operations, of its
Sylvan Prometric division, which, in turn, would materially adversely affect
its results of operations and financial condition. The Court has entertained
oral arguments relating to the Company's motion to dismiss this litigation but
has not yet ruled on this motion, and minimal discovery has been conducted.
The Company believes that all of ACT's claims are without merit, but it is
unable to predict the outcome of the ACT litigation at this time. Regardless
of the outcome, should the litigation continue for a significant period of
time, a material level of management attention and cash resources of the
Company could be diverted to resolve this matter.
Limitations from Franchise Regulation. Sylvan is subject to federal and
state laws regulating the offer and sale of franchises. These laws impose
registration and extensive disclosure requirements on the offer and sale of
franchises. These laws frequently apply substantive standards to the
relationship between franchisor and franchisee and limit the ability of a
franchisor to terminate or refuse to renew a franchise. State franchise laws
may delay or prevent Sylvan from terminating a franchise or withholding
consent to renewal or transfer of a franchise, and Sylvan may, therefore, be
required to retain a poorly performing franchisee and may be unable to replace
the franchisee, which could have an adverse effect on franchise royalties. In
addition, the nature and effect of any future legislation or regulation on
Sylvan's franchise operations cannot be predicted.
Risks Associated With International Sales and Currency Exchanges. As a
result of the acquisition of Drake and Wall Street a significant portion of
the Company's revenues are generated outside the United States. Conducting
business outside of the United States is subject to certain risks, including
longer payment cycles, unexpected changes in regulatory requirements and
tariffs, difficulties in staffing and managing foreign operations and greater
difficulty in accounts receivable collection. Moreover, gains and losses on
the conversion to U.S. dollars of accounts receivable not denominated in U.S.
dollars and
9
<PAGE>
accounts payable arising from international operations may in the future
contribute to fluctuations in the Company's business and operating results.
Variability of Quarterly Operating Results. The Company's revenues and
operating results have varied substantially from quarter to quarter and will
continue to vary, depending upon the timing of implementation of new computer-
based testing contracts or new contracts funded under Title I or similar
programs. Based on the Company's limited experience, revenues generated by
computer-based testing services may vary based on the frequency or timing of
delivery of individual tests and the speed of test administrators' conversion
of tests to computer-based versions. Revenues or profits in any period will
not necessarily be indicative of results in subsequent periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Reliance on Significant Customers. Testing services provided to ETS, and
Microsoft and Novell collectively, accounted for approximately 10.8% and
20.2%, respectively, of total revenues in 1996 and approximately 9.8% and
18.7%, respectively, of total revenues in the first quarter of 1997. The
Company believes that a substantial portion of its total revenues will
continue to be derived from ETS and Microsoft. The Company's contract with ETS
to provide domestic testing services expires in 1999. The Company's contract
with Microsoft expires in July 1999, although currently the contract requires
annual price evaluations by both parties. Failure to renew these contracts on
terms favorable to the Company or termination of these contracts would have a
material adverse effect on the Company's results of operations.
Potential Effect of Shares Eligible for Future Sale on Price of Common
Stock. Upon consummation of this offering, 29,591,694 shares of Common Stock
will be outstanding. The 4,770,000 shares sold in this offering (other than
shares that may be purchased by affiliates of the Company) and 14,429,910 of
the remaining outstanding shares will be freely tradeable unless acquired by
affiliates of the Company. The remaining 10,391,784 outstanding shares may be
resold publicly only following their registration under the Securities Act of
1933, as amended (the "Securities Act"), or pursuant to an available exemption
from registration (such as provided by Rule 144 following a one year holding
period for previously unregistered shares). The Company has agreed to register
approximately 1,400,000 of these shares within the next 90 days and, in
addition, approximately 700,000 of such shares by the end of 1997. In
addition, upon completion of this offering, the Company will have outstanding
options to purchase up to a total of 4,283,182 shares of Common Stock and
50,000 shares reserved for issuance under its Employee Stock Purchase Plan,
virtually all of which shares are registered under the Securities Act for
public resale. After their issuance, these shares generally will be freely
tradeable by persons not affiliated with the Company unless the Company
contractually restricts their resale. Sales, or the availability for sale of
substantial amounts of the Common Stock in the public market could adversely
affect prevailing market prices and the future ability of the Company to raise
equity capital and complete any additional acquisitions for Common Stock.
All directors and executive officers and certain other stockholders of the
Company who hold in the aggregate 6,678,305 shares of Common Stock, including
outstanding options, have agreed not to sell or otherwise dispose of any of
their shares for a period of 90 days after the date of this Prospectus without
the prior written consent of Alex. Brown & Sons Incorporated. Alex. Brown &
Sons Incorporated may, in its sole discretion, at any time and without notice,
release all or any portion of the Common Stock subject to these lock-up
agreements.
No Dividends. Sylvan has never declared or paid cash dividends. Sylvan
currently expects to retain its earnings for its business and does not
anticipate paying dividends at any time in the foreseeable future. The
decision whether to apply legally available funds to the payment of dividends
on its Common Stock will be made by the Board of Directors from time to time
in the exercise of its business judgment, as permitted by the Company's credit
facilities.
Potential Effects of Certain Anti-Takeover Provisions. Certain provisions of
Sylvan's Charter and By-Laws may have the effect of making more difficult an
acquisition of Sylvan in a transaction that is not
10
<PAGE>
approved by its Board of Directors. For example, the Board of Directors can
issue up to 10,000,000 shares of Preferred Stock in one or more series,
without further authorization of its stockholders, and Sylvan has a classified
Board of Directors. In September 1996, the Sylvan Board of Directors adopted a
shareholders rights plan. These Charter and By-Laws provisions and adoption of
the shareholders rights plan may have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control of Sylvan
even though such an attempt might be economically beneficial to Sylvan and its
stockholders.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,464,821 shares of the
Common Stock being offered hereby are estimated to be approximately $54.1
million ($69.5 million if the Underwriters' over-allotment option is exercised
in full), assuming a public offering price of $38.875 per share. The Company
will also receive aggregate proceeds of approximately $1.5 million from the
exercise of the Options and the Warrants in this offering. The Company will
use the net proceeds from this offering for general corporate purposes, which
may include the acquisition of complementary businesses. From time to time,
the Company evaluates possible acquisitions, but is not currently considering
any specific acquisition. The Company intends to invest substantially all of
the net proceeds from this offering in interest-bearing, investment-grade
obligations pending application thereof in the manner described above. The
Company will not receive any proceeds from the sale of the Common Stock being
offered by the Selling Securityholders other than the aggregate proceeds from
the exercise of the Options and the Warrants.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has traded on The Nasdaq National Market since
its initial public offering on December 9, 1993. Its trading symbol is SLVN.
The high and low trade prices for 1995, 1996 and the first three quarters of
1997 (through July 14) for the Common Stock are set out in the following
table. These prices are as reported by Nasdaq, and reflect inter-dealer price
quotations, without retail mark-up, mark down or commission and may not
necessarily represent actual transactions. All amounts reported have been
retroactively restated to reflect the effects of a 3-for-2 stock split which
occurred in November 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
1st Quarter................................................. $13.17 $11.17
2nd Quarter................................................. $14.33 $11.09
3rd Quarter................................................. $21.67 $14.33
4th Quarter................................................. $21.17 $15.33
1996
1st Quarter................................................. $26.17 $18.00
2nd Quarter................................................. $27.50 $21.33
3rd Quarter................................................. $27.50 $18.67
4th Quarter................................................. $33.00 $24.25
1997
1st Quarter................................................. $37.12 $24.04
2nd Quarter................................................. $37.06 $23.14
3rd Quarter (through July 30)............................... $41.50 $32.63
</TABLE>
The Company has never paid dividends and does not anticipate paying
dividends in the foreseeable future. Payment of dividends is generally
prohibited under the Company's existing credit facilities.
12
<PAGE>
CAPITALIZATION
The following table sets forth: (i) the actual total short-term debt and
total capitalization of the Company on March 31, 1997; and (ii) such actual
short-term debt and capitalization as adjusted to reflect the sale by the
Company of 1,464,821 shares of Common Stock offered hereby (assuming a public
offering price of $38.875 per share), after deducting the underwriting
discount and estimated offering expenses, the aggregate proceeds from the
exercise of the Options and the Warrants and application of the net proceeds
therefrom. This table should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes thereto and other
financial information incorporated by reference in this Prospectus. See "Use
of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt...................... $ 3,056 $ 3,056
Other short-term debt.................................. 250 250
-------- --------
Total short-term debt................................ $ 3,306 $ 3,306
======== ========
Long-term debt(1)........................................ $ 19,468 $ 19,468
Stockholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding ......... -- --
Common Stock, $0.01 par value; 40,000,000 shares
authorized; 24,993,707 shares issued and outstanding
actual; 26,912,416 shares issued and outstanding
actual as adjusted(2)................................. 250 269
Additional paid-in capital............................. 187,551 243,144
Unrealized losses on available-for-sale securities..... (11) (11)
Foreign currency translation adjustments............... (358) (358)
Retained earnings...................................... 14,448 14,448
-------- --------
Total stockholders' equity........................... 201,880 257,492
-------- --------
Total capitalization............................... $221,348 $276,960
======== ========
</TABLE>
- --------
(1) Includes an $8.1 million liability for Common Stock placed in escrow at
the closing of the acquisition of Drake that will be released to the Drake
sellers in the third quarter of 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Contingent
Matters."
(2) Includes the 435,492 shares issuable upon exercise of the Options and the
18,396 shares issuable upon exercise of the Warrants. See "Underwriting."
Excludes 4,476,358 shares issuable upon exercise of all other warrants and
stock options outstanding on March 31, 1997, at a weighted average
exercise price of $14.63 per share.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following combined statements of operations data for the year ended
December 31, 1992 are unaudited and consist of the operations of the Sylvan
KEE Systems, a Maryland general partnership (the "Partnership"), into which
Sylvan Learning Corporation (the "Predecessor") contributed the Sylvan
Learning Centers business. On January 26, 1993, Sylvan acquired the
Predecessor and dissolved the Partnership. The selected statements of
operations data for the year ended December 31, 1993 consists of the results
of the Partnership for January 1993 plus Sylvan results for the eleven months
ended December 31, 1993. The selected financial data for the years ended
December 31, 1994, 1995 and 1996 have been derived from Sylvan's consolidated
financial statements which have been audited by Ernst & Young LLP. The
selected consolidated financial data below should be read in conjunction with
the Consolidated Financial Statements and Notes incorporated by reference
herein.
SELECTED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
PARTNERSHIP
AND SYLVAN
PARTNERSHIP COMBINED SYLVAN
------------ ------------ ---------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
------------ ------------ --------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $33,821 $51,519 $68,748 $111,059 $181,936 $41,506 $51,944
Cost and expenses:
Direct costs .......... 28,840 44,056 60,388 96,708 150,449 36,423 43,630
General and
administrative
expense(2)............ 5,433 6,255 4,998 6,206 8,755 2,069 2,961
Loss on impairment of
assets................ -- -- -- 3,316 -- -- --
------- ------- ------- -------- -------- ------- -------
Total expenses......... 34,273 50,311 65,386 106,230 159,204 38,492 46,591
------- ------- ------- -------- -------- ------- -------
Operating income
(loss)................. (452) 1,208 3,362 4,829 22,732 3,014 5,353
Non-operating income
(expense).............. 1 (116) 224 391 363 92 (128)
Interest income
(expense), net......... (594) (1,290) (62) (1,440) 551 142 480
------- ------- ------- -------- -------- ------- -------
Income (loss) from
continuing operations
before income taxes and
extraordinary items.... (1,045) (198) 3,524 3,780 23,646 3,248 5,705
Income taxes............ (16) (7) (76) (209) (8,850) (1,469) (2,258)
------- ------- ------- -------- -------- ------- -------
Income (loss) from
continuing operations
before extraordinary
items.................. (1,061) (205) 3,448 3,571 14,796 1,779 3,447
Discontinued
operations(3):
Loss from operations,
net of tax............ (1,700) (375) -- -- -- -- --
Gain on disposal....... 427 580 -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Income (loss) from
discontinued
operations............ (1,273) 205 -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss) before
extraordinary items.... (2,334) -- 3,448 3,571 14,796 1,779 3,447
Extraordinary items(4).. -- (177) -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)(6)... $(2,334) $ (177) $ 3,448 $ 3,571 $ 14,796 $ 1,779 $ 3,447
======= ======= ======= ======== ======== ======= =======
Net income (loss) from
continuing operations
per share(5)........... $ (0.02) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12
======= ======= ======== ======== ======= =======
Net income (loss) per
share(5)(6)............ $ (0.01) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12
======= ======= ======== ======== ======= =======
Weighted average shares
outstanding(5)......... 12,967 16,533 17,386 24,996 24,901 27,207
======= ======= ======== ======== ======= =======
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 673 $11,499 $ 4,366 $ 2,903 $ 11,198 $ 4,272 $12,789
Available-for-sale
securities............. 127 1,248 2,537 30,735 16,449 22,725 10,730
Net working capital
(deficit).............. (3,302) 12,665 13,166 39,407 29,603 44,580 40,228
Intangible assets and
deferred contract
costs.................. 149 7,000 7,932 82,849 122,932 81,173 120,948
Total assets............ 18,446 42,003 50,046 174,070 259,590 174,200 260,380
Long-term debt and
capital leases......... 5,578 6,640 9,814 9,854 32,228 10,519 22,524
Stockholders' or
partners' equity....... 326 24,563 32,481 137,148 180,323 141,206 201,880
</TABLE>
- --------
14
<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 mergers all of the outstanding stock of
Learning Services, Inc. ("LSI") and Loralex Corporation ("Loralex"). These
companies owned and operated a total of nine Sylvan Learning Centers
located in the Northeast United States and Florida. On February 17, 1995,
Sylvan acquired by merger all of the outstanding stock of Remedial
Education and Diagnostic Services, Inc. and READS, Inc. (collectively,
"READS"), a Philadelphia-based provider of remedial, education and a
variety of consulting services to school districts, county-wide educational
agencies and municipalities in the Eastern United States. The READS,
Loralex and LSI acquisitions have been accounted for by Sylvan as poolings-
of-interests and, accordingly, Sylvan's financial statements have been
restated for all periods presented to include the results of operations of
READS, Loralex and LSI.
Effective September 30, 1995 Sylvan acquired Drake Prometric, L.P.
("Drake"), a leading provider of computer-based certification, licensure
and assessment testing. The transaction was accounted for using the
purchase method of accounting, and Sylvan's results of operations from
October 1, 1995 include the operations of Drake.
Effective December 1, 1996, Sylvan acquired Wall Street, a European-based
franchisor and operator of learning centers that teach the English
language. This transaction was accounted for using the purchase method of
accounting and Sylvan's results of operations from December 1, 1996 include
the operations of Wall Street. Sylvan paid $4.9 million of the $20.1
million purchase price in cash and the remainder in 714,884 shares of
Common Stock.
On May 30, 1997, the Company consummated its acquisition by merger of all
of the outstanding common stock of Educational Inroads. Educational Inroads
provided contract educational services to school districts in New Jersey
and several other states. The Educational Inroads acquisition has been
accounted for by Sylvan as a pooling-of-interests and, accordingly,
Sylvan's financial statements have been restated for all periods prior to
the acquisition to include the results of operations of Educational
Inroads. Educational Inroads generated revenues of $24.8 million in 1996.
(2) The Company has reclassified certain operating expenses previously
included in general and administrative expense to direct costs. This
change has been reflected for all periods presented.
(3) Represents Sylvan's computer training software development business which
was sold in September 1993 and a Canadian computer training business,
80.1% of which was sold in 1992.
(4) Represents the $350,000 gain on extinguishment of a $3.5 million debt to
Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0
million of notes payable to stockholders, each recorded in 1993.
(5) All share and per share data have been restated to retroactively reflect a
3-for-2 stock split of the Company's common stock for stockholders of
record on November 7, 1996.
(6) Reducing compensation expense relating to Educational Inroads stockholders
to reflect their post-acquisition contractual compensation levels and
eliminating non-recurring acquisition transaction costs would result in
pro forma net income and net income per share of $16,266,000 and $0.65,
respectively, in 1996 and $4,017,000 and $0.14, respectively in the first
quarter of 1997.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts, including but
not limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, expenditures to develop licensing and
certification tests under existing contracts, the Company's contingent payment
obligations relating to the PACE and Drake acquisitions, future capital
requirements, potential acquisitions and the Company's future development
plans are based on current expectations. These statements are forward looking
in nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: changes in the financial resources of the
Company's clients, timing and extent of testing clients' conversions to
computer-based testing, revenues earned by the Company's PACE and Drake
operations, the availability of sufficient capital to finance the Company's
business plan on terms satisfactory to the Company; general business and
economic conditions; and the other risk factors described in the Company's
reports filed from time to time with the Commission.
The discussion and analysis below is based on the Company's Consolidated
Financial Statements and related Notes thereto included in the Company's
Current Report on Form 8-K dated July 15, 1997 and incorporated herein by
reference.
OVERVIEW
Sylvan generates revenues from three business segments: core educational
services which primarily consist of franchise sales, royalties and Sylvan-
owned Learning Center revenues; testing services, which consist of computer-
based testing fees paid to Sylvan; and contract educational services, which
consist of revenues attributable to providing supplemental and remedial
education services to public and non-public schools and major corporations.
The following selected segment data for the years ended December 31, 1994,
1995 and 1996 is derived from the Company's audited consolidated financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1994 1995 1996 1996 1997
------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Core educational services........... $20,016 $ 26,063 $ 36,799 $ 7,213 $ 9,231
Contract educational services....... 35,067 50,430 58,186 16,493 17,574
Testing services.................... 13,665 34,566 86,951 17,800 25,139
------- -------- -------- ------- -------
Total revenue..................... $68,748 $111,059 $181,936 $41,506 $51,944
======= ======== ======== ======= =======
Direct costs:
Core educational services........... $13,255 $ 18,675 $ 25,557 $ 5,605 $ 6,829
Contract educational services....... 33,108 47,685 53,373 15,331 16,168
Testing services.................... 14,025 30,348 71,519 15,487 20,633
------- -------- -------- ------- -------
Total direct costs................ $60,388 $ 96,708 $150,449 $36,423 $43,630
======= ======== ======== ======= =======
</TABLE>
RESULTS OF OPERATIONS
Comparison of results for the quarter ended March 31, 1997 and the quarter
ended March 31, 1996.
Revenue. Total revenues increased 25%, from $41.5 million in the first
quarter of 1996 to $51.9 million in the first quarter of 1997. This increase
resulted from higher revenues in all business segments -- core educational
services, testing services and contract educational services.
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<PAGE>
Core educational services revenues increased 28%, from $7.2 million in the
first quarter of 1996 to $9.2 million in the first quarter of 1997. Franchise
royalties increased $0.5 million or 19%, to $3.0 million in the first quarter
of 1997 compared to the same period in 1996. This increase in franchise
royalties was due to the net increase of 18 Learning Centers opened in new
territories and three Learning Centers opened in existing franchise
territories in the first quarter of 1997, combined with an overall 14%
increase in revenues at existing Learning Centers open for more than one year
as of March 31, 1997. Franchise sales fees increased to $0.7 million in the
first quarter of 1997 compared to $0.2 million in the same period in 1996. In
the first quarter of 1997, five franchise Learning Center licenses and a $0.5
million area development agreement were sold, compared to six franchise
Learning Center licenses sold in the first quarter of 1996. The ability of
Sylvan to generate fees in the future from the sale of area development
agreements or franchise Learning Center licences cannot be assured.
Revenues from Company-owned Learning Centers increased 44%, from $3.4
million in the first quarter of 1996 to $4.9 million in the first quarter of
1997. Of the increase, $0.9 million resulted from the acquisition of 11
Learning Centers from two franchisees during the fourth quarter of 1996.
Revenue growth related to student enrollment increases at Learning Centers
operating more than one year as of March 31, 1997 resulted in $0.6 million of
the increase.
Contract educational services revenues increased 7%, from $16.5 million in
the first quarter of 1996 to $17.6 million in the first quarter of 1997. This
was due to both greater volumes of training and increases in the number of
public and non-public school contracts.
Testing services revenues increased 41%, from $17.8 million in the first
quarter of 1996 to $25.1 million in the first quarter of 1997. The increase
resulted primarily from the Company's acquisition of Wall Street during the
fourth quarter of 1996, increased volumes from IT, professional licensure and
certification clients and increased services under the ETS contracts.
Cost and Expenses. Total direct costs increased 20%, from $36.4 million in
the first quarter of 1996 to $43.6 million in the first quarter of 1997 but
decreased as a percentage of total revenues from 88% in the first quarter of
1996 to 84% in the first quarter of 1997. Core educational services expense
increased 22% from $5.6 million to $6.8 million in the first quarter of 1997.
Company-owned Learning Center services expense increased 41% from $3.0 million
in the first quarter of 1996 to $4.3 million in the first quarter of 1997 but
decreased as a percentage of Company-owned Learning Center services revenue
from 90% in the first quarter of 1996 to 88% in the first quarter of 1997.
$1.1 million of the increase related to the acquisition of 11 Learning Centers
from two franchisees. The remaining increase in expenses was primarily for
advertising, labor and other Learning Center expenses associated with
increased enrollment. Expenses for Learning Centers operating more than one
year as of March 31, 1997 accounted for $0.2 million of the increase and
represented 38% of incremental same-Learning Center revenue.
Contract educational services expense increased 5%, from $15.3 million in
the first quarter of 1996 to $16.2 million in the first quarter of 1997 but
decreased as a percentage of contract educational services revenues from 93%
in the first quarter of 1996 to 92% in the first quarter of 1997. Operating
expenses for PACE accounted for $0.4 million of this increase.
Testing services expense increased 33%, from $15.5 million in the first
quarter of 1996 to $20.6 million in the first quarter of 1997 but decreased as
a percentage of testing services revenues from 87% in the first quarter of
1996 to 82% in the first quarter of 1997. The expense in the first quarter of
1996 included $1.2 million of non-recurring charges related to the Drake
acquisition. Therefore, recurring expenses in the first quarter of 1996 were
80% of testing services revenues for that period. The increase in recurring
testing services expense as a percentage of testing services revenues was
primarily a result of increased salary and other operating costs resulting
from the integration of test delivery systems and growth in business that
occurred after the first quarter of 1996 and expected growth in business
volumes in 1997.
17
<PAGE>
General and administrative expense increased 43%, from $2.1 million in the
first quarter of 1996 to $3.0 million in the first quarter of 1997 and
increased as a percentage of total revenues from 5% in the first quarter of
1996 to 6% in the first quarter of 1997. The increase resulted from increases
in administrative staff salaries and expenses as well as increases in rent
expense related to the Company's new headquarters.
The Company's effective tax rate decreased from 45% in the first quarter of
1996 to 40% in the first quarter of 1997 mainly because a greater portion of
the Company's earnings were generated in foreign jurisdictions having lower
tax rates than the United States.
Comparison of results for the year ended December 31, 1996 to the year ended
December 31, 1995.
Revenues. Total revenues increased 64%, from $111.1 million in 1995 to
$181.9 million in 1996. This increase resulted from greater revenues in all
business segments--core educational services, testing services and contract
educational services.
Core educational services revenues increased 41%, from $26.1 million in 1995
to $36.8 million in 1996. Franchise royalties increased 21%, from $9.2 million
in 1995 to $11.2 million in 1996. This increase in franchise royalties was due
to an overall 20% increase in revenues at Learning Centers that had been
operating for more than one year as of December 31, 1996 combined with a net
increase of 49 Learning Centers opened during 1996.
Franchise sales fees increased 49%, from $2.1 million in 1995 to $3.2
million in 1996. During 1996, there were four area development agreements sold
for $1.7 million and 38 franchise Learning Center licenses sold, compared to
two area development agreements sold for $550,000 and 43 Learning Center
licenses sold during 1995.
Revenues from Company-owned Learning Centers increased 61%, from $11.5
million in 1995 to $18.5 million in 1996. Revenue growth related to increased
student enrollment at Learning Centers that had been operating for more than
one year as of December 31, 1996 resulted in $3.4 million, or 30%, of the
increase from 1995 to 1996. Approximately $3.2 million of the revenue increase
resulted from the acquisition of 11 Learning Centers from two franchisees. The
opening of one new Learning Center during 1996 resulted in an additional
$350,000 of revenues during 1996. Product sales increased 23%, from $3.2
million in 1995 to $3.9 million in 1996. This increase resulted from overall
student enrollment increases at franchised Learning Centers.
Contract educational services revenues increased 15%, from $50.4 million in
1995 to $58.2 million in 1996. Revenues from public and non-public school
contracts accounted for $5.9 million of the increase, and greater revenues
from PACE accounted for $1.9 million of the increase. The PACE increase
primarily resulted from the fact that the acquisition, accounted for as a
purchase, was effective February 28, 1995, and as such the 1995 revenues of
Sylvan only reflect ten months of PACE revenues.
Revenues from public and non-public school contracts executed during 1996
contributed $2.2 million to 1996 revenues. Revenues from public and non-public
school contracts executed during 1995 increased by $4.6 million in 1996,
primarily because a full year of revenues were generated under these contracts
during 1996.
Testing services revenues increased 152%, from $34.6 million in 1995 to
$87.0 million in 1996. The significant increase in testing services revenues
resulted primarily from the September 1995 acquisition of Drake, which
provided increased revenues from IT clients. Increased services under ETS
contracts, including the cost-plus international contract and the Graduate
Record Exam (the "GRE"), and other professional testing revenue increases,
including NASD testing, which began in February 1996, also contributed to the
increase in testing services revenues.
18
<PAGE>
Cost and Expenses. Total direct costs increased 56%, from $96.7 million in
1995 to $150.4 million in 1996 but decreased as a percentage of total revenues
from 87% in 1995 to 83% in 1996. Core educational services expense increased
37% from $18.7 million in 1995 to $25.6 million in 1996. Franchise services
expense increased 11%, from $5.9 million in 1995 to $6.5 million in 1996 but
decreased as a percentage of franchise royalties and sales revenues from 52%
in 1995 to 46% in 1996. The increased margin in 1996 primarily related to the
effects of leveraging the fixed costs of supporting this line of business over
a larger revenue base. Company-owned Learning Center expense increased 55%,
from $10.4 million in 1995 to $16.1 million in 1996 but decreased as a
percentage of Company-owned Learning Center services revenues from 90% in 1995
to 87% in 1996. Of the increase, $3.1 million related to the acquisition of 11
Learning Centers. The remaining increase primarily resulted from advertising,
labor and general overhead associated with increased enrollment at Learning
Centers that had been operating prior to 1996.
Contract educational services expense increased 12%, from $47.7 million in
1995 to $53.4 million in 1996 but decreased as a percentage of contract
educational services revenues from 95% in 1995 to 92% in 1996. The decline in
these expenses as a percentage of contract educational services revenues
resulted from increased revenues without corresponding increases in overhead.
Operating expenses for public and non-public school contracts increased $4.6
million during 1996, while operating expenses for PACE increased $1.1 million
during the same period. The PACE increase resulted from the fact that the
acquisition, accounted for as a purchase, was effective February 28, 1995, and
as such the 1995 results only reflect ten months of PACE results.
Testing services expense increased 136%, from $30.3 million in 1995 to $71.5
million in 1996 but decreased as a percentage of testing services revenue from
88% in 1995 to 82% in 1996. The increased expense resulted primarily from the
acquisition of Drake and the increased registration and delivery costs
associated with an increased volume of tests. Testing services expense in 1996
included $2.4 million of amortization of contract rights related to the Drake
acquisition. Testing services expense in 1995 included $4.1 million of
amortization of contract rights, imputed interest and salary termination
charges related to the Drake acquisition. Excluding non-recurring charges,
testing services expense, as a percentage of testing services revenues,
increased from 76% in 1995 to 79% in 1996. The principal reasons for this
percentage increase in 1996 are the full year of amortization of goodwill
associated with the Drake acquisition and increased staffing levels required
to meet the growth in business volumes that occurred during 1996 and expected
growth in business activity in 1997.
General and administrative expense increased 41%, from $6.2 million in 1995
to $8.8 million in 1996 but decreased as a percentage of total revenues from
6% in 1995 to 5% in 1996. The percentage decline resulted from increased
revenues from all segments without corresponding increases in overhead.
There was $1.4 million of net interest expense in 1995 and $0.6 million of
net interest income in 1996. This change resulted primarily from the $1.1
million of interest expense imputed on the purchase of Drake and an increase
in the average invested cash amounts in 1996 compared to 1995.
The Company's effective tax rate increased from 6% in 1995 to 37% in 1996.
This increase was primarily caused by a decrease in 1995 in the amount of the
valuation allowance for deferred tax assets, consisting principally of net
operating loss carryforwards.
Comparison of results for the year ended December 31, 1995 to the year ended
December 31, 1994.
Revenues. Total revenues increased 62%, from $68.7 million in 1994 to $111.1
million in 1995. This increase resulted from higher revenues in all business
segments--core educational services, testing services and contract educational
services.
19
<PAGE>
Core educational services revenues increased 30%, from $20.0 million in 1994
to $26.1 million in 1995. Franchise royalties increased $1.3 million, or 16%,
for 1995. This increase in franchise royalties was due to a net increase of 31
new Learning Centers in new territories and 15 new Learning Centers opened in
existing franchise territories) in 1995, combined with an overall 14% increase
in revenues at existing Learning Centers open for more than one year as of
December 31, 1995.
Franchise sales fees increased 70%, from $1.3 million in 1994 to $2.1
million in 1995. In 1995, there were two area development agreements sold for
$0.6 million and 43 franchise Learning Center licenses sold, as compared to 31
franchise Learning Center licenses and one $0.1 million area development
agreement sold in 1994.
Revenues from Company-owned Learning Centers increased 34%, from $8.6
million in 1994 to $11.5 million in 1995. The increase primarily resulted from
same-Learning Center revenue growth related to student enrollment increases.
Product sales increased $1.0 million or 43%, to $3.2 million for 1995.
Approximately $0.3 million of the increase in product sales was due to sales
of new versions of math and algebra programs (which began in the second half
of 1994) with the remainder resulting from overall increases in student
enrollment.
Contract educational services revenues increased 44%, from $35.1 million in
1994 to $50.4 million in 1995. Revenues from public and non-public school
contracts increased $6.8 million in 1995. This increase was due primarily to
$2.8 million in revenues from public and non-public school contracts obtained
during 1995 and by a $4.0 million increase in revenues from public and non-
public school contracts existing in 1994. Revenues from PACE, acquired
effective February 28, 1995, accounted for $8.3 million of the increase.
Testing services revenues increased 153%, from $13.7 million in 1994 to
$34.6 million in 1995. Revenues from Drake, acquired as of September 30, 1995,
accounted for $11.7 million of the increase and consisted primarily of
revenues from IT clients. Revenues from the ETS international contract
accounted for $3.7 million of the increase resulting primarily from the fact
that the contract was in effect during the entire 1995 period compared to six
months in 1994. During 1995, Sylvan sold the exclusive development rights for
testing centers in India for $0.5 million and in the Middle East for $0.5
million. The remaining increase in testing services revenues for 1995 was
attributable to a $1.7 million increase in revenues from the NCLEX test for
the licensing of registered and practical nurses, which began in April 1994,
$0.8 million of revenue from test development fees for ASVAB (the Armed
Services Vocational Aptitude Battery tests) and other test volume increases in
the GRE, PRAXIS and FAA tests.
Cost and Expenses. Total direct costs increased 60%, from $60.4 million in
1994 to $96.7 million in 1995 but decreased as a percentage of total revenues
from 88% in 1994 to 87% in 1995. Core educational services expense increased
41%, from $13.3 million in 1994 to $18.7 million in 1995. Franchise services
expense increased 53%, from $3.8 million in 1994 to $5.9 million in 1995 and
increased as a percentage of franchise royalties and sales revenues from 42%
in 1994 to 52% in 1995. The reduced margin in 1995 primarily relates to
increased marketing and advertising costs incurred to produce a new national
advertising campaign. Company-owned Learning Center expense increased 35%,
from $7.7 million in 1994 to $10.4 million in 1995 and increased as a
percentage of Company-owned Learning Center services revenues from 89% in 1994
to 90% in 1995. The increased expenses were primarily advertising, labor and
general overhead associated with increased Learning Center enrollment.
Contract educational services expense increased 44%, from $33.1 million in
1994 to $47.7 million in 1995 and increased as a percentage of contract
educational services revenues from 94% in 1994 to 95% in 1995. Operating
expenses for public and non-public school contracts increased $6.7 million
during 1995, while operating expenses for PACE accounted for $7.9 million of
the increase during the same period.
20
<PAGE>
The increase in contract educational services expense as a percent of related
revenues during 1995 resulted from the following factors: (i) 1994 included
consulting fee revenues of $0.5 million with no associated costs; and (ii)
higher total cost estimates relating to READs contracts.
Testing services expense increased 116%, from $14.0 million in 1994 to $30.3
million in 1995 but decreased as a percentage of total testing service
revenues from 103% in 1994 to 88% in 1995. The decrease in testing services
expense as a percentage of testing services revenues was attributable to
several factors, including the fixed and semi-variable nature of test delivery
and registration costs included in this segment. In addition, Sylvan
recognized $1.0 million of testing revenues in 1995 related to the sale of
exclusive development rights for testing centers in India and the Middle East
and $0.8 million of testing revenues related to the contract to develop the
ASVAB test. These revenues have significantly higher margins than fees for
test delivery and registration services.
Testing services expense during the fourth quarter of 1995 included
amortization expense of $2.1 million related to contract rights recorded upon
the acquisition of Drake and $1.1 million of non-recurring interest expense
imputed on the unpaid purchase price from September 30, 1995 to December 13,
1995, the closing date for the acquisition.
General and administrative expense increased 24%, from $5.0 million in 1994
to $6.2 million in 1995 but decreased as a percentage of total revenues from
7% in 1994 to 6% in 1995. The percentage decline resulted from increased
revenues from all segments without corresponding increases in overhead.
Interest expense of $1.4 million in 1995 was primarily attributable to $1.1
million of interest expense imputed on the purchase of Drake discussed above.
During 1995, Sylvan recorded a non-recurring loss on impairment of assets of
$3.3 million associated with the Drake acquisition. The Drake acquisition and
resulting consolidation of operations resulted in the determination that
certain assets in the Sylvan division were not recoverable and, therefore,
were written down to their realizable value.
During 1995, the Company reduced its valuation allowance relating to
deferred income tax assets by $3.1 million. Approximately $1.1 million of this
reduction was recorded through the allocation of the Drake purchase price. The
remaining decrease of $2.0 million reduced the Company's effective tax rate by
54%.
The Company's effective tax rate in 1995 and 1994 was substantially below
the U. S. statutory income tax rate of 34% due to the recognition of income
tax benefits from net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $0.4 million for the first quarter
of 1997 compared to $1.8 million used by operating activities in the first
quarter of 1996. Cash flow from operations before working capital changes
increased from $5.5 million in the first quarter of 1996 to $7.6 million in
the first quarter of 1997. This increase primarily resulted from significant
overall growth in income from operations before depreciation and amortization
and other non-cash charges. The Company's investment in working capital has
significantly reduced cash flows provided by operations, particularly as a
result of the growth in accounts and notes receivable and reductions in
accounts payable and accrued expenses. The increase in accounts receivable
related to a 25% increase in total revenues in the first quarter of 1997
compared to the first quarter of 1996. The Company expects this trend to
continue as its revenues increase. Of the $3.5 million operating cash flow
reduction attributable to an increase in accounts receivable, $2.4 million was
related to the ETS international testing contract and the remainder to higher
accounts receivable levels in all business segments. The increase in testing
services accounts receivable resulted from an
21
<PAGE>
increase in billings and longer collection periods under the international
testing contract. The Company experiences varying collection periods for
accounts receivable in its three operating divisions. The Company believes
that uncollectible accounts receivable will not have a significant effect on
future liquidity, as a significant portion of its accounts receivable are due
from enterprises with substantial financial resources and governmental units.
During the first quarter of 1997, the Company generated net proceeds of $6.2
million from the sale of available-for-sale securities. At March 31, 1997, the
Company's portfolio of available for-sale securities had a market value equal
to $10.7 million. The Company continues to incur expenditures for additions to
property and equipment, which totaled $2.5 million in the first quarter of
1997. These additions primarily consist of furniture and equipment for general
business expansion, including expenditures for new public and non-public
school classrooms and equipment needed for Testing Centers operated by the
Company. Under the international ETS testing contract, the Company is
reimbursed for overseas equipment expenditures as that equipment is
depreciated. This reimbursement includes a financing charge over the
reimbursement period.
The Company has a $15.0 million unsecured revolving line of credit which
either expires, or the outstanding balance of which can be converted into a
two year term loan, at the option of the Company on May 31, 1998. The credit
line and the term loan, when converted, both bear interest at a floating rate
equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.15% per
annum (6.84% at March 31, 1997). At March 31, 1997, the balance on the credit
line was $7.2 million, and at June 30, 1997, there was no balance outstanding.
During the first quarter of 1997, the Company received $0.9 million as a
result of the exercise of stock options and warrants to purchase 298,608
shares of Common Stock.
During the first quarter of 1997, the Company paid $4.7 million of the $4.9
million cash portion of the Wall Street purchase price. Pursuant to the
Caliber Learning Network stockholders' agreement, Sylvan is obligated to lend
or guarantee up to $3.0 million of debt for Caliber and anticipates investing
up to an additional $8.0 million in Caliber over the next 12 to 24 months.
In March 1997, the Company and NEC executed a definitive agreement pursuant
to which Sylvan was to acquire NEC. In May 1997, NEC accepted the offer of
Harcourt General, Inc. to acquire all of the stock of NEC, resulting in the
termination of its agreement with the Company and the payment by NEC to the
Company of the $30.0 million termination fee required by that agreement. In
connection with the terminated acquisition, the Company incurred approximately
$1.5 million of direct expenses. Therefore, the termination fee resulted in a
$28.5 million net positive impact on the Company's cash resources in the
second quarter of 1997. Subsequent to receipt of the termination fee, Sylvan
invested $3.0 million in cash in a non profit corporation formed to fund the
Sylvan Prometric division marketing programs.
The Company believes that the remaining cash from the termination fee, the
net proceeds of this offering, and cash provided by operations and other
available financial resources will be sufficient on a short-term basis and
over the next 24 months to fund continued expansion of the business, including
working capital needs and expected investments in property and equipment.
CONTINGENT MATTERS
The PACE acquisition agreement requires Sylvan to make a contingent payment
equal to 6.5 times PACE's 1997 earnings before interest and income taxes
("EBIT"); or, if PACE's EBIT is less than $2.7 million in 1997, the PACE
shareholders may elect to have the payment calculation based on EBIT in either
1998 or 1999. Management believes it is likely that the PACE shareholders will
elect to calculate the contingent payment based on PACE's 1997 EBIT. The
contingent payment is payable partially in cash and partially in Common Stock.
The amount of any contingent payment to the PACE shareholders will be
22
<PAGE>
capitalized as goodwill when paid and amortized over the remaining estimated
recovery period. PACE is expected to meet its cash needs from its operations.
PACE provides most of its services to large corporations with favorable credit
histories. PACE operations are not capital intensive and historically have
generated positive cash flow from operations.
The Drake acquisition agreement provides for future contingent payments
based on achievement of certain specified revenue targets in 1997 and 1998 (or
1999 at election of the Drake owners). The contingent payment of up to $40.0
million, if earned, is payable at least 12.5% in cash, with the remainder in
shares of Common Stock. The amount of any contingent payment will be
capitalized as goodwill when paid and amortized over the remaining useful life
of the goodwill as estimated when the contingent payment is paid. Based on
testing services revenues generated in 1996, 357, 143 of the 1,785,714 shares
of Common Stock that were placed in escrow at the closing of the acquisition
have been earned and, accordingly, will be released in the third quarter of
1997. At December 31, 1996, $8.1 million of goodwill relating to the earned
shares was recorded and will be amortized over the 24-year remaining life of
the goodwill.
EFFECTS OF INFLATION
Inflation has not had a material effect on Sylvan's revenues and income from
continuing operations in the past three years. Inflation is not expected to
have a material future effect.
QUARTERLY FLUCTUATIONS
Sylvan's revenues and operating results have varied substantially from
quarter to quarter and may continue to vary, depending upon the timing of
implementation of new computer-based testing contracts and contracts funded
under Title I or similar programs. Based on Sylvan's limited experience,
revenues generated by computer-based testing services may vary based on the
frequency or timing of delivery of individual tests and the speed of test
administrators' conversion of tests to computer-based format. Revenues or
profits in any period will not necessarily be indicative of results in
subsequent periods.
23
<PAGE>
BUSINESS
Sylvan is a leading international provider of educational and testing
services. The Company delivers a broad array of supplemental and remedial
educational services and computer-based testing through three principal
divisions. The Core Educational Services division designs and delivers
individualized tutorial services to school-age children and adults at its 642
franchised and Company-owned Sylvan Learning Centers. Sylvan Prometric, the
Company's testing services division, administers computer-based tests for
major organizations, corporations, professional associations and governmental
agencies through its worldwide network of Testing Centers. The Contract
Educational Services division provides Sylvan's core educational services
under federal and state funding programs to more than 9,500 students in 86
public schools and more than 40,000 students in 846 non-public schools
(including Educational Inroads) and provides on-site educational and training
services to employees of large corporations. Since 1994, the Company has
substantially expanded its business through a combination of internal growth
and acquisitions and has increased revenues and operating income from $68.7
million and $3.4 million, respectively, in 1994 to $181.9 million and $22.7
million, respectively, in 1996. Sylvan's 1996 systemwide revenues were
approximately $310.3 million, consisting of $165.1 million from core
educational services ($139.5 million from franchised Learning Centers and
$25.6 million from Company--owned Learning Centers, product sales and
franchise sales fees), $87.0 million from testing services and $58.2 million
from contract educational services.
STRATEGY
Sylvan's objective is to be the leading provider of lifelong educational
services to families, schools and industry worldwide. The key components of
Sylvan's strategy include:
. CAPITALIZING ON ITS WORLDWIDE DISTRIBUTION NETWORK. Sylvan has built a
global network of more than 2,000 Learning and Testing Centers throughout
the United States and 95 foreign countries. Through this network, Sylvan
currently provides remedial and enrichment educational services to more
than 125,000 students and delivers more than 1.4 million computer-based
tests worldwide annually. Sylvan's management will continue to focus on
expanding its network to capitalize on the increasing number of
educational products created by educators, schools, professional
associations and business organizations. In addition, to maximize the
benefits of Sylvan's extensive distribution network, the Company is
developing innovative products and services for delivery in existing
Learning Center locations. Some examples of these new products include
pre-school learning programs; after-school learning programs developed in
partnership with the National Geographic Society; and Sylvan@Home, an
Internet-based product using the same concepts taught at traditional
Sylvan Learning Centers.
. DEVELOPING BRAND RECOGNITION AND LOYALTY. Management will continue to
focus on making Sylvan synonymous with high quality, consistently
delivered educational services and products which provide quantifiable
results. The Company and its network of franchisees continues to develop
the Sylvan brand name by spending significant resources on national
advertising for both its educational and computer-based testing services.
In 1997, Sylvan and its franchisees intend to spend an aggregate of
approximately $25.0 million on advertising nationwide. In addition,
Sylvan has strengthened its brand identity by expanding the scope of its
products and services through partnerships with highly regarded academic
institutions and professional associations.
. CONTINUING PARTNERSHIPS WITH THE EDUCATIONAL ESTABLISHMENT. Sylvan seeks
to enhance its educational service offerings by partnering with respected
institutions in the educational field. In addition to its relationships
with ETS and the Baltimore City Public Schools, the Company recently
entered into an agreement with the National Geographic Society to provide
after-school educational programs.
. FOCUSING ON COMPUTER-BASED TESTING. Sylvan's international computer-based
testing network gives Sylvan unique access to students at critical points
throughout their continuing educational process. The increasing levels of
education demanded in the United States make formal
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testing/accreditation a key component of academic and professional
development. Sylvan's established computer-based testing network uniquely
positions the Company to participate in the increasing demand for computer-
based testing. Moreover, its ongoing relationships with educators,
professional associations and educational institutions developing and
requiring these tests allows Sylvan's access to students at key junctures
in their educational progression. This access provides Sylvan a unique
platform from which it can extend its educational products and services
for those using its testing services.
. INCORPORATING STATE-OF-THE-ART TECHNOLOGY INTO THE DISTRIBUTION PROCESS.
Sylvan management recognizes that technology is changing the way in which
learning and testing occurs. To this end, Sylvan is pioneering the
development of distance learning and testing networks utilizing state-of-
the-art satellite, video-conferencing, computer network and
internet/intranet technology. In addition, the Company regularly evaluates
opportunities to create new channels of distribution for its products and
services using information technology.
GROWTH STRATEGY
The Company's growth strategy includes the following key elements:
. CONTINUE TO STRENGTHEN CORE EDUCATIONAL SERVICES. Management intends to
continue to strengthen Sylvan's core educational services and the network
of Learning Centers and the marketing of these core services. The Company
also intends to increase the number of satellite Learning Centers in
existing franchised territories and to sell franchises in new territories
both domestically and internationally. The Company intends to continue
broadening the age range of children participating in Sylvan programs by
emphasizing offerings in study skills, preparation and pre-school
learning programs and believes it can increase the length of time
students stay in Sylvan programs by improving the marketing of the
variety of program offerings such as the Sylvan Extended Day Program and
by emphasizing to parents the program length necessary to achieve
specific goals.
. CONTINUE TO EXPAND COMPUTER-BASED TESTING SERVICES. The Company intends
to continue to expand its computer-based testing services in academic,
professional and IT certification, both domestically and internationally.
Sylvan has established an international network of 1,616 computer-based
testing centers through which Sylvan delivered more than 1.4 million
tests in 95 countries during 1996.
. CONTINUE TO EXPAND SERVICES UNDER THE TITLE I PROGRAM. The Company
intends to continue to market its services to major school districts and
education departments in order to gain additional Title I or similar
contracts for both public and nonpublic schools and to increase the
number of public and nonpublic schools served under existing contracts.
The Company acquired Educational Inroads, READS and other Title I and
similar contracts in furtherance of this strategy.
. CONTINUE TO EXPAND SERVICES TO THE CORPORATE WORKPLACE AND FOR OTHER
ADULT EDUCATION. The Company also provides educational services to adults
in the corporate workplace through PACE, the Sylvan-At-Work program and
in the near future through Caliber Learning Network. PACE and the Sylvan-
at-Work program are provided to large corporations throughout the United
States, including Ford Motor Company, International Business Machines
Corp., BankOne, General Motors Corporation, AT&T Corporation, Motorola,
Inc., Texas Instruments Incorporated and Martin Marietta Energy Systems,
Inc. Caliber Learning Network was formed for the purpose of becoming a
worldwide distribution network equipped with satellite-based video
conference computer network capabilities that will be targeted to
corporations, universities and professional continuing education
associations.
. CONTINUE TO EXPAND THROUGH ACQUISITIONS. A key component of the Company's
growth strategy is to pursue strategic acquisitions that expand and
complement the Company's business. The Company regularly reviews various
strategic acquisition opportunities and periodically engages in
discussions regarding such possible acquisitions. In the past three
years, the Company has
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acquired Loralex, LSI, READS, PACE, Drake, Wall Street and Educational
Inroads in furtherance of this strategy.
CORE EDUCATIONAL SERVICES: SYLVAN LEARNING CENTERS
Sylvan is widely recognized as a provider of high quality educational
services with consistent, quantifiable results and has delivered its core
educational services to more than 1,000,000 students primarily in third
through eighth grades during the past 17 years. The Company's Core Educational
Services division provides supplemental instruction in reading, mathematics
and reading readiness, featuring an extensive series of standardized
diagnostic tests, individualized instruction, a student motivational system
and continued involvement from both parents and the child's regular school
teacher.
Typically, a parent contacts a Sylvan Learning Center because the parent
believes that his or her child may have insufficient reading or mathematics
skills. Parents learn about Sylvan from the Company's media advertising, from
a referral from another parent or from school personnel. Learning Center
personnel ask the parent to bring the student to the Learning Center to
complete a series of standardized diagnostic tests and to receive educational
consultation. Approximately 35% of phone inquiries result in a visit to a
Learning Center. The Learning Center's Sylvan-trained educators, all of whom
are certified teachers, use test results to diagnose students' weaknesses and
to design an individual learning program for each student. After the initial
testing and consultation, the Company estimates that more than 90% of parents
enroll the student in a full course of study. The program typically requires
four to six months to complete and comprises approximately 36 to 60 hours of
instruction.
Franchise Operations. As of May 31, 1997, there were a total of 642 Learning
Centers in 49 states, five Canadian provinces, Hong Kong, South Korea and Guam
operated by the Company or its franchisees. As of that date, there were 450
franchisees operating 601 Sylvan Learning Centers, with the Company owning and
operating an additional 41 Learning Centers. During the first five months of
1997, 25 franchised Learning Centers were opened, three were closed, and the
Company acquired two.
The Company licenses franchisees to operate Sylvan Learning Centers in a
specified territory, the size of which depends on the number of school-age
children and average household income in the area. Most Learning Centers are
located in suburban areas and have approximately 10 employees, two of whom are
typically full-time employees and eight of whom are part-time instructors. The
cost to open a typical franchised Learning Center ranges from approximately
$79,000 to $145,000, including the franchise license fee, furniture, equipment
and an initial supply of certain items required to be purchased under the
Company's franchise agreement.
The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend two weeks of initial training in
Learning Center operations and Sylvan's educational programs. The Company also
offers franchisees continuing training each year. The Company employs field
operations managers that act as "consultants" to provide assistance to
franchisees in technology implementation, business development, marketing,
education and operations. These employees also facilitate regular
communications between franchisees and the Company.
Sylvan operates a quality assurance review program to maintain the quality
of Sylvan Learning Centers. Sylvan's field operations managers confirm
franchisee compliance with the Company's standards, including training
requirements, exclusive use of approved educational materials and programs,
correct administration of testing materials, proper execution of supervisory
procedures, sufficient time spent in parent/teacher conferences, staffing and
Learning Center appearance. Sylvan's consultants counsel franchisees that fail
to meet the Company's quality or financial performance standards and assist
these franchisees in developing a plan to improve their Learning Centers'
performance. When necessary, the Company assists franchisees in selling their
franchises.
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The Company's typical domestic franchise agreement has an initial term of
ten years, subject to unlimited additional ten year extensions at the
franchisee's option on the same terms and conditions. The initial license fee
ranges from $34,000 to $42,000, depending on factors such as the number of
school-age children in the territory. Royalties are either 8% or 9% of gross
revenues of the Learning Center, and the royalty rate depends upon the
demographics of the territory and is specified in the franchise agreement.
Advertising spending requirements range from $1,000 to $3,500 per month, or up
to 6% of gross revenues, whichever is greater. The franchise agreement has
been revised periodically, and several franchisees are operating under older
agreements with different terms. Approximately 10% of franchisees operate
under older agreements with royalties as low as 6% and without any requirement
to contribute to the national advertising fund. The remaining 90% of the
franchisees are required to contribute a minimum of 1.0% to 1.5% of gross
revenues to a national advertising fund. This fund is administered by a
nonprofit organization formed for the sole purpose of funding, advertising and
marketing programs for the Company's core educational services. Franchisees
must submit monthly financial data to the Company.
The Company believes there is significant potential for additional
franchised Learning Centers both domestically and internationally. A number of
territories with only one Learning Center could support one or more additional
Learning Centers based upon the number of school-age children in the market
area. The Company is actively encouraging existing franchisees in these
territories to open additional Learning Centers. In addition, management has
identified at least 240 territories in North America, primarily in smaller
markets, in which there are no Learning Centers. The Company is actively
seeking franchisees for a number of these territories. Approximately 11 new
territories were sold in the first five months of 1997.
The Company has sold franchise rights for the exclusive operation of
Learning Centers in South Korea, Hong Kong, China and Israel. Franchisees in
these countries offer the English version of the Sylvan program, and may not
offer a foreign language version of the program without paying additional fees
to the Company to subsidize the additional development costs associated with
developing a foreign language version of the program. In pricing international
franchise rights, the Company takes into account estimates of the number of
centers that could be opened in an area.
Company-owned Learning Centers. As of May 31, 1997, Sylvan owned and
operated 41 Learning Centers: five in Baltimore, six in Dallas, seven in Los
Angeles, five in the greater Philadelphia area, six in South Florida, seven in
the greater Washington, D.C. area and five in the greater Minneapolis area.
The Company's operation of Learning Centers enables it to test new educational
programs, marketing plans and Learning Center management procedures. As of May
31, 1997, nine of the Company-owned Learning Centers contained Technology
Centers for computer-based testing. Company-owned Learning Centers in
Baltimore, Dallas, Los Angeles, Philadelphia, South Florida, greater
Washington D.C. and greater Minneapolis give the Company a local presence in
key markets, which has been helpful in marketing the Company's services to
school districts utilizing Title I funds and to employers interested in the
Sylvan-At-Work and PACE programs See "--Contract Educational Services." The
Company may consider selected acquisitions of additional Learning Centers now
operated by franchisees.
SYLVAN PROMETRIC TESTING SERVICES
As of May 31, 1997, Sylvan or its authorized representatives operated 1,616
Testing Centers, 1,001 of which were located in North America and the
remainder in 95 foreign countries. Sylvan has 277 testing centers located in
existing Learning Centers and 4 stand-alone testing centers that primarily
deliver professional licensure and academic admissions testing and an
additional 1,319 testing centers operated by authorized Sylvan Prometric
representatives that deliver IT training certification testing. In addition,
as a result of a January 1996 agreement with the NASD, Sylvan now operates 16
NASD testing centers where it delivers various broker-dealer computer based
tests. The Company enters into contracts directly with various professional
licensure, educational and IT businesses, organizations and agencies, under
which Sylvan receives a fee based upon the number of tests given for those
customers. Principal customers for the Company's testing services are ETS and,
in the IT industry, Microsoft and Novell. IT customers sponsor
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worldwide certification programs for various professionals such as network
administrators and engineers, service technicians and instructors.
Collectively, Microsoft and Novell generated $36.6 million, or 42% of Sylvan
Prometric revenues in 1996.
ETS, a leading educational testing firm, develops and administers more than
9.5 million tests each year, including the GRE, the Graduate Management
Admissions Test ("GMAT"), the Test of English as a Foreign Language ("TOEFL"),
the National Teachers Exam ("NTE") and the Advanced Placement Program,
sponsored by organizations such as the College Board. The largest tests
administered by ETS are the SAT (which is given annually to over 1.6 million
college-bound students) and the PSAT, which is given annually to all students
in grade 10 or 11. As one of the largest and most influential test developers
and administrators, ETS is leading the conversion of tests to computer-based
format from pencil and paper versions.
The Company developed a working relationship with ETS as a result of a joint
venture between ETS and a predecessor of the Company in the late 1980s. This
relationship facilitated the Company's entering into a master agreement with
ETS (the "ETS Agreement"), under which the Company is the exclusive commercial
provider of computer-based tests administered by ETS. This exclusivity
provision does not apply to the SAT, PSAT and Achievement Tests which are
sponsored by the College Board.
During 1996, the Company recognized approximately $19.5 million, or 23% of
Sylvan Prometric's revenues in fiscal 1996, from services for ETS. The Company
provides testing services through contracts with ETS both domestically and
internationally. In April 1994, the Company entered into a ten year contract
with ETS to develop test sites and provide computer-based tests
internationally. During the first five months of 1997, the Company expanded
international testing for ETS to 123 permanent and temporary sites in 59
countries. The terms of the contract stipulate that the Company will be
compensated for its services through a fee equal to approved costs, plus 10
percent. The Company also will be reimbursed for its cost of capital and any
foreign exchange losses. During 1996, the Company recognized revenues of
approximately $7.6 million under this contract.
Sylvan has been designated as the exclusive commercial provider of computer-
based tests administered by ETS (other than the SAT and PSAT). The ETS
Agreement provides that ETS may establish ETS-operated testing centers,
client-specific testing locations or testing centers at colleges. However, ETS
has agreed that Sylvan will receive at least one-half of ETS' U.S. volume of
computer-based tests covered by the ETS Agreement. At present, there are no
ETS-operated testing centers in existence.
Under the ETS Agreement, the Company began offering computer-based versions
of ETS' PRAXIS examination, which is used to license beginning teachers, in
September 1992, and the GRE, which is used by graduate schools to evaluate
applicants, in October 1992. In August 1992, Sylvan and ETS were jointly
awarded a contract by the National Council of State Boards of Nursing to
develop and deliver exclusively a computer-based licensing examination (NCLEX)
for registered and practical nurses. Beginning in April 1994, the test has
been offered exclusively in the computer-based version.
In addition to the tests offered through its partnership with ETS, the
Company is one of two entities licensed by the FAA to deliver computer-based
versions of various pilot and mechanic licensing tests for private aviation.
In addition to FAA testing, the Company provides testing services for
organizations serving computer professionals, medical laboratory technicians,
military candidates and others.
Sylvan provides the supporting infrastructure and administration, including
computer equipment and software systems in each Testing Center and where
appropriate, registration and scheduling of candidates, downloading of
individual tests and training of Testing Center personnel in accordance with
procedures established by the sponsoring testing organization. For Testing
Centers located in Learning Centers, the franchisee provides the space and
personnel to staff the Testing Center. The Company provides
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training and certification of the Testing Center personnel as computer-based
test administrators. The Company has entered into a separate agreement with
each franchisee that operates a Testing Center, whereby the franchisee
receives a fee per test that decreases as the volume of the tests delivered
increases. The independently owned and managed Testing Centers must meet
certain criteria established by the Company for administering computer-based
testing. The owners of the Testing Centers are required to furnish the space,
equipment and personnel needed for their operation and receive compensation
for test delivery in various forms, including hardware obsolescence guarantees
and marketing assistance for their core business. The Learning Center and
stand-alone sites contain up to 20 networked computers. The Company believes
that it can increase capacity by adding workstations at existing Testing
Centers, as well as by opening new Testing Centers. Opening a new Testing
Center has taken, on average, 30 to 60 days. Computer-based tests, which can
be offered during regular school hours and on weekends, increase utilization
of Learning Centers. Testing also increases public awareness of Sylvan
Learning Centers and the Company's core educational services.
Effective December 1, 1996, the Company purchased Wall Street, a European
based franchisor and operator of learning centers where English is taught
through a combination of computer-based and live instruction. Typically, the
instructional programs are approximately nine months to one year in duration.
Wall Street generated revenues of $14.3 million for its fiscal year ended
August 31, 1996 and currently has 181 franchised centers in operation in
Europe and Latin America.
The acquisition of Wall Street is an important step in Sylvan's strategy to
increase its services to the adult education marketplace and to expand
internationally. Sylvan began building a global network for the delivery of
computer-based testing services in early 1994 through an exclusive
international alliance with ETS. In addition to offering the English language
programs, Wall Street locations can be utilized by Sylvan to administer
certain computer-based testing programs in Europe and Latin America.
Wall Street, which started franchising in 1991, has 92 centers in Spain with
the remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile
and Venezuela. Wall Street's international expansion was accomplished by
selling Master Licensing Agreements, with each Master Licensor licensing
franchisees to open centers in their development areas. Sylvan plans to
continue this strategy to expand Wall Street's presence globally, with a focus
on Asia and the Pacific Rim.
CONTRACT EDUCATIONAL SERVICES: PUBLIC AND NON-PUBLIC SCHOOL BASED PROGRAMS
FUNDED BY FEDERAL TITLE I AND STATE-BASED PROGRAMS; PACE AND SYLVAN-AT-WORK
Title I and state-based programs. The federal government and various state
and local governmental agencies allocate funds to local public school
districts to provide supplemental and remedial education to academically and
economically disadvantaged students in public, parochial and private schools.
The main program is the Title I (formerly Chapter I) program, administered by
the U.S. Department of Education. Title I services must be made available to
all eligible children, regardless of whether they attend public or non-public
schools. Federal law now contains minimum student performance standards for
each school district receiving Title I funds. Title I school districts must
satisfy obligations that include parent involvement in their children's
education, student progress evaluations and report delivery, student record
confidentiality protection and provision of other benefits to eligible non-
public school students in the district.
Although Title I does not expressly authorize school districts to contract
out for Title I services, the U.S. Department of Education has allowed school
districts to do so. The Company believes that the laws of many states neither
specifically authorize nor prohibit school districts from entering into
contracts for the Company's Title I services. In the absence of specific
authorization, a school district would need to determine independently whether
its general powers provide adequate legal authority for the district to
contract with private companies for compensatory educational services. As of
May 31, 1997, the Company had contracts to provide remedial educational
services to the following public schools: 27 Baltimore
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schools, 14 schools in Chicago, 10 schools in Detroit, 10 District of Columbia
schools, two schools in Texas; six schools in three counties in Maryland, five
schools in St. Paul, three schools in Newark, two schools in Broward County,
Florida, two schools in New Orleans, two schools in Charleston, two schools in
Oklahoma City and one school in Richmond. In 1996, approximately 10% of
contract educational services revenues were generated from Baltimore City
School contracts. The Company recently executed a contract to provide its core
educational program to two schools in Philadelphia and is actively seeking and
is currently negotiating contracts to provide these services to other school
systems.
Sylvan offers virtually the same core educational services to students in
schools as is offered at Sylvan Learning Centers. The school designates a
classroom or other facility to be the Learning Center for the duration of the
contract and modifies the space to resemble a typical Learning Center. Sylvan
personnel administer standardized diagnostic tests at the request of the
school district and, based on the results, prescribe an individualized
learning program for each child. Students typically receive two hours of
instruction per week, which includes use of personal computers as in a
Learning Center. The Company can provide these services to students after
school, on Saturdays, during the summer or as a "pullout" program during the
regular school day, which is the method prescribed by all current contracts.
There is a high degree of individual attention, with student to teacher ratios
of no more than three to one. The program is designed to include a high degree
of parental involvement, and teachers make a special effort to involve
parents.
Under most of its contracts, the Company has guaranteed that each student
who receives instruction in the Sylvan program and meets prescribed attendance
requirements will achieve some minimum measure of improvement required by the
school districts, as measured by standardized tests. Improvement is measured
using various standardized measures, including normal curve equivalents
("NCE's"), a generally accepted statistical measure of student performance.
The typical minimum improvement required is two NCE's per year. If a student
does not achieve the required improvement, the Company will provide 12 hours
of remedial instruction to that student during the following summer or school
year without charge. The Company has not incurred significant expense related
to this guarantee. Under the contracts, the school districts pay the Company a
set fee for all services, materials and equipment. The contracts have terms of
one to three years, with the latest expiring in June 1998. All of the
contracts contain provisions for cancellation by school district officials
based on funding constraints.
In contracting with school districts to provide Title I services, the
Company is subject to various Title I requirements and may become responsible
to the school district for carrying out specific functions required by law.
For example, under the Baltimore City Schools' contract, Sylvan has
responsibility for soliciting parental involvement, introducing program
content adequate to achieve certain educational gains and maintaining the
confidentiality of student records. The Company's failure to adhere to Title I
requirements or to carry out regulatory responsibilities undertaken by
contract may result in contract termination, financial liability or other
sanctions.
Additionally, until the Supreme Court's recent decision in Agostini v.
Felton, Sylvan had typically been required to provide Title I services to non-
public school students in a mobile unit classroom near, but not inside the
non-public school. The Company cannot yet predict how the Supreme Court's
decision in Agostini may affect its contracts for Title I services to non-
public school students. See "Risk Factors--Impact of Recent Supreme Court
Decision on Title I Services for Non-Public School Students."
PACE; Sylvan-At-Work; Caliber Learning Network. The Company offers its core
educational services to adults in the corporate workplace through PACE and its
Sylvan-At-Work program. Services offered by PACE include racial and gender
workplace diversity training and skills improvement programs such as writing,
advanced reading, listening and public speaking. Management believes PACE is
capitalizing on a trend toward outsourcing of training services by large
corporations. PACE licenses most of these programs from the individuals who
developed them and pays them royalties ranging from 5% to
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15% of the revenues generated from the programs. These programs are typically
offered on-site from one to several days at a time and are conducted by
trained instructors employed by PACE. In some cases, PACE will train the
customer's employees to conduct the programs. Additionally, a corporation may
purchase a site license to offer a particular PACE program. PACE and Sylvan-
At-Work provide services to large corporations such as Ford Motor Company,
International Business Machines Corp., BankOne, General Motors Corporation,
AT&T Corporation, Motorola, Inc., Texas Instruments Incorporated and Martin
Marietta Energy Systems, Inc. In November 1996, Caliber Learning Network,
Inc., was formed as a joint initiative of Sylvan and MCI Telecommunications
Corporation with the goal of becoming a worldwide distribution network of
professional education centers equipped with satellite-based video
conferencing and computer network capabilities. Sylvan currently owns a ten
percent interest in Caliber Learning Network and has the option to increase
its ownership to a majority stake in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
MARKETING
The Company and its franchisees market Sylvan's core educational services to
parents of school-aged children at all grade levels and academic abilities. A
portion of Sylvan's advertising includes television advertisements on morning
and evening news on the national networks. Sylvan's advertising campaign
demonstrates the benefits of its personalized educational services through
testimonials of actual parents and Sylvan teachers. It positions Sylvan as the
leader in supplemental education and emphasizes Sylvan's high quality
curriculum, personalized attention and positive results: better grades and
improved self-esteem. Franchisees form local cooperatives to purchase local
television and radio advertising and usually supplement their efforts with
local newspaper and direct mail. The Company also has additional marketing
support for specific programs, including reading, math, algebra, geometry,
study skills, SAT college preparation and writing.
The Company is actively involved in marketing computer-based testing
services to national and international academic testing organizations, such as
ETS, and licensing and professional certification organizations. The Company's
network of testing centers, centralized registration capability and computer-
based testing experience offer important competitive advantages. The Company
markets its school-based educational services to several public school systems
and state education departments. This marketing effort has been expanded to
seek contracts for both public and non-public schools, where both are
administered by the local public school district.
Marketing efforts for PACE and Sylvan-at-Work programs are focused on large
corporations seeking to outsource their training and educational programs.
CERTAIN LITIGATION
The Company is the defendant in a legal proceeding pending in the United
States District Court for the Northern District of Iowa, Civil Action No. C96-
334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation
formerly known as American College Testing Program, Inc. ACT's claim arises
out of the Company's acquisition rights to administer testing services for the
NASD. ACT has asserted that the Company tortiously interfered with ACT's
relations, contractual and quasi-contractual, with the NASD, caused ACT to
suffer the loss of its advantageous economic prospects with the NASD and other
ACT clients and that the Company has monopolized and attempted to monopolize
the computer-based testing services market. ACT has claimed unspecified
amounts of compensatory, treble and punitive damages, as well as injunctive
relief. If ACT were awarded significant compensatory or punitive damages, it
could materially adversely affect the Company's results of operation and
financial condition. Additionally, if ACT were granted significant injunctive
relief, Sylvan may be required to dispose, unit expansion or curtail existing
operations of its Sylvan Prometric division, which, in turn, would materially
adversely affect its results of operations and financial condition. The Court
has entertained oral arguments relating to the Company's motion to dismiss
this litigation but has not yet ruled on this motion, and minimal discovery
has been conducted. The Company believes that all of ACT's claims are without
merit, but it is unable to predict the outcome of the ACT litigation at this
time.
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MANAGEMENT
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 Board
Douglas L. Becker.................... 31 Co-Chief Executive Officer, President;
Secretary; Director
B. Lee McGee......................... 41 Vice President and Chief Financial
Officer; Treasurer
Stephen A. Hoffman................... 45 President--Sylvan Prometric Division
Peter J. Cohen....................... 42 President--Learning Services Division
Paula Singer......................... 42 President--Contract Educational
Services Division
Donald V. Berlanti (1)(2)............ 59 Director
Nancy S. Cole........................ 54 Director
R. William Pollock................... 68 Director
J. Phillip Samper (1)(2)............. 62 Director
James H. McGuire (1)................. 53 Director
Rick Inatome......................... 43 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
R. Christopher Hoehn-Saric. Mr. Hoehn-Saric has served as Chief Executive
Officer and Chairman of the Board since April 1993 and was President of Sylvan
from 1988 until 1993. He has been a Director of Sylvan or its predecessor
since 1986. He is a principal in Sterling Capital, Ltd. ("Sterling"), the
investment partnership that led the acquisition of the Predecessor in December
1986, and was a co-founder of Health Management Corporation, a health services
company. Before becoming Sylvan's President, Mr. Hoehn-Saric was involved in
Sterling's acquisition of several distribution, broadcasting and photography
businesses.
Douglas L. Becker. Mr. Becker has been President of Sylvan since April 1993
and Co-Chief Executive Officer since 1996. From February 1991 until April
1993, Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center
Division of Sylvan. He has been a Director of Sylvan or its predecessor since
1986. Mr. Becker was a co-founder of Health Management Corporation and is a
co-founder of Sterling. From January 1987 to February 1991, Mr. Becker
directed the Predecessor's marketing and sales.
B. Lee McGee. Mr. McGee has been Chief Financial Officer of Sylvan or its
predecessor entities since 1987. Prior to that time, he held various positions
with Kinder-Care Learning Centers, Inc.
Stephen A. Hoffman. Mr. Hoffman has been the President of the Sylvan
Prometric division since September 1996. For six years prior to joining
Sylvan, Mr. Hoffman was the Senior Vice President of Operations for the
Computer Task Group, a consulting and outsourcing firm serving the IT
industry. For several years prior to that, he held various marketing and
management positions for IBM.
Peter J. Cohen. Mr. Cohen has been the President of the Learning Services
division since August 1996. For three years prior to joining Sylvan, he was
the Chief Executive Officer of The Pet Practice, an 85-hospital veterinary
business. He also served as Vice President of Sales for National Media
Corporation from January 1992 until January 1994 and served as Senior Vice
President of Corporate Operations for Nutrisystem Weight Loss Centers prior to
that.
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Paula Singer. Ms. Singer has been the President of the Contract Educational
Services division since November 1996. For three years prior to that, she
served as Vice President of the division. From 1980 until 1992, Ms. Singer
served in a variety of managerial positions at American Learning Corp. (which
operated Brittanica Learning Centers), last serving as its Executive Vice
President and General Manager.
Donald V. Berlanti. Mr. Berlanti has been a Director of Sylvan since 1987.
Since 1975, Mr. Berlanti has been involved in the ownership and management of
several businesses, including a chain of convenience stores, restaurants and
real estate development companies. Mr. Berlanti is the sole general partner of
Quince Associates Limited Partnership, a stockholder of Sylvan.
Nancy S. Cole. Ms. Cole has been employed by ETS since 1989, serving as
President since 1994 and previously as Executive Vice President overseeing the
program administration process for ETS. Ms. Cole currently is on the ETS Board
of Trustees. Prior to joining ETS, Ms. Cole served for four years as Dean of
Education and Professor at the University of Illinois at Urbana- Champaign.
Ms. Cole's background includes previously serving as a member of the Graduate
Record Examination Board and as a member of the College Board's SAT committee.
R. William Pollock. Mr. Pollock has been a Director of the Company since
December 1995. Mr. Pollock serves as the Chairman of the Board of Drake
Holdings Limited, a company which owns interests in various businesses
throughout the world and also serves as a director of Medox Limited.
J. Phillip Samper. Mr. Samper has been a Director of Sylvan since 1993. Mr.
Samper currently serves as Chief Executive Officer and Chairman of the Board
of Cray Research, Inc. Mr. Samper served as President of Sun Microsystems,
Inc. from 1994 to 1995, as Managing Partner of FRN Group from 1992 to 1993, as
President and Chief Executive Officer of Kinder-Care Learning Centers, Inc.
during 1990 and as Vice Chairman of Eastman Kodak Company from 1986 to 1989.
Mr. Samper is also a director of Armstrong World Industries, Inc. and the
Interpublic Group of Companies.
James H. McGuire. Mr. McGuire has been a Director of the Company since
December 1995. Mr. McGuire serves as President of NJK Holding Company, which
controls the interests of Nasser J. Kazeminy (one of the prior owners of Drake
Prometric, L.P., now owned by the Company) in various businesses throughout
the country. Mr. McGuire also serves as a director of Green Isle Environmental
Services, Inc.
Rick Inatome. Mr. Inatome became a Director of the Company in July 1997. In
the late 1980s, Mr. Inatome founded Inacom Corp., a 1996 Fortune 500
information systems provider, and he has served as its Chairman since then.
Since 1993, Mr. Inatome has served as Co-Chairman of Speedy Printing Centers,
Inc. Prior to that, Mr. Inatome founded Computer City, Inc. Mr. Inatome also
serves as Chairman of Michigan's Liberty Business and Industrial Development
Corporation and was appointed by the Governor of Michigan to serve on
Michigan's Public Jobs Commission Board. He also serves as a director of
Atlantic Premium Brands, Ltd.
33
<PAGE>
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock (including shares issuable upon the
exercise of currently exercisable options and warrants) as of July 30, 1997 by
(i) the Selling Securityholders, (ii) each person who owns beneficially more
than 5% of the Company's Common Stock, (iii) each of the directors of the
Company, (iv) the Co-Chief Executive Officers and each of the other most
highly compensated executive officers and (v) all directors and executive
officers as a group. Unless otherwise indicated, the named persons exercise
sole voting and investment power over the shares that are shown as
beneficially owned by them.
<TABLE>
<CAPTION>
SHARES
SHARES SHARES TO BE BENEFICIALLY
BENEFICIALLY SOLD IN THIS OWNED AFTER
OWNED(1) OFFERING(1) THIS OFFERING
----------------- ------------ -----------------
NAME NUMBER PERCENT NUMBER NUMBER PERCENT
- ---- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Donald V. Berlanti(2)......... 1,338,414 4.8% 322,491 1,015,923 3.4%
Douglas L. Becker(3)(4)....... 1,673,915 5.9% 103,594 1,570,321 5.2%
R. Christopher Hoehn-
Saric(3)(4).................. 1,681,943 6.0% 103,597 1,578,346 5.3%
J. Phillip Samper............. 41,536 * -- 41,356 *
Nancy S. Cole(6).............. -- * -- -- --
R. William Pollock(5)......... 3,365,715 12.2% 1,250,000 2,115,715 7.2%
Nasser J. Kazeminy(5)......... 1,941,881 7.0% 900,000 1,041,881 3.5%
James H. McGuire.............. -- * -- -- --
Rick Inatome.................. -- * -- -- *
B. Lee McGee(3)............... 64,850 * -- 64,850 *
Stephen A. Hoffman(3)......... 8,200 * -- 8,200 *
Paula Singer(3)............... 24,500 * -- 24,500 *
Peter Cohen(3)................ -- * -- -- --
T. Rowe Price Associates,
Inc.(7)...................... 1,365,751 4.9% -- 1,365,751 4.6%
Denver Investment
Partners(8).................. 1,738,949 6.3% -- 1,738,949 5.9%
Jill Becker................... 92,352 * 36,102 56,250 *
Kathy Taslitz................. 90,060 * 36,102 53,958 *
John Casey.................... 32,736 * 32,736 -- --
Alex. Brown & Sons
Incorporated................. 16,002 * 16,002 -- --
The Becker Group, Inc......... 2,394 * 2,394 -- --
Matt Berlanti Management
Trust........................ 300,000 1.1% 300,000 -- --
McKenna Berlanti Management
Trust........................ 200,000 1.0% 200,000 -- --
Heart of Texas Learning
Centers, Inc................. 1,291 * 1,291 -- --
Anthony Cancelosi............. 870 * 870 -- --
All directors and executive
officers as a group
(12 persons)................. 6,894,237 23.7% 1,779,682 5,114,375 16.9%
</TABLE>
- --------
* Represents beneficial ownership of not more than one percent.
(1) Includes Options and Warrants held by the Selling Optionholders and
Selling Warrantholders to purchase an aggregate of 435,492 and 18,396
shares of Common Stock, respectively, which will be sold to the
Underwriters, who will then exercise such Options and Warrants at an
average exercise price of approximately $3.32 per share and $3.24 per
share, respectively and sell the shares of Common Stock issuable upon
exercise thereof in this offering.
(2) The address of this holder is 145 Barranca Road, Santa Fe, New Mexico
87501. Includes shares held by Quince Associates Limited Partnership, of
which Mr. Berlanti is sole general partner, and shares held by trusts for
the benefit of Mr. Berlanti's children for which Mr. Berlanti serves as
trustee. Includes options and warrants to purchase 209,241 shares.
Excludes shares held by trusts for the benefit of Messrs. Richard and
Donald Berlanti's children for which Richard Berlanti, Mr. Berlanti's
brother, is trustee.
(3) The address of Ms. Singer and Messrs. Becker, Hoehn-Saric, McGee, Hoffman
and Cohen is 1000 Lancaster Street, Baltimore, Maryland 21202.
(4) Includes the 810,961 shares issued to Messrs. Kazeminy and Pollock in
connection with Sylvan's acquisition of Drake Prometric, L.P. in December
1995 and subject to a Voting Trust Agreement pursuant to which Messrs.
Becker and Hoehn-Saric are voting trustees.
(5) Includes the shares subject to the Voting Trust Agreement (see note 4
above).
(6) Ms. Cole is the President of ETS and serves on its Board of Trustees. ETS
owns 425,810 shares of stock in the Company, as to which Ms. Cole
disclaims beneficial ownership.
(7) T. Rowe Price Associates, Inc. exercises sole voting and investment power
over 198,901 of the 1,365,751 shares held. The address of this holder is
100 E. Pratt Street, Baltimore, Maryland 21202. All information included
herein is derived from the Schedule 13G filed with the Commission by this
holder.
(8) Denver Investment Partners exercises sole voting and investment power over
1,098,250 of the 1,738,949 shares held. The address of this holder is 1225
17th Street, 26th Floor, Denver, Colorado 80202. All information included
herein is derived from the Schedule 13G filed with the Commission by this
holder.
34
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Montgomery Securities, Morgan Stanley & Co. Incorporated, Smith
Barney Inc. and Robertson, Stephens & Company LLC, have severally agreed to
purchase from the Company and the Selling Securityholders the aggregate number
of shares of Common Stock set forth opposite their respective names below,
consisting of (i) 1,464,821 shares of Common Stock from the Company, (ii)
Options from the Selling Optionholders exercisable for an aggregate of 435,492
shares of Common Stock (iii) Warrants from the Selling Warrantholders
exercisable for an aggregate of 18,396 shares of Common Stock and (iii)
2,851,291 shares of Common Stock from the Selling Stockholders. The purchase
price for the 4,316,112 shares of Common Stock to be purchased from the
Company and the Selling Stockholders will be the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. The aggregate purchase price for the Options and the Warrants will
be equal to the aggregate number of shares of Common Stock issuable upon
exercise of the Options and the Warrants multiplied by the public offering
price per share of the Common Stock, less underwriting discounts and
commissions set forth on the cover page of this Prospectus and the respective
aggregate exercise prices of the Options and the Warrants. The aggregate
exercise price payable upon exercise of the Options and Warrants will be paid
by the Underwriters to the Company.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
Montgomery Securities.................................................
Morgan Stanley & Co. Incorporated.....................................
Smith Barney Inc. ....................................................
Robertson, Stephens & Company LLC.....................................
---------
Total............................................................... 4,770,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Common Stock offered hereby if any of such shares are
purchased.
The Company and the Selling Securityholders have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
The public offering price and other selling terms may be changed by the
Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to 415,500 and 300,000, respectively, additional shares of
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. The portion of the
option granted by the Company may be exercised only after the Underwriters
have exercised in full their option to purchase 300,000 shares of Common Stock
from the Selling Stockholders. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to 4,770,000, and
the Company and the Selling Securityholders will be obligated, pursuant to the
Underwriters' option, to sell such additional shares to
35
<PAGE>
the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the 4,770,000 shares of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 4,770,000 shares are
being offered.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on The Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying
bids on The Nasdaq National Market limited by the bid prices of independent
market makers and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day
are limited to a specified percentage of the passive market maker's average
daily trading volume in the Common Stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize
the market price of the Common Stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a
short position created in connection with this offering. The Underwriters are
not required to engage in these activities and may end these activities at any
time. The Representatives, on behalf of the Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
Alex. Brown & Sons Incorporated ("Alex. Brown") will sell to the several
Underwriters Warrants to purchase 16,002 shares of Common Stock. The several
Underwriters will then exercise these Warrants and distribute the underlying
shares of Common Stock in this offering. Alex. Brown initially acquired these
Warrants in January 1993 for serving as placement agent for the Company's
private placement of preferred stock (all of which shares of preferred stock
converted into Common Stock upon consummation of the Company's initial public
offering). The Alex. Brown Warrants will be sold to the several Underwriters
on the same terms as all the shares of Common Stock being sold in the
offering.
The Company and the Selling Securityholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, the Company's executive officers and directors and certain
other stockholders of the Company, holding in the aggregate 6,678,305 shares
of Common Stock, including outstanding options, have agreed not to offer, sell
or otherwise dispose of any of such Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated. Alex. Brown & Sons Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
Common Stock subject to these lock-up agreements.
36
<PAGE>
LEGAL MATTERS
The legality of the shares offered hereby has been passed upon for the
Company and the Selling Securityholders by Piper & Marbury L.L.P., Baltimore,
Maryland and for the Underwriters by Hogan & Hartson L.L.P., Baltimore,
Maryland.
EXPERTS
The consolidated financial statements and schedule of Sylvan Learning
Systems, Inc. at December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, incorporated by reference in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon incorporated by
reference elsewhere herein which, as to the years 1996 and 1995, are based in
part on the reports of Deloitte & Touche LLP, independent auditors, and as to
the year 1994 is based in part on the report of Canterelli & Vernoia, CPAs,
independent auditors. The financial statements referred to above are included
in reliance upon such reports given upon the authority of such firms as
experts in accounting and auditing.
37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 12
Price Range of Common Stock and Dividend Policy.......................... 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 24
Management............................................................... 32
Principal and Selling Securityholders.................................... 34
Underwriting............................................................. 35
Legal Matters............................................................ 37
Experts.................................................................. 37
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,770,000 Shares
LOGO
SYLVAN LEARNING SYSTEMS, INC.
Common Stock
------------
PROSPECTUS
------------
Alex. Brown & Sons
INCORPORATED
Merrill Lynch & Co.
Montgomery Securities
Morgan Stanley Dean Witter
Smith Barney Inc.
Robertson, Stephens & Company
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with this
Registration Statement. The Company will pay all expenses of the offering,
except the legal, accounting and printing expenses, which will be paid pro
rata by the Selling Securityholders. All of such expenses are estimates, other
than the filing fees payable to the Securities and Exchange Commission, NASD
and Nasdaq.
<TABLE>
<S> <C>
Filing Fee--Securities and Exchange Commission................... $ 65,452
NASD Filing Fee.................................................. 22,100
Nasdaq Listing Fees.............................................. 17,500
Fees and Expenses of Counsel..................................... 75,000
Accountants' Fees and Expenses................................... 100,000
Printing Expenses................................................ 150,000
Transfer Agent and Registrar's Fees.............................. 20,000
Miscellaneous Expenses........................................... 49,948
--------
TOTAL.......................................................... $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Charter provides that, to the fullest extent that limitations
on the liability of directors and officers are permitted by the Maryland
General Corporation Law, no director or officer of the Company shall have any
liability to the Company or its stockholders for monetary damages. The
Maryland General Corporation Law provides that a corporation's charter may
include a provision which restricts or limits the liability of its directors
or officers to the corporation or its stockholders for money damages except:
(1) to the extent that it is provided that the person actually received an
improper benefit or profit in money, property or services, for the amount of
the benefit or profit in money, property or services actually received, or (2)
to the extent that a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding that
the person's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. The Company's Charter and By-laws provide that the Company
shall indemnify and advance expenses to its currently acting and its former
directors to the fullest extent permitted by the Maryland General Corporation
Law and that the Company shall indemnify and advance expenses to its officers
to the same extent as its directors and to such further extent as is
consistent with law.
The Charter and By-laws provides that the Company will indemnify its
directors and officers and may indemnify employees or agents of the Company to
the fullest extent permitted by law against liabilities and expenses incurred
in connection with litigation in which they may be involved because of their
offices with the Company. In addition, the Company's Charter provides that its
directors and officers will not be liable to stockholders for money damages,
except in limited instances. However, nothing in the Charter or By-laws of the
Company protects or indemnifies a director, officer, employee or agent against
any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. To the extent that a director has been
successful in defense of any proceeding, the Maryland General Corporation Law
provides that he shall be indemnified against reasonable expenses incurred in
connection therewith.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.01 Form of Underwriting Agreement.(a)
3.01 Articles of Amendment and Restatement of the Charter.(b)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.02 Amended and Restated Bylaws.(b)
3.03 Amended and Restated Bylaws dated September 27, 1996.(c)
4.01 Specimen Common Stock Certificate.(b)
4.02 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated January 26, 1993.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated July 14, 1993.(b)
4.04 Rights Agreement by and between Registrant and State Street Bank &
Trust Company dated as of October 1, 1996.(d)
5.01 Opinion of Piper & Marbury L.L.P.(a)
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche LLP.
23.03 Consent of Canterelli & Vernoia.
23.04 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01).(a)
24.00 Powers of Attorney.(a)
99.1 Opinion of Deloitte & Touche LLP.
99.2 Opinion of Canterelli & Vernoia.
</TABLE>
- --------
(a) Filed previously with this Registration Statement.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Company's Annual Report on Form 10-K
for the Year ended December 31, 1996.
(d) Incorporated by reference from the Company's Current Report on Form 8-K
dated September 27, 1996.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suite or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-2
<PAGE>
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT OR AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN BALTIMORE, MARYLAND, ON THIS 30TH DAY OF JULY, 1997.
Sylvan Learning Systems, Inc.
By /s/ R. Christopher Hoehn-Saric
-----------------------------------
R. CHRISTOPHER HOEHN-SARIC,
CHAIRMAN OF THE BOARD AND
CO-CHIEF EXECUTIVE OFFICER
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 July 30, 1997
- ------------------------------ and Chairman of the Board of
R. CHRISTOPHER HOEHN-SARIC Directors (Principal
Executive Officer)
/s/ Douglas L. Becker Co-Chief Executive Officer, July 30, 1997
- ------------------------------ President, Secretary and
DOUGLAS L. BECKER Director
/s/ B. Lee McGee Chief Financial Officer July 30, 1997
- ------------------------------ (Principal Financial and
B. LEE MCGEE Accounting Officer)
/s/ Donald V. Berlanti* Director July 30, 1997
- ------------------------------
DONALD V. BERLANTI
/s/ R. William Pollock* Director July 30, 1997
- ------------------------------
R. WILLIAM POLLOCK
/s/ James H. McGuire* Director July 30, 1997
- ------------------------------
JAMES H. MCGUIRE
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Phillip Samper* Director July 30, 1997
- -------------------------------
J. PHILLIP SAMPER
Director July , 1997
- -------------------------------
NANCY S. COLE
Director July , 1997
- -------------------------------
RICK INATOME
*By: /s/ Douglas L. Becker
----------------------------
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.01 Form of Underwriting Agreement.(a)
3.01 Articles of Amendment and Restatement of the Charter.(b)
3.02 Amended and Restated Bylaws.(b)
3.03 Amended and Restated Bylaws dated September 27, 1996.(c)
4.01 Specimen Common Stock Certificate.(b)
4.02 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated January 26, 1993.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated July 14, 1993.(b)
4.04 Rights Agreement by and between Registrant and State Street Bank &
Trust Company dated as of October 1, 1996.(d)
5.01 Opinion of Piper & Marbury L.L.P.(a)
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche LLP.
23.03 Consent of Canterelli & Vernoia.
23.04 Consent of Piper & Marbury L.L.P. (included in Exhibit 5.01).(a)
24.00 Powers of Attorney.(a)
99.1 Opinion of Deloitte & Touche LLP.
99.2 Opinion of Canterelli & Vernoia.
</TABLE>
- --------
(a) Filed previously with this Registration Statement.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Company's Annual Report on Form 10-K
for the Year ended December 31, 1996.
(d) Incorporated by reference from the Company's Current Report on Form 8-K
dated September 27, 1996.
<PAGE>
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" in the Registration Statement (Form
S-3 No. 333-31273) and related Prospectus of Sylvan Learning Systems, Inc. for
the registration of 4,770,000 shares of its common stock and to the
incorporation by reference therein of our report dated July 10, 1997 with
respect to the consolidated financial statements and schedule of Sylvan Learning
Systems, Inc. included in its Current Report on Form 8-K dated July 15, 1997,
filed with the Securities and Exchange Commission.
Baltimore, Maryland
July 29, 1997
<PAGE>
Exhibit 23.02
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the use of our reports on the financial statements of Independent
Child Study Teams, Inc. and I-R, Inc., dated March 14, 1997, appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
July 29, 1997
<PAGE>
Exhibit 23.03
CONSENT OF CANTERELLI & VERNOIA, CPAS,
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 25, 1995 and May 10, 1995, with respect to the
financial statements of I-R, Inc. and Independent Child Study Teams, Inc.,
respectively, included in the Registration Statement (Form S-3 No. 333-31273)
and related Prospectus of Sylvan Learning Systems, Inc. for the registration of
4,770,000 shares of its common stock.
/s/ Canterelli & Vernoia, CPAs
Somerville, New Jersey
July 29, 1997
<PAGE>
EXHIBIT 99.1
Report of Independent Auditors
The Board of Directors and
Stockholders of Independent Child Study Teams, Inc.
We have audited the balance sheets of Independent Child Study Teams, Inc. as of
December 31, 1996 and 1995, and the related statements of income, retained
earnings and cash flows for the year then ended (not presented separately
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Independent Child Study Teams, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 14, 1997
<PAGE>
Report of Independent Auditors
The Board of Directors and
Stockholders of I-R, Inc.
We have audited the balance sheets of I-R, Inc. as of December 31, 1996 and
1995, and the related statements of income, retained earnings and cash flows for
the year then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of I-R, Inc. at December 31, 1996
and 1995, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 14, 1997
<PAGE>
Exhibit 99.2
Report of Independent Auditors
The Board of Directors and
Stockholders of Independent Child Study Teams, Inc.
We have audited the balance sheet of Independent Child Study Teams, Inc. as of
December 31, 1994, and the related statements of income, retained earnings and
cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Independent Child Study Teams,
Inc. at December 31, 1994, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Canterelli & Vernoia
Somerville, New Jersey
May 10, 1995
<PAGE>
Report of Independent Auditors
The Board of Directors and
Stockholders of I-R, Inc.
We have audited the balance sheet of I-R, Inc. as of December 31, 1994, and the
related statements of income, retained earnings and cash flows for the year then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-R, Inc. at December 31, 1994,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Canterelli & Vernoia
Somerville, New Jersey
April 25, 1995
