<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999
REGISTRATION NO. 333-87273
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DPEC, INC.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
OHIO 7371 31-1015427
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
851 WEST THIRD AVENUE
COLUMBUS, OHIO 43212
(614) 781-7300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
CAROL A. CLARK
CHAIRPERSON OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
DPEC, INC.
851 WEST THIRD AVENUE
COLUMBUS, OHIO 43212
(614) 781-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
SUSAN E. BROWN, ESQ. JEREMY W. DICKENS, ESQ.
Vorys, Sater, Seymour and Pease LLP Weil, Gotshal & Manges LLP
52 East Gay Street 767 Fifth Avenue
Columbus, Ohio 43215 New York, New York 10153-0119
(614) 464-6400 (212) 310-8000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
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 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 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. / /
--------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1999
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON SHARES
----------------------------------------------------------------
This is our initial public offering of common shares. We are offering
common shares. No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"DPEC." Anticipated Price Range: $ to $ per share.
INVESTING IN OUR SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------- --------------------------
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discount.......................................... $ $
Proceeds to DPEC............................................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
common shares on the same terms and conditions as set forth above within 30 days
solely to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares on or about , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
WARBURG DILLON READ LLC
J.C. BRADFORD & CO.
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL
SERVICES CORPORATION
FACILITATING ELECTRONIC DISTRIBUTION
, 1999.
<PAGE>
[Inside front cover]
A spherical graph of our distribution channels:
- In the center is a globe with the words "Over 340 in-depth courses" above
and the DPEC logo (the word "DPEC" with a rule line above and below in
red) below.
- Next, a concentric circle labeled "The Internet."
- Next, three more concentric circles indicating our three sales channels as
follows:
- "Direct Sales" to "Large Organization Customers" ("Over 600
Customers").
- Sales to "Small/Medium Business Users" through "Internet Service
Provider Partners" ("Over 1,100 ISP's with access to over 700,000
businesses") and "Other Marketing Partners" ("Over 85 partners").
- Sales to "Home Users" through "Internet Service Provider Partners"
("Over 1,100 ISP's with access to 8.1 million customers") and "Other
Marketing Partners" ("Over 85 partners").
Six photographs representing our customers:
- For "Large Organization Customers," a large city skyline and an office
scene with several people around a computer.
- For "Small/Medium Business Users," a store front and an office scene with
two people at a computer.
- For "Home Users," a house and a mother and daughter at a computer.
At the bottom of the page, the DPEC logo with the tag line
"Customer-powered, Web-based learning at its best"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 26
<CAPTION>
PAGE
-----
<S> <C>
Management..................................... 36
Certain Transactions........................... 44
Principal Shareholders......................... 46
Description of Capital Stock................... 47
United States Federal Income Tax Consequences
to Non-U.S. Holders.......................... 51
Shares Eligible for Future Sale................ 53
Underwriting................................... 55
Legal Matters.................................. 57
Experts........................................ 57
Additional Information......................... 58
Index to Financial Statements.................. F-1
</TABLE>
Until , 1999, all dealers selling common shares, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
- A -FOR- SPLIT OF OUR COMMON SHARES ON OR BEFORE COMPLETION OF THIS
OFFERING;
- THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED SHARES INTO COMMON
SHARES UPON CLOSING OF THIS OFFERING; AND
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
DPEC is a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers worldwide. We offer a real-time,
interactive learning experience presented through standard Web browsers
operating over a variety of presentation platforms, including the Internet,
intranets and local-area and wide-area networks. Our courses incorporate
advanced technology to enable our users to learn in a self-paced, easy-to-use
and cost-efficient manner at any time, anywhere. Drawing from our extensive
online training library, our users receive instruction in information
technology, desktop applications and professional and practical skills. We
believe we have achieved, and will be able to maintain, our industry leadership
position due to our comprehensive courses, efficient and flexible technology and
extensive distribution channels.
We distribute our courses through multiple sales channels, enabling us to
effectively reach the large user market we believe exists for our Web-based
training products:
DIRECT SALES. Our internal sales force targets businesses and other large
organizations that we believe have over $50 million in annual revenues or
otherwise possess a need for our courses and services. We currently license
our courses and provide services to over 600 direct sales customers.
INDIRECT SALES. We distribute our courses indirectly to businesses,
organizations and individual consumers through Internet service providers
and other marketing partners:
INTERNET SERVICE PROVIDERS--Internet service providers offer their
subscribers direct access to the Internet. We currently have agreements
with more than 1,100 Internet service providers who offer our courses to
their subscribers and other visitors to their Websites.
OTHER MARKETING PARTNERS--We currently have marketing alliances with over
85 businesses and organizations whose current operations support and
facilitate the sale of our Web-based training courses. These marketing
partners include technology companies that combine our courses with their
products and non-business organizations, such as colleges, universities and
trade associations, that make our courses available to their students,
staff and members.
OUR MARKET OPPORTUNITY
International Data Corporation estimates that Web-based training is the
fastest growing market within the U.S. training industry. IDC estimates that the
total U.S. market for Web-based training will increase from approximately $550
million in 1998 to approximately $7.1 billion in 2002, a 90% compound annual
growth rate.
Historically, training products and services have been marketed primarily to
large organizations, given the associated cost-efficiencies. With the rapid
adoption of the Internet and an increasing willingness by individual consumers
to purchase goods and services via the Internet, we believe training
1
<PAGE>
products can now be marketed to small organizations and individual consumers in
a cost-efficient manner.
DPEC COMPETITIVE STRENGTHS
We believe we possess the following key competitive strengths:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. We offer users
more than 340 courses in a broad range of topics. In most subjects, we offer
a number of courses from introductory to advanced. For a fixed license fee,
customers can subscribe to our entire library of online courses, a smaller
group of related courses or individual courses.
MULTIPLE DISTRIBUTION CHANNELS. Historically, we have derived the vast
majority of our revenues from the direct sale of our courses to large
organizations. At the end of 1997, we launched our indirect distribution
channels to take advantage of the significant opportunity that we believe
exists in the small organization and individual consumer markets worldwide.
PROPRIETARY COURSE DEVELOPMENT PROCESS. We use a proprietary course
development process that enables us to produce new courses rapidly while
maintaining high-quality course design and content.
UNIQUE THIRD-PARTY CONTENT SOURCING. We use third-party content to provide
a wide variety of topics in a timely and cost-effective manner without the
expense of maintaining a large research staff.
EFFICIENT AND FLEXIBLE TECHNOLOGY. We present all of our courses through
standard Web browsers to eliminate the need for our clients to download our
content and to provide users with direct, immediate access to our courses.
ON-GOING REFERENCE RESOURCE. Our powerful index features allow users to
reference any topic in any licensed course or any group of licensed courses
quickly and easily.
OUR FOCUSED GROWTH STRATEGY
Our goal is to be the leading global provider of high-quality Web-based
training courses and services. The principal elements of our growth strategy are
to:
- continue to target large organizations aggressively;
- expand sales through the Internet and other indirect marketing channels in
the U.S. and abroad rapidly;
- broaden course offerings in new and existing topics and categories and
accelerate course development;
- enhance further our technological infrastructure;
- increase brand awareness in our target markets; and
- seek possible strategic acquisitions of or investments in complementary
businesses, products, services or technologies.
SPONSORSHIP
River Cities Capital Fund II Limited Partnership, which owns 15.81% of our
common shares before this offering, has made several investments in
Internet-related companies, including High Speed Access Corp. and private
companies involved in e-commerce and Web-based content. Affiliates of
2
<PAGE>
Chrysalis Ventures own 3.56% of our common shares before this offering.
Principals of Chrysalis Ventures co-founded and invested in High Speed Access
Corp., Regal Cinemas, Inc. and Regent Communications, Inc., which was
subsequently sold to Jacor Communications. We consider the knowledge of our
sponsors an important asset, on which we may draw as we accelerate our growth.
The investment results that our sponsors may have achieved with respect to their
past investments is not intended to forecast future investment results and you
should not place undue reliance on these results.
THE OFFERING
<TABLE>
<S> <C>
Common shares offered by DPEC................ shares
Common shares to be outstanding after this shares
offering...................................
To expand our business and pay our debt. For
a more detailed description of how we intend
to use the proceeds of this offering, see
"Use of Proceeds" on page 14.
Use of proceeds..............................
Proposed Nasdaq National Market symbol....... "DPEC"
</TABLE>
The common shares to be outstanding after this offering do not include
shares issuable on exercise of outstanding stock options. For information on the
number of common shares reserved for stock options, see "Management--1999
Incentive Stock Plan" on page 41.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. The
balance sheet data as of September 30, 1999 and the financial results for the
nine months ended September 30, 1998 and 1999 are unaudited. From August 1, 1996
through September 15, 1998, we elected S-Corporation status and, accordingly,
federal income taxes were the responsibility of the individual shareholders. The
pro forma information for each of the three years in the period ended December
31, 1998 and the nine months ended September 30, 1998 have been computed as if
we had been subject to corporate income taxes for all periods presented based on
the tax laws in effect during the period. Prior to August 1, 1996 and subsequent
to September 15, 1998 we are taxed as a C-Corporation.
The pro forma as adjusted basic and diluted net income (loss) per share for
the years ended December 31, 1998 and the nine months ended September 30, 1998
and 1999 give effect to the assumed conversion of our convertible preferred
shares into common shares upon the closing of this offering and the repayment of
related party debt at the beginning of the period from a portion of the offering
proceeds.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware sales........................ $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue........................... 2,440 1,731 793 687 55
--------- --------- --------- --------- ---------
Total revenue........................... 6,845 7,346 7,867 5,384 8,245
Gross profit............................ 6,519 7,035 7,402 5,080 7,690
Net loss................................ (355) (266) (1,698) (1,492) (2,088)
Convertible redeemable preferred stock
dividends............................. -- -- -- -- (20)
--------- --------- --------- --------- ---------
Net loss available to common
shareholders.......................... $ (355) $ (266) $ (1,698) $ (1,492) $ (2,108)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per common share...............
Basic................................. $ (9.86) $ (8.37) $ (50.99) $ (45.03) $ (62.46)
Diluted............................... $ (9.86) $ (8.37) $ (50.99) $ (45.03) $ (62.46)
Pro forma net income (loss) before
taxes................................. $ 678 $ (266) $ (1,698) $ (1,492) --
Pro forma provision (credit) for income
taxes................................. 269 (116) (688) (608)
--------- --------- --------- ---------
Pro forma net income (loss)............. $ 409 $ (150) $ (1,010) $ (884)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income per common share:
Basic................................. $ 11.38 $ (4.73) $ (30.32) $ (26.67)
Diluted............................... $ 11.38 $ (4.73) $ (30.32) $ (26.67)
Weighted average shares used in per
share calculation.....................
Basic................................. 35,965 31,737 33,315 33,137 33,737
Diluted............................... 35,965 31,737 33,315 33,137 33,737
Pro forma as adjusted net income (loss)
per common share:
Basic.................................
--------- ---------
Diluted...............................
--------- ---------
Weighted average shares used in pro
forma as adjusted per share
calculation...........................
--------- ---------
</TABLE>
4
<PAGE>
The following table provides a summary of our balance sheet as of September
30, 1999. The pro forma column reflects the sale of common shares in this
offering at an assumed initial offering price of $ per share, the mid-point of
the estimated offering range, and after deducting the underwriting discount and
estimated offering expenses payable by us and gives effect to the conversion of
all outstanding preferred shares into common shares upon the closing of this
offering. For additional information on this offering and our capitalization
after the offering, see "Use of Proceeds" at page 14 and "Capitalization" at
page 15.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999
----------------------
ACTUAL PRO FORMA
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 4,362 $
Working capital (deficiency)........................................... (691)
Total assets........................................................... 10,021
Long-term debt, including current maturities........................... 1,364
Mandatorily redeemable convertible preferred shares.................... 4,853
Total shareholders' equity (deficiency)................................ (7,134)
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus or in
any amendment or supplement to this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, common shares only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common shares.
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "seeks," "should" or "will," or the negative
of these terms or other comparable terminology, are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those factors discussed under "Risk
Factors."
DPEC was incorporated in Ohio on July 21, 1981. Our principal executive
offices are located at 851 West Third Avenue, Columbus, Ohio 43212. Our
telephone number is (614) 781-7300 and our Internet address is www.dpec.com.
Information contained on our Website is not intended to be incorporated by
reference in this prospectus and you should not consider that information a part
of this prospectus.
The name "DPEC" is a registered trademark of DPEC, Inc. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE YOU DECIDE TO BUY OUR COMMON SHARES. THESE ARE NOT THE ONLY RISKS AND
UNCERTAINTIES FACING US. IF ANY OF THESE RISKS ACTUALLY OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD SUFFER. AS A RESULT, THE
TRADING PRICE OF OUR COMMON SHARES COULD FALL, AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED LOSSES IN THE PAST AND WE EXPECT TO INCUR SUBSTANTIAL LOSSES
FOR THE NEXT SEVERAL YEARS.
We incurred net losses of $937,000 for the twelve months ended July 31,
1995, $523,000 for the five months ended December 31, 1995, $355,000, $266,000
and $1,698,000 for the years ended December 31, 1996, 1997, and 1998,
respectively, and $1,492,000 and $2,088,000 for the nine months ended September
30, 1998 and 1999, respectively. We intend to increase significantly
expenditures related to:
- marketing additional courses and services to large organizations;
- signing more Internet service providers and other indirect marketing
partners;
- promoting our courses and services; and
- developing new courses to attract small organizations and individual
consumers.
We may not realize incremental revenues from these expenditures for some time,
if ever. Accordingly, we expect to continue to experience net losses and
negative cash flow for the next several years. We may not achieve profitability
if our course development and sales and marketing efforts do not significantly
increase our revenues or if they increase revenues more slowly than we expect.
Even if we do achieve profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis. Any of these eventualities could
cause our share price to decline.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE DO NOT KNOW WHETHER, OR TO WHAT
EXTENT, BUSINESSES, ORGANIZATIONS AND INDIVIDUAL CONSUMERS WILL ACCEPT WEB-BASED
TRAINING.
Our future revenues, particularly those derived from sales over the Internet
and through our other indirect distribution channels, are subject to a high
degree of uncertainty. In the past, we have derived substantially all of our
revenue from licensing information technology training products directly to
large organizations. Our business plan contemplates rapidly expanding into the
small organization and individual consumer markets through Internet service
providers and other indirect marketing channels. Our experience in these markets
is very limited. Moreover, widespread market acceptance of Web-based training by
small organizations and individual consumers is uncertain. If these markets do
not continue to develop or develop more slowly than we expect, our revenues and
profitability may be lower than expected.
OUR INABILITY TO RETAIN SKILLED PERSONNEL COULD HARM OUR BUSINESS AND
OPERATIONS.
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, including Carol A.
Clark, our Chairperson of the Board of Directors, President and Chief Executive
Officer. The loss of the services of Ms. Clark, any of our other senior level
management personnel or other key employees could hinder or prevent
implementation of our growth strategy and harm our business.
Our success also depends on our ability to attract, motivate and retain
skilled personnel. Competition for personnel in our industry is intense. Our
failure to attract and retain these key
6
<PAGE>
employees could restrict our ability to develop, market and distribute our
courses effectively and to keep pace with developing trends in our industry.
OUR PRIMARY CONTENT PROVIDER CAN TERMINATE ITS CONTRACT WITH US AND WE MAY BE
UNABLE TO ATTRACT ADDITIONAL CONTENT PROVIDERS.
Historically, we have relied on one book publisher, Macmillan Publishing
USA, for substantially all of our content. We cannot assure you that Macmillan
will continue to provide us access to new content. Additionally, there are no
restrictions on its providing content to our competitors. We continually seek
new content providers; however, we cannot assure you that we will be able to
attract, or maintain relationships with, new content providers. Loss of our main
content provider, particularly if coupled with a failure to develop new sources
of content, could increase course development costs and delay introduction of
new courses.
WE MAY NOT BE SUCCESSFUL IN RETAINING OUR CURRENT INTERNET SERVICE PROVIDERS AND
OTHER MARKETING PARTNERS OR REACHING THE SMALL ORGANIZATION AND INDIVIDUAL
CONSUMER MARKETS THROUGH THESE INDIRECT DISTRIBUTION CHANNELS.
We depend on our indirect distribution channels to grow our business by
making our courses available to their Internet access subscribers, customers and
members, which are primarily small organizations and individual consumers. We
may not succeed in these markets if:
- our Internet service providers and other marketing partners do not
promote our courses to their subscribers, customers and members
effectively or at all;
- acceptance of Web-based training by the subscribers, customers and
members of our marketing partners is lower than we or our marketing
partners expect;
- consolidation of or technological changes within the Internet service
provider industry occurs, either of which could eliminate a portion of
our revenue stream if our marketing partners are not the survivors; or
- our marketing partners do not renew their agreements with us or refuse
to renew them on acceptable terms.
Our failure to effectively address these risks could severely restrict the
distribution and marketing of our products and services to a broad population
base, which would adversely affect our ability to generate revenue.
AS A RAPIDLY-GROWING COMPANY IN THE EMERGING WEB-BASED TRAINING MARKET, WE MAY
EXPERIENCE SIGNIFICANT FLUCTUATIONS IN REVENUES AND OPERATING RESULTS, WHICH
WOULD CAUSE OUR SHARE PRICE TO BE VOLATILE.
Due to the emerging nature of the Web-based training market, we may be
unable to forecast our revenues and profitability accurately. We expect our
revenues and operating results to vary significantly from quarter to quarter
depending on:
- our ability to attract and retain corporate customers, Internet service
providers and other marketing partners;
- the number of courses our corporate customers license and the number of
users who license courses through our Internet service providers and
other marketing partners;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, including costs associated
with our introduction of new or enhanced services and with upgrading and
developing our systems and infrastructure;
7
<PAGE>
- the seasonality of our operating results;
- the future development of the Web-based training market; and
- general economic conditions.
Because many of our costs are fixed and are based on anticipated revenue
levels, variations in the timing of revenue recognition could cause significant
variations in operating results from quarter to quarter. As a result, we believe
that quarter-to-quarter comparisons of our sales and operating results are not
necessarily meaningful and may not be accurate indicators of future performance.
If our future operating results are below the expectations of securities
analysts or investors, the trading price of our shares is likely to fall.
IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AWARENESS OF THE DPEC BRAND, OUR
CUSTOMER BASE MAY NOT GROW AS QUICKLY AS EXPECTED.
We believe that developing our brand within our target markets is critical
to achieving widespread acceptance of our courses and a broad customer base. We
may not succeed in developing our brand if our large marketing partners require
extensive private labeling, more successful competitors emerge, we are unable or
fail to devote sufficent resources to marketing efforts, or course performance
problems cause customer dissatisfaction. Our inability to develop our brand
would hinder our growth.
OUR INABILITY TO MANAGE OUR GROWTH EFFECTIVELY COULD PREVENT US FROM
CAPITALIZING ON BUSINESS OPPORTUNITIES THAT MAY ARISE AND STRENGTHENING OUR
CUSTOMER BASE.
Our growth has placed, and any further growth is also likely to place, a
significant strain on our managerial, operational, financial and other
resources. We have grown from 68 employees as of December 31, 1995 to 158
employees as of October 26, 1999. Future growth will require us to implement
additional management information systems; develop further our operating,
administrative, financial and accounting systems; and maintain close
coordination among our departments. Our failure to manage our growth effectively
could limit our ability to capitalize on attractive business opportunities that
may arise, strengthen our customer base and implement our growth strategy.
IF OUR INTERNAL COMPUTER NETWORK OR OUR EXTERNAL LINKS TO THE INTERNET FAIL, WE
MAY BE UNABLE TO MARKET AND DISTRIBUTE OUR COURSES EFFECTIVELY.
The continuing and uninterrupted performance of our internal computer
network and Internet course servers is critical to our success. Any system
failure that causes interruptions or delays in our ability to provide our
courses and services to our customers could reduce customer satisfaction and, if
sustained or repeated, could reduce the attractiveness of our courses and
services. In addition, we must protect our various computer systems against
damage from fire, power loss, telecommunications failures, vandalism and other
malicious acts and similar unexpected adverse events. Despite precautions we
have taken, unanticipated problems affecting our systems have from time to time
in the past caused, and in the future could cause, interruptions or delays in
the delivery of our courses. Any damage or failure that interrupts or delays our
operations could require us to make unanticipated expenditures or harm relations
with our customers.
The failure of our telecommunications provider or our network backbone
provider, which provide us with our Internet connection, to provide the data
communications capacity and network infrastructure in the required time frame
could cause service interruptions or slower response times. This too could
reduce customer demand for our courses and services.
8
<PAGE>
WE INTEND TO EXPAND INTERNATIONALLY AND AS A RESULT WE COULD BECOME SUBJECT TO
NEW RISKS.
We intend to expand our business internationally. In doing so, we could
become subject to new risks, including:
- unexpected changes in regulatory requirements, including the regulation
of Internet access;
- uncertainty regarding liability for information retrieved and replicated
in foreign countries;
- foreign currency fluctuations, which could result in reduced revenues
and increased operating expenses;
- foreign taxes, tariffs and trade barriers;
- potentially longer payment cycles and difficulty in collecting accounts
receivable; and
- burdens of complying with a variety of foreign laws and trade standards.
We could also be subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with our international operations. The risks associated with any
international operations could materially limit the distribution of our courses
and require us to adjust our growth strategy.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND
OUR INTERNET DOMAIN NAMES COULD LEAD TO UNAUTHORIZED USE OF OUR COURSES OR
RESTRICT OUR ABILITY TO MARKET OUR COURSES.
Our success depends, in part, on our ability to protect our proprietary
rights and technology. We rely on a combination of copyrights, trademarks,
service marks, trade secret laws and employee and third-party nondisclosure
agreements to protect our proprietary rights. Despite our efforts to protect
these rights, unauthorized parties may attempt to duplicate or copy aspects of
our courses or services or obtain and use information that we regard as
proprietary. Policing unauthorized use of the software underlying our courses
and services is difficult. While we are unable to determine the extent to which
piracy of our courseware exists, piracy in general will likely be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. As a
consequence, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our courses and
services are made available.
We currently hold various registered Internet domain names. Domain names
generally are regulated by government agencies and their designees. It is
possible, however, that third-parties could acquire domain names that are
substantially similar or conceptually similar to our domain names. This could
decrease the value of our domain names and could hurt our business. The
regulation of domain names in the United States and in foreign countries is
subject to change. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. As a
result, we may not acquire or maintain exclusive rights to our domain names in
the United States or in other countries in which we conduct business.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. Our involvement in any litigation to resolve
such matters would require us to incur substantial costs and divert management's
attention and resources. In addition, we cannot predict the effect of a failure
to prevail in any litigation of this kind.
OUR FAILURE OR THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
CAUSE US TO INCUR SIGNIFICANT COSTS AND LOSE REVENUES.
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Failure of
our internal infrastructure or courses or failure of any third-party equipment
or software to operate properly when the year changes
9
<PAGE>
to 2000 could severely disrupt our operations, divert management's time and
attention and require us to incur significant unanticipated expenses.
In addition, the purchasing patterns of our customers and potential
customers may be affected by actual or perceived concerns about Year 2000
issues. Organizations that need to expend significant resources to correct their
current systems for Year 2000 compliance may have fewer funds available to
purchase our courses and services, which would reduce our revenues and
profitability.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS, OR AT ALL.
We expect the proceeds of this offering, together with cash generated from
operations and our current cash and cash equivalents, will be sufficient for us
to meet our working capital and capital expenditure requirements for at least
the next 18 months. After that time, we may need to obtain additional funds to
finance our operations and sustain our growth. In addition, we intend to pursue
acquisition and investment activities selectively, which could require us to
raise more capital. Additional financing may not be available on terms favorable
to us, or at all, which could require us to revise our growth strategy and
implement changes to our operations.
WE MAY BE SUBJECT TO LEGAL LIABILITY IF THE CONTENT WE DISTRIBUTE IS FACTUALLY
INACCURATE.
We obtain the content contained in our courses from third-parties. Although
we routinely review the content for substantive accuracy, we cannot be sure that
information published in our courses will be factually accurate. Additionally,
we may be unable to update our course content on a timely basis to reflect
advances in technology or other changes relating to the subject matter of our
courses. Our inability to provide factually accurate content could subject us to
costly litigation and force us to divert financial and other resources to
address these issues.
ANY ACQUISITIONS OR INVESTMENTS WE MAKE COULD BE DISRUPTIVE TO OUR BUSINESS,
HAVE ADVERSE ACCOUNTING CONSEQUENCES OR BE DILUTIVE TO OUR INVESTORS.
Although we have no present agreement or understanding relating to any
material acquisition or investment, from time to time we have had discussions
with companies regarding acquiring or investing in their businesses. If we
acquire a company, we could have difficulty in assimilating its operations or
assimilating and retaining its key personnel. These difficulties could disrupt
our ongoing business and distract our management and employees. Also,
acquisitions may result in a variety of accounting charges, such as amortization
of goodwill and the write off of acquired in-process research and development,
that would increase our reported expenses. Furthermore, we may pay for future
acquisitions or investments with debt that reduces our financial flexibility or
equity securities that dilute current shareholders' investments.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN A RAPIDLY CHANGING, HIGHLY COMPETITIVE MARKET, AND WE MAY NOT HAVE
ADEQUATE RESOURCES TO COMPETE SUCCESSFULLY.
The Web-based training market is evolving quickly and is subject to rapid
technological change, shifts in customer demands and evolving industry
standards. To succeed, we must continue to expand our course offerings and
upgrade our technology. We may not be able to do so successfully. Any failure by
us to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in course development or introduction,
could allow our competitors to attract and maintain a greater customer base than
we.
10
<PAGE>
The Web-based training market is characterized by significant price
competition. We expect to face increasing price pressures from competitors as
information systems managers demand more value for their training budgets.
Increased competition or our inability to compete successfully against current
and future competitors could result in reduced operating margins, as well as
loss of market share and brand recognition.
Although the Web-based training market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. Our
competitors vary in size and in the scope and breadth of the courses and
services they offer. Several of our competitors have longer operating histories
and significantly greater financial, technical and marketing resources. We
anticipate that the lack of significant entry barriers to the Web-based training
market will allow other competitors to enter the market, increasing competition.
OUR BUSINESS COULD BE HARMED BY CONSUMERS' CONCERNS ABOUT THE SECURITY OF
TRANSACTIONS OVER THE INTERNET.
We believe that concerns regarding the security of confidential information
transmitted over the Internet, such as credit card numbers, prevent many
potential customers from engaging in online transactions like that required to
initiate one of our training courses. Our success may depend on our ability to
add sufficient security features to our course subscription procedures and to
instill confidence in those features in our customers. If we fail to do so, our
courses may not gain market acceptance.
DUE TO OUR USE OF THE INTERNET, INTRANETS, WEB SERVERS AND BROWSERS AS
PRESENTATION VEHICLES FOR OUR COURSES, OUR SUCCESS DEPENDS ON CONTINUED
DEVELOPMENT AND MAINTENANCE OF THESE TECHNOLOGIES BY OTHER COMPANIES.
Our success is highly dependent on the continued growth and maintenance of
the Internet, intranets, Web servers and browsers over which we present our
courses. There can be no guarantee that the general use of the Internet,
intranets, Web servers or browsers will continue to grow. Several factors over
which we have no control, including concerns related to security, compatibility,
cost, ease of use and access, could limit future growth in Internet, intranet,
Web server and browser use, which would limit or prevent implementation of our
growth strategy.
WE FACE LEGAL UNCERTAINTIES RELATING TO THE INTERNET IN GENERAL AND TO OUR
INDUSTRY IN PARTICULAR AND MAY BECOME SUBJECT TO COSTLY GOVERNMENT REGULATION.
The applicability to the Internet of existing laws is uncertain and
developing with regard to many issues, including sales tax, intellectual
property ownership and infringement, copyright, trademark, trade secret,
obscenity, libel, export of encryption technology and personal privacy.
There are an increasing number of laws and regulations pertaining to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services.
In addition, it is possible that more laws and regulations may be adopted with
respect to the Internet, such as laws or regulations relating to user privacy,
taxation, email, pricing, Internet access, content, copyrights, distribution and
characteristics and quality of products and services. Various state statutes
govern private post-secondary educational institutions. It is uncertain whether
states will attempt to apply these statutes to regulate the offering of courses
over the Internet.
Changes in existing laws and the adoption of additional laws or regulations
may decrease the popularity or limit expansion of the Internet. A decline in the
growth of the Internet could decrease demand for our courses and services and
increase our cost of doing business.
11
<PAGE>
RISKS RELATED TO THE OFFERING
OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US AND MAY BE ABLE
TO DELAY OR PREVENT A CHANGE IN OUR CONTROL.
We anticipate that our executive officers, directors and entities affiliated
with them together will beneficially own approximately % of our
outstanding common shares following the completion of this offering. As a
result, these shareholders will be able to exercise substantial influence over
all matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control.
RESTRICTIONS ON THE RESALE OF COMMON SHARES, OR % OF OUR TOTAL
OUTSTANDING COMMON SHARES, COULD CAUSE THE MARKET PRICE OF OUR COMMON SHARES TO
DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding common shares.
This includes the common shares we are selling in this offering,
which may be resold in the public market immediately. The remaining %, or
common shares, of our total outstanding common shares will become
available for resale in the public market as shown in the chart below, in some
cases subject to legal restrictions on the number of shares that may be sold in
any 90-day period.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES/% OF TOTAL OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET
<S> <C>
/ % 180 days after the date of this prospectus due to an
agreement these shareholders have with the
underwriters. However, the underwriters can waive this
restriction and allow these shareholders to sell their
shares at any time.
/ % Between 90 and 365 days after the date of this
prospectus due to the requirements of the federal
securities laws.
</TABLE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR SHARES, AND OUR SHARE PRICE IS LIKELY TO
BE HIGHLY VOLATILE.
Prior to this offering, there has been no public market for our common
shares. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our shares or how liquid that
market might become. The initial public offering price for the shares will be
determined through negotiations between our board of directors and the
representatives of the underwriters, and may not be indicative of prices that
will prevail in any future trading market. The stock market has experienced
extreme price and volume fluctuations. The market prices of the securities of
Internet-related companies have been especially volatile. In the past, companies
that have experienced volatility in the market price of their shares have been
the object of securities class action litigation. If we were the object of
securities class action litigation, we could face substantial costs and a
diversion of our management's attention and resources.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING.
Our management will have broad discretion over the application of the net
proceeds from this offering, as well as over the timing of the expenditure of
proceeds. As a result, investors will be relying
12
<PAGE>
on management's judgment with only limited information about its specific
intentions for use of the proceeds.
OUR ANTI-TAKEOVER PROVISIONS COULD PREVENT A THIRD-PARTY FROM ACQUIRING YOUR
SHARES AT A PREMIUM TO THE MARKET PRICE.
Various provisions of our articles of incorporation, our code of regulations
and Ohio law, together with the concentration of ownership in our executive
officers, our directors and entities affiliated with them, could make it more
difficult for a third-party to acquire us, even if you believe that doing so
would be beneficial to you and our other shareholders.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT.
Purchasers of common shares in this offering will incur immediate and
substantial dilution of $ in the pro forma net tangible book value per
common share from the assumed initial public offering price. Net tangible book
value represents the amount of our tangible assets less our total liabilities.
To the extent outstanding stock options to purchase common shares are exercised,
there may be further dilution to investors, because all of our outstanding stock
options have an exercise price below the initial public offering price.
13
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds we will receive from this offering will be
approximately $ ($ if the underwriters exercise their over-allotment
option in full) at an assumed initial public offering price of $ per share,
which is the midpoint of the price range set forth on the front cover page of
this prospectus.
We are conducting this offering primarily to increase our equity capital,
create a public market for our common shares and to facilitate future access by
us to public equity markets. We do not have specific uses planned for much of
the offering proceeds. We currently intend to use the net proceeds from this
offering to:
- repay existing indebtedness in the aggregate principal amount of $714,286
as of October 27, 1999 to Carol A. Clark, our Chairperson of the Board,
President and Chief Executive Officer, pursuant to the terms of a
promissory note dated May 10, 1996, that accrues interest at a rate of 1%
over prime and matures in November 2004;
- repay existing indebtedness in the aggregate principal amount of $143,256
as of October 27, 1999 to Frances Papalios, a shareholder and our
co-founder and a former member of our board of directors, pursuant to the
terms of a promissory note dated May 10, 1996, that accrues interest at a
rate of 8% per annum and matures in April 2001; and
- fund general corporate purposes, including anticipated losses, capital
expenditures, development of our courses and services, and expansion of
our sales and marketing activities.
In addition, we may use a portion of the net proceeds from this offering to
acquire complementary businesses, products or technologies. Although we have
from time to time had discussions with companies regarding our acquiring or
investing in their businesses, we have no present agreement or understanding,
and are not currently engaged in negotiations, relating to any material
acquisition or investment.
We have not yet determined the amount of net proceeds to be used
specifically for all of the foregoing purposes. Accordingly, management will
have significant flexibility in applying the net proceeds of this offering.
Pending these uses, we intend to invest the net proceeds from this offering in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common shares in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the development and growth of our business. Any future determination to
pay cash dividends will be at the discretion of our board of directors and will
depend upon our financial condition, operating results, capital requirements and
other factors our board of directors deems relevant. Loan agreements and
contractual arrangements that we enter into in the future also may restrict our
payment of dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of September 30, 1999. Our capitalization is
presented:
- on an actual basis; and
- on a pro forma basis to reflect our receipt of the estimated net proceeds
from the sale of the common shares to be sold in this offering at an
assumed initial public offering price of $ per share, the mid-point of
the anticipated price range, after deducting the underwriting discount and
estimated offering expenses and to give effect to the repayment of related
party debt and the automatic conversion of all outstanding preferred
shares into common shares upon the consummation of this offering.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999
----------------------
ACTUAL PRO FORMA
--------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 4,362 $ --
--------- -----------
--------- -----------
Short-term debt........................................................ $ 335 $ --
--------- -----------
--------- -----------
Long-term debt, less current portion................................... $ 1,029 $ --
Convertible preferred shares, no par value; 8,102 shares authorized,
8,102 shares issued and outstanding, actual; none authorized, issued
and outstanding, pro forma........................................... 4,853 --
Shareholders' equity (deficiency):
Common shares, no par value; 61,898 shares authorized; 44,550 shares
issued, actual; and shares issued, pro forma..................... 55 --
Treasury shares, at cost............................................. (935)
Additional paid-in capital........................................... -- --
Accumulated deficit.................................................. (6,254) --
--------- -----------
Total shareholders' equity (deficiency)................................ (7,134) --
--------- -----------
Total capitalization................................................. $ (1,252) $ --
--------- -----------
--------- -----------
</TABLE>
In addition to the common shares to be outstanding after this offering, as
of September 30, 1999 we may issue additional common shares pursuant to the
following plans and arrangements:
- 1,189 shares underlying stock options issued under the Amended and
Restated Stock Option Plan outstanding, at a weighted average exercise
price of $76.15 per share, of which 844 are currently exercisable; and
- 3,655 shares issuable under our 1998 Stock Option Plan, consisting of:
- 1,445 shares underlying stock options outstanding, at a weighted
average exercise price of $319.84 per share, none of which are
currently exercisable; and
- 2,210 shares available for future grants.
Please read "Selected Financial Data" on page 17 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 19 and the financial statements beginning on page F-1 of this prospectus.
15
<PAGE>
DILUTION
As of September , 1999, our pro forma net tangible book value was $ ,
or approximately $ per share. Pro forma net tangible book value per share
represents the amount of tangible assets less total liabilities, divided by the
number of common shares outstanding on a pro forma basis after giving effect to
the conversion of all outstanding preferred shares into common shares.
Without taking into account any other changes in the net tangible book value
after September , 1999, other than the sale of the shares offered hereby at an
assumed offering price of $ per share, our pro forma net tangible book
value as of September , 1999, would have been $ , or $ per share.
The pro forma net tangible book value assumes that the proceeds to us, net of
offering expenses and underwriting discount, will be approximately $ . This
represents an immediate increase in net tangible book value to existing
shareholders attributable to new investors of $ per share and the immediate
dilution of $ per share to new investors, a significant disparity between
the price paid by new investors for shares sold in the offering and the pro
forma net tangible book value of the shares.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
---------
Pro forma net tangible book value per share before this
offering.............................................. $
---------
Increase per share attributable to new investors........
---------
Pro forma net tangible book value per share after this
offering..............................................
---------
Dilution per share to new investors..................... $
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of September ,
1999, the differences between existing shareholders and the new investors with
respect to the number of common shares purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by the new investors purchasing common shares in this offering,
at an assumed initial public offering price of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.................... % $ % $
New investors............................
--------- --- --------- ---
Total.................................... $ % $ %
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
Our calculations do not take into account exercise of the underwriters'
over-allotment option or of any outstanding stock options. As of September ,
1999, there were stock options outstanding to purchase common shares
at a weighted average exercise price of $ per share, as more fully
described on page 15. additional shares were reserved for future grants
under our stock option plans. To the extent that any of these options is
exercised, there will be further dilution to new investors.
Please read the Capitalization table on page 15 together with the sections
of this prospectus entitled "Selected Financial Data" on page 17 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 19 and the financial statements beginning on page F-1 of
this prospectus.
16
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 19 of this prospectus.
We have derived the statement of operations data for the years ended December
31, 1996, 1997 and 1998, and the balance sheet data as of December 31, 1997 and
1998 from financial statements that Deloitte & Touche LLP, independent auditors,
have audited and that are included beginning on page F-1 of this prospectus. We
have derived the information for fiscal years ended July 31, 1994 and 1995, the
five months ended December 31, 1995 and the nine months ended September 30, 1998
and 1999, from our unaudited financial statements. The unaudited financial
statements have been prepared on substantially the same basis as the audited
financial statements and, in the opinion of management, these financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
those periods. Historical results are not necessarily indicative of results to
be expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year.
Effective December 31, 1996, we changed our fiscal year end from July 31 to
December 31. References to Fiscal 1994 and Fiscal 1995 refer to our fiscal years
ended July 31 for each respective year. References to the five months ended
December 31, 1995 refer to the transition period to a calendar year. References
to Fiscal 1996, Fiscal 1997 and Fiscal 1998 refer to our fiscal years ended
December 31 for each respective year.
From August 1, 1996 through September 15, 1998, we elected S-Corporation
status and, accordingly, federal income taxes were the responsibility of our
individual shareholders. The pro forma information has been computed as if we
had been subject to corporate income taxes for all periods presented based on
the tax laws in effect during the period. Prior to August 1, 1996 we were, and
subsequent to September 15, 1998 we have been, taxed as a C-Corporation.
<TABLE>
<CAPTION>
FIVE MONTHS NINE MONTHS
FISCAL YEAR ENDED ENDED SEPTEMBER
ENDED JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31, 30,
-------------- ------------ ------------------------- ----------------
1994 1995 1995 1996 1997 1998 1998 1999
------ ------ ------------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware sales.................................. $2,983 $2,826 $ 1,032 $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue..................................... 738 1,148 647 2,440 1,731 793 687 55
------ ------ ------------ ------- ------- ------- ------- -------
Total revenue..................................... 3,721 3,974 1,679 6,845 7,346 7,867 5,384 8,245
Cost of sales..................................... 91 417 69 326 311 465 304 555
------ ------ ------------ ------- ------- ------- ------- -------
Gross profit...................................... 3,630 3,557 1,610 6,519 7,035 7,402 5,080 7,690
Operating expenses................................ 3,410 4,512 2,055 5,691 7,120 8,994 6,459 9,753
------ ------ ------------ ------- ------- ------- ------- -------
Income (loss) from operations..................... 220 (955) (445) 828 (85) (1,592) (1,379) (2,063)
Interest expense (income)......................... (6) 60 33 150 181 106 113 25
------ ------ ------------ ------- ------- ------- ------- -------
Income (loss) before income taxes................. 226 (1,015) (478) 678 (266) (1,698) (1,492) (2,088)
Provision (benefit) for income taxes.............. 170 (78) 45 1,033 -- -- -- --
------ ------ ------------ ------- ------- ------- ------- -------
Net income (loss)................................. $ 56 $ (937) $ (523) $ (355) $ (266) $(1,698) $(1,492) $(2,088)
Convertible redeemable preferred stock
dividends....................................... -- -- -- -- -- -- -- (20)
------ ------ ------------ ------- ------- ------- ------- -------
Net loss available to common shareholders......... $ 56 $ (937) $ (523) $ (355) $ (266) $(1,698) $(1,492) $(2,108)
------ ------ ------------ ------- ------- ------- ------- -------
------ ------ ------------ ------- ------- ------- ------- -------
Net income (loss) available to common shareholders
per share:
Basic........................................... $ 5.86 $(8.35) $ (9.34) $ (9.86) $ (8.37) $(50.99) $(45.03) $(62.46)
Diluted......................................... 5.86 (8.35) (9.34) (9.86) (8.37) (50.99) (45.03) (62.46)
Pro forma income (loss) before income taxes....... $ 678 $ (266) $(1,698) $(1,492)
Pro forma provision (credit) for income taxes..... 269 (116) (688) (608)
------- ------- ------- -------
Pro forma net income (loss)....................... $ 409 $ (150) $(1,010) $ (884)
------- ------- ------- -------
------- ------- ------- -------
Pro forma net income (loss) per common share
Basic........................................... $ 11.38 $ (4.73) $(30.32) $(26.67) --
Diluted......................................... 11.38 (4.73) (30.32) (26.67) --
Weighted average shares used in per share
calculations
Basic........................................... 44,550 44,550 44,550 35,965 31,737 33,315 33,137 33,737
Diluted......................................... 44,550 44,550 44,550 35,965 31,737 33,315 33,137 33,737
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, DECEMBER 31,
-------------------- ------------- ------------------------------- SEPTEMBER 30,
1994 1995 1995 1996 1997 1998 1999
--------- --------- ------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 137 $ -- $ 70 $ 8 $ -- $ 1,835 $ 4,362
Working capital (deficiency)................ 314 (618) (1,783) (1,435) (1,778) (802) (691)
Total assets................................ 1,046 2,252 2,047 2,107 2,857 5,273 10,021
Total long-term debt (including current
maturities)............................... 203 772 1,053 2,258 2,344 1,095 1,364
Convertible redeemable preferred shares..... -- -- -- -- -- 1,893 4,853
Total shareholders's equity (deficiency).... 519 (418) (941) (2,376) (2,642) (4,761) (7,134)
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" ON PAGE 17 AND OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES BEGINNING ON PAGE F-1 OF THIS PROSPECTUS. THIS DISCUSSION CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FOR A
DISCUSSION OF THE RISKS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, SEE "RISK FACTORS" ON PAGE 6.
OVERVIEW
We are a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers. We license our courses and services
directly to large organizations through our direct sales force and indirectly to
businesses, organizations and individual customers through agreements with our
Internet service providers and other marketing partners.
REVENUES
We derive our revenues from:
- courseware sales, which represent sales of courses we have developed; and
- other revenues, which represent net royalties from sales of courses we
obtained from third-parties.
Currently, we derive our revenues primarily from license agreements under
which our customers license our courses, typically for one, two or three year
periods and generally receive upfront payments for the term of the license.
Until late 1997, we sold our courses primarily on a per-course basis. However,
to provide additional value to our customers, we now group our courses into
standard curricula and offer them on more favorable pricing terms than our
per-course pricing.
In the past, we recognized a substantial portion of revenue from the sale of
courses produced by third-parties. In 1997, we began de-emphasizing the sale of
third-party courses as we increased the development of our own courses. In
August 1998, we made a strategic decision to eliminate third-party courses, and
by February 1999 we had discontinued the sale of third-party courses to new
customers. Decreases in other revenues are due to the decision to de-emphasize,
and later to discontinue, the selling of third-party courses to new customers.
We also provide our courses through Internet service providers and other
marketing partners. Our Internet service providers and other marketing partners
can provide our courses to their customers by either hosting our courses on
their Internet sites or by linking their customers to our Internet site. If the
provider/partner hosts the courses, it bills customers and remits a royalty to
us. If the provider/ partner is linking to our Internet site, we bill the
customers, record revenue from the subscription and expense the royalty. In both
cases, because the customer has access to unspecified additional courses, the
revenue is treated as a subscription and recorded on a straight-line basis over
the term of the subscription. We believe that in the future many of our Internet
service providers and other marketing partners will link their customers to our
Internet site.
EXPENSES
Our expenses are comprised of the following:
COST OF SALES consists primarily of royalties paid to our content providers,
fulfillment costs and materials, such as CD-ROMs, packaging and
documentation.
SALES AND MARKETING EXPENSES consist primarily of salaries, payroll taxes,
commissions and related employee benefits to sales and marketing personnel,
as well as advertising and promotional expenses. To a lesser degree, sales
and marketing expenses include telemarketing, travel and communication
expenses. We expect that our sales and marketing expenses will increase
19
<PAGE>
significantly as we pursue our efforts to enter into more relationships with
Internet service providers and other marketing partners.
PRODUCT DEVELOPMENT EXPENSES consist primarily of salaries, payroll taxes,
incentive compensation and related employee benefits to course developers,
programmers and related support staff. We plan to invest significantly in
the development of new courses to complement and expand our existing library
of courses. We expect that our course development expenses will increase
significantly as we hire additional personnel to increase course production.
GENERAL AND ADMINISTRATIVE EXPENSES consist primarily of salaries, payroll
taxes, incentive compensation and related employee benefits for
administrative, operations and finance personnel as well as expenses for
occupancy and for professional services. We expect to hire additional
support personnel and to incur other expenses associated with being a public
company, including increased legal and accounting fees.
Following this offering, we plan to invest significantly to develop new
courses to complement and expand our existing course library. In addition, we
plan to significantly increase marketing related to our indirect distribution
channels. As a result of planned increases in personnel and marketing costs, we
expect to incur significant operating and net losses for at least the next two
years.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues increased $2.8 million, or 53.1%, from $5.4 million for the
first nine months of 1998 to $8.2 million for the comparable 1999 period. This
increase in total revenues was due to a $3.4 million, or 74.4%, increase in
courseware sales to large organizations, partially offset by a $0.6 million
decrease in third-party courseware sales. Revenues related to Internet service
providers increased from zero for the first nine months of 1998 to $0.3 million
for the comparable 1999 period. Revenues related to other marketing partners
increased from zero for the first nine months of 1998 to $0.3 million for the
comparable 1999 period. The increase in courseware revenues resulted from the
growing acceptance of our curriculum pricing, the expanded number of available
courses, customer contract renewals and increased marketing and sales
distribution efforts.
GROSS PROFIT
Gross profit increased $2.6 million, or 51.4%, from $5.1 million in the
first nine months of 1998 to $7.7 million for the comparable 1999 period. The
gross profit margin decreased from 94.3% for the first nine months of 1998 to
93.3% for the comparable 1999 period as a result of additional royalty payments
to content providers.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $1.6
million, or 53.7%, from $3.0 million for the first nine months of 1998 to $4.6
million for the comparable 1999 period. As a percentage of revenues, sales and
marketing expenses increased slightly from 55.7% for the first nine months of
1998 to 55.9% for the comparable 1999 period. The increase in sales and
marketing expenses was attributable to additional compensation of $0.8 million
for our sales and marketing staff, which increased from 41 people at September
30, 1998 to 59 people at September 30, 1999, as we expanded into indirect
distribution channels and to increased promotional expenses of $0.6 million.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased $1.3
million, or 77.9%, from $1.6 million for the first nine months of 1998 to $2.9
million for the comparable 1999 period. As a percentage of revenues, product
development expenses increased from 30.7% for the first nine months of 1998 to
35.7% for the comparable 1999 period. The increase in product development
20
<PAGE>
expenses was attributable to an increase in compensation for our product
development staff, as the number of course developers, programmers and other
support staff increased from a total of 43 at September 30, 1998 to 62 at
September 30, 1999. We increased staffing in these areas so that we could
accelerate the development of new courses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.4 million, or 21.8%, from $1.8 million for the first nine months of
1998 to $2.2 million for the comparable 1999 period. As a percentage of
revenues, general and administrative expenses decreased from 33.6% for the first
nine months of 1998 to 26.7% for the comparable 1999 period. The increase in
general and administrative expenses was for compensation for our administrative
personnel, which increased from a total of 24 people at September 30, 1998 to 27
people at September 30, 1999.
INTEREST EXPENSE, NET. Interest expense, net of interest income, decreased
from $113,000 for the first nine months of 1998 to $25,000 for the comparable
1999 period due to a reduction in the principal amount of outstanding debt and
an increase in interest income related to short-term investments. Interest
income increased from $7,000 for the first nine months of 1998 to $51,000 for
the comparable 1999 period.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Total revenues, including other revenues, increased $0.5 million, or 7.3%,
from $6.8 million in 1996 to $7.3 million in 1997, and increased $0.6 million,
or 7.1%, from $7.3 million in 1997 to $7.9 million in 1998. The increase in
total revenues from 1996 to 1997 was primarily due to a $1.2 million, or 27.5%,
increase in course sales to large organizations, partially offset by a $0.7
million decrease in third-party courseware sales. Similarly, the increase in
total revenues from 1997 to 1998 was due to a $1.5 million, or 26.0%, increase
in courseware sales to large organizations, partially offset by a $0.9 million
decrease in third-party courseware sales. The increase in revenues from 1996 to
1997, and from 1997 to 1998, was the result of an expanded number of courses,
the introduction of curriculum plan pricing, customer contract renewals and
increased marketing and sales distribution efforts. Distributing our courses
through Internet service providers and other marketing partners commenced in
late 1997 and accounted for an aggregate $0.1 million of our revenue increase
from 1997 to 1998.
GROSS PROFIT
Gross profit increased $0.5 million, or 7.9%, from $6.5 million in 1996 to
$7.0 million in 1997, and increased $0.4 million, or 5.2%, from $7.0 million in
1997 to $7.4 million in 1998. The gross profit percentage remained approximately
the same at 95.2% in 1996 to 95.8% in 1997, but then decreased to 94.1% in 1998
as a result of additional royalty payments to content providers.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $0.8
million, or 29.8%, from $2.7 million in 1996 to $3.5 million in 1997, and
increased $0.8 million, or 24.0%, from $3.5 million in 1997 to $4.3 million in
1998. Sales and marketing expenses increased as a percentage of revenues from
39.0% in 1996 to 47.2% in 1997 and to 54.7% in 1998. The increase in sales and
marketing expenses was attributable to an increase in compensation for our sales
and marketing staff, which increased from 32 people at December 31, 1996 to 34
at December 31, 1997 and to 44 at December 31, 1998. Eight of the ten people
added in 1998 were dedicated to the development of indirect distribution
channels.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased $0.5
million, or 38.4%, from $1.5 million in 1996 to $2.0 million in 1997, and
increased $0.4 million, or 16.9%, to $2.4 million in 1998. Product development
expenses increased as a percentage of revenues from 21.5% in 1996 to 27.7% in
1997 and to 30.3% in 1998. The increase in product development expenses was
attributable to
21
<PAGE>
an increase in compensation for our product development staff, as the number of
course developers, programmers and other support staff increased from a total of
22 at December 31, 1996 to 41 at December 31, 1997 and to 52 at December 31,
1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.1 million, or 4.3%, from $1.5 million in 1996 to $1.6 million in
1997, and increased $0.7 million, or 43.2%, from $1.6 million in 1997 to $2.3
million in 1998. General and administrative expenses decreased as a percentage
of revenues from 22.6% in 1996 to 22.0% in 1997 and increased to 29.4% in 1998.
The increase in general and administrative expenses was related to compensation
for our administrative personnel, which increased from 18 people at December 31,
1996 to 22 at December 31, 1997 to 24 at December 31, 1998.
INTEREST EXPENSE, NET. Interest expense, net increased from $150,000 in
1996 to $181,000 in 1997 and then decreased to $106,000 in 1998. The increase in
1997 was related to increased bank borrowings during the year and to shareholder
loans, which were outstanding for only the last seven months in 1996. In 1998,
interest expense decreased when we paid down and subsequently eliminated our
bank debt in July 1998, principally as a result of significantly increased net
income. Interest income for 1996 and 1997 was insignificant and was $33,000 for
1998.
INCOME TAXES. We were treated as an S-Corporation for federal income tax
purposes from August 1, 1996 to September 15, 1998. During that period the
federal and state taxable income and expenses flowed directly to our
shareholders and were not taxed at the corporate level. At December 31, 1998, we
had net operating loss carryforwards for federal and state tax purposes of
approximately $300,000 that will expire at various times through 2018. At
December 31, 1998, we had a net deferred tax asset of $2,494,000 relating
principally to deferred revenue and our net operating loss carryforwards. Our
ability to realize the value of our deferred tax asset depends on our future
earnings, if any, the timing and amount of which are uncertain. We have recorded
a valuation allowance for the entire net deferred tax asset as a result of those
uncertainties. Accordingly, we did not record any income tax benefit for net
losses incurred from September 16, 1998 through December 31, 1998.
On August 1, 1996, the date we elected S-Corporation status, we eliminated a
net deferred tax asset of approximately $807,000 from the balance sheet, which
was recognized as income tax expense. For the period from August 1, 1996 through
December 31, 1996 approximately $38,000 of income tax related to our operations
for the period was borne by our shareholders.
On September 15, 1998, the date our S-Corporation status terminated, we
established a net deferred tax asset of approximately $2,359,000, which was
offset by a full valuation reserve, resulting in no income tax benefit. For the
period from January 1, 1998 through September 15, 1998 approximately $465,000 of
income tax benefit related to our operations for the period was utilized by our
shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased from $2.8 million for
the first nine months of 1998 to $0.4 million for the comparable 1999 period.
This $2.4 million decrease was primarily due to a $0.6 million increase in net
loss and a $1.2 million reduction in the deferred revenue increase.
Net cash provided by operating activities decreased from $0.2 million in
1996 to $0.1 million in 1997 and increased to $2.0 million in 1998. The decrease
in net cash from operating activities in 1997 was primarily due to the
elimination of our deferred tax assets as a result of our change in income tax
status, and the increase in 1998 was primarily due to the increase in deferred
revenue.
Cash and cash equivalents at September 30, 1999 totaled $4.4 million. We had
no cash or cash equivalents as of December 31, 1996 and 1997. Cash and cash
equivalents increased to $1.8 million as of December 31, 1998, due primarily to
deferred revenues and from the proceeds from the sale of
22
<PAGE>
convertible preferred shares in September 1998. This increase was offset by
expenditures for property and equipment, distributions to S-Corporation
shareholders to pay income taxes and repayment of debt.
On July 28, 1999, we entered into a $3,000,000 line of credit and a $500,000
term note with a bank. The line of credit, which expires on October 31, 2001,
bears interest at the bank's prime rate minus 0.5%. No amounts are outstanding
at October 29, 1999. The term note, which matures on July 31, 2004, bears
interest at 8.04%. The line of credit and the term note contain restrictive
covenants which, among others, require the Company to maintain a certain level
of cash flow, as defined. Our other significant commitments consist of two
promissory notes payable to two shareholders, including Carol A. Clark, our
Chairperson of the Board, President and Chief Executive Officer, in the
aggregate principal amount of $857,542 as of October 27, 1999. We intend to use
a portion of the proceeds of this offering to repay these shareholder notes.
Prior to September 1998, we financed the majority of our operations through
bank borrowings and shareholder loans. The $2.0 million net cash provided by
operating activities and the net proceeds of $1.9 million from the sale of
convertible redeemable preferred shares in September 1998 allowed us to repay
bank debt and increase our cash and cash equivalents. In addition, we began to
implement our expansion strategy and incur the related personnel and other
expenses associated with developing additional courses and developing and
promoting our indirect sales channels.
On August 27, 1999 we issued 2,979 series B convertible redeemable preferred
shares for proceeds of $3,000,121.
Our capital requirements depend on numerous factors, including market
acceptance of our courses and services and the resources we allocate to course
development, developing and promoting our indirect sales channels and marketing
our courses and services. We have experienced substantial increases in our
expenditures during the last two years in order to develop our own courses and
distribute them through Internet service providers and other marketing partners.
We anticipate that our expenditures will continue to increase for the
foreseeable future. Additionally, we will continue to evaluate possible
acquisitions of or investments in complementary businesses, technologies,
services or products. We currently believe that our available cash and cash
equivalents combined with the net proceeds from this offering will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
the next 18 months. We may need to obtain additional funds, however, in order
to:
- fund more rapid expansion, including significant increases in personnel;
- develop new or enhanced courses or products;
- add new Internet service providers and other marketing partners;
- respond to competitive pressures; or
- to acquire or invest in complementary businesses, technologies, services
or products.
In order to meet our long term liquidity needs, we may need to raise additional
funds, establish an additional credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all.
YEAR 2000 CONCERNS
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. This could result in system
failures or miscalculations causing disruptions
23
<PAGE>
of operations for any company using these computer programs or hardware,
including, among other things, an inability to connect to the Internet, process
transactions, send invoices or engage in normal business activities. As a
result, many companies and individuals must upgrade or replace their computer
systems to avoid "Year 2000" issues.
We have used internal resources to identify, test and, as necessary, correct
or reprogram our products for Year 2000 compliance. We have determined that our
current software platforms are Year 2000 compliant, except for certain older
software platforms that we have discontinued and do not plan to make Year 2000
compliant. We have tested the software obtained from third-parties that we use
to author and present our courses, but we also intend to seek assurances from
these third-parties that their software is Year 2000 compliant. Despite our
testing or assurances from third-party software providers, there can be no
assurances our products do not contain undetected errors or defects associated
with Year 2000 date functions which may result in delay or loss of revenue,
diversion of development resources, damage to our reputation, costs for
third-party damage claims, or increased service costs, any of which could have a
material adverse effect on our business and financial results.
In addition to our internally developed software, we use software and
hardware developed by third-parties both for our network and internal
information systems. We have conducted testing of third-party software and
hardware to determine Year 2000 compliance. Our testing has indicated that only
a few pieces of software and hardware are not Year 2000 compliant. These are
scheduled to be replaced by November 5, 1999 at a total cost of less than
$100,000. In addition, we have completed the process of obtaining certifications
from our vendors to the effect that their hardware and software is Year 2000
compliant.
We rely on third-party network infrastructure providers to gain access to
the Internet. We also rely on other third-party providers such as utilities who
provide electricity to our physical facilities. If these providers experience
business interruptions as a result of their failure to achieve Year 2000
compliance, our ability to provide Internet connectivity, for example, could be
impaired, which could have a material adverse effect on our business and
financial results.
We expect to fund our Year 2000 readiness plan from operating cash flows and
in the past have not separately accounted for these costs. These costs have
principally been the related payroll costs for personnel in the development and
information systems group. We believe that these costs have not been material.
We have a contingency plan to deal with the worst-case scenario that might
occur if technologies upon which we depend are not Year 2000 compliant and fail
to operate effectively. If our present efforts to address our potential Year
2000 compliance issues are not successful, or if our Internet service providers
and other marketing partners, vendors and other third parties with which we
conduct business do not successfully address these issues, our business and
financial results could be materially and adversely affected.
In addition, the purchasing patterns of our customers and potential
customers may be affected by actual or perceived concerns about Year 2000
issues. Organizations that need to expend significant resources to correct their
current systems for Year 2000 compliance may have fewer funds available to
purchase our courses and services. This too could have a material adverse effect
on our business, operating results and financial condition.
We have also engaged a third-party consultant to perform a Year 2000
assessment study. It has reviewed all of the procedures we employed in our Year
2000 reviews and has found them to be consistent with generally accepted
business practices. The consultant did not identify any threats from Year 2000
issues other than those discussed above, none of which might reasonably be
expected to have a material adverse effect on our business and financial
statements.
24
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" which
addresses software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2" to extend the deferral of the application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. See Note 1 of Notes to Financial
Statements. We do not believe that this pronouncement will have a material
effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 30, 1999, we had no material market risk exposure such as
interest rate risk, foreign currency exchange rate risk or commodity price risk.
25
<PAGE>
BUSINESS
OVERVIEW
We are a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers worldwide. We offer a real-time,
interactive learning experience presented through standard Web browsers
operating over a variety of presentation platforms, including the Internet,
intranets and local-area and wide-area networks. Our courses enable users to
learn in a self-paced, easy-to-use and cost-effective manner anytime, anywhere.
Our extensive Web-based training library consists of over 340 courses covering a
broad range of topics, including information technology, desktop applications,
professional and managerial skills and practical skills. We distribute our
courses and services directly through our internal sales force and indirectly
through more than 1,100 Internet service providers and over 85 other marketing
partners. We believe we have achieved, and will be able to maintain, our
industry leadership position due to our comprehensive courses, efficient and
flexible technology and extensive distribution channels.
OUR MARKET OPPORTUNITY
International Data Corporation ("IDC") estimates that Web-based training is
the fastest growing segment within the overall U.S. training industry,
displacing other traditional training methods such as instructor-led and
text-based learning. The Web-based training market includes training delivered
over the Internet and Web-based training products, such as authoring and
training management software. IDC estimates that the total U.S. market for
Web-based training will increase from approximately $550 million in 1998 to
approximately $7.1 billion in 2002, a 90% compound annual growth rate. This
anticipated growth rate is significantly higher than the growth rate in the
overall U.S. information technology training industry, estimated at a compound
annual growth rate of approximately 12% over the same period. IDC also estimates
that U.S. revenues from Web-based training will represent approximately 31% of
total U.S. information technology training industry revenues in 2002, up from 5%
in 1998.
According to IDC, demand for Web-based information technology training will
exceed $4 billion by 2002. IDC also estimates that demand for Web-based personal
and professional training will exceed $3 billion by 2002. We believe this
significant anticipated growth will be due to the escalating need for trained
information technology professionals, the rapid adoption of the Internet and the
distribution efficiencies and enhanced accessibility created by the Web-based
training model. Because worldwide demand for skilled information technology
professionals far exceeds the existing supply, there has been a heightened focus
on developing technical, professional and managerial skills through the use of
training and education. We believe that increasing time and budgetary
constraints, coupled with an expanding need to train people across a wide number
of geographic regions, are causing organizations to examine innovative,
technology-based training alternatives, such as multi-media, video and Web-based
learning.
We believe that Web-based learning is the most attractive training
alternative for organizations and individual consumers, due to its:
FLEXIBILITY. Courses can be easily and efficiently modified or replaced
electronically, without the need to distribute new materials manually.
CONVENIENCE AND EASE-OF-ACCESS. Users can take courses at any time from
anywhere in the world simply through accessing the Internet.
COST-EFFECTIVENESS. Web-based training providers do not incur the costs
associated with shipping training materials or the expenses associated with
maintaining and operating learning facilities. Users
26
<PAGE>
do not incur the travel and lodging costs often associated with attending
seminars or off-site training centers.
REAL-TIME INTERACTIVITY. Web-based training courses can be offered in an
interactive format that allows users to proceed at their own pace and to easily
test their comprehension.
Additionally, we believe that the rapid adoption of the Internet and growth
in consumer spending on the Internet will fuel the demand for Web-based training
products and services. IDC estimates that the number of consumers buying goods
and services over the Internet was approximately 31 million in 1998, which is
expected to increase to approximately 134 million in 2002, representing a
compound annual growth rate of 44%. Furthermore, industry analysts estimate that
annual consumer spending over the Internet was approximately $50 billion in
1998, which is expected to increase to $734 billion in 2002, representing a
compound annual growth rate of approximately 95%.
Historically, training products and services have been marketed primarily to
large organizations, given the associated cost-efficiencies. With the rapid
adoption of the Internet and individual consumers' increasing willingness to
purchase goods and services via the Internet, we believe that training products
can now be targeted to small organizations and individual consumers in a
cost-efficient manner. We believe that significant opportunities exist in these
markets. Businesses and other organizations need employees with strong
technical, professional and managerial skills in order to remain competitive.
Similarly, individual consumers, facing the technical challenges of their
desktop applications, require efficient and cost-effective training that can be
accessed over the Internet at any time and from anywhere in the world.
COMPETITIVE STRENGTHS
We believe the following are our key competitive strengths:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. Our more than
340 courses offer users a broad range of topics. In most subjects, we offer a
number of courses from introductory to advanced, allowing users to select the
courses appropriate for their skill levels.
Our Web-based courses are cost-effective. Customers have the option of
subscribing to our entire library of online courses, a smaller group of related
courses or individual courses. For a fixed license fee, our direct sales
customers receive unlimited access to the courses to which they subscribe for a
specified number of users. Customers accessing our courses through Internet
service providers and other marketing partners pay an annual or monthly fee for
unlimited course access per user at rates set by our marketing partners.
MULTIPLE DISTRIBUTION CHANNELS. Historically, we have derived the vast
majority of our revenues from the direct sale of our courses to large
organizations. At the end of 1997, we launched our indirect distribution
channels to take advantage of the significant opportunity that we believe exists
in the small organization and individual consumer markets. We currently
distribute our courses through the following channels:
DIRECT SALES. Our 30-person internal direct sales force actively markets
our courses and services, targeting businesses and other large organizations
with annual revenues of at least $50 million or that otherwise possess a
need for our courses and services. These customers receive the complete
feature set of our courses and the ability to customize the content of the
standard courses to more closely match their specific training objectives.
We currently have over 600 direct sales customers.
INDIRECT SALES. We license our courses indirectly to businesses,
organizations and individual consumers through our agreements with Internet
service providers and other marketing partners. We grant our indirect
marketing partners the right to license our courses to their customers or
members for a fee set by each marketing partner. In exchange for receiving
access to our courses,
27
<PAGE>
our indirect marketing partners agree to market and promote our courses to
their customers or members. When a customer subscribes to our courses
through one of these indirect sales channels, we share a portion of the
subscription revenue with the Internet service provider or other marketing
partner.
INTERNET SERVICE PROVIDERS. Our Internet service providers make our
courses available to their Internet access subscribers and other visitors
to their Websites. We offer our Internet service providers an easy and
flexible way to provide training to their customers by installing our
courses on their servers or by linking their Websites directly to our
Website. In return, our Internet service providers give us access to
their customer bases and provide the first level of support to our users.
We currently have agreements with over 1,100 Internet service providers,
including MindSpring Enterprises, Freeserve plc and Verio.
OTHER MARKETING PARTNERS. Our other marketing partners are businesses
and organizations whose current and future operations support and
facilitate the sale of our Web-based training courses. They include
technology companies, who combine our courses with their products, and
non-business organizations such as colleges, universities and trade
associations. Our other marketing partners make our courses available to
businesses, organizations and individual consumers, enabling these
entities to offer their customers, staff, students and members a valuable
service. We currently have over 85 other marketing partners, including
Data General Corporation, Hand Technologies, Ohio University and BATNET,
a consortium reselling our courses to over 30 associations, including the
American Association of Retired Persons and the American Automobile
Association.
SCALEABLE, PROPRIETARY COURSE DEVELOPMENT PROCESS. We follow a four-stage
proprietary course development process that enables our in-house development
staff to produce new courses rapidly, while maintaining high-quality course
design and content. Course set-up includes converting text and graphics supplied
by third-parties into our format, updating tools and templates and adding basic
course elements. During the unit development stage, we create graphics and add
interactive course elements such as questions and simulations. We incorporate
our course navigation features, topic list, index, glossary and skill
assessments in the full-course development stage. Lastly, we conduct quality
assurance testing to ensure that the course is educationally sound, technically
accurate and visually appealing. Throughout each stage, we use proprietary
software tools that we created to automate most of the course development
process.
UNIQUE THIRD-PARTY CONTENT SOURCING. We obtain the content for our courses
from third-parties. Utilizing content from third-parties enables rapid,
cost-effective course production. By using third-party content, we can create a
large number of courses covering a variety of topics without the expense of
maintaining a large research staff. We are also able to respond to our clients'
changing needs quickly.
EFFICIENT AND FLEXIBLE TECHNOLOGY. We design our courses in hypertext
mark-up language, or HTML, a Web document formatting language, specifically for
fast presentation through the Internet and corporate intranets. As a result, our
courses are available at any time, from anywhere in the world. Our HTML course
design also enables us to take advantage of the growing capability of today's
computers to carry voice, data and video information, and should enable us to
incorporate additional features quickly as this capability increases.
We believe we are one of the few Web-based training providers to present all
of our courses through standard Web browsers without the need for users to
download our content. This provides users with direct, immediate access to our
courses without the need to use valuable hard drive space to store our courses.
28
<PAGE>
Our highly-interactive courses enable users to learn by experience, offering
frequent opportunities for practice in the form of simulations and exercises. We
also incorporate graphics and animation to gain and maintain users' interest
throughout a course.
We present all our courses in a standard format that enables users to become
familiar with the course interface, enhancing ease of use. Our intelligent
technology keeps track of users' progress throughout a course. This enables
users to stop working at any time while taking a course and later resume,
without losing any information and without having to start over from the
beginning.
ONGOING REFERENCE RESOURCE. Our courses can be used as an ongoing and
easy-to-use reference resource. Each course contains an index that allows users
to go directly to the information they want without working through the other
portions of the course. Our powerful index feature also allows users to
reference needed information in any group of licensed courses quickly and
easily. This immediate access to specific course content is highly efficient,
reducing training time by allowing users to focus on those areas where training
is needed.
OUR FOCUSED GROWTH STRATEGY
Our goal is to be the leading global provider of Web-based training courses
and services to businesses, organizations and individual consumers. The
principal elements of our strategy are to:
CONTINUE TO AGGRESSIVELY TARGET LARGE ORGANIZATIONS. Currently, we have
over 600 direct sales customers. With the proceeds of this offering, we intend
to expand our direct sales force and continue to target large organizations for
full scale implementations of Web-based training across corporate intranets and
the Internet. We intend to focus our direct marketing efforts on organizations
that employ a large number of information technology professionals and utilize
desktop applications throughout their operations.
EXPAND RAPIDLY THROUGH THE INTERNET AND OTHER INDIRECT MARKETING CHANNELS IN
THE U.S. AND ABROAD. We currently have agreements with more than 1,100 Internet
service providers. Based on information provided by our Internet service
providers, we believe they can make our courses accessible to over 8.1 million
subscribers, including over 700,000 businesses. We also have agreements with
more than 85 other marketing partners. Over 90% of our agreements with Internet
service providers and other marketing partners are for exclusive three year
terms. We will continue to sign as many Internet service providers and other
marketing partners as possible in order to rapidly expand our reach into the
small organization and individual consumer markets worldwide.
BROADEN COURSE OFFERINGS IN NEW AND EXISTING TOPICS AND CATEGORIES, AND
ACCELERATE COURSE DEVELOPMENT. Our goal is to expand our course offerings by
adding a wide range of categories directed at new markets and rapidly increasing
the number of courses in all of our existing categories. To achieve this goal,
we intend to:
HIRE ADDITIONAL COURSE DEVELOPERS. As of September 30, 1999, our 44 course
developers were producing courses at the rate of 20 to 30 courses every 60
days. We intend to use a portion of the proceeds of this offering to add a
substantial number of qualified developers and significantly increase course
production.
INCREASE NUMBER OF CONTENT PROVIDERS. We are actively pursuing
relationships with additional publishers and with new types of content
providers to develop courses directed toward new markets. For example, we
aim to develop certification, licensing and continuing education courses for
professionals in areas such as insurance, finance, law and accounting.
ENHANCE FURTHER OUR TECHNOLOGY INFRASTRUCTURE. We intend to use part of the
proceeds of this offering to continue our longstanding commitment to investing
in technology. By further enhancing our computer network, hardware and software
applications, we expect to be able to continue providing
29
<PAGE>
powerful, flexible training tools to our customers. We also believe that
continued technological advances, particularly those involving the Internet,
should provide new opportunities to customize our services further.
INCREASE BRAND AWARENESS IN OUR TARGET MARKETS. We intend to solidify our
position as a leading provider of Web-based training courses and services by
increasing our brand name recognition in all of our target markets.
Occasionally, we co-brand our courses and services on our Internet service
providers' and other marketing partners' Websites. We intend to expand our use
of advertising, public relations and marketing programs to promote our brand and
build loyalty among our small organization and individual customers, as well as
attract potential customers to our Website.
SEEK POSSIBLE STRATEGIC ACQUISITIONS OF OR INVESTMENTS IN COMPLEMENTARY
BUSINESSES, PRODUCTS, SERVICES OR TECHNOLOGIES. We may seek acquisitions of or
investments in complementary businesses, products, services or technologies. We
will focus our acquisition and investment efforts on those companies that we
believe would expand the breadth of our courses and services, increase our
market presence in the U.S. and abroad and introduce new technologies that
should better serve our customers. Although we have from time to time had
discussions with companies regarding our acquiring or investing in their
businesses, we have no present agreement or understanding relating to any
material acquisition or investment.
OUR PRODUCTS AND SERVICES
PRODUCTS. Our diverse online library includes courses designed to meet the
training needs of large organizations, small-to-medium organizations and
individual consumers. We offer over 340 courses in four categories:
INFORMATION TECHNOLOGY AND CERTIFICATION TRAINING. Our course library
includes approximately 230 courses on programming languages, databases and
operating systems. As a Microsoft Independent Courseware Vendor, we offer a
complete set of courses to prepare users for the Microsoft Certified Systems
Engineer (MCSE) exam.
A+ Certification (13 courses)
C (3 courses)
CGI Perl (4 courses)
CICS (5 courses)
Client/Server Technology (1 course)
CMS/XEDIT (2 courses)
COBOL (10 courses)
Data Communication (1 course)
Data Warehousing (2 courses)
DB2 (3 courses)
Dynamic HTML (5 courses)
Easytrieve (1 course)
Exchange Server (19 courses)
FOCUS (11 courses)
GUI Design (3 courses)
HTML (7 courses)
ISPF (2 courses)
JAVA (3 courses)
JCL (7 courses)
LANs (3 courses)
Micro Focus COBOL (5 courses)
Networking Essentials (6 courses)
Object-oriented Analysis & Design (2 courses)
OOP Using C++ (3 courses)
Oracle (13 courses)
PowerBuilder (15 courses)
QMF (2 courses)
RDBMS Fundamentals (1 course)
REXX (1 course)
SAA (2 courses)
SAS (7 courses)
SQL Server (12 courses)
Sybase (7 courses)
TCP/IP (10 courses)
TSO/E (1 course)
UNIX (6 courses)
Visual Basic (15 courses)
Visual InterDev (9 courses)
VSAM (1 course)
Windows NT (9 courses)
30
<PAGE>
DESKTOP APPLICATIONS AND CERTIFICATION TRAINING. We license approximately
60 training courses designed to improve users' proficiency with widely-used
desktop applications. As a Microsoft Independent Courseware Vendor, we also
provide courses to prepare users for the Microsoft Office User Specialist
(MOUS) certification.
Front Page (2 courses)
Internet/Internet Explorer (4 courses)
Internet/Netscape Navigator (4 courses)
Lotus Notes (2 courses)
Microsoft Access (2 courses)
Microsoft Excel (3 courses)
Microsoft Exchange (2 courses)
Microsoft Word (3 courses)
Microsoft Office 2000 (6 courses)
Microsoft Works (7 courses)
Microsoft Outlook (2 courses)
Microsoft PowerPoint (2 courses)
Microsoft Windows (6 courses)
Microsoft Windows Workstation (2 courses)
Paint Shop (2 courses)
Photoshop (4 courses)
Project 98 (2 courses)
Quicken (2 courses)
QuickBooks (5 courses)
PROFESSIONAL AND MANAGERIAL SKILLS DEVELOPMENT. We offer approximately 25
courses to assist professionals in developing their managerial skills.
Business Communication (3 courses)
Business Management (3 courses)
Concepts of Computing (5 courses)
Customer Service (5 courses)
Negotiating (4 courses)
Time Management (4 courses)
PRACTICAL SKILLS DEVELOPMENT. We license approximately 25 courses to help
individual consumers develop basic skills and improve their daily lives.
Grammar (4 courses)
Home Business (4 courses)
Investing Fundamentals (6 courses)
Math (6 courses)
Money 98 (2 courses)
Retirement Planning (2 courses)
SAT Preparation (3 courses)
COURSE FEATURES. All of our courses contain:
SKILL ASSESSMENTS. Our courses include a complete set of skill assessment
features designed to maximize our users' learning experience. Users have the
option of taking a preliminary test to assess their knowledge of a
particular course. Users can apply the results of the preliminary test to
create individualized learning paths. If users obtain high scores during the
assessment, they can save time by testing out of a course. Each course also
incorporates scored questions which provide users with feedback regarding
course comprehension. After users finish a course, they can take a final
test to evaluate overall course knowledge.
ONLINE REFERENCE CAPABILITY. Our courses contain an index that enables
users to go directly to the information they want without working through
the other portions of the course. Our powerful index feature also allows
users to access needed information in any group of licensed courses quickly
and easily.
In addition, we offer our direct sales customers a broad range of
value-added features that complement our course offerings:
ADMINISTRATION CAPABILITIES. Our courses include comprehensive
administration tools designed to provide meaningful feedback and reduce the
workload of our business customers. Our Web-based
31
<PAGE>
administration software tracks and reports usage of courses presented
through the Internet or intranets. Organizations can assess the
effectiveness of their training program by selecting either summary or
detailed reports on usage and scores broken down by company, site,
department or individual. Our administration tools also manage user
registration functions.
CUSTOMIZED INSTRUCTION. Our customization tools enable organizations
presenting courses over an intranet to instruct and test their employees on
information unique to their organizations. Customers can customize the text
within a course or insert links to information located at other intranet
sites. Organizations can also add customer-specific questions to our skill
assessments. These questions can be presented in a variety of formats,
including multiple choice, short answer and true/false. This enables
corporate trainers to reinforce crucial skills and to assess knowledge of
customer-specific content. Our customization tools allow organizations to
maximize their training budgets by tailoring training programs to meet their
specific needs.
ONLINE INSTRUCTOR ASSISTANCE. Our instructor online service answers users'
questions regarding selected courses while they are learning. For an
additional annual fee, large organization customers can submit an unlimited
number of questions to a course topic expert and receive a response via
email within one business day. Users can also employ the service to comment
on a course.
OTHER LARGE BUSINESS SERVICES. We offer our large organization customers
on-site product support, including course installation and promotion of our
courses and services within their organizations, at no additional charge. We
offer a variety of licensing options to provide maximum flexibility for
corporate training budgets. Large organization customers may choose to
present our courses through one or more of four presentation
platforms--Internet, intranets, local-area and wide-area networks or
personal computers.
DIRECT SALES CUSTOMERS
We license our Web-based training courses and services to a broad range of
customers in a wide variety of markets. No single customer accounted for more
than 10% of total revenues in 1996, 1997, 1998 or the nine months ended
September 30, 1999. The following table sets forth a representative list of
direct sales customers in various industries from whom we derived more than
$50,000 in revenues during the last year:
<TABLE>
<S> <C>
FINANCIAL/ACCOUNTING HEALTH CARE/INSURANCE
A.G. Edwards & Sons Capital Blue Cross
Bank of America Fireman's Fund Insurance
First Data Resources Traveler's
CONSULTING GOVERNMENT
Computer Horizons Defense Information Systems Agency
Computer Sciences Corporation Florida Department of Health
IMRglobal Social Security Administration
HARDWARE/SOFTWARE NETWORKING/COMMUNICATIONS
American Management Systems Bell South Mobility
Software Synergy Inc. Convergys
Sterling Software Harris Corporation
MANUFACTURING/OTHER RETAIL
Fort James Corporation QVC
The McGraw Hill Companies Saks Incorporated
Southwest Airlines Walgreens
</TABLE>
32
<PAGE>
COMPETITION
The Web-based training market is evolving quickly and is subject to rapid
technological change. Although the market is highly fragmented, with no single
competitor accounting for a dominant market share, competition is intense. We
anticipate that the lack of significant entry barriers to the Web-based training
market will allow new competitors to enter the market, increasing the level of
competition. Additionally, companies with significantly greater financial
resources are acquiring competitors. We expect that this trend will continue. We
believe that the principal competitive factors in our market include:
- the ability to provide an effective training solution meeting the needs of
users;
- breadth, depth and technical quality of course offerings;
- pricing;
- service features such as adaptability and the capacity to receive
meaningful user feedback;
- quality of implementation, course administration and customer service; and
- company reputation.
Our competitors vary in size and in the scope and breadth of the products
and services they offer. We face significant competition from a variety of
sources, including:
- third-party suppliers of instructor-led training;
- internal corporate training departments;
- providers of custom courses or software businesses can use to create their
own custom courses;
- Web-based training vendors offering off-the-shelf courses; and
- other suppliers of training, including several companies that produce
interactive software training.
As organizations increase their dependence on outside suppliers of training, we
expect to face increasing competition from these sources as training managers
compare a variety of cost-effective training products.
TECHNOLOGY AND INFRASTRUCTURE
We have made substantial investments in our technology infrastructure in
order to employ the best available software and hardware.
TECHNICAL SPECIFICATIONS OF OUR WEBSITE COMPUTER EQUIPMENT. Our Website is
housed by a group of Web servers and database servers. We utilize load balancing
hardware that distributes requests for information evenly among our servers. The
load balancer monitors traffic to each individual server and re-routes network
traffic in the event that a server fails. If the primary load balancing hardware
fails, a second set of load balancing hardware will automatically take over. We
can also add additional hardware and software to our existing Website computer
equipment without affecting the ability of our Website to function.
NETWORK INFRASTRUCTURE. Our network infrastructure consists of widely known
off-the-shelf components designed to create a stable architecture. We use the
Microsoft NT 4.0 network operating system for our servers. We also use the
Windows 95/98 operating system for our desktop computers, as well as Microsoft
Office 2000 and the latest releases of other well known application software.
Data is backed up daily by a 4-drive tape system. Our email server components,
as well as our authentication systems, are integrated into our network operating
system.
33
<PAGE>
We attempt to maintain a safe and secure data storage and email environment
through continual anti-virus scanning that involves automatic updates for
protection against new viruses. Our network gear, servers and phone switch are
connected to uninterruptible power supplies. Finally, we maintain firewall
technology to protect against security breaches and hackers.
Currently, all of our primary servers are running separate data channels for
redundancy. This allows our servers to be available for production through
multiple network connections. Our servers and network computers are connected to
the network by reliable dual-power network switches that forward data between
servers or desktop computers. This provides dedicated, responsive and fast
network access.
INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY
We regard our copyrights, service marks, trademarks, trade secrets,
software, domain names, proprietary technology and similar intellectual property
as critical to our success. To protect our proprietary rights we rely generally
on copyright, trademark and trade secret laws, licenses with customers,
independent contractors and other third-parties, and confidentiality agreements
with employees and others. Despite these protections, it may be possible for
third-parties to copy or otherwise obtain and use our courseware or technology
without our permission or to develop similar courseware or technology
independently. Additionally, our agreements with employees, consultants and
others participating in product and service development may be breached. We may
not have adequate remedies for any breach and our trade secrets may become known
or independently developed by competitors.
We pursue the registration of our trademarks and service marks in the United
States and in other countries, although we have not registered all of our marks.
We have obtained trademark registration in the United States for "DPEC" and
"SmartPro." We have also obtained a trademark registration in the United Kingdom
for "DPEC." We have registered with the United States Copyright Office the
copyright in a significant portion of our courseware. The laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States and effective copyright, patent, trademark and trade secret
protection may not be available in these jurisdictions.
We license our proprietary rights, such as our courseware, trademarks or
copyrighted material, to third-parties. While we attempt to ensure that the
quality of our brand is maintained by these licensees, they may take actions
that harm the value of our proprietary rights or reputation. To license some of
our products, we rely in part on "shrink-wrap" and "clickwrap" licenses that are
not signed by the end user and, therefore, may be unenforceable under the laws
of certain jurisdictions. As with other software products, our products are
susceptible to unauthorized copying and uses that may go undetected. Policing
unauthorized uses is difficult.
While we attempt to avoid infringing known proprietary rights of
third-parties in our product and service development efforts, other parties may
assert claims of infringement of intellectual property or other proprietary
rights against us. We expect to be subject to legal proceedings and claims from
time to time in the ordinary course of business, including claims of alleged
infringement of the proprietary rights of third-parties by us and our licensees.
These claims, even if without merit, could cause us to expend significant
financial and managerial resources. Further, if these claims are successful, we
may be required to change our trademarks, alter our courseware and pay financial
damages, any of which could have a material adverse effect on our business and
financial results.
We rely on proprietary information that we license from third-parties,
including course content we license from book publishers. We also may be
required to obtain licenses from others to refine, develop, market and deliver
new products and services. These third-party licenses may not continue to be
available to us on commercially reasonable terms. The loss of these licenses
could have a material
34
<PAGE>
adverse effect on our business and financial results. Moreover, rights granted
under any licenses may not be valid and enforceable.
Substantially all of the content for our current courses has been provided
by Macmillan Publishing USA. Under the terms of our agreement, Macmillan gives
us a non-exclusive license to create courses based upon books they provide to us
in exchange for a royalty based on the subscription revenue we receive from our
customers. The license for each course lasts for five years from the date we
release the course to our customers, unless renewed upon mutually agreeable
terms. Macmillan can terminate the license for a course before the end of the
five year license term if we default under the agreement, become bankrupt or
assign the agreement without Macmillan's consent. If a license for a course
expires or is terminated, we must stop licensing that course. We can, however,
continue to serve our customers for the remaining terms of their licenses, fill
existing orders for courses and sell any courses we have on hand for a period of
sixty days from the date the license ends.
We are currently pursuing new content providers and recently added three new
content providers. Although we expect that we will continue to obtain a
substantial amount of content from Macmillan, we also anticipate that we will
obtain an increasing amount of content from other content providers.
EMPLOYEES
As of October 26, 1999, we employed 158 people. None of our employees is
represented by a labor union. We have not experienced any work stoppages and we
consider our relations with our employees to be good.
FACILITIES
Our principal offices currently occupy approximately 30,000 square feet in
Columbus, Ohio, under a sublease that expires on May 10, 2002. The sublease is
renewable at our option for three successive two year periods and one additional
period of 21 months. We believe our existing facilities are adequate for current
requirements and that additional space can be obtained on commercially
reasonable terms to meet future requirements.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings. We may from time to time become
a party to various legal proceedings in the ordinary course of business.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees as of October 28, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Carol A. Clark.................................. 60 Chairperson of the Board of Directors, President
and Chief Executive Officer
Gary W. Qualmann................................ 48 Director, Chief Financial Officer, Secretary,
Treasurer and Vice President-- Finance
H. Neal Ater.................................... 48 Director
Robert J. Massie................................ 50 Director
Murray R. Wilson................................ 38 Director
Paul W. MacCartney.............................. 33 Vice President of Development
Gary L. Carabin................................. 48 Vice President and General Manager of the
Corporate Sales Division
James G. Marriott............................... 40 Senior Director and General Manager of the
Internet Service Provider Division
A. Katrina Ramsey............................... 38 Senior Director and General Manager of the
Affinity Channel Partner Division
Dennis E. Yost.................................. 48 Senior Director of Marketing
KEY EMPLOYEES
James A. Rubino, Ph.D........................... 47 Director of Courseware Design
James T. Talley, Ph.D........................... 43 Director of Systems Architecture
James K. Dietz.................................. 52 Director of Operations
</TABLE>
- ------------------------
CAROL A. CLARK, a co-founder of DPEC, has served as a Director, President
and Chief Executive Officer since our formation in 1981. Ms. Clark has over 37
years of management and consulting experience and an extensive background in
computer programming and teaching. Before founding DPEC, Ms. Clark served as
manager of customer service for Sterling Software. She also implemented and
taught data security, processing and analysis for a number of organizations,
including Carnegie Mellon University, Bank One, University of Minnesota and IBM.
GARY W. QUALMANN has served as a Director, Chief Financial Officer,
Treasurer and Vice President of Finance since joining us in July 1996. Mr.
Qualmann has also served as our Secretary since September 1998. From May 1988 to
July 1995, Mr. Qualmann served as executive vice president and chief financial
officer of Red Roof Inns, a lodging company based in Hilliard, Ohio. Prior to
joining Red Roof Inns, he was a partner in the Columbus, Ohio, office of
Deloitte Haskins & Sells (a predecessor of Deloitte & Touche LLP).
H. NEAL ATER has been a director of DPEC since August 1999. Since June 1999,
Mr. Ater has been Vice President Engineering of VERITAS Software. He is
responsible for over 350 engineers in the Data Protection Group, which provides
storage management software for UNIX, Windows NT and Netware. From May 1996 to
June 1999, Mr. Ater was Vice President--Research & Development at Seagate
Software, NSMG Division, which specialized in systems management software for
Windows NT, Netware and UNIX networks, until VERITAS Software acquired Seagate
Software. He was President of OnDemand Software, a privately-held company
specializing in systems management software for Windows NT and Netware networks
for medium to large scale corporations, from 1994 until Seagate Software
acquired OnDemand in 1996. From 1977 to 1993, Mr. Ater was Senior Vice
President-- Research & Development at Goal Systems International, Inc., a
software company specializing in data
36
<PAGE>
center management software and computer based training software, and Legent
Corp., which acquired Goal in 1992.
ROBERT J. MASSIE has been a director of DPEC since September 1999. Mr.
Massie is currently the Director/Chief Executive Officer of Chemical Abstracts
Service, an operating division of the American Chemical Society. CAS develops
and distributes chemical information databases and related software. Based in
Columbus, Ohio, Chemical Abstracts Service serves a global market of research
professionals in academic, industrial and government organizations. Prior to
joining Chemical Abstracts Service as Director in 1992, Mr. Massie was President
and CEO of Gale Research, a library reference publisher and subsidiary of the
Thomson publishing organization. Prior to that, he held a number of senior
executive positions with the Torstar Corporation, owner of the largest newspaper
in Canada, as well as book publishing and other communications holdings. Mr.
Massie is a former consultant with McKinsey and Co. and practiced law with the
Washington D.C. firm of Covington and Burling.
MURRAY R. WILSON has been a director of DPEC since September 1998. He is a
principal of River Cities Capital Funds, a $140 million family of venture
capital funds in Cincinnati, Ohio. He has been at River Cities, where he
oversees investments primarily involving Internet, software, high technology and
healthcare companies, since 1995. Mr. Wilson came to River Cities after serving
for three years as the senior analyst with Cincinnati-based Blue Chip Venture
Company. Prior to joining Blue Chip, he was an investment officer of Neworld
Bank in Boston. Mr. Wilson is a director or observer of several River Cities
portfolio companies, including Fourthchannel, Inc., CMHC Systems, Inc., TRANSMAP
Corp., Productivity Solutions, Inc., High Speed Access Corp. and Darwin
Networks, Inc.
PAUL W. MACCARTNEY, Vice President of Development, joined DPEC in January
1996. While at DPEC, he has directed both courseware development and systems
development. Mr. MacCartney managed the conversion of our courses to a Web-based
format. Before joining us, Mr. MacCartney was Manager of Training and Support at
RH Positive Software. He has over 12 years experience in software development
and training.
GARY L. CARABIN has served as our Vice President and General Manager of
Corporate Sales since 1992. Mr. Carabin is in charge of our sales and support
services for our large organization customers. He joined DPEC in 1990 and served
as Director of Sales from 1990 to 1992. From 1982 to 1990, Mr. Carabin held
various sales and management positions at Goal Systems International, Inc. He
also held sales and management positions at Diacon Systems Corporation from 1979
to 1982 and at Burroughs Corporation from 1974 to 1979.
JAMES G. MARRIOTT has served as the Senior Director and General Manager of
our Internet Service Provider Division since August 1997. He was the Eastern
Regional Sales Director for our Corporate Sales Division from October 1993 to
July 1997. Prior to joining us in March 1992, Mr. Marriott was employed at
Automatic Data Processing for more than seven years, becoming the first sales
manager for the Columbus, Ohio, office in 1989, a position he held until joining
DPEC.
A. KATRINA RAMSEY has served, since August 1998, as Senior Director and
General Manager of our Affinity Channel Partner Division, which is responsible
for all indirect marketing partners other than Internet service providers. From
1991 to July 1998, she held various positions within DPEC, including Director of
Strategic Accounts and Western Regional Sales Director, both positions within
the Corporate Sales Division. Prior to joining us, she held various sales and
management positions at OBE/ALCO Standard and Time Services.
DENNIS E. YOST has served as Senior Director of Marketing since November
1995, managing our corporate and product marketing efforts. From April 1992
through November 1995, he was employed by Cardinal Business Media, Inc., where
he was publisher and editor-in-chief of two high-technology publications focused
on network integration and database management. He was also responsible for
creating and launching numerous strategic marketing products. From 1986 to 1992,
Mr. Yost was Vice President of Sales and Marketing for BlueLine Software Inc., a
start-up company, where he was
37
<PAGE>
responsible for establishing worldwide marketing and sales activities. From 1978
to 1986, he held various sales and marketing positions with Goal Systems
International, Inc.
JAMES A. RUBINO, PH.D. has served as Director of Courseware Design since
October 1997. From August 1993 through September 1997, Dr. Rubino served DPEC in
a variety of roles, with a focus on courseware feature design and on writing
software to automate our courseware production and quality assurance. From 1987
through 1993, Dr. Rubino worked as a documentation specialist for Goal Systems
International, Inc. and Legent Corp., writing systems documentation for a
computer-based training software system. Dr. Rubino received a Ph.D. in
Philosophy in 1983 and Masters of Fine Arts in 1987 from The Ohio State
University.
JAMES T. TALLEY, PH.D. has served as Director of Systems Architecture since
October 1997. From July 1991 through September 1997, he held a number of
positions at DPEC, including programming, software design, management of
technical support and management of our computer support. From 1985 through
1991, Dr. Talley worked with faculty at The Ohio State University to develop
computer-based training materials as part of the Computer-Based Instruction
Group in the Center for Teaching Excellence. Dr. Talley received a Ph.D. in
Music Theory in 1989 from The Ohio State University.
JAMES K. DIETZ has served as Director of Operations since March 1995. From
May 1984 to February 1995, he held various positions with Information
Dimensions, Inc., a supplier of document database management systems and
text-retrieval software, including Manager of Prototype Operations, Director of
Facilities, National Software Sales Manager, Vice President of Customer Service
and Vice President of Quality. Mr. Dietz has over 25 years in management of
office facilities, software sales, customer service and quality systems.
TERMS OF DIRECTORS AND OFFICERS
We currently have five directors. Effective upon the closing of this
offering, our board of directors will be divided into two classes, each
consisting of three directors: class I, whose term will expire at the annual
meeting of shareholders to be held in 2000 and class II, whose term will expire
at the annual meeting of shareholders to be held in 2001. The class I directors
will be Gary W. Qualmann and Murray R. Wilson. One vacancy will exist in class
I. The class II directors will be Carol A. Clark, H. Neal Ater and Robert J.
Massie. At each annual meeting of shareholders after a director's initial term
expires, the successors to the directors whose terms have expired will be
elected to two year terms. This classification of our board of directors may
have the effect of delaying or preventing changes in our control or management.
For a more detailed description, see "Description of Capital
Stock--Anti-takeover Effects of Articles of Incorporation, Code of Regulations
and the Ohio General Corporation Law" on page 48.
Under the terms of the series B convertible preferred stock purchase
agreement, dated August 27, 1999, our preferred shareholders have the right to
designate one director. Additionally, Ms. Clark and the other common
shareholders have the right to designate the remaining directors, one of whom
must be Ms. Clark and two of whom must be independent directors reasonably
acceptable to the preferred shareholders. Pursuant to this agreement, the
preferred shareholders have designated Mr. Wilson, and Ms. Clark and the other
common shareholders have designated Ms. Clark and the remaining directors. Upon
the closing of this offering, the series B convertible preferred stock purchase
agreement will terminate automatically.
Each officer is elected by, and serves at the discretion of, our board of
directors. We have agreed to employ Ms. Clark as Chairperson of the Board of
Directors, President and Chief Executive Officer. For a more detailed
description of Ms. Clark's employment agreement, see "--Employment Agreement" on
page 40.
38
<PAGE>
BOARD COMMITTEES
The compensation committee consists of Robert J. Massie, Murray R. Wilson
and H. Neal Ater. The compensation committee reviews and evaluates the salaries,
supplemental compensation and benefits of our officers, reviews general policy
matters relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the board of directors. The
compensation committee also administers our stock option and employee stock
purchase plans. For a more detailed description of our stock option and employee
stock purchase plans, see "--1999 Incentive Stock Plan" on page 41.
The audit committee consists of Carol A. Clark, Murray R. Wilson and H. Neal
Ater. The audit committee reviews with our independent auditor the scope and
timing of its audit services, the auditor's report on our financial statements
following completion of its audit and our policies and procedures with respect
to internal accounting and financial controls. In addition, the audit committee
will make annual recommendations to the board of directors for the appointment
of independent auditors for the ensuing year.
DIRECTOR COMPENSATION
Directors who are officers, employees or who hold or represent persons who
hold more than 5% of our common shares receive no additional compensation for
their services as members of our board of directors or as members of board
committees. Other directors are paid a fee of $1,000 for each meeting of the
board and $750 for each meeting of a board committee they attend and are
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their service as directors, including travel expenses. We also grant each
such director an annual stock option to purchase of our common shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1998 to September 14, 1998, we did not have a compensation
committee. During this time, all decisions regarding executive officer
compensation were made by Carol A. Clark, our President, Chief Executive Officer
and Chairperson of the Board of Directors. When we created our compensation
committee on September 15, 1998, the Board of Directors appointed Ms. Clark and
Murray R. Wilson as its initial members. Ms. Clark remained on our compensation
committee until September 15, 1999. No other former or current member of the
compensation committee was at any time an officer or employee of DPEC. None of
our executive officers serves as a member of the board of directors or
compensation committee of any other entity which has one or more executive
officers serving as a member of our board of directors or compensation
committee.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information on all compensation received during
the year ended December 31, 1998, by each of the named executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND POSITION SALARY BONUS COMPENSATION(1)
- --------------------------------------------------------------- ---------- --------- -------------------------
<S> <C> <C> <C>
Carol A. Clark,
Chairperson of the Board of Directors, President and Chief
Executive Officer............................................ $ 100,000 -- $ 2,632
A. Katrina Ramsey,
Sr. Director and General Manager of the Affinity Channel
Partner Division............................................. 182,883 $ 26,374 4,000
Gary L. Carabin,
Vice President and General Manager of the Corporate Sales
Division..................................................... 144,402 54,660 4,000
Gary W. Qualmann,
Chief Financial Officer, Secretary, Treasurer and Vice
President--Finance........................................... 140,000 56,525 4,000
James G. Marriott,
Sr. Director and General Manger of the Internet Service
Provider Division............................................ 97,025 33,169 3,255
</TABLE>
- ------------------------
(1) The amounts shown in this column for each executive officer consist of
DPEC's matching contribution to the DPEC, Inc. 401(k) Plan.
FISCAL YEAR END OPTION VALUES
The following table provides information concerning unexercised options and
the value of unexercised in-the-money options held as of December 31, 1998 by
each executive officer named in the Summary Compensation Table. No options were
exercised during 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
---------------------------------- ----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
A. Katrina Ramsey......................................... -- 55 $ -- $
Gary L. Carabin........................................... -- 100 --
Gary W. Qualmann.......................................... 562 282
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options at fiscal year-end is based on
a price per share of $ , as determined in good faith by our board of
directors, less the exercise price.
EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Carol A. Clark. We have
agreed to employ her as Chairperson of the Board of Directors, President and
Chief Executive Officer. We have also agreed to cause her to be nominated for
re-election as a director for as long as she is employed under the agreement.
The agreement sets a base salary for Ms. Clark of $135,000 that may be
increased, but not decreased, by the compensation committee. In addition to a
base salary, Ms. Clark is eligible for a bonus based on performance goals set by
the compensation committee.
40
<PAGE>
The term of employment under Ms. Clark's employment agreement began August
1, 1998, and will continue indefinitely unless terminated:
- by us because Ms. Clark is convicted of a felony, engages in willful
misconduct or so neglects her duties as to materially damage our business;
- due to the death or disability of Ms. Clark; or
- by Ms. Clark for any reason.
After termination, we will have no continuing obligation to Ms. Clark, except
that we must pay her salary for 18 months if termination was:
- by us for any reason not listed above; or
- by Ms. Clark if:
- we assign her duties inconsistent with her position as President and
Chief Executive Officer;
- we fail to comply with our obligations under the agreement and shall
not have remedied our failure after receiving notice; or
- we require her to relocate outside of the Columbus, Ohio, metropolitan
area.
The agreement contains non-competition provisions during the term of
employment and for the period two years after termination of employment. The
non-competition provisions do not apply after termination, however, in the
situations when we are required to continue paying Ms. Clark's salary. Under
these provisions, Ms. Clark may not:
- take part in any business that competes with us;
- divert, or try to divert, any of our business; or
- solicit any of our employees.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Ms.
Clark during the term of the employment agreement.
1999 INCENTIVE STOCK PLAN
We previously established two stock option plans, the DPEC, Inc. Amended and
Restated Incentive Stock Option Plan and the DPEC, Inc. 1998 Stock Option Plan,
to provide our employees an opportunity to own our common shares. Effective
, 1999, our board of directors and shareholders approved and adopted the
DPEC, Inc. 1999 Incentive Stock Plan, which combined the Amended and Restated
Incentive Stock Plan and the 1998 Stock Option Plan into a single plan. The
purpose of the 1999 Incentive Stock Plan is to attract and retain key personnel,
including consultants, advisors and directors, to enhance their interest in our
continued success and to offer all employees the opportunity to own our common
shares.
The 1999 Incentive Stock Plan provides for the grant of incentive and
nonqualified stock options, stock appreciation rights, restricted stock,
performance shares and unrestricted common shares. In addition, the 1999
Incentive Stock Plan permits employees who have satisfied minimum eligibility
requirements to purchase common shares through payroll deductions. No award
under the 1999 Incentive Stock Plan may be granted after . Only
common shares may be issued under the 1999 Incentive Stock Plan, which will be
made available from the authorized but unissued common shares or from common
shares held in treasury. The 1999 Incentive Stock Plan contains customary
provisions for adjustments for stock splits and similar transactions and the
rights of participants upon mergers and other business combinations.
The compensation committee will administer and interpret the 1999 Incentive
Stock Plan. The compensation committee will select the eligible employees who
will receive awards and the terms and conditions applicable to each award. It is
anticipated that the committee's determinations of which
41
<PAGE>
eligible individuals will be granted awards and the terms thereof will be based
on each individual's present and potential contribution to the success of DPEC.
The 1999 Incentive Stock Plan also provides that, on an annual basis, each of
our non-employee directors automatically will receive stock options.
STOCK OPTIONS. The compensation committee may grant non-qualified stock
options to employees, advisors and consultants and may grant incentive stock
options only to employees. The compensation committee has discretion to fix the
exercise price of all stock options, but the exercise price of an incentive
stock option may not be less than the fair market value of the common shares on
the date of grant. In the case of an incentive stock option granted to a 10%
shareholder of DPEC, the exercise price may not be less than 110% of the fair
market value of the common shares at the date of grant. The compensation
committee also has broad discretion as to the terms and conditions under which
options will be exercisable. Incentive stock options will expire not later than
ten years after the grant date (or five years for an incentive stock option
granted to a 10% shareholder). The exercise price of the options may be paid in
cash or, in the discretion of the compensation committee, by exchanging common
shares owned by the participant, or by a combination of either.
DIRECTOR OPTIONS. Each director who is not an employee of DPEC or of a
subsidiary, or who does not hold or represent persons who hold more than 5% of
our common shares, will receive, on the first business day after the effective
date of this offering, a grant of a non-qualified stock option to purchase
common shares at an exercise price equal to the public offering price of
our common shares. Each person who subsequently becomes a director and is not an
employee of DPEC or of a subsidiary, or who does not hold or represent persons
who hold more than 5% of our common shares, will receive, on the first business
day after becoming a director, a grant of a non-qualified option to purchase
common shares at an exercise price equal to the fair market value of the
common shares on the date of grant. In addition, on the first business day after
each succeeding annual meeting of shareholders, each continuing director who is
still eligible to receive a director option will receive a grant of a
non-qualified stock option to purchase common shares at an exercise price
equal to the fair market value of the common shares on the date of grant. A
director option will be exercisable beginning six months after the date of grant
until the tenth anniversary of the date of grant and three months (one year in
the case of a director who becomes disabled or dies) after the date the director
ceases to be a director, whichever occurs first. If a director ceases to be a
director after having been convicted of, or pleading guilty to, a felony, the
director option will be canceled on the date the director ceases to be a
director.
STOCK APPRECIATION RIGHTS. Stock appreciation rights may be awarded either
in tandem with stock options or on a stand-alone basis. The compensation
committee may award tandem stock appreciation rights either at the time the
related option is granted or at any time prior to the exercise, termination or
expiration of the related option. The tandem stock appreciation right will have
the same exercise price as the related option. The compensation committee will
specify at the time of grant the base price of the common shares to be issued
for determining the amount of cash or number of common shares to be distributed
upon the exercise of a nontandem stock appreciate right. The base price of
nontandem stock appreciation rights will not be less than 100% of the fair
market value of our common shares on the date of grant.
Tandem stock appreciation rights are exercisable only to the extent that the
participant may exercise the related option and only for the period determined
by the compensation committee. Upon the exercise of all or a portion of tandem
stock appreciation rights, the related option terminates for an equal number of
our common shares. Similarly, upon exercise of all or a portion of an option,
the related tandem stock appreciation right terminates for an equal number of
our common shares.
42
<PAGE>
When a participant surrenders a tandem stock appreciation right and the
related unexercised option, or surrenders a nontandem stock appreciation right,
the participant will receive common shares with the same economic value as the
stock appreciation right represented. For each common share represented by the
stock appreciation right, this economic value equals the difference between the
fair market value of one common share on the date the participant surrenders the
stock appreciation right and the exercise or base price specified in the stock
appreciation right. The compensation committee may pay cash instead of our
common shares for a surrendered stock appreciation right.
RESTRICTED STOCK AWARDS. An award of restricted stock is an award of our
common shares that is subject to the forfeiture or transfer restrictions imposed
by the compensation committee. The compensation committee may grant awards of
restricted stock for or without consideration. Restrictions on restricted stock
may lapse in installments based on factors determined by the compensation
committee, which may waive or accelerate the lapsing of restrictions in whole or
in part in its sole discretion. Prior to the expiration of the restricted
period, except as the compensation committee may otherwise provide, a
participant will have the rights of a shareholder, including the right to vote
common shares and to receive dividends and other distributions, with respect to
the restricted stock awarded to him. DPEC, or an escrow agent designated by
DPEC, will hold the shares of restricted stock during the restricted period,
which may not be sold, assigned, transferred, pledged or otherwise encumbered
until lapse of these restrictions.
PERFORMANCE SHARE AWARDS. A performance share award is an award of units
giving a participant the right to receive a specified number of common shares or
cash, or both, after specified performance goals are met. The compensation
committee will determine these goals when it makes each performance share award.
The compensation committee has discretion to set the value of each performance
award, to adjust the performance goals as it deems equitable to reflect events
affecting DPEC, changes in law or accounting principles or other factors, and to
determine the form of payment for performance awards.
EMPLOYEE STOCK PURCHASE PLAN. Eligible employees may, from time to time,
have the opportunity to purchase common shares through payroll deductions during
offering periods established by the compensation committee. They will be able to
purchase common shares at a price that is not less than the lesser of 85% of the
fair market values of our common shares on the first or last day of the offering
period. Section 423 of the Internal Revenue Code imposes restrictions on
employee stock purchase plans, including limitations on the maximum value of
common shares an individual employee may purchase in any calendar year. The
first offering period will begin on the effective date of this offering.
UNRESTRICTED SHARES. The 1999 Stock Incentive Plan also permits the
compensation committee to grant unrestricted shares. Unrestricted shares would
entitle a participant to receive common shares without paying DPEC any
consideration for the shares.
The committee has broad discretion as to the specific terms and conditions
of each award and any applicable rules, including the effect, if any, of a
change in control of DPEC. A written instrument delivered to the participant
will evidence the terms of each award. The common shares issued under the 1999
Incentive Stock Plan are subject to applicable tax withholding by us which, to
the extent permitted by Rule 16b-3 under the Exchange Act, may be satisfied by
withholding common shares. A participant may not assign or transfer any awards
except by will or the laws of descent and distribution or under a qualified
domestic relations order.
Our board of directors may amend or terminate the 1999 Incentive Stock Plan
at any time, except that any amendment or termination that adversely affects
rights under any outstanding award would require the consent of the participant.
Our shareholders must approve any amendment the compensation committee
determines is necessary to comply with any tax or regulatory requirement.
43
<PAGE>
CERTAIN TRANSACTIONS
The following are brief descriptions of transactions between us and any of
our directors, executive officers or shareholders known to us to own
beneficially more than 5% of our shares, or any member of the immediate family
of any of those persons, since January 1, 1996, where the amount involved
exceeded $60,000:
PURCHASE OF COMMON SHARES
In May 1996, we purchased 14,850 of our common shares from Frances Papalios,
our co-founder and a former member of our board of directors, for an aggregate
purchase price of $1,250,000. We paid $1,000,000 of the purchase price in cash
and the remaining portion with a promissory note issued to Ms. Papalios in the
original principal amount of $250,000. The promissory note issued to Ms.
Papalios bears interest at the rate of 8% per annum and matures on April 1,
2001. As of October 27, 1999, the outstanding principal on the promissory note
issued to Ms. Papalios was approximately $143,256, and we intend to use a
portion of the proceeds from this offering to repay the balance of the
promissory note issued to Ms. Papalios.
We financed the $1,000,000 cash portion of the purchase price by a
$1,000,000 loan from Ms. Clark. As of October 27, 1999, the outstanding
principal on our loan from Ms. Clark was approximately $714,286, and we intend
to use a portion of the proceeds from this offering to repay the balance of the
loan. We evidenced the loan from Ms. Clark by a promissory note issued to Ms.
Clark that accrues interest at a rate of 1% over prime and matures in November
2004. Ms. Clark, in turn, financed a portion of her loan to us by a loan from a
bank to her in the original principal amount of $800,000. As a condition of
extending the bank loan to Ms. Clark, we were required by the bank to guarantee
Ms. Clark's obligation under the bank loan. In August 1999, Ms. Clark repaid the
outstanding balance of the bank loan from the proceeds of a loan from another
bank. As part of this refinancing, our guarantee of Ms. Clark's obligations was
released by the first bank and the successor bank did not require our guarantee.
In connection with our purchase of common shares from Ms. Papalios, we
entered into a noncompetition agreement with Ms. Papalios, pursuant to which we
paid Ms. Papalios the aggregate sum of $330,000 in six equal installments. We
pledged 4,950 common shares to Ms. Papalios as security for our payment
obligations under the promissory note and the noncompetition agreement. Ms.
Papalios has released all but 1,805 of the common shares from the pledge. We
have also entered into a shareholders agreement with Ms. Papalios, Ms. Clark and
their respective trusts. The shareholders agreement imposes certain restrictions
on, and grants certain rights to, the parties to the shareholders agreement with
respect to the ownership, sale or other transfer of their common shares. The
shareholders agreement will terminate when we repay the promissory note issued
to Ms. Papalios.
SALE OF PREFERRED SHARES
In August 1999, we sold 1,490 shares of series B convertible preferred stock
to River Cities Capital Fund II Limited Partnership for a cash purchase price of
$1,007.09 per share (an aggregate purchase price of $1,500,564). In September
1998, we sold 5,123 shares of senior convertible preferred stock to River Cities
Capital Group II Limited Partnership for a cash purchase price of $390.40 per
share (an aggregate purchase price of $2,000,000). In February 1999, River
Cities Capital Group II Limited Partnership transferred all of the senior
convertible preferred stock to River Cities Capital Fund II Limited Partnership.
Mr. Wilson, a member of our board of directors, is a principal of River Cities
Capital Fund II Limited Partnership.
44
<PAGE>
REGISTRATION RIGHTS AGREEMENTS
In connection with the sales of our preferred shares, we have entered into a
registration rights agreement that gives the preferred shareholders demand and
piggyback registration rights. Any time after we complete this offering, the
holders of a majority or more of the registrable securities are entitled to
demand that we register their registrable securities under the Securities Act.
Additionally, the holders of the registrable securities are entitled to require
us to include their registrable securities in future registration statements
that we may file.
We also have entered into a registration rights agreement with Carol Clark,
Frances Papalios and Gary Qualmann and their respective trusts that requires us,
upon their request, to include their shares in future registration statements
that we may file. For a more detailed description of these registration rights
agreements, see "Description of Capital Stock--Registration Rights" on page 50.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information regarding beneficial ownership of
our common shares as of , 1999, and as adjusted to reflect the sale
of shares offered hereby, by (1) each of our directors, (2) each executive
officer named in the Summary Compensation Table, (3) each person or group of
affiliated persons known by us to beneficially own more than 5% of our common
shares and (4) all directors and executive officers as a group.
Unless otherwise indicated, the address for each person named in the table
is c/o DPEC, Inc., 851 West Third Avenue, Columbus, Ohio 43212, and each person
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, for all shares listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of common shares outstanding for each
listed person includes any shares the individual has the right to acquire within
60 days. For purposes of calculating each person's or group's percentage
ownership, stock options exercisable within 60 days are included for that person
or group but not for the stock options of any other person or group. Asterisks
(*) indicate beneficial ownership of less than 1% of outstanding common shares.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- -------------------------------------------------------------------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Carol A. Clark.................................................................. 22,275(1) 53.24% %
Gary W. Qualmann................................................................ 2,565(2) 6.01
H. Neal Ater.................................................................... 0 * *
Robert J. Massie................................................................ 0 * *
Murray R. Wilson................................................................ 6,613(3) 15.81
Frances Papalios(4)............................................................. 7,425(5) 17.75
A. Katrina Ramsey............................................................... 355(6) * *
Gary L. Carabin................................................................. 1,443(7) 3.44
James G. Marriott............................................................... 219 * *
River Cities Capital Fund II Limited Partnership(8)............................. 6,613(3) 15.81
All directors and executive officers as a group
(10 persons).................................................................. 33,780(9) 78.86
</TABLE>
- ------------------------
(1) Includes 4,000 shares held by Ms. Clark's spouse as sole trustee of a trust
created by Ms. Clark.
(2) Includes 844 common shares issuable upon the exercise of stock options and
1,100 shares held by Mr. Qualmann's spouse as sole trustee of a trust
created by Mr. Qualmann.
(3) Shares owned of record by River Cities Capital Fund II Limited Partnership,
the general partner of which is Mayson, Inc. Murray R. Wilson, a director of
DPEC, is a principal of River Cities Capital Fund II Limited Partnership and
may be deemed to have a beneficial ownership interest in the common shares
held by it.
(4) 4170 Waddington Road, Columbus, Ohio 43220.
(5) Includes 7,400 common shares held by Ms. Papalios as sole trustee of a trust
created by Ms. Papalios.
(6) Includes 55 common shares issuable upon the exercise of a stock option that
will vest upon the closing of this offering.
(7) Includes 100 common shares issuable upon the exercise of a stock option that
will vest upon the closing of this offering.
(8) 221 East Fourth Street, Cincinnati, Ohio 45202-4147.
(9) Includes 4,000 shares held by Ms. Clark's spouse as sole trustee of a trust
created by Ms. Clark, 1,100 shares held by Mr. Qualmann's spouse as sole
trustee of a trust created by Mr. Qualmann, 844 common shares issuable upon
the exercise of stock options and 155 common shares issuable upon the
exercise of stock options that will vest upon the closing of this offering.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
Prior to the closing of this offering, we will have the following authorized
capital stock:
- common shares, no par value;
- 5,123 shares of senior convertible preferred stock, no par value; and
- 2,979 shares of series B convertible preferred stock, no par value.
Upon the closing of this offering, we will have the following authorized
capital stock:
- common shares, no par value; and
- preferred shares, no par value.
Upon the closing of this offering, we will have common shares
outstanding and no preferred shares outstanding.
COMMON SHARES
Voting:
- one vote for each share held of record on all matters submitted to a vote
of shareholders;
- no cumulative voting rights;
- election of directors by plurality of votes cast; and
- all other matters by majority of the votes cast.
Dividends:
- subject to preferential dividend rights of any outstanding preferred
shares, common shareholders are entitled to receive ratably declared
dividends; and
- the board of directors may only declare dividends out of legally available
funds.
Additional Rights:
- subject to the preferential liquidation rights of any outstanding
preferred shares, common shareholders are entitled to receive ratably net
assets, available after the payment of all debts and liabilities, upon our
liquidation, dissolution or winding up;
- no preemptive rights;
- no subscription rights;
- no redemption rights;
- no sinking fund rights; and
- no conversion rights.
The rights and preferences of common shareholders are subject to the right of
any series of preferred stock we may issue in the future.
PREFERRED STOCK
A total of 8,102 shares of preferred stock is outstanding as of the date of
this prospectus, consisting of 5,123 shares of senior convertible preferred
stock, no par value, and 2,979 shares of series B convertible preferred stock,
no par value. All of these outstanding preferred shares will be
47
<PAGE>
converted automatically into common shares concurrently with the
closing of this offering. As a result, there will then be no preferred shares
outstanding and the preferred shares converted into common shares will be
retired automatically. We presently have no plans to issue any additional
preferred shares.
Effective upon the closing of this offering and the filing of the Second
Amended Articles of Incorporation of DPEC, Inc., we may, by resolution of our
board of directors, and without any further vote or action by our shareholders,
authorize and issue, subject to certain limitations prescribed by law, up to an
aggregate of preferred shares. These preferred shares will consist of
voting preferred shares and nonvoting preferred shares. The
preferred shares may be issued in one or more classes or series of shares of any
class or series. With respect to any classes or series, the board of directors
may determine the designation and the number of shares, preferences, limitations
and special rights, including dividend rights, conversion rights, redemption
rights and liquidation preferences. Because of the rights that may be granted,
the issuance of preferred shares may delay, defer or prevent a change of
control.
ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND THE
OHIO GENERAL CORPORATION LAW
There are provisions in our articles of incorporation and code of
regulations, and the Ohio Revised Code that could discourage potential takeover
attempts and make attempts by shareholders to change management more difficult.
These provisions could adversely affect the market price of our shares. In
addition to our preferred shares described above:
STAGGERED BOARD
The board of directors is divided into two classes, with regular two-year
staggered terms and initial terms expiring at the 2000 annual meeting of
shareholders for class I directors and the 2001 annual meeting of shareholders
for class II directors. This classification system increases the difficulty of
replacing a majority of the directors and may tend to discourage a third-party
from making a tender offer or otherwise attempting to gain control of us. It
also may maintain the incumbency of our board of directors.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT
Ohio law generally requires that an action by written consent of the
shareholders in lieu of a meeting be unanimous. One exception is that the code
of regulations may be amended by an action by written consent of holders of
shares entitling them to exercise two-thirds of the voting power unless
otherwise provided in the articles of incorporation or code of regulations. Our
code of regulations provides that no action to amend the code of regulations may
be taken by a written consent of shareholders without a meeting. This provision
may have the effect of delaying, deferring or preventing a tender offer or
takeover attempt that a shareholder might consider in its best interest.
SUPERMAJORITY VOTING PROVISIONS
The following provisions in our code of regulations may not be repealed or
amended without the vote of the holders of not less than 66 2/3% of the total
voting power of DPEC:
- number and classification of directors;
- removal of directors;
- elimination of shareholder action by written consent to amend the code of
regulations;
- indemnification of directors; and
48
<PAGE>
- supermajority voting.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
Shareholders who want to bring business before an annual meeting of
shareholders or nominate candidates for election as directors must provide
advanced notice in writing within the time periods and in the form specified in
our code of regulations. Shareholders who do not fully comply with the
requirements of the code of regulations will be unable to bring matters before
the meeting or nominate candidates for election as directors.
MERGER MORATORIUM STATUTE
On completion of this offering, we will be deemed to be an issuing public
corporation under Ohio law. Chapter 1704 of the Ohio Revised Code governs
transactions between an issuing public corporation and
- an "interested shareholder," which, generally, means someone who becomes a
beneficial owner of 10% or more of the shares of the corporation without
the prior approval of the board of directors of the corporation; and
- persons affiliated or associated with an interested shareholder.
For at least three years after an interested shareholder becomes such, the
following transactions are prohibited if they involve both the issuing public
corporation and either an interested shareholder or anyone affiliated or
associated with an interested shareholder:
- the disposition or acquisition of any interest in assets;
- mergers, consolidations, combinations and majority share acquisitions;
- voluntary dissolutions or liquidations; and
- the issuance or transfer of shares or any rights to acquire shares in
excess of 5% of the outstanding shares
Subsequent to the three-year period, these transactions may take place
provided that either of the following conditions are satisfied:
- the transaction is approved by the holders of shares with at least
two-thirds of the voting power of the corporation, or a different
proportion set forth in the articles of incorporation, including at least
a majority of the outstanding shares after excluding shares controlled by
the interested shareholder; or
- the business combination results in shareholders, other than the
interested shareholder, receiving a fair price, as determined by Section
1704.03(A)(4), for their shares.
If, prior to the acquisition of shares by which a person becomes an
interested shareholder, the board of directors of the corporation approves the
transaction by which the person would become an interested shareholder, then
Chapter 1704's prohibition does not apply. The prohibition imposed by Chapter
1704 continues indefinitely after the initial three-year period unless the
subject transaction is approved by the requisite vote of the shareholders or
satisfies statutory conditions relating to the fairness of consideration
received by shareholders, other than the interested shareholder.
The Merger Moratorium Statute does not apply to a corporation whose articles
of incorporation or code of regulations so provide. We have not opted out of the
application of the Merger Moratorium Statute. The Merger Moratorium Statute also
does not apply to any person who becomes an interested shareholder before the
corporation becomes an issuing public corporation. Upon the completion of this
49
<PAGE>
offering, Carol A. Clark will not be subject to the Merger Moratorium Statute
because she owned more than 10% of our common shares before completion of this
offering.
CONTROL SHARE ACQUISITION ACT
Section 1701.831 of the Ohio Revised Code, known as the Control Share
Acquisition Act, provides that certain notice and informational filings and
special shareholder meetings and voting procedures must occur prior to
consummation of a proposed "control share acquisition." The Control Share
Acquisition Act does not apply to a corporation whose articles of incorporation
or code of regulations so provide. We have opted out of the application of the
Control Share Acquisition Act.
REGISTRATION RIGHTS
In connection with sales of our preferred shares, we have entered into an
amended and restated registration rights agreement that gives the preferred
shareholders demand and piggyback registration rights. After the completion of
this offering and the automatic conversion of such preferred shares into common
shares, the holders of common shares ("registrable securities") will be
entitled to demand registration of their registrable securities under the
Securities Act. Any time after we complete this offering, the holders of a
majority or more of the registrable securities are entitled to demand that we
register their registrable securities under the Securities Act. In addition, the
holders of registrable securities are entitled to require us to include their
registrable securities in future registration statements that we may file. These
registration rights are subject to various conditions and limitations, including
the right of the underwriters of an offering to limit the number of registrable
securities that may be included in the offering. In addition, holders of all of
these shares are restricted from exercising their demand rights until 180 days
after the date of this prospectus. We are generally required to bear all of the
expenses of these registrations, except underwriting discounts and selling
commissions. Registration of any of the registrable securities held by security
holders with registration rights will result in shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration.
We have also entered into a registration rights agreement with Carol A.
Clark, Frances Papalios, Gary W. Qualmann and their respective trusts. After the
completion of this offering, these shareholders are entitled to require us to
include any of the common shares owned by them in future registration statements
that we may file. These registration rights are subject to various conditions
and limitations, including the right of the underwriters of an offering to limit
the number of registrable securities that may be included in the offering. We
are generally required to bear all of the expenses of these registrations,
except underwriting discounts and selling commissions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common shares is Firstar Bank, N.A.
50
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary describes the material U.S. federal income and estate
tax consequences of the ownership and disposition of our common shares by a
non-U.S. holder who acquires and owns our shares as a capital asset within the
meaning of section 1221 of the Internal Revenue Code. A non-U.S. holder is any
person other than
- a citizen or resident of the United States;
- a corporation or partnership created or organized in the United States or
under the laws of the United States or of any state;
- an estate whose income is includable in gross income for United States
federal income tax purposes regardless of its source; or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
For purposes of the withholding tax on dividends discussed below, a non-resident
fiduciary of an estate or trust will be considered a non-U.S. holder. An
individual may, subject to certain exceptions, be deemed to be a resident alien
(as opposed to a non-resident alien) by virtue of being present in the United
States on at least 31 days in the calendar year and for an aggregate of at least
183 days during a three-year period ending in the current calendar year
(counting for these purposes all of the days present in the current year, one
third of the days present in the immediately preceding year, and one-sixth of
the days present in the second preceding year). Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens and, thus, are not non-U.S.
holders for purposes of this discussion.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular non-U.S. holder's tax position, including the fact
that in the case of a non-U.S. holder that is a partnership, the U.S. tax
consequences of holding and disposing of common shares may be affected by
certain determinations made at the partner level, and does not consider U.S.
state and local or non-U.S. tax consequences. Further, it does not consider
non-U.S. holders subject to special tax treatment under the federal income tax
laws, including banks and insurance companies, dealers in securities and holders
of securities held as part of a straddle, hedge or conversion transaction. In
addition, persons that hold the common shares through hybrid entities may be
subject to special rules and may not be entitled to the benefits of a U.S.
income tax treaty. A hybrid entity is treated as a partnership for U.S. tax
purposes and as a corporation for foreign law purposes. The following discussion
is based on provisions of the Internal Revenue Code and administrative and
judicial interpretations as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. Any change could affect the continuing
validity of this discussion. THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR
GENERAL INFORMATION. ACCORDINGLY, IF YOU ARE A NON-U.S. HOLDER, WE URGE YOU TO
CONSULT A TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL TAX CONSEQUENCES
OF HOLDING AND DISPOSING OF OUR COMMON SHARES, AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, LOCAL OR OTHER NON-U.S. TAXING
JURISDICTION.
DIVIDENDS. In general, if we have tax earnings and profits at the time of
any dividends, dividends paid to a non-U.S. holder will be subject to
withholding of U.S. federal income tax at a 30% rate unless this rate is reduced
by an applicable income tax treaty. Dividends that are effectively connected
with the holder's conduct of a trade or business in the United States, or, if a
tax treaty applies, attributable to a permanent establishment, or in the case of
an individual, a fixed base, in the United States ("U.S. trade or business
income") are generally subject to U.S. federal income tax at regular rates and
not subject to withholding if the non-U.S. holder files the appropriate U.S.
Internal Revenue form with the payor. Any U.S. trade or business income received
by a non-U.S. corporation may also
51
<PAGE>
be subject to an additional "branch profits tax" at a 30% rate, or any lower
rate that may be applicable under an income tax treaty.
Under current law, dividends paid to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above. The same
presumption applies under the current interpretation of U.S. Treasury
regulations, for purposes of determining the applicability of a tax treaty rate.
Under final U.S. Treasury regulations, effective January 1, 2001, however, a
non-U.S. holder of common shares who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification and
other requirements, including filing a Form W-8 BEN that contains the holder's
name and address. A non-U.S. holder of common shares that is eligible for a
reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain
a refund of any excess amounts currently withheld by filing an appropriate claim
for a refund with the U.S. Internal Revenue Service.
DISPOSITION OF COMMON SHARES. Except as described below, a non-U.S. holder
generally will not be subject to U.S. federal income tax in respect of gain
recognized on a disposition of common shares, provided that
- the gain is not U.S. trade or business income;
- the non-U.S. holder is an individual who is not present in the United
States for 183 or more days in the taxable year of the disposition and who
meets certain other requirements;
- the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. tax law applicable to certain United States expatriates; and
- We have not been and do not become a "United States real property holding
corporation" for U.S. federal income tax purposes.
We believe that DPEC has not been, is not currently, and is not likely to
become, a United States real property holding corporation. However, we cannot
assure you that DPEC will not be a United States real property corporation when
a non-U.S. holder sells its shares of common shares.
FEDERAL ESTATE TAXES. In general, an individual who is a non-U.S. holder
for U.S. estate tax purposes will incur liability for U.S. federal estate tax if
the fair market value of property included in the individual's taxable estate
for U.S. federal estate tax purposes exceeds the statutory threshold amount. For
these purposes, common shares owned or treated as owned, by an individual who is
a non-U.S. holder at the time of death will be included in the individual's
gross estate for U.S. federal tax purposes unless an applicable estate tax
treaty provides otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX. We are
required to report annually to the Internal Revenue Service and to each non-U.S.
holder the amount of dividends paid to, and the tax withheld with respect to,
each non-U.S. holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
non-U.S. holder resides. Under current regulations, the United States backup
withholding tax, which generally is a withholding tax imposed at the rate of 31%
on certain payments to persons that fail to furnish the information reporting
requirements, will generally not apply to dividends paid on the common shares to
a non-U.S. holder at an address outside the United States. Under final Treasury
regulations, effective January 1, 2001, a non-U.S. holder generally would not be
subject to backup withholding at a 31% rate if the beneficial owner certifies to
that owner's foreign status on a valid Form W-8 BEN.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
common shares effected by a foreign office of a foreign broker. If, however the
broker is a U.S. person or a U.S. related person, information reporting,
52
<PAGE>
but not backup withholding, would apply unless the broker received a signed
statement from the owner, certifying its foreign status or otherwise
establishing an exemption, or the broker had documentary evidence in its files
as to the non-U.S. holder's foreign status and the broker had no actual
knowledge to the contrary. For this purpose, a "U.S. related person" is
- a controlled foreign corporation for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for the part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business;
- a foreign partnership that is either engaged in a U.S. trade or business
or in which U.S. persons hold more than 50% of the income or capital
interest; or
- certain U.S. branches of foreign banks or insurance companies.
Non-U.S. holders will be subject to information reporting and backup
withholding at a rate of 31% with respect to the payment of proceeds from the
disposition of common shares effected by, to or through the United States office
of a broker, unless the non-U.S. holder certifies as to its foreign status or
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be allowed as a credit against the non-U.S. holder's U.S.
federal income tax, and any amounts withheld in excess of the non-U.S. holder's
federal income tax liability will be refunded, provided that the required
information is furnished to the Internal Revenue Service.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
shares, and no prediction can be made as to the effect, if any, that market
sales of common shares or the availability of common shares for sale will have
on the market price of our common shares prevailing from time to time.
Nevertheless, sales of substantial amounts of common shares in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common shares and could impair our future ability to
raise capital through the sale of our equity securities.
Upon the closing of this offering, we will have an aggregate of
common shares outstanding, assuming no exercise of the underwriters'
over- allotment option and no exercise of outstanding stock options, and
common shares will be issuable upon exercise of outstanding stock
options. The shares sold in this offering will be freely tradable, except that
any shares held by our "affiliates" (as that term is defined in Rule 144
promulgated under the Securities Act) may only be sold in compliance with the
limitations described below.
The common shares outstanding after this offering and held by our
affiliates will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 promulgated under
the Securities Act, which is summarized below. After taking into account the
180-day lock-up agreements described below and the provisions of Rule 144,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
90 days after the date of this prospectus
180 days after the date of this prospectus
At various times after 180 days after the date
of this prospectus
</TABLE>
53
<PAGE>
Approximately of the shares that will become eligible for resale after
the expiration of the 180-day lock-up agreements are held by affiliates and,
therefore, will remain subject to the volume limitations and other restrictions
of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
- 1% of the then outstanding common shares (approximately shares
immediately after this offering); or
- the average weekly trading volume in the common shares during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions.
A person who is not deemed to have been an affiliate at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years would be entitled to sell such shares without regard
to the requirements described above. To the extent that shares were acquired
from an affiliate, the transferee's holding period for the purpose of effecting
a sale under Rule 144 commences on the date of transfer from the affiliate.
All of our directors, officers and shareholders, and our option holders,
have agreed that they will not, without the prior written consent of the
representatives of the underwriters, sell or otherwise dispose of any common
shares or options to acquire common shares during the 180-day period following
the date of this prospectus. See "Underwriting."
We intend to file a Form S-8 registration statement under the Securities Act
on or immediately after the date of this prospectus to register all common
shares issuable under the 1999 Incentive Stock Plan and the 1999 Employee Stock
Purchase Plan. This registration statement will automatically become effective
upon filing. Accordingly, shares covered by this registration statement will
thereupon be eligible for sale in the public markets, unless the options are
subject to vesting restrictions or the contractual restrictions described above.
For a more detailed description of our stock option and employee stock purchase
plans, see "Management--1999 Incentive Stock Plan" on page .
We have agreed not to sell or otherwise dispose of any common shares during
the 180-day period following the date of the prospectus, except we may issue,
and grant options to purchase, common shares and we may offer and sell common
shares under our 1999 Incentive Stock Plan. In addition, we may issue common
shares in connection with any acquisition of another company if the terms of the
issuance provide that the common shares may not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence.
Following this offering, in some circumstances and subject to conditions,
holders of our outstanding common shares will have demand registration rights
(subject to the 180-day lock-up arrangement described above) to require us to
register their common shares under the Securities Act, and they will have rights
to participate in any future registration of securities by us. For a more
detailed description of these registration rights, see "Description of Capital
Stock--Registration Rights" on page 50.
54
<PAGE>
UNDERWRITING
GENERAL
Under the underwriting agreement, which is filed as an exhibit to the
registration statement of which this prospectus is a part, each of the
underwriters named below, for whom Lehman Brothers Inc., Warburg Dillon Read
LLC, J.C. Bradford & Co. and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, has agreed to
purchase from us the respective number of common shares shown opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Lehman Brothers Inc..........................................................
Warburg Dillon Read LLC......................................................
J.C. Bradford & Co...........................................................
Fidelity Capital Markets, a division of National Financial Services
Corporation................................................................
-------
Total........................................................................
-------
-------
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase common shares are subject to certain conditions, and that if any of the
foregoing common shares are purchased by the underwriters pursuant to an
underwriting agreement, all of the common shares that the underwriters have
agreed to purchase pursuant to the underwriting agreement must be so purchased.
COMMISSIONS AND EXPENSES
The representatives have advised us that the underwriters propose to offer
the common shares directly to the public at the public offering price set forth
on the cover page of this prospectus, and to certain selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions............. $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
55
<PAGE>
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an aggregate
of common shares, exercisable solely to cover over-allotments, if any,
at the public offering price less the underwriting discounts and commissions
shown on the cover page of this prospectus. Such option may be exercised at any
time, and from time to time, until 30 days after the date of the underwriting
agreement. To the extent that the underwriters exercise this option, each
underwriter will be committed, subject to certain conditions, to purchase a
number of additional common shares proportionate to such underwriter's initial
commitment, as indicated in the preceding table, and we will be obligated, under
such over-allotment option, to sell such common shares to the underwriters.
LOCK-UP AGREEMENTS
We and all of our directors, officers shareholders and option holders,
holding an aggregate of common shares, have agreed not to offer to
sell, sell or otherwise dispose of, directly or indirectly, any common shares
during the 180-day period following the date of the prospectus without the prior
written consent of Lehman Brothers Inc., except that we may issue, and grant
options to purchase, common shares under our 1999 Incentive Stock Plan. For a
description of the dilution of your investment, see "Risk Factors--You will
experience immediate and substantial dilution in the book value of your
investment" on page 13 and "Shares Eligible for Future Sale" on page 53.
OFFERING PRICE DETERMINATION
Prior to the offering, there has been no public market for the common
shares. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common shares, the representatives considered, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Application has been made to have the common shares approved for quotation
on the Nasdaq National Market under the symbol "DPEC."
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities related to
the offering, including liabilities under the Securities Act, and to contribute,
under defined circumstances, to payments that the underwriters may be required
to make in respect thereof.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase common shares. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common shares. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common shares.
If the underwriters create a short position in the common shares in
connection with the offering (i.e., they sell more shares than are set forth on
the cover page of this prospectus), the representatives may reduce that short
position by purchasing common shares in the open market. The representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of common shares
offered by them. The representatives
56
<PAGE>
also may impose a penalty bid on underwriters and selling group members. This
means that if the representatives purchase common shares in the open market to
reduce the underwriters' short position or to stabilize the price of the common
shares, they may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these stabilizing transactions or that these transactions, once
commenced, will not be discontinued without notice.
FIDELITY INVESTMENTS' ONLINE DISTRIBUTION PROCEDURES
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic dissemination of information through the Internet,
intranet and other proprietary electronic technology.
DEAL PROCESS AND PROCEDURES
Fidelity uses the Internet both to broadcast deal-specific announcements and
as an efficient delivery mechanism of preliminary prospectuses to customers. The
broadcast announcements include outgoing emails, pager messages and "passive"
postings on Fidelity's Internet web pages (but do not include allocation
announcements). The deal specific announcements, all of which include disclosure
complying with Rule 134, refer to:
- Participation announcements which summarize key aspects of the offering
for customers;
- Offering updates which communicate changes in the offering, such as
changes in offering size, price/yield level or timing of the offering, to
customers; and
- Pricing announcements which notify customers that the price and/or yield
on the offering has been determined.
Fidelity delivers prospectuses electronically to customers via web-viewable
and web-downloadable files. This delivery mechanism is used for preliminary
prospectuses only. The electronic delivery option is an alternative to
traditional physical delivery (i.e., by mail), which is still available via
phone request to Fidelity's dedicated new issue representative. Customers who
opt for electronic delivery must first consent to such delivery after logging-on
to Fidelity's InstantBroker-SM- web site. This consent, and the online
viewing/download, is recorded in the audit trail files of the core new issue
processing system, which are subject to standard records retention requirements.
In all cases, final prospectuses are delivered to customers via regular mail.
Actual placement of indications of interest, orders and confirmations are
NOT available via online means. These transactions are possible only via phone
with Fidelity's dedicated team of new issue representatives. Thus, Fidelity is
not conducting an electronic distribution of securities via the Internet or
other electronic means to disseminate offering-related information to customers
in accordance with the applicable regulatory rules and requirements. Contact
information, including phone numbers for this team, is included in all
electronic communications.
57
<PAGE>
ONLINE PROSPECTUS DELIVERY REQUIREMENT PROCEDURES
Fidelity facilitates electronic delivery of preliminary prospectuses via a
Web-based delivery platform. The preliminary prospectuses are made available for
online viewing and download in a widely-used electronic format (Adobe's Portable
Document Format or "PDF"). Recently, this web-platform was made available to all
Fidelity brokerage customers, who may sign-in to this Website via the same
sign-on and password which allows the customer to access account, portfolio, and
other types of client specific information. In order to access the prospectus,
the customer is presented with disclosure information consistent with
appropriate disclosure of risks and with relevant regulatory requirements (e.g.,
consent to electronic delivery, etc.). The prospectus download/viewing screen is
made available upon customer assent to this disclosure information. Upon
download/viewing of the prospectus, a permanent record of this event is made in
Fidelity's internal systems in similar fashion to the audit trails which are
maintained for traditional telephone and mail-based events.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to % of the common
shares offered hereby for sale to certain of our employees, directors and
friends at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus and must agree to be
subject to the 180-day lock-up described above. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase such reserved shares.
OFFERS AND SALES OUTSIDE THE UNITED STATES
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which a
sale is made.
Purchasers of the common shares offered in this prospectus may be required
to pay stamp taxes and other charges under the laws and practices of the country
of purchase, in addition to the offering price listed on the cover of this
prospectus.
LEGAL MATTERS
The validity of the common shares offered hereby will be passed upon for
DPEC by Vorys, Sater, Seymour and Pease LLP, Columbus, Ohio. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common shares
offered hereby. This prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in the registration
statement, certain parts of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For further information
about us and the common shares offered hereby, reference is made to the
registration statement. Statements contained in this prospectus
58
<PAGE>
as to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
registration statement, each such statement being qualified by such reference.
The registration statement (and all amendments, exhibits and schedules
thereto) may be inspected without charge at the principal office of the
Securities and Exchange Commission in Washington, D.C. and copies of all or any
part thereof may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Securities and
Exchange Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained at prescribed rates by mail from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a Website
(http//www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
We intend to distribute to our shareholders annual reports containing
audited consolidated financial statements.
59
<PAGE>
DPEC, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Changes in Shareholders' Deficiency..................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
DPEC, Inc.:
We have audited the accompanying balance sheets of DPEC, Inc. as of December
31, 1997 and 1998, and the related statements of operations, changes in
shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1998. 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 the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1999 the Company
retroactively changed its method of accounting for revenue recognition for
internet related services.
/s/ Deloitte & Touche LLP
Columbus, Ohio
October 26, 1999
F-2
<PAGE>
DPEC, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DEFICIENCY
DECEMBER 31, SEPTEMBER 30,
-------------------- SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 9)
--------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ -- $ 1,835 $ 4,362
Accounts receivable, net..................................... 2,196 1,966 1,912
Deferred commissions and royalties........................... 228 1,030 1,548
Other prepaid expenses....................................... 40 24 432
--------- --------- -------------
Total current assets..................................... 2,464 4,855 8,254
PROPERTY AND EQUIPMENT:
Computer hardware and software............................... 484 691 1,421
Office furniture and equipment............................... 146 168 377
Leasehold improvements....................................... -- 72 393
--------- --------- -------------
Total.................................................... 630 931 2,191
Less accumulated depreciation and amortization............... (360) (534) (769)
--------- --------- -------------
Property and equipment--net.............................. 270 397 1,422
OTHER ASSETS--net.............................................. 123 21 345
--------- --------- -------------
TOTAL.......................................................... $ 2,857 $ 5,273 $ 10,021
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable............................................. $ 369 $ 417 $ 953
Accrued compensation......................................... 328 480 638
Other accrued expenses....................................... 176 193 978
Borrowings under line of credit.............................. 965 -- --
Current portion of bank note................................. -- -- 111
Current portion of notes payable, related parties............ 275 227 224
Deferred revenue............................................. 2,129 4,340 6,041
--------- --------- -------------
Total current liabilities................................ 4,242 5,657 8,945
NOTES PAYABLE:
Bank note--less current portion.............................. -- -- 384
Related parties--less current portion........................ 1,104 868 645
--------- --------- -------------
Total notes payable........................................ 1,104 868 1,029
DEFERRED REVENUE............................................... 153 1,616 2,328
CONVERTIBLE REDEEMABLE PREFERRED STOCK......................... -- 1,893 4,853 $ --
COMMITMENTS AND CONTINGENCIES (Notes 3 and 9)
SHAREHOLDERS' DEFICIENCY:
Common stock, no par value, 60,000, 60,000 and 61,898 shares
authorized, 44,550 shares issued........................... 28 55 55 6,801
Treasury stock, at cost...................................... (1,108) (935) (935) (935)
Accumulated deficit.......................................... (1,562) (3,881) (6,254) (6,254)
--------- --------- ------------- -------------
Total shareholders' deficiency........................... (2,642) (4,761) (7,134) $ (388)
--------- --------- ------------- -------------
-------------
TOTAL.......................................................... $ 2,857 $ 5,273 $ 10,021
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DPEC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Courseware sales........................................... $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue.............................................. 2,440 1,731 793 687 55
--------- --------- --------- ------------- -------------
Total revenue.......................................... 6,845 7,346 7,867 5,384 8,245
--------- --------- --------- ------------- -------------
COST OF SALES--Courseware product cost and royalties......... 326 311 465 304 555
--------- --------- --------- ------------- -------------
GROSS PROFIT................................................. 6,519 7,035 7,402 5,080 7,690
OPERATING EXPENSES:
Sales and marketing........................................ 2,672 3,469 4,300 2,997 4,605
Product development........................................ 1,471 2,036 2,380 1,655 2,944
General and administrative................................. 1,548 1,615 2,314 1,807 2,204
--------- --------- --------- ------------- -------------
Total operating expenses............................... 5,691 7,120 8,994 6,459 9,753
--------- --------- --------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS................................ 828 (85) (1,592) (1,379) (2,063)
INTEREST EXPENSE, Net:
Interest expense, related parties.......................... 91 130 106 85 65
Interest expense, other.................................... 64 54 33 35 11
Interest income............................................ (5) (3) (33) (7) (51)
--------- --------- --------- ------------- -------------
Total interest expense, net............................ 150 181 106 113 25
--------- --------- --------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES............................ 678 (266) (1,698) (1,492) (2,088)
PROVISION FOR INCOME TAXES................................... 1,033 -- -- -- --
--------- --------- --------- ------------- -------------
NET LOSS..................................................... $ (355) $ (266) $ (1,698) $ (1,492) $ (2,088)
CONVERTIBLE REDEEMABLE PREFERRED STOCK DIVIDENDS............. -- -- -- -- (20)
--------- --------- --------- ------------- -------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS.................... $ (355) $ (266) $ (1,698) $ (1,492) $ (2,108)
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
BASIC AND DILUTED NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE
Basic...................................................... $ (9.86) $ (8.37) $ (50.99) $ (45.03) $ (62.46)
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Diluted.................................................... $ (9.86) $ (8.37) $ (50.99) $ (45.03) $ (62.46)
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
UNAUDITED PRO FORMA INCOME DATA (NOTE 9):
INCOME (LOSS) BEFORE INCOME TAXES............................ $ 678 $ (266) $ (1,698) $ (1,492)
PROVISION (CREDIT) FOR INCOME TAXES.......................... 269 (116) (688) (608)
--------- --------- --------- -------------
NET INCOME (LOSS)............................................ $ 409 $ (150) $ (1,010) $ (884)
--------- --------- --------- -------------
--------- --------- --------- -------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic...................................................... $ 11.38 $ (4.73) $ (30.32) $ (26.67)
--------- --------- --------- -------------
--------- --------- --------- -------------
Diluted.................................................... $ 11.38 $ (4.73) $ (30.32) $ (26.67)
--------- --------- --------- -------------
--------- --------- --------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic...................................................... 35,965 31,737 33,315 33,137 33,737
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
Diluted.................................................... 35,965 31,737 33,315 33,137 33,737
--------- --------- --------- ------------- -------------
--------- --------- --------- ------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
DPEC, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ TREASURY STOCK
SHARES ---------------------- ACCUMULATED
ISSUED AMOUNT SHARES AMOUNT DEFICIT
----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE--January 1, 1996............................... 45 $ .5 -- -- $ (941)
--
----- ------------
Net loss............................................... -- -- -- -- (355)
Purchase of treasury stock............................. -- -- 15 $ (1,284) --
Sale of treasury stock................................. -- 27.5 (2) 176 --
-- --
----- --------- ------------
BALANCE--December 31, 1996............................. 45 28 13 (1,108) (1,296)
Net loss............................................... -- -- -- -- (266)
-- --
----- --------- ------------
BALANCE--December 31, 1997............................. 45 28 13 (1,108) (1,562)
Net loss............................................... -- -- -- -- (1,698)
Distributions to common shareholders................... -- -- -- -- (621)
Sale of treasury stock................................. -- 27 (2) 173 --
-- --
----- --------- ------------
BALANCE--December 31, 1998............................. 45 55 11 (935) (3,881)
Net loss (unaudited)................................... -- -- -- -- (2,088)
Preferred stock dividends (unaudited).................. (20)
Distributions to common shareholders (unaudited)....... -- -- -- -- (265)
-- --
----- --------- ------------
BALANCE--September 30, 1999 (unaudited)................ 45 $ 55 11 $ (935) $ (6,254)
-- --
-- --
----- --------- ------------
----- --------- ------------
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFICIENCY
-------------
<S> <C>
BALANCE--January 1, 1996............................... $ (941)
-------------
Net loss............................................... (355)
Purchase of treasury stock............................. (1,284)
Sale of treasury stock................................. 204
-------------
BALANCE--December 31, 1996............................. (2,376)
Net loss............................................... (266)
-------------
BALANCE--December 31, 1997............................. (2,642)
Net loss............................................... (1,698)
Distributions to common shareholders................... (621)
Sale of treasury stock................................. 200
-------------
BALANCE--December 31, 1998............................. (4,761)
Net loss (unaudited)................................... (2,088)
Preferred stock dividends (unaudited).................. (20)
Distributions to common shareholders (unaudited)....... (265)
-------------
BALANCE--September 30, 1999 (unaudited)................ $ (7,134)
-------------
-------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DPEC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- --------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $ (355) $ (266) $ (1,698) $ (1,492) $ (2,088)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization....... 127 235 282 196 141
Deferred income taxes............... 687 -- -- -- --
Loss on sale of property and
equipment......................... 15 -- -- -- --
Decrease (increase) in certain
assets:
Accounts receivable............... (491) (645) 230 780 54
Prepaid expenses and other
assets.......................... (20) (149) (791) (769) (1,250)
Increase (decrease) in certain
liabilities:
Accounts payable.................. 150 (14) 167 175 194
Accrued expenses.................. 3 218 169 251 962
Deferred revenues................. 110 645 3,674 3,652 2,413
----------- --------- ---------- ----------- ----------
Net cash provided by operating
activities.................... 226 24 2,033 2,793 426
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment... (157) (198) (302) (156) (863)
----------- --------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long term debt....... 1,000 -- 250 250 500
Bank overdraft........................ 39 80 (119) -- --
Principal payments on long term
debt................................ (115) (154) (534) (483) (231)
Borrowings under line of credit....... 1,250 5,127 3,571 3,043 515
Repayments under line of credit....... (1,475) (4,887) (4,536) (4,008) (515)
Distributions to shareholders......... -- -- (621) (621) (265)
Proceeds from issuance of preferred
stock............................... -- -- 1,893 1,916 2,960
Purchase of treasury stock............ (1,034) -- -- -- --
Sale of treasury stock................ 204 -- 200 200 --
----------- --------- ---------- ----------- ----------
Net cash provided by (used in)
financing activities.......... (131) 166 104 297 2,964
----------- --------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... (62) (8) 1,835 2,934 2,527
CASH AND CASH EQUIVALENTS--Beginning of
period................................ 70 8 -- -- 1,835
----------- --------- ---------- ----------- ----------
CASH AND CASH EQUIVALENTS--End of
period................................ $ 8 $ -- $ 1,835 $ 2,934 $ 4,362
----------- --------- ---------- ----------- ----------
----------- --------- ---------- ----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH PAID
DURING THE YEAR:
Interest.............................. $ 151 $ 190 $ 150 $ 120 $ 73
----------- --------- ---------- ----------- ----------
----------- --------- ---------- ----------- ----------
Income taxes.......................... $ 254 $ 4 $ -- $ -- $ 10
----------- --------- ---------- ----------- ----------
----------- --------- ---------- ----------- ----------
NONCASH TRANSACTIONS:
Non-competition agreement financed
through note payable................ $ 293
-----------
-----------
Purchase of treasury shares through
note payable........................ $ 250
-----------
-----------
Property and equipment included in
accounts payable.................... $ 303
----------
----------
Dividends accrued on preferred
stock............................... $ 20
----------
----------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--DPEC, Inc. (the Company), founded in 1981, is a
leading provider of Web-based training courses and services designed to meet the
needs of businesses, government agencies, non-profit organizations and
individual consumers worldwide.
LONG-LIVED ASSETS--The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. No such impairment losses have been identified
by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the following estimated useful lives: Office furniture and equipment, 5 years;
automobiles and computer hardware and software, 3 years; and leasehold
improvements, the related lease term.
OTHER ASSETS--Other assets includes a non-compete agreement with a former
officer of the Company and deposits. The non-compete agreement is amortized over
30 months, the term of the agreement. The non-compete agreement was fully
amortized in 1998.
The Company recorded amortization expense of approximately $68,000, $117,000
and $108,000 in the years ended December 31, 1996, 1997 and 1998, respectively,
related to the non-compete agreement, which is included in general and
administrative expense. Accumulated amortization is $186,000 at December 31,
1997.
REVENUE RECOGNITION--Beginning in fiscal 1998, the Company adopted Statement
of Position ("SOP") 97-2 "Software Revenue Recognition" as amended by SOP 98-4.
The effect of this adoption did not have a material impact on the Company's
results of operations. Courseware revenues from perpetual licenses, annual
licenses and multi-year licenses are recognized on delivery of the courseware,
provided the fees are fixed and determinable, collections of accounts receivable
are probable and the customer does not have the option to access the courseware
through the internet.
In 1999, in connection with the planned registration of the Company's common
shares with the Securities and Exchange Commission, the Company has
retroactively adopted a new method of accounting for revenue recognition for
license agreements with multiple delivery options (e.g. CD-ROM or electronic
delivery) that also allow its customers to access the Company's courses through
the Internet at any time during the license term. Under the new policy, the
Company will recognize revenue over the license term if the customer has the
option to access the courses through the Company's internet hosting service.
Additionally, the costs of commissions and royalties related to these licenses
will be deferred and amortized over the term of the agreement. Previously, the
Company recognized revenue and the related commissions and royalties from these
licenses upon granting access to the Company's internet site or upon physical or
electronic delivery of the courses to the customer. The Company has restated its
1998 and 1997 financial statements for this accounting change.
Certain licenses allow customers to obtain access to other courses in the
Company's library of courseware at specified times during the licensing period.
Because the customer is permitted to access an unspecified number of courses
during the license period, these agreements are accounted for as subscriptions,
with the revenue recognized on a straight-line basis over the license term.
F-7
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We also provide our courses through Internet service providers and other
marketing partners. Our Internet service providers and other marketing partners
can provide our courses to their customers by either hosting our courses on
their Internet sites or by linking their customers to our Internet site. If the
provider/partner hosts the courses, it bills the customers and remits a royalty
to us. If the provider/ partner is linking to our Internet site, we bill the
customers, record revenue from the subscription and expense the royalty. In both
cases, because the customer has access to unspecified additional courses, the
revenue is treated as a subscription and recorded on a straight-line basis over
the term of the subscription.
The cost of providing Post Contract Support ("PCS") is accrued at the time
revenue is recognized, as: 1) PCS fees are included with the initial license and
are for one year or less; 2) the estimated cost of providing PCS during the
license term is insignificant; and 3) unspecified upgrades or enhancements
offered have been and are expected to be minimal and infrequent.
OTHER REVENUE--Prior to February 1999, the Company offered third-party
produced courseware to its customers. The Company recognized a net royalty
related to these sales. As of February 1999 the Company discontinued the
licensing of these products to new customers.
COST OF SALES--Cost of sales includes materials (such as diskettes, compact
discs, packaging and documentation), royalties paid to third parties and
fulfillment costs.
PRODUCT DEVELOPMENT--Product development expenditures are charged to
operations as incurred. Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Development costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
ADVERTISING COSTS--The Company expenses advertising costs as they are
incurred. Advertising expense was $233,000, $336,000, $272,000 and $776,000 in
1996, 1997, 1998 and the nine months ended September 30, 1999, respectively.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK--For purposes of computing net
income (loss) per share of common stock, weighted average basic and diluted
shares are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------
NINE MONTHS ENDED
YEAR ENDED ------------------------------------
------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998 1999
--------- --------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Weighted average basic and diluted shares
outstanding................................. 35,965 31,737 33,315 33,137 33,737
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
</TABLE>
F-8
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share of common stock calculation because
to do so would be anti-dilutive for the periods indicated:
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------------------------
YEAR ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------------------
1996 1997 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
--------- ----- --------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
Convertible preferred stock........................ -- -- 5,123 5,123 8,102
Stock options...................................... 1,294 844 844 844 2,289
--------- --- --------- ----- ------
Total.............................................. 1,294 844 5,967 5,967 10,391
--------- --- --------- ----- ------
--------- --- --------- ----- ------
</TABLE>
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
IMPACT OF NEW ACCOUNTING STANDARDS--In December 1998, the AICPA issued SOP
98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" which addresses software revenue recognition as it applies
to certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2" to extend the
deferral of the application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Management does not believe that this pronouncement will have a material effect
on its financial statements.
ACCOUNTING FOR INCOME TAXES--The Company accounts for income taxes pursuant
to SFAS No. 109, "Accounting for Income Taxes", which uses the liability method
to calculate deferred income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amount of cash, accounts
receivable, accounts payable and accrued liabilities at December 31, 1997, 1998
and September 30, 1999 approximate the fair value of the financial assets and
liabilities due to the short maturity of the instruments. The carrying amount of
borrowings under the line of credit at December 31, 1997 and the carrying amount
of notes payable at December 31, 1997 and 1998 and September 30, 1999
approximate the fair value of the financial liabilities, due to the instruments
having either variable or fixed rates of interest comparable to the rates
currently available to the Company for debt with similar remaining maturities.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consists principally of cash
investments and trade receivables. The Company invests its excess cash in
deposits with major banks. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal. The principal
market for the Company's products comprises major U.S. national and
multi-national organizations. The Company performs ongoing credit evaluations of
its customers. To date credit losses have been minimal. The Company generally
requires no collateral from its customers.
F-9
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPENDENCE ON CONTENT PROVIDERS--The Company currently relies on one book
publisher for substantially all of its course content. Although the Company
believes that there are alternative publishers or that it could develop its own
course content, the Company has established a favorable relationship with the
publisher. The loss of the Company's relationship with its current publisher
particularly if coupled with a failure to develop new sources of content, could
increase course development costs and delay introduction of new courses.
INTERIM FINANCIAL INFORMATION--The interim financial statements as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999 are
unaudited but contain all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of its
results of operations and cash flows for the periods. The financial and other
data disclosed in these notes to the financial statements for these periods are
also unaudited. Operating results for the nine months ended September 30, 1998
and 1999 are not necessarily indicative of results that may be expected for any
future periods.
2. NOTES PAYABLE AND BANK LOANS
Notes payable as of December 31, 1997 and 1998 and September 30, 1999
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Note payable to officer/shareholder, with interest at prime plus 1% (total of
9.50%, 8.75% and 8.75% at December 31, 1997 and 1998 and September 30, 1999,
respectively) and monthly principal payments of $11,905 commencing November
1997 through November 2004 plus interest through November 2004, unsecured.... $ 976 $ 833 $ 726
Note payable to former officer/shareholder with interest at 8%, interest due
quarterly through December 1998, and quarterly principal and interest
payments of $25,615 commencing October 1998 through April 2001, secured by
1,805 shares of treasury stock............................................... 250 209 143
Note payable to former officer/shareholder with interest at 8%, repaid in
1999......................................................................... 153 53 --
Bank note, with interest at 8.04% and monthly principal payments of $8,333
commencing August 1999 through July 2004, collateralized by all assets....... -- -- 495
--------- --------- ------
Total...................................................................... 1,379 1,095 1,364
Less current portion........................................................... 275 227 335
--------- --------- ------
Notes payable--long-term....................................................... $ 1,104 $ 868 $ 1,029
--------- --------- ------
--------- --------- ------
</TABLE>
F-10
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE AND BANK LOANS (CONTINUED)
Scheduled maturities of notes payable as of September 30, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000................................................ $ 335
2001................................................ 293
2002................................................ 243
2003................................................ 243
2004................................................ 226
Thereafter.......................................... 24
---------
Total............................................... $ 1,364
---------
---------
</TABLE>
On February 23, 1998, the Company amended their bank line of credit
agreement. Under the terms of the amended agreement, the Company obtained a
$1,250,000 line of credit ($965,000 outstanding at December 31, 1997 under the
prior agreement), decreasing to $1,000,000 at September 30, 1998 and bearing
interest at prime plus 1/2%. The agreement expired in 1999.
On July 28, 1999, the Company entered into a $3,000,000 line of credit with
a bank. No amounts were outstanding at September 30, 1999. The line of credit,
which expires on October 31, 2001, bears interest at the lenders' prime rate
less 1/2%, allows borrowings up to 85% of the Company's accounts receivable (not
to exceed $3,000,000) and is secured by all assets of the Company. The line of
credit and the term note contain restrictive covenants which, among others,
require the Company to maintain a certain level of cash flow, as defined.
3. OPERATING LEASES
The Company leases office space and certain equipment under non-cancelable
operating leases. The future minimum lease payments applicable to these
operating leases as of September 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................. $ 246
2001................................................. 241
2002................................................. 163
---------
Total future minimum lease payments.................. $ 650
---------
---------
</TABLE>
Total expense incurred by the Company under operating leases for 1996, 1997,
1998 and the nine months ended September 30, 1999 totaled $149,000, $170,000,
$257,000 and $228,000, respectively. In 1996, rent expense included $42,000 to a
related party.
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On September 15, 1998, the Company issued 5,123 shares of senior convertible
redeemable preferred stock (10,000 shares authorized) for proceeds of
$2,000,000.
The terms of the convertible redeemable preferred shares include, among
other things, the following, which are described in more detail in the
agreement:
- Dividends are payable quarterly in arrears beginning in August 1999 (no
dividends will be paid or accrued prior to September 1999) at 4%,
increasing 2% each year to 10% in 2003 and
F-11
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
thereafter. Dividends are cumulative and dividends not paid currently will
accrue and compound quarterly at a rate of 10% per year.
- The shares are entitled to a per share liquidation preference of $390.40
plus all accrued and unpaid dividends, if any. The amount is payable prior
to and in preference to any distribution to common shareholders.
- Each share is convertible into one common share at any time at the option
of the holder or upon the closing of an initial public offering of common
shares, as defined.
- Each share issued and outstanding has the right to vote, as defined in the
document, the number of shares equal to the number of common shares into
which the shares would be convertible.
- Under certain conditions the amended articles of incorporation grant to
the holders of the preferred shares the right to elect a majority of the
board and to possess a majority of the votes upon matters brought before
the shareholders for their consent.
At any time during the period beginning September 1, 2003 and ending August
31, 2004, as long as there has not occurred a closing of an initial public
offering of common shares, as defined, the holders of a majority of the shares
of preferred shares may demand the Company redeem all, but not less than all, of
the preferred shares and all, or a portion, of the common shares that the
holders have acquired by conversion of preferred shares, at a price equal to the
greater of (i) the original purchase price per share of preferred shares (as
adjusted) or (ii) the fair market value per share at the time of redemption
(taking into consideration the liquidation preference but not considering any
discount for lack of marketability or for minority interest) as determined by a
qualified, independent appraiser.
On August 27, 1999, the Company issued 2,979 shares of series B convertible
redeemable preferred stock (2,979 shares authorized) for proceeds of $3,000,121.
The shares are entitled to a per share liquidation preference of $1,007.09, and
contain similar provisions to the senior shares. Also on August 27, 1999, the
Company authorized an additional 1,898 shares of common stock resulting in a
total of 61,898 shares authorized and reduced the number of authorized senior
convertible redeemable preferred shares by 1,898 shares.
5. STOCK OPTIONS
The Company has an Amended and Restated Incentive Stock Option Plan (the
1994 Plan) for its key employees. The 1994 Plan provides for granting options to
purchase up to 3,000 shares of the Company's common shares for an amount not
less than the fair market value of the shares at the date of grant. Options
granted expire ten years from the date of grant and vest over three years. Under
the terms of the convertible redeemable preferred stock agreement (see note 4),
no additional options may be granted under this plan. No options were granted in
fiscal 1998 or during the nine months ended September 30, 1999.
The Company has outstanding a total of 844 options and 345 option
commitments to purchase the Company's common stock under the 1994 Plan as of
September 30, 1999. The exercise of the options under the option commitments is
contingent on a change in control of the Company or the Company becoming a
public entity before January 2005, the expiration date of the commitments. The
exercise price for the options and option commitments was the estimated fair
market value of the common stock at the grant dates, and range from $17.81 to
$100.
F-12
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS (CONTINUED)
In September 1998, the Company adopted a new employee Stock Option Plan (the
1998 Plan). The 1998 Plan provides for granting qualified and non-qualified
options to purchase up to 2,000 shares of the Company's common stock for amounts
determined by the Board of Directors at the date of grant. Options granted
generally expire ten years from the date of grant and will vest over periods
specified at the date of grant. On May 20, 1999 and September 15, 1999 the
Company issued 1,285 and 160 options, respectively, under the 1998 Plan at
option prices of $275 per share and $680 per share, respectively, the estimated
fair market value of the common shares on each grant date. The 1,285 and 160
options vest one third each year beginning May 2000 and September, 2000,
respectively.
On August 27, 1999 the Company changed the number of shares available for
all plans to an aggregate of 4,844 common shares.
The following summarizes the stock option and option commitment activity for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1999.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------- ----------------
<S> <C> <C>
Outstanding December 31, 1995............................ 795 $ 20.43
Granted.................................................. 844 100.00
----- -------
Outstanding December 31, 1996............................ 1,639 61.40
Cancelled................................................ (450) 22.43
----- -------
Outstanding December 31, 1997 and 1998................... 1,189 76.15
Granted (unaudited)...................................... 1,445 319.84
----- -------
Outstanding September 30, 1999 (unaudited)............... 2,634 $ 209.84
----- -------
----- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
1996 1997 1998 -------------
--------- --------- --------- (UNAUDITED)
<S> <C> <C> <C> <C>
Exercisable at end of period................... 450 281 563 844
--------- --------- --------- -------------
--------- --------- --------- -------------
Weighted average exercise price of options
exercisable at end of period................. $ 22.43 $ 100.00 $ 100.00 $ 100.00
--------- --------- --------- -------------
--------- --------- --------- -------------
Weighted average fair value of options granted
during period................................ $ 27.37 $ 91.45
--------- -------------
--------- -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing method with the following weighted-average
assumptions used for 1996 and the nine month period ended September 30, 1999:
dividend yield of 0%, risk-free interest rate of 6.5% and 6.85%, respectively,
and an expected life of five years.
Exercise prices for options totaling 345, 844, 1,285 and 160 shares at
September 30, 1999 are $17.81, $100, $275 and $680, respectively, with weighted
average contractual lives of six, seven, ten and ten years, respectively.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Had compensation cost for the Company's
stock option plans been determined based on
F-13
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS (CONTINUED)
the fair value at the grant dates for awards under the plan consistent with the
method of SFAS 123 "Accounting for Stock Based Compensation" the effect on net
loss would not have been significant.
6. 401(k) PLAN
The Company has a 401(k) plan for employees who have completed at least six
months of service. Discretionary employer contributions totaling $22,000,
$53,000, $179,000 and $154,000 have been expensed for the years ended December
31, 1996, 1997 and 1998 and the nine month period ended September 30, 1999,
respectively, representing an employer match of 50% on amounts contributed by an
employee, up to 5% of the employee's annual compensation.
7. INCOME TAXES
Effective August 1, 1996, the Company elected "S-Corporation" status for
income tax reporting purposes. As an "S-Corporation", all federal and state
taxable income and expenses flow directly to the shareholders and are not taxed
at the corporate level. At the effective date of the "S-Corporation" election,
all remaining deferred tax assets and liabilities were eliminated from the
balance sheet.
Because of the issuance of convertible preferred stock described in Note 4,
the Company no longer qualifies for "S-Corporation" status effective September
15, 1998. As a result, effective September 15, 1998, this change resulted in the
recognition of a net deferred tax asset and offsetting valuation reserve.
The components of income tax expense consisted of the following for the year
ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Current.............................................................................. $ 346
Deferred............................................................................. 687
---------
Total income tax expense............................................................. $ 1,033
---------
---------
</TABLE>
The income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% of pretax earnings as follows (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1998 SEPTEMBER 30, 1999
--------- --------- ------------------
<S> <C> <C> <C>
Income tax (benefit) expense at statutory rate........ $ 231 $ (577) $ (709)
Change in tax status.................................. 769 (1,894) --
Change in valuation reserve........................... -- 2,494 887
Net state income tax (benefit)........................ 34 (20) (125)
Other--net............................................ (1) (3) (53)
--------- --------- ----------
Total income tax expense.............................. $ 1,033 $ -- $ --
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-14
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
1998 SEPTEMBER 30, 1999
--------- -------------------
<S> <C> <C>
Deferred tax assets:
Deferred revenues.............................................. $ 2,543 $ 3,573
Net operating loss carry forwards.............................. 128 107
Non-compete agreement.......................................... 93 86
Accrued vacation............................................... 24 60
Other.......................................................... 37 35
Valuation allowance............................................ (2,494) (3,381)
--------- ------
Total assets................................................. 331 480
--------- ------
Deferred tax liabilities:
Prepaid commissions............................................ 318 456
Other.......................................................... 13 24
--------- ------
Total liabilities............................................ 331 480
--------- ------
Net deferred tax asset........................................... $ -- $ --
--------- ------
--------- ------
</TABLE>
As of September 30, 1999, the Company had tax net operating loss carry
forwards of approximately $250,000 for federal and state income tax purposes.
These carry forwards begin to expire at various times through 2018. A valuation
allowance has been provided to offset the net deferred tax assets due to the
uncertainty surrounding the realizability of such assets.
8. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. In accordance with SFAS 131, the company operates in one industry
segment, the development and marketing of interactive education and training
software.
9. PRO FORMA INFORMATION (UNAUDITED)
From August 1, 1996 through September 15, 1998, the Company was treated as
an "S Corporation" (see note 7). Accordingly, the Company had not recorded
federal and state income tax expense for that period. The pro forma income data
for the years ended December 31, 1996, 1997 and 1998 reflects a provision for
income taxes at a combined rate of 40% for all periods presented and includes
the effect of SFAS No. 109 "Accounting for Income Taxes".
Effective upon the closing of this offering, the outstanding shares of
senior convertible redeemable preferred shares and Series B convertible
redeemable preferred shares will automatically convert into 8,102 common shares.
The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma shareholders' deficiency at September
30, 1999 and result in pro forma shares outstanding at September 30, 1999.
Prior to the Company going public it will declare a stock split. As the
amount of the stock split is not presently known, the common shares have not
been adjusted to reflect the stock split.
* * * * * *
F-15
<PAGE>
[Inside back cover]
A listing of DPEC courses.
<PAGE>
SHARES
[LOGO]
COMMON SHARES
------------------------
PROSPECTUS
, 1999
------------------------
LEHMAN BROTHERS
WARBURG DILLON READ LLC
J.C. BRADFORD & CO.
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
FACILITATING ELECTRONIC DISTRIBUTION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee, the National Association of Securities
Dealers, Inc. filing fee and the NASDAQ National Market listing fee) fees and
expenses payable by Registrant in the distribution of the Common Shares:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 15,985
National Association of Securities Dealers, Inc. filing fee........ $ 6,250
NASDAQ National Market listing fee................................. *
Printing and engraving costs....................................... *
Legal fees and expenses............................................ *
Accountants' fees and expenses..................................... *
Blue sky qualification fees and expenses........................... *
Transfer agent fees................................................ *
Miscellaneous...................................................... *
---------
Total.......................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of
the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, member, manager,
or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust
or other enterprise, against expenses, including attorney's fees, judgments,
fines, and amounts paid in settlement actually and reasonably incurred by
him in connection with such action, suit, or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation
to procure a judgment in its favor, by reason of the fact that he is or was
a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability company, or a
II-1
<PAGE>
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged
to be liable for negligence or misconduct in the performance of his duty
to the corporation unless, and only to the extent that, the court of
common pleas or the court in which such action or suit was brought
determines, upon application, that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses as the
court of common pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense
of any action, suit, or proceeding referred to in division (E)(1) or (2) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action, suit, or
proceeding.
(4) Any indemnification under division (E)(1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case, upon a determination that indemnification
of the director, trustee, officer, employee, member, manager, or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in division (E)(1) or (2) of this section. Such
determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or
threatened by the action, suit, or proceeding referred to in division
(E)(1) or (2) of this section;
(b) If the quorum described in division (E)(4)(a) of this section is
not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel
other than an attorney, or a firm having associated with it an attorney,
who has been retained by or who has performed services for the
corporation or any person to be indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which the action,
suit, or proceeding referred to in division (E)(1) or (2) of this section
was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the corporation under
division (E)(2) of this section, and, within ten days after receipt of such
notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review
the reasonableness of such determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in division (E)(1) or
(2) of this section, the articles or the regulations of a corporation state,
by specific reference to this division, that the provisions of this division
do not apply to the corporation and unless the only liability asserted
against a director in an action, suit, or proceeding referred to in division
(E)(1) or (2) of this section is pursuant to section 1701.95 of the Revised
Code, expenses, including attorney's fees, incurred by a director in
defending the
II-2
<PAGE>
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding, upon receipt of an undertaking by or on behalf of the director
in which he agrees to both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure
to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or undertaken with reckless disregard for
the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, member, manager, or agent in defending any
action, suit, or proceeding referred to in division (E)(1) or (2) of this
section, may be paid by the corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding, as authorized by
the directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, trustee, officer, employee, member, manager, or
agent to repay such amount, if it ultimately is determined that he is not
entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles, the regulations, any agreement,
a vote of shareholders or disinterested directors, or otherwise, both as to
action in their official capacities and as to action in another capacity
while holding their offices or positions, and shall continue as to a person
who has ceased to be a director, trustee, officer, employee, member,
manager, or agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit,
or self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or a partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E)(1) or (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other
protection that may be provided pursuant to divisions (E)(5), (6), and (7)
of this section. Divisions (E)(1) and (2) of this section do not create any
obligation to repay or return payments made by the corporation pursuant to
division (E)(5), (6), or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity, or is or
was serving at the request of such constituent entity as a director,
trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited
liability company, or a partnership, joint venture, trust, or other
enterprise, shall stand in the same position under this section with respect
to the new or surviving corporation as he would if he had served the new or
surviving corporation in the same capacity.
II-3
<PAGE>
Article 5 of the Registrant's Second Amended and Restated Code of
Regulations governs indemnification by Registrant and provides, in part, as
follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall
indemnify any officer or director of the corporation who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including, without limitation, any action threatened or
instituted by or in the right of the corporation), by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
trustee, officer, employee, member, manager or agent of another corporation
(domestic or foreign, nonprofit or for profit), limited liability company,
partnership, joint venture, trust or other enterprise, against expenses
(including, without limitation, attorneys' fees, filing fees, court
reporters' fees and transcript costs), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
no reasonable cause to believe his conduct was unlawful. A person claiming
indemnification under this Section 5.01 shall be presumed, in respect of any
act or omission giving rise to such claim for indemnification, to have acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, and with respect to any criminal
matter, to have had no reasonable cause to believe his conduct was unlawful,
and the termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
Article Five also substantially incorporates the provisions of Section
1701.13 of the Ohio Revised Code quoted above.
Reference is also made to Section of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying directors and officers of the Company
against certain liabilities.
In addition, the Registrant intends to purchase insurance coverage which
will insure directors and officers against certain liabilities which might be
incurred by them in such capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 16, 1996, the Registrant has issued and sold the following
unregistered securities:
(i) In March 1998, the Registrant issued and sold an aggregate of 2,000
common shares to a total of seven employees and one director at a
purchase price of $100.00 per share for an aggregate purchase price of
$200,000.
(ii) On May 20, 1999, the Registrant granted stock options under the
Registrant's 1998 Stock Option Plan to purchase an aggregate of 1,285
common shares at an exercise price of $275.00 per share to a total of
15 employees.
(iii) On September 15, 1998, the Registrant issued and sold an aggregate
5,123 shares of senior convertible preferred stock (convertible into
5,123 common shares) to River Cities Capital Fund II Limited
partnership at a price of $390.40 per share for an aggregate purchase
price of $2,000,000.
(iv) On August 27, 1999, the Registrant issued and sold an aggregate of
2,979 shares of series B convertible preferred stock (convertible into
2,979 common shares) to River Cities Capital Fund II Limited
Partnership, JG Funding, LLC, Saunders Capital Group, LLC and Irving W.
Bailey II at a purchase price of $1,007.09 per share for an aggregate
purchase price of $3,000,121.
II-4
<PAGE>
The foregoing sales were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) of the Securities Act and/or Rule
506 of Regulation D promulgated thereunder as transactions by an issuer not
involving a public offering. The recipients of securities in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant or economic buying power, to information about the
Registrant. The purchasers of the common shares and the grantees of the stock
options were all key employees or directors of the Registrant. The purchasers of
the senior convertible preferred stock and the series B convertible preferred
stock were all venture capital companies or their affiliates. No underwriter or
securities broker was involved in any of these transactions and no underwriting
discount or sales commission was paid to any person on account of any of these
transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1.1* Amended and Restated Articles of Incorporation, as amended, of DPEC, Inc.
3.1.2* Proposed form of Second Amended and Restated Articles of Incorporation of DPEC, Inc.
3.2* Amended and Restated Code of Regulations of DPEC, Inc.
3.2.2* Proposed form of Second Amended and Restated Code of Regulations of
DPEC, Inc.
4.1* Form of Stock Certificate for Common Shares of DPEC, Inc.
5.1* Opinion of Vorys, Sater, Seymour and Pease LLP
10.1* DPEC, Inc. 1999 Incentive Stock Plan
10.2 Employment Agreement, dated September 15, 1998, by and between DPEC, Inc. and Carol A.
Clark.
10.3 Bonus plans for named executive officers
10.4 Share Purchase and Sale Agreement, dated May 10, 1996, by and among Frances Papalios, Carol
A. Clark and DPEC, Inc.
10.5 Senior Convertible Preferred Stock Purchase Agreement, dated September 15, 1998, by and
among River Cities Capital Group II Limited Partnership, DPEC, Inc. and Carol A. Clark.
10.6 Series B Convertible Preferred Stock Purchase Agreement, dated August 27, 1999, by and
among River Cities Capital Fund II Limited Partnership, JG Funding, LLC, Saunders Capital
Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.7 Registration Rights Agreement, dated May 10, 1996, by and among Carol A. Clark, Frances
Papalios, Gary W. Qualmann and DPEC, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------
<S> <C> <C>
10.8 Amended and Restated Registration Rights Agreement, dated August 27, 1999, by and among
River Cities Capital Fund II Limited Partnership, JG Funding, LLC, Saunders Capital
Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.9 Fourth Amended and Restated Shareholders Agreement, dated August 27, 1999, by and among
DPEC, Inc. Carol A. Clark, the Frances Papalios Trust and Frances Papalios.
10.10 Admission Agreement, dated September 8, 1999, by and between Robert N. Clark as Trustee
under the 1999 Grantor Retained Annuity Trust Created by Carol A. Clark dated September
8, 1999 and Carol A. Clark.
10.11 Admission Agreement, dated September 8, 1999, by and between Karen L. Qualmann as Trustee
under the 1999 Grantor Retained Annuity Trust Created by Gary W. Qualmann dated September
8, 1999 and Gary W. Qualmann.
10.12 $1,000,000 Term Note of DPEC, Inc. in favor of Carol A. Clark.
10.13 $250,000 Term Note of DPEC, Inc. in favor of Fran Papalios.
10.14 Pledge and Security Agreement, dated May 10, 1996, by and between DPEC, Inc. and Fran
Papalios.
10.15 Software Development and License Agreement, dated January 25, 1999, by and between Ahsoug,
Inc., through its Macmillan Publishing USA division, and DPEC, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Vorys, Sater, Seymour and Pease LLP (included in Exhibit 5.1)
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1* Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES:
None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
II-6
<PAGE>
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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, 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 this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in Columbus,
Ohio, on this 28th day of October, 1999.
<TABLE>
<S> <C> <C>
DPEC, INC.
By: /s/ GARY W. QUALMANN
----------------------------------------
Gary W. Qualmann
Title: VICE PRESIDENT--FINANCE, SECRETARY,
AND TREASURER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairperson of the Board
/s/ CAROL A. CLARK* of Directors; President
- ------------------------------ and Chief Executive October 28, 1999
Carol A. Clark Officer
Director; Chief Financial
/s/ GARY W. QUALMANN Officer; Secretary;
- ------------------------------ Treasurer and Vice October 28, 1999
Gary W. Qualmann President--Finance
/s/ H. NEAL ATER*
- ------------------------------ Director October 28, 1999
H. Neal Ater
/s/ ROBERT J. MASSIE*
- ------------------------------ Director October 28, 1999
Robert J. Massie
/s/ MURRAY R. WILSON*
- ------------------------------ Director October 28, 1999
Murray R. Wilson
/s/ ROBERT R. BROWNLEE*
- ------------------------------ Chief Accounting Officer October 28, 1999
Robert R. Brownlee
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ GARY W. QUALMANN
-------------------------
Gary W. Qualmann
(ATTORNEY-IN-FACT)
</TABLE>
II-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation, as amended, of DPEC, Inc.
3.1.2* Proposed form of Second Amended and Restated Articles of Incorporation of DPEC, Inc.
3.2* Amended and Restated Code of Regulations of DPEC, Inc.
3.2.2* Proposed form of Second Amended and Restated Code of Regulations of
DPEC, Inc.
4.1* Form of Stock Certificate for Common Shares of DPEC, Inc.
5.1* Opinion of Vorys, Sater, Seymour and Pease LLP
10.1* DPEC, Inc. 1999 Incentive Stock Plan
10.2 Employment Agreement, dated September 15, 1998, by and between DPEC, Inc. and Carol A. Clark.
10.3 Bonus plans for named executive officers.
10.4 Share Purchase and Sale Agreement, dated May 10, 1996, by and among Frances Papalios, Carol A.
Clark and DPEC, Inc.
10.5 Senior Convertible Preferred Stock Purchase Agreement, dated September 15, 1998, by and among
River Cities Capital Group II Limited Partnership, DPEC, Inc. and Carol A. Clark.
10.6 Series B Convertible Preferred Stock Purchase Agreement, dated August 27, 1999, by and among
River Cities Capital Fund II Limited Partnership, JG Funding, LLC, Saunders Capital Group,
LLC, Irving W. Bailey II and DPEC, Inc.
10.7 Registration Rights Agreement, dated May 10, 1996, by and among Carol A. Clark, Frances
Papalios, Gary W. Qualmann and DPEC, Inc.
10.8 Amended and Restated Registration Rights Agreement, dated August 27, 1999, by and among River
Cities Capital Fund II Limited Partnership, JG Funding, LLC, Saunders Capital Group, LLC,
Irving W. Bailey II and DPEC, Inc.
10.9 Fourth Amended and Restated Shareholders Agreement, dated August 27, 1999, by and among DPEC,
Inc. Carol A. Clark, the Frances Papalios Trust and Frances Papalios.
10.10 Admission Agreement, dated September 8, 1999, by and between Robert N. Clark as Trustee under
the 1999 Grantor Retained Annuity Trust Created by Carol A. Clark dated September 8, 1999
and Carol A. Clark.
10.11 Admission Agreement, dated September 8, 1999, by and between Karen L. Qualmann as Trustee
under the 1999 Grantor Retained Annuity Trust Created by Gary W. Qualmann dated September 8,
1999 and Gary W. Qualmann.
10.12 $1,000,000 Term Note of DPEC, Inc. in favor of Carol A. Clark.
10.13 $250,000 Term Note of DPEC, Inc. in favor of Fran Papalios.
10.14 Pledge and Security Agreement, dated May 10, 1996, by and between DPEC, Inc. and Fran
Papalios.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
10.15 Software Development and License Agreement, dated January 25, 1999, between Ahsoug, Inc.,
through its Macmillan Publishing USA division, and DPEC, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Vorys, Sater, Seymour and Pease LLP (included in Exhibit 5.1)
24.1+ Powers of Attorney
27.1 Financial Data Schedule
99.1* Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
II-10
<PAGE>
EXHIBIT 10.2
AGREEMENT OF EMPLOYMENT
THIS AGREEMENT OF EMPLOYMENT ("Agreement") is made and entered into as
of September 15, 1998 by and between DPEC, INC., an Ohio corporation having its
principal office at Building 3, 851 West Third Street, Columbus, Ohio (the
"Company"), and Carol A. Clark (the "Employee").
WITNESSETH:
WHEREAS, the Employee is currently employed as the President of the
Company and is a member of the Board of Directors of the Company; and
WHEREAS, the Company and the Employee mutually desire that Employee
continue as the Company's President and as a member of the Board of Directors;
and
WHEREAS, the Company and Employee wish to enter into this Agreement to
set forth their mutual understanding as to the terms and conditions of
Employee's continued employment by the Company.
It is therefore agreed between the parties as follows:
1. EMPLOYMENT. The Company agrees to employ the Employee as the
Company's Chairperson of the Board, President and Chief Executive Officer and
the Employee, in consideration of such employment, hereby accepts such
employment. During the term of her employment, the Employee shall use her best
efforts to do all things necessary and incident to her position and the dispatch
of her responsibilities as set forth from time to time by the Board of
Directors. Unless otherwise approved in advance by the Company's Board of
Directors, Employee shall devote her full business time and energy exclusively
to the business and affairs of the Company and in no event shall Employee engage
in any outside activities which would be reasonably expected to affect the
Company adversely or which would divert substantial time or effort from the
business affairs of the Company.
2. BOARD OF DIRECTORS. The Company further agrees that it will cause
Employee to be nominated for re-election to the Board of Directors during each
year of her employment hereunder, such election being subject only to the
approval of the Company's stockholders.
3. TERM. Employee's term of employment with the Company pursuant to
this Agreement shall begin as of August 1, 1998 (the "Commencement Date") and
shall continue until terminated by the Company or Employee pursuant to Section 5
hereof
<PAGE>
4. COMPENSATION AND BENEFITS. Except as otherwise provided upon a
termination of Employee's employment pursuant to Section 5 hereof, the Company
shall compensate Employee and provide the benefits as set forth in this Section
4. In addition, the Company shall reimburse Employee or pay directly for
reasonable business expenses incurred by her during her employment term.
4.1. BASE SALARY: PERFORMANCE REVIEW. Commencing August 1,
1998, the Company shall pay Employee an annual base salary of $135,000 during
each year of employment hereunder. Commencing August 1, 1999, Employee will also
be eligible for an annual salary review by the Compensation Committee (the
"Committee") of the Company's Board of Directors and her annual base salary for
the following fiscal year may be increased (but not decreased) by the Committee
based on the achievement of performance goals approved by the Committee. In
addition, Employee may be eligible for additional incentive compensation based
on the achievement of such performance goals.
4.2. STOCK OPTIONS. Employee shall be eligible to receive
awards under the DPEC, Inc. 1998 Stock Option Plan.
5. TERMINATION OF AGREEMENT.
5.1 FOR CAUSE. The Company may terminate Employee's
employment at any time for cause (as defined below) effective immediately upon
written notice to Employee. In such event, Employee shall receive her salary
through the effective date of termination and any incentive payments earned by
but not yet paid to Employee prior to such date, and the Company shall have no
further obligation to Employee under this Agreement. Such amounts shall be paid
by the Company within thirty (30) days of the effective date of such
termination. For purposes of this Agreement, "cause" shall mean conviction of a
felony or willful misconduct or gross neglect of duties materially damaging to
the Company's business.
5.2. DISABILITY. This Agreement may be terminated, at the
option of the Company or the Employee, if during the term hereof the Employee is
under a disability, meaning because of ill health, physical or mental
disability, or for any other disability ("disability"), the Employee shall have
been continuously unable or shall have otherwise failed to perform the essential
functions of her job hereunder for one hundred eighty (180) consecutive working
days. Provided, however, that if the question of disability is raised, Clark
shall submit to a medical examination by three physicians who shall determine
whether Clark is disabled, one of whom shall be appointed by the holders of a
majority of the shares of the Company's senior convertible preferred stock, no
par value per share, one of whom shall be appointed by the Employee or her
representative, and one of whom shall be appointed by the first two appointed
physicians. The decision of any two of the three physicians shall be final and
binding. In the event of the termination of Employee's employment due to
disability, the Company will pay Employee her monthly salary through the end of
month in which such termination upon disability occurs and all incentive
payments earned by but not yet paid to Employee prior to her termination upon
disability. Such amounts shall be paid by the Company within thirty (30) days
from the effective date of such termination. This Section 5.2 will be applied
consistent with the Company's
2
<PAGE>
obligations under applicable federal and state law, including without
limitation the Americans with Disabilities Act.
5.3. DEATH. This Agreement shall be terminated on the death
of the Employee effective as of the date of her death. Employee's spouse or
estate, as the case may be, shall be entitled to retain the Employee's salary
installment for the month in which she dies and shall be entitled to all
incentive payments earned by but not yet paid to Employee prior to her death.
Such amounts shall be paid by the Company within thirty (30) days from the
effective date of such termination.
5.4. BY EMPLOYEE OTHER THAN FOR GOOD REASON. If Employee
terminates her employment with the Company for other than for good reason,
Employee shall receive her salary through the effective date of termination and
all incentive payments earned by but not yet paid to Employee prior to such
date, and the Company shall have no further obligation to Employee under this
Agreement. Such amounts shall be paid by the Company within thirty (30) days
from the effective date of such termination.
5.5 BY THE COMPANY OTHER THAN FOR CAUSE OR BY EMPLOYEE FOR
GOOD REASON. If the Company terminates Employee's employment with the Company
other than for cause or other than by reason of Employee's death or disability
or if Employee terminates her employment with the Company for good reason, the
Company shall continue to pay Employee her salary in effect on the effective
date of the termination for a period of eighteen (18) months following the
effective date of her termination. In addition, the Company shall pay to
Employee all incentive payments earned but not yet paid to Employee prior to
such date which amounts shall be paid within thirty (30) days of the effective
date of such termination. For purposes of this Agreement, "good reason" shall
mean (a) the assignment of duties to Employee that are inconsistent in any
material respect with Section 1 of this Agreement, other than any such action
that is remedied by the Company within thirty (30) business days after receipt
of notice thereof from Employee; or (b) any failure by the Company to comply
with any other provision of this Agreement other than any such failure that is
remedied by the Company within thirty (30) business days after receipt of notice
thereof from Employee; or (c) the Company requiring Employee to relocate her
place of employment outside the Columbus metropolitan area. A termination of
employment by Employee for good reason shall be effectuated by Employee giving
the Company written notice of the termination, setting forth in reasonable
detail the specific conduct of the Company that constitutes good reason. A
termination of employment by the Employee for good reason shall be effective at
the close of business on the thirtieth (30th) business day following the date
when the notice of proposed termination for good reason is given; PROVIDED, that
such a termination of employment shall not become effective if the Company shall
have corrected the circumstances giving rise to the notice of proposed
termination within such period.
5.6 PAYMENT OF INDEBTEDNESS. If the Employee's employment
with the Company is terminated under Section 5.2, 5.3, or 5.5, the Company shall
use its reasonable best efforts (a) to repay all indebtedness of the Company
owed to the Employee and (b) to release
3
<PAGE>
Employee and her husband from all guarantees of indebtedness of the Company owed
to others, as soon as practicable following the effective date of such
termination; provided, however, with respect to (a) the Company shall in any
event effect such repayment within eighteen (18) months of the effective date of
such termination.
6. COVENANT NOT TO COMPETE.
6.1. NONCOMPETITION. At all times during the term of this
Agreement, and for a period of two (2) years thereafter if terminated by
Employee pursuant to Section 5.4 or if terminated by the Company pursuant to
Sections 5.1 or 5.2, Employee agrees that she will not directly or indirectly in
the United States of America (a) enter into or in any manner take part in any
business or endeavor, either as an employee, agent, independent contractor,
owner or otherwise, which directly or indirectly competes with the Company, (b)
divert or attempt to divert from the Company any business whatsoever by
influencing or attempting to influence, or soliciting or attempting to solicit
any of the customers of the Company with whom Employee may have dealt at any
time or who were customers of the Company on the date of termination of
Employee's employment or had been customers of the Company prior thereto, or (c)
divert or attempt to divert from the Company any person employed by the Company
by influencing or attempting to influence such person to leave the Company's
employ.
6.2. ACKNOWLEDGMENT AND AGREEMENT. The Company and Employee
each hereby acknowledge and agree as follows:
(a) The covenants, restrictions and obligations set
forth in Section 6.1 above are founded upon valuable consideration and are
reasonable in duration and geographic scope;
(b) In the event of a breach or threatened breach by
Employee of any of the covenants, restrictions, agreements and obligations set
forth herein, monetary damages or the other remedies at law that may be
available to the Company for such breach or threatened breach will be inadequate
and, without prejudice to the Company's right to pursue any other remedies at
law or in equity available to it for such breach or threatened breach,
including, without limitation, the recovery of damages from Employee, the
Company will be entitled to injunctive relief;
(c) The time period and geographical area set forth in
Section 6.1 hereof are each divisible and separable, and, in the event that the
covenants not to compete contained therein are judicially held invalid or
unenforceable as to such time period and/or geographical area, they will be
valid and enforceable in such geographical area(s) and for such time period(s)
which the court determines to be reasonable and enforceable. The Employee agrees
that in the event any court of competent jurisdiction determines that the above
covenants are invalid or unenforceable to join with the Company in requesting
that court to construe the applicable provision by limiting or reducing it so as
to be enforceable to the extent compatible with the then applicable law.
Furthermore, any period of restriction or covenant herein stated
4
<PAGE>
shall not include any period of violation or period of time required for
litigation to enforce such restriction or covenant; and
(d) The provisions of this Section 6 shall survive the
termination of this Agreement.
7. CONFIDENTIAL INFORMATION AND INVENTIONS.
7.1 CONFIDENTIALITY. Employee shall not at any time disclose,
distribute, publish, communicate or in any way cause to be disclosed,
distributed, published, or communicated in any way, Confidential Information (as
defined herein), or any part thereof; to any person, firm, corporation,
association, or any other operation or entity except on behalf of the Company,
in performance of Employee's duties for the Company, and Employee further agrees
not to use or permit the reproduction of any Confidential Information except on
behalf of the Company in Employee's capacity as an employee of the Company.
Employee shall take all reasonable care to avoid the unauthorized disclosure or
use of any Confidential Information. Employee hereby assumes responsibility for
and shall indemnify and hold harmless the Company from and against any
disclosure or use of the Confidential Information in violation of this
Agreement.
7.2 CONFIDENTIAL INFORMATION. For the purpose of this
Agreement, "Confidential Information" shall mean any written or unwritten
information which specifically relates to and/or is used in the Company's
business (including, without limitation, information related to the names,
addresses, buying habits and other special information regarding past, present
and potential customers, employees and suppliers of the Company; customer and
supplier contracts and transactions or price lists of the Company and suppliers;
all agreements, files, books, logs, charts, records, studies, reports,
processes, schedules and statistical information relating to the Company; all
products, services, programs and processes sold, and all software licensed or
developed by the Company; data, plans and specifications, present and/or future
development projects of the Company; financial and/or marketing data respecting
the conduct of the present or future phases of business of the Company; computer
programs, systems and/or software; ideas, inventions, trademarks, business
information, know-how, processes, techniques, improvements, designs, redesigns,
creations, discoveries and developments of the Company; and finances and
financial information of the Company) which the Company deems confidential and
proprietary, which is generally not known to others outside the Company, and
which gives or tends to give the Company a competitive advantage over persons
who do not possess such information or the secrecy of which is otherwise of
value to the Company in the conduct of its business regardless of when and by
whom such information was developed or acquired, and regardless of whether any
of these are described in writing, copyrightable or considered copyrightable,
patentable or considered patentable. "Confidential Information" shall not
include general industry information or information which is publicly available
or otherwise known to those persons working in the area of the business of the
Company or is otherwise in the public domain without breach of this Agreement or
information which Employee has lawfully acquired from a source other than the
Company. "Confidential Information" specifically includes information received
by the Company from others, including the Company's clients, that the
5
<PAGE>
Company has an obligation to treat as confidential and also includes any
confidential information acquired or obtained by Employee while in the
employment of any of the Company's subsidiary companies or any company which
has been acquired by the Company.
7.3 INVENTION OWNERSHIP. With respect to information,
inventions and discoveries developed, made or conceived by Employee, either
alone or with others, at any time during Employee's employment by the Company
whether prior to or hereafter and whether or not within normal working hours,
arising out of such employment or pertinent to any field of business or research
in which, during such employment, the Company is engaged or (if such is known to
or ascertainable by Employee) is considering engaging, Employee agrees:
(a) that all such information, inventions and
discoveries, whether or not patented or patentable, shall be and remain the sole
property of the Company;
(b) to disclose promptly to an authorized
representative of the Company all such information, inventions and discoveries
and all information in Employee's possession as to possible applications and
uses thereof;
(c) not to file any patent applications relating to any
such invention or discovery except with the prior consent of an authorized
representative of the Company; and
(d) at the request of the Company, and without expense
to Employee, to execute such documents and perform such other acts as the
Company deems necessary, to obtain patents on such inventions in a jurisdiction
or jurisdictions designated by the Company, and to assign to the Company or its
designee such inventions and all patent applications and patents relating
thereto.
7.4 CONFIDENTIALITY OF INVENTIONS. With respect to the
information, inventions and discoveries referred to in Section 7.3, and also
with respect to all other information, whatever its nature and form and whether
obtained orally, by observation, from graphic materials, or otherwise (except
such as is generally available through publication) obtained by Employee during
or as a result of her employment by the Company and relating to any product,
process, or apparatus or to any use of any of them, or to materials, tolerances,
specifications, costs (including manufacturing costs), prices, or to any plans
of the Company, Employee agrees:
(a) to hold all such information, inventions and
discoveries in strict confidence and not to publish or otherwise disclose any
thereof except with the prior consent of an authorized representative of the
Company;
(b) to take all reasonable precautions to assure that
all such information, inventions, and discoveries are properly protected from
access by unauthorized persons;
6
<PAGE>
(c) to make no use of any such information, invention,
or discovery except as required or permitted in the performance of Employee's
duties for the Company; and
(d) upon termination of Employee's employment by the
Company, or upon request of the Company, to deliver to the Company all graphic
materials and all substances, models, prototypes and the like containing or
relating to any such information, invention, or discovery, all of which graphic
materials and other things shall be and remain the sole property of the Company.
The term "graphic materials" includes letters, memoranda, reports, notes,
notebooks, books of account, drawings, prints, specifications, formulae, data
printouts, microfilms, magnetic tapes and disks and other documents and
recordings, together with all copies thereof.
7.5 DURATION OF OBLIGATIONS. The obligations under Sections
7.1, 7.3 and 7.4 hereof shall remain in effect throughout Employee's employment
by the Company and ever thereafter, unaffected by any transfer(s) between the
Company and its affiliate(s), and without regard to the reason for termination
of such employment.
8. ASSIGNMENT, SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective legal
representatives, successors and assigns. The Company may assign or otherwise
transfer its rights under this Agreement to any successor or affiliated business
or corporation (whether by sale of stock, merger, consolidation, sale of assets
or otherwise), but this Agreement may not be assigned nor may the duties
hereunder be delegated by Employee. In the event that the Company assigns or
otherwise transfers its rights under this Agreement to any successor or
affiliated business or corporation (whether by sale of stock, merger,
consolidation, sale of assets or otherwise), for all purposes of this Agreement,
the "Company" shall then be deemed to include the successor or affiliated
business or corporation to which the Company assigned or otherwise transferred
its rights hereunder.
9. COUNTERPARTS. This Agreement may be executed in two counterparts,
any one of which shall constitute an original without reference to the other.
10. SEVERABILITY OF CLAUSES. Each of the paragraphs of this Agreement
shall stand independently and severably, and the invalidity of any one paragraph
or portion thereof shall not affect the validity of any other provision. In the
event any provision shall be construed to be invalid, no other provision of this
Agreement shall be affected thereby.
11. APPLICABLE LAW. This Agreement shall be governed in all respects
by the law of the State of Ohio.
7
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands as of the
date first above written.
COMPANY
DPEC, INC.
By: /s/ Gary W. Qualmann
---------------------------------
Gary W. Qualmann
Title: Vice President and Secretary
EMPLOYEE
/s/ Carol A. Clark
CAROL A. CLARK
8
<PAGE>
Exhibit 10.3
Bonus Plans for Named Executive Officers
Bonus arrangements are highly informal and vary from employee to
employee. With respect to the named executive officers receiving bonuses, all
are "salesmen's bonuses" except Mr. Qualmann's. For 1998, his bonus was
targeted at 35% to 60% of base salary based on achieving certain cash flow
levels and completing specified goals.
<PAGE>
EXHIBIT 10.4
SHARE PURCHASE AND SALE AGREEMENT
THIS SHARE PURCHASE AND SALE AGREEMENT (this "Agreement") is
made to be effective as of May 10, 1996, by and between D.P.E.C., Inc., an Ohio
corporation (the "Company"), and Fran Papalios ("Fran").
WHEREAS, Fran owns of record and beneficially, in the
aggregate, 22,275 common shares, without par value, of the Company (the "Common
Shares"), which Common Shares constitute 50% of the issued and outstanding
Common Shares on the date hereof;
WHEREAS, Fran desires to sell, and the Company desires to
purchase, 14,850 of the Common Shares owned by Fran (the "Shares") on the terms
and subject to the satisfaction of the conditions contained in this Agreement;
and
WHEREAS, the Company and Fran desire to establish by this
Agreement certain rights and obligations between them;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants herein contained, the parties hereto agree as follows:
ARTICLE I
Sale and Purchase of the Shares
1.01. SALE AND PURCHASE. Upon the terms and subject to the
satisfaction of the conditions contained in this Agreement, at the Closing (as
hereinafter defined) Fran will sell to the Company, and the Company will
purchase from Fran, the Shares. At the Closing, Fran will deliver to the Company
stock certificate(s) evidencing the Shares, duly endorsed in blank or
accompanied by assignment(s) separate from the certificate(s).
1.02. PURCHASE PRICE. The purchase price for the Shares is
$1,250,000 payable by the Company at the Closing, of which $1,000,000 shall be
paid by a bank draft or certified check and $250,000 shall be paid by a
promissory note in substantially the form attached hereto as Exhibit 1.02 and
incorporated herein by reference (the "Note").
1.03. SUBORDINATION. At the Closing, Fran will enter into a
Subordination Agreement and Assignment with the Company for the benefit of
Huntington National Bank (the "Bank") in substantially the form attached hereto
as Exhibit 1.03 and incorporated herein by reference (the "Subordination
Agreement").
<PAGE>
1.04. AUTOMOBILE. As additional consideration for the Shares,
at the Closing the Company shall assign and transfer to Fran the Company-owned
automobile which Fran is currently using.
ARTICLE II
The Closing
2.01. CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") will take place at the offices of Vorys, Sater,
Seymour and Pease, 52 E. Gay St., Columbus, Ohio 43215, on May 10, 1996, at 3:30
p.m., or at such other place or time as the parties may agree. The date and time
at which the Closing occurs is hereinafter referred to as the "Closing Date."
ARTICLE III
Representations and Warranties of Fran
Fran represents and warrants to the Company as follows:
3.01. TITLE TO SHARES. Fran owns of record and beneficially
the Shares and such ownership is free and clear of any and all pledges, security
interests, liens, charges, encumbrances and claims of any nature whatsoever
except for any Encumbrance Exceptions. At the Closing, the Company will acquire
good title to the Shares, free and clear of any and all pledges, security
interests, liens, charges, encumbrances and claims of any nature whatsoever
except for any Encumbrance Exceptions. For purposes hereof, "Encumbrance
Exceptions" means any shareholder, pledge or other agreement to which the
Company is a party.
3.02. AUTHORITY. Fran has full authority to execute and
deliver this Agreement and the Subordination Agreement, the Shareholders
Agreement, the Noncompetition Agreement, the Registration Rights Agreement, and
the Pledge Agreement (collectively, "Fran's Other Agreements") and to consummate
the transactions contemplated hereby and thereby. This Agreement has been, and
Fran's Other Agreements will be at the Closing, duly and validly executed and
delivered by Fran, and upon such execution and delivery will constitute her
valid and binding agreements and will be enforceable against her in accordance
with their respective terms, subject to the Enforceability Exceptions. For
purposes hereof, "Enforceability Exceptions" means the limitations that may be
placed on enforceability by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and by general principles of equity.
3.03. CONSENTS AND APPROVALS; NO VIOLATION. Neither the
execution and delivery by Fran of this Agreement or Fran's Other Agreements, nor
the consummation by Fran of the transactions contemplated by this Agreement and
Fran's Other Agreements, will (i) require any consent, approval, authorization
or permit of, or filing with or notification to, any
2
<PAGE>
governmental or regulatory authority, (ii) result in a default under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which Fran is a party or by which
any of Fran's assets are bound or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Fran or any of Fran's assets.
3.04. BROKERAGE. There are no claims by any person for
brokerage commissions, finder's fees or agent's commissions or like payment for
which Fran is obligated or liable in connection with this Agreement or the
transactions contemplated hereby.
3.05. KNOWLEDGE AND EXPERIENCE. Fran has such knowledge and
experience with respect to business and financial matters that she is capable of
evaluating the merits and risks of the sale of the Shares. By virtue of her
relationship with the Company, Fran has had, and in making this sale is solely
relying upon, her complete access to all relevant information regarding the
business, operations, financial condition, assets, liabilities and prospects of
the Company.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to Fran as follows:
4.01. CORPORATE ORGANIZATION. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Ohio and has the requisite corporate power to carry on its business as
it is now being conducted.
4.02. AUTHORITY. The Company has the requisite corporate power
to execute and deliver this Agreement and the Note, the Shareholders Agreement,
the Noncompetition Agreement, the Registration Rights Agreement and the Pledge
Agreement (collectively, the "Company's Other Agreements") and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Company's Other Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all of
the directors and shareholders of the Company. This Agreement has been, and the
Company's Other Agreements will be at the Closing, duly and validly executed and
delivered by the Company, and upon such execution and delivery will constitute
the Company's valid and binding agreements and will be enforceable against the
Company in accordance with their respective terms, subject to the Enforceability
Exceptions.
4.03. CONSENTS AND APPROVALS; NO VIOLATION. Neither the
execution and delivery by the Company of this Agreement or the Company's Other
Agreements, nor the consummation by the Company of the transactions contemplated
by this Agreement and the Company's Other Agreements, will (i) require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, (ii) result in a breach
3
<PAGE>
of the Company's articles of incorporation or code of regulations or a default
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, agreement, lease or other instrument or obligation to which the
Company is a party or by which any of the Company's assets may be bound, or
(iii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of the Company's assets.
4.04. BROKERAGE. There are no claims by any person for
brokerage commissions, finder's fees or agent's commissions or other like
payment for which the Company is obligated or liable in connection with this
Agreement or the transactions contemplated hereby.
ARTICLE V
Other Covenants of the Parties
5.01. RESIGNATION. At the Closing, Fran will tender to the
Company her written resignation as an employee and an officer of the Company,
which resignation will be effective as of the Closing Date. Effective as of the
Closing Date, all salary, fringe benefits and other forms of compensation
payable by the Company to Fran will terminate, except as provided in the
Noncompetition Agreement or this Agreement. Following the Closing, Fran may
serve as an outside consultant to the Company providing such number of hours and
services and receiving such compensation as the Company and Fran mutually agree.
5.02. NONCOMPETITION AGREEMENT. At the Closing, Fran and the
Company will enter into a Noncompetition Agreement in substantially the form
attached hereto as Exhibit 5.02 and incorporated herein by reference (the
"Noncompetition Agreement").
5.03. REGISTRATION RIGHTS AGREEMENT. At the Closing, Fran and
the Company will enter into a Registration Rights Agreement in substantially the
form attached hereto as Exhibit 5.03 and incorporated herein by reference (the
"Registration Rights Agreement"). At the Closing, the Company will cause Carol
Clark ("Carol") also to enter into the Registration Rights Agreement.
5.04. SHAREHOLDERS AGREEMENT. At the Closing, Fran and the
Company will enter into the Second Amended and Restated Shareholders Agreement
in substantially the form attached hereto as Exhibit 5.04 and incorporated
herein by reference (the "Shareholders Agreement"). At the Closing, the Company
will cause Carol also to enter into the Shareholders Agreement.
5.05. PLEDGE AGREEMENT. At the Closing, Fran and the Company
will enter into a Pledge and Security Agreement in substantially the form
attached hereto as Exhibit 5.05 and incorporated herein by reference (the
"Pledge Agreement"). At the Closing, pursuant to the terms of the Pledge
Agreement, the Company shall deliver to Fran stock certificate(s) evidencing
4
<PAGE>
the Shares pledged thereunder, duly endorsed in blank or with separate powers
attached (the "Pledged Instruments").
5.06. RELEASE FROM LIABILITY. The Company will use its best
efforts to arrange with the Bank to have Fran removed as a guarantor on and
released from any liability with respect to any loans and other debts of the
Company which Fran may have personally guaranteed.
5.07 PROPRIETARY INFORMATION AND INVENTIONS.
(a) Fran shall hold in a fiduciary capacity, for the
benefit of the Company, all Proprietary Information and she
shall keep confidential and shall not disclose any Proprietary
Information to any person without the prior written consent of
the Company. All Proprietary Information, including
Inventions, shall be the exclusive property of the Company,
and Fran shall be deemed at the Closing to have assigned the
same to the Company. At any time after the Closing, Fran and
Fran's heirs, executors, administrators, and legal
representatives, at the Company's request and expense, shall
provide all information, documents, testimony and other
assistance, and shall execute all assignments or other
documents, that the Company considers to be necessary or
appropriate for the Company to acquire, maintain, perfect or
exercise any form of legal protection, including but not
limited to patent or copyright protection, that the Company
deems desirable in relation to any of the Inventions.
(b) (1) "Proprietary Information" means any
information acquired by Fran during or as a result of her
employment or consulting with the Company (including
information conceived, discovered or developed by Fran), which
is not in the public domain, and which relates to the business
or contemplated business of the Company, whether such
information is patentable or unpatentable, copyrightable or
uncopyrightable. By way of example, Proprietary Information
includes Inventions (as defined below), information of a
technical nature, such as trade secrets, innovations,
discoveries, formulae, algorithms, research projects,
software, source codes, work processes, flow charts, test
data, technical writings, and confidential information of
other parties which is provided to the Company by any
agreement under which the Company has an obligation to protect
the confidentiality of same. Proprietary Information also
includes matters of a business nature, such as customer lists,
customer requirements and preferences relating to the business
of the Company, costs or prices or license fees or maintenance
fees or other financial information such as sales, profits,
expenses, financial projections, financial goals, local, state
and federal tax returns, litigation,
5
<PAGE>
compensation, personnel data, business plans, and market
research. Notwithstanding the foregoing, Proprietary
Information does not include information that is in the
public domain (other than by acts by Fran or her
representatives in violation of this Section 5.07).
(2) "Inventions" means any inventions,
improvements, works of authorship, designs, plans, creative or
professional work product, discoveries or innovations, whether
of a technical or business nature, whether patentable or
unpatentable, copyrightable or uncopyrightable, relating in
any way to the business or contemplated business of the
Company and conceived or reduced to practice by Fran, either
alone or with others, either within or without normal working
hours, during Fran's employment with the Company, including
all data, records, physical embodiments and intellectual
property pertaining thereto.
5.08. LIFE INSURANCE. Each of Fran and Carol has procured, as
policy owner and beneficiary, two policies of term insurance on the life of the
other with aggregate face amounts of $1,000,000. At the Closing, Fran shall
assign to the Company or its designee the policies and benefits covering Carol's
life and the Company shall cause Carol to assign to Fran or her designee the
policies and benefits covering Fran's life.
5.09. EXPENSES AND TAXES. Each party will be responsible for
all costs and expenses incurred by such party in connection with this Agreement
and the transactions contemplated hereby, including any tax liability incurred
by such party.
5.10. FURTHER ASSURANCES. Subject to the terms and conditions
contained in this Agreement, each party hereto will use such party's best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable to cause the Closing to occur
and to consummate and make effective the sale and purchase of the Shares and the
other transactions contemplated by this Agreement.
ARTICLE VI
Closing Conditions
6.01. CONDITIONS TO THE OBLIGATIONS OF FRAN. The obligations
of Fran to effect the transactions contemplated hereby are subject to the
satisfaction, at or prior to the Closing, of the following conditions, any one
or more of which may be waived by Fran:
(a) The delivery by the Company to Fran of a bank
draft or certified check in the amount of $1,000,000 and of
the Note in the amount of $250,000, as provided in Section
1.02 hereof;
6
<PAGE>
(b) The delivery by the Company to Fran of a duly
endorsed certificate of title to the automobile, as provided
in Section 1.04 hereof;
(c) The execution and delivery by the Company to Fran
of the Noncompetition Agreement and the Pledge Agreement
(including the Pledged Instruments), as provided in Sections
5.02 and 5.05 hereof, respectively;
(d) The Company's and Carol's execution and delivery
to Fran of the Registration Rights Agreement and the
Shareholders Agreement, as provided in Sections 5.03 and 5.04
hereof, respectively;
(e) Fran shall have been removed as a guarantor and
released from liability as provided in Section 5.06 hereof;
(f) The assignment by Carol to Fran or her designee
of life insurance policies covering Fran's life, as provided
in Section 5.08 hereof;
(g) The execution and delivery by the Company to Fran
of a certificate, signed by Carol as President of the Company,
to the effect that the representations and warranties of the
Company set forth in this Agreement were true and correct as
of the date hereof and are true and correct as of the Closing
Date as though made at and as of the Closing Date; and
(h) The representations and warranties of the Company
set forth in Article IV hereof shall be true and correct as of
the date hereof and as of the Closing Date and the Company
shall have performed and complied with all other provisions
contained in this Agreement required to be performed and
complied with by the Company at or prior to the Closing.
6.02. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the transactions contemplated hereby are
subject to the satisfaction, at or prior to the Closing, of the following
conditions, any one or more of which may be waived by the Company:
(a) The assignment and delivery by Fran to the
Company of stock certificate(s) evidencing the Shares, as
provided in Section 1.01 hereof;
7
<PAGE>
(b) The execution and delivery by Fran to the Company
of the Registration Rights Agreement and the Shareholders
Agreement, as provided in Sections 5.03 and 5.04 hereof,
respectively;
(c) The execution and delivery by Fran to the Company
of the Subordination Agreement, Fran's written resignation,
the Noncompetition Agreement and the Pledge Agreement, as
provided in Sections 1.03, 5.01, 5.02 and 5.05 hereof,
respectively;
(d) The assignment by Fran to the Company or its
designee of life insurance policies covering Carol's life, as
provided in Section 5.08 hereof;
(e) The execution and delivery by Fran to the Company
of a certificate to the effect that the representations and
warranties of Fran set forth in this Agreement were true and
correct as of the date hereof and are true and correct as of
the Closing Date as though made at and as of the Closing Date;
and
(f) The representations and warranties of Fran set
forth in Article III hereof shall be true and correct as of
the date hereof and as of the Closing Date and Fran shall have
performed and complied with all other provisions contained in
this Agreement required to be performed and complied with by
Fran at or prior to the Closing.
ARTICLE VII
Miscellaneous Provisions
7.01. AMENDMENT AND MODIFICATION. This Agreement may be
amended only by a written agreement signed by the parties hereto.
7.02. WAIVER OF COMPLIANCE; CONSENTS. Except as otherwise
provided in this Agreement, any failure of a party to comply with any
representation, warranty, covenant, or condition contained herein may be waived
by the party entitled to the benefits thereof only by a written instrument
signed by the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure.
7.03. SURVIVAL OF REPRESENTATIONS. WARRANTIES AND COVENANTS.
The representations, warranties and covenants of the parties contained herein
shall survive the Closing and shall be deemed to be material and to have been
relied upon by the parties.
8
<PAGE>
7.04. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
facsimile transmission or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses and
facsimile numbers (or at such other address or number for a party as shall be
specified by like notice, provided that notices of a change of address or number
shall be effective only upon receipt thereof):
(a) if to Fran:
Fran Papalios
4170 Waddington Road
Columbus, Ohio 43220
Facsimile No: (614) 459-0049
with a copy to:
Daniel M. Maher, Esq.
Squire, Sanders & Dempsey
1300 Huntington Center
41 South High Street
Columbus, Ohio 43215
Facsimile No.: (614) 365-2499
(b) if to the Company:
D.P.E.C., Inc.
1679 Old Henderson Road
Columbus, Ohio 43220
Facsimile No.: (614) 457-1105
Attention: Carol Clark
with a copy to:
Michael A. Cline, Esq.
Vorys, Sater, Seymour and Pease
52 East Gay Street
Columbus, Ohio 43215
Facsimile No.: (614) 464-6350
7.05. ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors, personal representatives and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any party hereto without the prior written consent of the
other parties hereto. This Agreement is not intended to confer upon any person
except the parties hereto any rights or remedies hereunder.
7.06. GOVERNING LAW. This Agreement shall be governed by the
laws of the State of Ohio (regardless of the laws that might otherwise govern
under applicable Ohio principles of conflicts of law) as to all matters.
9
<PAGE>
7.07. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.08. INTERPRETATION. The captions contained in this Agreement
are solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement.
7.09. ENTIRE AGREEMENT. This Agreement, including the other
agreements and instruments referred to herein, embody the entire agreement and
understanding of the parties hereto in respect to the transactions contemplated
by this Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth or
referred to herein or therein. This Agreement supersedes, replaces and
terminates all prior agreements and understandings between the parties with
respect to the subject matter of this Agreement, including, without limitation,
the Letter of Intent, dated March 15, 1996, between Fran and Carol.
IN WITNESS WHEREOF, each of the parties has executed, or
caused its duly authorized officer to execute, this Agreement effective as of
the date first above written.
D.P.E.C., INC.
By: /s/ Carol Clark, Pres.
-----------------------------------------
Carol Clark, its President
/s/ Fran Papalios
-----------------------------------------
Fran Papalios
10
<PAGE>
EXHIBIT 10.5
SENIOR CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
BY AND AMONG
RIVER CITIES CAPITAL GROUP II LIMITED PARTNERSHIP,
DPEC, INC.
AND
CAROL A. CLARK
SEPTEMBER 15, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Sale and Issuance of Senior Convertible Preferred Stock. . . . . . . . 1
2. Closings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Closing Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Further Assurances.. . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Representations and Warranties of the Company and Clark. . . . . . . . 5
6.1 Corporate Standing. . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Authorization.. . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 Validly Issued Shares.. . . . . . . . . . . . . . . . . . . . . . 7
6.5 No Conflict.. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.6 Contracts and Other Commitments: Compliance.. . . . . . . . . . . 7
6.7 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.8 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.9 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
6.10 Indebtedness for Borrowed Money; No Undisclosed Liabilities. . . 8
6.11 Title to Property and Assets: Leases. . . . . . . . . . . . . . . 8
6.12 Legal Proceedings.. . . . . . . . . . . . . . . . . . . . . . . . 9
6.13 Environmental Matters.. . . . . . . . . . . . . . . . . . . . . . 9
6.14 Licenses and Permits: Compliance with Laws.. . . . . . . . . . . 9
6.15 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . 9
6.16 Labor Relations.. . . . . . . . . . . . . . . . . . . . . . . . . 10
6.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.18 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.19 Changes in Circumstances. . . . . . . . . . . . . . . . . . . . . 11
6.20 Patents and Trade Names, Etc. . . . . . . . . . . . . . . . . . . 12
6.21 Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . 14
6.22 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.23 Brokers' and Finders' Fees. . . . . . . . . . . . . . . . . . . . 14
6.24 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . 14
6.25 Small Business Concern. . . . . . . . . . . . . . . . . . . . . . 14
6.26 Material Facts. . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.27 Clark Debt Repayment Obligations. . . . . . . . . . . . . . . . . 15
7. Representations and Warranties of the Investor . . . . . . . . . . . . 15
7.1 Authorization; Binding Agreement. . . . . . . . . . . . . . . . . 15
7.2 Investment Representations. . . . . . . . . . . . . . . . . . . . 15
7.3 Accredited Investor; Residence. . . . . . . . . . . . . . . . . . 15
7.4 Receipt of Information; Restricted Securities . . . . . . . . . . 15
7.5 Investment Experience . . . . . . . . . . . . . . . . . . . . . . 16
8. Survival of Representations and Warranties . . . . . . . . . . . . . . 16
9. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
i
<PAGE>
9.1 Indemnification by the Company and Clark. . . . . . . . . . . . . 16
9.2 Indemnification by the Investor . . . . . . . . . . . . . . . . . 17
10. Covenants of the Company and Clark . . . . . . . . . . . . . . . . . . 17
10.1 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.2 Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . 17
10.3 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . 18
10.4 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . 19
10.5 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.6 Clark Debt Repayment Obligations. . . . . . . . . . . . . . . . . 19
10.7 Compliance with Small Business Investment Act . . . . . . . . . . 19
10.8 Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . 19
10.9 Definition of a Qualified Sale. . . . . . . . . . . . . . . . . . 20
11. Restrictions of Transfers. . . . . . . . . . . . . . . . . . . . . . . 20
11.1 Notice of Sale by Clark . . . . . . . . . . . . . . . . . . . . . 20
11.2 Definition of Qualified IPO . . . . . . . . . . . . . . . . . . . 21
11.3 Co-Sale Right . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11.4 Rights of Refusal . . . . . . . . . . . . . . . . . . . . . . . . 21
11.5 Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.6 Right of First Refusal. . . . . . . . . . . . . . . . . . . . . . 22
11.7 Right of First Offer. . . . . . . . . . . . . . . . . . . . . . . 22
11.8 Restrictive Legend. . . . . . . . . . . . . . . . . . . . . . . . 23
11.9 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . 23
12. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . 24
12.2 Remedy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.3 Diversion of Proceeds . . . . . . . . . . . . . . . . . . . . . . 25
12.4 Loss of Clark . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13. Public Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
15. Parties in Interest; Assignment . . . . . . . . . . . . . . . . . . . 26
16. Construction; Governing Law. . . . . . . . . . . . . . . . . . . . . . 27
17. Entire Agreement; Amendment and Waiver . . . . . . . . . . . . . . . . 27
18. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
19. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
20. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
21. Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
22. Confidentiality Agreement. . . . . . . . . . . . . . . . . . . . . . . 28
23. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
24. Rights of the Investor . . . . . . . . . . . . . . . . . . . . . . . . 28
25. Termination Upon a Qualified IPO . . . . . . . . . . . . . . . . . . . 28
</TABLE>
ii
<PAGE>
SENIOR CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SENIOR CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is
made and entered into as of the 15th day of September, 1998, by and among RIVER
CITIES CAPITAL GROUP II LIMITED PARTNERSHIP, a Delaware limited partnership (the
"Investor"), DPEC, INC., an Ohio corporation (the "Company"), and CAROL A.
CLARK ("Clark").
WITNESSETH:
The Company desires to sell and issue, and the Investor desires to purchase
and acquire, up to $3,000,000 of shares of the Company's authorized but unissued
Senior Convertible Preferred Stock upon the terms and subject to the conditions
contained herein.
NOW, THEREFORE, in consideration of the mutual covenants, representations
and warranties herein contained, and intending to be legally bound, the Company,
Clark and the Investor agree as follows:
1. SALE AND ISSUANCE OF SENIOR CONVERTIBLE PREFERRED STOCK.
1.1 The Company shall adopt and file with the Secretary of State of
Ohio on or before the First Closing (as defined below) the Certificate of
Amendment of Articles of Incorporation in the form attached hereto as EXHIBIT A
(the "Amended Articles"). The Senior Convertible Preferred Stock, no par value
per share (the "Senior Preferred Stock"), will have the rights, preferences and
privileges and restrictions set forth in the Amended Articles.
1.2 Subject to the terms and conditions of this Agreement, at the
First Closing the Investor agrees to purchase from the Company, and the Company
agrees to sell, issue and deliver to the Investor, 5,123 shares of the Senior
Preferred Stock at the price of $390.40 per share resulting in a total purchase
price at the First Closing of $2,000,000.
1.3 Subject to the terms and conditions of this Agreement, the
Company may, at any time after January 1, 1999 and until December 31, 1999,
determine to sell, issue and deliver to the Investor at up to two Subsequent
Closings (as defined below) additional shares of Senior Preferred Stock at a
price per share equal to the quotient of (i) 1.5 times the Company's trailing 12
month revenue determined in accordance with generally accepted accounting
principles ("GAAP")) through the most recently ended calendar month preceding
the Subsequent Closing (subject to verification and possible adjustment by any
subsequent audit(s)) divided by (ii) the fully diluted number of the Company's
shares outstanding (including conversion shares and shares subject to granted
options) at the time of the Subsequent Closing resulting in an additional
aggregate purchase price of up to $1,000,000. The Company is free to issue
additional equity or debt securities to third parties instead of selling
additional shares of Senior Preferred Stock to the Investor, as the Company's
Board of Directors may approve, subject to the Investor's preemptive and
anti-dilution rights provided in this Agreement and the Amended
<PAGE>
Articles. The Investor agrees to purchase such additional shares of the Senior
Preferred Stock if the following conditions are satisfied prior to each closing
of such subsequent purchase transactions ("Subsequent Closing"):
1.3.1 the Investor has received, at least 30 days prior to
the Subsequent Closing, a written notice of the date of such Subsequent Closing
and a certified copy of the resolution of the Company's Board of Directors
determining to issue such additional shares of the Senior Preferred Stock to the
Investor; and
1.3.2 in the reasonable judgment of the Investor, the Company
has met at least 85% of each of its projected sales and earnings before interest
and taxes ("EBIT") aggregate targets for, in the case of a Subsequent Closing
occurring on or after August 1, 1999, the preceding trailing 12 month period or,
in the case of a Subsequent Closing occurring prior to August 1, 1999, the
period of time commencing on August 1, 1998, as set forth on SCHEDULE 1.3.2
attached hereto.
1.4 Effective upon the First Closing, the Company shall grant to the
Investor registration rights under the Securities Act of 1933, as amended (the
"Securities Act"), on the terms and subject to the conditions of the
Registration Rights Agreement in the form attached hereto as EXHIBIT B
("Registration Rights Agreement").
2. CLOSINGS. The first closing of the transactions contemplated by this
Agreement (the "First Closing") will occur simultaneously with the execution of
this Agreement and shall take place on or before September 15, 1998, either by
facsimile or at the offices of Graydon, Head & Ritchey, counsel to the Investor,
1900 Fifth Third Center, 511 Walnut Street, Cincinnati, Ohio 45202, or at such
other time, date, or place as shall be mutually agreed upon by the parties
hereto in writing (the "First Closing Date"); provided, however, that the
deliveries of the purchase price and the certificates evidencing the Senior
Preferred Stock may occur after the First Closing Date but prior to or on
September 15, 1998, or such other date as shall be mutually agreed upon by the
parties hereto in writing (the "Funding Date"). Each Subsequent Closing, if
any, shall take place at the time, date and place specified in the notice given
pursuant to Section 1.3.1 above. No such Subsequent Closing shall take place
after December 31, 1999.
3. CLOSING ITEMS.
3.1 At the First Closing, the Company shall deliver, or cause to be
delivered, the following items:
3.1.1 the Amended Articles as file stamped by the Ohio
Secretary of State;
3.1.2 the Amended and Restated Code of Regulations in the
form attached hereto as EXHIBIT C ("Restated Regulations"), certified as to
their adoption by the Secretary of the Company;
2
<PAGE>
3.1.3 the Employment Agreement between the Company and Clark
in the form attached hereto as EXHIBIT D, duly executed by the Company and
Clark;
3.1.4 the Registration Rights Agreement duly executed by the
Company;
3.1.5 the Third Amended and Restated Shareholders Agreement
between the Company, Clark and Fran Papalios ("Papalios") in the form attached
hereto as EXHIBIT E duly executed by each of the Company, Clark and Papalios
(the "Shareholders Agreement");
3.1.6 the opinion of Vorys, Sater, Seymour and Pease LLP,
counsel to the Company, in the form attached hereto as EXHIBIT F;
3.1.7 resolutions of the Board of Directors and shareholders
of the Company authorizing the execution, delivery and consummation of this
Agreement, the filing of the Amended Articles, the issuance of the shares of
Senior Preferred Stock, the adoption of the Restated Regulations, and the other
matters contemplated hereby, certified as to their due adoption and continued
validity by the Secretary of the Company; and
3.1.8 the completed United States Small Business
Administration ("SBA") Form 480, Form 652 and Parts A and B of Form 1031.
3.2 At the First Closing, the Investor shall deliver, or cause to be
delivered, the Registration Rights Agreement, duly executed by the Investor.
3.3 On the Funding Date, the Company shall deliver, or cause to be
delivered, the following items:
3.3.1 a certificate in the Investor's name representing the
5,123 shares of Senior Preferred Stock that such Investor is purchasing; and
3.3.2 a certificate, in form reasonably acceptable to the
Investor and dated as of the Funding Date, from the Company, duly executed by
the President of the Company and by Clark, individually, as follows (but, in the
case of Clark, each of the following shall be subject to her reasonable
knowledge): (i) except for changes expressly contemplated by the terms of this
Agreement or approved by the Investor, the representations and warranties of the
Company and Clark contained in this Agreement are true and complete in all
material respects on and as of the Funding Date as if made on and as of that
date; and (ii) the Company and Clark have complied with or performed in all
material respects all terms, covenants and conditions to be complied with or
performed by them on or prior to the Funding Date.
3.4 On the Funding Date, the Investor shall deliver, or cause to be
delivered, the following items:
3.4.1 immediately available funds equal to the purchase price
of $2,000,000; and
3
<PAGE>
3.4.2 a certificate, in form reasonably acceptable to the
Company and dated as of the Funding Date, from the Investor, duly executed by
the General Partner of the Investor, as follows: (i) except for changes
expressly contemplated by the terms of this Agreement or approved by the
Company, the representations and warranties of the Investor contained in this
Agreement are true and complete in all material respects on and as of the
Funding Date as if made on and as of that date; and (ii) the Investor has
complied with or performed in all material respects all terms, covenants and
conditions to be complied with or performed by it on or prior to the Funding
Date.
3.5 At each Subsequent Closing, if any, the Company shall deliver, or
cause to be delivered, the following items:
3.5.1 certificates representing the number of shares of
Senior Preferred Stock that the Investor is purchasing as specified in the
notice delivered pursuant to Section 1.3.1 hereof;
3.5.2 a certificate, in form reasonably acceptable to the
Investor and dated as of the Subsequent Closing, from the Company, duly executed
by the President of the Company and by Clark, individually, as follows (but, in
the case of Clark, each of the following shall be subject to her reasonable
knowledge): (i) except for changes expressly contemplated by the terms of this
Agreement or approved by the Investor, the representations and warranties of the
Company and Clark contained in this Agreement are true and complete in all
material respects on and as of the Subsequent Closing as if made on and as of
that date; and (ii) the Company and Clark have complied with or performed in all
material respects all terms, covenants and conditions to be complied with or
performed by them on or prior to the Subsequent Closing; and
3.5.3 a certificate, in form acceptable to the Investor,
regarding the Company's satisfaction of at least 85% of each of its applicable
projected sales and EBIT aggregate targets for, in the case of a Subsequent
Closing occurring on or after August 1, 1999, the preceding trailing 12 month
period or, in the case of a Subsequent Closing occurring prior to August 1,
1999, the period of time commencing on August 1, 1998, as set forth on SCHEDULE
1.3.2.
3.6 At each Subsequent Closing, if any, the Investor shall deliver,
or cause to be delivered, the following items:
3.6.1 payment of the purchase price in immediately available
funds for the shares of Senior Preferred Stock that the Investor is purchasing;
and
3.6.2 a certificate, in form reasonably acceptable to the
Company and dated as of the Subsequent Closing, from the Investor, duly executed
by the General Partner of the Investor, as follows: (i) except for changes
expressly contemplated by the terms of this Agreement or approved by the
Company, the representations and warranties of the Investor
4
<PAGE>
contained in this Agreement are true and complete in all material respects on
and as of the Subsequent Closing as if made on and as of that date; and (ii) the
Investor has complied with or performed in all material respects all terms,
covenants and conditions to be complied with or performed by it on or prior to
the Subsequent Closing.
4. STOCK OPTIONS. Subsequent to the First Closing, senior management,
employees and non-employee directors may be granted options exercisable for up
to an aggregate of 2,000 shares of Common Stock, no par value per share (the
"Common Stock") under the 1998 Stock Option Plan in the form attached hereto as
EXHIBIT G (the "Plan"). Included in such number of options shall be the 345
outstanding "conditional options" previously issued to key employees by the
Company or options granted under the Plan in exchange for such conditional
options; provided, however, that the Company may exchange some or all of the 345
conditional options for options under the Plan. The exercise price per share of
Common Stock covered by an option granted under the Plan shall be not less than
the fair market value per share of the Common Stock at the time of grant. For
purposes of the shares of Common Stock authorized for issuance pursuant to the
Plan, the fair market value of the Common Stock at the time of option grant
shall be determined at least annually by the Board of Directors but shall in no
event be less than 60% of the most recent purchase price per share of the Senior
Preferred Stock on an as converted basis paid by the Investor to the Company.
The number of shares of Common Stock available for issuance under the Plan may
be increased after the first anniversary of the First Closing but in no event
may shares of Common Stock available for issuance under the Plan account for
more than 10% of the fully diluted shares of capital stock of the Company
(including the Senior Preferred Stock on an as converted basis and the shares of
Common Stock issued upon the exercise of outstanding options) without the prior
written consent of the Investor.
5. FURTHER ASSURANCES. Each party shall execute such additional
documents and take such other actions as the other party or parties may
reasonably request to consummate the transactions contemplated hereby and
otherwise as may be necessary to effectively carry out the terms and provisions
of this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CLARK. The Company
and Clark hereby represent and warrant to the Investor as of the date hereof; as
of the Funding Date, and as of the date of any additional issuance of Senior
Preferred Stock to the Investor pursuant to a Subsequent Closing as follows;
provided, however, that the following representations and warranties by Clark
shall be qualified as to materiality and shall be made subject to her reasonable
knowledge.
6.1 CORPORATE STANDING. The Company is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Ohio. The
Company has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted and
as presently proposed to be conducted and to execute, deliver and perform this
Agreement, the Registration Rights Agreement and any other agreement to which
the Company is a party, the execution and delivery of which is contemplated
hereby (the "Ancillary Agreements"). The Company is duly licensed, authorized
and qualified to do business and is in good standing in all jurisdictions
(domestic or foreign) in which the conduct of
5
<PAGE>
its business or the ownership or leasing of its properties requires it to be so
licensed, authorized or qualified, except where its failure to be so licensed,
authorized or qualified would not constitute a Material Adverse Effect. For
purposes of this Agreement, "Material Adverse Effect" means any event or
circumstance or any action taken or omitted to be taken by or on behalf of the
Company which has constituted, or with reasonable certainty will constitute, a
material adverse effect, singly or in the aggregate, on the condition (financial
or otherwise), properties, business, operations or prospects of the Company,
taken as a whole. True and accurate copies of the articles of incorporation
(and all amendments thereto), code of regulations (and all amendments thereto)
and minute book (containing the records of meetings and written consents of the
shareholders, the board of directors and any committees of the board of
directors) of the Company have previously been delivered to legal counsel to the
Investor.
6.2 AUTHORIZATION. The execution and delivery of this Agreement, the
Registration Rights Agreement and any Ancillary Agreement and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company. Each of this
Agreement, the Registration Rights Agreement and any Ancillary Agreement has
been duly executed and delivered by the Company and Clark, as applicable, and
constitutes the legal, valid and binding obligation of the Company and Clark, as
applicable, enforceable against each of them, as applicable, in accordance with
its terms, except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally and (ii) the availability of equitable remedies may be limited
by equitable principles of general applicability.
6.3 CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 60,000 shares of Common Stock of which as of the date hereof
33,737 shares are validly issued and outstanding, fully paid and nonassessable
and 10,000 shares of which have been duly and validly reserved for issuance upon
conversion of the Senior Preferred Stock, and (ii) 10,000 shares of Senior
Preferred Stock, none of which are outstanding as of the date hereof. Except as
set forth on SCHEDULE 6.3 or as contemplated by this Agreement, the Amended
Articles, the Registration Rights Agreement and Ancillary Agreements, there are
outstanding no subscriptions, options, warrants, calls, commitments or rights
(including conversion or preemptive rights and rights of first refusal), proxy
or shareholder agreements or agreements of any character relating to shares of
the Company's capital stock or any instruments that can be converted into shares
of the Company's capital stock. None of the shares of the Company's capital
stock have been issued in violation of any preemptive right. All issuances,
transfers or purchases of the capital stock of the Company have been in
compliance with all applicable agreements and all applicable laws, including
federal and state securities laws, and all taxes thereon, if any, have been
paid. Except as set forth on SCHEDULE 6.3, no former or present holder of any
of the shares of capital stock of the Company has any legally cognizable claim
against the Company or Clark based on any issuance, sale, purchase, redemption
or involvement in any transfer of any shares of capital stock by the Company.
Except as contemplated by this Agreement or as set forth on SCHEDULE 6.3, there
are no contractual obligations of the Company to repurchase, redeem or otherwise
acquire any shares of capital stock of the Company. No bonds, debentures, notes
or other indebtedness having the right to vote (or convertible into or
exercisable for securities having the right to vote) on any matters on which
shareholders of the
6
<PAGE>
Company may vote are issued or outstanding. Except for this Agreement and the
Shareholders Agreement, the Company is not a party or subject to any agreement
or understanding, and, to the Company's and Clark's best knowledge, there is no
agreement or understanding between any persons that affects or relates to the
voting or giving of written consents with respect to any security or the voting
by any director of the Company.
6.4 VALIDLY ISSUED SHARES. The shares of Senior Preferred Stock to
be issued, sold and delivered in accordance with the terms of this Agreement for
the consideration set out herein, will, upon issuance in accordance with the
terms hereof, be duly and validly issued, fully paid and nonassessable, free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable federal and state securities laws. The issuance
of the Senior Preferred Stock to the Investor pursuant to this Agreement will
comply with all applicable laws, including federal and state securities laws
(assuming the accuracy of the representations set forth in Sections 7.2 through
7.5 hereof), and will not violate the preemptive rights of any person. The
Common Stock issuable upon conversion of the Senior Preferred Stock being
purchased under this Agreement will be, upon issuance and delivery in accordance
with the terms of the Amended Articles, duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than restrictions on
transfer under this Agreement and under applicable federal and state securities
laws. The issuance of the Common Stock upon conversion of the Senior Preferred
Stock will comply with all applicable laws, including federal and state
securities laws (assuming the accuracy of the representations set forth in
Sections 7.2 through 7.5 hereof as of the date of issuance of such Common Stock
and of such Senior Preferred Stock), and will not violate the preemptive rights
of any person.
6.5 NO CONFLICT. Except as set forth on SCHEDULE 6.5, the execution
and delivery of this Agreement, the Registration Rights Agreement and any
Ancillary Agreement do not, and the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of; or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit under, or the creation of a
lien, pledge, security interest, charge or other encumbrance on assets (any such
conflict, violation, default, right of termination, cancellation or
acceleration, loss or creation, a "Violation") pursuant to, any provision of the
Amended Articles or Restated Regulations, or result in any Violation of any
lease, agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company, Clark or the Company's properties or assets.
6.6 CONTRACTS AND OTHER COMMITMENTS: COMPLIANCE. Except as set forth
on SCHEDULE 6.6 or those which do not constitute a Material Adverse Effect, the
Company is not bound by any judgment, order, writ or decree, written or oral,
absolute or contingent. The Company has made available to the Investor for its
review prior to the date hereof a copy of all written contracts, agreements,
leases, loans, and commitments with a third party to which the Company is a
party (each a "Contract") and the Company has described to the Investor the
terms of any oral Contracts that are material to the condition (financial or
otherwise), properties, business, operations or prospects of the Company taken
as a whole. Except those which do not
7
<PAGE>
constitute a Material Adverse Effect, the Company is not in violation or
default of any provision of its Amended Articles or Restated Regulations, any
provision of a written or oral Contract, or any provisions of any other items
listed on SCHEDULE 6.6.
6.7 SUBSIDIARIES. As of the date of this Agreement, the Company does
not own or control, directly or indirectly, any interest in any other
corporation, partnership, limited liability company, association or other
business entity and is not a participant in any joint venture, partnership or
similar arrangement.
6.8 CONSENTS. Except as set forth on SCHEDULE 6.8, no consent,
approval, qualification, order or authorization of, or registration, declaration
or filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, or other third
party is required by or with respect to the Company or Clark in connection with
the execution and delivery of this Agreement, or the consummation by the Company
or Clark of the transactions contemplated hereby, which has not already been
obtained, except for notices of sale required to be filed with the Securities
and Exchange Commission under Regulation D of the Securities Act or such post
closing filings as may be required under applicable state securities laws which
will be timely filed within the applicable periods therefor.
6.9 FINANCIAL STATEMENTS. The Company has delivered to the Investor
prior to the date hereof the Company's balance sheet as of July 31, 1998, and
the related statements of income and cash flows for the twelve months ended July
31, 1998, and SCHEDULE 6.9 related thereto (the "Financial Statements"). The
Financial Statements present fairly in all material respects the financial
condition and results of operations of the Company as of such date and the
period indicated and have been prepared in all material respects in accordance
with GAAP consistently applied during such period except for the omission of
footnote disclosures.
6.10 INDEBTEDNESS FOR BORROWED MONEY; NO UNDISCLOSED LIABILITIES.
Except as and to the extent reflected in the Financial Statements or on SCHEDULE
6.10, the Company has no direct or indirect indebtedness for borrowed money,
indebtedness by way of lease-purchase arrangements, guarantees, undertakings,
chattel mortgages or other security arrangements with any bank, financial
institution or other third party. Except as and to the extent reflected and
adequately reserved against in the Financial Statements or on SCHEDULE 6.10, as
of July 31, 1998, the Company had no liability or obligation whatsoever, whether
accrued, absolute, contingent or otherwise, other than liabilities or
obligations which in the aggregate do not exceed $550,000.
6.11 TITLE TO PROPERTY AND ASSETS: LEASES.
6.11.1 SCHEDULE 6.11.1 sets forth a complete and accurate list
and description of all the real property that the Company owns or leases and all
personal property that the Company owns or leases that the Company carries on
its books at a value of greater than $10,000. The Company is not bound or
committed to make any capital improvement or expenditure in excess of $10,000
with respect to any single piece of owned or leased real or personal property.
8
<PAGE>
6.11.2 Except as set forth in SCHEDULE 6.11.2, the Company has
good, valid and marketable title to all the personal and mixed, tangible and
intangible properties and assets which it purports to own, free and clear of all
liens, restrictions, claims, charges, security interests, easements or other
encumbrances of any nature whatsoever, except for liens for current taxes not
yet due and payable and except for liens, claims or other encumbrances that do
not constitute a Material Adverse Effect. With respect to the property and
assets that it leases, the Company is in compliance with such leases and holds a
valid leasehold interest free and clear of any liens, claims and encumbrances
except for liens, claims or other encumbrances that do not constitute a Material
Adverse Effect. Except in accordance with a valid license or other agreement
with the Company, all properties and assets of the Company are in the possession
or control of the Company, and no other person is entitled to possession of any
such properties and assets.
6.12 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE 6.12, there
are no claims of any kind or any actions, suits, proceedings, arbitrations or
investigations ("Legal Actions") pending or, to the Company's or Clark's
knowledge, threatened against or affecting the Company or Clark or against any
asset, interest or right of any of them or which questions the validity of the
transactions contemplated by this Agreement and neither the Company nor Clark
know of any facts which may constitute a basis for Legal Actions which would
constitute a Material Adverse Effect.
6.13 ENVIRONMENTAL MATTERS. The Company is not in violation of any
applicable statute, law or regulation relating to the environment or
occupational health and safety (the "Environmental Laws") except to the extent
that such violation does not constitute a Material Adverse Effect, and as of the
date hereof no material expenditures are required to be made by the Company in
order to comply with any of the Environmental Laws.
6.14 LICENSES AND PERMITS: COMPLIANCE WITH LAWS. Except as set forth
on SCHEDULE 6.14, the Company holds all franchises, permits, licenses,
variances, exemptions, orders and approvals of all governmental entities which
are required for the operation of the Company's business and is in compliance
with the terms thereof; except where the failure to so hold or to be in such
compliance would not constitute a Material Adverse Effect. The Company has
complied with and is not in any default under (and has not been charged with or
received notice with respect to, nor is threatened with or under investigation
with respect to, any charge concerning any violation of any provision of) any
federal, state or local law, regulation, ordinance, rule or order (whether
executive, judicial, legislative or administrative) or any order, writ,
injunction or decree of any court, agency or instrumentality, except where the
failure to be in compliance or where being in default would not constitute a
Material Adverse Effect, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against any of them alleging any failures to comply.
6.15 EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 6.15,
the Company has no employee benefit plans including any profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other plan, arrangement or
9
<PAGE>
understanding (whether or not legally binding) providing benefits to any current
or former employee, officer or director of the Company (collectively, the
"Benefit Plans"), or any employment, consulting, severance, termination or
indemnification agreement, arrangement or understanding between the Company and
any officer, director or employee of the Company. The Company has delivered to
the Investor true, complete and correct copies of each Benefit Plan, or, in the
case of any unwritten Benefit Plans, descriptions thereof. Each Benefit Plan
has been administered in compliance with its terms and all applicable laws
except where the failure to be in compliance would not constitute a Material
Adverse Effect.
6.16 LABOR RELATIONS.
6.16.1 The Company is in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours and occupational safety and health except where
the failure to be in compliance would not constitute a Material Adverse Effect.
6.16.2 There is no unfair labor practice charge or complaint
or any other matter against or involving the Company pending or, to the
Company's or Clark's knowledge, threatened against the Company before the
National Labor Relations Board or any court of law.
6.16.3 There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the Company's or Clark's knowledge, threatened against
the Company.
6.16.4 The Company is not a party to or bound by any
collective bargaining agreement or any similar labor union arrangement.
6.16.5 There are no charges, investigations, administrative
proceedings or formal complaints of discrimination (including discrimination
based upon sex, age, marital status, race, color, religion, national origin,
sexual preference, disability, handicap or veteran status) pending or, to the
Company's best knowledge, threatened against the Company before the Equal
Employment Opportunity Commission or any federal, state or local agency or
court. There have been no governmental audits of the equal employment
opportunity practices of the Company and, to the Company's best knowledge, no
basis for any such claim of violation exists except where such violation would
not constitute a Material Adverse Effect.
6.16.6 The Company is in compliance with the requirements of
the Americans Wit Disabilities Act except where the failure to be in compliance
would not constitute a Material Adverse Effect.
6.17 INSURANCE. SCHEDULE 6.17 sets forth a list of all insurance
policies, including property, casualty, liability and other insurance maintained
with respect to the assets and business of the Company (the "Company
Insurance"). The Company is not liable for any material retroactive premium
adjustments with respect to any of its insurance policies or bonds. All such
policies and bonds are legal, valid and enforceable and in full force and effect
and the Company is not in breach or default (including with respect to the
payment of premiums or the
10
<PAGE>
giving of notices) and no event has occurred which, with notice or the lapse of
time or both, would constitute such a breach or default, or permit termination,
modification or acceleration under the policy. The Company has not received any
notice of premium increases or cancellations with respect to any such policies
and bonds except in the ordinary course of business. The Company and Clark
believe the amount and type of the Company Insurance coverage is adequate for
the Company's business and is consistent with good business practice.
6.18 TAX MATTERS. Except as set forth on SCHEDULE 6.18, the Company
has timely filed or caused to be filed all federal, state, foreign and local
income, franchise, gross receipts, payroll, sales; use, withholding, occupancy,
excise, real and personal property, employment and other tax returns, tax
information returns and reports (the "Tax Returns") required to be filed and all
such Tax Returns were correct and complete in all respects, except where the
failure to file or to be correct and complete would not constitute a Material
Adverse Effect. The Company and Clark have paid, or made adequate provisions
for the payment of, all taxes, duties or assessments of any nature whatsoever,
interest payments, penalties and additions (whether or not reflected in the
returns as filed) due and payable (and/or property accruable for all periods
ending on or before the date of this Agreement) to any city, county, state,
foreign country, the United States or any other taxing authority, except where
the failure to pay or make adequate provisions for payment would not constitute
a Material Adverse Effect. There are no security interests on any of the assets
of the Company that arise in connection with any failure (or alleged failure) to
pay timely any tax. The Company has withheld and paid all taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder or other third party,
except where the failure to withhold or pay would not constitute a Material
Adverse Effect. Except as set forth in SCHEDULE 6.18, no deficiencies for any
taxes have been asserted or assessed or, to the knowledge of the Company and
Clark, proposed against the Company that are not adequately reserved for.
6.19 CHANGES IN CIRCUMSTANCES. Except as set forth in SCHEDULE 6.19
and except for any of the following actions which occur after the First Closing
and are authorized by the Company's Board of Directors, since July 31, 1998
there has not been:
6.19.1 any change in the condition (financial or otherwise),
properties, business, operations or prospects of the Company, or any event or
circumstance, which constitutes a Material Adverse Effect;
6.19.2 any indebtedness, liability or obligation (whether
absolute, accrued, contingent or otherwise and whether due or to become due)
incurred by the Company or any transaction entered into by the Company, other
than in the ordinary course of business and consistent with past practice, or
any guarantee by the Company of any indebtedness, liability or obligation of any
other person;
6.19.3 any declaration, setting aside or payment of any
dividend or other distribution in respect of any of the capital stock or other
securities of the Company other than the minimum amount of distributions
required by the Shareholders Agreement;
11
<PAGE>
6.19.4 any obligation, liability, lien or encumbrance paid,
discharged or satisfied by or on behalf of the Company, other than in the
ordinary course of business and consistent with past practice;
6.19.5 any mortgage, lien, pledge, charge or encumbrance
affecting the properties of the Company (except liens for current taxes not yet
due and payable) created, suffered or assumed by or on behalf of the Company in
excess of $50,000;
6.19.6 any sale, transfer or other disposition of any tangible
asset of the Company or any cancellation of any debt or claim owed the Company,
except in the ordinary course of business and consistent with past practice, or
any sale, transfer or other disposition of any of the Company's intangible
properties, assets or rights, except in the ordinary course of business and
consistent with past practice;
6.19.7 any loan made or increased by the Company, including
any loan to any officer, director, employee or agent of the Company or to any
member of their families, except for advances to non-executive officers in the
ordinary course of business;
6.19.8 any action taken or omitted to be taken by or on behalf
of the Company that would cause (after lapse of time, notice or both) the
breach, default or acceleration of any right, contact or other obligation of the
Company except where the breach, default or, acceleration would not constitute a
Material Adverse Effect;
6.19.9 any material change in the compensation arrangement or
agreement with any officer, director, employee or agent of the Company except in
the ordinary course of business and consistent with past practice; or
6.19.10 any agreement or commitment by the Company to do any of
the foregoing.
6.20 PATENTS AND TRADE NAMES, ETC.
6.20.1 SCHEDULE 6.20.1 sets forth a complete list of all trade
names, trademark and service mark registrations, common law trademarks,
copyright registrations and copyright applications currently owned by the
Company and a complete list of all works of authorship licensed to the Company
and from which the Company has created a courseware product on the basis of such
license (which, together with any proprietary works of authorship, including
software, owned by the Company for which there is no current copyright
registration or application, are referred to herein as the "Intellectual
Property"). The Company does not own or license any patents. Except as set
forth on SCHEDULE 6.20.1, all of the Intellectual Property is owned by the
Company. SCHEDULE 6.20.1 also indicates whether any of the Intellectual
Property was acquired by assignment to the Company or is used by the Company
under authority of a license. Except as set forth in SCHEDULE 6.20.1, to the
knowledge of the Company and Clark, no employees of the Company, past or
present, claim or have claimed any interest in the Intellectual Property and no
basis for such claim exists. Clark hereby acknowledges to and for the benefit
of
12
<PAGE>
the Company and the Investor that she claims no independent interest in the
Intellectual Property of the Company or any such intellectual property
previously used in the business of the Company other than by virtue of any
ownership interest she may maintain in the Company.
6.20.2 Except as provided on SCHEDULE 6.20.1, with respect to
the Intellectual Property listed thereon:
6.20.2.1 the Intellectual Property and all rights
appurtenant thereto are free and clear of any and all liens, claims, security
interests and other encumbrances of any nature or kind except for those which do
not constitute a Material Adverse Effect;
6.20.2.2 no prior transfer, sale or assignment has been
made by the Company of any part of any item constituting part of the
Intellectual Property or any rights appurtenant thereto;
6.20.2.3 each item constituting part of the Intellectual
Property which is owned by the Company has been duly registered with, filed in
or issued by, as the case may be, the United States Patent and Trademark Office,
and such registrations, filings and issuances remain in full force and effect,
or is otherwise protected as unregistered under common law principles; and
6.20.2.4 the Intellectual Property constitutes all
intellectual property necessary for the Company to carry on its business as
presently conducted.
6.20.3 Except as set forth on SCHEDULE 6.20.3, there are no
pending or, to the knowledge of the Company and Clark, threatened proceedings or
litigation or other adverse claims affecting or with respect to the Intellectual
Property as currently used by the Company. Except as set forth on SCHEDULE
6.20.3, no person or entity is known to be infringing upon the Company's rights
with respect to the Intellectual Property. None of the operations, processes or
products of the Company are known to infringe upon or violate the rights of any
third party and the Company has not received any charge, complaint, claim or
notice alleging any such infringement or violation. The Company has not copied
in violation of the rights of others any proprietary feature of any competitive
product in designing the Company's products. Neither the Company nor Clark has
knowingly misappropriated any trade secrets which are the property of a third
party.
6.20.4 There are no claims pending or, to the knowledge of the
Company and Clark, threatened to the effect that any shareholder, director,
employee or agent of the Company has, in respect of his or her activities to
date, violated any terms or conditions of any written or oral Contract, or
disclosed or utilized any trade secrets or proprietary information or
documentation of such third party, or interfered in the employment relationship
between such third party and any of its employees and, to the knowledge of the
Company, no basis for any such action exists except where such actions would not
constitute a Material Adverse Effect.
13
<PAGE>
6.21 AFFILIATED TRANSACTIONS. Except as set forth on SCHEDULE 6.21,
to the knowledge of the Company and Clark, no affiliate of the Company has any
interest (other than as a non-controlling holder of securities of a
publicly-traded company), either directly or indirectly, in any person (whether
as an employee, officer, director, shareholder, agent, independent contractor,
security holder, creditor, consultant or otherwise) that currently (i) provides
any services or designs, produces and/or sells any products or product lines, or
engages in any activity which is the same, similar to or competitive with any
activity or business in which the Company is now engaged; (ii) is a supplier of,
customer of, creditor of, or has an existing contractual relationship with, the
Company; or (iii) has any direct or indirect interest in any asset or property
used by the Company or any property, real or personal, tangible or intangible,
that is necessary or desirable for the conduct of the business of the Company.
All transactions set forth on SCHEDULE 6.21 were negotiated and entered into on
an arms'-length basis.
6.22 BANK ACCOUNTS. SCHEDULE 6.22 sets forth a complete and accurate
list of each bank or financial institution in which the Company has an account
or safe deposit box (giving the address and account numbers) and the names of
the persons authorized to draw thereon or to have access thereto.
6.23 BROKERS' AND FINDERS' FEES. Except as set forth on SCHEDULE
6.23, neither the Company nor Clark has employed any broker, finder or financial
advisor or incurred any liability for fees or commissions payable to any broker,
finder or financial advisor in connection with the negotiations relating to or
the transactions contemplated by this Agreement.
6.24 REGISTRATION RIGHTS. Except as provided in the Registration
Rights Agreement attached hereto as EXHIBIT B, the Registration Rights Agreement
between the Company, Papalios and Clark dated May 10, 1996, or the Supplement to
Registration Rights Agreement between the Company and Gary Qualmann dated July
31, 1996, the Company is presently not under any obligation and has not granted
any rights to register under the Securities Act any of its outstanding
securities or any of its securities that may be subsequently issued.
6.25 SMALL BUSINESS CONCERN. The Company acknowledges that the
Investor is a Federal licensee under the Small Business Investment Act of 1958,
as amended (the "SBIA"). The Company, together with its "affiliates" (as that
term is defined in Title 13, Code of Federal Regulations, Section 121.103), is a
"small business concern" within the meaning of the SBIA, and the regulations
thereunder, including Title 13, Code of Federal Regulations, Section 121.101 ET
SEQ. The information regarding the Company and its affiliates set forth in the
SBA Forms 480, 652 and 1031 delivered at the First Closing is accurate and
complete. The Company does not presently engage in, and it shall not hereafter
engage in, any activities prohibited by the SBIA and the regulations thereunder,
nor shall the Company use, directly or indirectly, the proceeds from the sale of
the Senior Preferred Stock hereunder for any purpose for which a Small Business
Investment Company is prohibited from providing funds by the SBIA and such
regulations thereunder.
6.26 MATERIAL FACTS. To the knowledge of the Company and Clark, the
Company has provided the Investor with all the information reasonably available
to the
14
<PAGE>
Company that the Investor has requested for deciding whether to purchase the
Senior Preferred Stock. This Agreement and the documents or written statements
furnished by the Company to the Investor in connection with the transactions
contemplated hereby, including the Company's business plan and projections as
set forth on SCHEDULE 6.26, do not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading, except, with respect to assumptions, projections and
expressions of opinions or predictions contained in the documents or written
materials furnished by the Company, the Company and Clark represent only that
such assumptions, projections and expressions of opinions and predictions were
made in good faith and the Company and Clark believe that there is a reasonable
basis therefor.
6.27 CLARK DEBT REPAYMENT OBLIGATIONS. All payments due to date by
Clark to Huntington National Bank pursuant to that certain term note in the
original principal amount of $800,000 dated May 10, 1996 and as amended on June
25, 1998, and all payments due to date by the Company to Clark pursuant to that
certain promissory note in the principal amount of $1,000,000 dated May 10,
1996, have been paid in full and when due.
7. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents and warrants to the Company as of the date hereof, as of the Funding
Date, and as of the date of any additional issuance of Senior Preferred Stock to
the Investor pursuant to a Subsequent Closing, as follows:
7.1 AUTHORIZATION: BINDING AGREEMENT. This Agreement and the
Registration Rights Agreement have been duly authorized, executed and delivered
by the Investor and each constitutes the legal, valid and binding obligation of
the Investor enforceable against it in accordance with its terms; except as (i)
the enforceability thereof may be limited by bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
7.2 INVESTMENT REPRESENTATIONS. The Investor is acquiring the Senior
Preferred Stock and the Common Stock issuable upon conversion thereof
(collectively the "Securities") solely for its own account as principal, for
investment purposes only and not with a view to resale or distribution thereof
in whole or in part, and the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the Securities. No
other person has a direct or indirect beneficial interest in the Securities to
be acquired by the Investor hereunder and the Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to any third person, with respect to any of the
Securities.
7.3 ACCREDITED INVESTOR; RESIDENCE. The Investor is a resident of
the State of Ohio and is an "accredited investor" as such term is defined under
Regulation D of the Securities Act.
7.4 RECEIPT OF INFORMATION: RESTRICTED SECURITIES. The Investor
acknowledges that the Securities are not being and will not be registered under
the Securities Act or the
15
<PAGE>
securities laws of any other jurisdiction in reliance on exemptions thereunder.
Accordingly, each certificate evidencing the Securities shall be imprinted with
the legend set forth in Article FOURTH of the Amended Articles. The Investor
acknowledges that the Securities have not been and will not be approved or
disapproved by the Securities and Exchange Commission or any other governmental
authority or agency of any jurisdiction. The Investor represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Senior Preferred Stock
and the business, properties, prospects, and financial condition of the Company
and to obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of any information furnished to the Investor or
to which the Investor had access. The Investor's representations under this
Section 7, however, shall not limit or modify the representations and warranties
of the Company and Clark in Section 6 of this Agreement or the right of the
Investor to rely thereon.
7.5 INVESTMENT EXPERIENCE. The Investor is experienced in evaluating
and investing in private placement transactions of securities of companies in a
similar stage of development and acknowledges that it can bear the economic risk
of the Investor's investment and has such knowledge and experience in financial
and business matters that the Investor is capable of evaluating the merits and
risks of the investment in the Securities. The Investor also represents that it
has not been organized for the purpose of acquiring the Senior Preferred Stock.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Agreement by the Company and the Investor and any
certificate or other instrument delivered by or on behalf of such party pursuant
to this Agreement shall survive the First Closing and each Subsequent Closing
and shall continue so long as the Preferred Holders (as defined in Section 15
hereof), individually or in the aggregate, hold capital stock of the Company in
the form of Senior Preferred Stock, Common Stock or a combination thereof equal
to a minimum of 1,000 shares (subject to adjustment for stock splits,
combinations, dividends and other similar events) of Common Stock (a "Minimum
Interest"). All representations and warranties contained in this Agreement by
Clark and any certificate or other instrument delivered by or on behalf of Clark
shall survive the First Closing and each Subsequent Closing and shall continue
until the second anniversary of the First Closing. Each party shall have the
right to rely on each other party's representations and warranties made herein,
notwithstanding any investigation conducted by such party.
9. INDEMNIFICATION.
9.1 INDEMNIFICATION BY THE COMPANY AND CLARK. The Company and Clark
shall indemnify and reimburse the Investor for any and all claims, losses,
liabilities, damages (including, without limitation, fines, penalties, and
criminal or civil judgments and settlements), costs (including, without
limitation, court costs) and expenses (including, without limitation, reasonable
attorneys' and accountants' fees) (hereinafter "Loss" or "Losses") suffered or
incurred by the Investor or any successors or assigns thereto as a result of or
with respect to:
16
<PAGE>
9.1.1 any breach or inaccuracy of any representation or
warranty of the Company or Clark set forth in this Agreement and the Exhibits
hereto;
9.1.2 any breach of or noncompliance by the Company or Clark
with any covenant or agreement of the Company or Clark contained in this
Agreement; and
9.1.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
The obligation of Clark to indemnify and reimburse the Investor
for Losses shall be subordinate to the Company's obligation to indemnify and
reimburse the Investor for Losses and shall be limited in an amount not to
exceed the aggregate purchase price paid to the Company by the Investor for the
Senior Preferred Stock. In the case of any event giving rise to a claim of
indemnification by the Investor, the Investor shall first proceed against the
Company for indemnification and reimbursement and shall exhaust all of the
remedies it may have against the Company before it shall proceed against Clark
for indemnification and reimbursement. Clark shall have a right of subrogation
with respect to any amounts paid by Clark pursuant to the provisions of Section
9.1 hereof.
9.2 INDEMNIFICATION BY THE INVESTOR. The Investor shall indemnify
and reimburse the Company and Clark for any and all Losses suffered or incurred
by the Company or Clark or any successors or assigns thereto as a result of, or
with respect to:
9.2.1 any breach or inaccuracy of any representation or
warranty of the Investor set forth in this Agreement and the Exhibits hereto;
9.2.2 any breach of or noncompliance by the Investor with any
covenant or agreement of the Investor contained in this Agreement; and
9.2.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
10. COVENANTS OF THE COMPANY AND CLARK.
10.1 INSURANCE. On or prior to the Funding Date, the Company will
have in full force and effect term life insurance on the life of Clark in the
face amount of $2,000,000 naming the Company as loss payee and the Investor as
collateral assignee of the proceeds. Prior to each Subsequent Closing, the
Company will increase the face amount of that policy by, or obtain an additional
policy for, an amount equal to the aggregate purchase price delivered by the
Investor at each such Subsequent Closing, provided that such additional
insurance is obtainable by the Company at a reasonable cost. The Company shall
maintain such insurance for so long as the Preferred Holders hold a Minimum
Interest.
10.2 FINANCIAL REPORTING. For periods commencing on or after the
First Closing Date, the Company shall deliver or cause to be delivered to the
Investor monthly and
17
<PAGE>
year-to-date balance sheets and income and cash flow statements (each as
compared to budget and the comparable prior year period), a brief monthly
written summary of operations and such other information and data with respect
to the Company as the Investor may reasonably request. Such monthly reports
shall be provided on or before 15 days following the end of each month. Prior
to the end of each fiscal year, the Company shall provide a business plan and
projections similar to that set forth on SCHEDULE 6.26 for the next fiscal year.
Annual audits of the Company's financial statements for periods commencing on or
after August 1, 1998 shall be performed by Deloitte & Touche or another
independent accounting firm reasonably acceptable to the Investor and copies
thereof shall be delivered to the Investor on or before the 120th day following
the end of the Company's fiscal year.
10.3 BOARD OF DIRECTORS.
10.3.1 The Restated Regulations of the Company provide for a
Board of Directors of five members, subject to increase as provided therein. So
long as the Preferred Holders hold a Minimum Interest and do not possess the
rights set forth in Section 12.2.2 below, Clark and the Investor shall vote
their respective Securities in a manner intended to cause the following
composition of the Board of Directors: the Investor shall designate one
director, Clark and the other holders of Common Stock shall designate three
directors (one of whom must be Clark and, for so long as the Shareholders
Agreement requires Papalios to be elected as a director, one of whom must be
Papalios), and Clark and the other holders of Common Stock shall designate one
director (who must be a non-employee (and not related to an employee)) who must
be reasonably acceptable to the Investor. The initial directors are currently
expected to include Clark, Papalios, Gary Qualmann (an employee director
designated by Clark and the other holders of Common Stock), and Murray R.
Wilson (designated by and related to the Investor). The remaining vacancy on
the five member Board of Directors shall be filled by Clark and the other
holders of Common Stock, with the reasonable acceptance by the Investor, prior
to December 31, 1998.
10.3.2 Pursuant to the Restated Regulations, the holders of a
majority of the voting power of the Company have the right to increase the size
of the Board of Directors to seven members. At such time, for so long as the
Preferred Holders hold a Minimum Interest and do not possess the rights set
forth in Section 12.2.2 below, Clark and the Investor shall vote their
respective Securities in a manner intended to cause the following composition of
the Board of Directors: the Investor shall designate two directors (one of whom
must be unrelated to the Investor), Clark and the other holders of Common Stock
shall designate four directors (one of whom must be Clark and, for so long as
the Shareholders Agreement requires Papalios to be elected as a director, one of
whom must be Papalios, and one of whom shall be a non-employee (and not related
to an employee)) and Clark and the Investor shall jointly designate one director
(who must be a non-employee (and not related to an employee)). The vacancies on
the seven member Board of Directors caused by the increase in the size of the
Board of Directors shall be promptly filled in accordance with this Section
10.3.2.
10.3.3 The Company shall reimburse the directors designated by
the Investor for their reasonable travel expenses incurred in connection with
meetings of the Board
18
<PAGE>
of Directors. Pursuant to the Restated Regulations, the Board of Directors
shall also have a Compensation Committee and an Audit Committee, each of which
shall be comprised of three directors. So long as the Preferred Holders hold a
Minimum Interest, Clark and the Investor shall use their best efforts to cause
at least two of the members to be non-employee (and not related to an employee)
directors and one of those two shall be designated by the Investor. The
Compensation Committee shall be responsible for initiating all decisions
regarding the compensation of the directors, executive officers and senior
management of the Company, including, but not limited to, all decisions
regarding salary increases, bonus awards, perquisites and stock option awards.
The Audit Committee shall supervise the annual audit of the Company and
undertake such other responsibilities and duties as the Board of Directors of
the Company may from time to time designate.
10.4 RESERVATION OF SHARES. On or prior to the First Closing Date,
the Company shall reserve and keep reserved at all times sufficient shares of
Common Stock for issuance upon conversion of the Senior Preferred Stock. Upon
conversion of any shares of Senior Preferred Stock, the Company shall promptly
issue and deliver the shares of Common Stock required to be delivered.
10.5 USE OF PROCEEDS. The proceeds from the sale of the Senior
Preferred Stock shall be used by the Company for working capital and/or the
payment of indebtedness.
10.6 CLARK DEBT REPAYMENT OBLIGATIONS. Clark shall remain current in
her principal and interest payments to Huntington National Bank in accordance
with that certain term note in the original principal amount of $800,000 dated
May 10, 1996 and amended June 25, 1998, as such indebtedness maybe restructured
and/or refinanced from time to time.
10.7 COMPLIANCE WITH SMALL BUSINESS INVESTMENT ACT. The Company
agrees to provide the Investor with sufficient information to permit the
Investor to comply with its obligations under the SBIA and the regulations
thereunder. Upon reasonable request, the Company shall also provide Investor
with (i) reasonable access to the Company's properties, places of business,
records (including financial records) and offices during normal business hours
and (ii) the opportunity to discuss the affairs, finances and accounts of the
Company with the officers of the Company. Investor and representatives of the
SBA shall be given reasonable access to the Company's records to confirm that
the proceeds received by the Company in connection with the consummation of the
transactions contemplated by this Agreement are used for the purposes set forth
in Section 10.5 hereof. The President of the Company shall certify to the
Investor, within three months of the date of the First Closing Date and from
time to time thereafter, that the Company has used the proceeds in accordance
with the purposes set forth in Section 10.5 hereof.
10.8 NEGATIVE COVENANTS. So long as any Securities are outstanding,
the Company shall not, without the prior written consent of the Investor:
10.8.1 sell a material portion of the Company's assets;
19
<PAGE>
10.8.2 merge or sell a controlling interest in the Company
(except in the case of a Qualified Sale (as defined below) and except that the
Company may, without the consent of the Investor, merge with another entity if
the Company (or its subsidiary) is the surviving corporation and the
consideration paid by the Company (or its subsidiary) for the merged entity's
securities is cash);
10.8.3 amend the Amended Articles or the Restated Regulations
in any manner, the Investor's consent to which shall not be unreasonably
withheld;
10.8.4 declare dividends or distributions (other than the
minimum tax distributions required by the Shareholders Agreement) to, and/or
redemptions or repurchases of any securities other than the Senior Preferred
Stock or pursuant to buy-sell agreements between the Company and its employees;
10.8.5 become a party to, modify, amend or restate the terms
of any agreement which restricts or would restrict the rights of the Senior
Preferred Stock; provided, however, that, without restricting or limiting the
Investor's ability to exercise its remedies pursuant to Section 12.2 or any
other section hereof, the Company may enter into credit agreements that restrict
the Company's ability to pay dividends on or repurchase the Securities if such
restrictions are required by the lender;
10.8.6 make any significant change in the fundamental nature
of the Company's business not contemplated in its existing business plan;
10.8.7 create a subsidiary or make an investment in any
entity;
10.8.8 enter into transactions with affiliates other than on
an arms'-length basis and on commercially reasonable terms; or
10.8.9 issue or sell Common Stock without consideration.
10.9 DEFINITION OF A QUALIFIED SALE. A Qualified Sale is a sale
transaction which yields the Investor at least an amount in cash equal to the
greater of: (i) return of the aggregate purchase price of the Senior Preferred
Stock purchased by the Investor from the Company, plus a compounded annual
return of 20% on such amount or (ii) two times the aggregate purchase price of
the Senior Preferred Stock purchased by the Investor from the Company.
11. RESTRICTIONS OF TRANSFERS.
11.1 NOTICE OF SALE BY CLARK. In the absence of and until a Qualified
IPO (as defined below), Clark shall give written notice to the Investor and the
Company if at any time she desires to sell or transfer any of her shares
("Notice of Sale"). The Notice of Sale shall set forth a description of the
proposed sale or transfer, including the name of the proposed purchaser or
transferee, the number of shares affected, the purchase price or consideration
and any other
20
<PAGE>
conditions of the sale or transfer. For a period of ten days following receipt
of such Notice of Sale, the Investor shall have the right to prohibit such sale
or transfer by Clark. The Investor shall notify Clark and the Company in
writing within ten days of receipt of the Notice of Sale of its intention to
either allow or prohibit the proposed sale or transfer ("Notice Reply").
11.2 DEFINITION OF QUALIFIED IPO. A Qualified IPO is an initial
public offering which yields net proceeds to the Company of at least $20,000,000
at a price per share indicating a total market equity capitalization
(post-money) of at least $60,000,000.
11.3 CO-SALE RIGHT. If the Investor does not prohibit the proposed
sale or transfer of shares by Clark pursuant to Section 11.1, for a period of 30
days following the Investor's receipt of the Notice of Sale, the Investor shall
have the right to elect to participate in such sale or transfer with Clark (on a
pro rata basis, I.E., if Clark owns 75 shares of Common Stock and the Investor
owns 25 shares of Securities, the Investor may sell one-fourth of the shares
proposed to be sold by Clark) on the same terms and conditions and for the price
or consideration designated in the Notice of Sale. Notice of the Investor's
intention to participate in such sale or transfer shall be evidenced by a
writing signed by the Investor and delivered to Clark prior to the end of the
30th day following the Investor's receipt of the Notice of Sale. If the
Investor fails to notify Clark within such 30-day period of its intent to
participate in such sale, its rights under this Section 11.3 shall be waived
with respect to the proposed sale or transfer by Clark.
11.4 RIGHTS OF REFUSAL. If the Investor does not prohibit the
proposed sale or transfer of shares by Clark pursuant to Section 11.1, for a
period of 30 days following the Company's receipt of the Notice of Sale, the
Company shall have the right to purchase all but not less than all of the shares
designated in the Notice of Sale on the same terms and conditions and for the
price or consideration designated therein (the "First Right of Refusal"). If
the Company does not exercise its First Right of Refusal, then, for a period of
30 days following the Investor's receipt of notice from the Company of the
Company's decision not to exercise its First Right of Refusal, the Investor
shall have the right to purchase all but not less than all of the shares from
Clark on the same terms and conditions and for the price or consideration
designated in the Notice of Sale (the "Second Right of Refusal"). At the sole
option of the Investor, the Company may be permitted to participate with the
Investor in the purchase of the shares pursuant to the Second Right of Refusal
so long as the Investor and the Company together purchase all but not less than
all of the shares.
Notice of the Company's intention to purchase the shares pursuant to its
First Right of Refusal shall be evidenced by a writing signed by the Company and
delivered to Clark prior to the end of the 30th day following the Company's
receipt of the Notice of Sale. Notice of the Investor's intention to purchase
the shares evidenced by its Second Right of Refusal shall be evidenced by a
writing signed by the Investor and delivered to Clark prior to the end of the
30th day following the later of the Investor's receipt of the Notice of Sale or
the Investor's receipt of the notice of the Company's decision not to exercise
its First Right of Refusal.
21
<PAGE>
In the event the Investor does not exercise its Second Right of Refusal,
Clark shall have the right to sell or transfer the shares designated in the
Notice of Sale on the same terms and conditions and for the price or
consideration designated therein within 60 days from the expiration of the
period during which the Investor had the option to purchase the shares pursuant
to its Second Right of Refusal. After such 60 day period, Clark shall not
transfer Clark's shares again without complying with this Section 11.
11.5 EXCEPTIONS. Sections 11.1, 11.3, and 11.4 shall not apply (a) to
any sale or transfer by Clark for estate planning purposes or to her ancestors,
siblings, descendants or spouse, (b) if the Preferred Holders no longer hold a
Minimum Interest, or (c) to sales or transfers of up to 2,000 shares in the
aggregate (subject to adjustment for stock splits, combinations, dividends and
other similar events) to employees of the Company.
11.6 RIGHT OF FIRST REFUSAL. In the absence of and until a Qualified
IPO, if the Investor desires to sell or transfer any of its Securities pursuant
to a bona fide offer, the Investor shall first give notice (the "Notice of
Intent") to the Company. The Notice of Intent shall set forth the terms of the
bona fide offer, including the name(s) of the proposed transferee(s), the type
and number of securities proposed to be transferred and the price or
consideration for the securities proposed to be transferred.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to purchase all (but not less than all) of the
Securities designated in the Notice of Intent on the same terms and conditions
and for the price or consideration designated therein. Notice of the Company's
intention to purchase such Securities shall be evidenced by a writing signed by
the Company and delivered to the Investor prior to the end of the 30th day
following the Company's receipt of the Notice of Intent.
In the event the Company does not exercise its Right of First Refusal, the
Investor shall have the right to sell or transfer the Securities designated in
the Notice of Intent on the same terms and conditions and for the price or
consideration and to the proposed transferee designated therein within 60 days
from the expiration of the period during which the Company had the option to
purchase such Securities. Notwithstanding the foregoing, the Investor may not
transfer any Securities pursuant to this Section 11.6 to those persons
competitive with the Company which are described on SCHEDULE 11.6 without the
consent of the Company. This Section 11.6 shall not apply to any distribution
in kind by the Investor to its partners or shareholders pursuant to Section 15.
11.7 RIGHT OF FIRST OFFER. In the absence of and until a Qualified
IPO, if the Investor desires to sell or transfer any of its Securities (except
pursuant to a bona fide offer received by the Investor in accordance with
Section 11.6), the Investor shall first give a Notice of Intent to the Company.
The Notice of Intent shall set forth the number of shares of Securities which
the Investor desires to sell.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to negotiate a transaction with the Investor
whereby the Company will purchase
22
<PAGE>
for cash all (but not less than all) of the Securities designated in the Notice
of Intent at a price and upon other terms and conditions acceptable to the
Investor and the Company. Any such purchase shall be consummated on or prior to
the 60th day after the Company's receipt of the Notice of Intent.
If (a) the Company elects not to exercise the right provided in this
Section 11.7, (b) the Company and the Investor cannot agree on the terms and
conditions of a purchase by the Company during such 30 day period, or (c) the
Company and the Investor shall agree on the terms and conditions of such
purchase but the Company shall fail to pay the purchase price in a timely
manner, then the Investor may sell the Securities designated in the Notice of
Intent at a price and on terms not more favorable to the purchaser than the
price and terms offered to the Company. The Investor may sell such Securities
during the period ending on the 150th day following the later of the end of such
30 day period and the date on which the Company fails to pay such price. If the
Investor does not sell such Securities in such 150 day period, the Securities
shall again be subject to this Section 11.7. This Section 11.7 shall not apply
to any distribution in kind by the Investor to its partners or shareholders
pursuant to Section 15. Notwithstanding the foregoing, the Investor may not
transfer any Securities pursuant to this Section 11.7 to those persons
competitive with the Company which are described on SCHEDULE 11.6 without the
consent of the Company.
11.8 RESTRICTIVE LEGEND. The share certificates evidencing the shares
subject to the foregoing provisions of this Section 11 shall bear appropriate
legends referring to the restrictions on transfer.
11.9 PREEMPTIVE RIGHTS. In the absence of and until a Qualified IPO,
the Investor shall have the right of first refusal to purchase all or part of
its pro rata share (equal to its percentage ownership of the Company on a fully
diluted basis) of New Securities (as defined below) that the Company may, from
time to time, propose to sell and issue, subject to the terms and conditions set
forth below. "New Securities" shall mean any capital stock of the Company
whether now authorized or not, and rights, options, or warrants to purchase
capital stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock, provided, however, that the term "New
Securities" does not include (i) the Senior Preferred Stock issuable under this
Agreement or the shares of Common Stock issuable upon conversion of the Senior
Preferred Stock; (ii) securities issued pursuant to an acquisition; (iii)
options granted or securities issued pursuant to an employee or director stock
option program; or (iv) securities issued as a result of any stock split, stock
dividend, or reclassification of Common Stock, distributable on a pro rata basis
to all holders of Common Stock. In the event the Company intends to issue New
Securities, it shall give written notice to the Investor ("Notice of Issuance")
which shall set forth the purchase price and any other conditions of the
issuance. The Investor shall have 30 days from the date of Notice of Issuance
to agree to purchase all or part of its pro rata share of such New Securities
for the price and upon the general terms and conditions specified in the Notice
of Issuance by giving written notice to the Company stating the quantity of New
Securities to be so purchased.
23
<PAGE>
The Company shall have the right during the period expiring 150 days after
the giving of the Notice of Issuance to sell any or all of such New Securities
not purchased by the Investor at a price and upon general terms no more
favorable to the purchasers than specified in the Notice of Issuance. In the
event that the Company has not sold such New Securities within such 150 day
period, the Company shall not thereafter issue or sell any New Securities
without first offering such New Securities to the Investor in the manner
provided in this Section 11.9.
12. DEFAULT
12.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default":
12.1.1 a material breach of any representation, warranty or
covenant of the Company or Clark contained herein or in the exhibits hereto;
12.1.2 any default in the performance by the Company or Clark
of any other material term of this Agreement or a declared event of default
under any loan agreement or financing agreement to which the Company is a party
(following any applicable cure period contained in such loan agreement or
financing agreement);
12.1.3 the adjudication of the insolvency of the Company or
the filing by or against the Company of any proceedings in bankruptcy,
reorganization or receivership (unless such proceedings are stayed or
dismissed), any assignment by the Company for the benefit of creditors or the
exercise of control rights by any secured lender of the Company; or
12.1.4 the failure of the Company to redeem or repurchase the
Investor's Senior Preferred Stock or converted shares in accordance with the
terms of this Agreement and the Amended Articles.
12.2 REMEDY. Upon the occurrence of any Event of Default, the
Investor may, at its option, elect either of the following rights and remedies:
12.2.1 require the Company to redeem all but not less than all
of the Senior Preferred Stock (including repurchase of conversion stock) at a
price equal to the greater of (i) the aggregate purchase price paid by the
Investor at the First Closing and any Subsequent Closing, plus any accrued and
unpaid dividends or (ii) the Fair Market Value (as defined below) thereof,
including any accrued and unpaid dividends; or
12.2.2 as authorized by the Amended Articles, the holders of the
shares of Preferred Stock shall have the right to elect a majority of the Board
of Directors of the Company and to vote two thirds (2/3) of the combined voting
power within the Company until the Event of Default is cured, and such majority
of the Board of Directors may vote to require the Company to redeem the
Securities in accordance with Section 12.2.1 above.
24
<PAGE>
The "Fair Market Value" per share shall take into account the
liquidation preference of the Senior Preferred Stock provided in the Amended
Articles but not any discount for lack of marketability or for the minority
interest and shall be determined by a qualified, independent appraiser
experienced in valuation of shares of companies similar to the Company (the
"Qualified Appraiser") acceptable to both the Company (with the decision of the
Company being exercised by a majority of the directors who were not designated
by the Investor) and the Investor. If the Investor and the Company are unable
to agree upon a Qualified Appraiser, each of them shall separately designate a
person and those two persons shall jointly designate a Qualified Appraiser. The
Qualified Appraiser's determination of the Fair Market Value of the Securities
shall be conclusive and binding upon the parties. The fees and expenses of the
Qualified Appraiser shall be borne one-half by the Investor and one-half by the
Company.
12.3 DIVERSION OF PROCEEDS. In addition, any diversion by the Company
of the proceeds hereunder from the Use of Proceeds as set forth in Section 10.5
hereof shall constitute a default requiring the immediate redemption of the
Investor's interest in the Company and full refund of the purchase price, plus
interest at 14% per annum.
12.4 LOSS OF CLARK. In addition, so long as the Preferred Holders
hold a Minimum Interest, in the event of the death, permanent disability or
termination of full time employment of Clark, except for a termination by the
Company other than for "cause" or a termination by Clark for "good reason" (as
those terms are defined in the Employment Agreement between Clark and the
Company), upon six months written notice to the Company, the Investor may
require the Company to redeem all but not less than all of the Senior Preferred
Stock (including the conversion stock) for the higher of (i) original aggregate
purchase price of the Senior Preferred Stock plus any accrued and unpaid
dividends or (ii) Fair Market Value of the Securities, as determined in
accordance with Section 12.2. Permanent disability shall occur whenever Clark,
due to ill health, physical or mental disability for a period of 180 consecutive
working days, is unable or otherwise fails to perform the essential functions of
her job. If the Investor and the Company are unable to agree as to whether
Clark is permanently disabled, the question of permanent disability shall be
submitted to three physicians, one of whom shall be appointed by the Investor,
one of whom shall be appointed by Clark's representative and one of whom shall
be appointed by the first two appointed physicians. The decision of any two of
the three physicians shall be final and binding. If the question of permanent
disability is raised, Clark shall submit to a medical examination by such
physicians and the Investor shall have access to the findings of the physicians.
13. PUBLIC STATEMENTS. Neither the Company, Clark nor the Investor shall,
without the prior written approval of the other parties hereto, make any press
release or other public announcement concerning the transactions contemplated by
this Agreement, provided, however, that the Investor may issue a "tombstone"
advertisement stating the amount of its investment in the Company. The
Investor, the Company and Clark may disclose additional information with respect
to the transactions contemplated hereby to their respective employees, agents,
consultants and third parties only to the extent such persons have a need to
know such information.
25
<PAGE>
14. NOTICES. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be mailed by first class,
registered, or certified mail, postage prepaid, or sent via overnight courier
service, or delivered personally:
If to the Investor, to: River Cities Capital Group II Limited
Partnership
ATTN: Murray R. Wilson
221 East Fourth Street, Suite 2250
Cincinnati, Ohio 45202-4147
With a copy to: Graydon, Head & Ritchey
ATTN: Michael A. Hirschfeld, Esq.
1900 Fifth Third Center
511 Walnut Street
Cincinnati, Ohio 45202-3157
If to the Company or
Clark, to: DPEC, Inc.
ATTN: Carol A. Clark
Building 3
851 West Third Avenue
Columbus, Ohio 43212
With a copy to: Vorys, Sater, Seymour and Pease LLP
ATTN: Michael A. Cline, Esq.
52 East Gay Street
Columbus, Ohio 43215
or to such other address of which the addressee shall have notified the sender
in writing. Notices mailed in accordance with this section shall be deemed
given when mailed, and notices sent by overnight courier service shall be deemed
given when placed in the hands of a representative of such service.
15. PARTIES IN INTEREST; ASSIGNMENT. Except as otherwise provided herein,
all covenants and agreements contained in this Agreement by or on behalf of any
of the parties to this Agreement shall bind and inure to the benefit of their
respective heirs, executors, successors, and permitted assigns, whether so
expressed or not. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto and their respective
successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement. This Agreement and the rights
and obligations under this Agreement are not assignable and any purported
assignment shall be null and void, provided that, subject to the provisions of
Sections 11.6 and 11.7, prior to the termination of the Investor's fund and the
resulting distribution in kind by the Investor to its partners or shareholders,
the Investor may assign its rights and obligations under this Agreement to River
Cities Capital Fund II Limited Partnership and/or a maximum of two unrelated
assignees, and, upon the termination of the Investor's fund and the resulting
distribution in kind by the Investor to its partners or
26
<PAGE>
shareholders, the Investor may assign its rights and obligations under this
Agreement to any and all of its partners or shareholders (all of such permitted
assignees being collectively referred to as 'the "Preferred Holders").
Notwithstanding such permitted assignment, the Investor shall not be released
from its obligations hereunder.
16. CONSTRUCTION; GOVERNING LAW. The section headings contained in this
Agreement are inserted as a matter of convenience and shall not affect in any
way the construction of the terms of this Agreement. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of Ohio as
applied to agreements entered into and performed entirely within Ohio. The
parties agree that any actions brought in connection with this Agreement or the
transactions contemplated hereby shall be filed and heard in Hamilton County,
Ohio, and each party submits to the jurisdiction of the Court of Common Pleas of
Hamilton County, Ohio, and to the United States District Court for the Southern
District of Ohio.
17. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement, including the
Schedules and Exhibits hereto, constitutes and contains the entire agreement
between the parties hereto with respect to the transactions contemplated hereby
and supersedes any prior writing by the parties. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, Clark and the
Investor (or the holders of a majority of the shares of Senior Preferred Stock
then outstanding, as provided in Section 24 hereof, as the case may be). Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon the Investor, each other holder of any Securities purchased under this
Agreement at the time outstanding (including Securities into which such
Securities have been converted), each future holder of any such Securities,
Clark and the Company.
18. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
20. EXPENSES. The Company agrees, upon consummation of the transactions
contemplated by this Agreement, to pay, against receipt of the documentation
therefor in reasonable detail, all reasonable legal and out-of-pocket expenses
incurred by the Investor in connection with this Agreement and the transactions
contemplated hereunder, including, without limitation, all fees and expenses of
legal counsel, accountants and other advisers engaged by the Investor in
connection with this Agreement and the transactions contemplated hereunder. The
aggregate obligation of the Company under this Section 20 shall not exceed
$40,000.
21. TIME OF ESSENCE. Time is of the essence to the performance of the
obligations set forth in this Agreement.
27
<PAGE>
22. CONFIDENTIALITY AGREEMENT. At the request of the Company, the
Investor and any subsequent holder of the Senior Preferred Stock or the
conversion stock shall execute and deliver to the Company a confidentiality
letter in a form reasonably acceptable to the Investor.
23. ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the Registration Rights
Agreement, any Ancillary Agreement or the Amended Articles, the prevailing party
shall be entitled to reasonable attorneys' fees, costs, and disbursements in
addition to any other relief to which such party may be entitled.
24. RIGHTS OF THE INVESTOR. The Investor, until the Investor has
transferred any Securities, and the holders of a majority of the shares of
Senior Preferred Stock then outstanding, after the Investor has transferred any
Securities, shall have the absolute right to exercise or refrain from exercising
any rights that the Investor may have by reason of this Agreement or any Senior
Preferred Stock including without limitation the right to consent to the waiver
of any obligation of Company under this Agreement and to enter into an agreement
with Company for the purpose of modifying this Agreement or any agreement
effecting any such modification, and shall not incur any liability to any other
holder or holders of Securities with respect to exercising or refraining from
exercising any such rights and all other holders of Securities shall be bound by
such exercising or refraining from exercising any such rights.
25. TERMINATION UPON A QUALIFIED IPO. Notwithstanding anything to the
contrary contained in this Agreement, this Agreement shall terminate upon the
closing of a Qualified IPO.
28
<PAGE>
IN WITNESS WHEREOF, the Company, Clark and the Investor have caused this
Agreement to be executed as of the day and year first above written.
INVESTOR
RIVER CITIES CAPITAL GROUP II
LIMITED PARTNERSHIP
By: /s/ Edwin T. Robinson
Edwin T. Robinson, President of Mayson II, Inc.,
The General Partner of River Cities Management
II Limited Partnership, the General Partner of River
Cities Capital Group II Limited Partnership
Address: Suite 2250
221 East Fourth Street
Cincinnati, Ohio 45202-4147
COMPANY
DPEC, INC.
By: /s/ Carol A. Clark, President
------------------------------------------
Carol A. Clark, President
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
CLARK
/s/ Carol A. Clark
----------------------------------------------
Carol A. Clark
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
29
<PAGE>
EXHIBIT 10.6
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
BY AND AMONG
RIVER CITIES CAPITAL FUND II LIMITED PARTNERSHIP,
JG FUNDING, LLC,
SAUNDERS CAPITAL GROUP, LLC,
IRVING W. BAILEY II,
DPEC, INC.
AND
CAROL A. CLARK
AUGUST 27, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Sale and Issuance of Series B Convertible Preferred Stock..............1
2. Closing................................................................2
3. Closing Items..........................................................2
4. Benefit Plans..........................................................3
5. Further Assurances.....................................................4
6. Representations and Warranties of the Company and Clark................4
6.1 Corporate Standing............................................4
6.2 Authorization.................................................5
6.3 Capitalization................................................5
6.4 Validly Issued Shares.........................................6
6.5 No Conflict...................................................6
6.6 Contracts and Other Commitments; Compliance...................6
6.7 Subsidiaries..................................................7
6.8 Consents......................................................7
6.9 Financial Statements..........................................7
6.10 Indebtedness for Borrowed Money; No Undisclosed Liabilities...7
6.11 Title to Property and Assets; Leases..........................8
6.12 Legal Proceedings.............................................8
6.13 Environmental Matters.........................................8
6.14 Licenses and Permits; Compliance with Laws....................8
6.15 Employee Benefit Plans........................................9
6.16 Labor Relations...............................................9
6.17 Insurance....................................................10
6.18 Tax Matters..................................................10
6.19 Changes in Circumstances.....................................10
6.20 Patents and Trade Names, Etc.................................12
6.21 Affiliated Transactions......................................13
6.22 Bank Accounts................................................13
6.23 Brokers'and Finders'Fees.....................................13
6.24 Registration Rights..........................................13
6.25 Small Business Concern.......................................14
6.26 Material Facts...............................................14
6.27 Clark Debt Repayment Obligations.............................14
6.28 Year 2000 Compliance.........................................14
i
<PAGE>
7. Representations and Warranties of the Investors.......................15
7.1 Authorization; Binding Agreement.............................15
7.2 Investment Representations...................................15
7.3 Accredited Investor; Residence...............................15
7.4 Receipt of Information; Restricted Securities................15
7.5 Investment Experience........................................16
8. Survival of Representations and Warranties............................16
9. Indemnification.......................................................16
9.1 Indemnification by the Company...............................16
9.2 Indemnification by Clark.....................................17
9.3 Indemnification by an Investor...............................17
10. Covenants of the Company (and Clark solely with respect to
Section 10.6).........................................................17
10.1 Insurance....................................................17
10.2 Financial Reporting..........................................17
10.3 Board of Directors...........................................18
10.4 Reservation of Shares........................................18
10.5 Use of Proceeds..............................................19
10.6 Clark Debt Repayment Obligations.............................19
10.7 Compliance with Small Business Investment Act................19
10.8 Negative Covenants...........................................19
10.9 Definition of a Qualified Sale...............................20
11. Restrictions of Transfers.............................................20
11.1 Notice of Sale by Clark......................................20
11.2 Definition of Qualified IPO..................................20
11.3 Co-Sale Right................................................21
11.4 Rights of Refusal............................................21
11.5 Exceptions...................................................22
11.6 Right of First Refusal.......................................22
11.7 Right of First Offer.........................................22
11.8 Restrictive Legend...........................................23
11.9 Preemptive Rights............................................23
12. Default...............................................................24
12.1 Events of Default............................................24
12.3 Diversion of Proceeds........................................24
12.4 Loss of Clark................................................24
13. Public Statements.....................................................25
14. Notices...............................................................25
ii
<PAGE>
15. Parties in Interest; Assignment.......................................26
16. Construction; Governing Law...........................................26
17. Entire Agreement; Amendment and Waiver................................27
18. Severability..........................................................27
19. Counterparts..........................................................27
20. Expenses..............................................................27
21. Time of Essence.......................................................27
22. Confidentiality Agreement.............................................27
23. Attorneys'Fees........................................................27
24. Rights of the Investors...............................................28
25. Termination Upon a Qualified IPO......................................28
26. Termination of Certain Provisions.....................................28
27. Pronouns..............................................................28
</TABLE>
iii
<PAGE>
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
("Agreement") is made and entered into as of the 27th day of August, 1999, by
and among RIVER CITIES CAPITAL FUND II LIMITED PARTNERSHIP, a Delaware limited
partnership ("River Cities"); JG FUNDING, LLC, a Kentucky limited liability
company ("JG"); SAUNDERS CAPITAL GROUP, LLC, a Kentucky limited liability
company ("Saunders"); IRVING W. BAILEY II, an individual ("Bailey") (River
Cities, JG, Saunders and Bailey are hereinafter sometimes referred to
individually as an "Investor" and collectively as the "Investors"); DPEC, INC.,
an Ohio corporation (the "Company"); and CAROL A. CLARK ("Clark").
WITNESSETH:
On September 15, 1998, the Company, Clark and River Cities Capital
Group II Limited Partnership ("Group"), an affiliate of River Cities, entered
into a certain Senior Convertible Preferred Stock Purchase Agreement (the
"Senior Preferred Stock Purchase Agreement") pursuant to which, for an aggregate
purchase price of $2,000,000, the Company sold to Group and Group purchased from
the Company, 5,123 shares of the Senior Preferred Stock (as defined in the
Senior Preferred Stock Purchase Agreement).
On February 22, 1999, Group assigned the Senior Preferred Stock to
River Cities.
The Company desires to sell and issue, and the Investors desire to
purchase and acquire, $3,000,121 of shares of the Company's authorized but
unissued Series B Convertible Preferred Stock upon the terms and subject to the
conditions contained herein. The shares of Senior Preferred Stock and the Series
B Convertible Preferred Stock are sometimes referred to herein collectively as
the "Preferred Stock."
NOW, THEREFORE, in consideration of the mutual covenants,
representations and warranties herein contained, and intending to be legally
bound, the Company, Clark and the Investors agree as follows:
1. SALE AND ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK.
1.1 The Company shall adopt and file with the Secretary
of State of Ohio on or before the Closing (as defined below) the Certificate of
Amendment of Articles of Incorporation in the form attached hereto as EXHIBIT A
(the "Amended Articles"). The Series B Convertible Preferred Stock, no par value
per share (the "Series B Preferred Stock"), will have the rights, preferences
and privileges and restrictions set forth in the Amended Articles.
1.2 Subject to the terms and conditions of this
Agreement, at the Closing the Investors agree to purchase from the Company, and
the Company agrees to sell, issue and deliver
<PAGE>
to the Investors, an aggregate of 2,979 shares of the Series B Preferred Stock
at the price of $1,007.09 per share resulting in a total purchase price at the
Closing of $3,000,121, allocated among the Investors as follows:
<TABLE>
<CAPTION>
Investor Number of Shares Total Purchase Price
-------- ---------------- --------------------
<S> <C> <C>
River Cities 1,490 $1,500,564
JG 993 $1,000,040
Saunders 198 $ 199,404
Bailey 298 $ 300,113
----- ----------
Total 2,979 $3,000,121
</TABLE>
1.3 Effective upon the Closing, the Company shall grant
to the Investors registration rights under the Securities Act of 1933, as
amended (the "Securities Act"), on the terms and subject to the conditions of
the Registration Rights Agreement in the form attached hereto as EXHIBIT B
("Registration Rights Agreement").
2. CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will occur simultaneously with the execution of this
Agreement and shall take place on or before August 27, 1999, either by facsimile
or at the offices of Graydon, Head & Ritchey, counsel to the Investors, 1900
Fifth Third Center, 511 Walnut Street, Cincinnati, Ohio 45202, or at such other
time, date, or place as shall be mutually agreed upon by the parties hereto in
writing (the "Closing Date").
3. CLOSING ITEMS.
3.1 At the Closing, the Company shall deliver, or cause
to be delivered, the following items:
3.1.1 the Amended Articles as file stamped by the
Ohio Secretary of State;
3.1.2 the Amended and Restated Code of Regulations
(as amended by agreed amendments) in the form attached hereto as EXHIBIT C
("Restated Regulations"), certified as to their current form by the Secretary of
the Company;
3.1.3 the Amended and Restated Registration Rights
Agreement duly executed by the Company;
3.1.4 the Fourth Amended and Restated Shareholders
Agreement among the Company, Clark, Fran Papalios ("Papalios") and Frances
Papalios, as trustee and grantor of the Frances Papalios Trust, in the form
attached hereto as EXHIBIT D duly executed by each of such parties (the
"Shareholders Agreement");
2
<PAGE>
3.1.5 the opinion of Vorys, Sater, Seymour and Pease
LLP, counsel to the Company, in the form attached hereto as EXHIBIT E
3.1.6 resolutions of the Board of Directors and
shareholders of the Company authorizing the execution, delivery and consummation
of this Agreement, the filing of the Amended Articles, the issuance of the
shares of Series B Preferred Stock, the adoption of the agreed amendments to the
Restated Regulations, and the other matters contemplated hereby, certified as to
their due adoption and continued validity by the Secretary of the Company; and
3.1.7 the completed United States Small Business
Administration ("SBA") Parts A and B of Form 1031.
3.1.8 a certificate in each Investor's name
representing the portion of the 2,979 shares of Series B Preferred Stock that
such Investor is purchasing; and
3.1.9 a certificate, in form reasonably acceptable to
the Investors and dated as of the Closing Date, from the Company, duly executed
by the President of the Company and by Clark, individually, as follows: (i)
except for changes expressly contemplated by the terms of this Agreement or
approved by the Investors, the representations and warranties of the Company and
Clark contained in this Agreement are true and complete in all material respects
on and as of the Closing Date as if made on and as of that date; and (ii) the
Company and Clark have complied with or performed in all material respects all
terms, covenants and conditions to be complied with or performed by them on or
prior to the Closing Date.
3.2 At the Closing, the Investors shall deliver, or cause
to be delivered:
3.2.1 immediately available funds equal to the
aggregate purchase price of $3,000,121; and
3.2.2 the Amended and Restated Registration Rights
Agreement, duly executed by the Investors; and
3.2.3 a certificate, in form reasonably acceptable to
the Company and dated as of the Closing Date, from each Investor, duly executed
by its General Partner or Manager as appropriate, as follows: (i) except for
changes expressly contemplated by the terms of this Agreement or approved by the
Company, the representations and warranties of the Investor contained in this
Agreement are true and complete in all material respects on and as of the
Closing Date as if made on and as of that date; and (ii) the Investor has
complied with or performed in all material respects all terms, covenants and
conditions to be complied with or performed by it on or prior to the Closing
Date.
4. BENEFIT PLANS. Subsequent to the Closing, senior management,
employees and non-employee directors and consultants (a) may be granted
options pursuant to the 1998 Stock Option Plan or any successor thereto (the
"Plan"), with such Options to be exercisable for shares of Common Stock, no
par value per share ("Common Stock"), and (b) may be issued shares of
3
<PAGE>
Common Stock pursuant to such other employee benefit plans as the Company
may hereafter adopt. All such grants of options and issuances of shares of
Common Stock shall be on such terms and conditions as the Compensation
Committee of the Board of Directors may determine; provided, however: (a) the
options granted (excluding options granted pursuant to an employee stock
purchase plan as described in Section 423 of the Internal Revenue Code of
1986, as amended ("Excluded Options") shall not exceed in the aggregate ten
percent (10%) of the fully diluted shares of capital stock of the Company
(including the Preferred Stock on an as converted basis and the shares of
Common Stock issued upon the exercise of outstanding options) without the
prior written consent of the designated representative on the Compensation
Committee of the holders of the Preferred Stock; (b) included in such number
of options shall be the 345 outstanding "conditional" options previously
issued to key employees by the Company or options granted under the Plan in
exchange for such conditional options, it being understood that the Company
may exchange some or all of the 345 conditional options for options under the
Plan; and (c) without the prior written consent of the designated
representative on the Compensation Committee of the holders of the Preferred
Stock: (i) the price per share, including the exercise price per share of
Common Stock covered by any options granted by the Company (excluding
Excluded Options), shall not be less than the fair market value per share of
the Common Stock at the time of grant, and (ii) the exercise price per share
of Common Stock covered by any Excluded Options granted by the Company shall
not be less than eighty-five percent of the fair market value per share of
the Common Stock at the time of grant. For purposes of the shares of Common
Stock authorized for issuance pursuant to the Plan, the fair market value of
the Common Stock at the time of the option grant shall be determined at least
annually by the Board of Directors.
5. FURTHER ASSURANCES. Each party shall execute such additional
documents and take such other actions as the other party or parties may
reasonably request to consummate the transactions contemplated hereby and
otherwise as may be necessary to effectively carry out the terms and provisions
of this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CLARK. The
Company hereby represents and warrants to the Investors, as of the date hereof
and as of the Closing Date (and Clark hereby represents and warrants to the
Investors as of the Closing Date solely with respect to the last sentence of
Section 6.20.1 and all of Section 6.27), as follows:
6.1 Corporate Standing. The Company is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Ohio. The Company has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted
and as presently proposed to be conducted and to execute, deliver and perform
this Agreement, the Amended and Restated Registration Rights Agreement and any
other agreement to which the Company is a party, the execution and delivery of
which is contemplated hereby (the "Ancillary Agreements"). The Company is duly
licensed, authorized and qualified to do business and is in good standing in all
jurisdictions (domestic or foreign) in which the conduct of its business or the
ownership or leasing of its properties requires it to be so licensed, authorized
or qualified, except where its failure to be so licensed, authorized or
qualified would not constitute a Material Adverse Effect. For purposes of this
Agreement,
4
<PAGE>
"Material Adverse Effect" means any event or circumstance or any action taken or
omitted to be taken by or on behalf of the Company which has constituted, or
with reasonable certainty will constitute, a material adverse effect, singly or
in the aggregate, on the condition (financial or otherwise), properties,
business, operations or prospects of the Company, taken as a whole. True and
accurate copies of the articles of incorporation (and all amendments thereto),
code of regulations (and all amendments thereto) and minute book (containing the
records of meetings and written consents of the shareholders, the board of
directors and any committees of the board of directors) of the Company have
previously been delivered to legal counsel to the Investor.
6.2 AUTHORIZATION. The execution and delivery of this
Agreement, the Amended and Restated Registration Rights Agreement and any
Ancillary Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
part of the Company. Each of this Agreement, the Amended and Restated
Registration Rights Agreement and any Ancillary Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and (ii) the availability of equitable remedies may be limited by
equitable principles of general applicability.
6.3 CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 70,000 shares of Common Stock of which as of the date
hereof 33,737 shares are validly issued and outstanding, fully paid and
non-assessable, 5,123 shares of which have been duly and validly reserved for
issuance upon conversion of the Senior Preferred Stock, and 2,979 shares of
which have been duly and validly reserved for issuance upon conversion of the
Series B Preferred Stock, (ii) 5,123 shares of Senior Preferred Stock of which
as of the date hereof 5,123 shares are validly issued and outstanding, fully
paid and non-assessable, and (iii) 2,979 shares of Series B Preferred Stock,
none of which are outstanding as of the date hereof. Except as set forth on
SCHEDULE 6.3 or as contemplated by this Agreement, the Senior Preferred Stock
Purchase Agreement, the Amended Articles, the Amended and Restated Registration
Rights Agreement and Ancillary Agreements, there are outstanding no
subscriptions, options, warrants, calls, commitments or rights (including
conversion or preemptive rights and rights of first refusal), proxy or
shareholder agreements or agreements of any character relating to shares of the
Company's capital stock or any instruments that can be converted into shares of
the Company's capital stock. None of the shares of the Company's capital stock
have been issued in violation of any preemptive right. All issuances, transfers
or purchases of the capital stock of the Company have been in compliance with
all applicable agreements and all applicable laws, including federal and state
securities laws, and all taxes thereon, if any, have been paid. Except as set
forth on SCHEDULE 6.3, no former or present holder of any of the shares of
capital stock of the Company has any legally cognizable claim against the
Company based on any issuance, sale, purchase, redemption or involvement in any
transfer of any shares of capital stock by the Company. Except as contemplated
by this Agreement, the Senior Preferred Stock Purchase Agreement or as set forth
on SCHEDULE 6.3, there are no contractual obligations of the Company to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company. No bonds, debentures, notes or other indebtedness having the right to
vote (or convertible into or
5
<PAGE>
exercisable for securities having the right to vote) on any matters on which
shareholders of the Company may vote are issued or outstanding. Except for this
Agreement, the Senior Preferred Stock Purchase Agreement and the Shareholders
Agreement, the Company is not a party or subject to any agreement or
understanding, and, to the Company's best knowledge, there is no agreement or
understanding between any persons that affects or relates to the voting or
giving of written consents with respect to any security or the voting by any
director of the Company.
6.4 VALIDLY ISSUED SHARES. The shares of Series B
Preferred Stock to be issued, sold and delivered in accordance with the terms of
this Agreement for the consideration set out herein, will, upon issuance in
accordance with the terms hereof, be duly and validly issued, fully paid and
non-assessable, free of restrictions on transfer other than restrictions on
transfer under this Agreement and under applicable federal and state securities
laws. The issuance of the Series B Preferred Stock to the Investors pursuant to
this Agreement will comply with all applicable laws, including federal and state
securities laws (assuming the accuracy of the representations set forth in
Sections 7.2 through 7.5 hereof), and will not violate the preemptive rights of
any person. The Common Stock issuable upon conversion of the Series B Preferred
Stock being purchased under this Agreement will be, upon issuance and delivery
in accordance with the terms of the Amended Articles, duly and validly issued,
fully paid and non-assessable and free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable federal and
state securities laws. The issuance of the Common Stock upon conversion of the
Series B Preferred Stock will comply with all applicable laws, including federal
and state securities laws (assuming the accuracy of the representations set
forth in Sections 7.2 through 7.5 hereof as of the date of issuance of such
Common Stock and of such Series B Preferred Stock), and will not violate the
preemptive rights of any person.
6.5 NO CONFLICT. Except as set forth on SCHEDULE 6.5, the
execution and delivery of this Agreement, the Amended and Restated Registration
Rights Agreement and any Ancillary Agreement do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or the
creation of a lien, pledge, security interest, charge or other encumbrance on
assets (any such conflict, violation, default, right of termination,
cancellation or acceleration, loss or creation, a "Violation") pursuant to, any
provision of the Amended Articles or Restated Regulations, or result in any
Violation of any lease, agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or the Company's properties or assets.
6.6 CONTRACTS AND OTHER COMMITMENTS; COMPLIANCE. Except
as set forth on SCHEDULE 6.6 or those which do not constitute a Material Adverse
Effect, the Company is not bound by any judgment, order, writ or decree, written
or oral, absolute or contingent. The Company has made available to the Investors
for their review prior to the date hereof a copy of all written contracts,
agreements, leases, loans, and commitments with a third party to which the
Company is a party (each a "Contract") and the Company has described to the
Investors the terms of any oral Contracts that are material to the condition
(financial or otherwise), properties,
6
<PAGE>
business, operations or prospects of the Company taken as a whole. Except those
which do not constitute a Material Adverse Effect, the Company is not in
violation or default of any provision of its Amended Articles or Restated
Regulations, any provision of a written or oral Contract, or any provisions of
any other items listed on SCHEDULE 6.6.
6.7 SUBSIDIARIES. As of the date of this Agreement, the
Company does not own or control, directly or indirectly, any interest in any
other corporation, partnership, limited liability company, association or other
business entity and is not a participant in any joint venture, partnership or
similar arrangement.
6.8 CONSENTS. Except as set forth on SCHEDULE 6.8, no
consent, approval, qualification, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, or other
third party is required by or with respect to the Company in connection with the
execution and delivery of this Agreement, or the consummation by the Company of
the transactions contemplated hereby, which has not already been obtained,
except for notices of sale required to be filed with the Securities and Exchange
Commission under Regulation D of the Securities Act or such post closing filings
as may be required under applicable state securities laws which will be timely
filed within the applicable periods therefor.
6.9 FINANCIAL STATEMENTS. The Company has delivered to
the Investors prior to the date hereof the Company's balance sheet as of July
31, 1998, and the related statements of income and cash flows for the twelve
months ended July 31, 1998, the Company's unaudited balance sheet as of June 30,
1999 and the related unaudited statements of income and cash flows for the year
to date ended June 30, 1999, and SCHEDULE 6.9 related thereto (the "Financial
Statements"). The Financial Statements present fairly in all material respects
the financial condition and results of operations of the Company as of such
dates and the periods indicated and have been prepared in all material respects
in accordance with GAAP consistently applied during such periods except for the
omission of footnote disclosures and the omission of year-end adjustments.
6.10 INDEBTEDNESS FOR BORROWED MONEY; NO UNDISCLOSED
LIABILITIES. Except as and to the extent reflected in the Financial Statements
or on SCHEDULE 6.10, the Company has no direct or indirect indebtedness for
borrowed money, indebtedness by way of lease-purchase arrangements, guarantees,
undertakings, chattel mortgages or other security arrangements with any bank,
financial institution or other third party or any other material liability
required by GAAP to be disclosed in the Financial Statements.
6.11 TITLE TO PROPERTY AND ASSETS; LEASES.
6.11.1 SCHEDULE 6.11.1 sets forth a complete and
accurate list and description of all the real property that the Company owns or
leases and all personal property that the Company owns or leases that the
Company carries on its books at a value of greater than $100,000. Except as set
forth in SCHEDULE 6.11.1, the Company is not bound or committed to
7
<PAGE>
make any capital improvement or expenditure in excess of $100,000 with respect
to any single piece of owned or leased real or personal property.
6.11.2 Except as set forth in SCHEDULE 6.11.2, the
Company has good, valid and marketable title to all the personal and mixed,
tangible and intangible properties and assets which it purports to own, free and
clear of all liens, restrictions, claims, charges, security interests, easements
or other encumbrances of any nature whatsoever, except for liens for current
taxes not yet due and payable and except for liens, claims or other encumbrances
that do not constitute a Material Adverse Effect. With respect to the property
and assets that it leases, the Company is in compliance with such leases and
holds a valid leasehold interest free and clear of any liens, claims and
encumbrances except for liens, claims or other encumbrances that do not
constitute a Material Adverse Effect. Except in accordance with a valid license
or other agreement with the Company, all properties and assets of the Company
are in the possession or control of the Company, and no other person is entitled
to possession of any such properties and assets.
6.12 LEGAL PROCEEDINGS. Except as set forth on SCHEDULE
6.12, there are no claims of any kind or any actions, suits, proceedings,
arbitrations or investigations ("Legal Actions") pending or, to the Company's
knowledge, threatened against or affecting the Company or against any asset,
interest or right of any of them or which questions the validity of the
transactions contemplated by this Agreement and the Company does not know of any
facts which may constitute a basis for Legal Actions which would constitute a
Material Adverse Effect.
6.13 ENVIRONMENTAL MATTERS. The Company is not in
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety (the "Environmental Laws") except
to the extent that such violation does not constitute a Material Adverse Effect,
and as of the date hereof no material expenditures are required to be made by
the Company in order to comply with any of the Environmental Laws.
6.14 LICENSES AND PERMITS; COMPLIANCE WITH LAWS. Except as
set forth on SCHEDULE 6.14, the Company holds all franchises, permits, licenses,
variances, exemptions, orders and approvals of all governmental entities which
are required for the operation of the Company's business and is in compliance
with the terms thereof, except where the failure to so hold or to be in such
compliance would not constitute a Material Adverse Effect. The Company has
complied with and is not in any default under (and has not been charged with or
received notice with respect to, nor is threatened with or under investigation
with respect to, any charge concerning any violation of any provision of) any
federal, state or local law, regulation, ordinance, rule or order (whether
executive, judicial, legislative or administrative) or any order, writ,
injunction or decree of any court, agency or instrumentality, except where the
failure to be in compliance or where being in default would not constitute a
Material Adverse Effect, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against any of them alleging any failures to comply.
6.15 EMPLOYEE BENEFIT PLANS. Except as set forth on
SCHEDULE 6.15, the Company has no employee benefit plans including any profit
sharing, deferred compensation,
8
<PAGE>
incentive compensation, stock ownership, stock purchase, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement or understanding (whether or not legally
binding) providing benefits to any current or former employee, officer or
director of the Company (collectively, the "Benefit Plans"), or any employment,
consulting, severance, termination or indemnification agreement, arrangement or
understanding between the Company and any officer, director or employee of the
Company. The Company has delivered to the Investors true, complete and correct
copies of each Benefit Plan, or, in the case of any unwritten Benefit Plans,
descriptions thereof. Each Benefit Plan has been administered in compliance with
its terms and all applicable laws except where the failure to be in compliance
would not constitute a Material Adverse Effect.
6.16 LABOR RELATIONS.
6.16.1 The Company is in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours and occupational safety and health
except where the failure to be in compliance would not constitute a Material
Adverse Effect.
6.16.2 There is no unfair labor practice charge or
complaint or any other matter against or involving the Company pending or, to
the Company's knowledge, threatened against the Company before the National
Labor Relations Board or any court of law.
6.16.3 There is no labor strike, dispute, slowdown or
stoppage actually pending or, to the Company's knowledge, threatened against the
Company.
6.16.4 The Company is not a party to or bound by any
collective bargaining agreement or any similar labor union arrangement.
6.16.5 There are no charges, investigations,
administrative proceedings or formal complaints of discrimination (including
discrimination based upon sex, age, marital status, race, color, religion,
national origin, sexual preference, disability, handicap or veteran status)
pending or, to the Company's best knowledge, threatened against the Company
before the Equal Employment Opportunity Commission or any federal, state or
local agency or court. There have been no governmental audits of the equal
employment opportunity practices of the Company and, to the Company's best
knowledge, no basis for any such claim of violation exists except where such
violation would not constitute a Material Adverse Effect.
6.16.6 The Company is in compliance with the
requirements of the Americans With Disabilities Act except where the failure to
be in compliance would not constitute a Material Adverse Effect.
6.17 INSURANCE. SCHEDULE 6.17 sets forth a list of all
insurance policies, including property, casualty, liability and other insurance
maintained with respect to the assets and business of the Company (the "Company
Insurance"). The Company is not liable for any material retroactive premium
adjustments with respect to any of its insurance policies or bonds.
9
<PAGE>
All such policies and bonds are legal, valid and enforceable and in full force
and effect and the Company is not in breach or default (including with respect
to the payment of premiums or the giving of notices) and no event has occurred
which, with notice or the lapse of time or both, would constitute such a breach
or default, or permit termination, modification or acceleration under the
policy. The Company has not received any notice of premium increases or
cancellations with respect to any such policies and bonds except in the ordinary
course of business. The Company believes the amount and type of the Company
Insurance coverage is adequate for the Company's business and is consistent with
good business practice.
6.18 TAX MATTERS. Except as set forth on SCHEDULE 6.18,
the Company has timely filed or caused to be filed all federal, state, foreign
and local income, franchise, gross receipts, payroll, sales, use, withholding,
occupancy, excise, real and personal property, employment and other tax returns,
tax information returns and reports (the "Tax Returns") required to be filed and
all such Tax Returns were correct and complete in all respects, except where the
failure to file or to be correct and complete would not constitute a Material
Adverse Effect. The Company has paid, or made adequate provisions for the
payment of, all taxes, duties or assessments of any nature whatsoever, interest
payments, penalties and additions (whether or not reflected in the returns as
filed) due and payable (and/or property accruable for all periods ending on or
before the date of this Agreement) to any city, county, state, foreign country,
the United States or any other taxing authority, except where the failure to pay
or make adequate provisions for payment would not constitute a Material Adverse
Effect. There are no security interests on any of the assets of the Company that
arise in connection with any failure (or alleged failure) to pay timely any tax.
The Company has withheld and paid all taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, shareholder or other third party, except where the failure
to withhold or pay would not constitute a Material Adverse Effect. Except as set
forth in SCHEDULE 6.18, no deficiencies for any taxes have been asserted or
assessed or, to the knowledge of the Company, proposed against the Company that
are not adequately reserved for.
6.19 CHANGES IN CIRCUMSTANCES. Except as set forth in
SCHEDULE 6.19 and except for any of the following actions which occur after the
Closing and are authorized by the Company's Board of Directors, since June 30,
1999 there has not been:
6.19.1 any change in the condition (financial or
otherwise), properties, business, operations or prospects of the Company, or any
event or circumstance, which constitutes a Material Adverse Effect;
6.19.2 any indebtedness, liability or obligation
(whether absolute, accrued, contingent or otherwise and whether due or to become
due) incurred by the Company or any transaction entered into by the Company,
other than in the ordinary course of business and consistent with past practice,
or any guarantee by the Company of any indebtedness, liability or obligation of
any other person;
10
<PAGE>
6.19.3 any declaration, setting aside or payment of
any dividend or other distribution in respect of any of the capital stock or
other securities of the Company other than the minimum amount of distributions
required by the Shareholders Agreement;
6.19.4 any obligation, liability, lien or encumbrance
paid, discharged or satisfied by or on behalf of the Company, other than in the
ordinary course of business and consistent with past practice;
6.19.5 any mortgage, lien, pledge, charge or
encumbrance affecting the properties of the Company (except liens for current
taxes not yet due and payable) created, suffered or assumed by or on behalf of
the Company in excess of $50,000;
6.19.6 any sale, transfer or other disposition of any
tangible asset of the Company or any cancellation of any debt or claim owed the
Company, except in the ordinary course of business and consistent with past
practice, or any sale, transfer or other disposition of any of the Company's
intangible properties, assets or rights, except in the ordinary course of
business and consistent with past practice;
6.19.7 any loan made or increased by the Company,
including any loan to any officer, director, employee or agent of the Company or
to any member of their families, except for advances to non-executive officers
in the ordinary course of business;
6.19.8 any action taken or omitted to be taken by or
on behalf of the Company that would cause (after lapse of time, notice or both)
the breach, default or acceleration of any right, contact or other obligation of
the Company except where the breach, default or acceleration would not
constitute a Material Adverse Effect;
6.19.9 any material change in the compensation
arrangement or agreement with any officer, director, employee or agent of the
Company except in the ordinary course of business and consistent with past
practice; or
6.19.10 any agreement or commitment by the Company to
do any of the foregoing.
6.20 PATENTS AND TRADE NAMES, ETC.
6.20.1 SCHEDULE 6.20.1 sets forth a complete list of
all trade names, trademark and service mark registrations, common law
trademarks, copyright registrations and copyright applications currently owned
by the Company and a complete list of all works of authorship licensed to the
Company and from which the Company has created a courseware product on the basis
of such license (which, together with any proprietary works of authorship,
including software, owned by the Company for which there is no current copyright
registration or application, are referred to herein as the "Intellectual
Property"). The Company does not own or license any patents. Except as set forth
on SCHEDULE 6.20.1, all of the Intellectual Property is owned by the Company.
SCHEDULE 6.20.1 also indicates whether any of the Intellectual Property
11
<PAGE>
was acquired by assignment to the Company or is used by the Company under
authority of a license. Except as set forth in SCHEDULE 6.20.1, to the knowledge
of the Company, no employees of the Company, past or present, claim or have
claimed any interest in the Intellectual Property and no basis for such claim
exists. Clark hereby acknowledges to and for the benefit of the Company and the
Investors that she claims no independent interest in the Intellectual Property
of the Company or any such intellectual property previously used in the business
of the Company other than by virtue of any ownership interest she may maintain
in the Company.
6.20.2 Except as provided on SCHEDULE 6.20.1, with
respect to the Intellectual Property listed thereon:
6.20.2.1 the Intellectual Property and all rights
appurtenant thereto are free and clear of any and all liens, claims, security
interests and other encumbrances of any nature or kind except for those which do
not constitute a Material Adverse Effect;
6.20.2.2 no prior transfer, sale or assignment has
been made by the Company of any part of any item constituting part of the
Intellectual Property or any rights appurtenant thereto;
6.20.2.3 each item constituting part of the
Intellectual Property which is owned by the Company has been duly registered
with, filed in or issued by, as the case may be, the United States Patent and
Trademark Office, and such registrations, filings and issuances remain in full
force and effect, or is otherwise protected as unregistered under common law
principles; and
6.20.2.4 the Intellectual Property constitutes all
intellectual property necessary for the Company to carry on its business as
presently conducted.
6.20.3 Except as set forth on SCHEDULE 6.20.3, there
are no pending or, to the knowledge of the Company, threatened proceedings or
litigation or other adverse claims affecting or with respect to the Intellectual
Property as currently used by the Company. Except as set forth on SCHEDULE
6.20.3, no person or entity is known to be infringing upon the Company's rights
with respect to the Intellectual Property. None of the operations, processes or
products of the Company are known to infringe upon or violate the rights of any
third party and the Company has not received any charge, complaint, claim or
notice alleging any such infringement or violation. The Company has not copied
in violation of the rights of others any proprietary feature of any competitive
product in designing the Company's products. The Company has not knowingly
misappropriated any trade secrets which are the property of a third party.
6.20.4 There are no claims pending or, to the
knowledge of the Company, threatened to the effect that any shareholder,
director, employee or agent of the Company has, in respect of his or her
activities to date, violated any terms or conditions of any written or oral
Contract, or disclosed or utilized any trade secrets or proprietary information
or documentation of such third party, or interfered in the employment
relationship between such third party and any
12
<PAGE>
of its employees and, to the knowledge of the Company, no basis for any such
action exists except where such actions would not constitute a Material Adverse
Effect.
6.21 AFFILIATED TRANSACTIONS. Except as set forth on
SCHEDULE 6.21, to the knowledge of the Company, no affiliate of the Company has
any interest (other than as a non-controlling holder of securities of a
publicly-traded company), either directly or indirectly, in any person (whether
as an employee, officer, director, shareholder, agent, independent contractor,
security holder, creditor, consultant or otherwise) that currently (i) provides
any services or designs, produces and/or sells any products or product lines, or
engages in any activity which is the same, similar to or competitive with any
activity or business in which the Company is now engaged; (ii) is a supplier of,
customer of, creditor of, or has an existing contractual relationship with, the
Company; or (iii) has any direct or indirect interest in any asset or property
used by the Company or any property, real or personal, tangible or intangible,
that is necessary or desirable for the conduct of the business of the Company.
All transactions set forth on SCHEDULE 6.21 were negotiated and entered into on
an arms'-length basis
6.22 BANK ACCOUNTS. SCHEDULE 6.22 sets forth a complete
and accurate list of each bank or financial institution in which the Company has
an account or safe deposit box (giving the address and account numbers) and the
names of the persons authorized to draw thereon or to have access thereto.
6.23 BROKERS' AND FINDERS' FEES. Except as set forth on
SCHEDULE 6.23, the Company has not employed any broker, finder or financial
advisor or incurred any liability for fees or commissions payable to any broker,
finder or financial advisor in connection with the negotiations relating to or
the transactions contemplated by this Agreement.
6.24 REGISTRATION RIGHTS. Except as provided in the
Amended and Restated Registration Rights Agreement attached hereto as EXHIBIT B,
the Registration Rights Agreement between the Company, Papalios, Francis
Papalios Trust (as successor to Fran Papalios) and Clark dated May 10, 1996, or
the Supplement to Registration Rights Agreement between the Company and Gary
Qualmann dated July 31, 1996, the Company is presently not under any obligation
and has not granted any rights to register under the Securities Act any of its
outstanding securities or any of its securities that may be subsequently issued.
6.25 SMALL BUSINESS CONCERN. The Company acknowledges that
River Cities is a Federal licensee under the Small Business Investment Act of
1958, as amended (the "SBIA"). The Company, together with its "affiliates" (as
that term is defined in Title 13, Code of Federal Regulations, Section 121.103),
is a "small business concern" within the meaning of the SBIA, and the
regulations thereunder, including Title 13, Code of Federal Regulations, Section
121.101 ET SEQ. The information regarding the Company and its affiliates set
forth in the SBA Form 1031 delivered at the Closing is accurate and complete.
The Company does not presently engage in, and it shall not hereafter engage in,
any activities prohibited by the SBIA and the regulations thereunder, nor shall
the Company use, directly or indirectly, the proceeds from the sale of the
Series B Preferred Stock hereunder for any purpose for which a Small Business
Investment Company is prohibited from providing funds by the SBIA and such
regulations thereunder.
13
<PAGE>
6.26 MATERIAL FACTS. To the knowledge of the Company, the
Company has provided the Investors with all the information reasonably available
to the Company that the Investors have requested for deciding whether to
purchase the Series B Preferred Stock. This Agreement and the documents or
written statements furnished by the Company to the Investors in connection with
the transactions contemplated hereby do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading, except, with respect to assumptions, projections
and expressions of opinions or predictions contained in the documents or written
materials furnished by the Company, the Company represents only that such
assumptions, projections and expressions of opinions and predictions were made
in good faith and the Company believes that there is a reasonable basis
therefor.
6.27 CLARK DEBT REPAYMENT OBLIGATIONS. All payments due to
date by Clark to Firstar, N.A., in connection with that certain term note issued
to Firstar in the original principal amount of $660,464.20 dated July 28, 1999
(the "Refinancing"), have been paid in full and when due and all payments due to
date by the Company to Clark pursuant to that certain promissory note in the
principal amount of $1,000,000 dated May 10, 1996, have been paid in full and
when due. In connection with the Refinancing, Clark repaid in full that certain
term note issued to Huntington National Bank in the original principal amount of
$800,000.
6.28 YEAR 2000 COMPLIANCE. All of the assets and products
of the Company that are material to its business and that contain (i) computer
hardware and/or software, and/or (ii) embedded chips/controllers with date-time
functionality, are or will be prior to January 1, 2000, "Year 2000 Compliant".
"Year 2000 Compliant" means such asset or product is able to provide all of the
following functions: (i) handle date information before, during and after
January 1, 2000, including but not limited to accepting date input, providing
date output, and performing calculations on dates or portions of dates; (ii)
function accurately and without interruption before, during and after January 1,
2000, without any change in operations associated with the advent of the new
century; (iii) respond to two-digit year-date input in a way that resolves the
ambiguity as to century in a disclosed, defined and predetermined manner; and
(iv) store and provide output of date information in ways that are unambiguous
as to century.
7. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each Investor
hereby represents and warrants to the Company, as of the date hereof and as of
the Closing Date, as follows:
7.1 Authorization; Binding Agreement. This Agreement and
the Amended and Restated Registration Rights Agreement have been duly
authorized, executed and delivered by the Investor and each constitutes the
legal, valid and binding obligation of the Investor enforceable against it in
accordance with its terms; except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally and (ii) the availability of equitable remedies may
be limited by equitable principles of general applicability.
14
<PAGE>
7.2 INVESTMENT REPRESENTATIONS. The Investor is acquiring
the Series B Preferred Stock and the Common Stock issuable upon conversion
thereof (collectively the "Securities") solely for its own account as principal,
for investment purposes only and not with a view to resale or distribution
thereof in whole or in part, and the Investor has no present intention of
selling, granting any participation in, or otherwise distributing the
Securities. No other person has a direct or indirect beneficial interest in the
Securities to be acquired by the Investor hereunder and the Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participation to any third person, with respect to any
of the Securities.
7.3 ACCREDITED INVESTOR; RESIDENCE. River Cities is a
resident of the State of Ohio; Bailey is a resident of the State of Florida;
each of the other Investors is a resident of the State of Kentucky. Each of the
Investors is an "accredited investor" as such term is defined under Regulation D
of the Securities Act.
7.4 RECEIPT OF INFORMATION; RESTRICTED SECURITIES. The
Investor acknowledges that the Securities are not being and will not be
registered under the Securities Act or the securities laws of any other
jurisdiction in reliance on exemptions thereunder. Accordingly, each certificate
evidencing the Securities shall be imprinted with the legend set forth in
Article FOURTH of the Amended Articles. The Investor acknowledges that the
Securities have not been and will not be approved or disapproved by the
Securities and Exchange Commission or any other governmental authority or agency
of any jurisdiction. The Investor represents that it has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Series B Preferred Stock and the business,
properties, prospects, and financial condition of the Company and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify the
accuracy of any information furnished to the Investor or to which the Investor
had access. The Investor's representations under this Section 7, however, shall
not limit or modify the representations and warranties of the Company in Section
6 of this Agreement or the right of the Investor to rely thereon.
7.5 INVESTMENT EXPERIENCE. The Investor is experienced in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development and acknowledges that it can bear
the economic risk of the Investor's investment and has such knowledge and
experience in financial and business matters that the Investor is capable of
evaluating the merits and risks of the investment in the Securities. The
Investor also represents that it has not been organized for the purpose of
acquiring the Series B Preferred Stock.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained in this Agreement by the Company and
the Investors and any certificate or other instrument delivered by or on behalf
of such party pursuant to this Agreement shall survive the Closing and shall
continue so long as the Preferred Holders (as defined in Section 15 hereof),
individually or in the aggregate, hold capital stock of the Company in the form
of Senior Preferred Stock, Series B Preferred Stock, Common Stock or a
combination thereof equal to a
15
<PAGE>
minimum of 1,000 shares (subject to adjustment for stock splits, combinations,
dividends and other similar events occurring on or after the Closing Date) of
Common Stock (a "Minimum Interest"). Each party shall have the right to rely on
each other party's representations and warranties made herein, notwithstanding
any investigation conducted by such party.
9. INDEMNIFICATION.
9.1 INDEMNIFICATION BY THE COMPANY. The Company shall
indemnify and reimburse an Investor for any and all claims, losses, liabilities,
damages (including, without limitation, fines, penalties, and criminal or civil
judgments and settlements), costs (including, without limitation, court costs)
and expenses (including, without limitation, reasonable attorneys' and
accountants' fees) (hereinafter "Loss" or "Losses") suffered or incurred by the
Investor or any successors or assigns thereto as a result of or with respect to:
9.1.1 any breach or inaccuracy of any representation
or warranty of the Company set forth in this Agreement and the Exhibits hereto;
9.1.2 any breach of or noncompliance by the Company
with any covenant or agreement of the Company contained in this Agreement; and
9.1.3 any and all actions, suits, proceedings,
claims, demands, assessments and judgments incident to any of the foregoing.
9.2 INDEMNIFICATION BY CLARK. Clark shall indemnify and
reimburse an Investor for any Loss suffered or incurred by the Investor or any
successors or assigns thereto as a result of or with respect to:
9.2.1 any breach or inaccuracy of any representation
or warranty by Clark set forth in the last sentence of Section 6.20.1 and
Section 6.27; and
9.2.2 any breach of or noncompliance by Clark with
any covenant or agreement of Clark contained in Section 10.6; and
9.2.3 any and all actions, suits, proceedings,
claims, demands, assessments and judgments incident to any of the foregoing.
9.3 INDEMNIFICATION BY AN INVESTOR. An Investor shall
indemnify and reimburse the Company and Clark for any and all Losses suffered or
incurred by the Company or Clark or any successors or assigns thereto as a
result of, or with respect to:
9.3.1 any breach or inaccuracy of any representation
or warranty of the Investor set forth in this Agreement and the Exhibits hereto;
9.3.2 any breach of or noncompliance by the Investor
with any covenant or agreement of the Investor contained in this Agreement; and
16
<PAGE>
9.3.3 any and all actions, suits, proceedings,
claims, demands, assessments and judgments incident to any of the foregoing.
10. CONVENANTS OF THE COMPANY (AND CLARK SOLELY WITH RESPECT TO
SECTION 10.6).
10.1 INSURANCE. The Company will use commercially
reasonable efforts to obtain, as soon as practicable after the Closing Date, but
not later than sixty (60) days after the Closing Date, additional term life
insurance on the life of Clark in the face amount of $3,000,000 naming the
Company as loss payee and the Investors as collateral assignee of the proceeds.
The Company shall use commercially reasonable efforts to maintain such insurance
for so long as the Preferred Holders hold a Minimum Interest.
10.2 FINANCIAL REPORTING. For periods commencing on or
after the Closing Date, the Company shall deliver or cause to be delivered to
the Investors monthly and year-to-date balance sheets and income and cash flow
statements (each as compared to budget and the comparable prior year period), a
brief monthly written summary of operations and such other information and data
with respect to the Company as the Investors may reasonably request. Such
monthly reports shall be provided on or before 15 days following the end of each
month. Prior to the end of each fiscal year, the Company shall provide a
business plan and projections for the next fiscal year which are similar in
format to those provided by the Company historically. Annual audits of the
Company's financial statements for periods commencing on or after August 1, 1998
shall be performed by Deloitte & Touche or another independent accounting firm
reasonably acceptable to the Investor and copies thereof shall be delivered to
the Investors on or before the 120th day following the end of the Company's
fiscal year.
10.3 BOARD OF DIRECTORS.
10.3.1 The Restated Regulations of the Company
provide for a Board of Directors of seven members. So long as the Preferred
Holders hold a Minimum Interest and do not possess the rights set forth in
Section 12.2.2 below, Clark and the Investors shall vote their respective
Preferred Stock in a manner intended to cause the following composition of the
Board of Directors: the Investors shall designate one director, Clark and the
other holders of Common Stock shall designate four directors (one of whom must
be Clark), and Clark and the other holders of Common Stock shall designate two
directors (who must be non-employees and not related to an employee) who must be
reasonably acceptable to the Investors. The initial directors are currently
expected to include Clark, Gary Qualmann (an employee director designated by
Clark and the other holders of Common Stock), Neal Ater (a non-employee director
designated by Clark and the other holders of Common Stock and reasonably
acceptable to the Investors), and Murray R. Wilson (designated by and related to
the Investors). The remaining vacancies on the seven member Board of Directors
shall be filled by Clark and the other holders of Common Stock in accordance
with the above requirements as soon as practicable.
10.3.2 The Company shall reimburse the director
designated by the Investors for the reasonable travel expenses incurred in
connection with meetings of the Board of
17
<PAGE>
Directors. Pursuant to the Restated Regulations, the Board of Directors shall
also have a Compensation Committee and an Audit Committee, each of which shall
be comprised of three directors. So long as the Preferred Holders hold a Minimum
Interest, Clark and the Investors shall use their best efforts to cause at least
two of the members of each such committee to be non-employee (and not related to
an employee) directors and one of those two shall be designated by the
Investors. The Compensation Committee shall be responsible for initiating all
decisions regarding the compensation of the directors, executive officers and
senior management of the Company, including, but not limited to, all decisions
regarding salary increases, bonus awards, perquisites and stock option awards.
The Audit Committee shall supervise the annual audit of the Company and
undertake such other responsibilities and duties as the Board of Directors of
the Company may from time to time designate.
10.4 RESERVATION OF SHARES. So long as any shares of
Preferred Stock are outstanding, the Company shall reserve and keep reserved at
all times sufficient shares of Common Stock for issuance upon conversion of the
Preferred Stock. Upon conversion of any shares of Preferred Stock, the Company
shall promptly issue and deliver the shares of Common Stock required to be
delivered.
10.5 USE OF PROCEEDS. The proceeds from the sale of the
Series B Preferred Stock shall be used by the Company for working capital
and/or the payment of indebtedness.
10.6 CLARK DEBT REPAYMENT OBLIGATIONS. Clark shall remain
current in her principal and interest payments to Firstar Bank, N.A. pursuant to
the Refinancing, in accordance with that certain term note in the original
principal amount of $660,464.20 dated July 28,1999, as such indebtedness may be
restructured and/or refinanced from time to time.
10.7 COMPLIANCE WITH SMALL BUSINESS INVESTMENT ACT. The
Company agrees to provide each Investor with sufficient information to permit
the Investor to comply with its obligations under the SBIA and the regulations
thereunder. Upon reasonable request, the Company shall also provide each
Investor with (i) reasonable access to the Company's properties, places of
business, records (including financial records) and offices during normal
business hours and (ii) the opportunity to discuss the affairs, finances and
accounts of the Company with the officers of the Company. Each Investor and
representatives of the SBA shall be given reasonable access to the Company's
records to confirm that the proceeds received by the Company in connection with
the consummation of the transactions contemplated by this Agreement are used for
the purposes set forth in Section 10.5 hereof. The President of the Company
shall certify to the Investors, within three months of the date of the First
Closing Date and from time to time thereafter, that the Company has used the
proceeds in accordance with the purposes set forth in Section 10.5 hereof.
10.8 NEGATIVE COVENANTS. So long as any shares of Preferred
Stock are outstanding, the Company shall not, without the prior written consent
of the holders of a majority of the shares of Preferred Stock then outstanding:
10.8.1 sell a material portion of the Company's
assets;
18
<PAGE>
10.8.2 merge or sell a controlling interest in the
Company (except in the case of a Qualified Sale (as defined below) and except
that the Company may, without the consent of the holders of the Preferred stock,
merge with another entity if the Company (or its subsidiary) is the surviving
corporation and the consideration paid by the Company (or its subsidiary) for
the merged entity's securities is cash);
10.8.3 amend the Amended Articles or the Restated
Regulations in any manner, the consent of the holders of the Preferred Stock to
which shall not be unreasonably withheld;
10.8.4 declare dividends or distributions (other than
the minimum tax distributions required by the Shareholders Agreement) to, and/or
redemptions or repurchases of any securities other than the Preferred Stock or
pursuant to buy-sell agreements between the Company and its employees;
10.8.5 become a party to, modify, amend or restate
the terms of any agreement which restricts or would restrict the rights of the
Preferred Stock; provided, however, that, without restricting or limiting an
Investor's ability to exercise its remedies pursuant to Section 12.2 or any
other section hereof, the Company may enter into credit agreements that restrict
the Company's ability to pay dividends on or repurchase the Preferred Stock if
such restrictions are required by the lender;
10.8.6 make any significant change in the fundamental
nature of the Company's business not contemplated in its existing business plan;
10.8.7 create a subsidiary or make an investment in
any entity;
10.8.8 enter into transactions with affiliates other
than on an arms'-length basis and on commercially reasonable terms; or
10.8.9 issue or sell Common Stock without
consideration.
10.9 DEFINITION OF A QUALIFIED SALE. A Qualified Sale is a
sale transaction which yields the Investors at least an amount in cash equal to
the greater of: (i) return of the aggregate purchase price of the Preferred
Stock purchased by the Investors from the Company, plus a compounded annual
return of 20% on such amount or (ii) two times the aggregate purchase price of
the Preferred Stock purchased by the Investors from the Company.
11. RESTRICTIONS OF TRANSFERS.
11.1 NOTICE OF SALE BY CLARK. In the absence of and until
a Qualified IPO (as defined below), Clark shall give written notice to the
holders of the Preferred Stock and the Company if at any time she desires to
sell or transfer any of her shares ("Notice of Sale"). The Notice of Sale shall
set forth a description of the proposed sale or transfer, including the name of
19
<PAGE>
the proposed purchaser or transferee, the number of shares affected, the
purchase price or consideration and any other conditions of the sale or
transfer. For a period of ten days following receipt of such Notice of Sale, the
Investors shall have the right to prohibit such sale or transfer by Clark. The
holders of a majority of the shares of Preferred Stock then outstanding shall
notify Clark and the Company in writing within ten days of receipt of the Notice
of Sale of their intention to either allow or prohibit the proposed sale or
transfer ("Notice Reply").
11.2 DEFINITION OF QUALIFIED IPO. A Qualified IPO is an
initial public offering which yields net proceeds to the Company of at least
$30,000,000 at a price per share indicating a total market equity capitalization
(post-money) of at least $90,000,000.
11.3 CO-SALE RIGHT. If the holders of the majority of the
shares of Preferred Stock then outstanding do not prohibit the proposed sale or
transfer of shares by Clark pursuant to Section 11.1, for a period of 30 days
following the receipt by the holders of the Preferred Stock of the Notice of
Sale, each holder of Preferred Stock shall have the right to elect to
participate in such sale or transfer with Clark (on a pro rata basis, I.E., if
Clark owns 75 shares of Common Stock and such holder owns 25 shares of Preferred
Stock, the holder may sell one-fourth of the shares proposed to be sold by
Clark) on the same terms and conditions and for the price or consideration
designated in the Notice of Sale. Notice of the holder's intention to
participate in such sale or transfer shall be evidenced by a writing signed by
the holder and delivered to Clark prior to the end of the 30th day following the
holders' receipt of the Notice of Sale. If the holder fails to notify Clark
within such 30-day period of its intent to participate in such sale, its rights
under this Section 11.3 shall be waived with respect to the proposed sale or
transfer by Clark.
11.4 RIGHTS OF REFUSAL. If the holders of a majority of
the shares of Preferred Stock then outstanding do not prohibit the proposed sale
or transfer of shares by Clark pursuant to Section 11.1, for a period of 30 days
following the Company's receipt of the Notice of Sale, the Company shall have
the right to purchase all but not less than all of the shares designated in the
Notice of Sale on the same terms and conditions and for the price or
consideration designated therein (the "First Right of Refusal"). If the Company
does not exercise its First Right of Refusal, then, for a period of 30 days
following the receipt by the holders of the Preferred Stock of notice from the
Company of the Company's decision not to exercise its First Right of Refusal,
the holders of the Preferred Stock shall' have the right to purchase all but not
less than all of the shares from Clark on the same terms and conditions and for
the price or consideration designated in the Notice of Sale (the "Second Right
of Refusal"). At the sole option of the holders of a majority of the shares of
Preferred Stock then outstanding, the Company may be permitted to participate
with the holders of the Preferred Stock in the purchase of the shares pursuant
to the Second Right of Refusal so long as the holders of the Preferred Stock and
the Company together purchase all but not less than all of the shares.
Notice of the Company's intention to purchase the shares pursuant to
its First Right of Refusal shall be evidenced by a writing signed by the Company
and delivered to Clark prior to the end of the 30th day following the Company's
receipt of the Notice of Sale. Notice of the intention of the holders of the
Preferred Stock to purchase the shares evidenced by their Second
20
<PAGE>
Right of Refusal shall be evidenced by a writing signed by the holders of the
Preferred Stock and delivered to Clark prior to the end of the 30th day
following the later of the holders' receipt of the Notice of Sale or the
holders' receipt of the notice of the Company's decision not to exercise its
First Right of Refusal.
In the event the holders of the Preferred Stock do not exercise their
Second Right of Refusal, Clark shall have the right to sell or transfer the
shares designated in the Notice of Sale on the same terms and conditions and for
the price or consideration designated therein within 60 days from the expiration
of the period during which the holders had the option to purchase the shares
pursuant to its Second Right of Refusal. After such 60-day period, Clark shall
not transfer Clark's shares again without complying with this Section 11.
11.5 EXCEPTIONS. Sections 11.1, 11.3, and 11.4 shall not
apply (a) to any sale or transfer by Clark for estate planning purposes or
to her ancestors, siblings, descendants or spouse, (b) if the Preferred
Holders no longer hold a Minimum Interest, or (c) to sales or transfers of up
to 4,000 shares in the aggregate (subject to adjustment for stock splits,
combinations, dividends and other similar events) to employees of the Company.
11.6 RIGHT OF FIRST REFUSAL. In the absence of and until a
Qualified IPO, if a holder of Preferred Stock desires to sell or transfer any of
its Preferred Stock pursuant to a bona fide offer, the holder shall first give
notice (the "Notice of Intent") to the Company. The Notice of Intent shall set
forth the terms of the bona fide offer, including the name(s) of the proposed
transferee(s), the type and number of securities proposed to be transferred and
the price or consideration for the securities proposed to be transferred.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to purchase all (but not less than all) of the
Preferred Stock designated in the Notice of Intent on the same terms and
conditions and for the price or consideration designated therein. Notice of the
Company's intention to purchase such Preferred Stock shall be evidenced by a
writing signed by the Company and delivered to the holder prior to the end of
the 30th day following the Company's receipt of the Notice of Intent.
In the event the Company does not exercise its Right of First Refusal,
the holder shall have the right to sell or transfer the Preferred Stock
designated in the Notice of Intent on the same terms and conditions and for the
price or consideration and to the proposed transferee designated therein within
60 days from the expiration of the period during which the Company had the
option to purchase such Preferred Stock. Notwithstanding the foregoing, the
holder may not transfer any Preferred Stock pursuant to this Section 11.6 to
those persons competitive with the Company which are described on Schedule 11.6
without the consent of the Company. This Section 11.6 shall not apply to any
distribution in kind by a holder to its partners, members or shareholders
pursuant to Section 15.
11.7 RIGHT OF FIRST OFFER. In the absence of and until a
Qualified IPO, if a holder of Preferred Stock desires to sell or transfer any of
its Preferred Stock (except pursuant to a bona fide offer received by the holder
in accordance with Section 11.6), the holder shall first
21
<PAGE>
give a Notice of Intent to the Company. The Notice of Intent shall set forth the
number of shares of Preferred Stock which the holder desires to sell.
For a period of 30 days following receipt of such Notice of Intent, the
Company shall have the right to negotiate a transaction with the holder whereby
the Company will purchase for cash all (but not less than all) of the Preferred
Stock designated in the Notice of Intent at a price and upon other terms and
conditions acceptable to the holder and the Company. Any such purchase shall be
consummated on or prior to the 60th day after the Company's receipt of the
Notice of Intent.
If (a) the Company elects not to exercise the right provided in this
Section 11.7, (b) the Company and the holder cannot agree on the terms and
conditions of a purchase by the Company during such 30 day period, or (c) the
Company and the holder shall agree on the terms and conditions of such purchase
but the Company shall fail to pay the purchase price in a timely manner, then
the holder may sell the Preferred Stock designated in the Notice of Intent at a
price and on terms not more favorable to the purchaser than the price and terms
offered to the Company. The holder may sell such Preferred Stock during the
period ending on the 150th day following the later of the end of such 30 day
period and the date on which the Company fails to pay such price. If the holder
does not sell such Preferred Stock in such 150 day period, the Preferred Stock
shall again be subject to this Section 11.7. This Section 11.7 shall not apply
to any distribution in kind by the holder to its partners or shareholders
pursuant to Section 15. Notwithstanding the foregoing, the holder may not
transfer any Preferred Stock pursuant to this Section 11.7 to those persons
competitive with the Company which are described on SCHEDULE 11.6 without the
consent of the Company.
11.8 RESTRICTIVE LEGEND. The share certificates evidencing
the shares subject to the foregoing provisions of this Section 11 shall bear
appropriate legends referring to the restrictions on transfer.
11.9 PREEMPTIVE RIGHTS. In the absence of and until a
Qualified IPO, each holder of Preferred Stock shall have the right of first
refusal to purchase all or part of its pro rata share (equal to its percentage
ownership of the Company on a fully diluted basis) of New Preferred Stock (as
defined below) that the Company may, from time to time, propose to sell and
issue, subject to the terms and conditions set forth below. "New Securities"
shall mean any capital stock of the Company whether now authorized or not, and
rights, options, or warrants to purchase capital stock, and securities of any
type whatsoever that are, or may become, convertible into capital stock,
provided, however, that the term "New Securities" does not include (i) the
Series B Preferred Stock issuable under this Agreement or the shares of Company
Stock issuable upon conversion of the Series B Preferred Stock or the Senior
Preferred Stock; (ii) securities issued pursuant to an acquisition; (iii)
options granted or securities issued pursuant to an employee or director stock
option program; or (iv) securities issued as a result of any stock split, stock
dividend, or reclassification of Common Stock, distributable on a pro rata basis
to all holders of Common Stock. In the event the Company intends to issue New
Securities, it shall give written notice to the holders of Preferred Stock
("Notice of Issuance") which shall set forth the purchase price and any other
conditions of the issuance. Each holder of Preferred Stock shall
22
<PAGE>
have 30 days from the date of Notice of Issuance to agree to purchase all or
part of its pro rata share of such New Securities for the price and upon the
general terms and conditions specified in the Notice of Issuance by giving
written notice to the Company stating the quantity of New Securities to be so
purchased.
The Company shall have the right during the period expiring 150 days
after the giving of the Notice of Issuance to sell any or all of such New
Securities not purchased by the holders of Preferred Stock at a price and upon
general terms no more favorable to the purchasers than specified in the Notice
of Issuance. In the event that the Company has not sold such New Securities
within such 150 day period, the Company shall not thereafter issue or sell any
New Securities without first offering such New Securities to the holders of
Preferred Stock in the manner provided in this Section 11.9.
12. DEFAULT.
12.1 EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an "Event of Default": Qualified Appraiser
shall be borne one-half by the holders of the Preferred Stock and one-half by
the Company.
12.3 DIVERSION OF PROCEEDS. In addition, any diversion by
the Company of the proceeds hereunder from the Use of Proceeds as set forth in
Section 10.5 hereof shall constitute a default requiring the immediate
redemption of the Investor's interest in the Company and full refund of the
purchase price, plus interest at 14% per annum.
12.4 LOSS OF CLARK. In addition, so long as the holders of
the Preferred Stock hold a Minimum Interest, in the event of the death,
permanent disability or termination of full time employment of Clark, except for
a termination by the Company other than for "cause" or a termination by Clark
for "good reason" (as those terms are defined in the Employment Agreement
between Clark and the Company), upon six months written notice to the Company,
the holders of a majority of the Preferred Stock then outstanding may require
the Company to redeem all but not less than all of the Preferred Stock
(including the conversion stock) for the higher of (i) aggregate original issue
price of the Preferred Stock plus any accrued and unpaid dividends or (ii) Fair
Market Value of the Preferred Stock, as determined in accordance with Section
12.2. Permanent disability shall occur whenever Clark, due to ill health,
physical or mental disability for a period of 180 consecutive working days, is
unable or otherwise fails to perform the essential functions of her job. If the
holders of a majority of the Preferred Stock then outstanding and the Company
are unable to agree as to whether Clark is permanently disabled, the question of
permanent disability shall be submitted to three physicians, one of whom shall
be appointed by the holders of a majority of the Preferred Stock then
outstanding, one of whom shall be appointed by Clark's representative and one of
whom shall be appointed by the first two appointed physicians. The decision of
any two of the three physicians shall be final and binding. If the question of
permanent disability is raised, Clark shall submit to a medical examination by
such physicians and the holders of the Preferred Stock shall have access to the
findings of the physicians. This Section 12.4 shall be of no force or effect for
such time as the Company employs a Chief Operating Officer (other than Clark)
who is reasonably acceptable to the holders
23
<PAGE>
of a majority of the Preferred Stock then outstanding, or if a Chief Operating
Officer has been appointed but is no longer employed by the Company, for such
time as the Company is actively seeking such a Chief Operating Officer.
Notwithstanding the foregoing, this Section 12.4 shall terminate and be of no
further force and effect as of August 27, 2000.
13. PUBLIC STATEMENTS. Neither the Company, Clark nor the
Investors shall, without the prior written approval of the other parties hereto,
make any press release or other public announcement concerning the transactions
contemplated by this Agreement, provided, however, that an Investor may issue a
"tombstone" advertisement stating the amount of its investment in the Company.
Each Investor, the Company and Clark may disclose additional information with
respect to the transactions contemplated hereby to their respective employees,
agents, consultants and third parties only to the extent such persons have a
need to know such information.
14. NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be mailed by
first class, registered, or certified mail, postage prepaid, or sent via
overnight courier service, or delivered personally:
If to River Cities, to: River Cities Capital Fund II Limited Partnership
ATTN: Murray R. Wilson
221 East Fourth Street, Suite 1900
Cincinnati, Ohio 45202-4147
With a copy to: Graydon, Head & Ritchey
ATTN: Michael A. Hirschfeld, Esq.
1900 Fifth Third Center
511 Walnut Street
Cincinnati, Ohio 45202-3157
If to JG, to: JG Funding, LLC
ATTN: David Jones, Jr.
1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
If to Saunders, to: Saunders Capital Group, LLC
ATTN: Robert S. Saunders
1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
If to Bailey, to: Irving W. Bailey II
c/o Bailey Capital Corporation
205 Worth Avenue, Suite 201
Palm Beach, Florida 33480
24
<PAGE>
If to the Company or
Clark, to: DPEC, Inc.
ATTN: Carol A. Clark
Building 3
851 West Third Avenue
Columbus, Ohio 43212
With a copy to: Vorys, Sater, Seymour and Pease LLP
ATTN: Michael A. Cline, Esq.
52 East Gay Street
Columbus, Ohio 43215
or to such other address of which the addressee shall have notified the sender
in writing. Notices mailed in accordance with this section shall be deemed given
when mailed, and notices sent by overnight courier service shall be deemed given
when placed in the hands of a representative of such service.
15. PARTIES IN INTEREST; ASSIGNMENT. Except as otherwise provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties to this Agreement shall bind and inure to the benefit of
their respective heirs, executors, successors, and permitted assigns, whether so
expressed or not. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto and their respective
successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement. This Agreement and the rights
and obligations under this Agreement are not assignable and any purported
assignment shall be null and void, provided that, subject to the provisions of
Sections 11.6 and 11.7, prior to the termination of an Investor's fund and the
resulting distribution in kind by the Investor to its partners, members or
shareholders, an Investor may assign its rights and obligations under this
Agreement to an affiliate and/or a maximum of two unrelated assignees, and, upon
the termination of an Investor's fund and the resulting distribution in kind by
the Investor to its partners, members or shareholders, the Investor may assign
its rights and obligations under this Agreement to any and all of its partners,
members or shareholders (all of such permitted assignees being collectively
referred to as the "Preferred Holders"). Notwithstanding such permitted
assignment, the Investor shall not be released from its obligations hereunder.
16. CONSTRUCTION; GOVERNING LAW. The section headings contained in
this Agreement are inserted as a matter of convenience and shall not affect in
any way the construction of the terms of this Agreement. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of Ohio as
applied to agreements entered into and performed entirely within Ohio. The
parties agree that any actions brought in connection with this Agreement or the
transactions contemplated hereby shall be filed and heard in Hamilton County,
Ohio, and each party submits to the jurisdiction of the Court of Common Pleas of
Hamilton County, Ohio, and to the United States District Court for the Southern
District of Ohio.
25
<PAGE>
17. ENTIRE AGREEMENT; AMENDMENT AND WAIVER. This Agreement,
including the Schedules and Exhibits hereto, constitutes and contains the entire
agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes any prior writing by the parties. Any term of
this Agreement may be amended and the observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company,
Clark and the holders of a majority of the shares of the Preferred Stock then
outstanding). Any amendment or waiver effected in accordance with this paragraph
shall be binding upon the Investors, each other holder of any Preferred Stock
purchased under this Agreement at the time outstanding (including Common Stock
into which such Preferred Stock have been converted), each future holder of any
such Preferred Stock, Clark and the Company.
18. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of the remaining provisions.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
20. EXPENSES. The Company agrees, upon consummation of the
transactions contemplated by this Agreement, to pay, against receipt of the
documentation therefor in reasonable detail, up to $22,500 of the reasonable
legal and out-of-pocket expenses incurred by the Investors in connection with
this Agreement and the transactions contemplated hereunder, including, without
limitation, all fees and expenses of legal counsel, accountants and other
advisers engaged by the Investors in connection with this Agreement and the
transactions contemplated hereunder.
21. TIME OF ESSENCE. Time is of the essence to the performance of
the obligations set forth in this Agreement.
22. CONFIDENTIALITY AGREEMENT. At the request of the Company, an
Investor and any subsequent holder of Preferred Stock or the conversion stock
shall execute and deliver to the Company a confidentiality letter in a form
reasonably acceptable to the Investor.
23. ATTORNEYS' FEES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the Amended and
Restated Registration Rights Agreement, any Ancillary Agreement or the Amended
Articles, the prevailing party shall be entitled to reasonable attorneys' fees,
costs, and disbursements in addition to any other relief to which such party may
be entitled.
24. RIGHTS OF THE INVESTORS. The holders of a majority of the
shares of Preferred Stock then outstanding shall have the absolute right to
exercise or refrain from exercising any rights that the Investors may have by
reason of this Agreement, including without limitation the right to consent to
the waiver of any obligation of Company under this Agreement and to enter into
an agreement with Company for the purpose of modifying this Agreement or any
agreement
26
<PAGE>
effecting any such modification, and shall not incur any liability to
any other holder or holders of Preferred Stock with respect to exercising or
refraining from exercising any such rights and all other holders of Preferred
Stock shall be bound by such exercising or refraining from exercising any such
rights.
25. TERMINATION UPON A QUALIFIED IPO. Notwithstanding anything to
the contrary contained in this Agreement, this Agreement shall terminate upon
the closing of a Qualified IPO.
26. TERMINATION OF CERTAIN PROVISIONS. Sections 4, 10, 11 and 12
of the Senior Preferred Stock Purchase Agreement are hereby terminated and shall
be of no further force and effect.
27. PRONOUNS. Use of male, female and neuter pronouns in the
singular or plural in this Agreement shall be understood to include each of the
other pronouns as the context requires.
IN WITNESS WHEREOF, the Company, Clark and the Investors have caused
this Agreement to be executed as of the day and year first above written.
INVESTORS
RIVER CITIES CAPITAL FUND II
LIMITED PARTNERSHIP
By: /s/ Edwin T. Robinson
-------------------------------------------
Edwin T. Robinson, President of Mayson,
Inc., the General Partner of River Cities
Fund II Limited Partnership
Address: Suite 2250
221 East Fourth Street
Cincinnati, Ohio 45202-4 147
27
<PAGE>
JG FUNDING, LLC
By: /s/ David Jones, Jr.
--------------------------------------------
David Jones, Jr., Manager of Chrysalis
Ventures, LLC, the Manager of JG Funding,
LLC
Address: 1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
SAUNDERS CAPITAL GROUP, LLC
By: /s/ Robert S. Saunders
--------------------------------------------
Robert S. Saunders, Manager
Address: 1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
/s/ Irving W. Bailey
--------------------------------------------
Irving W. Bailey II
Address: c/o Bailey Capital Corporation
205 Worth Avenue, Suite 201
Palm Beach, Florida 33480
COMPANY
DPEC, INC.
By: /s/ Carol A. Clark
--------------------------------------------
Carol A. Clark, President
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
28
<PAGE>
CLARK
By: /s/ Carol A. Clark
--------------------------------------------
Carol A. Clark
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
29
<PAGE>
EXHIBIT 10.7
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is dated as of
May 10, 1996, by and among D.P.E.C., Inc., an Ohio corporation (the "Company"),
Fran Papalios and Carol Clark.
TERMS AND CONDITIONS
In consideration of the mutual covenants and agreements contained in
this Agreement, and intending to be legally bound, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
have the meanings indicated below or in the referenced sections of this
Agreement:
"Carol's Family": Carol Clark and her Family.
"Common Shares": The common shares, without par value, of the Company.
"Exchange Act": The Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exempt Registration": A registration by the Company of the offer of
its securities pursuant to Form S-8 (or successor form), Form S-4 (or successor
form) or any other form of registration under the Securities Act that does not
permit the registration of Registrable Securities.
"Family": With respect to Carol Clark or Fran Papalios, as the case may
be, (a) her husband on the date of this Agreement and any person who
subsequently becomes her husband, (b) her lineal descendants, parents and
siblings and (c) one or more trusts, the sole beneficiaries or owners of which
are members of her Family.
"Fran's Family": Fran Papalios and her Family.
"Investor": Fran Papalios, Carol Clark, members of Fran's Family and
Carol's Family (to the extent such Family members have agreed in writing to be
bound by the terms of this Agreement) and any other Person who from time to time
may be designated as such by the Company, in its sole discretion, and who has
agreed in writing to be bound by the terms of this Agreement.
"Person": An individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a government entity or any
department, agency, or political subdivision thereof.
"Piggyback Registration": As defined in SECTION 2(a) hereof.
<PAGE>
"Registrable Securities": The Common Shares and other securities of the
Company convertible into or exchangeable or exercisable for Common Shares owned
by an Investor; PROVIDED, HOWEVER, that a Registrable Security ceases to be a
Registrable Security when it is sold or transferred to a Person other than an
Investor.
"Registration Expenses": All registration filing fees and other
expenses incurred by the Company in complying with federal, state and other
securities laws (including fees and expenses of counsel for the underwriters in
connection with state or other securities law qualifications and registrations),
printing expenses and delivery expenses; fees and expenses of counsel for the
Company; fees and expenses of all independent certified public accountants for
the Company (including the expenses of any audit or "comfort" letters required
by or incident to performance of the obligations contemplated by this
Agreement); fees and expenses of any special experts retained by the Company at
the request of the managing underwriters in connection with the registration;
and fees and expenses of other Persons retained by the Company in connection
with the registration.
"SEC": The United States Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"Termination Date": The later of (i) April 1, 2001 or (ii) the date of
payment in full of the promissory note of even date herewith in the principal
amount of $250,000 given by the Company to Fran Papalios and the consideration
payable to Fran Papalios for the first 30 months of the Restricted Period under
the Noncompetition Agreement of even date herewith between the Company and Fran
Papalios.
"Underwritten registration" or "underwritten offering": A registration
in which securities of the Company are sold pursuant to a firm commitment
underwriting.
SECTION 2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register the
offer of any of its securities under the Securities Act except pursuant to an
Exempt Registration (a "Piggyback Registration"), it will so notify in writing
all holders of Registrable Securities not later than 30 days prior to the
anticipated filing date. Subject to the provisions of SECTIONS 2(c) and 2(d)
hereof, the Company will include in the Piggyback Registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion within 15 business days after the applicable holder's receipt of the
Company's notice. Such Registrable Securities may be made subject to an
underwriters' over-allotment option, if so requested by the managing
underwriter. The holders of Registrable Securities may withdraw all or any part
of the Registrable Securities from a Piggyback Registration at any time until 30
days prior to the effective date of the Piggyback Registration.
-2-
<PAGE>
(b) REGISTRATION AND OTHER EXPENSES. The Company shall pay all
Registration Expenses of a Piggyback Registration to the extent that it is not
prohibited from doing so by applicable state securities laws. If the Company is
prohibited by applicable state securities laws from paying any portion of the
Registration Expenses, such portion will be borne by all sellers of securities
in the registration (excluding the Company) in proportion to the number of
securities each sells in the registration. All other expenses incurred by a
seller in connection with a registration or allocable to a seller's securities
so included in a registration (including, without limitation, underwriting
discounts and commissions and fees and expenses of any legal counsel for the
seller) shall be borne by the seller.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is
an underwritten primary registration initiated by the Company and if the
managing underwriter gives the Company its written opinion that the total number
or dollar amount of securities requested to be included in the registration
exceeds the number or dollar amount of securities that can be sold, the Company
will include the securities in the registration in the following order of
priority: first, all securities the Company proposes to sell; second, up to the
full number or dollar amount of Registrable Securities and other securities
requested to be included in the registration by the holders of Registrable
Securities and by the holders of the Company's securities who hereafter obtain
registration rights from the Company in connection with the issuance of such
securities by the Company (allocated pro rata among the holders of all such
securities on the basis of the dollar amount or number of such securities owned
by such holders, with the understanding that in the case of Registrable
Securities owned by Carol's Family or Fran's Family the ownership of the entire
Family shall be considered in determining the pro rata amount and each member of
either such Family selling securities shall be entitled to a pro rata share of
the amount allocated to the Family based upon the actual amount owned by the
Family member); and third, any other securities (provided they are of the same
class as the securities sold by the Company) requested to be included, allocated
among the holders of the securities in such proportions as the Company and those
holders may agree. In the event that the managing underwriter advises the
Company that an underwriters' over-allotment option is necessary or advisable,
the preceding priority shall apply to the determination of which securities are
to be included in the primary portion of such registration and, if necessary,
the overallotment portion of such registration.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is
an underwritten secondary registration initiated by holders of the Company's
securities who hereafter obtain demand registration rights from the Company in
connection with the issuance of such securities by the Company and if the
managing underwriter gives the Company its written opinion that the dollar
amount or number of securities requested to be included in the registration
exceeds the dollar amount or number of securities that can be sold, the Company
will include the securities in the registration in the following order of
priority: first, to the extent of the number or dollar amount of securities that
in the underwriter's opinion can be sold, the securities requested to be
included in the registration by the holders of securities who possess such
demand registration rights, allocated among the holders of those securities in
such proportions as the Company and those holders may agree; second, up to the
full number of or dollar amount of securities the Company proposes to sell;
-3-
<PAGE>
and third, to the extent of the balance, the Registrable Securities and other
securities requested to be included in the registration by the holders of
Registrable Securities and by the holders of the Company's securities who
hereafter obtain registration rights from the Company in connection with the
issuance of such securities by the Company (allocated pro rata among the holders
of all such securities on the basis of the dollar amount or number of such
securities owned by such holders, with the understanding that in the case of
Registrable Securities owned by Carol's Family or Fran's Family the ownership of
the entire Family shall be considered in determining the pro rata amount and
each member of either such Family selling securities shall be entitled to a pro
rata share of the amount allocated to the Family based upon the actual amount
owned by the Family member). If, after including all such securities, the
underwriters determine that there are additional securities that can be sold,
then such additional securities may be added to the registration. In the event
that the managing underwriter advises the Company that an underwriters'
over-allotment option is necessary or advisable, the preceding priority shall
apply to the determination of which securities are to be included in the primary
portion of such registration and, if necessary, the overallotment portion of
such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten primary registration initiated by the Company, the Company will
select the investment banker(s) and manager(s) that will administer the
offering, and will enter into customary underwriting arrangements with the
investment banker(s) and managing underwriter(s). No Person may participate in
any underwritten registration without (a) agreeing to sell securities on the
basis provided in the underwriting arrangements approved by the Company , and
(b) completing and executing all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required by the
underwriting arrangements.
(f) OTHER REGISTRATION RIGHTS. The Company shall not offer or grant to
any Investor any demand, piggyback or other registration rights with respect to
Registrable Securities in addition to those provided for herein except as and to
the extent such registration rights are also offered or granted to all other
Investors.
SECTION 3. HOLDBACK AGREEMENTS.
(a) RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRABLE SECURITIES.
Each holder of Registrable Securities whose securities are included in a
registration statement agrees not to make any public sale or distribution of
equity securities of the Company (except as part of the underwritten
registration or pursuant to registration on Form S-8 or any successor form),
including a sale pursuant to Rule 144, during the seven days prior to and the
180 days after the effective date of any underwritten Piggyback Registration
unless the managing underwriter agrees otherwise.
(b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY AND OTHERS. The Company
agrees not to make any public sale or distribution of its equity securities, or
any securities convertible into or exchangeable or exercisable for its equity
securities, including a sale under Regulation D under the Securities Act or
under any other exemption of the Securities Act (except as part of the
underwritten registration or pursuant to an Exempt Registration), during the
seven days prior to and
-4-
<PAGE>
the 180 days after the effective date of any underwritten Piggyback Registration
unless the managing underwriters agree otherwise. The Company also agrees to use
reasonable efforts to cause each holder of at least 5% (on a fully-diluted
basis) of its equity securities (other than Registrable Securities) or any
securities convertible into or exchangeable or exercisable for its equity
securities (other than Registrable Securities), purchased from the Company at
any time on or after the date of this Agreement (other than in a registered
public offering), and shall cause each holder of its equity securities (other
than Registrable Securities) or any securities convertible into or exchangeable
or exercisable for its equity securities (other than Registrable Securities) who
is selling shares pursuant to the registration, to agree not to make any public
sale or distribution of those securities, including a sale pursuant to Rule 144
(except as part of the underwritten registration, if permitted), during the
seven days prior to and the 180 days after the effective date of the
registration unless the managing underwriter agrees otherwise.
SECTION 4. REGISTRATION PROCEDURES.
(a) Whenever the holders of Registrable Securities request the
registration of any Registrable Securities pursuant to SECTION 2(a) hereof, the
Company shall use its best efforts to register and to permit the sale of the
Registrable Securities in accordance with the intended method of disposition. To
carry out this obligation, the Company shall as expeditiously as possible:
(1) prepare and file with the SEC a registration
statement on the appropriate form and use its best efforts to
cause the registration statement to become effective. At least
three days before filing a registration statement or
prospectus or any amendments or supplements thereto, the
Company will furnish to the counsel of the holders of a
majority of the Registrable Securities being registered copies
of all documents proposed to be filed for that counsel's
review and approval, which approval shall not be unreasonably
withheld or delayed;
(2) notify immediately each seller of Registrable
Securities of any stop order threatened or issued by the SEC
and take all actions reasonably required to prevent the entry
of a stop order or if entered to have it rescinded or
otherwise removed;
(3) prepare and file with the SEC such amendments and
supplements to the registration statement and the
corresponding prospectus necessary to keep the registration
statement effective for 90 days or such shorter period as may
be required to sell all Registrable Securities covered by the
registration statement; and comply with the provisions of the
Securities Act with respect to the disposition of all
securities covered by the registration statement during each
period in accordance with the sellers' intended methods of
disposition as set forth in the registration statement;
(4) furnish to each seller of Registrable Securities
a sufficient number of copies of the registration statement,
each amendment and supplement thereto (in
-5-
<PAGE>
each case including all exhibits), the corresponding
prospectus (including each preliminary prospectus), and such
other documents as a seller may reasonably request to
facilitate the disposition of the seller's Registrable
Securities;
(5) use its best efforts to register or qualify the
Registrable Securities under such securities or blue sky laws
or jurisdictions in the United States of America as any seller
requests and will do any and all other reasonable acts and
things that may be necessary or advisable to enable the seller
to consummate the disposition of the seller's Registrable
Securities in such jurisdictions; PROVIDED, HOWEVER, that the
Company shall not be obligated to qualify as a foreign
corporation to do business under the laws of any jurisdiction
in which it is not then qualified to file any general consent
to service of process;
(6) notify each seller of Registrable Securities, at
any time when a prospectus is required to be delivered under
the Securities Act, of any event as a result of which the
prospectus or any document incorporated therein by reference
contains an untrue statement of a material fact or omits to
state any material fact necessary to make the statements
therein not misleading, and will prepare a supplement or
amendment to the prospectus or any such document incorporated
therein by reference so that thereafter the prospectus will
not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements
therein not misleading;
(7) cause all registered Registrable Securities to be
listed on each securities exchange or securities association,
if any, on which similar securities issued by the Company are
then listed;
(8) provide an institutional transfer agent and
registrar and a CUSIP number for all Registrable Securities on
or before the effective date of the registration statement;
(9) enter into such customary agreements (including
an underwriting agreement in customary form) and take all
other actions in connection with those agreements as the
underwriters, if any, reasonably request to expedite or
facilitate the disposition of the Registrable Securities;
(10) make available for inspection by any seller of
Registrable Securities, any underwriter participating in any
disposition pursuant to the registration statement, and any
attorney, accountant, or other agent of any seller or
underwriter, all financial and other records, pertinent
corporate documents, and properties of the Company, and cause
the Company's officers, directors, and employees to supply all
information reasonably requested by any seller, underwriter,
attorney, accountant, or agent in connection with the
registration statement; provided that an appropriate
-6-
<PAGE>
confidentiality agreement is executed by any such seller,
underwriter, attorney, accountant or other agent;
(11) in connection with any underwritten offering,
obtain a "comfort" letter from the Company's independent
public accountants in customary form and covering those
matters customarily covered by "comfort" letters as the
managing underwriter reasonably requests (and the letter shall
be addressed to holders of the Registrable Securities, the
Company and the underwriters);
(12) obtain an opinion of the counsel representing
the Company for the purposes of the registration, in the form
and substance customarily given to underwriters in an
underwritten public offering, addressed to the underwriters,
if any, and to the holders of Registrable Securities being
registered; and
(13) use its best efforts to comply with all
applicable rules and regulations of the SEC, and make
available to its security holders, as soon as reasonably
practicable, an earnings statement complying with the
provisions of Section 11(a) of the Securities Act and covering
the period of at least 12 months, but not more than 18 months,
beginning with the first month after the effective date of the
registration statement.
(b) From time to time, the Company may require each seller of
Registrable Securities subject to the registration to furnish to the Company
information regarding the distribution of the Registrable Securities subject to
the registration.
(c) Each holder of Registrable Securities agrees that, upon receipt of
any notice from the Company of any event of the kind described in SECTION
4(a)(6) hereof, the holder will discontinue disposition of Registrable
Securities until the holder receives copies of the supplemented or amended
prospectus contemplated by SECTION 4(a)(6) HEREOF. In addition, if the Company
requests, the holder will deliver to the Company all copies, other than
permanent file copies then in the holder's possession, of the prospectus
covering the Registrable Securities current at the time of receipt of the
notice.
(d) Whenever the holders of Registrable Securities have requested that
any Registrable Securities be registered pursuant to SECTION 2(a) hereof, those
holders shall notify the Company, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event, which (i) is uniquely within any such holder's respective knowledge and
(ii) concerns matters relating to that holder of the Registrable Securities, as
a result of which the prospectus included in the registration statement contains
an untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading.
-7-
<PAGE>
SECTION 5. INDEMNIFICATION.
(a) INDEMNIFICATION BY COMPANY. In the event of any registration of
Registrable Securities under the Securities Act pursuant to this Agreement, to
the full extent permitted by law, the Company agrees to indemnify each holder of
Registrable Securities (including any trustee)against all losses, claims,
damages, liabilities and reasonable expenses (including reasonable attorneys'
fees and expenses) caused by any untrue or allegedly untrue statement of
material fact contained in any registration statement under which such
Registrable Securities were registered under the Securities Act, any prospectus
or preliminary prospectus contained therein or any omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, except to the extent the untrue statement or
omission resulted from information that the holder furnished in writing to the
Company expressly for use therein or the holder's failure to provide the notice
required under SECTION 4(d) hereof or by the holder's failure to deliver a copy
of the registration statement or prospectus or any amendments or supplements
thereto to any purchaser after the Company has furnished the holder with a
sufficient number of copies of the relevant documents. In connection with a firm
or best efforts underwritten offering, to the extent customarily required by the
managing underwriter, the Company will indemnify the underwriters, their
officers and directors and each Person who controls the underwriters (within the
meaning of the Securities Act and the Exchange Act), to the extent customary in
such agreements.
(b) INDEMNIFICATION BY HOLDERS OF SECURITIES. In connection with any
registration statement, each participating holder of Registrable Securities will
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any registration statement or
prospectus and each holder agrees to indemnify, to the full extent permitted by
law, the Company, its directors and officers, and each Person who controls the
Company (within the meaning of the Securities Act and the Exchange Act), against
any losses, claims, damages, liabilities, and reasonable expenses (including
reasonable attorneys' fees and expenses) resulting from any untrue or allegedly
untrue statement of a material fact or any omission or alleged omission of a
material fact required to be stated in the registration statement or prospectus
or any amendment thereof or supplement thereto necessary to make the statements
therein not misleading, but only to the extent that the untrue statement or
omission is contained in or omitted from any information or affidavit the holder
furnished in writing, or resulting from the holder's failure to provide the
notice required under SECTION 4(d) hereof or to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto to
any purchaser after the Company has furnished the holder with a sufficient
number of copies of the relevant documents.
(c) INDEMNIFICATION PROCEEDINGS. Any Person entitled to indemnification
under this Agreement will (i) give prompt notice to the indemnifying party of
any claim with respect to which it seeks indemnification and (ii) unless in the
indemnified party's reasonable judgment a conflict of interest may exist between
the indemnified and indemnifying parties with respect to the claim, permit the
indemnifying party to assume the defense of the claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party does not assume
the defense, the
-8-
<PAGE>
indemnifying party will not be liable for any settlement made without its
consent (but that consent may not be unreasonably withheld). No indemnifying
party will consent to entry of any judgment or will enter into any settlement
that does not include as an unconditional term the claimant's or plaintiff's
release of the indemnified party from all liability concerning the claim or
litigation. An indemnifying party who is not entitled to or elects not to assume
the defense of a claim will not be obligated to pay the fees and expenses of
more than one counsel for all parties indemnified by the indemnifying party with
respect to the claim.
(d) CONTRIBUTION. If the indemnification provided for in SECTION 5(a)
or 5(b) hereof is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
indemnifying party thereunder shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company and the participating holders of Registrable Securities in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Company and the
participating holders of Registrable Securities shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the participating holders
of Registrable Securities and the parties' relative intent and knowledge.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this SECTION 5(d) hereof were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding anything herein to the contrary, no participating holder of
Registrable Securities shall be required to contribute any amount in excess of
the amount by which the net proceeds of the offering (before deducting expenses,
if any) received by such participating holder exceeds the amount of any damages
that such participating holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
SECTION 6. RULE 144. If the Company files a registration statement
pursuant to the requirements of the Securities Act or Section 12 of the Exchange
Act which has been declared effective, the Company covenants that it will file
the reports required to be filed by it under the Securities Act and the Exchange
Act, and it will take such further action as any holder of Registrable
Securities reasonably may request, all to the extent required from time to time,
to enable the holder to sell Registrable Securities without registration under
the Securities Act within the limitation of the exemption provided by Rule 144
under the Securities Act or any successor rule. Upon the request of any holder
of Registrable Securities, the Company will deliver to the holder a written
statement as to whether it has complied with the requirements of Rule 144 or any
successor rule.
-9-
<PAGE>
SECTION 7. MISCELLANEOUS.
(a) AMENDMENT. This Agreement may be amended or modified only by a
written agreement executed by the Company, by the holders of at least a majority
of the Registrable Securities then held by members of Carol's Family and by the
holders of at least a majority of the Registrable Securities then held by
members of Fran's Family.
(b) BENEFIT OF PARTIES; ASSIGNMENT. All of the terms and provisions of
this Agreement shall be binding on and inure to the benefit of the parties and
their respective successors and assigns, including without limitation all
subsequent holders of securities who become entitled to the benefits of this
Agreement and who agree in writing to become bound by the terms of this
Agreement; PROVIDED, HOWEVER, this Agreement may not be assigned or transferred
(by operation of law or otherwise) to any Person and no successor or assign will
be entitled to the benefits hereof other than an Investor.
(c) CAPTIONS. The captions of the sections and subsections of this
Agreement are solely for convenient reference and shall not be deemed to affect
the meaning or interpretation of any provision of this Agreement.
(d) COOPERATION. The parties agree that after execution of this
Agreement they will from time to time, upon the request of any other party and
without further consideration, execute, acknowledge and deliver in proper form
any further instruments and take such other action as any other party may
reasonably require to carry out effectively the intent of this Agreement.
(e) COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
(f) ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties with respect to the subject matter of this Agreement. There are
no promises, covenants or undertakings other than those expressly set forth or
provided for in this Agreement.
(g) GOVERNING LAW AND CHOICE OF FORUM. The internal laws of the State
of Ohio shall govern the interpretation, construction, and enforcement of this
Agreement and all transactions and agreements contemplated hereby,
notwithstanding any state's choice of law rules to the contrary. Any litigation
related to this Agreement may be maintained only in the federal district court
for the Southern District of Ohio, Columbus Division (or any successor
jurisdiction) or in an Ohio state court in Franklin County, and each party
hereby irrevocably consents and submits to the jurisdiction of that federal or
state court and irrevocably waives any objection the party may have based upon
improper venue, FORUM NON CONVENIENS or other similar doctrines or rules.
(h) NOTICES. All notices, requests, demands, or other communications
that are required or may be given pursuant to the terms of this Agreement shall
be in writing and delivery shall be deemed sufficient in all respects and to
have been duly given on the date of service if delivered
-10-
<PAGE>
personally to the party to whom notice is to be given, or on the third day after
mailing if mailed by first class mail - return receipt requested, postage
prepaid, and properly addressed to the addresses set forth in the shareholder
records of the Company or to such other address(es) as the respective parties
hereto shall from time to time designate to the other(s) in writing.
(i) SPECIFIC PERFORMANCE. Each of the parties agrees that damages for a
breach of or default under this Agreement would be inadequate and that in
addition to all other remedies available at law or in equity the parties and
their successors and assigns shall be entitled to specific performance or
injunctive relief, or both, in the event of a breach or a threatened breach of
this Agreement.
(j) VALIDITY OF PROVISIONS. Should any part of this Agreement for any
reason be declared by any court of competent jurisdiction to be invalid, that
decision shall not affect the validity of the remaining portion, which shall
continue in full force and effect as if this Agreement had been executed with
the invalid portion eliminated, it being the intent of the parties that they
would have executed the remaining portion of this Agreement without including
any part or portion that may for any reason be declared invalid.
(k) TERMINATION. This Agreement shall terminate on the Termination
Date.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above.
D.P.E.C., INC.
By /S/ CAROL CLARK, PRES.
----------------------------------
Carol Clark, its President
/S/ FRAN PAPALIOS
----------------------------------
Fran Papalios
/S/ CAROL CLARK
----------------------------------
Carol Clark
-11-
<PAGE>
SUPPLEMENT TO REGISTRATION RIGHTS AGREEMENT
This Supplement to Registration Rights Agreement (this
"Supplement") is dated as of July 31, 1996, by and between DPEC, Inc., an Ohio
corporation (the "Company"), and Gary Qualmann ("Qualmann").
WHEREAS, the Company, Carol Clark and Fran Papalios are
parties to a Registration Rights Agreement dated May 10, 1996 (the "Agreement");
WHEREAS, under the Agreement, the Company has the right, in
its sole discretion, to designate as an "Investor" a Person who has agreed to be
bound by the terms of the Agreement;
WHEREAS, the Company desires to designate Qualmann as an
Investor (as such term is defined in the Agreement), and Qualmann desires to be
designated as an Investor;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company hereby designates Qualmann as an Investor under
the Agreement.
2. Qualmann, as an Investor, agrees to be bound by the terms
of the Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplement to be signed as of the date first above written.
DPEC, Inc.
By: /S/ CAROL CLARK, PRES.
----------------------------------
Carol Clark, President
/S/ GARY W. QUALMANN
----------------------------------
Gary Qualmann
-12-
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement is made as of
August 27, 1999 (the "Effective Date"), by and among DPEC, INC., an Ohio
corporation (the "Company"), and RIVER CITIES CAPITAL FUND II LIMITED
PARTNERSHIP, a Delaware limited partnership ("River Cities"), JG FUNDING, LLC, a
Kentucky limited liability company ("JG"), SAUNDERS CAPITAL GROUP, LLC, a
Kentucky limited liability company ("Saunders"), and IRVING W. BAILEY II, an
individual ("Bailey") River Cities, JG, Saunders and Bailey are hereinafter
sometimes referred to individually as an "Investor" and collectively as the
"Investors").
W I T N E S S E T H:
WHEREAS, the Company has issued to the Investors shares of Series B
Convertible Preferred Stock, no par value per share of the Company (the "Series
B Preferred Stock"), and/or shares of Senior Convertible Preferred Stock, no par
value of the Company (the "Senior Convertible Preferred Stock", which, together
with the Series B Preferred Stock, is hereinafter called the "Preferred Stock");
WHEREAS, the parties to this Agreement also are parties to that certain
Series B Convertible Preferred Stock Purchase Agreement (the "Purchase
Agreement") of even date herewith;
WHEREAS, the Investors were unwilling to acquire the Preferred Stock
(i) without assurances of an ability to dispose publicly of the shares of the
Company's common stock ("Common Stock") into which the Preferred Stock is
convertible and (ii) without certain other assurances as provided herein;
WHEREAS, the Company is willing to make such assurances; and
WHEREAS, the Company and River Cities (by way of assignment from River
Cities Capital Group II Limited Partnership) are parties to that certain
Registration Rights Agreement dated September 15, 1998 (the "Original
Registration Rights Agreement");
NOW, THEREFORE, in consideration of the recitals, the mutual covenants
and agreements herein contained and the issuance and purchase of the Preferred
Stock, the parties hereto, intending to be legally bound, do hereby covenant and
agree as follows:
1. REGISTRATION OF SECURITIES.
1.1 REGISTRATION BY THE COMPANY. If at any time or from time
to time the Company proposes to file on its behalf a registration statement
under the Securities Act of 1933,
<PAGE>
as amended (the "Securities Act"), with respect to its Common Stock, other than
a registration that has been initiated at the request of the holders of
Registrable Securities (as defined below) pursuant to Section 1.2 or that has
been initiated at the request of the holders of securities (other than
Registrable Securities) of the Company who have been granted registration rights
by the Company which are similar to the rights set forth in Section 1.2, the
Company shall in each case give written notice at least thirty (30) days before
the anticipated filing date to the Investors and each other holder of shares of
Preferred Stock or of shares of Common Stock previously acquired by the
conversion of Preferred Stock ("Registrable Securities"). The notice shall offer
to include in the filing, subject to reduction as provided below, the number of
Registrable Securities held by such holder. If a holder desires to have any of
its Registrable Securities registered under this Section 1.1, it shall advise
the Company in writing within ten (10) days after receiving the Company's
notice, setting forth the number of Registrable Securities for which
registration is requested. In connection with any registration of any of the
Registrable Securities pursuant to this Section 1.1, the Company shall pay all
expenses of the registration and the related offering, including, without
limitation, any and all special audits, legal and accounting fees and
disbursements (including reasonable fees and disbursements of one legal counsel
designated to represent all holders of Registrable Securities and selected by
the holders of a majority of the Registrable Securities being registered), blue
sky fees and expenses, printing costs and related disbursements arising out of
the preparation, filing, amending and supplementing of the registration
statement, but not including brokers' and underwriters' discounts and
commissions which shall be paid by the holders of the Registrable Securities
being registered. Neither the delivery of the notice by the Company nor the
request by the holders of Registrable Securities shall in any way obligate the
Company to file a registration statement and, notwithstanding such filing, the
Company may, at any time prior to the effective date thereof, determine not to
offer the securities to which the registration statement relates without
liability to any holder of Registrable Securities. No registration of any of the
Registrable Securities effected under this Section 1.1 shall relieve the Company
of its obligation to effect registration of any of the Registrable Securities
upon the request of a holder pursuant to the provisions of Section 1.2 below.
If the managing underwriter of an underwritten registration under this
Section 1.1 gives the Company its written opinion that the total number of
securities proposed or requested to be included in the registration exceeds the
number of securities that can be sold without adversely affecting the marketing
of the securities, the Company shall be entitled to limit the number of
securities to be included in the registration and shall include the securities
in the registration in the following order of priority: first, all securities
the Company proposes to sell; second, to the extent of any balance, up to the
full number of securities requested to be included in the registration by the
holders of Registrable Securities and by other holders of the Company's
securities who have been granted registration rights by the Company (allocated
pro rata among each such holder on the basis of the number of such securities
owned by all such holders); and third, to the extent of any balance but only if
permitted by the Company, up to the full number of any other securities
requested to be included by other holders of securities (allocated among such
holders in such proportions as the Company and such holders may agree). In the
event that the managing underwriter advises the Company that an underwriters'
overallotment option is necessary or advisable, the preceding priority shall
apply to the determination of which securities
2
<PAGE>
are to be included in the primary portion of such registration and, if
necessary, the overallotment portion of such registration.
1.2 REGISTRATION AT THE HOLDERS' REQUEST. At any time after
the earlier of (i) an initial public offering of the Common Stock or (ii)
September 14, 2003, the holders of a majority of the Registrable Securities may
request in writing that the Company effect the registration under the Securities
Act of any of the holders' shares of Registrable Securities. The request shall
specify the intended method or methods of disposition of such Registrable
Securities (including, if the proposed offering is to be an underwritten
offering, the managing underwriter or underwriters thereof which underwriter
shall be acceptable to the Company). Upon receiving the request of the holders
of the Registrable Securities, the Company shall promptly notify any other
holders of Registrable Securities of the request and shall permit such holders
to request that their Registrable Securities also be included in such
registration. If such a holder desires to have any of its Registrable Securities
registered under this Section 1.2, it shall advise the Company in writing within
ten (10) days after receiving the Company's notice, setting forth the number of
Registrable Securities for which registration is requested. Thereafter, the
Company shall expeditiously prepare and file a registration statement with
respect to, and use its best efforts to effect the registration under the
Securities Act of, the Registrable Securities specified in the holders' request;
provided, however, that, (i) in the case of any registration pursuant to this
Section 1.2 which is an underwritten offering, the Company shall have the right
to postpone such registration for up to sixty (60) days on the advice of the
managing underwriter thereof; and (ii) no more than two registrations pursuant
to this Section 1.2 will be effected by the Company.
If at any time the holders of a majority of the Registrable Securities
request registration of any of their Registrable Securities pursuant to this
Section 1.2, the Company shall have the option, exercisable within ten (10) days
of the date of the holders' request, to purchase the Registrable Securities
requested to be registered at the average closing sale price of the Common
Stock, as reported on the applicable exchange or other market on which the
Common Stock is traded or quoted, during the period from the date of the request
through the date the Company exercises its option to purchase; provided,
however, that if the Common Stock is not traded or quoted on an exchange or
other market, the purchase price shall be the fair market value of the
Registrable Securities as determined in accordance with the provisions of
paragraph (B)(5) of Article FOURTH of the Company's Articles of Incorporation,
as amended. The Company shall pay to such holders the purchase price for the
Registrable Securities and the holders shall tender to the Company
certificate(s) representing the Registrable Securities sold, within sixty (60)
days of the exercise of the option.
Any registration of Registrable Securities requested by the holders
pursuant to the provisions of this Section 1.2 which, for any reason (other than
by reason of the fault of the Company) shall not become effective within ninety
(90) days after its filing with the Commission, may be terminated by the
Company. Any such registration which is so terminated by the Company shall,
nonetheless, be deemed to be a registration under this Section.
In connection with the registration of the Registrable Securities
pursuant to this Section 1.2, the Company shall pay all expenses of such
registration and the related offering, including,
3
<PAGE>
without limitation, any and all special audits, legal and accounting fees and
disbursements (including fees and disbursements of legal counsel designated to
represent all holders of the Registrable Securities and selected by the holders
of a majority of the Registrable Securities being registered), blue sky fees and
expenses, printing costs and related disbursements arising out of the
preparation, filing, amending and supplementing of the registration statement,
except for broker's and underwriter's discounts and commissions which shall be
paid by the holders of the Registrable Securities being registered.
If the managing underwriter of an underwritten registration under this
Section 1.2 gives the Company its written opinion that the total number of
securities proposed or requested to be included in the registration exceeds the
number of securities that can be sold without adversely affecting the marketing
of the securities, the Company shall be entitled to limit the number of
securities to be included in the registration and shall include the securities
in the registration in the following order of priority: first, all Registrable
Securities requested to be included in the registration by the holders thereof;
second, to the extent of any balance, up to the full number of securities the
Company proposes to sell; third, to the extent of any balance, up to the full
number of other securities requested to be included in the registration by the
holders of the Company's securities who have been granted registration rights by
the Company (allocated pro rata among each such holder on the basis of the
number of such securities owned by all such holders); and fourth, to the extent
of any balance but only if permitted by the Company, up to the full number of
any other securities requested to be included by other holders of securities
(allocated among such holders in such proportions as the Company and such
holders may agree). In the event that the managing underwriter advises the
Company that an underwriters' overallotment option is necessary or advisable,
the preceding priority shall apply to the determination of which securities are
to be included in the primary portion of such registration and, if necessary,
the overallotment portion of such registration.
Anything in this Section 1.2 to the contrary notwithstanding, if the
Registrable Securities are included in any registration of any securities for
sale by or on behalf of the Company, such registration shall not be deemed to be
a registration for the purpose of this Section 1.2 but shall be deemed to be a
registration pursuant to the provisions of Section 1.1 hereof; provided,
however, that this paragraph shall not entitle the holders of Registrable
Securities to more than two registrations pursuant to Section 1.2.
1.3 REGISTRATION GENERALLY. If and when the Company shall be
required by the provisions of this Section 1 to effect the registration of
Registrable Securities under the Securities Act, the Company shall, as
expeditiously as possible:
1.3.1 prepare and file a registration statement under
the Securities Act on Form S-1, S-2 or S-3 (or on any other form for the general
registration of securities) with respect to the Registrable Securities being
registered, and use its best efforts to cause the registration statement to
become effective; provided, however, that before filing the registration
statement and any amendment or supplement thereto, the Company shall furnish to
the holders of the Registrable Securities being registered or, if requested by
such holders, to counsel selected by such holders, copies of all documents
proposed to be filed, which documents shall be subject to
4
<PAGE>
the review and approval of such counsel, which approval shall not be
unreasonably withheld or delayed;
1.3.2 prepare and file with the Securities and
Exchange Commission (the "Commission") such amendments and supplements to the
registration statement and the prospectus used in connection therewith as may be
necessary to keep the registration statement effective for a period of one
hundred eighty (180) days from the effective date of the applicable registration
statement or such shorter period agreed upon by the Company and the holders of a
majority of the Registrable Securities being registered, and to comply with the
provisions of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), with respect to the offer of the Registrable
Securities covered by the registration statement during the period required for
distribution of the Registrable Securities;
1.3.3 furnish to the holders of Registrable
Securities being registered such number of printed copies of the registration
statement and of each amendment and supplement thereto, the prospectus included
in the registration statement (including each preliminary prospectus and any
summary prospectus), the documents incorporated by reference in the registration
statement or prospectus and any other documents as such holders may reasonably
request in order to facilitate the disposition of the Registrable Securities
covered by the registration statement, in conformity with the requirements of
the Securities Act;
1.3.4 use its best efforts to register or qualify the
Registrable Securities covered by the registration statement under the
securities or blue sky laws in such jurisdictions within the United States as
the holders may reasonably request; provided however, that the Company shall not
be obligated to qualify its business in any jurisdiction where it is not then so
qualified or otherwise required to be so qualified or to take any action which
would subject it to the service of process in suits other than those arising out
of such registrations;
1.3.5 furnish to the holders of the Registrable
Securities being registered and, in the case of any registration pursuant to
Section 1.2 which is an underwritten offering, to the managing underwriter
thereof, a signed counterpart of customary closing documents including (A) an
opinion of counsel for the Company, dated the effective date of the registration
statement (or, in the case of any underwritten offering, the date of closing
with the underwriters) and (B) a so-called "cold comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in the registration statement, covering substantially the
same matters with respect to the registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in accountants' letters delivered to underwriters in connection with
underwritten public offerings of securities;
1.3.6 immediately notify the holders of the
Registrable Securities being registered at any time when a prospectus relating
to the registration of the Registrable Securities is required to be delivered
under the Securities Act (except where circumstances requiring such deliveries
are within the knowledge or control of the holders) of the happening of any
event as a result of which the prospectus included in the registration
statement, as then in effect, includes an
5
<PAGE>
untrue statement of a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
then existing, and at the request of any holder prepare and furnish to the
holder a reasonable number of copies of a supplement to or an amendment of the
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of the Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing;
1.3.7 otherwise use its best efforts to comply with
the Securities Act, Exchange Act and all applicable rules and regulations of the
Commission, and make available to its securities holders, as soon as reasonably
practicable, an earnings statement covering a period of at least twelve (12)
months, but not more than eighteen (18) months, beginning with the first month
of the first fiscal quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
1.3.8 use its best efforts to list the Registrable
Securities being registered on the securities exchange or securities association
on which the Common Stock is then listed, and to provide, if appropriate, a
transfer agent and registrar for the Registrable Securities not later than the
effective date of such registration statement.
If requested by the underwriters of any underwritten offering of the
Registrable Securities, the Company and the holders of the Registrable
Securities being registered shall enter into an underwriting agreement with the
underwriters of the offering, such agreement to contain such representations and
warranties by the Company and such holders and such other terms and provisions
as are customarily contained in underwriting agreements with respect to
secondary distributions, including, without limitation, indemnities to the
effect and to the extent provided in Section 1.5 hereof. If the Company at any
time proposes to register any of its securities under the Securities Act, other
than pursuant to a request made under Section 1.2 hereof, whether or not for
sale for its own account, and such securities are to be distributed by or
through one or more underwriters, the Company shall make reasonable efforts to
arrange for the underwriters to include the Registrable Securities among those
securities to be distributed by or through the underwriters.
If an underwritten registration of the Company has been initiated at
the request of the holders of securities (other than Registrable Securities) of
the Company who have been granted registration rights by the Company which are
similar to the rights set forth in Section 1.2 and if the managing underwriter
gives the Company its written opinion that the total number of securities
proposed or requested to be included in the registration exceeds the number of
securities that can be sold without adversely affecting the marketing of the
securities, the Company shall be entitled to limit the number of securities to
be included in the registration and shall include the securities in the
registration in the following order of priority: first, up to the sum of the
full number of securities requested to be included in the registration by the
holders who have requested the registration and the number of Registrable
Securities requested to be included in the registration by the holders thereof
(allocated pro rata among each such holder on
6
<PAGE>
the basis of the number of securities owned by all such holders); second, to the
extent of any balance, up to the full number of securities the Company proposes
to sell; and third, to the extent of any balance but only if permitted by the
Company, up to the full number of any other securities requested to be included
by other holders of securities (allocated among such holders in such proportions
as the Company and such holder may agree). In the event that the managing
underwriter advises the Company that an underwriter's overallotment option is
necessary or advisable, the preceding priority shall apply to the determination
of which securities are to be included in the primary portion of such
registration and, if necessary, the overallotment portion of such registration.
In connection with the preparation and filing of each registration
statement registering Registrable Securities under the Securities Act, the
Company shall give the holders of the Registrable Securities being registered
and their underwriter, if any, and their counsel and accountants the opportunity
to participate in the preparation of such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto. The Company shall also give each of them such
access to its books and records and such opportunities to discuss the business
of the Company with its officers, its counsel and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of the holders of a majority of the Registrable Securities being
registered and the underwriter or counsel for such holders, to conduct a
reasonable investigation within the meaning of the Securities Act prior to the
effectiveness of the registration statement.
1.4 CONDITIONS TO REGISTRATION. The right of the holders to
have Registrable Securities included in any registration statement filed by the
Company in accordance with the provisions of this Section 1 shall be subject to
the following conditions:
1.4.1 the holders shall furnish the Company in a
timely manner with all information required by the applicable rules and
regulations of the Commission concerning the proposed method of sale or other
disposition of the Registrable Securities, the identity of and compensation to
be paid to any proposed underwriters to be employed in connection therewith, and
such other information as may be reasonably required by the Company to prepare
and file such registration statement in accordance with applicable provisions of
the Securities Act;
1.4.2 if the holders desire to sell and distribute
the Registrable Securities over a period of time, or from time to time, at then
prevailing market prices, then the holders shall execute and deliver to the
Company such written undertakings as the Company and its counsel may reasonably
require in order to assure full compliance with relevant provisions of the
Securities Act and the Exchange Act;
1.4.3 in the case of any underwritten offering on
behalf of the holders of Registrable Securities pursuant to the provisions of
Section 1.2 hereof, the managing underwriters shall be subject to the approval
of the Company, such approval not to be unreasonably withheld or delayed; and
7
<PAGE>
1.4.4 in the case of a filing involving Common Stock
which has not yet been acquired by the conversion of Preferred Stock, the holder
shall complete the conversion of its Preferred Stock into such Common Stock by
the effective date of the registration statement.
1.5 INDEMNIFICATION. In the event of the registration of any
of the Registrable Securities under the Securities Act pursuant to the
provisions hereof, the Company shall, to the extent permitted by law, indemnify
and hold harmless the holders of such Registrable Securities, their respective
partners, directors, officers, agents, and any underwriters, and each other
person, if any, who controls or is controlled by such holders or any such
underwriters within the meaning of the Securities Act (each such person being
hereinafter sometimes referred to as an "indemnified person"), against any
losses, claims, damages or liabilities, joint or several (collectively, the
"Losses"), to which such indemnified person may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained or incorporated by reference in the
registration statement, any preliminary prospectus or final prospectus contained
therein (as they may be amended or supplemented), or any document incorporated
by reference therein, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company shall reimburse each
indemnified person for any legal or other expenses reasonably incurred by the
indemnified person (which shall be limited as provided in this Section 1.5) in
connection with investigating or defending any Losses. However, the Company
shall not be liable in any case to the extent that any Losses arise out of or
are based upon an untrue statement or alleged untrue statement or omission or
alleged omission made or incorporated by reference in the registration
statement, preliminary prospectus or final prospectus (as they may be amended or
supplemented) in reliance upon and in conformity with written information
furnished to the Company by an indemnified person specifically stating that it
is for use in preparation thereof or an indemnified person's failure to deliver
a copy of the registration statement or prospectus or any amendments or
supplements thereto to any purchaser. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
indemnified person and shall survive the transfer of the Registrable Securities
by the holders.
In the event of the registration of any holder's Registrable Securities
under the Securities Act pursuant to the provisions hereof, the holder shall, to
the extent permitted by law, indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the registration
statement, each underwriter, broker and dealer, if any, who participates in the
offering and sale of the Registrable Securities and each other person, if any,
who controls or is controlled by the Company or any such underwriter, broker or
dealer within the meaning of the Securities Act, against any Losses to which the
Company, such director, officer, underwriter, broker or dealer or controlling or
controlled person may become subject under the Securities Act or otherwise,
insofar as such Losses (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained or incorporated by reference in the registration statement, any
preliminary prospectus or final prospectus contained therein (as they may be
amended or supplemented), or any document incorporated by reference
8
<PAGE>
therein, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, which untrue statement or alleged untrue
statement or omission or alleged omission has been made or incorporated therein
in reliance upon and in conformity with written information furnished to the
Company by the holder of Registrable Securities specifically stating that it is
for use in the preparation thereof. Such holder of Registrable Securities shall
also reimburse the Company, each such director, officer, underwriter, broker,
dealer and controlling or controlled person for any legal or other expenses
reasonably incurred by the Company, such director, officer, underwriter, broker,
dealer or controlling or controlled person in connection with investigating or
defending any such Losses.
Each party entitled to indemnification under this Section 1.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnifying Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Section 1.5 (except and to the
extent the Indemnifying Party has been materially prejudiced as a consequence
thereof). The Indemnifying Party shall be entitled to participate in, and if it
provides written notice to the Indemnified Party promptly after receiving the
notice from the Indemnified Party, at its expense to assume, the defense of any
such claim or any litigation resulting therefrom with counsel reasonably
satisfactory to the Indemnified Party; provided, that the Indemnified Party may
participate in such defense at its expense, notwithstanding the assumption of
such defense by the Indemnifying Party, and provided, further, that if the
defendants in any such action shall include both the Indemnified Party and the
Indemnifying Party and the Indemnified Party shall have reasonably concluded
that there may be a conflict of interest in counsel representing both the
Indemnifying Party and the Indemnified Party, the Indemnified Party or Parties
shall have the right to select one separate counsel on behalf of all of the
Indemnified Party or Parties and the reasonable fees and expenses of such
counsel shall be paid by the Indemnifying Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party (which shall not be unreasonably withheld), consent to entry
of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
The amount paid or payable by an Indemnifying Party as a result of the
Losses (or actions in respect thereof) referred to above in this Section 1.5 or
Section 1.6 hereof shall include any legal or other expenses reasonably incurred
by the Indemnified Party in connection with investigating or defending any such
action or claim (which shall be limited as provided in this Section 1.5). No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
9
<PAGE>
Indemnification similar to that specified in the preceding provisions
of this Section 1.5 (with appropriate modifications) shall be given by the
Company to the holders of Registrable Securities being registered and by such
holders to the Company with respect to any required registration or other
qualification of such Registrable Securities under any federal or state law or
regulation of governmental authority other than the Securities Act.
In the event of any underwritten offering of the Registrable
Securities under the Securities Act pursuant to the provisions of this Section
1, the Company and the holders thereof agree to enter into an underwriting
agreement, in standard form, with the underwriters, which underwriting agreement
may contain provisions with respect to indemnification different from those set
forth in this Section 1.5, but this Agreement shall govern as between the
Company and such holders.
1.6 EXCHANGE ACT REGISTRATION. The Company covenants
and agrees that until such time as a holder no longer holds any of the
Registrable Securities:
1.6.1 subsequent to any registration of Common Stock
under the Securities Act, the Company shall, if required by law, maintain an
effective registration statement (containing such information and documents as
the Commission shall specify) with respect to the Common Stock under Section
12(g) of the Exchange Act and shall file on time such information, documents and
reports as the Commission may require or prescribe for companies whose stock has
been registered pursuant to said Section 12(g);
1.6.2 the Company shall, if a registration statement
with respect to the shares of the Company under Section 12(b) or Section 12(g)
of the Exchange Act is, or is required to be maintained, effective, upon the
request of the holder, make whatever other filings with the Commission or
otherwise make generally available to the public such financial and other
information as may be reasonably necessary in order to enable the holder to be
permitted to sell its Registrable Securities pursuant to the provisions of Rule
144 promulgated under the Securities Act (or any successor rule or regulation
thereto or any statute hereafter adopted to replace or to establish the
exemption that is now covered by said Rule 144) if otherwise available; and
1.6.3 upon the reasonable request of the holder, the
Company shall deliver to the holder a written statement as to whether the
Company has complied with the requirements of this Section 1.6.
The Company represents and warrants that the registration or any
information, documents or reports filed with the Commission and incorporated by
reference therein shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements contained therein, in light of the circumstances
under which such statements were made, not misleading. The Company agrees to
indemnify and hold harmless (or, to the extent the same is not enforceable, make
contribution to) the holders of Registrable Securities being registered, their
respective partners, officers, directors and agents, each broker, dealer or
underwriter (within the meaning of the Securities Act) acting for such
10
<PAGE>
holders in connection with any offering or sale by such holders of Registrable
Securities or any person, firm or corporation controlling or controlled by
(within the meaning of the Securities Act) any such holder and any such broker,
dealer or underwriter from and against any and all Losses (or actions in respect
thereof) arising out of or resulting from any breach of the foregoing
representation or warranty, all on terms and conditions comparable to those set
forth in Section 1.5 hereof provided, however, that the Company shall not be
liable in any such case to the extent that any such Losses arise out of or are
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made or incorporated by reference in the registration
statement, document or report in reliance upon filings made by any such holder
under the Exchange Act and in conformity with written information furnished to
the Company by any such holder specifically stating that it is for use in the
preparation thereof; provided, further, that the Company shall be given written
notice and an opportunity to participate in, and, to the extent that it may
wish, to assume on terms and conditions comparable to those set forth in Section
1.5 hereof, the defense thereof.
1.7 LIMITATION ON REGISTRATION RIGHTS OF OTHERS. The Company
covenants and agrees that; so long as there are any shares of Registrable
Securities in respect of which any of the rights of registration provided for in
this Section 1 shall continue, the Company shall not, directly or indirectly,
without the prior written consent of the holders of a majority of such
Registrable Securities, which consent shall not be unreasonably withheld or
delayed, grant at any time after the date hereof to any person or agree to or
otherwise become obligated in respect of any rights of registration of
securities of the Company which are either (i) more favorable than, or (ii) in
the nature or substantially in the nature of, the rights of registration of the
holders of Registrable Securities pursuant to Sections 1.1 or 1.2 hereof;
provided, however, that the consent of the holders of Registrable Securities
shall not be required with regard to (ii) above if such rights of registration
are being offered to a holder of securities of the Company who purchased such
securities for a price per share equal to or greater than the then applicable
Conversion Price (as defined in the Company's Articles of Incorporation, as
amended) per share of the shares of Series B Preferred Stock issued to the
Investors on the Effective Date.
1.8 EXCEPTION TO REGISTRATION. The Company shall not be
required to effect a registration of Registrable Securities under this Agreement
if (i) the Registrable Securities have been previously sold pursuant to a
registration under the Securities Act, (ii) in the written opinion of counsel
for the Company, which counsel and the opinion so rendered shall be reasonably
acceptable to the holders of a majority of Registrable Securities, the holder
may sell without registration under the Securities Act substantially all of the
Registrable Securities for which it requested registration under the provisions
of the Securities Act and in the manner and in the quantity in which the
Registrable Securities were proposed to be sold or (iii) the Company shall have
obtained from the Commission a "no-action" letter to that effect; provided that
this Section 1.8 shall not apply to sales made under Rule 144(k) or any
successor rule promulgated by the Commission until two years after the effective
date of the Company's initial registration of shares under the Securities Act.
1.9 HOLDBACK OBLIGATIONS. Each holder of Registrable
Securities agrees not to make, during the seven days prior to and the 90 days
after the effective date of an underwritten
11
<PAGE>
registration by the Company, any public sale or distribution of any of its
Registrable Securities (except as part of the underwritten registration or
pursuant to a registration on Form S-8 or any successor or comparable forms),
including a sale pursuant to Rule 144, unless the managing underwriter agrees
otherwise. The Company agrees not to make any public sale or distribution of any
of its equity securities or any securities convertible into or exchangeable or
exercisable for any of its equity securities, including a sale under Regulation
D of the Securities Act or under any other exemption of the Securities Act
(except as part of the underwritten registration or pursuant to a registration
on Form S-4, Form S-8 or any successor or comparable forms), during the seven
days prior to and the 90 days after the effective date of any underwritten
registration by the Company, unless the managing underwriter agrees otherwise.
The Company also agrees to use reasonable efforts to cause each holder of at
least 5% (on a fully-diluted basis) of its equity securities or any securities
convertible into or exchangeable or exercisable for any of its equity
securities, purchased from the Company at any time on or after the date of this
Agreement (other than pursuant to a registration), and shall cause each holder
of its equity securities or any securities convertible into or exchangeable or
exercisable for any of its equity securities who is selling securities pursuant
to an underwritten registration, to agree not to make any public sale or
distribution of those securities, including a sale pursuant to Rule 144 (except
as part of the underwritten registration or pursuant to a registration on Form
S-8 or any successor or comparable forms), during the seven days prior to and
the 90 days after the effective date of the registration, unless the managing
underwriter agrees otherwise. Notwithstanding anything to the contrary herein,
this Section 1.9 shall not apply to any of the Investors, or their partners,
members or shareholders.
2. SPECIFIC PERFORMANCE. The Company recognizes that the rights of the
holders of Registrable Securities under this Agreement are unique and,
accordingly, the holders shall, in addition to such other remedies as may be
available to them at law or in equity, have the right to enforce their rights
hereunder by actions for injunctive relief and specific performance to the
extent permitted by law. This Agreement is not intended to limit or abridge any
right of the holders of Registrable Securities which may exist apart from this
Agreement.
3. EXPENSES. Pursuant to Section 23 of the Purchase Agreement, the
Company shall pay all expenses incident to the performance or enforcement of
this Agreement, including all fees and expenses of counsel for all activities
undertaken pursuant to this Agreement, except as otherwise provided in Section 1
hereof.
4. NOTICES, ETC. All notices and other communications hereunder shall
be in writing and shall be (i) mailed by first class or express mail, postage
prepaid, (ii) sent by telex, telegram, telecopy or other similar form of rapid
transmission, confirmed by mailing (by first class or express mail, postage
prepaid) written confirmation at substantially the same time as such rapid
transmission, or (iii) personally delivered to an officer of the receiving
party. All such communications shall be mailed, sent or delivered as follows:
If to the Company: DPEC, Inc.
851 West Third Street
Building 3
12
<PAGE>
Columbus, Ohio 43212
Attn: Carol A. Clark
with a copy to: Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
Columbus, Ohio 43215
Attn: Michael A. Cline, Esq.
If to the Investors
or other holder
of Registrable
Securities:
River Cities Capital Fund II Limited
Partnership
221 East Fourth Street, Suite 1900
Cincinnati, Ohio 45202
Attn: Murray R. Wilson
JG Funding, LLC
1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
Attn: David Jones, Jr.
Saunders Capital Group, LLC
1850 National City Tower
101 South Fifth Street
Louisville, Kentucky 40202
Attn: Robert S. Saunders
Irving W. Bailey II
Bailey Capital Corporation
205 Worth Avenue, Suite 201
Palm Beach, Florida 33480
with a copy to: Graydon, Head & Ritchey
1900 Fifth Third Center
511 Walnut Street
Cincinnati, Ohio 45202
Attn: Michael A. Hirschfeld, Esq.
or to such other person(s) or address(es) as the addressee shall have furnished
to the sender in writing.
Any notice so addressed and mailed shall be deemed to be given when so
mailed. Any notice so sent by rapid transmission shall be deemed to be given
when receipt of such
13
<PAGE>
transmission is acknowledged, and any communication so delivered in person shall
be deemed to be given when receipted for by, or actually received by, an
authorized officer of the party to whom it is given.
5. ENTIRE AGREEMENT. The parties hereto agree that this Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings as between
them as to such subject matter. There are no restrictions, agreements or
arrangements, oral or written, between the parties relating to the subject
matter hereof which are not fully expressed or referred to herein.
6. WAIVERS AND FURTHER AGREEMENTS. No waiver of any breach of any term
or condition of this Agreement shall operate as a waiver of any other breach of
such terms or conditions or any other term or condition, nor shall any failure
to enforce any provision hereof operate as a waiver of such provision or of any
other provision hereof. Each of the parties hereto agrees to execute all such
further instruments and documents and to take all such further actions as the
other parties may reasonably require in order to effectuate the terms and
purposes of this Agreement.
7. AMENDMENTS. This Agreement may not be amended nor shall any waiver,
change, modification, consent or discharge be effected except by an instrument
in writing executed by or on behalf of the party against whom enforcement of any
amendment, waiver, change, modification, consent or discharge is sought.
8. ASSIGNMENT: SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the Investors and their successors and
permitted assigns and, provided that any transaction entered into by the Company
is in accordance with Section 10.8 of the Purchase Agreement, this Agreement
shall be binding upon and shall inure to the benefit of the Company and its
successors and permitted assigns.
9. SEVERABILITY. If any provision of this Agreement shall be held or
deemed to be, or shall in fact be, invalid, inoperative or unenforceable as
applied to any particular case in any jurisdiction or jurisdictions, such
circumstance shall not have the effect of rendering the provision or provisions
in question, invalid, inoperative or unenforceable in any other jurisdiction or
in any other case or circumstance or of rendering any other provision or
provisions herein contained invalid, inoperative or unenforceable, but this
Agreement shall be reformed and construed in any such jurisdiction or case as if
such invalid, inoperative or unenforceable provision had never been contained
herein and such provision reformed so that it would be valid, operative and
enforceable to the maximum extent permitted in such jurisdiction or in such
case.
10. COUNTERPARTS. This Agreement may be executed in counterparts. each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument, and in pleadings or proving any provision of this
Agreement, it shall not be necessary to produce more than one of such
counterparts.
14
<PAGE>
11. SECTION HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12. PLURALS. Whenever used herein, the singular number shall include
the plural and the plural shall include the singular.
13. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Ohio.
14. TERMINATION OF THE ORIGINAL REGISTRATION RIGHTS AGREEMENT. The
Original Registration Rights Agreement is hereby terminated and shall be of no
further force or effect.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement as of the date first above written.
DPEC, INC.
By: /S/CAROL A. CLARK
-----------------------------
Carol A. Clark
President
RIVER CITIES CAPITAL FUND II
LIMITED PARTNERSHIP
By: /S/ EDWIN T. ROBINSON
-----------------------------
Edwin T. Robinson, President of
Mayson, Inc., the General Partner
of River Cities Capital Fund II
Limited Partnership
JG FUNDING, LLC
By: /S/ DAVID JONES, JR.
-----------------------------
David Jones, Jr.
Ventures, LLC, the Manager of JG
Funding, LLC
15
<PAGE>
SAUNDERS CAPITAL GROUP, LLC
By: /S/ ROBERT S. SAUNDERS
-----------------------------
Robert S. Saunders, Manager
/S/ IRVING W. BAILEY II
-----------------------------
Irving W. Bailey II
16
<PAGE>
EXHIBIT 10.9
FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
This Fourth Amended and Restated Shareholders Agreement (this
"Agreement") is entered into and made to be effective as of August 27, 1999, by
and among DPEC, Inc. an Ohio corporation (the "Company"), and each of the
individuals executing counterparts of a signature page to this Agreement
(individually, a "Shareholder" and, collectively, the "Shareholders").
WITNESSETH
WHEREAS, the parties to that certain Third Amended and Restated
Shareholders Agreement dated September 15, 1998, desire to terminate that
agreement and replace it with this Agreement;
WHEREAS, the Shareholders and the Company desire to memorialize certain
other agreements among themselves;
WHEREAS, the Shareholders own common shares, without par value, of the
Company (the "Shares");
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
REVOCATION OF S CORPORATION STATUS
1.01 TERMINATION AND REVOCATION OF S CORPORATION ELECTION. The parties
acknowledge and agree to the termination and revocation of the election of the
Company to be an S Corporation under the Internal Revenue Code of 1986, as
amended, effective September 15, 1998.
ARTICLE II
RESTRICTIONS ON TRANSFER; RIGHTS OF SHAREHOLDERS OF THE COMPANY
2.01 RESTRICTIONS ON TRANSFER. No Shareholder shall sell, assign,
convey, give, pledge, hypothecate, dispose of, issue or otherwise transfer
(collectively "Transfer"), whether such Transfer is inter vivos or testamentary,
any Shares, or any interest therein (such as stock options), now owned or
hereafter acquired by such Shareholder unless the entire consideration, if any,
for such Transfer is cash, publicly-traded securities, promissory notes or a
combination thereof and unless such Transfer is effected in accordance with the
terms of this Article II. In addition, if such Shareholder is Carol, she must
comply with the terms of Section 11 of the Series B Convertible Preferred Stock
Purchase Agreement by and among River Cities Capital Fund II
<PAGE>
Limited Partnership, JG Funding, LLC, Saunders Capital Group, LLC, Irving W.
Bailey II, the Company and Carol dated of even date herewith.
2.02 NOTICE AND PROCEDURES.
(a) Except as provided in Section 2.05 hereof, if a
Shareholder has a bona fide intention to make a Transfer, whether such Transfer
is inter vivos or testamentary, of any Shares, or any interest therein, now
owned or hereafter acquired by such Shareholder (the "Transferring Shareholder")
to a prospective purchaser, assignee, transferee or other recipient (a
"Prospective Transferee"), the Transferring Shareholder shall give written
notice to the Company of such intention to Transfer such Shares (the Shares
subject to such proposed Transfer are hereinafter called the "Available Shares")
at least 90 days prior to the anticipated closing date of the proposed Transfer
(the "Notice"). The Notice shall be in affidavit form and shall set forth the
name and address of the Transferring Shareholder, the number of Available
Shares, the name and address of the Prospective Transferee, the terms and the
consideration, if any, offered by the Prospective Transferee and the anticipated
closing date of the Transfer.
(b) The Notice given to the Company pursuant to Section
2.02(a) hereof shall also include an offer to sell to the Company all, but not
less than all, of the Available Shares (or the remaining portion thereof) at the
same per Share price and on the same terms as are specified in the Notice (the
"Offer to the Company"). The Offer to the Company shall be subject and
subordinate to any Offer to Participate, as provided in Section 2.02(c) hereof,
with respect to the Available Shares. If the Company wishes to accept the Offer
to the Company, it must do so in a writing received by the Transferring
Shareholder within 60 days after its receipt of the Offer to the Company, and
such acceptance must be unconditional. The Company shall have 30 days after its
acceptance of the Offer to the Company to complete the purchase. If the Company
does not accept an Offer to the Company or complete the purchase in accordance
with the terms specified in the Notice, the Company's rights under this Section
2.02(b) shall terminate with respect to such Offer to the Company.
(c) If (1) the Transferring Shareholder is a member of Carol's
Family and (2) the effective date of the Transfer is prior to the Expiration
Date, the Notice given to the Company pursuant to Section 2.02(a) hereof shall
also be given to Fran's Family and shall include an offer to Fran's Family to
participate Pro Rata in the Transfer at the same per Share price and on the same
terms as are specified in the Notice (the "Offer to Participate"). If Fran's
Family wishes to accept the Offer to Participate, Fran's Family must do so in a
writing received by Carol and the Company within 30 days after their receipt of
the Offer to Participate, and such acceptance shall be unconditional and shall
specify the total number of Shares (up to the Pro Rata number) that Fran's
Family will Transfer pursuant to the Offer to Participate. If Fran's Family does
not accept an Offer to Participate as provided above or complete the Transfer in
accordance with the terms specified in the Notice, their rights under this
Section 2.02(c) shall terminate with respect to such Offer to Participate.
2.03 EFFECT OF TERMINATION OR WAIVER OF RIGHTS. If the rights of the
Company and the other Shareholders with respect to Available Shares under the
provisions of Section 2.02 hereof have terminated or been waived, the
Transferring Shareholder shall have the right, for a period of
-2-
<PAGE>
60 days after the last such termination or waiver, to make a bona fide Transfer
of the Available Shares (or the remaining portion thereof) to the Prospective
Transferee named in the Notice given pursuant to Section 2.02(a) hereof at the
same per Share price and on the same terms specified in the Notice. If such
Transfer of the Available Shares is not so made by such date, the Transfer shall
again be subject to the requirements of Section 2.02 hereof
2.04 DEATH OF A SHAREHOLDER. Except as otherwise provided in this
Section 2.04 and in Section 2.05 hereof, upon the death of a Shareholder, (a)
all of the Shares held by the deceased Shareholder at the time of her death
shall be deemed to be Available Shares, (b) the personal representative of the
estate of the deceased Shareholder shall be deemed to be a Transferring
Shareholder, (c) the Transferring Shareholder (or the Company on behalf of the
Transferring Shareholder) shall give the Notice specified in Section 2.02(a)
hereof and shall make the Offer to the Company or Offer to Participate as
provided in Section 2.02(b) and (c) hereof, respectively, and (d) the rights and
obligations of the parties with respect to such Available Shares shall be
governed by the provisions of Section 2.02 and 2.03 hereof. Notwithstanding the
foregoing, the price of the Available Shares purchased pursuant to this Section
2.04 shall be paid in cash and shall be an amount equal to the fair market value
of the Available Shares. The fair market value of the Available Shares shall be
mutually agreed upon by the Transferring Shareholder and the Company. If the
Transferring Shareholder and the Company cannot agree upon the fair market value
of the Available Shares, an independent appraiser mutually selected by the
Transferring Shareholder and the Company shall establish the fair market value
of the Available Shares. If the Transferring Shareholder and the Company cannot
mutually agree upon an independent appraiser, each shall select an independent
appraiser and the two independent appraisers so selected shall select a third
independent appraiser. The three independent appraisers shall convene as soon as
practicable to establish the fair market value of the Available Shares. The
decision of a majority of the three independent appraisers with respect to the
fair market value of the Available Shares shall be final and binding on the
Transferring Shareholder and the Company. Each of the Transferring Shareholder
and the Company shall pay half of the costs of the independent appraiser(s)
selected pursuant to this Section 2.04.
2.05 EXCEPTIONS TO TRANSFER RESTRICTIONS. Notwithstanding anything to
the contrary contained in Article II hereof, (a) a Transfer, whether inter vivos
or testamentary, of Shares by a member of Carol's Family exclusively to one or
more other members of Carol's Family or by a member of Fran's Family exclusively
to one or more other members of Fran's Family and (b) a Transfer of Shares
included in a registration statement of the Company pursuant to its initial
public offering, shall not be subject to the provisions of Sections 2.01, 2.02
or 2.04 so long as, in the case of subparagraph (a) above, the acquiring Family
member agrees to be a party to this Agreement at or prior to the effective date
of the Transfer.
2.06 TRANSFERS BY THE COMPANY TO CAROL'S FAMILY -- RIGHTS OF FRAN'S
FAMILY. Prior to the Expiration Date, the Company shall not Transfer any Shares
to Carol's Family at less than the fair market value of the Shares, as
determined in good faith by the Board of Directors of the Company; provided,
however, that this Section 2.06 shall not prohibit the Company from making a pro
rata distribution of Shares to the then holders of the Company's issued and
outstanding Shares, including to those members of Carol's
-3-
<PAGE>
Family who then hold Shares. Prior to the Expiration Date, if the Company
intends to make a Transfer of Shares to any member of Carol's Family (other than
pursuant to a pro rata distribution described in the foregoing proviso), the
Company shall give written notice to Fran's Family of such intention at least 30
days prior to the anticipated closing date of the proposed Transfer and shall
offer to sell to Fran's Family a Pro Rata number of Shares at the same per Share
price and on the same terms (the "Protective Offer"). If Fran's Family wishes to
accept the Protective Offer, they must do so in a writing received by the
Company within 15 business days after their receipt of the Protective Offer from
the Company, and such acceptance shall be unconditional and shall specify the
total number of Shares (up to the Pro Rata number) that Fran's Family will
purchase pursuant to the Protective Offer. If Fran's Family does not accept the
Protective Offer or complete the purchase as provided above, their rights under
this Section 2.06 shall terminate with respect to such Protective Offer.
2.07 ALLOCATION OF RIGHTS OF FRAN'S FAMILY. Fran may allocate to one or
more members of her Family, as she sees fit, any of the rights of Fran's Family
pursuant to the Offer to Participate, Offer to Sell or the Protective Offer.
2.08 SHAREHOLDER GUARANTEE. Notwithstanding anything to the contrary
contained in Section 2.01 hereof, a term of the Transfer of Available Shares may
be the release or reduction of Shareholder Guarantees by the Transferring
Shareholder. In such event, a purchaser of the Available Shares pursuant to
Section 2.02 or 2.04 hereof shall similarly be required to cause the release or
reduction of Shareholder Guarantees.
2.09 CERTAIN DEFINITIONS. The terms "Pro Rata," "Expiration Date" and
"Shareholder Guarantee" and the family-related terms shall have the meanings set
forth below:
"Carol" means Carol Clark.
"Carol's Family" means Carol and her Family.
"Fran" means Fran Papalios.
"Fran's Family" means Fran and her Family.
"Family" means, with respect to Carol or Fran, as the case may
be, any one or more of the following persons if, and only if, such persons have
agreed to be parties to this Agreement: (a) her husband on the date of this
Agreement and any person who subsequently becomes her husband, (b) her lineal
descendants, parents and siblings and (c) one or more trusts, the sole
beneficiaries or owners of which are members of her Family.
"Expiration Date" means the later of the two dates specified
in (a) and (b) below: (a) the date of payment in full of the Company's
promissory note to Fran dated May 10, 1996 in the original principal amount of
$250,000 and the consideration payable to Fran for the first 30 months of the
Restricted Period under the Noncompetition Agreement dated May 10, 1996 between
the Company and Fran (the "Obligations to Fran"); and (b) the date which is the
earlier of April 1, 2001 and the closing date of an initial public offering by
the Company in which it receives gross proceeds of not less than $10.0 million
before payment of expenses.
-4-
<PAGE>
"Pro Rata" means that, of the total number of Shares proposed
to be sold by Carol's Family (in the case of Section 2.02(c) hereof) or to be
purchased by Carol's Family (in the case of Section 2.06 hereof), Fran's Family
will be entitled to sell or purchase, as the case may be, that portion of such
Shares which is equal to a fraction, the numerator of which is the number of
Shares owned by Fran's Family and the denominator of which is the sum of the
Shares owned by Fran's Family and the number of Shares owned by Carol's Family,
all as determined immediately prior to such sale or purchase transaction. In
such cases, all allocations of Shares among the members of Fran's Family shall
be determined by Fran if she is living and willing to do so; otherwise the same
shall be determined by the holders of a majority of the Shares then owned by
Fran's Family.
"Shareholder Guarantee" means any debt or other obligations of
the Company which any member of Carol's Family or Fran's Family has personally
assumed or guaranteed.
2.10 PURPOSES OF RESTRICTIONS. The Company and each Shareholder
acknowledge and agree that the restrictions on Transfers of Shares imposed by
this Agreement are imposed to accomplish legitimate purposes of the Company and
the Shareholders, and that such restrictions are not more restrictive than
necessary to accomplish those purposes.
ARTICLE III
MISCELLANEOUS PROVISIONS
3.01 FRAN'S OBSERVER RIGHTS. Prior to the Expiration Date, so long as
the aggregate number of Shares then owned by Fran's Family constitutes 5% or
more of the then issued and outstanding Shares of the Company, Fran shall have
observer rights, which observer rights shall consist of the right to receive
copies of all notices, minutes, consents and other materials that the Company
provides to members of its Board of Directors at the same time that the Company
provides such information to members of its Board of Directors, the right to
receive notice of, attend and observe all meetings of the Board of Directors of
the Company and the right to receive, promptly after adoption, a copy of all
written actions of all of the directors of the Company without a meeting.
3.02 LIFE INSURANCE. The Company may, but shall not be required to,
purchase and maintain policies of life insurance on the life of any Shareholder.
Each Shareholder shall provide his or her full cooperation to enable the Company
to purchase or maintain any such policies of insurance on the life of such
Shareholder, including, without limitation, sitting for such medical exam as may
be required.
3.03 CREATION OF CAPITAL SURPLUS. If (a) the Company is prohibited from
purchasing Shares which it may be permitted to do pursuant to the provisions of
this Agreement or from making distributions to the owners of the Shares because,
at the time of any such purchase or distribution, the Company does not have
sufficient available surplus to effect such purchase or distribution and (b) at
the time of any such purchase or distribution, the tangible or intangible assets
of the Company have a fair value to the Company in excess of the amount at which
they
-5-
<PAGE>
are carried on the Company's books, the Company, through its directors,
shall write up to fair value any or all of the tangible bit intangible assets of
the Company (and thereby create or add to the Company's capital surplus) in
order to make permissible or lawful any such purchase or distribution.
3.04 LEGEND. The Company and each Shareholder acknowledge and agree
that a legend, in substantially the following form or another appropriate form,
shall be placed on all certificates evidencing Shares which are subject to this
Agreement:
THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A
CERTAIN SHAREHOLDERS AGREEMENT TO WHICH THE COMPANY IS A PARTY
RESTRICTING THE SALE, ASSIGNMENT, CONVEYANCE, GIFT, PLEDGE,
HYPOTHECATION, DISPOSITION OR OTHER TRANSFER OF THE SHARES AND
IMPOSING CERTAIN OTHER REQUIREMENTS ON THE HOLDER OF THE
SHARES. THE COMPANY WILL MAIL A COPY OF THE SHAREHOLDERS
AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE, WITHOUT
CHARGE, WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN REQUEST
THEREFOR.
3.05 EFFECT OF VIOLATION. Any attempted or purported Transfer, and any
attempted or purported acquisition of Shares, in violation of Article I or II
shall be null and void AB INITIO and a fraud upon the Company and the other
Shareholders. Any such attempted or purported Transfer or acquisition may be
enjoined in any court of competent jurisdiction by the Company or by any
Shareholder. The Shareholder making the attempted or purported Transfer,
notwithstanding any agreement or understanding with any such attempted or
purported transferee, shall retain the right to vote the Shares and to receive
dividends and liquidation proceeds from the Company, shall continue to be a
shareholder of the Company for state and federal tax purposes.
3.06 MONTHLY FINANCIAL STATEMENTS. Until the Obligations to Fran have
been repaid in full, the Company shall deliver its monthly financial statements
(balance sheet, income statement, cash flow statement) to Fran at the same time
that it delivers such financial statements to the President of the Company.
3.07 CAROL'S SALARY AND BONUS. Carol's salary and bonus shall be
determined pursuant to the terms of the employment agreement between Carol and
the Company dated September 15, 1998.
3.08 LOAN REPAYMENTS. On May 10, 1996, Carol borrowed from Huntington
National Bank (the "Bank") $800,000 (such loan, together with the subsequent
refinancing thereof by Firstar, N.A. and any other refinancing, are hereinafter
called the "Bank Loan") and borrowed from Unlimited Mortgage Services, Inc.
$200,000 (the "Mortgage Loan") (the Bank Loan and the Mortgage Loan are together
hereinafter called the "Financing") and Carol loaned $1,000,000 to the Company
to enable the Company to purchase the Shares from Fran. The Company shall
-6-
<PAGE>
not make any payment on its loan from Carol unless Carol shall make an
equivalent and contemporaneous payment on the Financing. In addition, Carol
shall not make any optional prepayments on the Financing unless the Company
shall make proportionate and contemporaneous prepayments on the Note; PROVIDED,
HOWEVER, that the following payments shall not be considered to be optional
prepayments on the Financing: (a) any payments required by the terms of the Bank
Loan or required as a condition to any refinancing of the Bank Loan; and (b) any
payments on the Mortgage Loan in amounts not greater than are necessary to
amortize the principal sum of the Mortgage Loan on the same amortization
schedule (excluding maturity date or balloon payments) provided for the Bank
Loan. Notwithstanding anything to the contrary in this Section 3.08, in the
event that the provisions of that certain Subordination Agreement and
Assignment, dated May 10, 1996, between the Company and Fran shall conflict with
the provisions of this Section 3.08, the provisions of the Subordination
Agreement and Assignment shall prevail and control.
3.09 AMENDMENT AND TERMINATION. This Agreement may be amended only by a
written agreement signed by all of the parties hereto. Unless sooner terminated
by an amendment in writing signed by all of the parties hereto, this Agreement
shall terminate on the later of the Expiration Date or the closing date of an
initial public offering by the Company.
3.10 PRONOUNS; GENDER. All pronouns and any variations thereof used in
this Agreement to refer to any person or persons shall be deemed to refer to the
masculine, feminine, neuter, singular or plural, as the identity of the person
or persons may require.
3.11 OTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
3.12 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by complete and
legible facsimile transmission or mailed by registered or certified mail (return
receipt requested), postage prepaid, to the parties at the following addresses
and facsimile numbers (or at such other address or number for a party as shall
be specified by like notice, provided that notice of a change of address or
number shall be effective only upon receipt thereof):
(a) if to Fran or Fran's Family:
Fran Papalios
4170 Waddington Road
Columbus, Ohio 43220
Facsimile No.: (614) 459-0049
with a copy to:
Daniel M. Maher, Esq.
Squire, Sanders & Dempsey L.L.P.
1300 Huntington Center
41 South High Street
Columbus, Ohio 43215
Facsimile No.: (614) 365-2499
-7-
<PAGE>
(b) if to Carol, Carol's Family or the Company,
to: DPEC, Inc.
Building 3
851 West Third Street
Columbus, Ohio 43212
Facsimile No.: (614) 457-1105
Attention: Carol Clark
with a copy to:
Michael A. Cline, Esq.
Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
Columbus, Ohio 43215
Facsimile No.: (614) 464-6350
(c) if to another party, to the address or
facsimile number of such party as specified
in a notice by such party to the other
parties.
3.13 SUCCESSORS AND ASSIGNS. This Agreement and the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, personal representatives and permitted assigns.
3.14 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio (regardless of the laws that might otherwise govern under
applicable Ohio principles of conflicts of law) as to all matters.
3.15 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.16 INTERPRETATION. The captions contained in this Agreement are
solely for the purpose of reference, are not part of the agreement of the
parties and shall not in any way affect the meaning or interpretation of this
Agreement.
3.17 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto in respect to the transactions contemplated
by this Agreement. This Agreement supersedes, replaces and terminates all prior
agreements and understandings among the parties with respect to the subject
matter of this Agreement, including, without limitation, the Third Amended and
Restated Shareholders Agreement dated September 15, 1998.
3.18 SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement in any particular respect shall not affect the validity and
enforceability of any other provision of this Agreement or the same provision in
any other respect.
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed, or caused its
duly authorized officer to execute, this Agreement effective as of the date
first above written.
DPEC, INC.
By: /s/ Carol A. Clark
----------------------------------
Carol A. Clark, President
-9-
<PAGE>
SIGNATURE PAGE
TO
FOURTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fourth
Amended and Restated Shareholders Agreement dated as of August 27, 1999.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO BECOME
A PARTY TO THE FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DESCRIBED
ABOVE.
Date: 8/27/99 Carol A. Clark
------------------------ -----------------------------------
NAME OF SHAREHOLDER
/s/ Carol A. Clark
-----------------------------------
Signature
-----------------------------------
Title (if applicable)
-----------------------------------
Street Address
-----------------------------------
City State Zip
-10-
<PAGE>
SIGNATURE PAGE
TO
FOURTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fourth
Amended and Restated Shareholders Agreement dated as of August 27, 1999.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO BECOME
A PARTY TO THE FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DESCRIBED
ABOVE.
Date: 8/27/99 Frances Papalios Trust
------------------------ -----------------------------------
NAME OF SHAREHOLDER
/s/ Fran Papalios
-----------------------------------
Signature
Grantor and Trustee
-----------------------------------
Title (if applicable)
4170 Waddington Road
-----------------------------------
Street Address
Columbus, Ohio 43220
-----------------------------------
City State Zip
-10-
<PAGE>
SIGNATURE PAGE
TO
FOURTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fourth
Amended and Restated Shareholders Agreement dated as of August 27, 1999.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO BECOME
A PARTY TO THE FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT DESCRIBED
ABOVE.
Date: 8/27/99 Fran Papalios
------------------------ -----------------------------------
NAME OF SHAREHOLDER
/s/ Fran Papalios
-----------------------------------
Signature
N/A
-----------------------------------
Title (if applicable)
4170 Waddington Road
-----------------------------------
Street Address
Columbus, Ohio 43220
-----------------------------------
City State Zip
-10-
<PAGE>
EXHIBIT 10.10
ADMISSION AGREEMENT
This ADMISSION AGREEMENT (this "Agreement") is made to be
effective as of the 8th day of September, 1999, by and between Robert N. Clark,
as Trustee under the 1999 Grantor Retained Annuity Trust Created by Carol A.
Clark dated September 8, 1999 ("Assignee"), and Carol A. Clark ("Assignor"),
under the following circumstances:
A. Assignor owns, of record and beneficially, 22,275 common
shares of DPEC, Inc., an Ohio corporation ("DPEC"), evidenced by certificate no.
30, and Assignor is transferring to Assignee 4,000 of such common shares (the
"Shares") effective as of September 8, 1999.
B. The terms of the trust instrument governing Assignee are
summarized in a letter, dated September 8, 1999, from Barry R. Robinson to
Michel A. Cline, a copy of which is attached to this Agreement.
C. Assignor is party to a certain Fourth Amended and Restated
Shareholders Agreement, dated August 27, 1999 (the "Shareholders Agreement"), by
and among Assignor, DPEC, Frances Papalios and Frances Papalios, as Grantor and
Trustee of the Frances Papalios Trust, and a certain Registration Rights
Agreement, dated May 10, 1996 (the "Registration Rights Agreement"), by and
among Assignor, DPEC and certain other persons.
D. The Registration Rights Agreement grants to the Company the
right to admit a person as a party to the Registration Rights Agreement if such
person agrees in writing to be bound by the terms of the Registration Rights
Agreement; and
E. The Shareholders Agreement provides that it may be amended
only by a writing signed by all of the parties thereto.
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. AGREEMENT. By Assignee's execution of this Agreement,
Assignee agrees to be a party to, and to be bound by the terms of, the
Shareholders Agreement and the Registration Rights Agreement.
2. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of, and be binding upon, the respective successors and assigns of each
of the parties hereto, subject to the provisions of the Shareholders Agreement
and the Registration Rights Agreement.
<PAGE>
3. APPLICABLE LAW. The construction and performance of this
Agreement shall be governed by the laws of the State of Ohio without giving
effect to the choice of law provisions thereof.
4. MISCELLANEOUS. This Agreement may be terminated, amended,
supplemented, waived or modified only by an instrument in writing signed by the
party against whom enforcement of the termination, amendment, supplement, waiver
or modification is sought.
5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
6. AGREEMENT. Assignor and Assignee agree that Assignee shall
be deemed to be a member of "Carol's Family" for purposes of the Shareholders
Agreement and the Registration Rights Agreement.
7. RELIANCE. DPEC, Frances Papalios and Frances Papalios, as
Grantor and Trustee of the Frances Papalios Trust, as parties to the
Shareholders Agreement and the Registration Rights Agreement, shall be entitled
to rely on this Agreement.
IN WITNESS WHEREOF, effective as of the 8th day of September,
1999, each of the parties hereto has executed and delivered this Agreement.
ASSIGNEE:
ROBERT N. CLARK, AS TRUSTEE UNDER
THE 1999 GRANTOR RETAINED ANNUITY
TRUST CREATED BY CAROL A. CLARK
DATED SEPTEMBER 8, 1999
/s/ Robert N. Clark
---------------------------------
Robert N. Clark, as Trustee
ASSIGNOR:
/s/ Carol A. Clark
---------------------------------
Carol A. Clark, Individually
-2-
<PAGE>
CONSENT AND WAIVER
Effective as of the 8th day of September, 1999, each of the
undersigned hereby consents to the Admission Agreement, to the transfer of the
Shares described in the Admission Agreement and to the admission of Assignee as
a party to the Shareholders Agreement and the Registration Rights Agreement
pursuant to the Admission Agreement, and each of the undersigned hereby waives
any right to purchase the Shares on account of such transfer.
DPEC, INC.
By: /s/ Gary Qualmann
------------------------------------------
Gary Qualmann, its Chief Financial Officer
/s/ Frances Papalios
------------------------------------------
Frances Papalios, Individually
FRANCES PAPALIOS, AS GRANTOR AND
TRUSTEE OF THE FRANCES PAPALIOS
TRUST
By: /s/ Frances Papalios
------------------------------------------
Frances Papalios, as Grantor and Trustee
-3-
<PAGE>
EXHIBIT 10.11
ADMISSION AGREEMENT
This ADMISSION AGREEMENT (this "Agreement") is made to be
effective as of the 8th day of September, 1999, by and between Karen L.
Qualmann, as Trustee under the 1999 Grantor Retained Annuity Trust Created by
Gary W. Qualmann dated September 8, 1999 ("Assignee"), and Gary W. Qualmann
("Assignor"), under the following circumstances:
A. Assignor owns, of record and beneficially, a total of 1,721
common shares of DPEC, Inc., an Ohio corporation ("DPEC"), evidenced by
certificate no. 16 for 844 common shares and certificate no. 22 for 877 common
shares, and Assignor is transferring to Assignee 1,100 of such common shares
(the "Shares") effective as of September 8, 1999.
B. The terms of the trust instrument governing Assignee are
summarized in a letter, dated September 8, 1999, from Barry R. Robinson to
Michel A. Cline, a copy of which is attached to this Agreement.
C. Assignor is party to a certain Fourth Amended and Restated
Shareholders Agreement, dated July 31, 1996, by and between Assignor and DPEC,
and a certain Registration Rights Agreement, dated May 10, 1996 (the
"Registration Rights Agreement"), by and among Assignor, DPEC and certain other
persons.
D. The Registration Rights Agreement grants to the Company the
right to admit a person as a party to the Registration Rights Agreement if such
person agrees in writing to be bound by the terms of the Registration Rights
Agreement; and
E. In connection with the execution of this Agreement,
Assignee and DPEC also have entered into a Buy-Sell Agreement (the "Buy-Sell
Agreement") which is substantially similar to the Buy-Sell Agreement between
Assignor and DPEC.
NOW, THEREFORE, in consideration of the premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. AGREEMENT. By Assignee's execution of this Agreement,
Assignee agrees to be a party to, and to be bound by the terms of, the
Registration Rights Agreement.
2. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of, and be binding upon, the respective successors and assigns of each
of the parties hereto, subject to the provisions of the Registration Rights
Agreement.
<PAGE>
3. APPLICABLE LAW. The construction and performance of this
Agreement shall be governed by the laws of the State of Ohio without giving
effect to the choice of law provisions thereof.
4. MISCELLANEOUS. This Agreement may be terminated, amended,
supplemented, waived or modified only by an instrument in writing signed by the
party against whom enforcement of the termination, amendment, supplement, waiver
or modification is sought.
5. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
6. RELIANCE. DPEC, as a party to the Buy-Sell Agreement and
the Registration Rights Agreement, shall be entitled to rely on this Agreement.
IN WITNESS WHEREOF, effective as of the 8th day of September,
1999, each of the parties hereto has executed and delivered this Agreement.
ASSIGNEE:
KAREN L. QUALMANN, AS TRUSTEE UNDER
THE 1999 GRANTOR RETAINED ANNUITY
TRUST CREATED BY GARY W. QUALMANN
DATED SEPTEMBER 8, 1999
/s/ Karen L. Qualmann
-----------------------------------
Karen L. Qualmann, as Trustee
ASSIGNOR:
/s/ Gary W. Qualmann
-----------------------------------
Gary W. Qualmann, Individually
-2-
<PAGE>
CONSENT AND WAIVER
Effective as of the 8th day of September, 1999, DPEC, Inc.
hereby consents to the foregoing Admission Agreement, to the transfer of the
Shares described in the Admission Agreement and to the admission of Assignee as
a party to the Registration Rights Agreement pursuant to the Admission
Agreement, and also hereby waives any right to purchase the Shares on account of
such transfer.
DPEC, INC.
By: /s/ Carol A. Clark
------------------------------
Carol A. Clark, its President
-3-
<PAGE>
EXHIBIT 10.12
TERM NOTE
$1,000,000.00 May 10, 1996
Columbus, Ohio
FOR VALUE RECEIVED, D.P.E.C., Inc., an Ohio corporation (hereinafter
called the "Borrower"), promises to pay to the order of Carol A. Clark
(hereinafter called "Clark", which term shall include any holder hereof) at such
place as Clark may designate or, in the absence of such designation, at 1679 Old
Henderson Road, Columbus, Ohio 43220, the principal sum of One Million Dollars
($1,000,000) (hereinafter called the "Principal Sum"), together with interest as
hereinafter provided, and payable at the time(s) and in the manner(s)
hereinafter provided. The Borrower further agrees that Clark's calculation of
the amount outstanding shall be rebuttably presumptive evidence of the amount of
the Principal Sum and of the amount of any accrued interest.
Interest
Interest will accrue on the unpaid balance of the Principal Sum until
paid at a variable rate of interest per annum, which shall change in the manner
set forth below, equal to the sum of (i) one hundred (100) basis points, plus
(ii) the Prime Commercial Rate.
All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Principal Sum or any part thereof remains unpaid.
There shall be no penalty for prepayment.
As used herein, Prime Commercial Rate shall mean the rate established
by The Huntington National Bank ("HNB") from time to time based on its
consideration of economic, money market, business and competitive factors, and
it is not necessarily HNB's most favored rate. The rate of interest on the
obligation evidenced hereby shall change automatically without notice to the
Borrower immediately with each change in the Prime Commercial Rate.
Manner of Payment
The Borrower shall pay consecutive monthly installments of INTEREST
ONLY on the Principal Sum commencing on June 10, 1996 and continuing on the same
day of each month thereafter until and including November 10, 1997. Thereafter,
the Principal Sum and interest thereon shall be payable in monthly installments
of principal and interest in an amount sufficient to amortize the Principal Sum
over a term of eighty-four (84) months, with the first installment due on
December 10, 1997 and continuing on the same day of each month thereafter until
November 10, 2004, at which time the entire unpaid balance of the Principal Sum
plus accrued interest shall be due and payable
<PAGE>
immediately. Each payment shall be applied first to costs, then to interest,
then to the Principal Sum.
Late Charge; Default Rate
Any installment or other payment not made within 10 days of the date
such installment or payment is due shall be subject to a late charge equal to 5%
of the amount of the installment or payment. During any period when any Event of
Default shall have occurred and be continuing, or upon maturity of this Note (by
acceleration or otherwise), the entire unpaid Principal Sum shall bear interest
from the date of such Event of Default until paid in full (after as well as
before judgment) at a fluctuating rate per annum equal to two hundred (200)
basis points above the rate which would otherwise be applicable.
Additional Covenants
Until payment in full of this Note, the Borrower shall provide, or
cause to be provided, to Clark within 15 days after end of each calendar
quarter, a certification of the Borrower stating that no material adverse change
has occurred in the Borrower's financial condition, individually or in the
aggregate, since the prior certificate was submitted to Clark.
Default
An "Event of Default" shall exist if any of the following occurs and is
continuing (a) in the case of any monetary default, 10 days after Clark gives
the Borrower notice thereof, and (b) in the case of any non-monetary default, 20
days after Clark gives the Borrower notice thereof:
(a) the Borrower fails to make any payment of principal or
interest of this Note on or before the date such payment is due;
(b) the Borrower fails to comply with any other provision of
this Note;
(c) the Borrower fails to perform or observe any covenant
contained in any mortgage, guaranty, security agreement or other agreement in
favor of HNB (all collectively referred to as the "Loan Documents");
(d) any warranty, representation or other statement by or on
behalf of the Borrower, contained in this Note or in any instrument furnished in
compliance with or in reference to this Note or the Loan Documents is false or
misleading in any material respect;
(e) the Borrower becomes insolvent or makes an assignment for
the benefit of creditors, or consents to the appointment of a trustee, receiver
or liquidator;
2
<PAGE>
(f) bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings are instituted by or against the Borrower and, in the
case of any involuntary proceeding is not dismissed within 60 days;
(g) a final judgment or judgments for the payment of money
aggregating in excess of $50,000 is or are outstanding against the Borrower and
any such judgment or judgments have not been discharged in full or stayed; or
(h) the occurrence of any event which allows the acceleration
of the maturity of any indebtedness of the Borrower by HNB or any of HNB's
affiliates.
Notwithstanding the above, no Event of Default shall exist with respect
to any failure on the part of the Borrower to make payments hereunder which are
prohibited by Section 3.08 of the Second Amended and Restated Shareholders
Agreement dated May 10, 1996 to which the Borrower and Clark are parties.
Default; Remedies
If an Event of Default exists, Clark may immediately exercise any
right, power or remedy permitted to Clark by law or any provision of this Note
or the Loan Documents, and shall have, in particular, without limiting the
generality of the foregoing, the right to declare the entire principal and all
interest accrued on this Note to be forthwith due and payable, without any
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower.
Rights of Borrower
Borrower has executed and delivered to HNB a Guaranty of even date
herewith (the "Guaranty") with respect to Clark's $800,000 Note to HNB (the
"Clark Note"). By accepting delivery of Borrower's Note to Clark, Clark agrees
that the aggregate amount outstanding on such Note shall be reduced by the
aggregate of all amounts Borrower is required to pay to HNB on the Clark Note
pursuant to the Guaranty.
General Provisions
All of the parties hereto, including the Borrower, and any indorser,
surety or guarantor, hereby severally waive presentment, notice of dishonor,
protest, notice of protest, and diligence in bringing suit against any party
hereto, and consent that, without discharging any of them, the time of payment
may be extended an unlimited number of times before or after maturity without
notice. Clark shall not be required to pursue any party hereto, including any
guarantor, or to exercise any rights against any collateral herefor before
exercising any other such rights.
The obligations evidenced hereby from time to time may be evidenced by
another note or notes given in substitution, renewal or extension hereof. Any
security
3
<PAGE>
interest or mortgage which secures the obligations evidenced hereby shall remain
in full force and effect notwithstanding any such substitution, renewal, or
extension.
The captions used herein are for reference only and shall not be deemed
a part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and provisions
shall not be affected.
This Note and the rights and obligations of Clark and the Borrower
hereunder shall be governed by, and construed and interpreted in accordance
with, the law of the State of Ohio. The Borrower agrees that any legal suit,
action or proceeding arising out of or relating to this Note may be instituted
in a state or federal court of appropriate subject matter jurisdiction in the
State of Ohio; waives any objection which it may have now or hereafter to the
venue of any such suit, action or proceeding; and irrevocably submits to the
jurisdiction of any such court in any such suit, action or proceeding.
The Borrower hereby irrevocably authorizes any attorney-at-law,
including any attorney-at-law employed or retained by Clark, to appear for the
Borrower in any action on this Note at any time after the same becomes due as
herein provided, in any court of record situated in Franklin County, Ohio (which
the Borrower acknowledges to be the place where this Note was executed), in the
county where the Borrower then has its place of business or can be found, to
waive the issuing and service of process, and confess a judgment in favor of the
holder of this Note against the Borrower for the amount that may then be due,
with interest at the rate provided for herein, together with the costs of suit,
and to waive and release all errors in said proceedings and the right to appeal
from the judgment rendered. The Borrower consents to the jurisdiction and venue
of such court. The Borrower waives any conflict of interest that any
attorney-at-law employed or retained by Clark may have in confessing judgment
hereunder and consents to the payment of a legal fee to any attorney-at-law
confessing judgment hereunder.
- --------------------------------------------------------------------------------
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
- --------------------------------------------------------------------------------
4
<PAGE>
D.P.E.C., INC.
By: /s/ Carol Clark
------------------------
Title: /s/ Its President
--------------------
5
<PAGE>
EXHIBIT 10.13
PROMISSORY NOTE
$250,000.00 Columbus, Ohio
May 10, 1996
FOR VALUE RECEIVED, the undersigned, D.P.E.C., Inc., an Ohio
corporation having offices at 1679 Old Henderson Road, Columbus, Ohio 43220 (the
"Borrower"), promises to pay to the order of Fran Papalios, an individual
residing in Ohio and having a mailing address of 4170 Waddington Road, Columbus,
Ohio 43220 (the "Payee"), at Payee's address as set forth herein, or at such
other place as the holder hereof may from time to time in writing designate, the
principal sum of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00),
together with interest, payable as stated herein.
Principal and interest hereunder shall be due and payable as
follows:
(1) Interest shall accrue on the unpaid principal balance
evidenced hereby, shall be calculated daily on the basis of the actual number of
days elapsed, shall be computed on the basis of a 360-day year, and interest
only shall be paid quarterly in arrears commencing on July 1, 1996, and
continuing on the first day of each consecutive October, January, April and July
thereafter, through and including July 1, 1998;
(2) Commencing on the date hereof and continuing through the
Maturity Date (as hereinafter defined), the interest rate hereunder shall be a
fixed rate of interest equal to eight percent (8.0%) per annum except as
otherwise provided in item (3) below:
(3) After the occurrence of any Event of Default (as
hereinafter defined) and until such time as there has been a cure of any such
Event of Default, interest hereunder shall accrue at a fixed rate of interest
equal to ten percent (10.0 %) per annum (the "Default Rate");
(4) Commencing on October 1, 1998, and continuing quarterly on
the first day of each consecutive January, April, July and October thereafter,
through and including April 1, 2001, principal and interest payments each in the
aggregate amount of Twenty-Five Thousand Three Hundred Ninety-Four and 61/100
Dollars ($25,394.61) shall be due and payable; and
(5) The entire unpaid principal balance evidenced by this
Note, together with any and all accrued but unpaid interest hereunder, shall be
due and payable in full on or prior to April 1, 2001 (the "Maturity Date").
The indebtedness evidenced hereby may be prepaid in whole or
in part without payment of any premium or penalty of any kind. All payments and
prepayments received by the Payee shall be (a) applied first to the payment of
all accrued but unpaid interest hereunder and then to principal due and payable
hereunder, and (b) in lawful money of the United States.
<PAGE>
At the option of the Payee or any other holder or holders
hereof, the entire unpaid principal balance of this Note, together with all
other sums payable in accordance with this Note, shall become due and payable
immediately, upon notice or demand, upon the occurrence of any of the following
events (each, an "Event of Default"): (a) the Borrower fails to pay any
installment of principal or interest payable in accordance with this Note within
ten (10) days after its receipt of notice from Payee that such payment has not
been paid when due; (b) the Borrower fails to pay any other sum payable in
accordance with this Note within thirty (30) days after its receipt of written
notice from Payee that such payment has not been paid when due; (c) the Borrower
becomes insolvent or a receiver or custodian, as those terms are defined under
the Bankruptcy Code of 1978, as amended, Title 11, U.S.C. (the "Bankruptcy
Code"), is appointed or exists for the Borrower or any of the Borrower's
property; (d) the Borrower makes any assignment for the benefit of creditors or
any petition initiating any case is filed by or against the Borrower under any
applicable chapter of the Bankruptcy Code and any such petition is not dismissed
within sixty (60) days; or (e) the Borrower breaches the terms of the Second
Amended and Restated Shareholders Agreement, the Registration Rights Agreement,
the Noncompetition Agreement or the Pledge and Security Agreement to which the
Borrower and the Payee are parties and fails to cure such breach within the time
period provided for cure therein or, in the absence of such a provision, within
ten (10) days after its receipt of notice from Payee specifying the act or
omission constituting the breach.
If an Event of Default occurs, then the whole or any part of
the unpaid indebtedness evidenced hereby shall, at once or at any time
thereafter, at the option of the Payee or any other holder or holders hereof,
become due and payable, upon notice or demand therefor to the Borrower. A
failure of the Payee or any other holder hereof to insist upon strict compliance
with the terms hereof or to assert any right hereunder shall not be a waiver of
any Event of Default, and shall not be deemed to constitute a modification of
the terms hereof or to establish any claim or defense of the Borrower.
The Borrower, for itself and any and all other persons or
entities now or hereafter liable, primarily or secondarily, for the payment of
the indebtedness evidenced hereby, agrees that the local laws of the State of
Ohio shall govern all of the rights and duties hereunder and the construction
and effect hereof. However, if any provision hereof is or becomes invalid or
unenforceable under any law of mandatory application, it is the intent of the
Borrower, the Payee and all other persons or entities primarily or secondarily
liable hereunder that such provision will be deemed severed and omitted
herefrom, with the remaining portions hereof to remain in full force and effect
as written.
The obligations of the Borrower under this Note are secured by
a pledge of treasury shares of the Borrower under a separate Pledge and Security
Agreement.
This Note is subject to a Subordination Agreement and
Assignment for the benefit of Huntington National Bank to which the Payee and
the Borrower are parties.
<PAGE>
IN WITNESS WHEREOF, the Borrower has executed and delivered
this Note as of the day and year first above written at Columbus, Franklin
County, Ohio.
BORROWER:
D.P.E.C., INC., an Ohio corporation
By: /s/ Carol Clark
---------------------------------
Carol Clark, its President
10/19/99 - 8575064
<PAGE>
EXHIBIT 10.14
PLEDGE AND SECURITY AGREEMENT
This Pledge and Security Agreement (the "PLEDGE AND SECURITY
AGREEMENT") is made this 10th day of May, 1996, by and between D.P.E.C., Inc.,
an Ohio corporation ("PLEDGOR"), and Fran Papalios ("PLEDGEE"). For valuable
consideration, the receipt of which is hereby acknowledged, Pledgor and Pledgee,
intending to be legally bound, hereby recite and agree as follows:
RECITALS
A. Pledgor is purchasing from Pledgee a total of 14,850 common
shares without par value (the "PURCHASED SHARES") of Pledgor, pursuant to a
Share Purchase and Sale Agreement dated as of even date herewith between Pledgor
and Pledgee (the "SHARE PURCHASE AND SALE AGREEMENT").
B. The purchase price for the Purchased Shares is $1,250,000,
of which $1,000,000 is being paid in cash and $250,000 is evidenced by a
promissory note of even date herewith from Pledgor to Pledgee (the "NOTE").
C. Pledgor also has obligations to Pledgee under a
Noncompetition Agreement as of even date herewith between Pledgor and Pledgee
(the "NONCOMPETITION AGREEMENT") for the payment of $330,000 with respect to the
first thirty (30) months of the term of the Noncompetition Agreement (the
"THIRTY MONTHS PAYMENT OBLIGATIONS").
D. Section 5.05 of the Share Purchase and Sale Agreement
requires Pledgor to pledge to Pledgee, and grant Pledgee a security interest in,
4,950 of the Purchased Shares (the "PLEDGED SHARES") as security for Pledgor's
payment and performance of the Note and payment of the Thirty Months Payment
Obligations.
E. The Pledged Shares (i) bear certificate number 11, and (ii)
when reissued to Pledgor shall bear certificate number 13.
AGREEMENT
l. DEFINITIONS. As used herein, "COLLATERAL" shall mean all of
Pledgor's right, title and interest in and to the Pledged Shares, together with
all other rights at any time received or receivable or otherwise distributed in
respect of or in exchange for the Pledged Shares; but subject in all respects to
the provisions of Section 7 hereof.
As used herein, "LIABILITIES" shall mean all of Pledgor's
liabilities, obligations and indebtedness to Pledgee pursuant to the Note and
with respect to the Thirty Months Payment Obligations.
<PAGE>
2. SECURITY INTEREST. To secure the prompt payment of the
Liabilities, Pledgor hereby conveys, pledges, transfers and delivers to Pledgee,
and grants to Pledgee a continuing security interest in, the Collateral. For
this purpose, Pledgor is also hereby delivering to Pledgee executed
assignment(s) separate from certificate for the Pledged Shares.
3. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor
represents and warrants to Pledgee, which representations and warranties are
continuing so long as any Liabilities remain outstanding, that: (a) Pledgor has
and will continue to have title to the Collateral free and clear of all liens,
security interests, restrictions, setoffs, adverse claims, assessments,
defaults, prepayments, defenses and conditions precedent except for the lien and
security interest of Pledgee created by this Pledge and Security Agreement and
the restrictions contained in that certain Second Amended and Restated
Shareholders Agreement of even date herewith by and among the Pledgor, Pledgee
and Carol Clark; (b) the Collateral is enforceable in accordance with its terms,
is genuine and complies with all applicable laws concerning form, content and
manner of preparation and execution; (c) no financing statement covering any of
the Collateral is on file in any public office other than those, if any, which
reflect the security interest created by this Pledge and Security Agreement; (d)
the execution and delivery of this Pledge and Security Agreement will not
violate any law or any agreement to which Pledgor is a party; and (e) all
information contained in this Pledge and Security Agreement is true and correct
to the best of Pledgor's knowledge.
4. COVENANTS OF PLEDGOR. Unless and until Pledgee consents in
writing to another course of action, so long as any of the Liabilities remain
outstanding, Pledgor covenants and agrees that: (a) Pledgor will not sell or
assign any of the Collateral (except as provided in Section 6 hereof), will keep
the Collateral free of liens, security interests and adverse claims, will
promptly notify Pledgee of any Default (as defined in Section 8 hereof), will
defend the Collateral against the claims and demands of all persons, will pay
promptly all taxes and assessments with respect to the Collateral, and will not
permit or consent to any amendment, modification, termination or assignment of
the Collateral; and (b) Pledgor will from time to time perform such other acts
as Pledgee may reasonably request to perfect and maintain Pledgee's security
interest in the Collateral.
5. COVENANTS OF PLEDGEE. Pledgee covenants and agrees, so long
as this Pledge and Security Agreement remains in effect, that she shall (a) keep
the Pledged Shares and all other Collateral in a safe location and shall be
responsible for any theft, loss, damage or destruction of the Pledged Shares and
all other Collateral in Pledgee's possession, and (b) temporarily deliver to
Pledgor any of the Collateral for the purpose of any exchange or other
transaction permitted by Pledgee.
6. SUBSTITUTION OF COLLATERAL. From time to time hereafter,
Pledgor shall have the right to substitute for the Collateral other securities
acceptable to Pledgee (such securities being hereinafter referred to as
"SUBSTITUTED SECURITIES"). Upon substitution, all Substituted Securities shall
be part of the Collateral for all purposes under this Pledge and Security
Agreement. Notwithstanding anything in this Section 6 to the contrary, in no
event shall any substitution of Substituted Securities for Collateral pursuant
to this Section 6 be effected unless
2
<PAGE>
and until each of the Substituted Securities has been delivered into the
possession of Pledgee. Pledgor hereby agrees that promptly upon any and all
substitutions of Substituted Securities for Collateral pursuant to this Section
6, Pledgor shall deliver to Pledgee all documents and instruments with respect
to the perfection of the Substituted Securities as Pledgee shall require in her
reasonable discretion.
7. RELEASE OF PLEDGED SHARES. Notwithstanding any terms and
conditions hereof to the contrary, with each reduction (by payment or otherwise)
of an aggregate of $10,000 of principal on the Note and payments on the Thirty
Months Payment Obligations, upon the written request of Pledgor, Pledgee will
release 85 Pledged Shares from this Pledge and Security Agreement until all
Pledged Shares have been released. Any such Pledged Shares that are released
shall (a) thereafter be excluded from Collateral and (b) be accompanied by
appropriate assignment(s) separate from certificate executed by Pledgee.
8. DEFAULT. The occurrence or existence of any one or more of
the following shall constitute a default hereunder ("DEFAULT"):
(a) There occurs an Event of Default under the
provisions of the Note or with respect to the Thirty Months Payment Obligations
(after giving effect to any applicable cure periods); or
(b) Pledgor fails or neglects to perform, keep or
observe any of the covenants, conditions, promises or agreements of Pledgor
contained in this Pledge and Security Agreement; or
(c) All or any part of the Collateral is attached,
seized (unless such seizure is the result of Pledgee's negligence), or levied
upon, or comes within the possession (constructive or actual) of any receiver,
trustee, custodian or assignee for the benefit of creditors.
9. REMEDIES. Upon the occurrence of any Default and at any
time thereafter, Pledgee shall have, in addition to all other rights and
remedies, the remedies of a Pledgee under the applicable Uniform Commercial Code
(the "UCC"), regardless of whether the UCC applies to the security transactions
covered by this Pledge and Security Agreement. If notice is required, Pledgee
shall give to Pledgor at least ten days' prior written notice of the time and
place of any public sale of the Collateral or of the time after which a private
sale or any other intended disposition is to be made.
10. TERMINATION. When the Liabilities are paid in full,
Pledgee shall return the Collateral that has not previously been released
pursuant to Section 7 hereof, together with any necessary executed assignment(s)
separate from certificate, to Pledgor, and Pledgor's and Pledgee's obligations
under this Pledge and Security Agreement shall terminate.
11. TREASURY SHARES. Until such time following a Default that
Pledgee exercises its rights and remedies as a secured creditor to foreclose or
realize on the Pledged
3
<PAGE>
Shares, the Pledged Shares shall constitute treasury shares and, as such, shall
not be deemed to be outstanding for dividend or distribution, quorum, voting or
other purposes.
12. NOTICES. Any notice required to be given hereunder shall
be in writing and shall be deemed to have been validly served, given or
delivered (a) on the date of delivery thereof if hand-delivered or transmitted
by facsimile, or (b) five days after deposit in the United States mails with
registered or certified postage prepaid, addressed as follows:
If to Pledgor:
D.P.E.C., Inc.
1679 Old Henderson Road
Columbus, OH 43220
Facsimile: (614) 457-1107
Attn: Carol Clark
If to Pledgee:
Fran Papalios
4170 Waddington Road
Columbus, OH 43220
Facsimile: (614) 459-0049
13. GOVERNING LAW. This Pledge and Security Agreement has been
executed by Pledgor and Pledgee in Columbus, Ohio. This Pledge and Security
Agreement shall be governed by and interpreted in accordance with the local laws
of the State of Ohio except to the extent precluded by other law of mandatory
application.
IN WITNESS WHEREOF, Pledgor and Pledgee have executed, or
caused a duly authorized representative to execute, this Pledge and Security
Agreement to be effective as of the day and year first above written.
PLEDGOR: PLEDGEE:
D.P.E.C., INC.
By: /s/ Carol Clark, Pres. /s/ Fran Papalios
------------------------------ ------------------------------
Carol Clark, its President Fran Papalios
4
<PAGE>
EXHIBIT 10.15
SOFTWARE DEVELOPMENT AND LICENSE AGREEMENT
Agreement made as of this 25th day of January , 1999 ("Effective
Date") between Ahsoug, Inc., through its Macmillan Publishing USA division, 1633
Broadway, 6th Floor, New York, New York 10019, Attn: Eve Taben (the
"Proprietor") and DPEC, Inc., an Ohio Corporation, 851 West Third Avenue,
Building 3, Columbus, Ohio 43212 (the "Publisher").
WHEREAS, Proprietor owns or controls copyright, publishing and other
ancillary rights with respect to those works of authorship listed on Exhibit B
hereto, as such Exhibit may be amended and supplemented by the parties upon
mutual agreement from time to time hereafter (each of the listed works of
authorship is hereafter referred to as a "Work", and the listed works of
authorship are collectively the "Works"), and
WHEREAS, Publisher is engaged in the business of creating
computer-based training and reference materials, including software and training
manuals,
NOW THEREFORE, the parties, intending to be legally bound with respect
to the Works agree as follows:
1. GRANT
(a) During the License Term (as defined in Paragraph 3(b)) for each
Work, Proprietor hereby grants to Publisher the non-exclusive right and license
(the "Publisher License") to (i) to prepare or cause to be prepared a work
derivative of the Work entirely in the English language (subject to Paragraph
1(f) below), and only in the form described as the Adaptation, as defined in
Paragraph 1(d) below (such derivative work is referred to hereinafter as the
"CBT Materials"), (ii) to prepare and publish instructional documentation
incorporating material from the text of the Work for use in conjunction with the
CBT Materials, provided that such documentation may only be sold or licensed in
conjunction with the CBT Materials (and shall be considered part of the CBT
Materials for the purposes of this Agreement), (iii) to use, reproduce, market,
distribute (directly or indirectly, and via sale, lease or license only), and
perform or display publicly the CBT Materials in the Territory and Markets
defined in Paragraph 2, subject to the terms and conditions set forth in this
Agreement, (iv) to annotate and to permit others to annotate the CBT Materials
for Publisher's and such others' own internal use, and (v) to further develop
the CBT Materials and to prepare further works derivative thereof in the
Adaptation form (all such works to be subject to the prior approval of the
Proprietor; such approval to be communicated to Publisher as provided for in
Paragraph 1(b) below) for exploitation only as permitted under (a)(iii) and
(a)(iv) above.
The Publisher License shall include the right to grant non-exclusive
sublicenses to third parties to exercise any or all of the rights granted to
Publisher in subparagraphs (iii) and (iv) above, and to permit such third
parties the right to establish subdistributors and subresellers to further
exercise the rights granted in subparagraphs (iii) and (iv) above. This right
expressly does not include the right to license the underlying Work or portions
thereof. Publisher shall keep Proprietor informed of all such sublicenses by
delivering to Proprietor, not later than thirty (30) days following the
Effective Date, a listing of such third party distributors, subdistributors and
subresellers. Publisher will update this listing to reflect changes since the
last report at the same time Publisher makes each quarterly payment hereunder.
(b) Publisher may adapt the material contained in the Work for
purposes of developing the CBT Materials, provided, however, that in making such
adaptation, Publisher shall not alter the substantive
<PAGE>
information as contained in the Work without the prior written approval of
Proprietor. Proprietor shall have the right to approve the CBT Materials as well
as the use of the Work's title on the CBT Materials, such approval not to be
unreasonably withheld or delayed, but in no event will approvals (or written
objections, specifying the reasons for rejection) be delayed for more than ten
(10) business days following delivery of the CBT Materials for review purposes.
Proprietor may request an extension of this period from the Publisher, and
Publisher shall not unreasonably refuse such request. Subject to such review
rights, Publisher shall be solely responsible for determining the extent of the
Work incorporated into the CBT Materials and the nature of such incorporation.
Publisher shall have no obligation to incorporate all of the Work into the CBT
Materials. It is understood that the CBT Materials shall include material from
other works and that the Proprietor shall be notified in advance of and have
approval of the other works also to be included in the CBT Materials. The
"material from other works" included in the CBT Materials can consist solely of,
but is not necessarily limited to, the adaptations authorized by DPEC to adapt
the Work into the form of the Adaptation.
(c) Within thirty (30) days of the addition of a Work to Exhibit B,
Proprietor shall deliver to Publisher one copy of such Work in an electronic
format (recorded in an agreed upon electronic format). All costs of such
delivery or any alternate delivery shall be borne solely by the Publisher.
(d) As used herein, "Adaptation" means:
One or more versions of the Work which have been modified,
supplemented and/or adapted either alone or in conjunction with other
materials for use as a training program, educational course or
reference for delivery to the student or user at least in part through
interaction (locally or remotely through telecommunications means)
with a computer program, computer delivery system or intranet or
internet browser. Acceptable delivery vehicles and formats include,
but are not limited to, training programs and/or educational courses
in "computer-based training" form and materials presented in
computer-based reference form (including, but not limited to,
materials in hypertext or hypermedia form delivered locally or through
the internet or via other telecommunications means and materials
combining text, images, video, audio, animations, graphics and/or
application launching). As provided in Paragraph 1(a)(ii), written
documentation derivative of the Work may be prepared and distributed
by Publisher in conjunction with training programs, educational
courses or computer-based references otherwise in the required form,
but such written documentation may not be distributed to parties who
have not separately acquired rights to use Publisher's training
program, educational course or computer-based reference.
Upon release or publication, Publisher shall notify Proprietor in writing of the
format or platform in which the Adaptation or the CBT Materials appear.
(e) Proprietor agrees that so long as Publisher is not in uncured
default hereunder, during the License Term for any Work Publisher shall have the
right to make a written request to the Proprietor to receive updated or revised
versions of such Work. Should Proprietor decide at its sole discretion that such
updates or revisions are essential to the success of the CBT Materials, then
Proprietor shall deliver the updates or revisions to the Publisher, who shall
bear all costs associated with such delivery.
(f) Notwithstanding subparagraph l(a)(i), upon the written request of
Publisher, and only for those Works for which Proprietor has such rights,
Publisher may prepare CBT Materials in languages other than the English
language. Publisher will notify Proprietor prior to any translation of the CBT
Materials. Any such translated version of the CBT Materials will be considered a
further work derivative of the CBT Materials prepared under subparagraph
l(a)(v), and such translated version will be subject to the same License Term as
the English-language version thereof.
2
<PAGE>
2. TERRITORY AND MARKET
The territory granted in this Agreement (the "Territory") shall be the
world provided that the Proprietor has the worldwide rights for each Work.
Should Proprietor's rights be limited, so shall Publisher's. All limitations of
the worldwide right will be specified in Exhibit B. Publisher shall have the
right to sell the CBT Materials in all markets (the "Markets") except the
"Retail Market", as hereafter defined. Publisher may also sell the CBT Materials
in the Retail Market subject to Proprietor's written approval not to be
unreasonably withheld or delayed. In the event the Retail Market is approved for
a Work or Works, such Retail Market shall be part of the Markets for such Work
or Works.
For the purposes hereof, the "Retail Market" means the offering for sale of
copies of the CBT Materials in retail store locations for point of sale purchase
by consumers.
3. TERM
(a) The parties intend this Agreement to provide the terms and
conditions under which Proprietor grants Publisher certain rights in each Work,
as more fully set forth herein. The term of this Agreement ("Agreement Term")
shall commence on the Effective Date and shall continue until the last to occur
of (i) Publisher's rights with respect to all Works have expired (as set forth
in Paragraphs 3(b) and 3(d) below) or have been terminated (as set forth in
Paragraph 9 below) or (ii) either party gives written notice to the other party
of termination of this Agreement. During the Agreement Term, the parties may
from time to time upon mutual written agreement add works of authorship to
Exhibit B, and Publisher's rights in any such Work shall exist only during the
License Term (as defined in Paragraph 3(b)) for such Work.
(b) Subject to prior termination in accordance with the provisions of
Paragraphs 3(d) and 9, the term during which Publisher shall have the rights
granted herein in any Work (the "License Term") shall commence as of (i) the
date listed under "License Agreement Date" for such Work on Exhibit B for Works
existing as of the Effective Date or (ii) the date such Work is added to Exhibit
B for Works added thereto after the Effective Date, and shall continue for a
period of five (5) years following the date of first release by the Publisher of
the CBT Materials associated with such Work. For Works listed on Exhibit B as of
the Effective Date, the date of such first CBT Materials release is set forth in
Exhibit B. Upon expiration or termination of the License Term for a Work, all
rights to such Work granted hereunder shall fully and forever revert to the
Proprietor, subject to the right of Publisher to continue to administer and
receive income from any licenses to the CBT Materials granted prior to
expiration, but such continuing right of Publisher shall continue to be subject
to the royalty rights of Proprietor set forth in Paragraph 5(b). Immediately
upon termination of the License Term for a Work, Publisher shall cease
distributing the CBT Materials associated with such Work, except as permitted in
Paragraph 3(c) below. For Works added to Exhibit B after the Effective Date (or
for existing Works for which no date of first release is specified in Exhibit
B), Publisher will notify Proprietor of the date of first release of the CBT
Materials associated with such Work to the market. The License Term for any Work
may be renewed upon mutually agreeable terms. Publisher shall notify Proprietor
of its wish to renew 6 months prior to the expiration, and any mutually agreed
extension (and terms thereof) will be memorialized in a writing signed by both
parties.
(c) Following the expiration or termination of the License Term for
any Work, Publisher may dispose of copies of the CBT Materials associated with
such Work which are on hand for a period of sixty (60) days, provided royalties
with respect to that period are paid, statements are furnished and such
disposition otherwise complies with the provisions of this Agreement. In
addition, in the event of the expiration or termination of any License Term,
Publisher may deliver copies of the CBT Materials associated with the expiring
or terminated Work pursuant to any order outstanding on the date of
3
<PAGE>
expiration or termination, subject to the payment of monies pursuant to
Paragraph 5(b) hereof. To the extent that Publisher has granted licenses which
permit end users to access via the internet or other telecommunications means
CBT Materials on computer systems maintained by or for Publisher, and such
licenses extend beyond the expiration or termination of any License Term,
Publisher may maintain the CBT Materials on such computer systems through the
expiration or normal termination of such access licenses, subject to the payment
of monies pursuant to Paragraph 5(b) hereof.
(d) Proprietor may terminate the License Term for any Work by written
notice to Publisher, without prejudice to any other claims Proprietor may have
against Publisher, if:
(i) Publisher fails to release the CBT Materials associated
with such Work within the time specified in Paragraph 4, unless such time is
extended by Proprietor in writing (provided that, in the event Proprietor elects
not to terminate the License Term for such Work on the date specified in
Paragraph 4 or any extended date, Proprietor may exercise its right to terminate
under this clause until the date of any subsequent release by Publisher of the
CBT Materials associated with such Work to the market at which time such right
shall lapse);
(ii) the CBT Materials associated with such Work go out of
print or off the market and Publisher does not within six months after having
received notice from Proprietor or its agent reissue such CBT Materials;
(iii) Publisher defaults in accounting or making payments as
herein provided for such Work and Publisher fails to cure such default within
thirty (30) days following receipt of written notice thereof from Proprietor;
(iv) Publisher fails to protect Proprietor's copyright and
trademarks in the Work as provided in Paragraphs 7 and 8 hereof and Publisher
fails to cure such default within thirty (30) days following receipt of written
notice thereof from Proprietor.
The License Term for all Works will terminate on any termination of this
Agreement under Paragraph 9.
4. RELEASE
Publisher shall release the CBT Materials within a twelve (12) month
period beginning on the date of Proprietor's delivery under Paragraph 1(c). In
the event Publisher fails to release the CBT Materials on schedule Proprietor
may, as its sole and exclusive remedy for any such failure by Publisher,
terminate the License Term for such Work as provided in Paragraph 3(d) above.
5. ROYALTIES
Publisher shall pay to Proprietor the following amounts:
(a) a guaranteed minimum of $3,000 per Work payable within the first
year following the release of the CBT Materials associated with such Work. In
the event actual royalties payable in connection with such CBT Materials do not
cover this amount, Publisher may make a supplemental payment to achieve the
$3,000 minimum. The parties acknowledge and agree that such minimum payment has
been made for all of the Works listed on Exhibit B as of the Effective Date; and
(b) a royalty calculated at the Royalty Rate (as defined in Exhibit C)
against Gross Revenues (as defined below) received by Publisher from any source
from the licensing, distribution or other exploitation of the CBT Materials
associated with each Work, plus, where so specified in Exhibit C, a
4
<PAGE>
Supplemental Royalty. If CBT Materials are included in a group of Publisher
products which are licensed or distributed to end users for a specific fee for
the entire group of Publisher products (e.g., a FLEX or other license), the
royalty due Proprietor hereunder shall be (1) the applicable Royalty Rate
multiplied by (2) the quotient of the number of CBT Materials included in the
group divided by the number of products in the group multiplied by (3) the Gross
Revenues received by Publisher for the group of products. By way of example
only, if CBT Materials associated with Works constitute 20 out of 40 Publisher
products licensed or distributed as a group, then the royalty due Proprietor
hereunder will be the applicable Royalty Rate times 20/40 (or the applicable
Royalty Rate X .5) times the Gross Revenues received by Publisher for the entire
group. If CBT Materials are included in a group of Publisher products licensed
on a usage or other basis calculated against the time the end user actually
possessed a course, such as SMARTFLEX licenses, the royalty due Proprietor shall
be the applicable Royalty Rate times that portion of the Gross Revenues for the
group of products attributable to the end user's actual possession or usage of
the CBT Materials.
"Gross Revenues" shall mean all revenues collected by Publisher from the sale,
lease, distribution or other exploitation of the CBT Materials. "Gross Revenues"
for the purpose of calculation of the license fees hereunder shall not include
(i) sales, use or excise taxes collected by Publisher, (ii) refunds or returns,
(iii) commissions, royalties and other fees paid by Publisher to third parties
in connection with the license or sale of the CBT Materials, or (iv) revenues
received by Publisher on account of maintenance fees or Resource Packages, i.e.,
student handbooks or related documentation when licensed or sold separately from
the CBT Materials. It is hereby acknowledged by the parties that the exemption
provided for under this subparagraph (iv) shall only apply should the annual
volume of such revenues not exceed more than five percent (5%) of Publisher's
total annual gross revenues from the sale of the CBT Materials; provided
(c) In the event that, under any Prior Agreement (as defined in
Paragraph 15(d)) pursuant to which Publisher paid Proprietor an advance against
royalties, any such advance had not been fully applied to royalties otherwise
due in respect to the associated CBT Materials, Publisher may apply any such
advance against royalties due under this Agreement. All such unapplied advances
existing as of the Effective Date are set forth in Exhibit B.
6. PAYMENTS, STATEMENTS & EXAMINATION OF BOOKS
(a) Following first release of the CBT Materials associated with a
Work, Publisher shall account and render statements to Proprietor within 30 days
following December 31, March 31, June 30 and September 30 during each year of
this Agreement. Each such statement shall report the number of copies of the CBT
Materials sold and the retail price of the CBT Materials. At the same time,
Publisher shall provide Proprietor with a list of all its sublicensees, whether
sublicensed by Publisher directly or indirectly by Publishers distributors.
Publisher shall pay any amounts due pursuant to Paragraph 5 hereof with each
such statement. If any advance against royalties (as specified in Paragraph 5(c)
has not earned out the unearned balance shall also be specified on the
statement.
5
<PAGE>
All sums due hereunder shall be paid to MACMILLAN PUBLISHING USA and
sent by first class mail to:
Macmillan Publishing USA
The First National Bank of Chicago
7th Floor Mailroom
525 West Monroe
Chicago, Illinois 60661
Attention Lockbox: #93684
312-732-6277
A copy of the check plus the accompanying royalty statement should be
sent directly to:
Eve Taben
Macmillan Publishing USA
1633 Broadway
New York, New York 10019
(b) Publisher shall maintain complete and accurate books of account
relating to the manufacture and sale of the CBT Materials. Proprietor or its
duly authorized representative shall have the right, upon written request, to
examine and make extracts from said books of account insofar as they relate to
this Agreement. Expenses of such examination shall be borne by Proprietor unless
errors in accounting in Publisher's favor amounting to five percent or more of
the sums paid to Proprietor are found, in which event such expense shall be
borne by Publisher. All relevant books of account and records of Publisher shall
be kept available for at least three years after the termination of the License
Term of the associated Work.
7. COPYRIGHT
Proprietor or Proprietor's licensor is the sole proprietor of
copyright in the Work. Publisher shall not exploit the copyright in the Work
except as specifically authorized by this Agreement. Publisher shall take all
necessary measures to protect copyright in the CBT Materials and the underlying
Work to the maximum extent possible by complying with the applicable provisions
of all pertinent domestic and international copyright laws in the Territory. In
addition to Publisher's copyright notice, each copy of the CBT Materials shall
carry a legally sufficient notice both in hard copy and as part of the video
"boot-up" screen display in the following form or such other form as Proprietor
may designate in writing:
Portions Copyright @ [as in Proprietor's edition of the Work] All
Rights Reserved. Based upon the work [insert title from Exhibit B]
Published under license from Macmillan Publishing USA, a division of
Ahsoug, Inc.
Publisher shall promptly notify Proprietor of any infringements or unauthorized
use of a Work by others. Proprietor shall have the right but not the obligation
to prosecute any action for infringement or unauthorized use in such manner as
it deems appropriate. If Proprietor prosecutes such an action, it shall recoup
the expense incurred by it from any recovery. Publisher shall have the right but
not the obligation to prosecute any action for infringement or unauthorized use
of any expression or other work of authorship authored or created by Publisher
and included in the CBT Materials in such manner as it deems appropriate. The
parties will cooperate in any such action, including any action involving
6
<PAGE>
infringement or unauthorized use of both the CBT Materials and a Work. Each
party will keep the other party apprised of the progress of any such action.
8. TRADEMARKS
The name MACMILLAN and associated colophons (the "Trademarks") are
trademarks of Proprietor and/or Proprietors licensor and all right, title and
interest therein and the goodwill pertaining thereto belong exclusively to them.
Proprietor hereby authorizes Publisher to use the Trademarks in connection with
the promotion and sale of the CBT Materials provided the requirements herein are
met. The Trademarks must be used properly and include appropriate legal notice.
In using the Trademarks, unless otherwise agreed to in writing by Proprietor,
each of the Trademarks must always be:
1. legible;
2. used as an adjective;
3. used in the singular;
4. used in its entirety;
5. used in its complete form - it may never be modified;
6. given special typographical treatment, (i.e. all capital
letters, underlined, italics, different colors or boldface
type);
7. used with the appropriate trademark symbol, "(R)", if
registered, or "(TM)", if not registered, which symbol should
be placed on the right hand shoulder of the trademark; and
8. accompanied by a proprietary notice on the CBT Materials
which identifies Proprietor as the trademark owner.
Proprietor shall have the right, upon request, to review and approve
any use of the Trademarks by Publisher in the packaging, advertising and
promotion of the CBT Materials.
9. TERMINATION
Proprietor may terminate this Agreement by written notice to
Publisher, without prejudice to any other claims Proprietor may have against
Publisher, if:
(a)Publisher materially breaches any of the terms of this Agreement
other than those addressed by the provisions of subparagraphs
3(d)(iii) and 3(d)(iv) and does not cure such breach within one
month of receipt of written notice from Proprietor to do so;
(b)Publisher shall be adjudicated as bankrupt or an order appointing a
trustee or receiver of it or of a substantial part of its property
shall be made, or an order shall be made approving a petition
seeking its reorganization under any bankruptcy statute or similar
law, or if it shall institute proceedings for or similar to
voluntary bankruptcy or reorganization or apply for or consent to
the appointment of a receiver of it or its property, or shall make
an assignment for the benefit of its creditors, or shall admit in
writing its inability to pay its debts generally as they become
due, or shall suspend its activities or cease to carry on business
or, if any action of any government or any subdivision thereof
shall materially impair Publishers operations; or
(c) This Agreement is assigned or conveyed by Publisher other than as
permitted in Paragraph 13 hereof.
7
<PAGE>
Termination of this Agreement under any provision of this Paragraph
shall not relieve Publisher of the obligation to pay any monies then due or that
become due from Publisher to Proprietor and shall be without prejudice to any
rights of Proprietor against Publisher either at law or in equity.
10. RESERVATION OF RIGHTS
(a) Except as non-exclusively licensed to Publisher under the
Publisher License, all other rights, whether now existing or which may hereafter
come into existence, which are not expressly granted to Publisher herein are
reserved to Proprietor and may be exercised, sold, licensed, or otherwise
disposed of by Proprietor at any time. Proprietor retains all other rights to
and multimedia uses of the Works, including but not limited to on-line
(commercial databases), audio, abridgment or condensation, translation and all
forms of book publication. Except as provided in Paragraph 1(a) herein this
Agreement shall in no way limit Proprietors right to license the Works to other
third party licensees.
(b) Publisher hereby reserves all right, title and interest to
Publisher's Components, to the extent that such Components are separable from
the Work and are eligible for protection under applicable intellectual property
laws. Publisher's Components shall include computer programs, HTML coding,
information and graphic designs and modules, and video, audio, animation and
other works of authorship, owned, acquired or developed by the Publisher in the
course of manufacturing and developing the CBT Materials. Proprietor
acknowledges that it has no right, title or interest in and to the Components
and shall not reproduce or otherwise make use of them without the express
written consent of the Publisher, except to the extent that such use is
permitted under applicable principles of fair use or otherwise.
11. WARRANTY & INDEMNITY
Proprietor warrants and represents that each Work in no way violates
any existing copyright, either in whole or in part, and that it contains no
matter which, if published, will be libelous. Proprietor shall defend and
indemnify Publisher from all damages, costs and expenses (including reasonable
attorneys fees) which it may incur as a result of a breach of the above
warranties and representations. Notwithstanding the foregoing, Proprietor shall
not be liable for any claim based on material inserted in or added to the CBT
Materials by Publisher, or edited out of a Work by Publisher, whether with or
without the permission of Proprietor. Publisher warrants and represents that the
CBT Materials (except for the Work associated with such CBT Materials) will in
no way violate any third party copyright, patent, process, idea, method, device
or any other right of any third party. Publisher shall indemnify Proprietor for
all damages, costs and expenses (including reasonable attorneys fees) which it
may incur as a result of a breach of these warranties and representations, as
well as any claim, suit, loss or damage arising in connection with the
manufacture, distribution, advertisement or sale of the CBT Materials (except
for those arising solely as a result of the Work) or any alleged defect in the
CBT Materials (other than a defect in the Work).
With respect to any suit, claim, demand or action against Proprietor
for which Proprietor is indemnified by Publisher pursuant to this Paragraph
("Indemnified Claim"), Publisher will defend such Indemnified Claim at its own
expense. However, such defense, and Publisher's indemnity obligations hereunder
are subject to the following conditions: (i) that Publisher be notified promptly
in writing by Proprietor of any notice of such Indemnified Claim; and (ii) that
Publisher will have sole control of such defense and all negotiations for any
settlement or compromise, on the conditions that Proprietor may participate at
its expense in any defense and that no settlement shall impose any obligations
upon Proprietor without its prior written consent.
In no event shall either party be liable for any special, indirect,
consequential or exemplary damages even if such party has been advised of the
possibility thereof, including but not limited to lost
8
<PAGE>
profits, lost business revenue, or failure to realize expected savings. The
foregoing provisions shall apply in respect of any claim, demand or action by a
party irrespective of the nature of the cause of action underlying the same,
including but not limited to breach of contract or tort including negligence or
misrepresentation, except that the foregoing limitation of liability shall not
apply to claims for infringement of the proprietary rights if third parties.
12. COMPLIMENTARY COPIES
Effective upon Publisher's release of the CBT Materials for marketing
and distribution to its customers generally, Publisher agrees to grant to
Proprietor a license to use five (5) copies of the CBT Materials (in the form
made available to Publisher's customers generally) during the License Term of
the associated Work solely for Proprietors internal business purposes and only
on other terms and conditions set forth in the license agreement attached as
Exhibit A. During the License Term of the associated Work, Publisher shall
provide Proprietor at no charge with such maintenance of and updates to the CBT
Materials as Publisher provides to its customers with monthly or annual
licenses.
13. ASSIGNMENT
This Agreement is personal to Publisher and may not be assigned by
Publisher except (i) with the express written permission of Proprietor, or (ii)
when in connection with the sale or transfer of Publisher's entire business. Any
assignment in violation of this section shall be void and unenforceable.
14. NOTICES
All notices contemplated or required under this Agreement shall be in
writing and shall be deemed given when hand-delivered, sent by certified or
registered mail (return receipt requested, postage prepaid), or delivered by
other form of receipted delivery, to the other party at the addresses first set
forth above, or at such other address or to the attention of such other person
as either party may from time to time designate pursuant to this Paragraph.
15. GENERAL
(a) Paragraph captions in this Agreement are for identification
purposes only and shall not affect the interpretation of this Agreement or any
part hereof.
(b) The provisions of this Agreement shall be severable, and if any
provision of this Agreement is held or declared to be illegal, invalid, or
unenforceable, the remainder of this Agreement disregarding such illegal,
invalid, or unenforceable portion shall continue in full force and effect as
though such void provision had not existed, unless such illegality, invalidity,
or unenforceability materially alters the rights and obligations of the parties,
in which case this Agreement shall be deemed terminated.
(c) The waiver by either party of any breach of any provision of this
Agreement by the other party shall not be construed to be either a waiver of
that party's rights regarding any succeeding breach of any such provision or a
waiver of the provision itself.
(d) This Agreement contains the entire agreement between the parties
and supersedes and cancels all previous written or oral understandings,
agreements, negotiations, commitments and all other writings or communications
in respect of the Work. It specifically supersedes the prior agreements between
the parties in respect of the Works listed on Exhibit B as of the Effective Date
(the "Prior Agreements"). All amounts due and payable under such Prior
Agreements as of the Effective Date shall
9
<PAGE>
be paid by Publisher consistent with the terms thereof. This Agreement may not
be modified in any manner except by an instrument in writing signed by an
authorized officer of each party.
(e) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND FULLY PERFORMED
THEREIN. The state courts in the State of New York in New York County and, if
the jurisdictional prerequisites exist at the time, the United States District
Court for the Southern District of New York, shall have the sole and exclusive
jurisdiction to hear and determine any dispute or controversy arising under or
concerning this Agreement.
(f) Upon termination of this Agreement, neither party shall have any
further obligation to the other, except for such post-termination rights as may
exist pursuant to the terms hereof.
(g) Nothing in this Agreement shall be construed to make either party
the agent of the other for any purpose whatsoever. Neither party is authorized
to enter into any contract or assume any obligation for the other. Nothing in
this Agreement shall be construed to establish a partnership or joint venture
between Proprietor or Publisher.
See Exhibit A, Exhibit B and Exhibit C Attached Hereto and
Made Part Hereof
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed,
DPEC, INC. MACMILLAN PUBLISHING USA,
(Publisher) DIVISION OF AHSOUG, INC.
(Proprietor)
By /s/Gary W. Qualmann By /s/ Michael Violano
--------------------------------- ---------------------------
Name Gary W. Qualmann Name Michael Violano
--------------------------------- ---------------------------
Date 1/25/99 Date 2/1/99
--------------------------------- ---------------------------
10
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of DPEC, INC. on
Form S-1 of our report dated October 26, 1999, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Columbus, Ohio
October 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 AND THE
COMPANY'S STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,835 4,362
<SECURITIES> 0 0
<RECEIVABLES> 1,966 1,912
<ALLOWANCES> 0 20
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,855 8,254
<PP&E> 931 2,191
<DEPRECIATION> 534 769
<TOTAL-ASSETS> 5,273 10,021
<CURRENT-LIABILITIES> 5,657 8,945
<BONDS> 1,095 1,364
1,893 4,853
0 0
<COMMON> 55 55
<OTHER-SE> (4,816) (7,189)
<TOTAL-LIABILITY-AND-EQUITY> (4,761) (7,134)
<SALES> 7,074 8,190
<TOTAL-REVENUES> 7,867 8,245
<CGS> 465 555
<TOTAL-COSTS> 8,994 9,753
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 20
<INTEREST-EXPENSE> 139 76
<INCOME-PRETAX> (1,698) (2,088)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,698) (2,088)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,698) (2,088)
<EPS-BASIC> (50.99) (61.88)
<EPS-DILUTED> (50.99) (61.88)
</TABLE>
