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Company Press Release

Sylvan Learning Systems Convertible Subordinated Notes Rated 'B' by Standard & Poor's

NEW YORK, July 31 /PRNewswire/ -- Standard & Poor's today assigned its single-'B' rating to Sylvan Learning Systems, Inc.'s proposed Rule 144A offering of $200 million convertible subordinated notes due 2005. A double-'B'-minus corporate credit rating also was assigned to the company.

The outlook is positive.

The ratings reflect Sylvan's leading positions in the supplemental educational service niche and the growth prospects for each business. The ratings further reflect the company's relatively moderate financial policy, good business diversity within this niche, and a degree of cash flow stability inherent in Sylvan's business relationships. Balancing these factors are concerns regarding Sylvan's acquisitive nature, the profitability of future acquisitions, as well as the ability to successfully integrate new businesses. Client concentration in information technology certification testing, the potential for increased competition in all of the company's businesses, particularly non-academic testing, and dependence on government-funded contracts for contract educational services represent further concerns.

With predecessor companies dating from the 1970s, Sylvan provides educational services to families, schools, and businesses through computer- based testing services, contract supplemental education services for schools and corporations, English language instruction, and learning centers for children. Operating from 3,000 locations in the U.S. and 100 foreign countries, Sylvan provides services to over 125,000 students and delivers more than 2.2 million computer-based tests annually. The company distributes multiple services in its locations to maximize resource utilization.

Learning centers had historically been the company's core business, but are now a less significant cash flow contributor, largely due to acquisitions during the last few years. The learning center business provides individualized after-school instruction to grade school through high school students, primarily in franchised learning centers. Computer-based academic admissions and professional certification services testing has grown considerably through acquisitions and good internal growth, and is Sylvan's largest business. This business is favorably positioned in academic testing, holding exclusive contracts with Educational Testing Service, Inc. (ETS). Contracts with ETS to administer domestic and international computer-based tests extend until 2005 and 2003, respectively. Information technology certification testing has shown strong growth, and key customer Microsoft Corp. [Nasdaq:MSFT - news] accounts for a significant portion of segment cash flow, representing a measure of revenue concentration risk that is magnified by short remaining contract life and low industry barriers to entry in this area.

Further cash flow and geographic diversity are provided by international English language instruction services. Contract educational services primarily providing supplemental in-school instruction under government funding for academically and economically disadvantaged students leverage Sylvan's learning center expertise and provides additional diversity. Although contracts in this business provide an element of stability, there is potential for cash flow instability in the event of a government funding decrease.

Previous acquisitions have been under $100 million and included significant equity financing. The convertible debt offering signals a change in financial policy and the prospect for larger acquisitions. Proceeds from the offering will increase cash balances to a pro forma level of about $270 million as of June 30, 1998. Pro forma debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted for operating leases for the last 12 months ended June 30, 1998, was around 4 times, without the benefit of any acquisition-related EBITDA increases or interim interest income.

OUTLOOK: POSITIVE

Intermediate-term upgrade consideration will weigh the size, timing, and profitability of future acquisitions, as well as cash flow concentration, and the potential for increased competition in the testing segment. -- CreditWire

SOURCE: Standard & Poor's CreditWire