<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 2000
REGISTRATION NO. 333-87273
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MINDLEADERS.COM, 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 organization) Classification Code Number) Identification Number)
</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
MINDLEADERS.COM, 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:
<TABLE>
<S> <C>
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
</TABLE>
--------------------------
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 MARCH 20, 2000
THE 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
3,100,000 SHARES
[LOGO]
COMMON SHARES
----------------------------------------------------------------
This is our initial public offering of common shares. We are offering 3,100,000
common shares. No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"MDLR." Anticipated Price Range: $12.00 to $14.00 per share.
INVESTING IN OUR SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 6.
<TABLE>
PER SHARE TOTAL
------------------------- -------------------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to MindLeaders.com................................. $ $
</TABLE>
We have granted the underwriters the right to purchase up to 465,000 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 , 2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
J.C. BRADFORD & CO.
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL
SERVICES CORPORATION
FACILITATING ELECTRONIC DISTRIBUTION
, 2000.
<PAGE>
[Inside front cover]
A spherical graph of our distribution channels:
- In the center is a globe with the words "Over 400 in-depth courses" above
and the MindLeaders.com logo (the word "MindLeaders.com" with "Mind" in
gold and the word "Leaders" in black.
- Next, a circle labeled "The Internet."
- Next, three more concentric circles indicating our three sales channels as
follows:
- "Direct Sales" to "Large Organization Clients" ("Over 700 Clients").
- Sales to "Small/Medium Business Users" through "Internet Service
Provider Partners" ("Over 1,300 ISP's with access to over 900,000
businesses") and "Other Marketing Partners" ("Over 125 partners").
- Sales to "Home Office Users" through "Internet Service Provider
Partners" ("Over 1,300 ISP's with access to 7.4 million home offices
and individuals") and "Other Marketing Partners" ("Over 125 partners").
Three photographs representing our clients:
- For "Large Organization Clients," a large city skyline.
- For "Small/Medium Business Users," an office scene with two people at a
computer.
- For "Home Office Users," a woman working at a computer at home.
At the bottom of the page, the "MindLeaders.com logo."
<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.............................. 24
</TABLE>
<TABLE>
Management............................ 35
<CAPTION>
PAGE
--------
<S> <C>
Certain Transactions.................. 46
Principal Shareholders................ 47
Description of Capital Stock.......... 48
United States Federal Income Tax
Consequences to Non-U.S. Holders.... 52
Shares Eligible for Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 59
Index to Financial Statements......... F-1
</TABLE>
Until , 2000, 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
OUR BUSINESS
We provide Web-based courses and services designed to meet the training
needs of businesses, organizations and home office users worldwide. We deliver
our courses over our clients' internal computer networks and over the Internet.
Our extensive online catalog of over 400 courses covers information technology,
desktop computing and professional and practical skills. Our course technology
enables users to learn in an interactive, flexible and cost-effective manner
anytime, anywhere. Our courses are designed to provide users with knowledge
necessary to compete in today's dynamic business environment.
We license our courses through direct and indirect sales channels, enabling
us to effectively reach the large user market we believe exists for Web-based
training:
DIRECT SALES. Our internal sales force targets businesses and other large
organizations that we believe generate over $50 million in annual revenues
or require an efficient means of training a large number of employees. We
currently license our courses and provide services to over 700 direct sales
clients.
INDIRECT SALES. We distribute our courses indirectly to businesses,
organizations and individuals 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 1,300 Internet service providers who offer our courses to
over 7.4 million subscribers, including over 900,000 businesses.
OTHER MARKETING PARTNERS--We currently have marketing alliances with over
125 businesses and other 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 with members who need our Web-
based courses and services.
OUR MARKET OPPORTUNITY
In today's rapidly changing and competitive business environment, business
leaders recognize that a significant source of competitive advantage is the
depth and breadth of knowledge of their employees. In order to gain a
competitive advantage, businesses are investing increasing amounts in employee
training. The United States Department of Education estimates that in 1997
businesses spent more than $55 billion on training programs in the United
States.
Historically, the majority of this training has been in the form of
instructor-led training. This traditional method of training is costly, slow and
inflexible. Web-based training offers a more efficient and effective means for
providing training. International Data Corporation ("IDC") estimates that the
U.S. corporate market for training and education presented over the Internet
will increase from $550 million in 1998 to approximately $11.4 billion by 2003,
an 83% compound annual growth rate. With the rapid adoption of the Internet, we
believe the advantages of online training can now be marketed to both large and
small businesses, as well as to home office users, in a cost-efficient manner.
OUR COMPETITIVE STRENGTHS
We believe we possess the following key competitive strengths:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. We offer more
than 400 courses in a broad range of topics, over 80% of which address
information technology, desktop computing and certification training. In
most subjects, we offer a number of courses from introductory to
1
<PAGE>
advanced. For a fixed license fee, clients can subscribe to our entire
catalog of online courses, a smaller group of related courses or individual
courses.
MULTIPLE DISTRIBUTION CHANNELS. We derive 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 business and
home office user 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, which are common software applications that allow
users to access and interact with Websites. This eliminates the need for our
clients to download our content and provides 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
business-to-business Web-based training courses and services. The principal
elements of our growth strategy are to:
- continue to license our courses and services to large organizations;
- expand sales to small businesses and home office users through our
indirect marketing channels in the U.S. and abroad;
- broaden course offerings in new and existing topics and categories and
accelerate course development;
- further enhance our technological infrastructure;
- increase brand awareness in our target business markets; and
- seek possible strategic acquisitions of or investments in complementary
businesses, products, services or technologies.
RECENT EVENTS
In January 2000, we sold 1,167 shares of series C convertible preferred
stock for an aggregate purchase price of $1,500,000 and a warrant to purchase
49,348 of our common shares at $7.60 per share to River Cities Capital Fund II
Limited Partnership.
In March 2000, we changed our name from "DPEC, Inc." to "MindLeaders.com,
Inc."
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common shares offered by MindLeaders.com..... 3,100,000 shares
Common shares to be outstanding after this 11,384,615 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....... "MDLR"
</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--2000
Incentive Stock Plan" on page 42.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
- A 169-FOR-1 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.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. 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 1997 and 1998 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. The pro forma income tax provision
(benefit) has been offset by a valuation allowance of $535,000 for the year
ended December 31, 1998. Prior to August 1, 1996 we were, and since
September 15, 1998 we have been, taxed as a C-Corporation.
The pro forma as adjusted basic and diluted net loss per share for the year
ended December 31, 1999 gives 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 and term note at the beginning
of the period from a portion of the offering proceeds.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARES AND PER
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware fees.................................... $ 5,615 $ 7,074 $ 11,307
Third-party courseware fees........................ 1,783 651 83
Other revenue...................................... 706 447 26
---------- ---------- ----------
Total revenue...................................... 8,104 8,172 11,416
Gross profit....................................... 7,035 7,402 10,614
Net loss........................................... (266) (1,698) (4,873)
Convertible redeemable preferred stock dividends... -- -- (20)
Intrinsic value of beneficial conversion feature of
preferred stock.................................. -- -- (2,960)
---------- ---------- ----------
Net loss available to common shareholders.......... $ (266) $ (1,698) $ (7,853)
========== ========== ==========
Basic and diluted net loss per common share........ $ (0.05) $ (0.30) $ (1.38)
========== ========== ==========
Weighted average shares used in per share
calculation...................................... 5,363,553 5,630,235 5,701,553
========== ========== ==========
Pro forma net loss before taxes.................... $ (266) $ (1,698)
Pro forma benefit for income taxes................. (116) (153)
---------- ----------
Pro forma net loss................................. $ (150) $ (1,545)
========== ==========
Basic and diluted pro forma net loss per common
share:........................................... $ (.03) $ (.27)
========== ==========
Basic and diluted weighted average shares used in
per share calculation............................ 5,363,553 5,630,235 5,701,553
========== ========== ==========
Basic and diluted pro forma as adjusted net loss
per common share:................................ $ (1.11)
----------
Weighted average shares used in pro forma as
adjusted per share calculation................... 7,168,438
----------
</TABLE>
4
<PAGE>
The following table provides a summary of our balance sheet as of
December 31, 1999. The pro forma column reflects the sale of 1,167 shares of
series C convertible preferred stock for $1.5 million and the sale of
3.1 million common shares in this offering at an assumed initial offering price
of $13.00 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 DECEMBER 31,
1999
--------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 538 $
Working capital (deficiency)............................. (3,788)
Total assets............................................. 8,976
Long-term debt, including current maturities............. 1,269
Convertible redeemable preferred stock................... 4,853
Total shareholders' deficiency........................... (9,381)
</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.
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."
We were 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.
We have filed applications to register the trademarks "MindLeaders" and
"MindLeaders.com." The name "DPEC" is our registered trademark. 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. 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; and $355,000,
$266,000, $1,698,000 and $4,873,000 for the years ended December 31, 1996, 1997,
1998, and 1999. 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;
- enhancing recognition of our brand; and
- developing new courses to attract small businesses and home office users.
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 HOME OFFICE USERS 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 business and home office 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
businesses and home office users 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 IN REACHING THE SMALL BUSINESS AND HOME OFFICE
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 individuals. 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 clients, Internet service
providers and other marketing partners;
- the number of courses our corporate clients license and the number of
users who license courses through our corporate clients, 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;
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<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 MINDLEADERS.COM BRAND,
OUR CLIENT 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 client base. We
only recently changed our name from "DPEC" to "MindLeaders.com." This name
change might cause confusion for our clients and harm our brand recognition. We
expect to expend substantial resources, which we cannot estimate at this time,
to promote our new name. 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 sufficient resources to
marketing efforts, or course performance problems cause client 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 FROM STRENGTHENING OUR
CLIENT 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 187
employees as of February 29, 2000. 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, to strengthen our client base and to 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 clients could reduce client 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 clients.
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 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.
Currently, trademark registrations are pending for the marks "MindLeaders"
and "MindLeaders.com." These registrations may not be approved. Even if they are
approved, they may be challenged successfully by others or invalidated. If our
trademark registrations are not approved because third-parties own these
trademarks, our use of these marks would be restricted unless we enter into
arrangements with the third-party owners, which might not be possible on
commercially reasonable terms or at all.
Despite our efforts to protect our proprietary 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
9
<PAGE>
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.
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 OR INFRINGES ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
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. We also cannot be sure that the information we obtain from
third-parties does not infringe on known proprietary rights of other
third-parties. Our inability to provide factually accurate content or to ensure
that our content does not infringe on the proprietary rights of others, 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 client base than
we have.
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
10
<PAGE>
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 CLIENTS' 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 clients 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 clients. If we fail to do so, our
courses may not gain market acceptance.
DUE TO OUR USE OF THE INTERNET, CLIENTS' INTERNAL COMPUTER NETWORKS, 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, clients' internal computer networks, Web servers and browsers over
which we present our courses. There can be no guarantee that the general use of
the Internet, internal computer networks, 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, internal computer networks, 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. Some states are attempting to apply these statutes to regulate the
offering of courses over the Internet. We are exploring with the state regulator
in Ohio whether application of its statute is appropriate. We cannot predict
what resources might be expended if we are required to comply with these
statutes. We also cannot predict whether any of our Internet service providers
or other marketing partners might refuse to carry our courses in order to avoid
becoming subject to these statutes.
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 38.5% 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 8,284,615 COMMON SHARES, OR 72.8% 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 11,384,615 common shares. This
includes the 3,100,000 common shares we are selling in this offering, which may
be resold in the public market immediately. The remaining 72.8%, or 8,284,615
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
- ----------------------- ---------------------- ----------------------------------------------------
<C> <C> <S>
8,087,392 71.1% 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.
197,223 1.7% Between 180 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 $13.00 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, to
fund our expansion and to create a public market for our common shares. This
public market will facilitate our future access to public equity markets and
enhance our ability to use our common shares as a means of attracting and
retaining key employees and as consideration for acquisitions. We currently
intend to use the net proceeds from this offering to:
- repay existing indebtedness in the aggregate principal amount of $666,667
as of February 29, 2000 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 $120,593
as of February 29, 2000 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;
- repay existing indebtedness in the aggregate principal amount of $441,667
as of February 29, 2000 to Firstar Bank, N.A., pursuant to the terms of an
Amended and Restated Loan Agreement dated August 26, 1999 and a promissory
note dated July 28, 1999 that accrues interest at a rate of 8.04% per
annum and matures in July 2004; 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.
Aside from repaying our existing indebtedness to Ms. Clark, Ms. Papalios and
Firstar Bank, N.A., we have not specifically allocated the net proceeds of this
offering to any of these purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of this offering. We currently plan,
however, to spend approximately $10,000,000 of the proceeds on sales and
marketing and approximately $10,000,000 of the proceeds on development of
courses and delivery systems in the year ending December 31, 2000. Additional
expenses and capital expenditures are projected to be funded by revenues.
Nevertheless, the amount of these expenditures are subject to material changes
as a result of market conditions or changes in our plans. 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 December 31, 1999. Our capitalization is
presented:
- on an actual basis; and
- on a pro forma basis to reflect the sale of 1,167 shares of series C
convertible preferred stock for $1,500,000 in January 2000, the issuance
of warrants to purchase 49,348 shares of common stock at $7.60 per share
and the related $1,330,000 intrinsic value of the warrants and preferred
stock; and
- on a pro forma as adjusted 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 $13.00 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 term note and the automatic
conversion of all outstanding preferred shares into common shares upon the
consummation of this offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 538 $ 2,038 $ --
======== ======== ====
Short-term debt................................... $ 338 $ 338 $ --
======== ======== ====
Long-term debt, less current portion.............. $ 931 $ 931 $ --
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 6,353 --
Shareholders' equity (deficiency):
Preferred shares, no par value, 5,000,000
authorized, none outstanding, pro forma as
adjusted.
Common shares, no par value; 10,460,762 shares
authorized; 7,528,950 shares issued, actual;
and 7,726,173 shares issued, pro forma; and
40,000,000 authorized, 12,195,411 issued, pro
forma as adjusted............................. 55 55 --
Additional paid-in capital...................... 5,705 7,035 --
Treasury stock, at cost......................... (935) (935) --
Deferred compensation........................... (2,207) (2,207) --
Accumulated deficit............................. (11,999) (13,329) --
-------- -------- ----
Total shareholders' equity (deficiency)........... (9,381) (9,381) --
-------- -------- ----
Total capitalization (deficit).................. $ (3,597) $ (2,097) $ --
======== ======== ====
</TABLE>
In addition to the common shares to be outstanding after this offering, as
of December 31, 1999 we may issue additional common shares pursuant to the
following plans and arrangements:
- 200,941 shares underlying stock options issued under the Amended and
Restated Stock Option Plan outstanding, at a weighted average exercise
price of $0.46 per share, of which 142,636 are currently exercisable and
the remainder will vest upon the closing of the Offering; and
- 617,695 shares issuable under our 1998 Stock Option Plan, consisting of:
- 244,205 shares underlying stock options outstanding, at a weighted
average exercise price of $1.89 per share, none of which are currently
exercisable; and
- 373,490 shares available for future grants.
We also may issue 49,348 additional common shares pursuant to a warrant
issued in January 2000.
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 December 31, 1999, our pro forma net tangible book value was
$(3,496,000), or approximately $(0.48) per share. Pro forma net tangible book
value per share represents the amount of pro forma tangible assets less total
liabilities, divided by the number of common shares outstanding on a pro forma
basis after giving effect to the sale of 1,167 shares of our series C
convertible preferred stock in January 2000 and the conversion of all
outstanding preferred shares into common shares.
As of December 31, 1999, as further adjusted for the sale of the shares
offered hereby at an assumed offering price of $13.00 per share, our pro forma
net tangible book value 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......... $ 13.00
--------
Pro forma net tangible book value per share before this
offering.............................................. $ (0.48)
--------
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 December 31,
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 $13.00 per share.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 8,284,615 73% $ 6,408,000 14% $ 0.77
New investors............... 3,100,000 27 40,300,000 86 13.00
---------- --- ----------- ---
Total....................... 11,384,615 100% $46,708,000 100%
========== === =========== ===
</TABLE>
Our calculations do not take into account exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants. As of
December 31, 1999, there were stock options outstanding to purchase 445,146
common shares at a weighted average exercise price of $1.24 per share, as more
fully described on page 15. 373,490 additional shares were reserved for future
grants under our stock option plans. In addition, we issued a warrant to
purchase 49,348 common shares at $7.60 per share in January 2000. 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, 1997, 1998 and 1999, and the balance sheet data as of December 31,
1998 and 1999 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 as of December 31, 1996 and 1997 and
for the year ended December 31, 1996 from audited financial statements not
included herein. We have derived the information for fiscal year ended July 31,
1995, and the five months ended December 31, 1995, 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.
Effective December 31, 1996, we changed our fiscal year end from July 31 to
December 31. References to Fiscal 1995 refer to our fiscal year ended July 31,
1995. References to the five months ended December 31, 1995 refer to the
transition period to a calendar year. References to 1996, 1997, 1998 and 1999
refer to our year 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. The pro forma income tax provision
(benefit) has been offset by a valuation allowance of $535 for the year ended
December 31, 1998. Prior to August 1, 1996 we were, and subsequent to
September 15, 1998 we have been, taxed as a
C-Corporation.
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FIVE MONTHS
ENDED ENDED
JULY 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
----------- ------------- -------------------------------------------------
1995 1995 1996 1997 1998 1999
----------- ------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware fees................................. $ 2,826 $ 1,032 $ 4,405 $ 5,615 $ 7,074 11,307
Third-party courseware fees..................... 925 852 1,439 1,783 651 83
Other revenue................................... 639 195 1,669 706 447 26
---------- ---------- ---------- ---------- ---------- ----------
Total revenue................................... 4,390 2,079 7,513 8,104 8,172 11,416
Courseware fees cost of revenues................ 417 69 326 311 465 762
Third-party courseware fees cost of revenues.... 416 400 668 758 305 40
---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenues........................ 833 469 994 1,069 770 802
---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................................... 3,557 1,610 6,519 7,035 7,402 10,614
Operating expenses.............................. 4,512 2,055 5,691 7,120 8,994 15,460
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations................... (955) (445) 828 (85) (1,592) (4,846)
Interest expense, net........................... 60 33 150 181 106 27
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............... (1,015) (478) 678 (266) (1,698) (4,873)
Provision (benefit) for income taxes............ (78) 45 1,033 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net loss........................................ $ (937) $ (523) $ (355) $ (266) $ (1,698) (4,873)
Convertible redeemable preferred stock
dividends..................................... -- -- -- -- -- (20)
Intrinsic value of beneficial conversion feature
of preferred stock............................ -- -- -- -- -- (2,960)
---------- ---------- ---------- ---------- ---------- ----------
Net loss available to common shareholders....... $ (937) $ (523) $ (355) $ (266) $ (1,698) $ (7,853)
========== ========== ========== ========== ========== ==========
Basic and diluted net loss available to common
shareholders per share:....................... $ (0.12) $ (0.07) $ (0.06) $ (0.05) $ (0.30) $ (1.38)
========== ========== ========== ========== ========== ==========
Basic and diluted weighted average shares used
in per share calculations..................... 7,528,950 7,528,950 6,078,085 5,363,553 5,630,235 5,701,553
========== ========== ========== ========== ========== ==========
Pro forma income (loss) before income taxes..... $ 678 $ (266) $ (1,698)
Pro forma provision (credit) for income taxes... 269 (116) (153)
---------- ---------- ----------
Pro forma net income (loss)..................... $ 409 $ (150) $ (1,545)
========== ========== ==========
Basic and diluted pro forma net income (loss)
per common share.............................. $ 0.07 $ (0.03) $ (0.27)
========== ========== ==========
Weighted average shares used in pro forma per
share calculations:
Basic......................................... 7,528,950 7,528,950 6,078,085 5,363,553 5,630,235 5,701,553
========== ========== ========== ========== ========== ==========
Diluted....................................... 7,528,950 7,528,950 6,130,306 5,363,553 5,630,235 5,701,553
========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ 70 $ 8 $ -- $ 1,835 538
Working capital (deficiency).................... (618) (1,783) (1,435) (1,778) (802) (3,788)
Total assets.................................... 2,252 2,047 2,107 2,857 5,273 8,976
Total long-term debt (including current
maturities)................................... 772 1,053 2,258 2,344 1,095 1,269
Convertible redeemable preferred stock.......... -- -- -- -- 1,893 4,853
Total shareholders' deficiency.................. (418) (941) (2,376) (2,642) (4,761) (9,381)
</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 provide Web-based courses and services designed to meet the training
needs of businesses, organizations and home office users worldwide. We license
our courses and services directly to large organizations through our direct
sales force and indirectly to businesses, professional organizations and home
office users through agreements with our Internet service providers and other
marketing partners.
REVENUES
We derive our revenues from:
- courseware fees, which represent license fees for courses we have
developed;
- third-party courseware fees, which represent gross revenues from license
fees on courses we obtained from third-parties in which we took title to
the courseware or assumed the risk of collection; and
- other revenues, net, which represent net royalties from the distribution
of courses we obtained from third-parties in which we did not assume the
risk of ownership of the courseware or the collection of the receivable.
Currently, we derive our revenues primarily from license agreements under
which our clients license our courses, typically for one, two or three year
periods and generally receive upfront payments for the term of the license.
In 1997, we began de-emphasizing the licensing of third-party courses and
increased the development of our own courses. By February 1999, we had
discontinued the licensing of third-party courses to new customers.
We also distribute our courses indirectly through agreements with Internet
service providers and other marketing partners. These providers/partners can
deliver our courses to their customers by either hosting the courses on their
Internet sites or by linking their customers to our Internet site. If the
provider/partner hosts our courses, it bills the customers and remits a royalty
to us, which we record as net revenue. If the provider/partner is linking to our
Internet site, we bill the customers, record revenue from the subscription and
defer and expense the royalty paid to the partner/provider. In both cases,
because the customer has access to unspecified additional courses, the revenue
is accounted for as a subscription and recorded ratably over the term of the
subscription.
EXPENSES
Our expenses are comprised of the following:
COST OF REVENUES 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
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significantly as we pursue our efforts to enhance recognition of our brand
and 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 catalog
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 increase marketing related to brand enhancement and our indirect
distribution channels significantly. 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
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
Total revenues increased $0.1 million, or 0.8%, from $8.1 million in 1997 to
$8.2 million in 1998, and increased $3.2 million, or 39.7%, from $8.2 million in
1998 to $11.4 million in 1999. The increase in total revenues from 1997 to 1998
was primarily due to a $1.5 million, or 26.0% increase in our courseware fees,
offset by a $1.4 million decrease in third-party courseware fees and other
revenue. Similarly, the increase in total revenues from 1998 to 1999 was due to
a $4.2 million, or 59.8%, increase in our courseware fees, partially offset by a
$1.0 million decrease in third-party courseware fees and other revenue. The
increase in our courseware fees from 1997 to 1998 and from 1998 to 1999 was the
result of an expanded number of courses, client contract renewals and increased
marketing and sales distribution efforts. Distribution of 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 and $0.6 million of our revenue increase from 1998 to 1999.
GROSS PROFIT
Gross profit increased $0.4 million, or 5.2%, from $7.0 million in 1997 to
$7.4 million in 1998, and increased $3.2 million, or 43.4%, from $7.4 million in
1998 to $10.6 million in 1999. Gross profit on our courseware fees increased
$1.3 million, or 24.6%, from $5.3 million in 1997 to $6.6 million in 1998, and
increased $3.9 million, or 59.5%, from $6.6 million in 1998 to $10.5 million in
1999. The gross profit percentage on our courseware fees decreased slightly,
however, from 94.5% in 1997 to 93.4% in 1998 and to 93.3% in 1999 as a result of
additional royalty payments to course content providers. Gross profit on
third-party courseware fees and other revenue decreased $0.9 million, or 54.2%,
from $1.7 million in 1997 to $0.8 million in 1998 and decreased $0.7 million, or
91.2%, from $0.8 million in 1998 to $0.1 million in 1999.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$0.8 million, or 24.0%, from $3.5 million in 1997 to $4.3 million in 1998, and
increased $3.3 million, or 76.2%, from $4.3 million in 1998 to $7.6 million in
1999. Sales and marketing expenses increased as a percentage of
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revenues from 42.8% in 1997 to 52.6% in 1998 and 66.4% in 1999. The increase in
sales and marketing expenses was attributable to an increase in compensation for
our sales and marketing staff, which increased from 34 at December 31, 1997 to
44 at December 31, 1998 and to 72 at December 31, 1999. Eight of the ten people
added in 1998 and 17 of the 28 people added in 1999 were dedicated to the
development of indirect distribution channels. Marketing expenses were
approximately the same for 1997 and 1998 and then increased $1.6 million in 1999
as we expanded our advertising, public relations and marketing programs.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$0.4 million, or 16.9%, from $2.0 million in 1997 to $2.4 million in 1998 and
increased $2.2 million, or 92.2%, to $4.6 million in 1999. Product development
expenses increased as a percentage of revenues from 25.1% in 1997 to 29.1% in
1998 and to 40.0% in 1999. The increase in product development 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 41 at December 31, 1997 to 52 at December 31, 1998 and
to 81 at December 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.7 million, or 43.2%, from $1.6 million in 1997 to $2.3 million in
1998, and increased $1.0 million, or 42.9%, from $2.3 million in 1998 to
$3.3 million in 1999. General and administrative expenses increased as a
percentage of revenues from 19.9% in 1997 to 28.3% in 1998 and then increased to
29.0% in 1999. The increase in general and administrative expenses was related
to compensation for our administrative personnel, which increased from 22 people
at December 31, 1997 to 24 at December 31, 1998 and to 32 people at
December 31, 1999.
INTEREST EXPENSE, NET. Interest expense, net, decreased from $181,000 in
1997 to $106,000 in 1998 and to $27,000 in 1999. Interest expense in 1997 was
related to bank borrowings during the year and to shareholder loans. 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 cash
generated from operations. In 1999, interest expense continued to decrease as we
did not incur bank debt until August 1999. Interest income for 1997 was
insignificant, was $33,000 for 1998 and was $78,000 for 1999 when proceeds from
the sale of convertible preferred shares were invested until needed to fund
growth and operations.
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, 1999, we
had net operating loss carryforwards for federal and state tax purposes of
approximately $1,885,000 that will expire at various times through 2018. At
December 31, 1999, we had a net deferred tax asset of $4,513,000 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 or for the
year ended December 31, 1999.
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 increased from $0.1 million in
1997 to $2.0 million in 1998. The increase in 1998 was primarily due to the
increase in deferred revenue. Net cash used by
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operating activities in 1999 was $2.7 million primarily due to the net loss and
to an increase in accounts receivable which was partially offset by deferred
revenue.
We had no cash or cash equivalents as of December 31, 1997. Cash and cash
equivalents increased to $1.8 million as of December 31, 1998, due primarily to
deferred revenues and the proceeds from the sale of 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. At December 31, 1999, cash and cash equivalents decreased to
$0.5 million due to cash used by operating activities and for property and
equipment expenditures which was partially offset by proceeds from the issuance
of additional convertible preferred shares and from bank borrowings.
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
under the line of credit at February 29, 2000. The term note, which matures on
July 31, 2004, bears interest at 8.04%. As of February 29, 2000, $441,667 of
principal was outstanding under the term note. The line of credit and the term
note contain restrictive covenants that, among others, require us 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 $787,260 as of February 29, 2000. We intend to
use a portion of the proceeds of this offering to repay these shareholder notes
and the term note.
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 in 1998 and the net proceeds of $1.9 million from the sale
of convertible 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 preferred shares for
net proceeds of approximately $2,960,000.
On January 7, 2000 we issued 1,167 shares of series C convertible preferred
shares for an aggregate purchase price of $1,500,000 and a warrant to purchase
49,348 common shares at $7.60 per share.
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;
- enhance brand awareness;
- respond to competitive pressures; or
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- 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.
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities." SFAS No. 133, as amended by
SFAS 137, is required to be adopted for our 2001 annual financial statements. As
we do not currently engage or plan to engage in derivative or hedging
tranactions there will be no impact on our results of operations, financial
position or cash flows when such statements are adopted.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 1999 we had a bank note and a related party note with
variable interest rates based on the prime rate. If market interest rates were
to increase immediately and uniformly by 10% from levels at December 31, 1999,
the decline in fair value of the notes would not be material. See Note 1 to the
financial statements.
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BUSINESS
OVERVIEW
We provide Web-based courses and services designed to meet the training
needs of businesses, government agencies, non-profit organizations and home
office users worldwide. We offer an interactive learning experience delivered
over our clients' internal computer networks and the Internet. Our courses
enable users to learn in a self-paced, flexible and cost-effective manner
anytime, anywhere. Our extensive online catalog of over 400 courses addresses a
broad range of topics, including information technology, desktop computing,
basic skills for small businesses and home offices and business skills
development. We distribute our courses and services directly through our
internal sales force and indirectly through more than 1,300 Internet service
providers and over 125 other marketing partners. We believe we have achieved,
and will be able to maintain, our leading position in the delivery of
interactive Web-based training due to our comprehensive course catalog,
efficient and flexible technology and extensive distribution channels.
OUR MARKET OPPORTUNITY
In today's rapidly changing and competitive business environment, business
leaders recognize that a significant source of competitive advantage is the
depth and breadth of knowledge of their employees. In order to gain a
competitive advantage, businesses are investing increasing amounts in employee
training. The United States Department of Education estimates that in 1997
businesses spent more than $55 billion on training programs in the United
States.
International Data Corporation ("IDC") estimates that the U.S. corporate
market for training and education presented over the Internet will increase from
$550 million in 1998 to approximately $11.4 billion by 2003, an 83% compound
annual growth rate. The largest component of this market is training content,
such as our courses, which IDC estimates will increase from $391 million in 1998
to approximately $6 billion by 2003. The second largest component is learning
services, such as needs assessments, program-building components, technical and
systems integration, site management/hosting, maintenance and online monitoring.
We also provide many of these services. IDC estimates that this component of the
market will increase from $99 million in 1998 to approximately $4 billion by
2003. The balance of the market consists of delivery solutions that we do not
provide.
We believe that Web-based learning is the most attractive training
alternative for businesses, organizations and home office users 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 anytime from
anywhere in the world simply by 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 classrooms. Businesses and individuals can avoid the
travel and lodging costs associated with attendance at seminars and off-site
training centers.
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.
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 the increasing willingness of businesses and
individuals to purchase goods and services via the Internet, we believe that
training products can now be targeted to small businesses and home offices in a
cost-efficient
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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,
home office users, facing the technical challenges of desktop computing, require
efficient and cost-effective training that can be accessed over the Internet,
anytime, from anywhere in the world.
COMPETITIVE STRENGTHS
We believe our key competitive strengths are:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. Our more than
400 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. Clients have the option of
subscribing to our entire catalog of online courses, a smaller group of related
courses or individual courses. For a fixed license fee, our direct sales clients
receive unlimited access to the courses to which they subscribe for a specified
number of users. Clients 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. We derive 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 business,
organization and home office user 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
generating annual revenues of at least $50 million or that require an
efficient means of training a large number of employees. These clients
receive a complete set of our courses and are able to customize course
content to more closely match their specific training objectives. We
currently have over 700 direct sales clients.
INDIRECT SALES. We license our courses indirectly to small businesses,
organizations, home office users and individuals 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, our indirect marketing partners agree
to market and promote our courses to their customers or members. When a user
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 users with the first level of support.
We currently have agreements with over 1,300 Internet service providers,
including OneMain.com, Freeserve plc, Verio and Frontier Corporation, a
Global Crossing Company. We believe Internet service providers are
actively seeking value added services, like online training, as a means
of attracting and retaining subscribers.
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,
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and organizations such as colleges, universities and trade associations.
Our other marketing partners make our courses available to businesses,
organizations and home office users, enabling these entities to offer
their customers, staff, students and members a valuable service. We
currently have over 125 other marketing partners, including Merant,
Techies.com, CareerShop.com, InformIT.com and BATNET.
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. The course set-up stage 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. Our course development process is also scaleable, which
means we can substantially increase our rate of course production at a lower
incremental cost.
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 anytime, 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.
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 each 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.
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OUR FOCUSED GROWTH STRATEGY
Our goal is to be the leading global provider of high quality,
business-to-business Web-based training courses and services. The principal
elements of our strategy are to:
CONTINUE TO AGGRESSIVELY TARGET LARGE ORGANIZATIONS. Currently, we have
over 700 direct sales clients. 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 computer
networks 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 computing 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 1,300 Internet
service providers. Based on information provided by our Internet service
providers, we believe they can make our courses accessible to over 7.4 million
subscribers, including over 900,000 businesses. We also have agreements with
more than 125 other marketing partners. 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 business, organization and home office
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 February 29, 2000, our 53 course
developers were producing courses at the rate of 30 to 45 courses every
90 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 and accounting.
FURTHER ENHANCE 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 powerful, flexible
training tools to our clients. We also believe that continued technological
advances, particularly those involving the Internet, should provide new
opportunities to enhance our courses and services further.
INCREASE BRAND AWARENESS IN OUR TARGET MARKETS. We intend to solidify our
position as a leading provider of business-to-business Web-based training
courses and services by increasing our brand name recognition in all of our
target markets. We intend to expand our use of advertising, public relations and
marketing programs to promote our brand and build loyalty among our large
organization and small business clients and home office users, as well as
attract potential clients to our Website.
SEEK POSSIBLE STRATEGIC ACQUISITIONS OF OR INVESTMENTS IN COMPLEMENTARY
BUSINESSES, PRODUCTS, SERVICES OR TECHNOLOGIES. We intend to pursue
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 clients. Although we have from time to
time had discussions with companies regarding our acquiring or
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investing in their businesses, we have no present agreement or understanding
relating to any material acquisition or investment.
OUR COURSES AND SERVICES
COURSES. IDC divides education and training presented over the Internet
into information technology and non-information technology courses. It estimates
that information technology training, which includes information technology
training and desktop computing training, will increase from $440 million, or 80%
of the market, in 1998 to approximately $5 billion by 2003. IDC further
estimates that non-information technology training will increase from
$110 million, or 20% of the market, in 1998 to approximately $6 billion, more
than 50% of the market, by 2003.
Our diverse online catalog includes courses designed to meet the training
needs of large and small businesses and other organizations as well as home
office users. Of our more than 400 courses, approximately 80% address
information technology and desktop computing training. We have accelerated
production of courses that will parallel the changing needs of businesses and
home office users.
DESKTOP COMPUTING: We license approximately 57 training courses designed to
improve users' proficiency with widely-used desktop applications and the Windows
computer operating system. As a Microsoft Independent Courseware Vendor, we also
provide courses to prepare users for the Microsoft Office User Specialist (MOUS)
certification:
Concepts of Computing (5 courses)
Computer Basics (1 course)
Microsoft Exchange (2 courses)
Microsoft Internet Explorer (4 courses)
Netscape Navigator (4 courses)
Lotus Notes (10 courses)
Microsoft Office User Specialist (11 courses)
Microsoft Office 2000 (8 courses)
Microsoft Outlook 98 (2 courses)
Paint Shop Pro (2 courses)
Project 98 (2 courses)
Microsoft Windows (6 courses)
HOME OFFICE AND SMALL BUSINESS: We license approximately 52 courses to help
individuals and small businesses develop basic skills:
Estate Planning (6 courses)
Home Business (4 courses)
Interview Skills (6 courses)
Investing Fundamentals (6 courses)
Money 98 (2 courses)
QuickBooks (10 courses)
Quicken 98 (2 courses)
Resumes (4 courses)
Retirement Planning (2 courses)
SAT Preparation (3 courses)
Microsoft Works (7 courses)
BUSINESS SKILLS DEVELOPMENT: We offer approximately 34 courses to assist
professionals in developing their managerial skills:
Business Communication (3 courses)
Customer Service (5 courses)
Grammar (4 courses)
Math (6 courses)
Motivational Skills (5 courses)
Negotiating (4 courses)
Business Management (3 courses)
Time Management (4 courses)
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TECHNICAL/MICROSOFT CERTIFIED SYSTEMS ENGINEER: As a Microsoft Independent
Courseware Vendor, we offer approximately 69 courses to prepare users for
the Microsoft Certified Systems Engineer Exam:
Exchange Server (19 courses)
IIS 4 Series (14 courses)
Networking Essentials (6 courses)
SQL Server 6.5 (6 courses)
SQL Server 7.0 Administration (5 courses)
TCP/IP (10 courses)
Windows NT Server 4.0 (6 courses)
Windows NT Workstation 4.0 (3 courses)
TECHNICAL WEB DEVELOPMENT: We offer approximately 39 courses to help users
develop the skills they need to create and operate a Website:
CGI/Perl (4 courses)
Dynamic HTML (5 courses)
FrontPage (2 courses)
GUI Design (3 courses)
HTML (7 courses)
JAVA (3 courses)
Photoshop (6 courses)
Visual InterDev (9 courses)
TECHNICAL GENERAL: Our course catalog includes approximately 116 courses on
programming languages, databases, computer networks and computer operating
systems:
A+ Certification (13 courses)
C (3 courses)
Cisco CCNA (13 courses)
Client/Server Technology (1 course)
Data Communication (1 course)
Data Warehousing (2 courses)
FOCUS (11 courses)
Local Area Networks (3 courses)
Object-Oriented Analysis & Design (2 courses)
OOP Using C++ (3 courses)
Oracle (6 courses)
Oracle8 (7 courses)
PowerBuilder (15 courses)
RDBMS Fundamentals (1 course)
SAS (7 courses)
Sybase (7 courses)
UNIX Systems (6 courses)
Visual Basic (15 courses)
TECHNICAL MAINFRAME: We license approximately 47 training courses designed
to improve users' proficiency with programming languages, databases and
operating systems that run on large mainframe computers:
CICS (4 courses)
CMS/XEDIT (3 courses)
COBOL (OS/VS) (2 courses)
COBOL (8 courses)
DB2 (3 courses)
EASYTRIEVE PLUS (1 course)
ISPF (2 courses)
JCL (4 courses)
Micro Focus COBOL Workbench (5 courses)
MVS (3 courses)
QMF (2 courses)
SAA (2 courses)
SQL (3 courses)
SQL/DS (3 courses)
TSO/E (1 course)
VSAM (1 course)
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
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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 clients 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 clients. Our Web-based administration software
tracks and reports usage of courses presented through the Internet or our
clients' internal computer networks. 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 clients presenting
courses over an internal computer network to instruct and test their
employees on information unique to their organizations. Clients can
customize the text within a course or insert links to information located at
other sites on their internal computer networks. Organizations can also add
client-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 client-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 clients 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 clients
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 clients may choose to present
our courses through one or more of three presentation platforms--Internet,
internal computer networks or personal computers.
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DIRECT SALES CLIENTS
We license our Web-based training courses and services to a broad range of
clients in a wide variety of markets. No single client accounted for more than
10% of total revenues in 1997, 1998 or 1999. The following table sets forth a
representative list of direct sales clients 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
Control Systems International Convergys
Software Synergy Inc. Harris Corporation
Sterling Software
MANUFACTURING/OTHER RETAIL
Fort James Corporation Saks Incorporated
The McGraw Hill Companies Walgreens
Southwest Airlines
</TABLE>
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 that businesses can use to create
their own custom courses;
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- 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.
OUR COMPUTER NETWORK. Our computer network 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.
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 clients,
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 courses or technology
without our permission or to develop similar courses 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 recently filed applications to register the trademarks "MindLeaders" and
"MindLeaders.com" in the United States. We have obtained
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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 courses. 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 courses, 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 courses, we rely in part on "shrink-wrap" and "clickwrap" licenses that are
not signed by the user and, therefore, may be unenforceable under the laws of
certain jurisdictions. As with other software products, our courses 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 courses and pay financial
damages, any of which could have a material adverse effect on our business and
financial results.
Historically, we developed all of our own content. Of our current catalog of
over 400 courses, approximately 90 were developed by us. Currently, however, 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 courses
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 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 is being 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
clients. The license for each course lasts for five years from the date we
release the course to our clients, 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 clients 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. 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. Based on our current development schedule, we estimate that
during 2000, we will obtain approximately one quarter of our content from
providers other than Macmillan.
EMPLOYEES
As of February 29, 2000, we employed 187 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.
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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.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees as of March 17, 2000 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...................... 51 Director
Kenneth T. Stevens.................... 48 Director
Murray R. Wilson...................... 38 Director
Angus J. Carroll...................... 41 Chief Operating Officer
Paul MacCartney....................... 33 Vice President of Development
Gary L. Carabin....................... 48 Vice President and General Manager of
the Corporate Sales Division
John P. Gordon........................ 48 General Counsel and Assistant
Secretary
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................. 48 Director of Courseware Design
James T. Talley, Ph.D................. 44 Director of Systems Architecture
James K. Dietz........................ 52 Director of Operations
</TABLE>
- ------------------------
CAROL A. CLARK, a co-founder of MindLeaders.com, 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
MindLeaders.com, Ms. Clark served as Manager of Customer Service and Programming
for the OrderNet Division for Sterling Software. She also directed and
implemented many software projects within the information technology industry
and taught information technology topics 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 MindLeaders.com 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.
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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 center management software and computer based training software, and
Legent Corp., which acquired Goal in 1992.
ROBERT J. MASSIE has been a director of MindLeaders.com 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.
KENNETH T. STEVENS has been a director of MindLeaders.com since
November 1999. Mr. Stevens is currently the Chairman and Chief Executive Officer
of the Bank One Retail Group, the fourth largest banking distribution system in
the United States. He is responsible for all aspects of the Bank One retail
banking line of business, including product development, technology, marketing,
service, distribution and risk management. Mr. Stevens has also been
instrumental in the launch and development of Bank One's online banking
services. Prior to joining Bank One in 1996, Mr. Stevens served as the Senior
Vice President of Strategic Planning of PepsiCo. and as President of Taco Bell
Corporation. Mr. Stevens is a former partner of McKinsey and Co. and has held
many management positions at General Mills.
MURRAY R. WILSON has been a director of MindLeaders.com 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.
ANGUS J. CARROLL became our Chief Operating Officer in March 2000. From
January 1999 until joining us, Mr. Carroll was Executive Vice President of
Worldwide Marketing for Dialog Corporation, an online provider of business
information and market research. During his tenure at Dialog, Mr. Carroll was
responsible for several e-commerce initiatives, including the creation of
e-commerce portals and an Internet search engine. He also managed Dialog's
pricing, marketing and website groups. From 1996 to 1997, Mr. Carroll was the
Senior Vice President of Business Planning & Strategy for Medicus Systems
Corporation, a medical software company. In addition to leading the sale of
Medicus to Quadramed, Mr. Carroll was responsible for Medicus' business
strategy, product design and information systems. From 1993 to 1996,
Mr. Carroll was the Vice President of Business Development for Ceridian
Corporation, where he was responsible for business development of Ceridian
Employer Services, ran the three largest development projects and led the
management information systems department. Before joining Ceridian, Mr. Carroll
was the Director of Business Strategy for GTE Information Services Group and
held a variety of positions at Dun & Bradstreet, including Assistant Vice
President of Business Planning and Strategy.
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PAUL MACCARTNEY, Vice President of Development, joined us in January 1996.
While at MindLeaders.com, 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 clients. He joined us 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.
JOHN P. GORDON became General Counsel and Assistant Secretary of
MindLeaders.com in March 2000. Mr. Gordon has been providing legal services to
us as a consultant since July 1999. From 1996 to 1998, Mr. Gordon was Chairman
of Timberline Construction, Inc., a commercial construction company specializing
in the construction of restaurants and multifamily housing. From 1986 to 1995,
Mr. Gordon was Vice President, General Counsel and Secretary of Red Roof
Inns, Inc. Prior to joining Red Roof Inns, Mr. Gordon was a partner in the
Columbus, Ohio law firm of Porter, Wright, Morris & Arthur, where he specialized
in corporate, employee benefit and federal income tax matters.
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
MindLeaders.com.
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 MindLeaders.com, 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 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 us 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 MindLeaders.com, 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
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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 six 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 2001 and class II, whose term will expire
at the annual meeting of shareholders to be held in 2002. The class I directors
will be Gary W. Qualmann, Murray R. Wilson and Kenneth T. Stevens. 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 49.
Under the terms of the series C convertible preferred stock purchase
agreement, dated January 7, 2000, 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 C 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 President and Chief Executive
Officer and Mr. Carroll as Chief Operating Officer. For a more detailed
description of their employment agreements, see "--Employment Agreements" on
page 41.
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 "--2000 Incentive Stock Plan" on page 42.
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.
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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 a number of our common shares
determined by dividing $10,000 by the fair market value of the shares on the
grant date.
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
MindLeaders.com. 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.
In May 1996, we purchased 2,509,650 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 financed a portion of the purchase
price by a $1,000,000 loan from Ms. Clark. As of February 29, 2000, the
outstanding principal on our loan from Ms. Clark was approximately $666,667, 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.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information on all compensation received during
the year ended December 31, 1999, by each of the named executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND POSITION SALARY BONUS OPTIONS COMPENSATION(1)
- ----------------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Carol A. Clark,
Chairperson of the Board of Directors,
President and Chief Executive Officer......... $100,000 -- -- $2,632
Gary W. Qualmann,
Chief Financial Officer, Secretary, Treasurer
and Vice President--Finance................... 182,292 $72,083 16,900 4,000
Gary L. Carabin,
Vice President and General Manager of the
Corporate Sales Division...................... 148,388 62,767 16,900 4,000
A. Katrina Ramsey,
Sr. Director and General Manager of the
Affinity Channel Partner Division............. 112,237 45,000 16,900 4,000
Dennis E. Yost,
Sr. Director of Marketing..................... 132,000 8,250 16,900 --
</TABLE>
- ------------------------
(1) The amounts shown in this column for each executive officer consist of
MindLeaders.com's matching contribution to our 401(k) Plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to our four most highly compensated executive officers during the fiscal
year ended December 31, 1999. We did not grant any stock options to Carol A.
Clark, our chief executive officer, in 1999. We have never granted any stock
appreciation rights. All option grants described in the following table were
made under our 1998 Stock Option Plan. The exercise price per share was equal to
the fair market value on the date of the grant as determined by our board of
directors. The percentage of total options is based on an aggregate of 244,205
common shares granted under our 1998 Stock Option Plan in the year ended
December 31, 1999. All of the option grants described below vest and become
exercisable in increments of one-third on each anniversary of the grant date,
provided that we continue to employ each executive officer, and provided further
that, all of the options will become fully vested upon the occurrence of certain
change in control events.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATE OF
NUMBER OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary W. Qualmann....... 16,900 7.0% $1.63 5/20/09 $334,900 $567,190
Gary L. Carabin........ 16,900 7.0 $1.63 5/20/09 334,900 567,190
A. Katrina Ramsey...... 16,900 7.0 $1.63 5/20/09 334,900 567,190
Dennis E. Yost......... 16,900 7.0 $1.63 5/20/09 334,900 567,190
</TABLE>
- ------------------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the ten-year option term.
These gains are based on assumed rates of stock price
40
<PAGE>
appreciation of 5% and 10% compounded annually from the date the respective
options were granted to their expiration date based upon an assumed initial
public offering price of $13.00 per share. These assumptions are for
illustration purposes only and are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
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, 1999 by
each executive officer named in the Summary Compensation Table. No options were
exercised during 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary W. Qualmann.............. 142,636 16,900 $1,769,868 $192,153
Gary L. Carabin............... -- 33,800 -- 410,072
A. Katrina Ramsey............. -- 26,195 -- 312,008
Dennis E. Yost................ -- 16,900 -- 192,153
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options at fiscal year-end is based on
an assumed initial public offering price of $13.00 per share.
EMPLOYMENT AGREEMENTS
In March 2000, we entered into an employment agreement with Carol A. Clark.
We have agreed to employ her as President and Chief Executive Officer. The
agreement sets a base salary for Ms. Clark of $210,000 that may be increased,
but not decreased, by the compensation committee. In addition to a base salary,
Ms. Clark is eligible for an annual bonus of not less than $100,000 based on the
achievement of performance goals set by the compensation committee. The
agreement also states that Ms. Clark will be eligible for awards of incentive
stock options under our 2000 Incentive Stock Plan beginning with the first
calendar quarter of 2001.
The term of employment under Ms. Clark's employment agreement will continue
indefinitely unless terminated:
- by us because Ms. Clark is convicted of a felony or a crime involving
dishonesty, participates in any act of fraud or dishonesty involving us,
willfully breaches our policies, materially breaches the agreement or
engages in conduct that demonstrates her unfitness to serve as our
President and Chief Executive Officer;
- 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 12 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 and we do not remedy our action after receiving
notice; or
- we fail to comply with our obligations under the agreement and do not
remedy our failure after receiving notice.
41
<PAGE>
The agreement contains non-competition provisions that apply during the term
of Ms. Clark's employment and for a period of one year after termination of
employment. 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 by influencing or soliciting
our clients; 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 her employment agreement.
In March 2000, we entered into an employment agreement with Angus J. Carroll
to employ him as our Chief Operating Officer. The agreement sets a base salary
for Mr. Carroll of $225,000 that may be increased, but not decreased, by the
compensation committee. In addition to a base salary, Mr. Carroll is eligible
for a quarterly bonus of $20,000 based on the achievement of performance goals
set by the compensation committee. Under the agreement, we also granted
Mr. Carroll a stock option to purchase 82,303 of our common shares at fair
market value on the date of the grant and are obligated to grant Mr. Carroll an
option to purchase an additional 41,067 of our common shares prior to March 31,
2001 at the fair market value at the date of the grant.
The term of employment under Mr. Carroll's employment agreement began on
March 13, 2000, and will continue indefinitely unless terminated:
- by us because Mr. Carroll is convicted of a felony or crime involving
dishonesty, participates in any act of fraud or dishonesty involving us,
willfully breaches our policies, breaches the agreement or engages in
conduct that demonstrates his unfitness to serve as our Chief Operating
Officer;
- due to the death or disability of Mr. Carroll; or
- by Mr. Carroll for any reason.
After termination, we will have no continuing obligation to Mr. Carroll, except
that we must pay his salary for 12 months if termination was:
- by us for any reason not listed above; or
- by Mr. Carroll if:
- we assign him duties inconsistent with his position as Chief Operating
Officer and we fail to remedy our action after receiving notice; or
- we fail to comply with our obligations under the agreement and do not
remedy our failure after receiving notice.
The agreement contains non-competition provisions that apply during the term
of Mr. Carroll's employment and for the one year period after termination of
employment. Under these provisions, Mr. Carroll may not:
- take part in any business that competes with us;
- divert, or try to divert, any of our business by influencing or soliciting
our clients; 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
Mr. Carroll during the term of his employment agreement.
2000 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
42
<PAGE>
opportunity to own our common shares. Effective March , 2000, our board of
directors and shareholders approved and adopted the MindLeaders.com, Inc. 2000
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 2000
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 2000 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 2000
Incentive Stock Plan permits employees who have satisfied minimum eligibility
requirements to purchase common shares through payroll deductions. No award
under the 2000 Incentive Stock Plan may be granted after March , 2010. Only
common shares may be issued under the 2000 Incentive Stock Plan, which will be
made available from the authorized but unissued common shares or from common
shares held in treasury. The 2000 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 2000 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 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 MindLeaders.com. The 2000
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 MindLeaders.com, 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 person who becomes a director after the effective
date of this offering, who is not an employee of MindLeaders.com or of a
subsidiary and 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 a number of common
shares determined by dividing $15,000 by the fair market value of a common share
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 a number of common shares determined by dividing
$10,000 by the fair market value of a common share on the date of grant.
Director options will be exercisable at an exercise price equal to the fair
market value of the common shares on the date of grant. Director options 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.
43
<PAGE>
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.
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. MindLeaders.com, or an escrow agent
designated by MindLeaders.com, 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 MindLeaders.com, 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.
44
<PAGE>
UNRESTRICTED SHARES. The 2000 Stock Incentive Plan also permits the
compensation committee to grant unrestricted shares. Unrestricted shares would
entitle a participant to receive common shares without paying MindLeaders.com
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 MindLeaders.com. A written instrument delivered to the
participant will evidence the terms of each award. The common shares issued
under the 2000 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 2000 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.
45
<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, 1997, where the amount involved
exceeded $60,000:
PURCHASE OF COMMON SHARES
In May 1996, we purchased 2,509,650 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 February 29, 2000, the outstanding principal on the promissory note
issued to Ms. Papalios was approximately $120,593, 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. For a description of
this loan, see "Compensation Committee Interlocks and Insider Participation" on
page 39.
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 836,550 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 305,045 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 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. 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 January 2000, we sold 1,167 shares of series C convertible
preferred stock for $1,500,000 and a warrant to purchase 49,348 of our common
shares at $7.60 per share to River Cities Capital Fund II Limited Partnership.
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 51.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information regarding beneficial ownership of
our common shares as of March 17, 2000, 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 MindLeaders.com, 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 BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Carol A. Clark.............................................. 3,764,475(1) 51.80% %
Gary W. Qualmann............................................ 439,062(2) 5.92
H. Neal Ater................................................ 0 * *
Robert J. Massie............................................ 0 * *
Kenneth T. Stevens.......................................... 0 * *
Murray R. Wilson............................................ 0 * *
Frances Papalios(3)......................................... 1,254,825(4) 17.27
A. Katrina Ramsey........................................... 65,572(5) * *
Gary L. Carabin............................................. 249,444(6) 3.42
Dennis E. Yost.............................................. 7,267(7) * *
River Cities Capital Fund II Limited Partnership(8)......... 1,314,820 18.09
All directors and executive officers as a group
(12 persons).............................................. 4,597,138(9) 61.45
</TABLE>
- ------------------------
(1) Includes 676,000 shares held by Ms. Clark's spouse as sole trustee of a
trust created by Ms. Clark.
(2) Includes 148,213 common shares issuable upon the exercise of stock options
and 185,900 shares held by Mr. Qualmann's spouse as sole trustee of a trust
created by Mr. Qualmann.
(3) 4170 Waddington Road, Columbus, Ohio 43220.
(4) Includes 1,250,600 common shares held by Ms. Papalios as sole trustee of a
trust created by Ms. Papalios.
(5) Includes 9,295 common shares issuable upon the exercise of a stock option
that will vest upon the closing of this offering and 5,577 common shares
issuable upon the exercise of another stock option.
(6) Includes 16,900 common shares issuable upon the exercise of a stock option
that will vest upon the closing of this offering and 5,577 common shares
issuable upon the exercise of another stock option.
(7) Includes 5,577 common shares issuable upon the exercise of a stock option.
(8) 221 East Fourth Street, Cincinnati, Ohio 45202-4147.
(9) Includes 676,000 shares held by Ms. Clark's spouse as sole trustee of a
trust created by Ms. Clark, 85,900 shares held by Mr. Qualmann's spouse as
sole trustee of a trust created by Mr. Qualmann, 187,421 common shares
issuable upon the exercise of stock options and 26,195 common shares
issuable upon the exercise of stock options that will vest upon the closing
of this offering.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
Prior to the closing of this offering, we will have the following authorized
capital stock:
- 40,000,000 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.
- 1,167 shares of series C convertible preferred stock, no par value.
Upon the closing of this offering, we will have the following authorized
capital stock:
- 40,000,000 common shares, no par value; and
- 5,000,000 preferred shares, no par value.
Upon the closing of this offering, we will have 11,384,615 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.
48
<PAGE>
PREFERRED STOCK
A total of 9,269 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; 2,979 shares of series B convertible preferred stock, no
par value; and 1,167 shares of series C convertible preferred stock, no par
value. Each of these outstanding preferred shares will be converted
automatically into 169 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 Third
Amended Articles of Incorporation of MindLeaders.com, 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 5,000,000 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, voting rights 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 2001 annual meeting of
shareholders for class I directors and the 2002 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 MindLeaders.com:
- number and classification of directors;
- removal of directors;
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- elimination of shareholder action by written consent to amend the code of
regulations;
- indemnification of directors; and
- 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
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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 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 a
second 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 1,566,461 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.
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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
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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 MindLeaders.com 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 MindLeaders.com 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
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foreign broker. If, however the broker is a U.S. person or a U.S. related
person, information reporting, 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 11,384,615
common shares outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding stock options, and 445,146
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.
Of the common shares outstanding after this offering, 8,284,615 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
- ---------------- --------------------------------------------
<C> <S>
8,087,392 180 days after the date of this prospectus
197,223 At various times after 180 days after the
date of this prospectus
</TABLE>
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Approximately 4,383,522 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 113,846 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 2000 Incentive Stock Plan and the 2000 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--2000 Incentive Stock Plan" on page 42.
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 2000 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 51.
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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., 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.........................................
J.C. Bradford & Co..........................................
Fidelity Capital Markets, a division of National Financial
Services Corporation......................................
---------
Total....................................................... 3,100,000
=========
</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 $ .
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OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an aggregate
of 465,000 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, existing shareholders and option
holders 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 2000
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 54.
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 "MDLR."
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
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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.
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
MindLeaders.com 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 included in this prospectus and the related
financial statement schedule included elsewhere in the Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement and
are so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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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 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.
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MINDLEADERS.COM, 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
MindLeaders.com, Inc.:
We have audited the accompanying balance sheets of MindLeaders.com, Inc.,
(formerly DPEC, Inc.), as of December 31, 1998 and 1999, 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, 1999. 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, 1998 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
Columbus, Ohio
March 16, 2000
(except as to Note 9, which is March , 2000)
The accompanying financial statements included herein reflect the approval
of the "MindLeaders.com" amended Articles of Incorporation and stock split of
MindLeaders.com, Inc's common stock as described in Note 9 to the financial
statements. The above opinion is in the form that will be signed by Deloitte &
Touche LLP upon the effectiveness of such events, assuming no other events shall
have occurred that would affect the accompanying financial statements or Notes
thereto.
Deloitte & Touche LLP
Columbus, Ohio
March 16, 2000
F-2
<PAGE>
MINDLEADERS.COM, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DEFICIENCY
DECEMBER 31, DECEMBER 31,
------------------- 1999
1998 1999 (NOTE 10)
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,835 $ 538
Accounts receivable, net.................................. 1,966 4,050
Deferred commissions and royalties........................ 1,030 1,261
Deferred offering expenses................................ -- 468
Other prepaid expenses.................................... 24 76
------- --------
Total current assets.................................. 4,855 6,393
PROPERTY AND EQUIPMENT:
Computer hardware and software............................ 691 1,868
Office furniture and equipment............................ 168 441
Leasehold improvements.................................... 72 397
------- --------
Total................................................. 931 2,706
Less accumulated depreciation and amortization............ (534) (936)
------- --------
Property and equipment--net........................... 397 1,770
OTHER ASSETS--net........................................... 21 813
------- --------
TOTAL....................................................... $ 5,273 $ 8,976
======= ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 417 $ 1,220
Accrued compensation...................................... 480 814
Other accrued expenses.................................... 193 586
Current portion of bank note.............................. -- 100
Current portion of notes payable, related parties......... 227 238
Deferred revenue.......................................... 4,340 7,223
------- --------
Total current liabilities............................. 5,657 10,181
NOTES PAYABLE:
Bank note--less current portion........................... -- 358
Related parties--less current portion..................... 868 573
------- --------
Total notes payable..................................... 868 931
DEFERRED REVENUE............................................ 1,616 2,392
CONVERTIBLE REDEEMABLE PREFERRED STOCK...................... 1,893 4,853 $ --
COMMITMENTS AND CONTINGENCIES (Notes 3 and 9)
SHAREHOLDERS' DEFICIENCY:
Preferred Stock, no par value, pro forma 5,000,000
authorized, none issued
Common stock, no par value, 10,140,000, 10,460,762 and pro
forma 40,000,000 shares authorized, 7,528,950 and pro
forma 9,095,411 shares issued........................... 55 55 4,908
Additional paid-in capital................................ -- 5,705 5,705
Treasury stock, at cost................................... (935) (935) (935)
Deferred compensation..................................... -- (2,207) (2,207)
Accumulated deficit....................................... (3,881) (11,999) (11,999)
------- -------- -------
Total shareholders' deficiency........................ (4,761) (9,381) $(4,528)
------- -------- =======
TOTAL....................................................... $ 5,273 $ 8,976
======= ========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
MINDLEADERS.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Courseware fees........................................... $ 5,615 $ 7,074 $ 11,307
Third-party courseware fees............................... 1,783 651 83
Other revenue, net........................................ 706 447 26
--------- --------- ---------
Total revenue......................................... 8,104 8,172 11,416
--------- --------- ---------
COST OF REVENUES--Courseware product cost and royalties:
Courseware fees........................................... 311 465 762
Third-party courseware fees............................... 758 305 40
--------- --------- ---------
Total cost of revenues.................................. 1,069 770 802
--------- --------- ---------
GROSS PROFIT................................................ 7,035 7,402 10,614
OPERATING EXPENSES:
Sales and marketing....................................... 3,469 4,300 7,578
Product development....................................... 2,036 2,380 4,576
General and administrative................................ 1,615 2,314 3,306
--------- --------- ---------
Total operating expenses.............................. 7,120 8,994 15,460
--------- --------- ---------
LOSS FROM OPERATIONS........................................ (85) (1,592) (4,846)
INTEREST EXPENSE, Net:
Interest expense, related parties......................... 130 106 84
Interest expense, other................................... 54 33 21
Interest income........................................... (3) (33) (78)
--------- --------- ---------
Total interest expense, net........................... 181 106 27
--------- --------- ---------
NET LOSS.................................................... (266) (1,698) (4,873)
CONVERTIBLE REDEEMABLE PREFERRED STOCK DIVIDENDS............ -- -- (20)
INTRINSIC VALUE OF BENEFICIAL CONVERSION FEATURE OF
PREFERRED STOCK........................................... -- -- (2,960)
--------- --------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS................... $ (266) $ (1,698) $ (7,853)
========= ========= =========
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS PER SHARE:........
Basic and diluted......................................... $ (.05) $ (.30) $ (1.38)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted......................................... 5,363,553 5,630,235 5,701,553
========= ========= =========
UNAUDITED PRO FORMA LOSS DATA (NOTE 10):
LOSS BEFORE INCOME TAXES.................................... $ (266) $ (1,698)
CREDIT FOR INCOME TAXES..................................... (116) (153)
--------- ---------
NET LOSS.................................................... $ (150) $ (1,545)
========= =========
NET LOSS PER SHARE OF COMMON STOCK..........................
Basic and diluted......................................... $ (.03) $ (.27)
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................
Basic and diluted......................................... 5,363,553 5,630,235 5,701,553
========= ========= =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
MINDLEADERS.COM, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL TREASURY STOCK TOTAL
SHARES PAID-IN ------------------- DEFERRED ACCUMULATED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL SHARES AMOUNT COMPENSATION DEFICIT DEFICIENCY
-------- -------- ---------- -------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE--January 1,
1997................... 7,529 $ 28 $ -- 2,197 $(1,108) $ -- $ (1,296) $(2,376)
Net loss................. -- -- -- -- -- -- (266) (266)
----- ----- ------ ----- ------- ------- -------- -------
BALANCE--December 31,
1997................... 7,529 28 -- 2,197 (1,108) -- (1,562) (2,642)
Net loss................. -- -- -- -- -- -- (1,698) (1,698)
Distributions to common
shareholders........... -- -- -- -- -- -- (621) (621)
Sale of treasury stock... -- 27 -- (338) 173 -- -- 200
----- ----- ------ ----- ------- ------- -------- -------
BALANCE--December 31,
1998................... 7,529 55 -- 1,859 (935) -- (3,881) (4,761)
Net loss................. -- -- -- -- -- -- (4,873) (4,873)
Preferred stock
dividends.............. -- -- -- -- -- -- (20) (20)
Intrinsic value of
conversion feature of
preferred stock........ -- -- 2,960 -- -- -- (2,960) --
Deferred compensation
from grants of stock
options to purchase
common stock........... -- -- 2,745 -- -- (2,745) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 538 -- 538
Distributions to common
shareholders........... -- -- -- -- -- -- (265) (265)
----- ----- ------ ----- ------- ------- -------- -------
BALANCE--December 31,
1999................... 7,529 $ 55 $5,705 1,859 $ (935) $(2,207) $(11,999) $(9,381)
===== ===== ====== ===== ======= ======= ======== =======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
MINDLEADERS.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (266) $(1,698) $(4,873)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 235 282 402
Non-cash compensation expense from issuance of stock
options................................................ -- -- 538
Decrease (increase) in certain assets:
Accounts receivable................................... (645) 230 (2,084)
Prepaid expenses and other assets..................... (149) (791) (1,543)
Increase (decrease) in certain liabilities:
Accounts payable...................................... (14) 167 444
Accrued expenses...................................... 218 169 707
Deferred revenues..................................... 645 3,674 3,659
------- ------- -------
Net cash provided by (used in) operating
activities.......................................... 24 2,033 (2,750)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (198) (302) (1,416)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long term debt........................... -- 250 500
Principal payments on long term debt...................... (154) (534) (326)
Borrowings under line of credit........................... 5,127 3,571 515
Repayments under line of credit........................... (4,887) (4,536) (515)
Bank overdraft............................................ 80 (119) --
Distributions to common shareholders...................... -- (621) (265)
Proceeds from issuance of redeemable preferred stock...... -- 1,893 2,960
Sale of treasury stock.................................... -- 200 --
------- ------- -------
Net cash provided by financing activities........... 166 104 2,869
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8) 1,835 (1,297)
CASH AND CASH EQUIVALENTS--Beginning of year................ 8 -- 1,835
------- ------- -------
CASH AND CASH EQUIVALENTS--End of year...................... $ -- $ 1,835 $ 538
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR:
Interest.................................................. $ 190 $ 150 $ 106
======= ======= =======
NONCASH TRANSACTIONS:
Property and equipment included in accounts payable....... $ 359
=======
Dividends accrued on preferred stock...................... $ 20
=======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--MindLeaders.com, Inc. (the Company), formerly DPEC,
Inc., 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 home office users worldwide.
CASH EQUIVALENTS--The Company considers all checking accounts, cash funds
and highly liquid debt instruments with a maturity of less than three months at
the date of purchase to be cash equivalents. All cash is principally on deposit
with one bank.
ACCOUNTS RECEIVABLE--Accounts receivable at December 31, 1999 is net of a
$100,000 allowance for doubtful accounts recorded in 1999. There was no
provision for bad debts required in 1998 or 1997.
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 is 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, deposits and, at December 31, 1999, $318,000 income tax
receivable. The non-compete agreement is amortized over 30 months, the term of
the agreement.
The Company recorded amortization expense of approximately $117,000 and
$108,000 in the years ended December 31, 1997 and 1998, respectively, related to
the non-compete agreement, which is included in general and administrative
expense. The non-compete agreement was fully amortized in 1998.
REVENUE RECOGNITION--Beginning in 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.
The Company distributes its courseware through annual or multi-year licenses
and, occasionally, perpetual licenses (intranet and PC platforms only). The
Company typically enters into license agreements for its courseware for a
specified number of users. The number of users is determined at the time of the
license start date and is not refunded if the client does not utilize its total
number of users. The Company offers its courses on a variety of platforms
including the Internet, intranet and PC platforms.
INTERNET PLATFORM: The Company recognizes license fees ratably over the
license term if the client has the option to access the courses through the
Company's Internet site. Additionally, the costs of commissions and
royalties related to these licenses are deferred and amortized over the term
of the agreement. For undelivered specified courseware, a portion of the
total license fee is deferred and recognized ratably over the remainder of
the license term when the courseware is made available on the Company's
Internet site.
F-7
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTRANET AND PC PLATFORMS: Courseware revenues under these platforms are
recognized on delivery of the courseware, provided the fees are fixed and
determinable, collections of accounts receivable are probable and the client
does not have the option to access the courseware through the Internet. For
undelivered specified courseware, a portion of the total license fee is
deferred and recognized upon physical or electronic delivery of the
courseware to the client.
In 1997, certain licenses allowed clients to obtain access to other courses
in the Company's library of courseware at specified times during the
licensing period. Because the clients were permitted to access an
unspecified number of courses during the license period, these agreements
were accounted for as subscriptions, with the revenue recognized ratably
over the license term.
Additionally, the Company distributes its courses indirectly through
agreements with Internet service providers and other marketing partners. The
Internet service providers and other marketing partners can provide the
Company's courses to their customers by either hosting the courses on their
Internet sites or by linking their customers to the Company's Internet site. If
the provider/partner hosts the Company's courses, it bills the customers and
remits a royalty to the Company, which the Company records as net revenue. If
the provider/partner is linking to the Company's Internet site, the Company
bills the customers, records revenue from the subscription and defers and
expenses the royalty paid to the partner/provider. In both cases, because the
customer has access to unspecified additional courses, the revenue is accounted
for as a subscription and recognized ratably over the term of the subscription.
OTHER REVENUE--Prior to February 1999, the Company offered certain
third-party produced courseware to its clients where it acted merely as an
agent. The Company recognized a net royalty related to these licenses. As of
February 1999 the Company discontinued the licensing of these products to new
clients.
COST OF REVENUES--Cost of revenues 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 $336,000, $272,000 and $1,670,000 in 1997,
1998 and 1999, respectively.
NET LOSS PER SHARE OF COMMON STOCK--For purposes of computing net loss per
share of common stock (see note 9), weighted average basic and diluted shares
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average basic and diluted shares outstanding...... 5,363,553 5,630,235 5,701,553
========= ========= =========
</TABLE>
F-8
<PAGE>
MINDLEADERS.COM, 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>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Convertible preferred stock............................ -- 865,787 1,369,238
Stock options.......................................... 142,636 142,636 386,841
------- --------- ---------
Total.................................................. 142,636 1,008,423 1,756,079
======= ========= =========
</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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities." SFAS No. 133, as amended by
SFAS No. 137, is required to be adopted for the Company's 2001 annual financial
statements. As the Company does not currently engage or plan to engage in
derivatives or hedging transactions there will be no impact to the Company's
results of operations, financial position or cash flows when such statement is
adopted.
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, 1998 and
1999 approximate the fair value of the financial assets and liabilities due to
the short maturity of the instruments. The carrying amount of notes payable at
December 31, 1998 and 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
F-9
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customers. To date credit losses have been minimal. The Company generally
requires no collateral from its customers.
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.
2. NOTES PAYABLE AND BANK LOANS
Notes payable as of December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable to officer/shareholder, with interest at prime
plus 1% (total of 8.75% and 9.5% at December 31, 1998 and
1999, respectively) and monthly principal payments of
$11,905 commencing November 1997 through November 2004
plus interest through November 2004, unsecured............ $ 833 $ 690
Note payable to former officer/shareholder, quarterly
principal and 8% interest payments of $25,615 commencing
October 1998 through April 2001, secured by 1,805 shares
of treasury stock......................................... 209 121
Note payable to former officer/shareholder, with interest at
8%, repaid in 1999........................................ 53 --
Bank note, with interest at 8.04% and monthly principal
payments of $8,333 (plus interest) commencing August 1999
through July 2004, collateralized by all assets........... -- 458
------ ------
Total................................................... 1,095 1,269
Less current portion........................................ 227 338
------ ------
Notes payable--long-term.................................... $ 868 $ 931
====== ======
</TABLE>
Scheduled maturities of notes payable as of December 31, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
2000................................................ $ 338
2001................................................ 293
2002................................................ 243
2003................................................ 243
2004................................................ 152
------
Total............................................... $1,269
======
</TABLE>
Under the terms of the Company's amended bank credit agreement, the Company
obtained a $1,250,000 line of credit that decreased to $1,000,000 at
September 30, 1998 and bore interest at prime plus 1/2%. The agreement expired
in 1999.
On July 28, 1999, the Company entered into a $3,000,000 credit agreement
with a bank. No amounts were outstanding at December 31, 1999. The credit
agreement, which expires on October 31,
F-10
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE AND BANK LOANS (CONTINUED)
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 cash flow of not less than a negative $1,000,000 for the twelve
months ended July 31, 2001 and positive thereafter to maturity.
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 December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................. $307
2001................................................. 304
2002................................................. 132
2003................................................. 5
2004................................................. 5
----
Total future minimum lease payments.................. $753
====
</TABLE>
Total expense incurred by the Company under operating leases for 1997, 1998
and 1999 totaled $170,000, $257,000 and $295,000, respectively.
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On September 15, 1998, the Company issued 5,123 shares of senior convertible
redeemable preferred stock (5,123 shares authorized) for net proceeds of
$1,893,000.
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 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 169 common shares 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.
F-11
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
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 net proceeds of
$2,960,000. 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 320,762 shares of common
stock resulting in a total of 10,460,762 shares authorized and reduced the
number of authorized senior convertible redeemable preferred shares by 1,898
shares. The Company recorded a beneficial conversion feature on the series B
preferred shares of $2,960,000 in 1999.
On January 7, 2000, the Company issued 1,167 shares of series C convertible
redeemable preferred stock (1,167 shares authorized) for proceeds of $1,500,000
and a warrant to purchase 49,348 shares of the Company's authorized but unissued
common stock at $7.60. The shares contain similar provisions to the senior
shares. On January 6, 2000 the Company reduced the authorized number of shares
of common stock resulting in a total of 10,263,539 shares authorized. The
Company will record a beneficial conversion feature for the series C preferred
shares and warrants of approximately $1,330,000 in 2000.
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 507,000 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
1997, 1998 or 1999.
The Company has outstanding a total of 142,636 options and 58,305 option
commitments to purchase the Company's common stock under the 1994 Plan as of
December 31, 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 ranges from $0.11 to
$0.59 per share.
F-12
<PAGE>
MINDLEADERS.COM, 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 338,000 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 217,165 and 27,040 options, respectively, under the 1998 Plan
at option prices of $1.63 per share and $4.02 per share, respectively. The
217,165 and 27,040 options vest one third each year beginning May 2000 and
September, 2000, respectively. These options were considered compensatory and
the Company recorded deferred compensation and compensation expense of
$2,745,000 and $538,000, respectively, in 1999. Recognition of this expense is
over three years, the vesting periods of the options.
On August 27, 1999 the Company changed the number of shares available for
all plans to an aggregate of 818,636 common shares.
The following summarizes the stock option and option commitment activity for
1997, 1998 and 1999.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding January 1, 1997................... 276,991 $0.36
Cancelled..................................... (76,050) 0.13
------- -----
Outstanding December 31, 1997 and 1998........ 200,941 0.45
Granted....................................... 244,205 1.89
------- -----
Outstanding December 31, 1999................. 445,146 $1.24
======= =====
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Exercisable at end of period...................... 47,489 95,147 142,636
====== ======= =======
Weighted average exercise price of options
exercisable at end of period.................... $ 0.59 $ 0.59 $ 0.59
====== ======= =======
</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 1999: volatility and dividend yield of 0%, risk-free
interest rate of 6.85%, and an expected life of five years. The weighted average
fair value of options granted in 1999 was $.54 per share.
Exercise prices for options totaling 58,305, 142,636, 217,165 and 27,040
shares at December 31, 1999 are $0.11, $0.59, $1.63 and $4.02, 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 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.
F-13
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 401(k) PLAN
The Company has a 401(k) plan for employees. Discretionary employer
contributions totaling $53,000, $111,000 and $128,000 have been expensed for
1997, 1998 and 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 qualified 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 income tax benefit differs from the amount computed by applying the
statutory federal income tax rate of 34% of pretax earnings as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Income tax benefit expense at statutory rate............... $ (577) $(1,657)
Change in tax status....................................... (1,894) --
Change in valuation reserve................................ 2,494 2,019
Net state income tax benefit............................... (20) (358)
Other--net................................................. (3) (4)
------ -------
Total income tax benefit................................... $ -- $ --
====== =======
</TABLE>
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenues....................................... $ 2,543 $ 4,105
Net operating loss carry forwards....................... 128 797
Stock options........................................... -- 230
Non-compete agreement................................... 93 84
Accrued vacation........................................ 24 63
Other................................................... 37 36
Valuation allowance..................................... (2,494) (4,513)
------- -------
Total assets.......................................... 331 802
------- -------
Deferred tax liabilities:
Prepaid commissions and royalties....................... 318 740
Other................................................... 13 62
------- -------
Total liabilities..................................... 331 802
------- -------
Net deferred tax asset.................................... $ -- $ --
======= =======
</TABLE>
F-14
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company had tax net operating loss carry
forwards of approximately $1,885,000 for federal and state income tax purposes.
These carry forwards begin to expire at various times through 2019. 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 SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information." 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. SUBSEQUENT EVENTS
On March , 2000, the Company received approval of the amendment of the
Articles of Incorporation to change DPEC's name to MindLeaders.com, Inc., by the
Ohio Secretary of State. On March , 2000 the Company's Board of Directors
approved a common stock split of 169:1 and amended the articles of incorporation
to increase the number of common shares to 40,000,000 and to authorize 5,000,000
preferred shares, no par value.
10. 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, 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." The proforma income tax
provision (benefit) has been offset by a valuation allowance of $535,000 for the
year ended December 31, 1998.
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 1,369,238 common
shares. The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma shareholders' deficiency at
December 31, 1999 and result in 7,070,791 pro forma shares outstanding at
December 31, 1999.
F-15
<PAGE>
MINDLEADERS.COM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET LOSS BASIC AND
AVAILABLE TO DILUTED
TOTAL GROSS COMMON LOSS PER
REVENUES PROFIT NET LOSS SHAREHOLDERS SHARE
-------- -------- -------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1999
First Quarter............................... $ 2,474 $ 2,281 $ (663) $ (663) $(0.12)
Second Quarter(1)........................... 2,544 2,345 (800) (800) (0.14)
Third Quarter(1)............................ 3,158 2,959 (1,036) (3,996) (0.70)
Fourth Quarter(1)........................... 3,240 3,029 (2,374) (2,394) (0.42)
------- ------- ------- ------- ------
YEAR...................................... $11,416 $10,614 $(4,873) $(7,853) $(1.38)
======= ======= ======= ======= ======
1998
First Quarter............................... $ 1,709 $ 1,486 $ (481) $ (481) $(0.09)
Second Quarter.............................. 2,046 1,859 (198) (198) (0.03)
Third Quarter............................... 1,896 1,735 (813) (813) (0.14)
Fourth Quarter.............................. 2,521 2,322 (206) (206) (0.04)
------- ------- ------- ------- ------
YEAR...................................... $ 8,172 $ 7,402 $(1,698) $(1,698) $(0.30)
======= ======= ======= ======= ======
</TABLE>
- ------------------------
(1) Net loss and net loss available to common shareholders were increased by
charges related to the amortization of deferred compensation on grants of
stock options to purchase common stock as follows: second quarter--$94 ($.02
per basic and diluted share); third quarter $214--($.04 per basic and
diluted share); fourth quarter--$230 (.04 per basic and diluted share) and
full year--$538 ($.09 per basic and diluted share). In addition net loss and
net loss available to common shareholders were reduced by a charge in the
third quarter related to the intrinsic value of the beneficial conversion
feature of preferred stock of $2,960.
F-16
<PAGE>
[Inside back cover]
MINDLEADERS.COM LOGO IN TOP RIGHT CORNER OF PAGE.
A series of graphics of computer screens showing elements of our courses with
the following descriptive text underneath the screens:
<TABLE>
<S> <C>
First screen: "This is the title screen for the
course unit"
Second screen: "Objectives are listed at the
beginning of each unit to describe
what will be taught."
Third screen: "Our interactive courses maintain
users' interest and help them learn
by having them perform tasks."
Fourth screen: "Course exercises allow users to
perform tasks using the actual
application outside of the course."
Fifth screen: Each course contains instructions and
useful tips, giving users depth to
their learning."
Sixth screen: "Questions test users as they work
through our course to determine
their understanding of course
content."
Seventh screen: "Our course simulations provide a
hands-on learning experience within
a risk-free environment."
Eighth screen: "The use of course simulations
enhances hands-on learning
experience and tests ability to put
course content into practice."
Ninth screen: "The topics list and Index makes our
courses an invaluable reference
tool to refresh specific skills or
to quickly learn a task."
</TABLE>
<PAGE>
SHARES
[LOGO]
COMMON SHARES
------------------------
PROSPECTUS
, 2000
------------------------
LEHMAN BROTHERS
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 338,000
common shares to a total of seven employees and one director at a
purchase price of $0.59 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 217,165
common shares at an exercise price of $1.63 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
865,787 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
503,451 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>
(v) On January 7, 2000 the Registrant issued and sold 1,167 shares of series
C convertible preferred stock (convertible into 197,223 common shares)
for an aggregate purchase price of $1,500,000, and a warrant to purchase
49,348 common shares at $7.60 per share to River Cities Capital Fund II
Limited Partnership.
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 Proposed form of Second Amended and Restated Articles of
Incorporation of MindLeaders.com, Inc.
3.1.2 Proposed form of Third Amended and Restated Articles of
Incorporation of MindLeaders.com, 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
MindLeaders.com, Inc.
4.1* Form of Stock Certificate for Common Shares of
MindLeaders.com, Inc.
5.1 Proposed form of Opinion of Vorys, Sater, Seymour and Pease
LLP
10.1 MindLeaders.com, Inc. 2000 Incentive Stock Plan
10.2 Employment Agreement, dated March 13, 2000, 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 Second Amended and Restated Registration Rights Agreement,
dated January 7, 2000, 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 Fifth Amended and Restated Shareholders Agreement, dated
January 7, 2000, by and among DPEC, Inc. Carol A. Clark,
Robert N. Clark as Trustee under the 1999 Grantor Retained
Annuity Trust created by 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.
10.16 Series C Convertible Preferred Stock Purchase Agreement,
dated January 7, 2000, by and among River Cities Capital
Fund II Limited Partnership, JG Funding, LLC, Saunders
Capital Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.17 Warrant to Purchase 49,348 shares of Common Stock of DPEC,
Inc., issued to River Cities Capital Fund II Limited
Partnership on January 7, 2000.
10.18 Employment Agreement, dated March 13, 2000, by and between
DPEC, Inc. and Angus J. Carroll.
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
24.2 Power of Attorney for Kenneth T. Stevens
27.1 Financial Data Schedule
99.1 Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule II. Consolidated Valuation and Qualifying Accounts.
II-6
<PAGE>
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 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. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in Columbus,
Ohio, on this 20 day of March, 2000.
<TABLE>
<S> <C> <C>
MINDLEADERS.COM, INC.
By: /s/ CAROL A. CLARK
----------------------------------------
Carol A. Clark
Title: CHAIRPERSON OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 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>
/s/ CAROL A. CLARK Chairperson of the Board of
------------------------------------------- Directors; President and March 20, 2000
Carol A. Clark Chief Executive Officer
Director; Chief Financial
/s/ GARY W. QUALMANN* Officer; Secretary;
------------------------------------------- Treasurer and Vice March 20, 2000
Gary W. Qualmann President--Finance
/s/ H. NEAL ATER*
------------------------------------------- Director March 20, 2000
H. Neal Ater
/s/ ROBERT J. MASSIE*
------------------------------------------- Director March 20, 2000
Robert J. Massie
/s/ KENNETH T. STEVENS*
------------------------------------------- Director March 20, 2000
Kenneth T. Stevens
/s/ MURRAY R. WILSON*
------------------------------------------- Director March 20, 2000
Murray R. Wilson
/s/ ROBERT R. BROWNLEE*
------------------------------------------- Chief Accounting Officer March 20, 2000
Robert R. Brownlee
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CAROL A. CLARK
--------------------------------------
Carol A. Clark
(ATTORNEY-IN-FACT)
</TABLE>
II-8
<PAGE>
SCHEDULE II
MINDLEADERS.COM, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ----------- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts........ $ 0 $100 $ 0 $ 0 $100
==== ==== ==== ==== ====
YEAR ENDED DECEMBER 31, 1998
None
YEAR ENDED DECEMBER 31, 1997
None
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Proposed form of Second Amended and Restated Articles of
Incorporation of MindLeaders.com, Inc.
3.1.2 Proposed form of Third Amended and Restated Articles of
Incorporation of MindLeaders.com, 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
MindLeaders.com, Inc.
5.1 Proposed form of Opinion of Vorys, Sater, Seymour and Pease
LLP
10.1 MindLeaders.com, Inc. 2000 Incentive Stock Plan
10.2 Employment Agreement, dated March 13, 2000, 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 Second Amended and Restated Registration Rights Agreement,
dated January 7, 2000, 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 Fifth Amended and Restated Shareholders Agreement, dated
January 7, 2000, by and among DPEC, Inc. Carol A. Clark,
Robert N. Clark, as Trustee under the 1999 Grantor
Retained Annuity Trust Created by 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, between Ahsoug, Inc., through its
Macmillan Publishing USA division, and DPEC, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------- -----------
<S> <C> <C>
10.16 Series C Convertible Preferred Stock Purchase Agreement,
dated January 7, 2000, by and among River Cities Capital
Fund II Limited Partnership, JG Funding, LLC, Saunders
Capital Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.17 Warrant to Purchase 49,348 shares of Common Stock of DPEC,
Inc., issued to River Cities Capital Fund II Limited
Partnership on January 7, 2000.
10.18 Employment Agreement, dated March 13, 2000, by and between
DPEC, Inc. and Angus J. Carroll.
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
24.2 Power of Attorney for Kenneth T. Stevens
27.1 Financial Data Schedule
99.1 Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 1.1
__________________ SHARES
MINDLEADERS.COM, INC.
COMMON SHARES
UNDERWRITING AGREEMENT
_____ __, 2000
LEHMAN BROTHERS INC.
J.C. BRADFORD & CO.
FIDELITY CAPITAL MARKETS, A DIVISION OF NATIONAL
FINANCIAL SERVICES CORPORATION
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Gentlepeople:
MindLeaders.com, Inc., an Ohio corporation (the "Company"),
proposes to sell _________ shares (the "Firm Shares") of the Company's common
shares, no par value (the "Common Shares"). In addition, the Company proposes to
grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an
option to purchase up to an additional _______ Common Shares on the terms and
for the purposes set forth in Section 2 (the "Option Shares"). The Firm Shares
and the Option Shares, if purchased, are hereinafter collectively called the
"Shares." This is to confirm the agreement concerning the purchase of the Shares
from the Company by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE
COMPANY. The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and
amendments thereto, with respect to the Shares have (i) been
prepared by the Company in conformity with the requirements of the
United States Securities Act of 1933 (the "Securities Act") and the
rules and regulations (the "Rule and Regulations") of the United
States Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the
Securities Act and (iii) become effective under the Securities Act.
Copies of such registration statement and the amendments thereto
have been delivered by the Company to you as the representatives
(the "Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of which
such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the
Commission; "Effective Date" means the date of the Effective Time;
<PAGE>
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with
the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 5(a) hereof and deemed to be a part of the
registration statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or
Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be,
conform in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable
filing date (as to the Prospectus and any supplement thereto)
contain 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 (in the case of the Prospectus, in light of
the circumstances under which they were made) not misleading;
PROVIDED that no representation or warranty is made as to
information contained in or omitted from the Registration Statement
or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by
or on behalf of any Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Ohio, is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to
obtain any such qualification would not have a material adverse
effect on the financial condition, shareholders' equity, results of
operations, business or prospects of the Company (a "Material
Adverse Effect"), and has all corporate power and authority
necessary to own or hold its properties and to conduct the business
in which it is engaged. The Company has no "subsidiaries," as such
term is defined in Rule 405 of the Rules and Regulations.
(d) At the First Delivery Date (as defined in Section
4), the Company will have an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company will have been duly and
2
<PAGE>
validly authorized and issued, will be fully paid and
non-assessable and will conform to the description thereof
contained in the Prospectus.
(e) The Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein will be duly and validly issued, fully paid and
non-assessable and the Shares will conform to the description
thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed
and delivered by the Company.
(g) The execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby will not (i) conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is bound or to which any
of the property or assets of the Company is subject, except for any
such conflicts or breaches which, individually or in the aggregate,
would not have a Material Adverse Effect, or result in any
violation of the provisions of the articles of incorporation or
code of regulations of the Company or any statute or any order,
rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties or
assets; and except for the registration of the Shares under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the United
States Securities Exchange Act of 1934 (the "Exchange Act") and
applicable state or foreign securities laws in connection with the
purchase and distribution of the Shares by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby.
(h) Except as described in the Prospectus, there are
no contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect
to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in
any securities that may hereafter be registered pursuant to any
other registration statement filed by the Company under the
Securities Act.
(i) Except as described in the Prospectus and the
Registration Statement, the Company has not sold or issued any
Common Shares during the six-month period preceding the date of the
Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities Act,
3
<PAGE>
other than shares issued pursuant to employee benefit plans,
qualified stock options plans or other employee compensation plans
or pursuant to outstanding options, rights or warrants.
(j) The Company has not sustained, since the date of
the latest audited financial statements included in the Prospectus,
any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not
been any change in the capital stock or long-term debt of the
Company or any material adverse change, or any development
involving a prospective material adverse change, in or affecting
the general affairs, management, financial position, shareholders'
equity or results of operations of the Company, otherwise than as
set forth or contemplated in the Prospectus.
(k) The historical and PRO FORMA financial statements,
together with the related notes, set forth in the Prospectus comply
as to form in all material respects with the requirements of
Regulation S-X under the Securities Act applicable to registration
statements on Form S-1 under the Securities Act. The historical
financial statements (including the related notes and supporting
schedules) filed as part of the Registration Statement or included
in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown
thereby, at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods
involved. The PRO FORMA financial statements have been prepared on
a basis consistent with such historical statements of the Company,
except for the PRO FORMA adjustments specified therein, and give
effect to assumptions made on a reasonable basis and in good faith
and present fairly the historical and proposed transactions
contemplated by the Prospectus and this Agreement. The other
financial information and data included in the Prospectus,
historical and PRO FORMA, have been derived from the financial
records of the Company and, in all material respects is fairly
presented and has been prepared on a basis consistent with such
books and records of the Company.
(l) Deloitte & Touche LLP, who have certified certain
financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to in
Section 7(f) hereof, are independent public accountants as required
by the Securities Act and the Rules and Regulations.
(m) The Company has good and marketable title in fee
simple to all real property and good and marketable title to all
personal property owned by it that are material to the conduct of
its business, in each case free and clear of all liens,
encumbrances and defects except such as do not materially affect
the value of such property and do not materially interfere with the
use made and
4
<PAGE>
proposed to be made of such property by the Company; and all real
property and buildings held under lease by the Company are held by
it under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the
Company.
(n) The Company carries, or is covered by, insurance
in such amounts and covering such risks as is adequate for the
conduct of its business and the value of its properties and as is
customary for companies engaged in similar businesses in similar
industries.
(o) Except as disclosed in the Prospectus, the Company
owns or possesses adequate rights to use all material trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of
its business and has no knowledge that the conduct of its business
will conflict with, and has received no notice of any claim of
conflict with, any such rights of others.
(p) There are no legal or governmental proceedings
pending to which the Company is a party or of which any property or
assets of the Company is the subject which, if determined adversely
to the Company, would have a Material Adverse Effect; and to the
best of the Company's knowledge, no such proceedings have been
threatened or contemplated by governmental authorities or
threatened by others.
(q) There are no contracts or other documents which
are required to be described in the Prospectus or filed as exhibits
to the Registration Statement by the Securities Act or by the Rules
and Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
(r) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the directors,
officers, shareholders, customers or suppliers of the Company on
the other hand, which is required to be described in the Prospectus
which is not so described.
(s) No labor disturbance by the employees of the
Company exists or, to the knowledge of the Company, is imminent
which would reasonably be expected to have a Material Adverse
Effect.
(t) The Company has filed all federal, state and local
income and franchise tax returns required to be filed through the
date hereof and has paid all taxes due thereon, and no tax
deficiency has been determined adversely to the Company which has
had (nor does the Company know of any tax deficiency which, if
determined adversely to the Company, would have) a Material Adverse
Effect.
5
<PAGE>
(u) Since the date as of which information is given in
the Prospectus through the date hereof, and except as may otherwise
be disclosed in the Prospectus, the Company has not (i) issued or
granted any securities, except pursuant to stock option or other
employee benefit plans existing on the date hereof, (ii) incurred
any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary
course of business, (iii) entered into any material transaction not
in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(v) The Company (i) makes and keeps accurate books and
records and (ii) maintains internal accounting controls sufficient
to provide reasonable assurance that (A) transactions are executed
in accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of its financial
statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability for
its assets is compared with existing assets at reasonable
intervals.
(w) The Company (i) is not in violation of its
articles of incorporation or code of regulations, (ii) is not in
default in any material respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant
or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to
which it is a party or by which it is bound or to which any of its
properties or assets is subject, (iii) is not in violation in any
material respect of any law, ordinance, governmental rule,
regulation or court decree to which it or its property or assets
may be subject and (iv) except as disclosed in the Prospectus, has
not failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary
to the ownership of its property or to the conduct of its business.
(x) Neither the Company nor any director or officer
or, to the Company's knowledge, any agent, employee or other person
associated with or acting on behalf of the Company, has used any
corporate funds for any unlawful contribution, gift, entertainment
or other unlawful expense relating to political activity; made any
direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or
is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
(y) The Company is not, or will be after the offering
and use of proceeds therefrom, an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.
6
<PAGE>
2. PURCHASE OF THE SHARES BY THE UNDERWRITERS. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell [_______]
Firm Shares to the several Underwriters and each of the Underwriters, severally
and not jointly, agrees to purchase the number of Firm Shares set opposite that
Underwriter's name in Schedule 1 hereto. The respective purchase obligations of
the Underwriters with respect to the Firm Shares shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to [_______] Option Shares. Such option is granted for the purpose
of covering over-allotments in the sale of Firm Shares and is exercisable as
provided in Section 4 hereof. Option Shares shall be purchased severally for the
account of the Underwriters in proportion to the number of Firm Shares set
opposite the name of such Underwriters in Schedule 1 hereto. The respective
purchase obligations of each Underwriter with respect to the Option Shares shall
be adjusted by the Representatives so that no Underwriter shall be obligated to
purchase Option Shares other than in 100 share lots. The price of both the Firm
Shares and any Option Shares shall be $_____ per share.
The Company shall not be obligated to deliver any of the Shares to
be delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Shares to be purchased on such Delivery Date as
provided herein.
3. OFFERING OF SHARES BY THE UNDERWRITERS.
Upon authorization by the Representatives of the release of the
Firm Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
It is understood that [_______] Firm Shares will initially be
reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to employees
and persons having business relationships with the Company who have heretofore
delivered to the Representatives offers or indications of interest to purchase
Firm Shares in form satisfactory to the Representatives, and that any allocation
of such Firm Shares among such persons will be made in accordance with timely
directions received by the Representatives from the Company; PROVIDED, that
under no circumstances will the Representatives or any Underwriter be liable to
the Company or to any such person for any action taken or omitted in good faith
in connection with such offering to employees and persons having business
relationships with the Company. It is further understood that any such Firm
Shares which are not purchased by such persons will be offered by the
Underwriters to the public upon the terms and conditions set forth in the
Prospectus.
4. DELIVERY OF AND PAYMENT FOR THE SHARES. Delivery of
and payment for the Firm Shares shall be made at the office of Weil, Gotshal &
Manges LLP, 767 Fifth Avenue, New York, New York 10153, at 10:00 A.M., New York
City time, on the fourth full business day following the date of this Agreement
or at such other date or place as shall
7
<PAGE>
be determined by agreement between the Representatives and the Company. This
date and time are sometimes referred to as the "First Delivery Date." On the
First Delivery Date, the Company shall deliver or cause to be delivered
certificates representing the Firm Shares to the Representatives for the account
of each Underwriter against payment to or upon the order of the Company of the
purchase price by wire transfer in immediately available funds. Time shall be of
the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Firm Shares shall be registered in such names and
in such denominations as the Representatives shall request in writing not less
than two full business days prior to the First Delivery Date.
The option granted in Section 2 will expire 30 days after the date
of this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of Option Shares as to which the option is
being exercised, the names in which the Option Shares are to be registered, the
denominations in which the Option Shares are to be issued and the date and time,
as determined by the Representatives, when the Option Shares are to be
delivered; PROVIDED, HOWEVER, that this date and time shall not be earlier than
the First Delivery Date nor earlier than the second business day after the date
on which the option shall have been exercised nor later than the fifth business
day after the date on which the option shall have been exercised. The date and
time the Option Shares are delivered are sometimes referred to as a "Second
Delivery Date" and the First Delivery Date and any Second Delivery Date are
sometimes each referred to as a "Delivery Date."
Delivery of and payment for the Option Shares shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Shares to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Shares shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice.
5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees:
(a) To prepare the Prospectus in a form approved by
the Representatives and to file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than the Commission's
close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to
the Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the Registration
Statement has been filed or
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becomes effective or any supplement to the Prospectus has been
filed and to furnish the Representatives with copies thereof; to
advise the Representatives, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts
to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives
and to counsel for the Underwriters a signed copy of the
Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such
number of the following documents as the Representatives shall
reasonably request: (i) conformed copies of the Registration
Statement as originally filed with the Commission and each
amendment thereto (in each case excluding exhibits other than this
Agreement and the computation of per share earnings) and (ii) each
Preliminary Prospectus, the Prospectus and any supplemented
Prospectus and, if the delivery of a prospectus is required at any
time after the Effective Time in connection with the offering or
sale of the Shares or any other securities relating thereto and if
at such time any events shall have occurred as a result of which
the Prospectus as then supplemented would include an untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall
be necessary to supplement the Prospectus in order to comply with
the Securities Act, to notify the Representatives and, upon their
request, to prepare and furnish without charge to each Underwriter
and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of a
supplemented Prospectus which will correct such statement or
omission or effect such compliance.
(d) To file promptly with the Commission any amendment
to the Registration Statement or any supplement to the Prospectus
that may, in the reasonable judgment of the Company or the
Representatives, be required by the Securities Act or requested by
the Commission;
(e) Prior to filing with the Commission any amendment
to the Registration Statement or supplement to the Prospectus or
any Prospectus pursuant to Rule 424 of the Rules and Regulations,
to furnish a copy thereof
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<PAGE>
to the Representatives and counsel for the Underwriters and obtain
the consent of the Representatives to the filing, such consent not
to be unreasonably withheld or delayed;
(f) As soon as practicable after the Effective Date
(it being understood that the Company shall have until at least 410
days after the end of the Company's current fiscal quarter OR, if
the fourth quarter following the fiscal quarter that includes the
Effective Date is the last fiscal quarter of the Company's fiscal
year, 455 days after the end of the Company's current fiscal
quarter), to make generally available to the Company's security
holders and to deliver to the Representatives an earnings statement
of the Company and any subsidiaries (which need not be audited)
complying with Section 11(a) of the Securities Act and the Rules
and Regulations (including, at the option of the Company, Rule
158);
(g) For a period of three years following the
Effective Date, to furnish to the Representatives copies of all
materials furnished by the Company to its shareholders and all
public reports and all reports and financial statements furnished
by the Company to the Nasdaq Stock Market or the principal national
securities exchange upon which the Common Shares may be listed
pursuant to requirements of or agreements with Nasdaq or such
exchange or to the Commission pursuant to the Exchange Act or any
rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as
the Representatives may request to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as the
Representatives may reasonably request and to comply with such laws
so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares; PROVIDED that in connection therewith
the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in
any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, contract to
sell, pledge, hedge or otherwise dispose, directly or indirectly,
of any Common Shares or securities convertible into or exchangeable
for Common Shares (other than the Shares and shares issued pursuant
to employee benefit plans, qualified stock option plans or other
employee compensation plans existing on the date hereof or pursuant
to currently outstanding options, warrants or rights), or sell or
grant options, rights or warrants with respect to any Common Shares
or securities convertible into or exchangeable for Common Shares
(other than the grant of options pursuant to option plans existing
on the date hereof), or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such
Common Shares, whether any such transaction described in clause (1)
or (2) above is to be settled by delivery of Common Shares or other
securities, in cash or
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<PAGE>
otherwise, or (3) publicly disclose an intention to make any such
offer, sale, pledge, hedge, swap or other transaction, in each case
without the prior written consent of Lehman Brothers Inc.; and to
cause each officer and director of the Company to furnish to the
Representatives, prior to the First Delivery Date, a letter or
letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not
to, directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which
is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any Common Shares or
securities convertible into or exchangeable for Common Shares or
(2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such Common Shares, whether any
such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Shares or other securities, in cash
or otherwise, in each case for a period of 180 days from the date
of the Prospectus, without the prior written consent of Lehman
Brothers Inc;
(j) Prior to the Effective Date, to apply for the
inclusion of the Shares in the National Market System of the Nasdaq
Stock Market and to use its best efforts to complete that listing,
subject only to official notice of issuance and evidence of
satisfactory distribution, prior to the First Delivery Date;
(k) Prior to filing with the Commission its initial
Report on Form 10-Q containing the information specified in Rule
463 of the Rules and Regulations, to furnish a copy thereof to the
counsel for the Underwriters at a reasonable time prior to filing
such report with the Commission, and receive and consider its
comments thereon, which will be provided promptly to the Company,
and to deliver promptly to the Representatives a signed copy of
such Report on Form 10-Q filed by it with the Commission;
(l) To take such steps as shall be necessary to ensure
that neither the Company nor any subsidiary shall become an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of the
Commission thereunder.
6. EXPENSES. The Company agrees to pay (a) the costs
incident to the authorization, issuance, sale and delivery of the Shares and any
taxes payable in that connection; (b) the costs incident to the preparation,
printing and filing under the Securities Act of the Registration Statement and
any amendments and exhibits thereto; (c) the costs of distributing the
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any supplement to the Prospectus, all
as provided in this Agreement; (d) the costs of producing and distributing this
Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the Shares; (e) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of sale of the Shares; (f) any applicable listing or other
fees; (g) the
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<PAGE>
fees and expenses of qualifying the Shares under the securities laws of the
several jurisdictions as provided in Section 5; (h) and of preparing, printing
and distributing a Blue Sky Memorandum (including related reasonable fees and
expenses of counsel to the Underwriters); (i) all costs and expenses of the
Underwriters, including the reasonable fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of the Shares by the Underwriters
to employees and persons having business relationships with the Company, as
described in Section 3; and (j) all other costs and expenses incident to the
performance of the obligations of the Company under this Agreement; PROVIDED
that, except as provided in this Section 6 and in Section 12 the Underwriters
shall pay their own costs and expenses, including the costs and expenses of
their counsel, any transfer taxes on the Shares which they may sell and the
expenses of advertising any offering of the Shares made by the Underwriters.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
respective obligations of the Underwriters hereunder are subject to the
accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company contained herein, to the performance by the Company of
its obligations hereunder, and to each of the following additional terms and
conditions:
(a) The Prospectus shall have been timely filed with
the Commission in accordance with Section 5(a); no stop order
suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission;
and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed
to the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which, in
the opinion of Weil, Gotshal & Manges LLP, counsel for the
Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings incident to the
authorization, form and validity of this Agreement, the Shares, the
Registration Statement and the Prospectus, and all other legal
matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Company
shall have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such
matters.
(d) Vorys, Sater, Seymour and Pease LLP shall have
furnished to the Representatives their written opinion, as counsel
to the Company, addressed to the Underwriters and dated such
Delivery Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
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<PAGE>
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Ohio, and has all corporate power and authority
necessary to own or hold its properties and conduct the businesses
in which it is engaged as described in the Prospectus;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly authorized and validly
issued, are fully paid and non-assessable and conform in all
material respects to the description thereof contained in the
Prospectus; and all of the Shares to be delivered on such Delivery
Date have been duly authorized and, when issued upon payment
therefor in accordance with this Agreement, will be validly issued,
fully paid and non-assessable;
(iii) There are no preemptive or, except as described
in the Prospectus, other rights to subscribe for or to purchase,
and there will not be, immediately after the First Delivery Date,
any restriction upon the voting or transfer of, any Shares pursuant
to the Company's articles of incorporation or code of regulations
or any agreement or other instrument known to such counsel to which
the Company is a party;
(iv) To such counsel's knowledge and except as
described in the Prospectus, there are no legal or governmental
proceedings pending to which the Company is a party or of which any
property or assets of the Company is the subject which, if
determined adversely to the Company, could reasonably be expected
to have a Material Adverse Effect; and, to such counsel's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in such
opinion, the Prospectus was filed with the Commission pursuant to
the subparagraph of Rule 424(b) of the Rules and Regulations
specified in such opinion on the date specified therein and, to the
knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose is pending or threatened by the
Commission;
(vi) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial and
statistical data therein related notes and schedules thereto, as to
which such counsel need express no opinion) comply as to form in
all material respects with the requirements of the Securities Act
and the Rules and Regulations;
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<PAGE>
(vii) The statements contained in the Prospectus under
the captions "Management - Employment Agreements," "Certain
Transactions," "Principal Shareholders," "Description of
Capital Stock," and "Shares Eligible for Future Sale," insofar as
they describe charter documents, contracts, statutes, rules and
regulations and other legal matters, constitute an accurate summary
thereof in all material respects;
(viii) The statements contained in the Prospectus
under the captions "United States Income Tax Consequences to
Non-U.S. Holders," insofar as they describe federal statutes, rules
and regulations, constitute a fair summary thereof ;
(ix) To such counsel's knowledge, there are no
contracts or other documents which are required to be described in
the Prospectus or filed as exhibits to the Registration Statement
by the Securities Act or by the Rules and Regulations which have
not been described or filed as exhibits to the Registration
Statement;
(x) This Agreement been duly authorized, executed and
delivered by the Company; and
(xi) The issue and sale of the Shares being delivered
on such Delivery Date by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument known to such counsel to which the
Company is a party or by which the Company is bound or to which any
of the property or assets of the Company is subject, nor will such
actions result in any violation of the provisions of the articles
of incorporation or code of regulations of the Company or any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of its properties or assets; and, except for the
registration of the Shares under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws in connection with the
purchase and distribution of the Shares by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement by the Company and the issuance and sale of the Shares
hereunder; and
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<PAGE>
(xii) To the best of such counsel's knowledge, there
are no contracts, agreements or understandings between the Company
and any person granting such person the right (other than rights
which have been waived or satisfied) to require the Company to file
a registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
In rendering such opinion, such counsel may state that their opinion is
limited to matters governed by the Federal laws of the United States of
America and the laws of the State of Ohio. Such counsel shall also have
furnished to the Representatives a written statement, addressed to the
Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that (x)
such counsel has acted as counsel to the Company in connection with the
preparation of the Registration Statement and during the course of the
preparation of the Registration Statement and Prospectus, such counsel
participated in conferences with representatives of the Company and its
accountants and the representatives of the Underwriters and at which the
contents of the Registration Statement and the Prospectus and related
matters were discussed, and (y) based on the foregoing, no facts have
come to the attention of such counsel which lead them to believe that the
Registration Statement (except as to financial and statistical data
contained therein and related notes and schedules thereto, and except for
the information referred to under the caption "Experts" as having been
included in the Prospectus on the authority of the Company's independent
accountants as experts, as to which such counsel need express no
opinion), as of the Effective Date, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, or that the Prospectus (except as to financial and
statistical data therein and related notes and schedules thereto, and
except for the information referred to under the caption "Experts" as
having been included in the Prospectus on the authority of the Company's
independent accountants as experts, as to which such counsel need express
no opinion) contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The foregoing opinion and statement may
be qualified by a statement to the effect that such counsel does not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus
except for the statements made in the Prospectus under the captions
identified in Section 7(d)(vii) and (viii).
(e) The Representatives shall have received from Weil Gotshal &
Manges LLP, counsel for the Underwriters, such opinion or opinions, dated
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<PAGE>
such Delivery Date, with respect to the issuance and sale of the Shares,
the Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for
the purpose of enabling them to pass upon such matters.
(f) At the time of execution of this Agreement, the Representatives
shall have received from Deloitte & Touche LLP a letter, in form and
substance satisfactory to the Representatives, addressed to the
Underwriters and dated the date hereof (i) confirming that they are
independent public accountants within the meaning of the Securities Act
and are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates as
of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial
information and other matters ordinarily covered by accountants' "comfort
letters" to underwriters in connection with registered public offerings.
(g) With respect to the letter of Deloitte & Touche LLP referred to
in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial letter"),
the Company shall have furnished to the Representatives a letter (the
"bring-down letter") of such accountants, addressed to the Underwriters
and dated such Delivery Date (i) confirming that they are independent
public accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the qualification
of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates as
of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial letter and
(iii) confirming in all material respects the conclusions and findings
set forth in the initial letter.
(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairperson of the Board,
its President or a Vice President and its Chief Financial Officer stating
that, to their knowledge:
(i) The representations, warranties and agreements
of the Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Subsections (a) and (i) of
this Section 7 have been fulfilled; and
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<PAGE>
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have been set forth
in a supplement or amendment to the Registration Statement or the
Prospectus.
(i) (i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or any change,
or any development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is, in the judgment of the Representatives, so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered on such Delivery Date on the terms and in
the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of
the Representatives impracticable or inadvisable to proceed with the public
offering or delivery of the Shares being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
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(k) The Nasdaq Stock Market shall have approved the Shares
for inclusion in the National Market System, subject only to official
notice of issuance and evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company shall indemnify and hold harmless
each Underwriter, its officers and employees and each person, if any,
who controls any Underwriter within the meaning of the Securities
Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited
to, any loss, claim, damage, liability or action relating to
purchases and sales of Shares), to which that Underwriter, officer,
employee or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any
materials or information provided to investors by, or with the
approval of, the Company in connection with the marketing of the
offering of the Shares ("Marketing Materials"), including any
roadshow or investor presentations made to investors by the Company
(whether in person or electronically), (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Marketing Materials or Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading or (iii) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to
in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (provided that
the Company shall not be liable under this clause (iii) to the extent
that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence
or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for
any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the indemnification provided in
this paragraph (a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any
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officer, employee or controlling person of such Underwriter) on
account of any such loss, claim, damage or liability, joint or
several, or any action in respect thereof, arising from the sale of
the Shares by such Underwriter to any person if a copy of the
Prospectus shall have been provided to such Underwriter in a timely
manner and shall not have been sent to such person within the time
required by the Securities Act, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact
contained in such Preliminary Prospectus was corrected in the
Prospectus; and provided further, however, that the Company shall not
be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any
untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any such amendment or supplement,
in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for
inclusion therein which information consists solely of the
information specified in Section 8(e). The foregoing indemnity
agreement is in addition to any liability which the Company may
otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees,
each of its directors and each person, if any, who controls the
Company within the meaning of the Securities Act, from and against
any loss, claim, damage or liability, joint or several, or any action
in respect thereof, to which the Company or any such director,
officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained
(A) in any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in any
Blue Sky Application or (ii) the omission or alleged omission to
state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any
Blue Sky Application any material fact required to be stated therein
or necessary to make the statements therein not misleading, but in
each case only to the extent that the untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives by
or on behalf of that Underwriter specifically for inclusion therein,
and shall reimburse the Company and any such director, officer or
controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling
person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as
such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any
19
<PAGE>
Underwriter may otherwise have to the Company or any such director,
officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under this Section 8,
notify the indemnifying party in writing of the claim or the
commencement of that action; PROVIDED, HOWEVER, that the failure to
notify the indemnifying party shall not relieve it from any liability
which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, PROVIDED FURTHER,
that the failure to notify the indemnifying party shall not relieve
it from any liability which it may have to an indemnified party
otherwise than under this Section 8. If any such claim or action
shall be brought against an indemnified party, and it shall notify
the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes,
jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to
the indemnified party. After notice from the indemnifying party to
the indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to the
indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of
investigation; PROVIDED, HOWEVER, that the Representatives shall have
the right to employ counsel to represent jointly the Representatives
and those other Underwriters and their respective officers, employees
and controlling persons who may be subject to liability arising out
of any claim in respect of which indemnity may be sought by the
Underwriters against the Company under this Section 8 if, in the
reasonable judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and
controlling persons to be jointly represented by separate counsel,
and in that event the fees and expenses of such separate counsel
shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent
shall not be unreasonably withheld), settle or compromise or consent
to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or
not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding, or
(ii) be liable for any settlement of any such action effected without
its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party
or if there be a final judgment of the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of
such settlement or judgment.
20
<PAGE>
(d) If the indemnification provided for in this Section 8
shall for any reason be unavailable to or insufficient to hold
harmless an indemnified party under Section 8(a) or 8(b) in respect
of any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount
paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such
proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the
other from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault
of the Company on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the
other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares
purchased under this Agreement (before deducting expenses) received
by the Company, on the one hand, and the total underwriting discounts
and commissions received by the Underwriters with respect to the
Shares purchased under this Agreement, on the other hand, bear to the
total gross proceeds from the offering of the Shares under this
Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the
Underwriters, the intent of the parties and their relative knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this
Section were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the
equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above
in this Section shall be deemed to include, for purposes of this
Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section
8(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public was offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8(d), the Company
shall not be
21
<PAGE>
required to contribute an amount in excess of the amount for which it
would have been liable if the provisions of Section 8(a) had been
available. 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. The Underwriters' obligations to contribute as
provided in this Section 8(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering
of the Shares by the Underwriters set forth in the last paragraph on
the cover page of, and the information contained in paragraphs 3, 10
and 12 under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of
the Underwriters specifically for inclusion in the Registration
Statement and the Prospectus.
9. DEFAULTING UNDERWRITERS.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Shares which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of Firm Shares set opposite the name
of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the
total number of Firm Shares set opposite the names of all the remaining
non-defaulting Underwriters in Schedule 1 hereto; PROVIDED, HOWEVER, that the
remaining non-defaulting Underwriters shall not be obligated to purchase any of
the Shares on such Delivery Date if the total number of Shares which the
defaulting Underwriter or Underwriters agreed but failed to purchase on such
date exceeds 9.09% of the total number of Shares to be purchased on such
Delivery Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the number of Shares which it agreed to
purchase on such Delivery Date pursuant to the terms of Section 2. If the
foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or
those other underwriters satisfactory to the Representatives who so agree, shall
have the right, but shall not be obligated, to purchase, in such proportion as
may be agreed upon among them, all the Shares to be purchased on such Delivery
Date. If the remaining Underwriters or other underwriters satisfactory to the
Representatives do not elect to purchase the shares which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such Delivery Date,
this Agreement (or, with respect to the Second Delivery Date, the obligation of
the Underwriters to purchase, and of the Company to sell, the Option Shares)
shall terminate without liability on the part of any non-defaulting Underwriter
or the Company, except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 6 and 12. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Shares which a
defaulting Underwriter agreed but failed to purchase.
22
<PAGE>
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Shares of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the applicable Delivery Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
10. DIRECTED SHARE PROGRAM. (a) It is understood that approximately
__ Firm Shares (the "Directed Shares") will initially be reserved by the
Underwriters for offer and sale to employees and persons having business
relationships with the Company ("Directed Shares Participants") in a directed
share program ("Directed Share Program") upon the terms and conditions set forth
in the Prospectus and in accordance with the rules and regulations of the
National Association of Securities Dealers, Inc. Under no circumstances will
Lehman Brothers or any Underwriter be liable to the Company or to any Directed
Share Participant for any action taken or omitted to be taken in good faith in
connection with the Directed Share Program. To the extent that any Directed
Shares are not affirmatively reconfirmed for purchase by any Directed Share
Participant on or immediately after the date of this Agreement, such Directed
Shares may be offered to the public as part of the public offering contemplated
hereby.
(b) The Company agrees to pay all fees and disbursements incurred by
the Underwriters in connection with the Directed Share Program, including
counsel fees and any stamp duties or other taxes incurred by the Underwriters in
connection with the Directed Share Program.
(c) In connection with the offer and sale of the Directed Shares, the
Company agrees, promptly upon request in writing, to indemnify and hold harmless
Lehman Brothers and the other Underwriters from and against any loss, claim,
damage, expense, liability or action which (i) arises out of, or is based upon,
any untrue statement or alleged untrue statement of a material fact contained in
any materials prepared by or with the approval of the Company for distribution
to Directed Share Participants in connection with the Directed Share Program or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
arises out of the failure of any Directed Share Participant to pay for and
accept delivery of Directed Shares that the Participant agreed to purchase, or
(iii) is otherwise related to the Directed Share Program, other than losses,
claims, damages pr liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted directly from the gross negligence or
willful misconduct of Lehman Brothers.
11. TERMINATION. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Shares if, prior to that
time, any of the events described in Sections 7(j) or 7(k), shall have occurred
or if the Underwriters shall decline to purchase the Shares for any reason
permitted under this Agreement.
23
<PAGE>
12. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) the
Company shall fail to tender the Shares for delivery to the Underwriters by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled by
the Company is not fulfilled, the Company will reimburse the Underwriters for
all reasonable out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Shares, and upon demand the Company shall pay the full
amount thereof to the Representative(s). If this Agreement is terminated
pursuant to Section 9 by reason of the default of one or more Underwriters, the
Company shall not be obligated to reimburse any defaulting Underwriter on
account of those expenses.
13. NOTICES, ETC. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-526-6588), with a copy, in the case of
any notice pursuant to Section 8(d), to the Director of Litigation,
Office of the General Counsel, Lehman Brothers Inc., 3 World
Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: Carol A. Clark (Fax:
(614) 340-7301, with a facsimile copy to Susan E. Brown, Esq. (Fax:
(614) 719-4642) ;
PROVIDED, HOWEVER, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc.
14. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 13 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the
24
<PAGE>
persons referred to in this Section 14, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
15. SURVIVAL. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Shares and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
16. DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY".
For purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of New York.
18. COUNTERPARTS. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
19. HEADINGS. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
25
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
MINDLEADERS.COM, INC.
By
-------------------------
NAME:
TITLE:
Accepted:
LEHMAN BROTHERS INC.
J.C. BRADFORD & CO.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By
-----------------------------------
AUTHORIZED REPRESENTATIVE
26
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
Number of
Underwriters Shares
- ------------ -----------------
<S> <C>
Lehman Brothers Inc...........................
J.C. Bradford & Co. ..........................
Fidelity Capital Markets, a division of National Financial
Services Corporation
Total _
</TABLE>
<PAGE>
_____________, 2000
MindLeaders.com, Inc.
851 West Third Avenue
Columbus, Ohio 43212
Lehman Brothers Inc.
J.C. Bradford & Co.
Fidelity Capital Markets, a division of National
Financial Services Corporation
As Representatives of the Several Underwriters
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
The undersigned understands that you and certain other firms
propose to enter into an Underwriting Agreement (the "Underwriting Agreement")
providing for the purchase by you and such other firms (the "Underwriters") of
common shares (the "Shares") of Common Shares, no par value (the "Common
Shares"), of MindLeaders.com, Inc. (the "Company") and that the Underwriters
propose to reoffer the Common Shares to the public (the "Offering").
In consideration of the execution of the Underwriting
Agreement by the Underwriters, and for other good and valuable consideration,
the undersigned hereby irrevocably agrees that, without the prior written
consent of Lehman Brothers Inc., the undersigned will not, directly or
indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter
into any transaction or device that is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any Common
Shares (including, without limitation, Common Shares that may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission and Common Shares that may
be issued upon exercise of any option or warrant) or securities convertible into
or exchangeable for Common Shares owned by the undersigned on the date of
execution of this Lock-Up Letter Agreement or on the date of the completion of
the Offering, or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such Common Shares, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Shares or other
securities, in cash or otherwise, for a period of 180 days after the date of the
final Prospectus relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer
Agent are hereby authorized to decline to make any transfer of securities if
such transfer would constitute a violation or breach of this Lock-Up Letter
Agreement.
<PAGE>
It is understood that, if the Company notifies you that it
does not intend to proceed with the Offering, if the Underwriting Agreement does
not become effective, or if the Underwriting Agreement (other than the
provisions thereof which survive termination) shall terminate or be terminated
prior to payment for and delivery of the Common Shares, the undersigned will be
released from its obligations under this Lock-Up Letter Agreement.
The undersigned understands that the Company and the
Underwriters will proceed with the Offering in reliance on this Lock-Up Letter
Agreement.
The undersigned hereby represents and warrants that the
undersigned has full power and authority to enter into this Lock-Up Letter
Agreement and that, upon request, the undersigned will execute any additional
documents necessary in connection with the enforcement hereof. Any obligations
of the undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
Very truly yours,
By:__________________________________
Name:
Title:
Dated: _______________
2
<PAGE>
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MINDLEADERS.COM, INC.
FIRST: The name of the corporation shall be MindLeaders.com, Inc.
SECOND: The place in Ohio where the principal office of the
corporation is to be located is in the City of Columbus, County of Franklin.
THIRD: The purpose for which the corporation is formed is to engage
in any lawful act or activity for which corporations may be formed under
Sections 1701.01 to 1701.98 of the Ohio Revised Code.
FOURTH: The authorized number of shares of the corporation is 70,000
shares, of which 60,731 shares are designated common stock, no par value (the
"Common Stock"), 5,123 shares are designated senior convertible preferred stock,
no par value (the "Senior Preferred Stock"), 2,979 shares are designated Series
B Convertible Preferred Stock, no par value (the "Series B Preferred Stock"),
1,167 shares are designated Series C Convertible Preferred Stock (the "Series C
Preferred Stock") (the Senior Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are hereafter sometimes referred to collectively as the
"Preferred Stock"). Such shares of Common Stock and Preferred Stock may be
issued either as whole shares or as fractional shares in an amount not less than
one one-hundredth of a whole share.
(A) COMMON STOCK. The holders of Common Stock shall be entitled
to one vote per share on each matter submitted to a vote of the
shareholders and, except as required by law or as provided in
paragraph (B)(1) of this Article FOURTH, the shares of Common Stock
shall vote as a single class with the shares of Preferred Stock on all
such matters. The Common Stock shall not have any stated capital.
(B) PREFERRED STOCK. Each series of Preferred Stock shall rank
pari passu with each other series of Preferred Stock. The Preferred
Stock shall rank ahead of any junior securities, including the Common
Stock. The holders of the Preferred Stock shall be entitled to
rights, preferences, powers and privileges as follows:
(1) VOTING RIGHTS. Each holder of Preferred Stock shall be
entitled to the number of votes on each matter submitted to a vote of
the shareholders equal to the number of shares of Common Stock into
which the Preferred Stock held by such holder could be converted on
the record date fixed for the vote of shareholders and, except as
required by law, the shares of Preferred
<PAGE>
Stock shall vote as a single class of stock with the shares of Common Stock
on all matters submitted to a vote of the holders of the Common Stock;
provided, however, that upon the occurrence of an event of default and an
election by the holders of a majority of the shares of Preferred Stock then
outstanding, the holders of Preferred Stock shall be entitled to elect a
majority of the Board of Directors of the corporation and to vote
two-thirds (2/3rds) of the combined voting power of the corporation until
the event of default is cured, all as provided in that certain Series C
Convertible Preferred Stock Purchase Agreement by and among the
corporation, River Cities Capital Fund II Limited Partnership, JG Funding,
LLC, Saunders Capital Group, LLC, Irving W. Bailey II and Carol A. Clark
(the "Series C Preferred Stock Purchase Agreement"). If any matter is
required by law to be submitted to a vote of the holders of Preferred Stock
as a separate class, such matter shall be determined by the affirmative
vote of a majority of the shares of Preferred Stock entitled to vote on
such matter.
(2) DIVIDENDS. The holders of record of the Preferred
Stock shall be entitled to receive dividends quarterly in arrears
beginning for the period commencing August 1, 1999 and ending July 31,
2000 at the rates specified below (adjusted for any stock dividends,
consolidations or splits with respect to such shares); provided,
however, that no dividends shall accrue or be payable with respect to
the Senior Preferred Stock prior to August 1, 1999, and with respect
to the Series B Preferred Stock and Series C Preferred Stock prior to
August 1, 2000:
<TABLE>
<CAPTION>
12 Months Ending July 31, Annual Rate Quarterly Rate
------------------------- ----------- --------------
<S> <C> <C>
2000 4% 1.0%
2001 6% 1.5%
2002 8% 2.0%
2003 and thereafter 10% 2.5%
</TABLE>
The annual dividend rate and quarterly dividend rate applicable
to each share of Preferred Stock shall be based on the purchase price
paid to the corporation at the time of the original issuance of the
share of Preferred Stock by the corporation ("Applicable Purchase
Price"). The Applicable Purchase Prices shall be $390.40 for each
share of Senior Preferred Stock, $1,007.09 for each share of Series B
Preferred Stock and $1,285.26 for each share of Series C Preferred
Stock (in each case, adjusted for any stock dividends, consolidations
or splits with respect to such shares).
Dividends may be paid on the Preferred Stock only from retained
earnings. Such dividends shall be fully payable in cash and shall be
payable quarterly in arrears on the last day of October, January,
April and July in each year to holders of record of the Preferred
Stock at the close of business on the last business day of the
preceding month. Such dividends shall be cumulative and dividends not
paid currently will accrue and compound quarterly at the rate of 10%
per annum
-2-
<PAGE>
regardless of the year in which such dividends were earned. If dividends
on the outstanding Preferred Stock shall not have been paid or declared and
set apart for payment, at the rate specified, for each past quarter-annual
dividend period, or payment of, or provision for the payment of, any
dividends thereon for the current quarter-annual dividend period shall not
have been made, dividends equal to the amount of such deficiency shall be
paid or declared and set apart for payment with respect to the Preferred
Stock before any dividends or other distributions with respect to the
Common Stock may be paid or declared and set apart for payment.
Except for any dividend paid to the holders of Common Stock
attributable to taxable income generated by the Company on or prior to
September 15, 1998, the holders of record of the Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of
Directors, any dividend or other distribution paid to the holders of
Common Stock in the amount which such holders of Preferred Stock would
have been entitled to receive if such Preferred Stock had been
converted to Common Stock immediately prior to the record date for the
determination of shareholders entitled to receive such dividend or
other distribution.
At the option of the Company, accrued dividends on the Preferred
Stock may be paid in Common Stock at the Conversion Price, as adjusted
pursuant to Section (4) below.
(3) LIQUIDATION PREFERENCE.
(a) In the event of any dissolution, liquidation or
winding up of the corporation or any Sale Transaction (as defined
below) which yields net proceeds to the holders of the Preferred Stock
of less than the Conversion Price, as adjusted (subject to adjustment
for stock dividends, splits and combinations) per fully diluted share
of Common Stock after payment or provision for payment of the debts
and other liabilities of the corporation (each a "Liquidation Event"),
each holder of a share of Preferred Stock shall be entitled, to the
extent of the remaining assets of the corporation legally available
for distribution, if any, and before any distribution is made upon any
other class of capital stock issued by the corporation, to be paid an
amount equal to the Applicable Purchase Price of such share of
Preferred Stock (as adjusted for stock dividends, splits and
combinations) held by such holder of Preferred Stock, together with an
amount equal to all accrued and unpaid dividends thereon to the date
of such payment. "Sale Transaction" means (i) a sale or transfer of
all or substantially all of the assets of the corporation and its
consolidated subsidiaries in any transaction or series of related
transactions (other than sales of inventory in the ordinary course of
business) or (ii) any merger, consolidation or reorganization to which
the corporation or a consolidated subsidiary thereof is a party,
except for a merger, consolidation or reorganization in which the
-3-
<PAGE>
corporation or such subsidiary is the surviving corporation and, after
giving effect to such merger, consolidation or reorganization, the
beneficial owners directly and indirectly of the corporation's outstanding
capital stock (on a fully-diluted basis) immediately prior to the merger,
consolidation or reorganization will beneficially own directly and
indirectly immediately following the merger, consolidation or
reorganization the corporation's outstanding capital stock (on a
fully-diluted basis) having a majority of the ordinary voting power to
elect the corporation's board of directors.
(b) After payment to the holders of the Preferred
Stock of the aggregate amount set forth in Section (3)(a) above (the
"Preferred Amount"), each holder of the Common Stock shall be
entitled, to the extent of the remaining assets of the corporation
legally available for distribution, if any, and before any further
distribution is made upon any other class of capital stock issued by
the corporation, to be paid an amount equal to such holder's pro rata
share of the Preferred Amount.
(c) After payment to the holders of the Preferred
Stock and the holders of the Common Stock of the amounts set forth in
Sections (3)(a) and (b) above, the entire remaining assets and funds
of the corporation legally available for distribution, if any, shall
be distributed among the holders of Preferred Stock and Common Stock
in proportion to the shares of Common Stock then held by them and
shares of Common Stock which they have the right to acquire upon
conversion of the Preferred Stock then held by them.
(d) Written notice of such Liquidation Event, stating
a payment date and the amount of the liquidation payment, shall be
given by mail, postage prepaid, not less than 30 days prior to the
date stated therein, to the holders of record of the Preferred Stock,
such notice to be addressed to each such holder at the address that
appears on the books of the corporation.
(4) CONVERSION.
(a) Any holder of Preferred Stock shall have the
right, at any time and from time to time, to convert all or any of
such Preferred Stock into fully-paid and nonassessable shares of
Common Stock of the corporation at the rate described in Section
(4)(b) below (an "Optional Conversion") and, upon the closing of a
Qualified IPO (as defined below), all outstanding shares of Preferred
Stock shall mandatorily and automatically (without any action by the
holders of the Preferred Stock) convert to shares of Common Stock of
the corporation at the rate described in Section (4)(b) (a "Mandatory
Conversion"). To the extent permitted by law, when a share of
Preferred Stock is converted into Common Stock, the holder of such
share of Preferred Stock so converted shall be immediately entitled to
an amount equal to all accrued and unpaid dividends
-4-
<PAGE>
thereon to the date of conversion and payment of such amount shall
accompany the certificate or certificates representing the Common Stock
issued upon such conversion.
(b) The number of shares of Common Stock into which a
share of Preferred Stock shall convert shall be determined by dividing
(i) the sum of the Applicable Purchase Price for such share of
Preferred Stock by (ii) the Conversion Price applicable to such share
in effect on the effective date of the conversion ("Conversion
Effective Date"). The "Conversion Price" per share at which shares of
Common Stock shall be issuable upon conversion of any shares of
Preferred Stock shall be equal initially to the Applicable Purchase
Price of such shares of Preferred Stock, subject to adjustment as
provided in Section (4)(d) below.
(c) To exercise an Optional Conversion right, a holder
of Preferred Stock shall surrender the certificates representing such
Preferred Stock at the principal office of the corporation or at such
other office of the corporation specified for such purpose together
with written notice to the corporation of the number of shares of
Preferred Stock which the holder elects to convert, and written
instructions regarding the registration and delivery of certificates
for the shares of Common Stock acquired thereby. On the date of the
closing of a Qualified IPO, each holder of Preferred Stock shall
surrender the certificates representing such Preferred Stock at the
principal office of the corporation or at such other place specified
by the corporation for such purpose and provide written instructions
regarding the registration and delivery of the certificates for the
shares of Common Stock acquired thereby. The person entitled to
receive Common Stock issuable upon conversion shall be deemed to have
become the holder of record of such Common Stock at the Conversion
Effective Date which shall be the close of business on the date, in
the case of an Optional Conversion, upon which the Optional Conversion
right is so exercised or, in the case of a Mandatory Conversion, upon
the date of the closing of the Qualified IPO. If, in the case of an
Optional Conversion, any certificate representing Preferred Stock
shall have been converted in part, the holder shall be entitled to a
new certificate representing the Preferred Stock not converted.
(d) The Conversion Price from time to time in effect
shall be subject to adjustment from time to time as follows:
(i) If, at any time after the issuance of the
Series C Preferred Stock and prior to March 15, 2000, the corporation
shall issue or sell any shares of its capital stock in a private
equity financing at a price per share less than the Conversion Price
then in effect for the Series C Preferred Stock, then in each such
case the applicable Conversion Price of the Series C
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<PAGE>
Preferred Stock shall be decreased to equal the price per share at which
such capital stock was issued or sold.
(ii) If the corporation shall issue or sell
Common Stock at a price per share less than the applicable Conversion
Price, then in each such case the applicable Conversion Price shall be
reduced to an amount determined by multiplying the applicable
Conversion Price then in effect by a fraction:
(1) the numerator of which shall be (A)
the number of shares of Common Stock outstanding on a fully-diluted
basis immediately prior to the issuance of such additional shares of
Common Stock (including the total number of shares of Common Stock
available to be issued pursuant to the exercise of outstanding stock
options and pursuant to the conversion of Preferred Stock), plus (B)
the number of shares of Common Stock which the aggregate
consideration, if any, received by the corporation for the total
number of such additional shares of Common Stock so issued would
purchase at the Conversion Price; and
(2) the denominator of which shall be
(A) the number of shares of Common Stock outstanding on a
fully-diluted basis immediately prior to the issuance of such
additional shares of Common Stock (including the total number of
shares of Common Stock available to be issued pursuant to the exercise
of outstanding stock options and pursuant to the conversion of
Preferred Stock), plus (B) the number of such additional shares of
Common Stock so issued.
(iii) For the purpose of this Section (4)(d), the
issuance of any warrants, options, subscriptions, or purchase rights
with respect to Common Stock and the issuance of any securities
convertible into or exchangeable for Common Stock (or the issuance of
any warrants, options or any rights with respect to such convertible
or exchangeable securities) shall be deemed an issuance at such time
of such Common Stock at the Net Consideration Per Share (as
hereinafter defined) if such Net Consideration Per Share which may be
received by the corporation for such Common Stock shall be less than
the Conversion Price. Any obligation, agreement, or undertaking to
issue warrants, options, subscriptions, or purchase rights at any time
in the future shall be deemed to be an issuance at the time such
obligation, agreement or undertaking is made or arises. No adjustment
of the Conversion Price shall be made under this Section (4)(d) upon
the issuance of any Common Stock which is issued pursuant to the
exercise of any warrants, options, subscriptions, or purchase rights
or which is issued pursuant to the conversion or exchange of any
convertible or exchangeable securities (or the exercise of any such
warrants, options or rights with respect to such convertible or
exchangeable securities) if any adjustment shall previously
-7-
<PAGE>
have been made or deemed not required upon the issuance of any such
warrants, options, or subscription or purchase rights or upon the issuance
of any such convertible or exchangeable securities (or upon the issuance
of any warrants, options or rights with respect to such convertible or
exchangeable securities) as above provided. Notwithstanding anything to
the contrary contained in this Section (4)(d), no adjustment of the
Conversion Price of the Series C Preferred Stock shall be made under clause
(ii) as a result of any private equity financing for which an adjustment of
the Conversion Price of the Series C Preferred Stock shall be required
under clause (i).
Should the Net Consideration Per Share of any such
warrants, options, subscriptions, or purchase rights or convertible or
exchangeable securities be increased or decreased from time to time,
then, upon the effectiveness of each such change, the Conversion Price
shall be adjusted to such as would have been in effect had the
adjustments made upon the issuance of such warrants, options, rights
or convertible or exchangeable securities been made upon the basis of
the increased or decreased Net Consideration Per Share of such
securities, and any adjustments otherwise made to the Conversion Price
since the date of the issuance of such securities shall be
recalculated to reflect such adjustment. Any adjustment of the
Conversion Price with respect to this paragraph which relates to
warrants, options, subscriptions, purchase rights or convertible or
exchangeable securities with respect to Common Stock shall be
disregarded if, as, and when any such warrants, options,
subscriptions, purchase rights or convertible or exchangeable
securities expire or are canceled without being exercised, converted
or exchanged, so that the Conversion Price effective immediately upon
such cancellation or expiration shall be equal to the Conversion Price
that would have been in effect had the expired or canceled warrants,
options, subscriptions, purchase rights or convertible or exchangeable
securities not been issued and any adjustments otherwise made shall be
recalculated to reflect the cancellation of such adjustment.
For the purposes of this Section (4)(d), the "Net
Consideration Per Share" which may be received by the corporation
shall be determined as follows:
(1) The "Net Consideration Per Share"
shall mean the amount equal to the total amount of consideration, if
any, received by the corporation for the issuance of such warrants,
options, subscriptions or other purchase rights or convertible or
exchangeable securities, plus the amount of consideration, if any,
payable to the corporation upon exercise, conversion or exchange
thereof, divided by the aggregate number of shares of Common Stock
that would be issued if all such warrants, options, subscriptions, or
other purchase rights or convertible or exchangeable securities were
exercised, converted, or exchanged.
-7-
<PAGE>
(2) The "Net Consideration Per Share"
which may be received by the corporation shall initially be determined
in each instance as of the date of issuance of warrants, options,
subscriptions, or other purchase rights or convertible or exchangeable
securities without giving effect to any possible future upward or
downward price adjustments or rate adjustments which may be applicable
with respect to such warrants, options, subscriptions or other
purchase rights or convertible or exchangeable securities.
(iv) For purposes of this Section (4)(d), if
part or all of the consideration received by the corporation in
connection with the issuance of Common Stock or the issuance of any of
the securities described in this Section (4)(d) consists of property
other than cash, such consideration shall be deemed to have a fair
market value as reasonably determined in good faith by the Board of
Directors of the corporation.
(v) Notwithstanding anything to the contrary
contained herein, there shall be no adjustment of the Conversion Price
as a result of (1) the issuance of Common Stock upon the conversion of
Preferred Stock, (2) the issuance of Common Stock or the grant of
stock options to senior management, employees, non-employee directors
and other non-employees, such as consultants and independent
contractors, of the corporation, as permitted under Section 4 of the
Series C Preferred Stock Purchase Agreement, or (3) the issuance of
Common Stock upon exercise of the warrant for 292 shares of Common
Stock granted to the original purchaser of the Series C Preferred
Stock in connection with such purchase.
(vi) The foregoing provisions of this Section
(4)(d) shall not apply under any of the circumstances which would
constitute an Extraordinary Common Stock Event (as hereinafter
defined). Upon the happening of an Extraordinary Common Stock Event,
the Conversion Price shall, simultaneously with the happening of the
Extraordinary Common Stock Event, be proportionately increased or
decreased, as appropriate. The Conversion Price shall be adjusted in
the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (1)
the issuance of additional shares of Common Stock as a dividend or
other distribution on outstanding Common Stock or on any class or
series of convertible preferred stock, unless such distribution also
is made pro rata to holders of Preferred Stock, (2) a subdivision of
outstanding Common Stock into a greater number of shares of Common
Stock, or (3) a combination of outstanding Common Stock into a smaller
number of shares of Common Stock.
-8-
<PAGE>
(vii) Upon the happening of any event requiring
an adjustment or change in the Conversion Price, the corporation shall
forthwith give written notice thereof to the holders of the Preferred
Stock stating the adjusted number of shares of Common Stock or
securities or property receivable upon the conversion of the Preferred
Stock resulting from such event and setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based. The Board of Directors of the corporation shall determine in
good faith the computations made hereunder.
(viii) If the corporation does not effect a
Qualified IPO prior to July 1, 2000, the Conversion Price with respect
to the Series B Preferred Stock shall be automatically reduced to
$935.16 per share (adjusted for any stock dividends, consolidations or
splits with respect to such shares).
(ix) If the corporation does not effect a
Qualified IPO prior to August 31, 2004, the Conversion Price with
respect to the Series B Preferred Stock shall be automatically further
reduced to $701.37 per share (adjusted for any stock dividends,
consolidations or splits with respect to such shares).
(5) REDEMPTION.
(a) At any time during the period beginning September
1, 2003 and ending August 31, 2004, so long as there has not occurred
a closing of an initial public offering of the Common Stock which has
yielded net proceeds to the corporation 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 (a "Qualified IPO"), the holders of a
majority of the shares of Preferred Stock then outstanding may demand
the corporation to redeem all, but not less than all, of the shares of
Preferred Stock then outstanding and all, or a portion, of the shares
of Common Stock that the holders have acquired by conversion of
Preferred Stock (the "Converted Stock") at a price per share (the
"Redemption Price") equal to the greater of (i) the Applicable
Purchase Price for such share of Preferred Stock (as adjusted for any
stock dividends, consolidations or splits with respect to such shares)
or (ii) the fair market value for such share at the time of redemption
(taking into account the liquidation preference of the Preferred
Stock provided in Section (B)(3) above but not any discount for lack
of marketability or for the minority interest) as determined by a
qualified, independent appraiser experienced in valuation of shares of
companies similar to the corporation (the "Qualified Appraiser")
acceptable to both the corporation and the holders of a majority of
the shares of Preferred Stock then outstanding ("Fair Market Value").
If the holders of a majority of the shares of Preferred Stock then
outstanding so demand the redemption of the Preferred Stock, then all
holders of Preferred Stock (including those holders who did not join
in the demand) shall be obligated to have their
-9-
<PAGE>
shares of Preferred Stock redeemed by the corporation but each holder of
the Converted Stock shall have the right to decide whether such holder's
Converted Stock shall be redeemed by the corporation. If the holders of a
majority of the shares of Preferred Stock then outstanding and the
corporation 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 Preferred Stock (and the Converted Stock)
shall be conclusive and binding upon the parties. The fees and expenses of
the Qualified Appraiser shall be borne one-half by the holders of Preferred
Stock to be redeemed and one-half by the corporation. At the redemption
closing, the corporation shall also pay to the holders of Preferred Stock
any accrued but unpaid dividends through the date of the redemption
closing. To exercise the redemption right, the holders of a majority of
the shares of the Preferred Stock then outstanding must give written notice
to the corporation 12 months prior to the proposed redemption closing,
which notice may be given any time after August 31, 2002. The redemption
closing shall take place at a time and place mutually agreed upon by the
parties on or before the 365th day after written notice of exercise of the
redemption is given to the corporation by the holder of Preferred Stock, or
if the parties shall not agree on the time and place, the redemption
closing shall take place at the principal office of the corporation in
Columbus, Ohio at 10:00 a.m. on the 365th day after written notice of
exercise is given, unless such day is a Saturday, Sunday or holiday, in
which case it shall occur on the next business day; provided, however, that
if subsequent to the date that notice of the redemption is given and prior
to the redemption closing, the corporation consummates a Qualified IPO,
merger or a sale of all or substantially all of its assets at a price per
share greater than the Redemption Price ("Interim Event"), then such
redemption closing shall take place upon the consummation of the Interim
Event.
(b) In addition to the obligation and rights of the
corporation to redeem the Preferred Stock pursuant to Section (5)(a)
above, the holders of the Preferred Stock also have certain
conditional rights of redemption pursuant to Section 12 of the Series
C Preferred Stock Purchase Agreement.
(6) LEGEND. The certificates representing the Preferred
Stock shall bear a legend evidencing the following restrictions on
transfer substantially in the following form:
'These shares have not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), or any
applicable state law. The shares have been acquired for
investment and may not be offered, sold or otherwise
transferred, pledged or hypothecated in the absence of (i)
an effective registration under the Securities Act and any
applicable state securities laws, or (ii) an opinion of
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<PAGE>
counsel satisfactory to the corporation to the effect that such
registration is not required under the Securities Act and such
securities laws.'
(7) STATED CAPITAL. The stated capital of each share of Preferred
Stock shall initially be equal to its Applicable Purchase Price, but shall
be adjusted for stock dividends, splits and combinations. Notwithstanding
anything to the contrary contained in Section 1701.30 of the Ohio Revised
Code, and as permitted by Section 1701.31(D) of the Ohio Revised Code, upon
the conversion of a share of Preferred Stock into Common Stock, the stated
capital attributable to such share of Preferred Stock shall, without
further action, be eliminated and transferred to the capital surplus of the
corporation.
FIFTH: The directors of the corporation shall have the power to cause
the corporation from time to time and at any time to purchase, hold, sell,
transfer or otherwise deal with (A) shares of any class or series issued by it,
(B) any security or other obligation of the corporation which may confer upon
the holder thereof the right to convert the same into shares of any class or
series authorized by the articles of the corporation, and (C) any security or
other obligation which may confer upon the holder thereof the right to purchase
shares of any class or series authorized by the articles of the corporation.
The corporation shall have the right to repurchase, if and when any shareholder
desires to sell, or on the happening of any event is required to sell, shares of
any class or series issued by the corporation. The authority granted in this
ARTICLE FIFTH of these Amended Articles shall not limit the plenary authority of
the directors to purchase, hold, sell, transfer or otherwise deal with shares of
any class or series, securities, or other obligations issued by the corporation
or authorized by its articles.
SIXTH: No shareholder of the corporation shall have, as a matter of
right, the right to vote cumulatively in the election of directors.
SEVENTH: These Second Amended and Restated Articles of Incorporation take
the place of and supersede the Amended and Restated Articles of Incorporation,
as amended, of the corporation.
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<PAGE>
THIRD AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MINDLEADERS.COM, INC.
FIRST: The name of the corporation shall be MindLeaders.com, Inc.
SECOND: The place in Ohio where the principal office of the corporation
is to be located is in the City of Columbus, County of Franklin.
THIRD: The purpose for which the corporation is formed is to engage in
any lawful act or activity for which corporations may be formed under Sections
1701.01 to 1701.98 of the Ohio Revised Code.
FOURTH: The authorized number of shares of the corporation shall be
forty-five million (45,000,000), of which forty million (40,000,000) shares
shall be Common Shares, no par value, and five million (5,000,000) shares shall
be Preferred Shares, no par value.
Each outstanding Common Share shall entitle the holder thereof to one
vote on each matter properly submitted to the shareholders for their vote,
consent, waiver, release or other action. No shareholder of the corporation
shall have, as a matter of right, the right to vote cumulatively in the election
of directors.
The directors of the corporation may adopt an amendment to the Third
Amended and Restated of Incorporation determining the express terms, within the
limits set forth in Chapter 1701 of the Ohio Revised Code, of any class of
shares before the issuance of any shares of that class, or of one or more series
within a class before the issuance of any shares of that series. No vote of the
holders of Common Shares, as a class, shall be required in connection with the
authorization by the directors of shares of any class, or series of any class,
that are convertible into Common Shares.
FIFTH: The directors of the corporation shall have the power to cause
the corporation from time to time and at any time to purchase, hold, sell,
transfer or otherwise deal with (A) shares of any class or series issued by it,
(B) any security or other obligation of the corporation which may confer upon
the holder thereof the right to convert the same into shares of any class or
series authorized by the articles of the corporation, and (C) any security or
other obligation which may confer upon the holder
<PAGE>
thereof the right to purchase shares of any class or series authorized by the
articles of the corporation. The corporation shall have the right to repurchase,
if and when any shareholder desires to sell, or on the happening of any event is
required to sell, shares of any class or series issued by the corporation. The
authority granted in this ARTICLE FIFTH of these Amended Articles shall not
limit the plenary authority of the directors to purchase, hold, sell, transfer
or otherwise deal with shares of any class or series, securities, or other
obligations issued by the corporation or authorized by its articles.
SIXTH: No shareholder of the corporation shall have, as a matter of
right, the right to vote cumulatively in the election of directors.
SEVENTH: No shareholder of the corporation shall have, as a matter
of right, the pre-emptive right to subscribe for or purchase any part of any
new or additional issue of shares of any class whatsoever, or of securities
convertible into any shares of any class whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration or by way of a
dividend.
EIGHTH: Section 1701.831 of the Ohio Revised Code does not apply to
control share acquisitions of shares of the corporation.
NINTH: These Third Amended and Restated Articles of Incorporation take
the place of and supersede the Second Amended and Restated Articles of
Incorporation of the corporation.
-2-
<PAGE>
AMENDED AND RESTATED
CODE OF REGULATIONS
OF
DPEC, INC.
December 29, 1999
<PAGE>
AMENDED AND RESTATED
CODE OF REGULATIONS
OF
DPEC, INC.
INDEX
<TABLE>
<S> <C>
ARTICLE ONE.......................................................................................................1
MEETINGS OF SHAREHOLDERS..........................................................................................1
SECTION 1.01. ANNUAL MEETINGS...........................................................................1
SECTION 1.02. CALLING OF MEETINGS.......................................................................1
SECTION 1.03. PLACE OF MEETINGS.........................................................................1
SECTION 1.04. NOTICE OF MEETINGS........................................................................2
SECTION 1.05. WAIVER OF NOTICE..........................................................................3
SECTION 1.06. QUORUM....................................................................................3
SECTION 1.07. VOTES REQUIRED............................................................................3
SECTION 1.08. ORDER OF BUSINESS.........................................................................3
SECTION 1.09. SHAREHOLDERS ENTITLED TO VOTE.............................................................4
SECTION 1.10. PROXIES...................................................................................4
SECTION 1.11. INSPECTORS OF ELECTION....................................................................4
ARTICLE TWO.......................................................................................................5
DIRECTORS.........................................................................................................5
SECTION 2.01. AUTHORITY AND QUALIFICATIONS..............................................................5
SECTION 2.02. NUMBER OF DIRECTORS AND TERM OF OFFICE....................................................5
SECTION 2.03. ELECTION..................................................................................6
SECTION 2.04. REMOVAL...................................................................................6
SECTION 2.05. VACANCIES.................................................................................6
SECTION 2.06. MEETINGS..................................................................................7
SECTION 2.07. NOTICE OF MEETINGS........................................................................7
SECTION 2.08. WAIVER OF NOTICE..........................................................................8
SECTION 2.09. QUORUM....................................................................................8
SECTION 2.10. COMPENSATION..............................................................................8
SECTION 2.11. BY-LAWS...................................................................................9
ARTICLE THREE.....................................................................................................9
COMMITTEES........................................................................................................9
SECTION 3.01. DESIGNATION OF COMMITTEES.................................................................9
SECTION 3.02. AUTHORITY.................................................................................9
SECTION 3.03. COMPENSATION COMMITTEE....................................................................9
SECTION 3.04. AUDIT COMMITTEE..........................................................................10
SECTION 3.05. OTHER COMMITTEES.........................................................................11
ARTICLE FOUR.....................................................................................................11
OFFICERS.........................................................................................................11
SECTION 4.01. OFFICERS.................................................................................11
SECTION 4.02. TENURE OF OFFICE.........................................................................12
SECTION 4.03. DUTIES OF THE CHAIRMAN OF THE BOARD......................................................12
ii
<PAGE>
SECTION 4.04. DUTIES OF THE PRESIDENT..................................................................12
SECTION 4.05. DUTIES OF THE VICE PRESIDENTS............................................................12
SECTION 4.06. DUTIES OF THE SECRETARY..................................................................13
SECTION 4.07. DUTIES OF THE TREASURER..................................................................13
ARTICLE FIVE.....................................................................................................14
SHARES...........................................................................................................14
SECTION 5.01. CERTIFICATES.............................................................................14
SECTION 5.02. TRANSFERS................................................................................14
SECTION 5.03. TRANSFER AGENTS AND REGISTRARS...........................................................15
SECTION 5.04. LOST, WRONGFULLY TAKEN OR DESTROYED CERTIFICATES.........................................15
ARTICLE SIX......................................................................................................16
INDEMNIFICATION AND INSURANCE....................................................................................16
SECTION 6.01. MANDATORY INDEMNIFICATION................................................................16
SECTION 6.02. COURT-APPROVED INDEMNIFICATION...........................................................17
SECTION 6.03. INDEMNIFICATION FOR EXPENSES.............................................................17
SECTION 6.04. DETERMINATION REQUIRED...................................................................18
SECTION 6.05. ADVANCES FOR EXPENSES....................................................................19
SECTION 6.06. ARTICLE FIVE NOT EXCLUSIVE...............................................................20
SECTION 6.07. INSURANCE................................................................................20
SECTION 6.08. CERTAIN DEFINITIONS......................................................................20
SECTION 6.09. VENUE....................................................................................21
ARTICLE SEVEN....................................................................................................22
MISCELLANEOUS....................................................................................................22
SECTION 7.01. AMENDMENTS...............................................................................22
SECTION 7.02. ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING....................................22
SECTION 7.03. SEAL.....................................................................................22
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
CODE OF REGULATIONS
OF
DPEC, INC.
ARTICLE ONE
MEETINGS OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETINGS. The annual meeting of the shareholders
for the election of directors, for the consideration of reports to be laid
before such meeting and for the transaction of such other business as may
properly come before such meeting, shall be held on the second Tuesday of April
in each year or on such other date as may be fixed from time to time by the
directors.
SECTION 1.02. CALLING OF MEETINGS. Meetings of the shareholders may be
called only by the chairman of the board, the president, or, in case of the
president's absence, death, or disability, the vice president authorized to
exercise the authority of the president; the secretary; the directors by action
at a meeting, or a majority of the directors acting without a meeting; or the
holders of shares outstanding and entitled to vote thereat entitling them to
exercise not less than 10% of the voting power of the corporation.
SECTION 1.03. PLACE OF MEETINGS. All meetings of shareholders shall be
held at the principal office of the corporation, unless otherwise provided by
action of the directors. Meetings of shareholders may be held at any place
within or without the State of Ohio.
<PAGE>
SECTION 1.04. NOTICE OF MEETINGS. (A) Written notice stating the time,
place and purposes of a meeting of the shareholders shall be given either by
personal delivery or by mail not less than seven nor more than sixty days before
the date of the meeting, (1) to each shareholder of record entitled to notice of
the meeting, (2) by or at the direction of the president or the secretary. If
mailed, such notice shall be addressed to the shareholder at his address as it
appears on the records of the corporation. Notice of adjournment of a meeting
need not be given if the time and place to which it is adjourned are fixed and
announced at such meeting. In the event of a transfer of shares after the record
date for determining the shareholders who are entitled to receive notice of a
meeting of shareholders, it shall not be necessary to give notice to the
transferee. Nothing herein contained shall prevent the setting of a record date
in the manner provided by law, the Articles or the Regulations for the
determination of shareholders who are entitled to receive notice of or to vote
at any meeting of shareholders or for any purpose required or permitted by law.
(B) Following receipt by the president or the secretary of a request in
writing, specifying the purpose or purposes for which the persons properly
making such request have called a meeting of the shareholders, delivered either
in person or by registered mail to such officer by any persons entitled to call
a meeting of shareholders, such officer shall cause to be given to the
shareholders entitled thereto notice of a meeting to be held on a date not less
than seven nor more than sixty days after the receipt of such request, as such
officer may fix. If such notice is not given within fifteen days after the
receipt of such request by the president or the secretary, then, and only then,
the persons properly calling the meeting may fix the time of meeting and give
notice thereof in accordance with the provisions of the Amended Code of
Regulations (the "Regulations").
2
<PAGE>
SECTION 1.05. WAIVER OF NOTICE. Notice of the time, place and purpose
or purposes of any meeting of shareholders may be waived in writing, either
before or after the holding of such meeting, by any shareholders, which writing
shall be filed with or entered upon the records of such meeting. The attendance
of any shareholder, in person or by proxy, at any such meeting without
protesting the lack of proper notice, prior to or at the commencement of the
meeting, shall be deemed to be a waiver by such shareholder of notice of such
meeting.
SECTION 1.06. QUORUM. At any meeting of shareholders, the holders of
shares of the corporation then outstanding and entitled to vote thereat
entitling them to exercise not less than a majority of the voting power of the
corporation, present in person or by proxy, shall constitute a quorum for such
meeting. The holders of shares entitling them to exercise not less than a
majority of the voting power of the shares represented at a meeting, whether or
not a quorum is present, or the chairman of the board, the president, or the
officer of the corporation acting as chairman of the meeting, may adjourn such
meeting from time to time, and if a quorum is present at such adjourned meeting
any business may be transacted as if the meeting had been held as originally
called.
SECTION 1.07. VOTES REQUIRED. At all elections of directors the
candidates receiving the greatest number of votes shall be elected. Any other
matter submitted to the shareholders for their vote shall be decided by the vote
of such proportion of the shares, or of any class of shares, or of each class,
as is required by law, the Articles or the Regulations.
SECTION 1.08. ORDER OF BUSINESS. The order of business at any meeting
of shareholders shall be determined by the officer of the corporation acting as
chairman of such meeting unless otherwise determined by a vote of the holders of
a majority of the shares of the
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corporation then outstanding, present in person or by proxy, entitled to vote at
such meeting and entitling them to exercise not less than a majority of the
voting power of the corporation.
SECTION 1.09. SHAREHOLDERS ENTITLED TO VOTE. Except as otherwise
provided in the Articles, each shareholder of record on the books of the
corporation on the record date for determining the shareholders who are entitled
to vote at a meeting of shareholders shall be entitled at such meeting to one
vote for each share of the corporation standing in his name on the books of the
corporation on such record date. The directors may fix a record date for the
determination of the shareholders who are entitled to receive notice of and to
vote at a meeting of shareholders, which record date shall not be a date earlier
than the date on which the record date is fixed and which record date may be a
maximum of sixty days preceding the date of the meeting of shareholders.
SECTION 1.10. PROXIES. At meetings of the shareholders any shareholder
of record entitled to vote thereat may be represented and may vote by a proxy or
proxies appointed by an instrument in writing signed by such shareholder, but
such instrument shall be filed with the secretary of the meeting before the
person holding such proxy shall be allowed to vote thereunder. No proxy shall be
valid after the expiration of eleven months after the date of its execution,
unless the shareholder executing it shall have specified therein the length of
time it is to continue in force.
SECTION 1.11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the directors may appoint inspectors of election to act at such
meeting or any adjournment thereof; if inspectors are not so appointed, the
officer of the corporation acting as chairman of any such meeting may make such
appointment. In case any person appointed as inspector fails to appear or act,
the vacancy may be filled only by appointment made by the
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directors in advance of such meeting or, if not so filled, at the meeting by the
officer of the corporation acting as chairman of such meeting. No other person
or persons may appoint or require the appointment of inspectors of election.
ARTICLE TWO
DIRECTORS
SECTION 2.01. AUTHORITY AND QUALIFICATIONS. Except where the law, the
Articles or the Regulations otherwise provide, all authority of the corporation
shall be vested in and exercised by its directors. Directors need not be
shareholders of the corporation.
SECTION 2.02. NUMBER OF DIRECTORS AND TERM OF OFFICE.
(A) Until changed in accordance with the provisions of the Regulations,
the number of directors of the corporation shall be seven.* Each director shall
be elected to serve until the next annual meeting of shareholders and until his
successor is duly elected and qualified or until his earlier resignation,
removal from office, or death.
(B) The number of directors may be fixed or changed at a meeting of the
shareholders called for the purpose of electing directors at which a quorum is
present, only by the affirmative vote of the holders of shares which are
represented at the meeting, in person or by proxy, entitled to vote on such
proposal and entitling them to exercise not less than a majority of the voting
power of the corporation in the election of directors.
(C) The directors may fix or change the number of directors and may
fill
- -------------
* Pursuant to Actions by All of the Shareholders of DPEC, Inc. Without a
Meeting, effective August 27, 1999, the number of directors of the corporation
was changed from five to seven.
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any director's office that is created by an increase in the number of directors;
provided, however, that the directors may not increase the number of directors
to more than seven nor reduce the number of directors to less than five.
(D) No reduction in the number of directors shall of itself have the
effect of shortening the term of any incumbent director.
SECTION 2.03. ELECTION. At each annual meeting of shareholders for the
election of directors, the successors to the directors whose term shall expire
in that year shall be elected, but if the annual meeting is not held or if one
or more of such directors are not elected thereat, they may be elected at a
special meeting called for that purpose. The election of directors shall be by
ballot whenever requested by the presiding officer of the meeting or by the
holders of shares outstanding, entitled to vote at such meeting and present in
person or by proxy entitling them to exercise not less than a majority of the
voting power of the corporation in the election of directors, but unless such
request is made, the election shall be viva voce.
SECTION 2.04. REMOVAL. A director or directors may be removed from
office, with or without assigning any cause, only by the vote of the holders of
shares entitling them to exercise not less than a majority of the voting power
of the corporation to elect directors in place of those to be removed. In case
of any such removal, a new director may be elected at the same meeting for the
unexpired term of each director removed. Failure to elect a director to fill the
unexpired term of any director removed shall be deemed to create a vacancy in
the board.
SECTION 2.05. VACANCIES. The remaining directors, though less than a
majority of the whole authorized number of directors, may, by the vote of a
majority of their number, fill any vacancy in the board for the unexpired term.
A vacancy in the board exists within the meaning of this Section 2.05 in case
the shareholders increase the authorized number
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of directors but fail at the meeting at which such increase is authorized, or an
adjournment thereof, to elect the additional directors provided for, or in case
the shareholders fail at any time to elect the whole authorized number of
directors.
SECTION 2.06. MEETINGS. A meeting of the directors shall be held
immediately following the adjournment of each annual meeting of shareholders at
which directors are elected, and notice of such meeting need not be given. The
directors shall hold such other meetings as may from time to time be called, and
such other meetings of directors may be called only by the chairman of the
board, the president, or any director. All meetings of directors shall be held
at the principal office of the corporation or at such other place within or
without the State of Ohio, as the directors may from time to time determine by a
resolution. Meetings of the directors may be held through any communications
equipment if all persons participating can hear each other and participation in
a meeting pursuant to this provision shall constitute presence at such meeting.
SECTION 2.07. NOTICE OF MEETINGS. Notice of the time and place of each
meeting of directors for which such notice is required by law, the Articles, the
Regulations or the By-Laws shall be given to each of the directors by at least
one of the following methods:
(A) In a writing mailed not less than three days before such
meeting and addressed to the residence or usual place of
business of a director, as such address appears on the records
of the corporation; or
(B) By telegraph, cable, radio, wireless, or a writing sent or
delivered to the residence or usual place of business of a
director as the same appears on the records of the
corporation, not later than the day before the date on which
such meeting is to be held; or
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(C) Personally or by telephone not later than the day before the
date on which such meeting is to be held.
Notice given to a director by any one of the methods specified in the
Regulations shall be sufficient, and the method of giving notice to all
directors need not be uniform. Notice of any meeting of directors may be given
only by the chairman of the board, the president or the secretary of the
corporation. Any such notice need not specify the purpose or purposes of the
meeting. Notice of adjournment of a meeting of directors need not be given if
the time and place to which it is adjourned are fixed and announced at such
meeting.
SECTION 2.08. WAIVER OF NOTICE. Notice of any meeting of directors may
be waived in writing, either before or after the holding of such meeting, by any
director, which writing shall be filed with or entered upon the records of the
meeting. The attendance of any director at any meeting of directors without
protesting, prior to or at the commencement of the meeting, the lack of proper
notice, shall be deemed to be a waiver by him of notice of such meeting.
SECTION 2.09. QUORUM. A majority of the whole authorized number of
directors shall be necessary to constitute a quorum for a meeting of directors,
except that a majority of the directors in office shall constitute a quorum for
filling a vacancy in the board. The act of a majority of the directors present
at a meeting at which a quorum is present is the act of the board, except as
otherwise provided by law, the Articles or the Regulations.
SECTION 2.10. COMPENSATION. Directors shall be entitled to receive as
compensation for services rendered and expenses incurred as directors, such
amounts as the directors may determine.
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SECTION 2.11. BY-LAWS. The directors may adopt, and amend from time to
time, By-Laws for their own government, which By-Laws shall not be inconsistent
with the law, the Articles or the Regulations.
ARTICLE THREE
COMMITTEES
SECTION 3.01. DESIGNATION OF COMMITTEES. There shall be a Compensation
Committee and an Audit Committee and such other committees, including an
Executive Committee, as the directors may create. Such committees shall
undertake the responsibilities designated in the Regulations, or if not
designated in the Regulations, designated by the directors.
SECTION 3.02. AUTHORITY. Each such committee shall serve at the
pleasure of the board of directors, shall act only in intervals between meetings
of directors, and shall be subject to the control and direction of the board of
directors. Any act or authorization of any act by a committee shall be as
effective for all purposes as the act or authorization of the directors. No
notice of a meeting of a committee shall be required. A meeting of a committee
of directors may be called by the chairman, the president or by a member of such
committee of directors. A committee of directors may act by a majority of its
members at a meeting or by a writing or writings signed by all of its members.
Meetings of a committee of directors may be held through any communications
equipment if all persons participating can hear each other and participation in
such a meeting shall constitute presence thereat.
SECTION 3.03. COMPENSATION COMMITTEE. The Compensation Committee shall
consist of three directors. So long as a Qualified IPO (as such term is defined
in the Articles) has
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not yet occurred and the Preferred Holders (as such term is defined in Section
11.2 of the Series C 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, the corporation and Carol A. Clark),
individually or in the aggregate, hold capital stock of the corporation in the
form of senior convertible preferred stock, series B preferred stock, series C
preferred stock, common stock, warrant to purchase 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 occurring at any time
after the initial issuance of series C preferred stock) of common stock (the
"Minimum Interest"), at least two of the members of the Compensation Committee
shall be non-employee (and not related to an employee) directors and one of
those two shall be designated by the Preferred Holders.* The Compensation
Committee shall be responsible for initiating all decisions regarding the
compensation of the directors, executive officers and senior management of the
corporation, including, but not limited to, all decisions regarding salary
increases, bonus awards, perquisites and stock option awards for such persons,
and shall undertake such other responsibilities as the board of directors may
from time to time designate.
SECTION 3.04. AUDIT COMMITTEE. The Audit Committee shall consist of
three directors. So long as a Qualified IPO has not yet occurred and the
Preferred Holders hold a Minimum Interest, at least two of the members of the
Audit Committee shall be non-employee (and not related to an employee) directors
and one of those two shall be designated by the
- -----------
* Pursuant to Actions by All of the Shareholders of DPEC, Inc. Without a
Meeting, effective December 29, 1999, the second sentence of Section 3.03 was
amended to reflect the issuance of series C convertible preferred stock under
the terms of the Series C 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, the corporation and Carol A.
Clark.
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Preferred Holders. The Audit Committee shall supervise the annual audit of the
corporation and shall undertake such other responsibilities as the board of
directors may from time to time designate.
SECTION 3.05. OTHER COMMITTEES. The directors may create an executive
or any other committee of directors, to consist of not less than three directors
or such lesser number as, from time to time, shall be permitted pursuant to the
laws of the State of Ohio, and may authorize the delegation to such executive
committee or other committees of any of the authority of the directors, however
conferred, other than that of filling vacancies among the directors or in any
committee of directors.
ARTICLE FOUR
OFFICERS
SECTION 4.01. OFFICERS. The officers of the corporation to be elected
by the directors shall be a president, a secretary, a treasurer, and, if
desired, one or more vice presidents and such other officers and assistant
officers as the directors may from time to time elect. The directors may elect a
chairman of the board, who must be a director. Officers need not be shareholders
of the corporation, and may be paid such compensation as the board of directors
may determine. Any two or more offices may be held by the same person, but no
officer shall execute, acknowledge, or verify any instrument in more than one
capacity if such instrument is required by law, the Articles, the Regulations or
the By-Laws to be executed, acknowledged, or verified by two or more officers.
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SECTION 4.02. TENURE OF OFFICE. The officers of the corporation shall
hold office at the pleasure of the directors. Any officer of the corporation may
be removed, either with or without cause, at any time, by the affirmative vote
of a majority of all the directors then in office; such removal, however, shall
be without prejudice to the contract rights, if any, of the person so removed.
SECTION 4.03. DUTIES OF THE CHAIRMAN OF THE BOARD. The chairman of the
board, if any, shall preside at all meetings of the directors. The chairman
shall have such other powers and duties as the directors shall from time to time
assign to the office.
SECTION 4.04. DUTIES OF THE PRESIDENT. The president shall be the chief
executive officer of the corporation and shall exercise supervision over the
business of the corporation and shall have, among such additional powers and
duties as the directors may from time to time assign to him, the power and
authority to sign all certificates evidencing shares of the corporation and all
deeds, mortgages, bonds, contracts, notes and other instruments requiring the
signature of the president of the corporation. It shall be the duty of the
president to preside at all meetings of shareholders.
SECTION 4.05. DUTIES OF THE VICE PRESIDENTS. In the absence of the
president or in the event of his inability or refusal to act, the vice
president, if any (or in the event there be more than one vice president, the
vice presidents in the order designated, or in the absence of any designation,
then in the order of their election), shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all
restrictions upon the president. The vice presidents shall perform such other
duties and have such other powers as the directors may from time to time
prescribe.
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SECTION 4.06. DUTIES OF THE SECRETARY. It shall be the duty of the
secretary, or of an assistant secretary, if any, in case of the absence or
inability to act of the secretary, to keep minutes of all the proceedings of the
shareholders and the directors and to make a proper record of the same; to
perform such other duties as may be required by law, the Articles or the
Regulations; to perform such other and further duties as may from time to time
be assigned to him by the directors or the president; and to deliver all books,
paper and property of the corporation in his possession to his successor, or to
the president.
SECTION 4.07. DUTIES OF THE TREASURER. The treasurer, or an assistant
treasurer, if any, in case of the absence or inability to act of the treasurer,
shall receive and safely keep in charge all money, bills, notes, choses in
action, securities and similar property belonging to the corporation, and shall
do with or disburse the same as directed by the president or the directors;
shall keep an accurate account of the finances and business of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, stated capital and shares, together with such other accounts as may be
required and hold the same open for inspection and examination by the directors;
shall give bond in such sum with such security as the directors may require for
the faithful performance of his duties; shall, upon the expiration of his term
of office, deliver all money and other property of the corporation in his
possession or custody to his successor or the president; and shall perform such
other duties as from time to time may be assigned to him by the directors.
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ARTICLE FIVE
SHARES
SECTION 5.01. CERTIFICATES. Certificates evidencing ownership of shares
of the corporation shall be issued to those entitled to them. Each certificate
evidencing shares of the corporation shall bear a distinguishing number; the
signatures of the chairman of the board, the president, or a vice president, and
of the secretary or an assistant secretary (except that when any such
certificate is countersigned by an incorporated transfer agent or registrar,
such signatures may be facsimile, engraved, stamped or printed); and such
recitals as may be required by law. Certificates evidencing shares of the
corporation shall be of such tenor and design as the directors may from time to
time adopt and may bear such recitals as are permitted by law.
SECTION 5.02. TRANSFERS. Where a certificate evidencing a share or
shares of the corporation is presented to the corporation or its proper agents
with a request to register transfer, the transfer shall be registered as
requested if:
(1) An appropriate person signs on each certificate so presented or
signs on a separate document an assignment or transfer of shares evidenced by
each such certificate, or signs a power to assign or transfer such shares, or
when the signature of an appropriate person is written without more on the back
of each such certificate; and
(2) Reasonable assurance is given that the endorsement of each
appropriate person is genuine and effective; the corporation or its agents may
refuse to register a transfer of shares unless the signature of each appropriate
person is guaranteed by a commercial bank or trust company having an office or a
correspondent in the City of New York or by a firm having membership in the New
York Stock Exchange; and
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(3) All applicable laws relating to the collection of transfer or other
taxes have been complied with; and
(4) The corporation or its agents are not otherwise required or
permitted to refuse to register such transfer.
SECTION 5.03. TRANSFER AGENTS AND REGISTRARS. The directors may appoint
one or more agents to transfer or to register shares of the corporation, or
both.
SECTION 5.04. LOST, WRONGFULLY TAKEN OR DESTROYED CERTIFICATES. Except
as otherwise provided by law, where the owner of a certificate evidencing shares
of the corporation claims that such certificate has been lost, destroyed or
wrongfully taken, the directors must cause the corporation to issue a new
certificate in place of the original certificate if the owner:
(1) So requests before the corporation has notice that such original
certificate has been acquired by a bona fide purchaser; and
(2) Files with the corporation, unless waived by the directors, an
indemnity bond, with surety or sureties satisfactory to the corporation, in such
sums as the directors may, in their discretion, deem reasonably sufficient as
indemnity against any loss or liability that the corporation may incur by reason
of the issuance of each such new certificate; and
(3) Satisfies any other reasonable requirements which may be imposed by
the directors, in their discretion.
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ARTICLE SIX
INDEMNIFICATION AND INSURANCE
SECTION 6.01. 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, agent or volunteer of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee,
member, manager, agent or volunteer 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 his act or omission
giving rise to any claim for indemnification under this Section 6.01 was not
occasioned by his intent to cause injury to the corporation or by his reckless
disregard for the best interests of the corporation, and in respect of any
criminal action or proceeding, he had no reasonable cause to believe his conduct
was unlawful. It shall be presumed that no act or omission of a person claiming
indemnification under this Section 6.01 that gives rise to such claim was
occasioned by an intent to cause injury to the corporation or by a reckless
disregard for the best interests of the corporation and, in respect of any
criminal matter, that such person had no reasonable cause to believe his conduct
was unlawful; the presumption recited in this Section 6.01 can be rebutted only
by clear and convincing evidence,
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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.
SECTION 6.02. COURT-APPROVED INDEMNIFICATION. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted 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, agent or volunteer of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, member, manager, agent or volunteer of
another corporation (domestic or foreign, nonprofit or for profit), limited
liability company, partnership, joint venture, trust or other enterprise, in
respect of any claim, issue or matter asserted in such action or suit as to
which he shall have been adjudged to be liable for an act or omission occasioned
by his deliberate intent to cause injury to the corporation or by his reckless
disregard for the best interests of the corporation, unless and only to the
extent that the Court of Common Pleas of Franklin County, Ohio or the court in
which such action or suit was brought shall determine upon application that,
despite such adjudication of liability, and in view of all the circumstances of
the case, he is fairly and reasonably entitled to such indemnity as such Court
of Common Pleas or such other court shall deem proper; and
(B) the corporation shall promptly make any such unpaid indemnification
as is determined by a court to be proper as contemplated by this Section 6.02.
SECTION 6.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director
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of the corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Section 6.01, or in defense of any
claim, issue or matter therein, he shall be promptly indemnified by the
corporation against expenses (including, without limitation, attorneys' fees,
filing fees, court reporters' fees and transcript costs) actually and reasonably
incurred by him in connection therewith.
SECTION 6.04. DETERMINATION REQUIRED. Any indemnification required
under Section 6.01 and not precluded under Section 6.02 shall be made by the
corporation only upon a determination that such indemnification is proper in
the circumstances because the officer or director has met the applicable
standard of conduct set forth in Section 6.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority 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, or (C) by the Court of Common Pleas of Franklin County, Ohio
or (if the corporation is a party thereto) the court in which such action,
suit or proceeding was brought, if any; any such determination may be made by
a court under division (C) of this Section 6.04 at any time [including, without
limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been
denied or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) of this Section 6.04]; and no
failure for any reason to make any such determination, and no decision for
any reason to deny any such determination, by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 6.04]; and no failure for any reason to make any such determination,
and no decision for any reason to deny any such determination, by the
disinterested directors under division (A) or by independent legal counsel
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under division (B) of this Section 6.04 shall be evidence in rebuttal of the
presumption recited in Section 6.01. Any determination made by the
disinterested directors under division (A) or by independent legal counsel
under division (B) of this Section 6.04 to make indemnification in respect of
any claim, issue or matter asserted in an action or suit threatened or
brought by or in the right of the corporation shall be promptly communicated
to the person who threatened or brought such action or suit, and within ten
(10) days after receipt of such notification such person shall have the right
to petition the Court of Common Pleas of Franklin County, Ohio or the court
in which such action or suit was brought, if any, to review the
reasonableness of such determination.
SECTION 6.05. ADVANCES FOR EXPENSES. The provisions of Section
1701.13(E)(5)(a) of the Ohio Revised Code do not apply to the corporation.
Expenses (including, without limitation, attorneys' fees, filing fees, court
reporters' fees and transcript costs) incurred in defending any action, suit or
proceeding referred to in Section 6.01 shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding to or on
behalf of the officer or director promptly as such expenses are incurred by him,
but only if such officer or director shall first agree, in writing, to repay all
amounts so paid in respect of any claim, issue or other matter asserted in such
action, suit or proceeding in defense of which he shall not have been successful
on the merits or otherwise if it is proved by clear and convincing evidence in a
court of competent jurisdiction that, in respect of any such claim, issue or
other matter, his relevant action or failure to act was occasioned by his
deliberate intent to cause injury to the corporation or his reckless disregard
for the best interests of the corporation, unless, and only to the extent that,
the Court of Common Pleas of Franklin County, Ohio or the court in which such
action or suit was brought shall determine upon application that, despite such
determination, and
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in view of all of the circumstances, he is fairly and reasonably entitled to all
or part of such indemnification.
SECTION 6.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided
by this Article Six shall not be exclusive of, and shall be in addition to, any
other rights to which any person seeking indemnification may be entitled under
the Articles, the Regulations, any agreement, a vote of disinterested directors,
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be an officer or director of the corporation and shall inure
to the benefit of the heirs, executors, and administrators of such a person.
SECTION 6.07. INSURANCE. The corporation may purchase and maintain
insurance, or furnish similar protection, including but not limited to trust
funds, letters of credit, or self-insurance, for or on behalf of any person who
is or was a director, officer, employee, agent or volunteer of the corporation,
or is or was serving at the request of the corporation as a director, trustee,
officer, employee, member, manager, agent or volunteer of another corporation
(domestic or foreign, nonprofit or for profit), limited liability company,
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 obligation or
the power to indemnify him against such liability under the provisions of this
Article Five. Insurance may be purchased from or maintained with a person in
which the corporation has a financial interest.
SECTION 6.08. CERTAIN DEFINITIONS. For purposes of this Article Six,
and as an example and not by way of limitation:
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(A) A person claiming indemnification under this Article Six shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 6.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry of
a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in settlement thereof (whether or not any such termination is based upon
a judicial or other determination of the lack of merit of the claims made
against him or otherwise results in a vindication of him).
(B) References to an "other enterprise" shall include employee tax
benefit plans; references to a "fine" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries.
SECTION 6.09. VENUE. Any action, suit or proceeding to determine a
claim for, or for repayment to the corporation of, indemnification under this
Article Six may be maintained by the person claiming such indemnification, or by
the corporation, in the Court of Common Pleas of Franklin County, Ohio. The
corporation and (by claiming or accepting such indemnification) each such person
consent to the exercise of jurisdiction over its or his person by the Court of
Common Pleas of Franklin County, Ohio in any such action, suit or proceeding.
21
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ARTICLE SEVEN
MISCELLANEOUS
SECTION 7.01. AMENDMENTS. The Regulations may be amended, or new
regulations may be adopted, at a meeting of shareholders held for such purpose,
only by the affirmative vote of the holders of shares entitling them to exercise
not less than a majority of the voting power of the corporation on such
proposal, or without a meeting by the written consent of the holders of shares
entitling them to exercise not less than a majority of the voting power of the
corporation on such proposal.
SECTION 7.02. ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING.
Anything contained in the Regulations to the contrary notwithstanding, except as
provided in Section 7.01, any action which may be authorized or taken at a
meeting of the shareholders or of the directors or of a committee of the
directors, as the case may be, may be authorized or taken without a meeting with
the affirmative vote or approval of, and in a writing or writings signed by, all
the shareholders who would be entitled to notice of a meeting of the
shareholders held for such purpose, or all the directors, or all the members of
such committee of the directors, respectively, which writings shall be filed
with or entered upon the records of the corporation.
SECTION 7.03. SEAL. The seal of the corporation, if any, shall be
circular, about two inches in diameter, with the name of the corporation
engraved around the margin and the word "SEAL" engraved across the center.
22
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SECOND AMENDED AND RESTATED
CODE OF REGULATIONS
OF
MINDLEADERS.COM, INC.
INDEX
ARTICLE ONE
MEETINGS OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETINGS
Section 1.02. Calling of Meetings..........................................1
Section 1.03. Place of Meetings............................................1
Section 1.04. Notice of Meetings...........................................1
Section 1.05. Waiver of Notice.............................................2
Section 1.06. Quorum.......................................................2
Section 1.07. Votes Required...............................................3
Section 1.08. Order of Business............................................3
Section 1.09. Shareholders Entitled to Vote................................3
Section 1.10. Proxies......................................................3
Section 1.11. Inspectors of Election.......................................3
ARTICLE TWO
DIRECTORS
Section 2.01. Authority and Qualifications.................................4
Section 2.02. Number of Directors and Term of Office.......................4
Section 2.03. Election.....................................................4
Section 2.04. Nominations..................................................4
Section 2.05. Removal......................................................5
Section 2.06. Vacancies....................................................5
Section 2.07. Meetings.....................................................5
Section 2.08. Notice of Meetings...........................................6
Section 2.09. Waiver of Notice.............................................6
Section 2.10. Quorum.......................................................6
Section 2.11. Executive Committee..........................................6
Section 2.12. Compensation.................................................7
Section 2.13. By-Laws......................................................7
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ARTICLE THREE
OFFICERS
Section 3.01. Officers.....................................................8
Section 3.02. Tenure of Office.............................................8
Section 3.03. Duties of the Chairperson of the Board.......................8
Section 3.04. Duties of the President......................................8
Section 3.05. Duties of the Vice Presidents................................8
Section 3.06. Duties of the Secretary......................................8
Section 3.07. Duties of the Treasurer......................................9
ARTICLE FOUR
SHARES
Section 4.01. Certificates.................................................9
Section 4.02. Transfers....................................................9
Section 4.03. Transfer Agents and Registrars..............................10
Section 4.04. Lost, Wrongfully Taken or Destroyed Certificates............10
Section 4.05. Uncertificated Shares.......................................10
ARTICLE FIVE
INDEMNIFICATION AND INSURANCE
Section 5.01. Mandatory Indemnification...................................11
Section 5.02. Court-Approved Indemnification..............................11
Section 5.03. Indemnification for Expenses................................12
Section 5.04. Determination Required......................................12
Section 5.05. Advances for Expenses.......................................12
Section 5.06. Article FIVE Not Exclusive..................................13
Section 5.07. Insurance...................................................13
Section 5.08. Certain Definitions.........................................13
Section 5.09. Venue.......................................................14
ARTICLE SIX
MISCELLANEOUS
Section 6.01. Amendments..................................................14
Section 6.02. Action by Shareholders or Directors Without a Meeting.......15
ii
<PAGE>
SECOND AMENDED AND RESTATED
CODE OF REGULATIONS
OF
MINDLEADERS.COM, INC.
ARTICLE ONE
MEETINGS OF SHAREHOLDERS
SECTION 1.01. ANNUAL MEETINGS. The annual meeting of the shareholders
for the election of directors, for the consideration of reports to be laid
before such meeting and for the transaction of such other business as may
properly come before such meeting, shall be held on the fourth Monday in May in
each year or on such other date as may be fixed from time to time by the
directors.
SECTION 1.02. CALLING OF MEETINGS. Meetings of the shareholders may be
called only by the chairperson of the board, the president, or, in case of the
president's absence, death, or disability, the vice president authorized to
exercise the authority of the president; the secretary; the directors by action
at a meeting, or a majority of the directors acting without a meeting; or the
holders of at least fifty percent (50%) of all shares outstanding and entitled
to vote thereat.
SECTION 1.03. PLACE OF MEETINGS. All meetings of shareholders shall be
held at the principal office of the corporation, unless otherwise provided by
action of the directors. Meetings of shareholders may be held at any place
within or without the State of Ohio.
SECTION 1.04. NOTICE OF MEETINGS.
(A) Written notice stating the time, place and purposes of a meeting
of the shareholders shall be given either by personal delivery or by mail not
less than seven nor more than sixty days before the date of the meeting, (1)
to each shareholder of record entitled to notice of the meeting, (2) by or at
the direction of the president or the secretary. If mailed, such notice shall
be addressed to the shareholder at his address as it appears on the records
of the corporation. Notice of adjournment of a meeting need not be given if
the time and place to which it is adjourned are fixed and announced at such
meeting. In the event of a transfer of shares after the record date for
determining the shareholders who are entitled to receive notice of a meeting
of shareholders, it shall not be necessary to give notice to the transferee.
Nothing herein contained shall prevent the setting of a record date in the
manner provided by law, the Articles or the Regulations for the determination
of shareholders who are entitled to receive
<PAGE>
notice of or to vote at any meeting of shareholders or for any purpose
required or permitted by law.
(B) Following receipt by the president or the secretary of a request in
writing, specifying the purpose or purposes for which the persons properly
making such request have called a meeting of the shareholders, delivered either
in person or by registered mail to such officer by any persons entitled to call
a meeting of shareholders, such officer shall cause to be given to the
shareholders entitled thereto notice of a meeting to be held on a date not less
than seven nor more than sixty days after the receipt of such request, as such
officer may fix. If such notice is not given within fifteen days after the
receipt of such request by the president or the secretary, then, and only then,
the persons properly calling the meeting may fix the time of meeting and give
notice thereof in accordance with the provisions of the Regulations.
(C) A shareholder seeking to bring business before an annual meeting of
the shareholders shall provide written notice thereof to the Secretary of the
corporation, stating his intent and the subject of business. Such notice shall
be personally delivered to, or mailed by United States mail, postage prepaid,
and received at, the principal executive offices of the corporation not less
than sixty, nor more than ninety days, prior to the date of the annual meeting.
If, however, notice or public disclosure of the date of the annual meeting is
given or made less than seventy days prior to the annual meeting, then written
notice by the shareholder must be received by the Secretary of the corporation
no later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. Notwithstanding the provisions of this Division (C) of
Section 1.04, a shareholder's proposal shall be considered timely submitted to
the corporation if it is submitted in accordance with Rule 14a-8 under the
Securities Exchange Act of 1934, as amended, or any successor rule or
regulation. The chairperson of the annual meeting may refuse to acknowledge the
proposal of any person to bring business before the annual meeting not made in
compliance with the foregoing procedure and applicable federal securities laws.
SECTION 1.05. WAIVER OF NOTICE. Notice of the time, place and purpose or
purposes of any meeting of shareholders may be waived in writing, either before
or after the holding of such meeting, by any shareholders, which writing shall
be filed with or entered upon the records of such meeting. The attendance of any
shareholder, in person or by proxy, at any such meeting without protesting the
lack of proper notice, prior to or at the commencement of the meeting, shall be
deemed to be a waiver by such shareholder of notice of such meeting.
SECTION 1.06. QUORUM. At any meeting of shareholders, the holders of a
majority of the voting shares of the corporation then outstanding and entitled
to vote thereat, present in person or by proxy, shall constitute a quorum for
such meeting. The holders of a majority of the voting shares represented at a
meeting, whether or not a quorum is present, or the chairperson of the board,
the president, or the officer of the corporation acting as chairperson of the
meeting, may adjourn such meeting from time to time, and if a quorum is present
at such
2
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adjourned meeting any business may be transacted as if the meeting had
been held as originally called.
SECTION 1.07. VOTES REQUIRED. At all elections of directors the
candidates receiving the greatest number of votes shall be elected. Any other
matter submitted to the shareholders for their vote shall be decided by the vote
of such proportion of the shares, or of any class of shares, or of each class,
as is required by law, the Articles or the Regulations.
SECTION 1.08. ORDER OF BUSINESS. The order of business at any meeting of
shareholders shall be determined by the officer of the corporation acting as
chairperson of such meeting unless otherwise determined by a vote of the holders
of a majority of the voting shares of the corporation then outstanding, present
in person or by proxy, and entitled to vote at such meeting.
SECTION 1.09. SHAREHOLDERS ENTITLED TO VOTE. Each shareholder of record
on the books of the corporation on the record date for determining the
shareholders who are entitled to vote at a meeting of shareholders shall be
entitled at such meeting to one vote for each share of the corporation standing
in his name on the books of the corporation on such record date. The directors
may fix a record date for the determination of the shareholders who are entitled
to receive notice of and to vote at a meeting of shareholders, which record date
shall not be a date earlier than the date on which the record date is fixed and
which record date may be a maximum of sixty days preceding the date of the
meeting of shareholders.
SECTION 1.10. PROXIES. At meetings of the shareholders, any shareholder
of record entitled to vote thereat may be represented and may vote by a proxy or
proxies appointed by an instrument in writing signed by such shareholder or
appointed in any other manner permitted by Ohio law. Any such instrument in
writing or record of any such appointment shall be filed with the secretary of
the meeting before the person holding such proxy shall be allowed to vote
thereunder. No proxy shall be valid after the expiration of eleven months after
the date of its execution, unless the shareholder executing it shall have
specified therein the length of time it is to continue in force.
SECTION 1.11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the directors may appoint inspectors of election to act at such
meeting or any adjournment thereof; if inspectors are not so appointed, the
officer of the corporation acting as chairperson of any such meeting may make
such appointment. In case any person appointed as inspector fails to appear or
act, the vacancy may be filled only by appointment made by the directors in
advance of such meeting or, if not so filled, at the meeting by the officer of
the corporation acting as chairperson of such meeting. No other person or
persons may appoint or require the appointment of inspectors of election.
3
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ARTICLE TWO
DIRECTORS
SECTION 2.01. AUTHORITY AND QUALIFICATIONS. Except where the law, the
Articles or the Regulations otherwise provide, all authority of the corporation
shall be vested in and exercised by its directors. Directors need not be
shareholders of the corporation.
SECTION 2.02. NUMBER OF DIRECTORS, CLASSIFICATION AND TERM OF OFFICE.
(A) Until changed by amendment of the Regulations or by the adoption of
new Regulations, or as provided in the Regulations, the number of directors of
the corporation shall be six. Directors shall be classified into two classes,
designated as Class I and Class II, consisting of not less than three directors
each. The initial term of the Class I directors shall expire at the 2000 annual
meeting of shareholders, and the initial term of the Class II directors shall
expire at the 2001 annual meeting of shareholders. Thereafter, the directors of
each class shall be elected to serve for two years and until their successors
are elected.
(B) The directors may fix or change the number of directors and may fill
any director's office that is created by an increase in the number of directors;
provided, however, that the directors may not reduce the number of directors to
less than six or the number of directors in each class to less than three.
(C) No reduction in the number of directors shall of itself have the
effect of shortening the term of any incumbent director.
SECTION 2.03. ELECTION. At each annual meeting of the shareholders for
the election of directors, the successors to the directors of the class whose
term shall expire in that year shall be elected, but if the annual meeting is
not held or if one or more of such directors are not elected thereat, they may
be elected at a special meeting called for that purpose. The election of
directors shall be by ballot whenever requested by the presiding officer of the
meeting or by the holders of a majority of the voting shares outstanding,
entitled to vote at such meeting and present in person or by proxy, but unless
such request is made, the election shall be viva voce.
SECTION 2.04. NOMINATIONS. Nominations for the election of directors may
be made by the board of directors of the corporation or a committee by the board
or by any shareholder entitled to vote in the election of directors generally.
However, any shareholders entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at a
meeting only if written notice of such shareholder's intent to make such
nomination or nominations has been given to the Secretary of the corporation.
Such notice shall be personally delivered to, or mailed by United States mail,
postage prepaid, and received at, the principal executive offices of the
corporation not less than sixty, nor more than ninety days, prior to the date of
the meeting at which such election is to occur. If, however, notice or public
4
<PAGE>
disclosure of the date of the meeting is given or made less than seventy days
prior to the meeting, then written notice by the shareholder must be received by
the Secretary of the corporation not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Each such notice shall set forth: (A)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated; (B) a representation that the
shareholder is a holder of record of shares of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (C) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (D) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, by the board of directors of the corporation; and (E)
the consent of each nominee to serve as a director of the corporation if so
elected. The chairperson of the meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure.
SECTION 2.05. REMOVAL. A director or directors may be removed from
office only for cause and only by the vote of the holders of shares entitling
them to exercise not less than a majority of the voting power of the corporation
to elect directors in place of those to be removed. In case of any removal, a
new director may be elected at the same meeting for the unexpired term of each
director removed. Failure to elect a director to fill the unexpired term of any
director removed shall be deemed to create a vacancy in the board.
SECTION 2.06. VACANCIES. The remaining directors, though less than a
majority of the whole authorized number of directors, may, by the vote of a
majority of their number, fill any vacancy in the board for the unexpired term.
A vacancy in the board exists within the meaning of this Section 2.06 in case
the shareholders increase the authorized number of directors but fail at the
meeting at which such increase is authorized, or an adjournment thereof, to
elect the additional directors provided for, or in case the shareholders fail at
any time to elect the whole authorized number of directors.
SECTION 2.07. MEETINGS. A meeting of the directors shall be held
immediately following the adjournment of each annual meeting of shareholders at
which directors are elected, and notice of such meeting need not be given. The
directors shall hold such other meetings as may from time to time be called, and
such other meetings of directors may be called only by the chairperson of the
board, the president, any vice president or any two directors. All meetings of
directors shall be held at the principal office of the corporation in Columbus,
Ohio or at such other place within or without the State of Ohio, as the
directors may from time to time determine by a resolution. Meetings of the
directors may be held through any communications equipment if all persons
participating can hear each other and participation in a meeting pursuant to
this provision shall constitute presence at such meeting.
5
<PAGE>
SECTION 2.08. NOTICE OF MEETINGS. Notice of the time and place of each
meeting of directors for which such notice is required by law, the Articles, the
Regulations or the By-Laws shall be given to each of the directors by at least
one of the following methods:
(A) In a writing mailed not less than three days before such meeting and
addressed to the residence or usual place of business of a director,
as such address appears on the records of the corporation; or
(B) By telegraph, cable, radio, wireless, or a writing sent or delivered
to the residence or usual place of business of a director as the
same appears on the records of the corporation, not later than the
day before the date on which such meeting is to be held; or
(C) Personally or by telephone not later than the day before the date on
which such meeting is to be held.
Notice given to a director by any one of the methods specified in the
Regulations shall be sufficient, and the method of giving notice to all
directors need not be uniform. Notice of any meeting of directors may be given
only by the chairperson of the board, the president or the secretary of the
corporation. Any such notice need not specify the purpose or purposes of the
meeting. Notice of adjournment of a meeting of directors need not be given if
the time and place to which it is adjourned are fixed and announced at such
meeting.
SECTION 2.09. WAIVER OF NOTICE. Notice of any meeting of directors may
be waived in writing, either before or after the holding of such meeting, by any
director, which writing shall be filed with or entered upon the records of the
meeting. The attendance of any director at any meeting of directors without
protesting, prior to or at the commencement of the meeting, the lack of proper
notice, shall be deemed to be a waiver by him of notice of such meeting.
SECTION 2.10. QUORUM. A majority of the whole authorized number of
directors shall be necessary to constitute a quorum for a meeting of directors,
except that a majority of the directors in office shall constitute a quorum for
filling a vacancy in the board. The act of a majority of the directors present
at a meeting at which a quorum is present is the act of the board, except as
otherwise provided by law, the Articles or the Regulations.
SECTION 2.11. COMMITTEES. The directors may create one or more
committees of the directors, including an executive committee, consisting of one
or more directors, and may authorize the delegation to any such committee of any
of the authority of the directors, however conferred, other than that of filling
vacancies among the directors or in any committee of the directors.
Any such committee of directors shall serve at the pleasure of the
directors, shall act only in the intervals between meetings of the directors,
and shall be subject to the
6
<PAGE>
control and direction of the directors. Any such committee of directors may act
by a majority of its members at a meeting or by a writing or writings signed by
all of its members.
Any act or authorization of any act by any such committee of directors
within the authority delegated to it shall be as effective for all purposes as
the act or authorization of the directors. No notice of a meeting of any such
committee of directors shall be required. A meeting of any such committee of
directors may be called only by the president or by a member of any such
committee of directors. Meetings of any such committee of directors may be held
through any communications equipment if all persons participating can hear each
other and participation in such a meeting shall constitute presence thereat.
SECTION 2.12. COMPENSATION. Directors shall be entitled to receive as
compensation for services rendered and expenses incurred as directors, such
amounts as the directors may determine.
SECTION 2.13. BY-LAWS. The directors may adopt, and amend from time to
time, By-Laws for their own government, which By-Laws shall not be inconsistent
with the law, the Articles or the Regulations.
7
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ARTICLE THREE
OFFICERS
SECTION 3.01. OFFICERS. The officers of the corporation to be elected by
the directors shall be a president, a secretary, a treasurer, and, if desired,
one or more vice presidents and such other officers and assistant officers as
the directors may from time to time elect. The directors may elect a chairperson
of the board, who must be a director. Officers need not be shareholders of the
corporation, and may be paid such compensation as the board of directors may
determine. Any two or more offices may be held by the same person, but no
officer shall execute, acknowledge, or verify any instrument in more than one
capacity if such instrument is required by law, the Articles, the Regulations or
the By-Laws to be executed, acknowledged, or verified by two or more officers.
SECTION 3.02. TENURE OF OFFICE. The officers of the corporation hold
office at the pleasure of the directors. Any officer of the corporation may be
removed, either with or without cause, at any time, by the affirmative vote of a
majority of all the directors then in office; such removal, however, shall be
without prejudice to the contract rights, if any, of the person so removed.
SECTION 3.03. DUTIES OF THE CHAIRPERSON OF THE BOARD. The chairperson of
the board, if any, shall preside at all meetings of the directors. He shall have
such other powers and duties as the directors shall from time to time assign to
him.
SECTION 3.04. DUTIES OF THE PRESIDENT. The president shall be the chief
executive officer of the corporation and shall exercise supervision over the
business of the corporation and shall have, among such additional powers and
duties as the directors may from time to time assign to him, the power and
authority to sign all certificates evidencing shares of the corporation and all
deeds, mortgages, bonds, contracts, notes and other instruments requiring the
signature of the president of the corporation. It shall be the duty of the
president to preside at all meetings of shareholders.
SECTION 3.05. DUTIES OF THE VICE PRESIDENTS. In the absence of the
president or in the event of his inability or refusal to act, the vice
president, if any (or in the event there be more than one vice president, the
vice presidents in the order designated, or in the absence of any designation,
then in the order of their election), shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all
restrictions upon the president. The vice presidents shall perform such other
duties and have such other powers as the directors may from time to time
prescribe.
SECTION 3.06. DUTIES OF THE SECRETARY. It shall be the duty of the
secretary, or of an assistant secretary, if any, in case of the absence or
inability to act of the secretary, to keep minutes of all the proceedings of the
shareholders and the directors and to make a proper record
8
<PAGE>
of the same; to perform such other duties as may be required by law, the
Articles or the Regulations; to perform such other and further duties as may
from time to time be assigned to him by the directors or the president; and to
deliver all books, papers and property of the corporation in his possession to
his successor, or to the president.
SECTION 3.07. DUTIES OF THE TREASURER. The treasurer, or an assistant
treasurer, if any, in case of the absence or inability to act of the treasurer,
shall receive and safely keep in charge all money, bills, notes, choses in
action, securities and similar property belonging to the corporation, and shall
do with or disburse the same as directed by the president or the directors;
shall keep an accurate account of the finances and business of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, stated capital and shares, together with such other accounts as may be
required and hold the same open for inspection and examination by the directors;
shall give bond in such sum with such security as the directors may require for
the faithful performance of his duties; shall, upon the expiration of his term
of office, deliver all money and other property of the corporation in his
possession or custody to his successor or the president; and shall perform such
other duties as from time to time may be assigned to him by the directors.
ARTICLE FOUR
SHARES
SECTION 4.01. CERTIFICATES. Certificates evidencing ownership of shares
of the corporation shall be issued to those entitled to them. Each certificate
evidencing shares of the corporation shall bear a distinguishing number; the
signatures of the chairperson of the board, the president, or a vice president,
and of the secretary or an assistant secretary (except that when any such
certificate is countersigned by an incorporated transfer agent or registrar,
such signatures may be facsimile, engraved, stamped or printed); and such
recitals as may be required by law. Certificates evidencing shares of the
corporation shall be of such tenor and design as the directors may from time to
time adopt and may bear such recitals as are permitted by law.
SECTION 4.02. TRANSFERS. Where a certificate evidencing a share or
shares of the corporation is presented to the corporation or its proper agents
with a request to register transfer, the transfer shall be registered as
requested if:
(A) An appropriate person signs on each certificate so presented or
signs on a separate document an assignment or transfer of shares evidenced by
each such certificate, or signs a power to assign or transfer such shares, or
when the signature of an appropriate person is written without more on the back
of each such certificate; and
9
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(B) Reasonable assurance is given that the indorsement of each
appropriate person is genuine and effective; the corporation or its agents may
refuse to register a transfer of shares unless the signature of each appropriate
person is guaranteed by a commercial bank or trust company having an office or a
correspondent in the City of New York or by a firm having membership in the New
York Stock Exchange; and
(C) All applicable laws relating to the collection of transfer or other
taxes have been complied with; and
(D) The corporation or its agents are not otherwise required or
permitted to refuse to register such transfer.
SECTION 4.03. TRANSFER AGENTS AND REGISTRARS. The directors may appoint
one or more agents to transfer or to register shares of the corporation, or
both.
SECTION 4.04. LOST, WRONGFULLY TAKEN OR DESTROYED CERTIFICATES. Except
as otherwise provided by law, where the owner of a certificate evidencing shares
of the corporation claims that such certificate has been lost, destroyed or
wrongfully taken, the directors must cause the corporation to issue a new
certificate in place of the original certificate if the owner:
(A) So requests before the corporation has notice that such original
certificate has been acquired by a bona fide purchaser; and
(B) Files with the corporation, unless waived by the directors, an
indemnity bond, with surety or sureties satisfactory to the corporation, in such
sums as the directors may, in their discretion, deem reasonably sufficient as
indemnity against any loss or liability that the corporation may incur by reason
of the issuance of each such new certificate; and
(C) Satisfies any other reasonable requirements which may be imposed by
the directors, in their discretion.
SECTION 4.05. UNCERTIFICATED SHARES. Anything contained in this Article
FOUR to the contrary notwithstanding, the directors may provide by resolution
that some or all of any or all classes and series of shares of the corporation
shall be uncertificated shares, provided that such resolution shall not apply to
(A) shares of the corporation represented by a certificate until such
certificate is surrendered to the corporation in accordance with applicable
provisions of Ohio law or (B) any certificated security of the corporation
issued in exchange for an uncertificated security in accordance with applicable
provisions of Ohio law. The rights and obligations of the holders of
uncertificated shares and the rights and obligations of the holders of
certificates representing shares of the same class and series shall be
identical, except as otherwise expressly provided by law.
10
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ARTICLE FIVE
INDEMNIFICATION AND INSURANCE
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.
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted 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), limited liability
company, partnership, joint venture, trust or other enterprise, in respect of
any claim, issue or matter asserted in such action or suit as to which he shall
have been adjudged to be liable for acting with reckless disregard for the best
interests of the corporation or misconduct (other than negligence) in the
performance of his duty to the corporation unless and only to the extent that
the Court of Common Pleas of Franklin County, Ohio or the court in which such
action or suit was brought shall determine upon application that, despite such
adjudication of liability, and in view of all the circumstances of the case, he
is fairly and reasonably entitled to such indemnity as such Court of Common
Pleas or such other court shall deem proper; and
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(B) the corporation shall promptly make any such unpaid indemnification
as is determined by a court to be proper as contemplated by this Section 5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
SECTION 5.04. DETERMINATION REQUIRED. Any indemnification required under
Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification of the officer
or director is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 5.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority 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, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Franklin County,
Ohio or (if the corporation is a party thereto) the court in which such action,
suit or proceeding was brought, if any; any such determination may be made by a
court under division (D) of this Section 5.04 at any time (including, without
limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04); and no failure for any reason to make any
such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under division
(C) of this Section 5.04 shall be evidence in rebuttal of the presumption
recited in Section 5.01. Any determination made by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 5.04 to make indemnification in respect of any claim, issue or matter
asserted in an action or suit threatened or brought by or in the right of the
corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Franklin County, Ohio or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) incurred in defending any action, suit or proceeding referred to in
Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf
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of the officer or director promptly as such expenses are incurred by him, but
only if such officer or director shall first agree, in writing, to repay all
amounts so paid in respect of any claim, issue or other matter asserted in such
action, suit or proceeding in defense of which he shall not have been successful
on the merits or otherwise:
(A) if it shall ultimately be determined as provided in Section 5.04
that he is not entitled to be indemnified by the corporation as provided under
Section 5.01; or
(B) if, in respect of any claim, issue or other matter asserted by or in
the right of the corporation in such action or suit, he shall have been adjudged
to be liable for acting with reckless disregard for the best interests of the
corporation or misconduct (other than negligence) in the performance of his duty
to the corporation, unless and only to the extent that the Court of Common Pleas
of Franklin County, Ohio or the court in which such action or suit was brought
shall determine upon application that, despite such adjudication of liability,
and in view of all the circumstances, he is fairly and reasonably entitled to
all or part of such indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided
by this Article FIVE shall not be exclusive of, and shall be in addition to, any
other rights to which any person seeking indemnification may be entitled under
the Articles, the Regulations, any agreement, a vote of shareholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be an officer or director of the
corporation and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
SECTION 5.07. INSURANCE. The 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 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, or agent of another corporation (domestic or foreign, nonprofit or for
profit), 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
obligation or the power to indemnify him against such liability under the
provisions of this Article FIVE. Insurance may be purchased from or maintained
with a person in which the corporation has a financial interest.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article FIVE,
and as examples and not by way of limitation:
(A) A person claiming indemnification under this Article FIVE shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry of
a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in
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settlement thereof (whether or not any such termination is based upon a judicial
or other determination of the lack of merit of the claims made against him or
otherwise results in a vindication of him); and
(B) References to an "other enterprise" shall include employee benefit
plans; references to a "fine" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" within the meaning of that term as used in this Article FIVE.
SECTION 5.09. VENUE. Any action, suit or proceeding to determine a claim
for indemnification under this Article FIVE may be maintained by the person
claiming such indemnification, or by the corporation, in the Court of Common
Pleas of Franklin County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Franklin County, Ohio in any
such action, suit or proceeding.
ARTICLE SIX
MISCELLANEOUS
SECTION 6.01. AMENDMENTS.
(A) The Regulations may be amended, or new regulations may be adopted,
at a meeting of the shareholders held for such purpose, only by the affirmative
vote of the holders of shares entitling them to exercise not less than a
majority of the voting power of the corporation on such proposal.
(B) Division (A) of this Section 6.01 notwithstanding, the shareholders
shall have no right to (1) amend or repeal, in any respect, Section 2.02,
Section 2.05, Article FIVE, this Division (B) of Section 6.01 or Division (B) of
Section 6.02 of these Regulations; or (2) adopt, amend or repeal any other
provision which would modify or circumvent Section 2.02, Section 2.05, Article
FIVE, this Division (B) of Section 6.01 or Division (B) of Section 6.02 of these
Regulations, unless, in each case, the holders of not less than sixty-six and
two-thirds percent (66 2/3 %) of the total voting power of the corporation shall
have voted in favor of such action.
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SECTION 6.02. ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING.
(A) Anything contained in the Regulations to the contrary
notwithstanding, except as provided in Division (B) of this Section 6.02, any
action which may be authorized or taken at a meeting of the shareholders or of
the directors or of a committee of the directors, as the case may be, may be
authorized or taken without a meeting with the affirmative vote or approval of,
and in a writing or writings signed by, all the shareholders who would be
entitled to notice of a meeting of the shareholders held for such purpose, or
all the directors, or all the members of such committee of the directors,
respectively, which writings shall be filed with or entered upon the records of
the corporation.
(B) Notwithstanding the provisions of Division (A) of this Section 6.02,
the Regulations may be amended, or new regulations adopted, by the shareholders
only at a meeting of the shareholders held for such purpose.
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EXHIBIT 5.1
, 2000
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Board of Directors
MindLeaders.com, Inc.
851 West Third Avenue
Columbus, Ohio 43212
Gentlepeople:
We are acting as counsel to MindLeaders.com, Inc., an Ohio
corporation (the "Company"), in connection with the issuance and sale by the
Company of up to 3,565,000 of its common shares, without par value, including
465,000 common shares subject to an over-allotment option (collectively, the
"Common Shares"), pursuant to a Registration Statement on Form S-1
(Registration No. 333-87273), as amended, filed by the Company with the
Securities and Exchange Commission for the registration of the sale of such
Common Shares under the Securities Act of 1933, as amended (the "Registration
Statement").
As counsel for the company, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and other instruments as we
have deemed necessary for the purposes of rendering this opinion. In our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity with the
originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Company is a
duly incorporated and legally existing corporation under the laws of the State
of Ohio. We are also of the opinion, based upon the foregoing and assuming
compliance with applicable federal and state securities laws, that when the
Common Shares to be issued and sold by the Company have been delivered by the
Company against payment of the purchase price therefor, as specified in the
Registration Statement when it shall become effective, said Common Shares will
be validly issued and outstanding, fully paid and non-assessable.
<PAGE>
Board of Directors
Page 2
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and we consent to the reference to our firm under the
caption "Legal Matters" in the Registration Statement.
Very truly yours,
VORYS, SATER, SEYMOUR AND PEASE LLP
<PAGE>
MINDLEADERS.COM, INC.
2000 INCENTIVE STOCK PLAN
SECTION l. PURPOSES. The purposes of the MindLeaders.com, Inc. 2000
Incentive Stock Plan are to promote the interests of MindLeaders.com, Inc. and
its shareholders by (a) attracting and retaining exceptional executive personnel
and other key employees of, and advisors and consultants to, and directors of
the Company and its Subsidiaries; (b) motivating such employees, advisors and
consultants and Eligible Directors by means of performance-related incentives to
achieve longer-range performance goals; and (c) providing all long-term
employees of the Company and its Subsidiaries with the opportunity to
participate in the long-term growth and financial success of the Company. The
Plan constitutes an amendment, restatement and combination of the DPEC, Inc.
Amended and Restated Incentive Stock Option Plan and the DPEC, Inc. 1998 Stock
Option Plan.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall
have the meanings set forth below:
"Award" shall mean any Option; stock appreciation right ("Stock
Appreciation Right"), as described in Section 10, which may be awarded either in
tandem with Options ("Tandem Stock Appreciation Rights") or on a stand-alone
basis ("Nontandem Stock Appreciation Rights"); Restricted Stock Award;
Performance Award or unrestricted Shares ("Unrestricted Shares"), as described
in Section 12, but shall not include any Director Option.
"Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award which may, but need not, be executed
or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Cash Account" shall mean an account established for each Participant to
which amounts withheld through payroll deductions shall be credited to purchase
Shares under the provisions of Section 11.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean: (a) until a registration statement for an initial
public offering of the Shares shall become effective, the full Board and (b)
after such a registration statement shall become effective, a committee of the
Board designated by the Board to administer the Plan which shall satisfy the
requirements contained in Section 1.162-27(c)(4) of the Final Regulations and
which shall be composed of not less than the minimum number of Persons from time
to time required by Rule 16b-3, each of whom shall be (i) a Person from time to
time permitted by the rules promulgated under Section 16 of the Exchange Act in
order for grants of Awards to be
<PAGE>
exempt transactions under said Section 16 and (ii) receiving remuneration in no
other capacity than as a director, except as permitted under Section
1.162-27(e)(3) of the Final Regulations.
"Company" shall mean MindLeaders.com, Inc., together with any successor
thereto.
"Covered Employee" shall mean any individual who, on the last day of the
Company's taxable year, is
(a) the chief executive officer of the Company or is acting in such
capacity; or
(b) among the four highest compensated officers of the Company (other
than the chief executive officer).
For this purpose, the determination of an individual's status as the chief
executive officer or one of the four highest compensated officers of the Company
shall be made in accordance with the executive compensation disclosure rules
under the Exchange Act.
"Director Option" shall mean a Non-Qualified Stock Option granted to each
Eligible Director pursuant to Section 6(e) without any action by the Board or
the Committee.
"Effective Date" shall mean the date a registration statement filed
pursuant to the Securities Act of 1933, as amended, to register an initial
public offering of the Shares is declared effective by the SEC.
"Eligible Director" shall mean, on any date, a Person who is serving as a
member of the Board but shall not include (a) a Person who is an Employee of the
Company or a Subsidiary, or (b) a Person who beneficially owns or represents a
Person who beneficially owns more than five percent of the outstanding Shares.
"Employee" shall mean (a) an employee of the Company or of any Subsidiary;
and (b) except with respect to an Incentive Stock Option and a Right to
Purchase, an advisor or consultant to the Company or to any Subsidiary.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the fair market value of the property or
other item being valued, as determined by the Committee in its sole discretion,
provided that the fair market value of Shares shall be determined by reference
to the most recent closing price quotation or, if none, the average of the bid
and asked prices, as reported as of the most recent available date with respect
to the sale of Shares on any quotation system approved by the National
Association of Securities Dealers then reporting sales of Shares or on any
national securities exchange on which the Shares are then listed.
"Final Regulations" shall mean the final regulations promulgated by the
Internal Revenue Service under Section 162(m) of the Code.
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"Incentive Option Plan" shall mean the DPEC, Inc. Amended and Restated
Incentive Stock Option Plan.
"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.
"Initial Offering Period" shall mean the duration of the initial Offering,
which shall commence on the Effective Date and which shall terminate as of the
close of business on December 31, 2001.
"1998 Plan" shall mean the DPEC, Inc. 1998 Stock Option Plan.
"Non-Qualified Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is not intended to
be an Incentive Stock Option.
"Offering" shall mean an opportunity provided by the Committee to any
Participant to purchase Shares under the provisions of Section 11 of the Plan.
Offerings may be consecutive or concurrent, as determined by the Committee. The
Committee shall designate the maximum number of Shares that may be purchased
under each Offering. Shares not sold under one Offering may be offered again in
any subsequent Offering.
"Offering Effective Date" shall mean the day of the month designated by the
Committee as the start of the Offering Period applicable to an Offering.
"Offering Period" shall mean the duration of an Offering, as designated by
the Committee. The Offering Period for any Offering shall not exceed 24 months.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option but shall not include a Director Option.
"Participant" shall mean any Employee selected by the Committee to receive
an Award under the Plan. In addition, for purposes of Section 11 of the Plan,
the term "Participant" shall include any Employee who has satisfied the
requirements of such section to acquire Shares under the Plan.
"Performance Award" shall mean any right granted under Section 8 of the
Plan.
"Person" shall mean any individual, corporation, partnership, limited
liability company, association, joint-stock company, trust, unincorporated
organization, government or political subdivision thereof or other entity.
"Plan" shall mean the MindLeaders.com, Inc. 2000 Incentive Stock Plan.
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<PAGE>
"Restricted Stock" shall mean any Share granted under Section 7 of the
Plan.
"Right to Purchase" shall mean an option to purchase Shares granted to a
Participant who elects to participate in an Offering under the provisions of
Section 11 of the Plan. A Right to Purchase granted for an Offering shall
terminate following the close of business on the last Right to Purchase Date for
that Offering to the extent that such Right to Purchase is not exercised on such
Right to Purchase Date.
"Right to Purchase Date" shall mean (a) the last business day of any period
within an Offering Period as designated by the Committee or (b) the last
business day of an Offering Period, in each case to purchase Shares under the
provisions of Section 11 of the Plan.
"Rule l6b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the staff thereof.
"Shares" shall mean Common Shares, no par value, of the Company or such
other securities of the Company as may be designated by the Committee from time
to time.
"Share Account" shall mean an account established for each Participant who
exercises a Right to Purchase under Section 11 of the Plan. A Participant's
Share Account will be credited with the number of Shares purchased on each Right
to Purchase Date and debited for the number of Shares withdrawn by the
Participant after such date.
"Subsidiary" shall mean any corporation which, on the date of
determination, qualified as a subsidiary corporation of the Company under
Section 424(f) of the Code. In addition, the term "Subsidiary" shall include
any trade or business which is under common control with the Company, as
determined under Section 414(c) of the Code.
"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.
"Ten Percent Shareholder" shall mean any shareholder who, at the time an
Incentive Stock Option is granted to such shareholder, owns (within the meaning
of Section 425(d) of the Code) more than ten percent of the voting power of all
classes of stock of the Company or a Subsidiary.
SECTION 3. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. Subject to the
terms of the Plan and applicable law, and in addition to other express powers
and authorizations conferred
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<PAGE>
on the Committee by the Plan, the Committee shall have full power and authority
to: (i) designate Participants; (ii) determine the type or types of Awards to
be granted to an eligible Employee; (iii) determine the number of Shares to be
covered by, or with respect to which payments, rights or other matters are to be
calculated in connection with, Awards; (iv) determine the terms and conditions
of any Award; (v) determine whether, to what extent and under what circumstances
Awards may be settled or exercised in cash, Shares, other securities, other
Awards or other property, or canceled, forfeited or suspended; (vi) determine
whether, to what extent and under what circumstances cash, Shares, other
securities, other Awards, other property and other amounts payable with respect
to an Award shall be deferred either automatically or at the election of the
holder thereof or of the Committee; (vii) interpret and administer the Plan and
any instrument or agreement relating to, or Award made under, the Plan;
(viii) establish, amend, suspend or waive such rules and regulations and appoint
such agents as it shall deem appropriate for the proper administration of the
Plan; and (ix) make any other determination and take any other action that the
Committee deems necessary or desirable for the administration of the Plan.
Notwithstanding anything else contained in the Plan to the contrary, neither the
Committee nor the Board shall have any discretion regarding whether an Eligible
Director shall receive a Director Option pursuant to Section 6(e) or regarding
the terms of any Director Option, including, without limitation, the number of
Shares subject to such Director Option, the timing of the grant or the
exercisability of such Director Option or the exercise price per Share of such
Director Option.
(b) Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive and binding
upon all Persons, including the Company, any Subsidiary, any Participant, any
holder or beneficiary of any Award, any shareholder and any Employee.
SECTION 4. SHARES AVAILABLE FOR THE PLAN.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section
4(b), the number of Shares available for issuance under the Plan shall be
1,700,000. If, after the effective date of the Plan, any Shares covered by an
Award or Director Option granted under the Plan, or to which such an Award or
Director Option relates, or any Shares issued under Section 11, are forfeited,
or if an Award or Director Option otherwise terminates or is canceled without
the delivery of Shares, then the Shares which may be issued under this Plan, to
the extent of any such settlement, forfeiture, termination or cancellation,
shall again be, or shall become, Shares available for issuance, to the extent
permissible under Rule l6b-3. In the event that any Option, Director Option or
other Award granted hereunder is exercised through the delivery of Shares, the
number of Shares available under the Plan shall be increased by the number of
Shares surrendered, to the extent permissible under Rule l6b-3.
(b) ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of Shares, other securities or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Shares or other securities of the Company, issuance of warrants or other
rights to
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<PAGE>
purchase Shares or other securities of the Company, or other similar corporate
transaction or event affects the Shares such that an adjustment is necessary in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall
proportionately adjust any or all (as necessary) of (i) the number of Shares or
other securities of the Company (or number and kind of other securities or
property) which may be issued under this Plan; (ii) the number of Shares or
other securities of the Company (or number and kind of other securities or
property) subject to outstanding Awards; (iii) the number of Shares or other
securities of the Company (or number and kind of other securities or property)
and the purchase price per Share subject to purchase under Section 11 hereof;
and (iv) the grant or exercise price with respect to any Award; provided, in
each case, that with respect to Awards of Incentive Stock Options, no such
adjustment shall be authorized to the extent that such authority would cause the
Plan to violate Section 422(b)(l) of the Code, as from time to time amended.
If, pursuant to the preceding sentence, an adjustment is made to outstanding
Options held by Participants, a corresponding adjustment shall be made to
outstanding Director Options and if, pursuant to the preceding sentence, an
adjustment is made to the number of Shares authorized for issuance under the
Plan, a corresponding adjustment shall be made to the number of Shares subject
to each Director Option thereafter granted pursuant to Section 6(e).
(c) SOURCES OF SHARES. Any Shares issued pursuant to the terms of
this Plan may consist, in whole or in part, of authorized and unissued Shares or
of Treasury Shares.
SECTION 5. ELIGIBILITY FOR AWARDS AND DIRECTOR OPTIONS. Any Employee,
including any officer or employee-director of the Company or any Subsidiary, who
is not a member of the Committee, shall be eligible to be designated a
Participant for purposes of receiving an Award under the Plan. Each Eligible
Director shall receive nondiscretionary Director Options in accordance with, and
only in accordance with, Section 6(e) hereof.
SECTION 6. OPTIONS AND DIRECTOR OPTIONS.
(a) GRANT. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom
Options shall be granted, the number of Shares to be covered by each Option, the
option price therefor and the conditions and limitations applicable to the
exercise of the Option. The Committee shall have the authority to grant
Incentive Stock Options or to grant Non-Qualified Stock Options or to grant both
types of options. In the case of Incentive Stock Options, the terms and
conditions of such grants shall be subject to, and comply with, such rules as
may be prescribed by Section 422 of the Code, as from time to time amended, and
any regulations implementing such statute, including, without limitation, the
requirements of Code Section 422(d) which limit the aggregate Fair Market Value
of Shares for which Incentive Stock Options are exercisable for the first time
to $100,000 per calendar year. Each provision of the Plan and of each written
option agreement relating to an Option designated as an Incentive Stock Option
shall be construed so that such Option qualifies as an Incentive Stock Option,
and any provision that cannot be so construed shall be disregarded.
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<PAGE>
(b) EXERCISE PRICE. The Committee shall establish the exercise price
at the time each Option is granted, which price, except in the case of Options
that are substitute Awards, shall not be less than 100% of the per Share Fair
Market Value on the date of grant. Notwithstanding any provision contained
herein, in the case of an Incentive Stock Option, the exercise price at the time
such Incentive Stock Option is granted to any Employee who, at the time of such
grant, is a Ten Percent Shareholder, shall not be less than 110% of the per
Share Fair Market Value on the date of grant.
(c) EXERCISE. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award Agreement or thereafter; provided,
in the case of an Incentive Stock Option, a Participant may not exercise such
Incentive Stock Option after (i) the date which is ten years (five years in the
case of a Participant who is a Ten Percent Stockholder) after the date on which
such Incentive Stock Option is granted; or (ii) the date which is three months
(twelve months in the case of a Participant who becomes disabled, as defined in
Section 22(e)(3) of the Code, or who dies) after the date on which he ceases to
be an Employee of the Company or a Subsidiary. The Committee may impose such
conditions with respect to the exercise of Options, including without
limitation, any relating to the application of federal or state securities laws,
as it may deem necessary or advisable. The Committee shall have the right to
accelerate the exercisability of any Option or outstanding Option in its
discretion.
(d) PAYMENT. No Shares shall be delivered pursuant to any exercise
of an Option until payment in full of the option price therefor is received by
the Company. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest) or
by a combination of the foregoing, provided that the combined value of all cash
and cash equivalents and the Fair Market Value of any such Shares so tendered to
the Company as of the date of such tender is at least equal to such option
price.
(e) DIRECTOR OPTIONS. Notwithstanding anything else contained herein
to the contrary:
(i) each Eligible Director who becomes a member of the Board
after the Effective Date, shall receive, on the first business day
after he becomes an Eligible Director, a grant of a Director Option to
purchase a number of Shares determined by dividing $15,000 by the Fair
Market Value of a Share on the date of grant; and
(ii) on the first business day after each annual meeting of
shareholders of the Company beginning with the annual meeting in 2001,
each Eligible
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Director who is serving as a member of the Board on such date and who
is not receiving a Director Option pursuant to (i) above on such
date, shall receive a grant of a Director Option to purchase a
number of Shares determined by dividing $10,000 by the Fair Market
Value of a Share on the date of grant.
A Director Option shall be exercisable at a price per Share equal to the Fair
Market Value on the date of grant. A Director Option shall be exercisable
during a period beginning six months after the date of grant and ending on
the earlier to occur of the following two dates: (A) the tenth anniversary
of the date of grant of such Director Option or (B) three months (twelve
months in the case of an Eligible Director who becomes disabled, as defined
in Section 22(e)(3) of the Code, or who dies) after the date the Eligible
Director ceases to be a member of the Board, except that if the Eligible
Director ceases to be a member of the Board after having been convicted of,
or pled guilty or NOLO CONTENDERE to, a felony, his Director Option shall be
canceled on the date he ceases to be a member of the Board. An Eligible
Director may pay the exercise price of a Director Option in the manner
described in Section 6(d).
(f) CONSTRUCTION. Notwithstanding any other provision of the Plan,
to the extent that any of the provisions of the Plan are inconsistent or
conflict with any provision of any Award previously granted pursuant to the
Incentive Option Plan or the 1998 Plan outstanding on the effective date of the
Plan, and the application of any such inconsistent or conflicting provision to
such Award would cause such Award to no longer meet the requirements of Section
422 of the Code, such inconsistent or conflicting provision shall not be
applicable to such Award and the provisions of such Award shall be deemed to
control any interpretation of the provisions of such Award as if such provisions
had been set forth in the Plan.
SECTION 7. RESTRICTED STOCK.
(a) GRANT. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom Shares
of Restricted Stock shall be granted, the number of Shares of Restricted Stock
to be granted to each Participant, the duration of the period during which, and
the conditions under which, the Restricted Stock will vest and no longer be
subject to forfeiture to the Company and the other terms and conditions of such
Awards. The Committee shall have the right to accelerate the vesting of any
Restricted Stock or outstanding Restricted Stock in its discretion.
(b) TRANSFER RESTRICTIONS. Until the lapse of applicable
restrictions, Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered except as provided in the Plan or the applicable
Award Agreements. Certificates issued in respect of Shares of Restricted Stock
shall be registered in the name of the Participant and deposited by such
Participant, together with a stock power endorsed in blank, with the Company.
Upon the lapse of the restrictions applicable to such Shares of Restricted
Stock, the Company shall deliver such certificates to the Participant or the
Participant's legal representative.
(c) PAYMENT OF DIVIDENDS. Dividends paid on any Shares of Restricted
Stock may be paid directly to the Participant, or may be reinvested in
additional Shares of Restricted Stock, as determined by the Committee in its
sole discretion.
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SECTION 8. PERFORMANCE AWARDS.
(a) GRANT. The Committee shall have sole and complete authority to
determine the Employees who shall receive a Performance Award denominated in
cash or Shares; (i) valued, as determined by the Committee, in accordance with
the achievement of such performance goals during such performance periods as the
Committee shall establish; and (ii) payable at such time and in such form as the
Committee shall determine.
(b) TERMS AND CONDITIONS. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the performance goals
to be achieved during any performance period, the length of any performance
period, the amount of any Performance Award and the amount and kind of any
payment or transfer to be made pursuant to any Performance Award.
(c) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid in
a lump sum or in installments following the close of the performance period or,
in accordance with procedures established by the Committee, on a deferred basis.
SECTION 9. CODE SECTION 162(m) LIMITATIONS.
(a) GENERAL LIMITATIONS. Any Awards issued under this Plan to
Covered Employees must satisfy the requirements of this Section 9.
(b) REQUIREMENTS FOR ALL AWARDS. Any Award issued to a Covered
Employee shall constitute qualified performance-based compensation. For this
purpose, an Award shall constitute qualified performance-based compensation to
the extent that:
(i) it is granted by the Committee on account of the attainment
of one or more preestablished, objective performance goals established
by the Committee, in accordance with the provisions of Section
1.162-27(e)(2) of the Final Regulations;
(ii) the material terms of the performance goal under which the
Award is issued are disclosed to and subsequently approved by the
shareholders of the Company, in accordance with the provisions of
Section 1.162-27(e)(4) of the Final Regulations; and
(iii) the Committee certifies, in writing, prior to the payment
of any compensation under the Award, that the performance goals and
any other material terms were in fact satisfied.
(c) SPECIAL RULES FOR OPTIONS. The grant of an Option to a Covered
Employee under this Plan shall satisfy the requirements of Section 9(b)(i) to
the extent that the following requirements are satisfied:
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(i) subject to the provisions of Section 4(b), no Covered
Employee shall receive Options for more than 50,000 Shares over any
five-year period. For this purpose, to the extent that any Option is
canceled (as described in Section 1.162-27(e)(2)(vi)(B) of the Final
Regulations), such canceled Option shall continue to be counted
against the maximum number of Shares for which Options may be granted
to a Covered Employee under the Plan; and
(ii) under the terms of the Option, the amount of compensation
that the Covered Employee may receive is based solely on an increase
in the value of the Shares after the grant of the Option, unless the
grant of such Option is contingent upon the attainment of a
performance goal that otherwise satisfies the requirements of Section
9(b)(i).
SECTION 10. STOCK APPRECIATION RIGHTS.
(a) GRANTS OF STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights may be awarded by the Committee in connection with any Option granted
under the Plan, either at the time the Option is granted or thereafter at any
time prior to the exercise, termination or expiration of the Option. Nontandem
Stock Appreciation Rights may also be granted by the Committee at any time. At
the time of grant of a Nontandem Stock Appreciation Right, the Committee shall
specify the number of Shares covered by such right and the base price of Shares
to be used in connection with the calculation described in Section 10(d). The
base price of a Nontandem Stock Appreciation Right shall be not less than 100%
of the per Share Fair Market Value on the date of grant. Stock Appreciation
Rights shall be subject to such terms and conditions not inconsistent with the
other provisions of this Plan as the Committee shall determine.
(b) LIMITATIONS ON EXERCISE. A Tandem Stock Appreciation Right shall
be exercisable only to the extent that the related Option is exercisable and
shall be exercisable only for such period as the Committee may determine (which
period may expire prior to the expiration date of the related Option). Upon the
exercise of all or a portion of Tandem Stock Appreciation Rights, the related
Option shall be canceled with respect to an equal number of Shares. Shares
subject to Options, or portions thereof, surrendered upon exercise of a Tandem
Stock Appreciation Right, shall not be available for subsequent awards under the
Plan. A Nontandem Stock Appreciation Right shall be exercisable during such
period as the Committee shall determine.
(c) SURRENDER OR EXCHANGE OF TANDEM STOCK APPRECIATION RIGHTS. A
Tandem Stock Appreciation Right shall entitle the Participant to surrender to
the Company unexercised the related Option, or any portion thereof, and to
receive from the Company in exchange therefor that number of Shares having an
aggregate Fair Market Value equal to (i) the excess of (A) the Fair Market Value
of one (1) Share as of the date the Tandem Stock Appreciation Right is exercised
over (B) the exercise price per Share specified in such Option, multiplied by
(ii) the
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number of Shares subject to the Option, or portion thereof, which is
surrendered. Cash shall be delivered in lieu of any fractional shares.
(d) EXERCISE OF NONTANDEM STOCK APPRECIATION RIGHTS. The exercise of
a Nontandem Stock Appreciation Right shall entitle the employee to receive from
the Company that number of Shares having an aggregate Fair Market Value equal to
(i) the excess of (A) the Fair Market Value of one (1) Share as of the date on
which the Nontandem Stock Appreciation Right is exercised over (B) the base
price of the Shares covered by the Nontandem Stock Appreciation Right,
multiplied by (ii) the number of Shares covered by the Nontandem Stock
Appreciation Right, or the portion thereof being exercised. Cash shall be
delivered in lieu of any fractional shares.
(e) SETTLEMENT OF STOCK APPRECIATION RIGHTS. As soon as is
reasonably practicable after the exercise of a Stock Appreciation Right, the
Company shall (i) issue, in the name of the Participant, stock certificates
representing the total number of full Shares to which the Participant is
entitled pursuant to Section 10(c) or 10(d), and cash in an amount equal to the
Fair Market Value, as of the date of exercise, of any resulting fractional
shares, and (ii) if the Committee causes the Company to elect to settle all or
part of its obligations arising out of the exercise of the Stock Appreciation
Right in cash pursuant to Section 10(f), deliver to the Participant an amount in
cash equal to the Fair Market Value, as of the date of exercise, of the Shares
it would otherwise be obligated to deliver.
(f) CASH SETTLEMENT. The Committee, in its discretion, may cause the
Company to settle all or any part of its obligation arising out of the exercise
of a Stock Appreciation Right by the payment of cash in lieu of all or part of
the Shares it would otherwise be obligated to deliver.
SECTION 11. STOCK PURCHASE PLAN.
(a) ELIGIBILITY. Each Employee on an Offering Effective Date shall
be eligible to participate in the Offering which is applicable to such Offering
Effective Date. Nothing contained herein and no rules and regulations
prescribed by the Committee shall permit or deny participation in any Offering
contrary to the requirements of the Code (including, without limitation,
Sections 423(b)(3), 423(b)(4) and 423(b)(8) thereof). Nothing contained herein
and no rules and regulations prescribed by the Committee shall permit any
Participant to be granted a Right to Purchase:
(i) if, immediately after such Right to Purchase is granted,
such Participant would own, and/or hold outstanding options or rights
to purchase, shares of the Company or of any Subsidiary, possessing
five percent (5%) or more of the total combined voting power or value
of all classes of shares of the Company or such Subsidiary; or
(ii) which permits a Participant's rights to purchase Shares
under all employee stock purchase plans of the Company and of its
Subsidiaries to accrue
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at a rate which exceeds Twenty-Five Thousand Dollars ($25,000.00) of
Fair Market Value of Shares (determined as of the date such right is
granted) for each calendar year in which such right is outstanding at
any time.
For purposes of clause (a)(i) above, the provisions of Section 424(d) of the
Code shall apply in determining the stock ownership of each Participant. For
purposes of clause (a)(ii) above, the provisions of Section 423(b)(8) of the
Code shall apply in determining whether a Participant's Rights to Purchase and
other rights are permitted to accrue at a rate in excess of the permitted rate.
(b) PURCHASE PRICE. The purchase price for a Share under each
Offering shall be determined by the Committee prior to the Offering Effective
Date and shall be stated as a percentage of the Fair Market Value of a Share on
either the Right to Purchase Date or the Offering Effective Date, whichever is
the lesser, but the purchase price shall not be less than the lesser of
eighty-five percent (85%) of the per share Fair Market Value of the Shares as of
the Offering Effective Date or eighty-five percent (85%) of the per share Fair
Market Value of the Shares as of the Right to Purchase Date for the Offering.
(c) PARTICIPATION IN OFFERINGS. Except as may be otherwise provided
for herein, each Employee who is eligible for and elects to participate in an
Offering shall be granted Rights to Purchase for as many full Shares as he may
elect to purchase during that Offering, to be paid by payroll deductions during
such period. The Committee shall establish administrative rules and regulations
regarding the payroll deduction process for this Section 11, including, without
limitation, minimum and maximum permissible deductions; the timing for initial
elections, changes in elections and suspensions of elections during an Offering
Period and the complete withdrawal by a Participant from an Offering. Amounts
withheld through payroll deductions under this paragraph shall be credited to
each Participant's Cash Account. Such amounts will be delivered to a custodian
for the Plan and held pending the purchase of Shares as described in Section
11(e). All amounts held in a Participant's Cash Account shall bear interest at
a rate as may be agreed upon by the Committee and the custodian for the Plan.
If a Participant withdraws entirely from an Offering (pursuant to rules
established by the Committee), his Cash Account balance will not be used to
purchase Shares on the Right to Purchase Date. Instead, the portion of the Cash
Account equal to the Participant's payroll deductions under the Plan during the
Offering Period will be refunded to the Participant without interest
(notwithstanding any provision contained herein). Such a Participant will not
be eligible to re-enroll in that Offering, but may resume participation on the
Offering Effective Date for the next Offering. In addition, the Committee may
impose such other restrictions on the right to withdraw from Offerings as it may
deem appropriate. An election by a Participant to have any amount in his Cash
Account used to purchase Shares on any subsequent Right to Purchase Date as
described in Section 11(e) shall not constitute a withdrawal from an Offering.
(d) GRANT OF RIGHTS TO PURCHASE. Rights to Purchase with respect to
Shares shall be granted to Participants who elect to participate in an Offering.
Such Rights to Purchase may be exercised on any Right to Purchase Date
applicable to the Offering. The number of Shares subject to Rights to Purchase
on each Right to Purchase Date, when added to the number
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of Shares purchased by a Participant on each Right to Purchase Date during any
Offering, shall not exceed the number of Shares authorized for issuance during
the applicable Offering.
(e) EXERCISE OF RIGHTS TO PURCHASE. Except as otherwise provided
herein, each Right to Purchase shall be exercised on the applicable Right to
Purchase Date. Each Participant automatically and without any act on his part
will be deemed to have exercised a Right to Purchase on each Right to Purchase
Date to the extent that the amount in his Cash Account on such Right to Purchase
Date is sufficient to purchase whole Shares, unless the Participant otherwise
notifies the Committee in accordance with the administrative rules and
regulations established by the Committee. Fractional Shares will not be issued
under the Plan. Any remaining amount credited to a Participant's Cash Account
which is not sufficient to purchase a whole Share shall remain in such
Participant's Cash Account for use during the balance of an Offering or in the
next Offering unless withdrawn by the Participant. The Company shall deliver to
the custodian for the Plan as soon as practicable after each Right to Purchase
Date a certificate for the total number of whole Shares purchased by all
Participants on such Right to Purchase Date. The custodian shall allocate the
proper number of Shares to the Share Account of each Participant. If the
aggregate Cash Account balances of all Participants on any Right to Purchase
Date exceeds the amount required to purchase all of the Shares subject to Rights
to Purchase on that Right to Purchase Date, then the Shares subject to Rights to
Purchase shall be allocated pro rata among the Participants in the proportion
that the number of Shares subject to Rights to Purchase bears to the number of
Shares that could have been purchased with such aggregate amount available, if
an unlimited number of Shares were available for purchase. Any balances
remaining in Participants' Cash Accounts due to over subscription will remain in
the Participants' Cash Accounts for use during the balance of an Offering or in
the next Offering unless withdrawn by the Participant.
(f) WITHDRAWALS FROM SHARE ACCOUNTS AND DIVIDEND REINVESTMENT. A
Participant may withdraw the Shares credited to his Share Account on a
first-in-first-out basis. The Committee shall establish rules and regulations
governing such withdrawals. All cash dividends paid, if any, with respect to
the Shares credited to a Participant's Share Account shall be added to the
Participant's Cash Account and thereby shall be applied to exercise Rights to
Purchase for whole Shares on the Right to Purchase Date next succeeding the date
such cash dividends are paid by the Company. An election to leave Shares with
the custodian shall constitute an election to apply the cash dividends with
respect to such Shares to the exercise of Rights to Purchase hereunder. Shares
so purchased shall be applied to the Shares credited to each Participant's Share
Account.
(g) TERMINATION OF EMPLOYMENT. If the employment of a Participant
terminates for any reason, including death, disability, retirement or other
cause, his participation in this Section 11 of the Plan shall automatically and
without any act on his part terminate as of the date of termination of his
employment. As soon as practicable following the Participant's termination of
employment, the Company shall refund to such Participant (or beneficiary, in the
case of the Participant's death) any amount in his Cash Account which
constitutes payroll deductions, without interest, and the custodian shall
deliver to such Participant (or beneficiary, in
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the case of the Participant's death) a share certificate issued in his name for
the number of whole Shares credited to his Share Account through prior
Offerings.
SECTION 12. UNRESTRICTED SHARES.
(a) AWARD OF UNRESTRICTED SHARES. The Committee may cause the
Company to grant Unrestricted Shares to Employees at such time or times, in such
amounts and for such reasons as the Committee, in its sole discretion, shall
determine. No payment shall be required for Unrestricted Shares.
(b) DELIVERY OF UNRESTRICTED SHARES. The Company shall issue, in the
name of each Employee to whom Unrestricted Shares have been granted, stock
certificates representing the total number of Unrestricted Shares granted to the
Employee, and shall deliver such certificates to the Employee as soon as
reasonably practicable after the date of grant or on such later date as the
Committee shall determine at the time of grant.
SECTION 13. AMENDMENT AND TERMINATION.
(a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend,
discontinue or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act for which or with which the Board deems it necessary
or desirable to qualify or comply; and, provided further, that no amendment may
be made to Section 6(e) or any other provision of the Plan relating to Director
Options within six months of the last date on which any such provision was
amended, other than to comport with changes in the Code or the rules thereunder.
Notwithstanding anything to the contrary herein, the Committee may amend the
Plan, subject to any shareholder approval required under Rule l6b-3, in such
manner as may be necessary so as to have the Plan conform with local rules and
regulations in any jurisdiction outside the United States.
(b) AMENDMENTS TO AWARDS. Subject to the provisions of Section 9,
the Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate any Award therefore granted,
prospectively or retroactively; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of any Participant or any holder or beneficiary of any Award
therefore granted shall not to that extent be effective without the consent of
the affected Participant, holder or beneficiary.
(c) CANCELLATION OF AWARD. Any provision of this Plan (except
Section 9) or any Award Agreement to the contrary notwithstanding, the Committee
may cause any Award granted hereunder to be canceled in consideration of the
granting to the holder of an alternative Award having a Fair Market Value equal
to the Fair Market Value of such canceled Award.
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SECTION 14. GENERAL PROVISIONS.
(a) NONTRANSFERABILITY.
(i) Each Award, each Director Option and each Right to
Purchase, and each right under any Award, any Director Option or any
Right to Purchase, shall be exercisable during the Participant's or
the Eligible Director's lifetime only by the Participant or the
Eligible Director or, if permissible under applicable law, by the
Participant's or the Eligible Director's guardian or legal
representative or a transferee receiving such Award, Director Option
or Right to Purchase pursuant to a qualified domestic relations order
("QDRO"), as determined by the Committee.
(ii) No Award, Director Option or Right to Purchase that
constitutes a "derivative security," for purposes of Section 16 of the
Exchange Act, may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant or Eligible
Director otherwise than by will or by the laws of descent and
distribution or pursuant to a QDRO, and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be
void and unenforceable against the Company or any Subsidiary; provided
that the designation of a beneficiary shall not constitute an
assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.
(b) NO RIGHTS TO AWARDS. No Employee, Participant or other Person
shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.
(c) SHARE CERTIFICATES. All certificates for Shares or other
securities of the Company or any Subsidiary delivered under the Plan shall be
subject to such stop transfer orders and other restrictions as the Committee may
deem advisable under the Plan or the rules, regulations and other requirements
of the SEC, any stock exchange or national securities association upon which
such Shares or other securities are then listed and any applicable federal or
state laws; and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
(d) WITHHOLDING. A Participant or Eligible Director may be required
to pay to the Company or any Subsidiary, and the Company or any Subsidiary shall
have the right and is hereby authorized to withhold from any Award, Director
Option or Share otherwise issued under the Plan, from any payment due or
transfer made under any Award or any Director Option or otherwise under the
Plan, or from any compensation or other amount owing to a Participant or
Eligible Director, the amount of any applicable withholding taxes in respect of
an Award, a Director Option or a Share otherwise issued under the Plan, its
exercise or any payment or transfer under an Award, under a Director Option or
otherwise under the Plan and to take such other action as may be necessary in
the opinion of the Company to satisfy all obligations for the payment of such
taxes. With respect to Participants who are not subject to Section 16 of the
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Exchange Act, the withholding may be in the form of cash, Shares, other
securities, other Awards or other property as the Committee may allow. With
respect to Participants and Eligible Directors who are subject to Section 16 of
the Exchange Act, the withholding shall be in cash or in any other property
permitted by Rule 16b-3 as the Committee may allow. The Committee may provide
for additional cash payments to Participants or Eligible Directors to defray or
offset any tax arising from the grant, vesting, exercise or payments of any
Award or Share otherwise issued under this Plan.
(e) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto,
including but not limited to the effect on such Award of the death, retirement
or other termination of employment of a Participant and the effect, if any, of a
change in control of the Company.
(f) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other compensation arrangements, which may, but need not,
provide for the grant of options, restricted stock, shares and other types of
awards provided for hereunder (subject to shareholder approval if such approval
is required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(g) NO RIGHT TO EMPLOYMENT. Eligibility for participation in this
Plan or the grant of an Award shall not be construed as giving a Participant the
right to be retained in the employ of the Company or any Subsidiary. Further,
the Company or a Subsidiary may at any time dismiss a Participant from
employment, free from any liability or any claim under the Plan, unless
otherwise expressly provided in the Plan or in any Award Agreement.
(h) NO RIGHTS AS SHAREHOLDER. Subject to the provisions of the Plan
and/or the applicable Award, no Participant or holder or beneficiary of any
Award or Director Option shall have any rights as a shareholder with respect to
any Shares to be distributed under the Plan until he or she has become the
holder of such Shares. Notwithstanding the foregoing, in connection with each
grant of Restricted Stock hereunder, the applicable Award shall specify if and
to what extent the Participant shall not be entitled to the rights of a
shareholder in respect of such Restricted Stock.
(i) GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Ohio.
(j) SEVERABILITY. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or as to any Person or Award, or would disqualify the Plan or any Award under
any law deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to the applicable laws, or if it cannot be construed
or deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such
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jurisdiction, Person or Award and the remainder of the Plan and any such Award
shall remain in full force and effect.
(k) OTHER LAWS. The Committee may refuse to issue or transfer any
Shares or other consideration under the Plan if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the issuance of such Shares shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of the Company, and no such offer shall be outstanding, unless and
until the Committee in its sole discretion has determined that any such offer,
if made, would be in compliance with all applicable requirements of the U.S.
federal securities laws.
(l) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Subsidiary and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Subsidiary pursuant to the Plan, such rights
shall be no greater than the right of any unsecured general creditor of the
Company or any Subsidiary
(m) RULE 16b-3 COMPLIANCE. With respect to Persons subject to
Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable terms and conditions of Rule 16b-3 and any successor
provisions. To the extent that any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
(n) HEADINGS. Headings are given to the sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
(o) NO IMPACT ON BENEFITS. Plan Awards or Shares otherwise issued
under this Plan shall not be treated as compensation for purposes of calculating
an Employee's rights under any employee benefit plan.
(p) INDEMNIFICATION. Each Person who is or shall have been a member
of the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of any
judgment in any such action, suit or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf.
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The foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such Persons may be
entitled under the Company's Articles of Incorporation or Code of Regulations,
by contract, as a matter of law, or otherwise.
SECTION 15. TERM OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall be effective as of March ,
2000, the date of its approval by the shareholders of the Company.
(b) EXPIRATION DATE. No Award or Right to Purchase shall be granted
under the Plan after March , 2010, the ten year anniversary of the effective
date of the Plan. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue or
terminate any such Award or to waive any conditions or rights under any such
Award shall, continue after March , 2010.
-18-
<PAGE>
EXHIBIT 10.2
AGREEMENT OF EMPLOYMENT
THIS AGREEMENT OF EMPLOYMENT ("Agreement") is made and entered into as of
March 13, 2000 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 ("Employee").
W I T N E S S E T H:
WHEREAS, Employee is a longstanding employee of the Company;
WHEREAS, the Company and Employee desire to revise the terms and conditions
under which the Company will employ Employee on and after the date hereof; and
WHEREAS, the Company and Employee desire to enter into this Agreement to
set forth their mutual understanding as to the terms and conditions of
Employee's employment by the Company on and after the date hereof.
It is therefore agreed between the parties as follows:
1. EMPLOYMENT. The Company agrees to employ Employee as the Company's
President and Chief Executive Officer and Employee, in consideration of such
employment, hereby accepts such employment. Employee shall have the duties,
responsibilities and authority customarily possessed by a chief executive
officer of a corporation. During the term of her employment with the Company,
Employee shall perform faithfully, diligently and competently her duties and
responsibilities. 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. TERM. Employee's term of employment with the Company pursuant to this
Agreement shall continue until terminated by the Company or Employee pursuant to
Section 4 hereof. Employee shall be an "employee-at-will" of the Company.
3. COMPENSATION AND BENEFITS. Except as otherwise provided upon a
termination of Employee's employment pursuant to Section 4 hereof, the Company
shall compensate Employee and provide the benefits as set forth in this Section
3. In addition, the Company shall reimburse Employee or pay directly for
reasonable business expenses incurred by her during her employment term in
accordance with the Company's standard policy for reimbursing employment-related
expenses.
3.1 BASE SALARY. The Company shall pay Employee an annual base
salary of not less than $210,000 (prorated for any partial calendar year) during
each calendar year of
<PAGE>
employment hereunder. Commencing January 1, 2001, 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 calendar year may be increased (but not decreased) by the
Committee based on such criteria as the Committee shall determine.
3.2 BONUS. Employee shall be eligible to participate in the
Company's executive bonus plan, as such plan may be amended from time-to-time by
the Committee. Bonuses will be awarded by the Company to Employee based upon
the achievement of goals that are mutually agreeable to Employee and the
Committee. Employee's targeted bonus will be not less than $100,000 per
calendar year. Any bonus awarded to Employee shall be paid by the Company by
the end of the month following such date of award.
3.3 OTHER BENEFITS. Subject to the terms and conditions of the
Company's employee benefit plans and other benefit arrangements, Employee shall
be eligible to participate in the employee benefit plans and other benefits that
the Company makes available from-time-to time to its executive officers, as such
plans and benefits may be amended from time-to-time by the Company. The plans
and benefits that the Company currently offers to its executive officers are
described in its Employee Handbook, a copy of which has previously been provided
to Employee. Notwithstanding anything to the contrary contained in this
Section 3.3, Employee shall first be eligible for an award of incentive stock
options under the Company's incentive stock option plan during the first
calendar quarter of 2001.
4. TERMINATION OF AGREEMENT.
4.1 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 bonus payments awarded by the Company 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 (a) conviction
of any felony or crime involving dishonesty; (b) participation in any act of
fraud or dishonesty against or involving the Company; (c) willful breach of any
Company policy; (d) material breach of this Agreement; or (e) conduct by
Employee which in the good faith determination of the Company's Board of
Directors demonstrates Employee's unfitness to serve as Chief Operating Officer
of the Company.
4.2 DISABILITY. Employee's employment may be terminated, at the
option of the Company or 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 ninety (90) consecutive working days.
Provided, however, that if the question of disability is raised, Employee shall
submit to a medical examination by three physicians who shall determine whether
Employee is disabled, one of whom shall be appointed by the Company, one of whom
shall be appointed by Employee or her representative, and one of whom shall be
appointed by the first two appointed physicians. The
-2-
<PAGE>
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 salary through the end of month in which such termination
upon disability occurs and all bonus payments awarded by the Company but not yet
paid to Employee prior to her termination for disability. Such amounts shall be
paid by the Company within thirty (30) days following the effective date of such
termination. This Section 4.2 will be applied consistent with the Company's
obligations under applicable federal and state law, including without limitation
the Americans with Disabilities Act.
4.3 DEATH. This Agreement shall be terminated on the death of
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 bonus payments
awarded by the Company but not yet paid to Employee prior to her death. Such
amounts shall be paid by the Company within thirty (30) days after the date of
death.
4.4 BY EMPLOYEE OTHER THAN FOR GOOD REASON. If Employee terminates
her employment with the Company other than for good reason (as defined below),
Employee shall receive her salary through the effective date of termination and
all bonus payments awarded by the Company 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.
4.5 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 twelve (12) months following the effective date of
her termination. In addition, the Company shall pay to Employee all bonus
payments awarded by the Company 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 or responsibilities to Employee that are inconsistent
in any material respect with her position as Chief Operating Officer of the
Company 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 in any material respect with any 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.
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.
-3-
<PAGE>
5. COVENANT NOT TO COMPETE.
5.1 NONCOMPETITION. At all times during the term of Employee's
employment, and for a period of one (1) year thereafter, Employee agrees that
she will not, directly or indirectly, anywhere in the Restricted Territory: (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. For purposes of this Agreement,
"Restricted Territory" means (x) during the term of Employee's employment,
anywhere in the World and (y) during the one (1) year period after the
termination of Employee's employment, only those countries where the Company had
a reseller of its products as of the termination date and/or where the Company
did more than $10,000 of business in the one (1) year period prior to the
termination date.
5.2 ACKNOWLEDGMENT AND AGREEMENT. The Company and Employee each
hereby acknowledge and agree as follows:
(a) The covenants, restrictions and obligations set forth in
Section 5.1 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
5.1 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. 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
6. CONFIDENTIAL INFORMATION AND INVENTIONS.
6.1 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.
6.2 CONFIDENTIAL INFORMATION. For the purpose of this Agreement,
"Confidential Information" shall mean any written or unwritten information which
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 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.
-5-
<PAGE>
6.3 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.
6.4 CONFIDENTIALITY OF INVENTIONS. With respect to the information,
inventions and discoveries referred to in Section 6.3, 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, service,
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;
(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
at any time 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,
-6-
<PAGE>
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.
6.5 DURATION OF OBLIGATIONS. The obligations under Sections 6.1, 6.3
and 6.4 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.
7. 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.
8. COUNTERPARTS. This Agreement may be executed in two counterparts, any
one of which shall constitute an original without reference to the other.
9. SEVERABILITY. Each of the provisions of this Agreement shall stand
independently and severably, and the invalidity of any one provision 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.
10. APPLICABLE LAW. This Agreement shall be governed in all respects by
the laws of the State of Ohio.
11. ENTIRE AGREEMENT. This Agreement supercedes and replaces all other
understandings and agreements, whether oral or in writing, between the parties
concerning the subject matter of this Agreement, including without limitation
the Employment Agreement dated September 15, 1998 between the Company and
Employee. No amendment or waiver of this Agreement or any provision hereof
shall be binding upon either party unless it is contained in a writing signed by
both parties.
-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
Title: CFO
EMPLOYEE
/s/ Carol A. Clark
Carol A. Clark
-8-
<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
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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,
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"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
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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,
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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
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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,
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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.
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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;
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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
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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
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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.
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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.
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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
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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
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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
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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;
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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
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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
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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
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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
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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":
12.1.1 a material breach of any representation, warranty or
covenant of the Company or Clark contained herein or in the exhibits hereto
or in the Senior Preferred Stock purchase Agreement or the exhibits thereto;
12.1.2 any default in the performance by the Company or
Clark of any other material term of this Agreement or of the Senior Preferred
Stock Purchase 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 Preferred Stock or converted shares in accordance with the terms of this
Agreement, the Senior Preferred Stock Purchase Agreement and the Amended
Articles.
12.2 REMEDY. Upon the occurrence of any Event of Default,
the holders of a majority of the Preferred Stock then outstanding may, at
their 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 Preferred Stock (including repurchase of conversion stock) at a
price equal to the greater of (i) the aggregate original issue price of the
Preferred Stock 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 a majority of the Preferred Stock then outstanding 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 Preferred Stock in accordance with Section
12.2.1 above.
The "Fair Market Value" per share shall take into account
the liquidation preference of the 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 holders of the Preferred Stock) and the holders of a
majority of the Preferred Stock then outstanding. If the holders of a
majority of the Preferred Stock then outstanding 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
Preferred Stock shall be conclusive and binding upon the parties. The fees
and expenses of the 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
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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
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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.
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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
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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
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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
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CLARK
By: /s/ Carol A. Clark
--------------------------------------------
Carol A. Clark
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
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EXHIBIT 10.8
SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Second Amended and Restated Registration Rights Agreement (this
"Agreement") is made as of January __, 2000 (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 one or more of the Investors shares
of Series C Convertible Preferred Stock, no par value per share of the Company
(the "Series C Preferred Stock"), shares of Series B Convertible Preferred
Stock, no par value per share of the Company (the "Series B Preferred Stock"),
shares of Senior Convertible Preferred Stock, no par value of the Company (the
"Senior Convertible Preferred Stock") (the Senior Convertible Preferred Stock,
Series B Preferred Stock and Series C Convertible Preferred Stock are
hereinafter sometimes referred to, collectively, as the "Preferred Stock") and a
warrant to acquire shares of Common Stock, no par value of the Company (the
"Warrant");
WHEREAS, the parties to this Agreement also are parties to that certain
Series C Convertible Preferred Stock Purchase Agreement (the "Purchase
Agreement") of even date herewith pursuant to which the Company issued the
Series C Preferred Stock and the Warrant;
WHEREAS, the Company and the Investors are parties to that certain
Amended and Restated Registration Rights Agreement dated August 27, 1999 (the
"Prior Registration Rights Agreement"); and
WHEREAS, the Company and the Investors desire by this Agreement to
amend and restate the Prior Registration Rights Agreement for the purpose of
adding to the definition of "Registrable Securities" the Series C Preferred
Stock, the Warrant, the Common Stock issuable upon the conversion of the Series
C Preferred Stock and the Common Stock issuable upon exercise of the Warrant;
NOW, THEREFORE, in consideration of the recitals, the mutual covenants
and agreements herein contained and the issuance and purchase of the Preferred
Stock and the Warrant, the parties hereto, intending to be legally bound, do
hereby covenant and agree as follows:
<PAGE>
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, 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 or the exercise of the Warrant ("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
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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 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.
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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, 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.
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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 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
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"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 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.
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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 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;
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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
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.
8
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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 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
9
<PAGE>
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.
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
10
<PAGE>
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 statement 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 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.
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<PAGE>
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 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.
12
<PAGE>
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
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
13
<PAGE>
Irving W. Bailey II
c/o 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 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.
14
<PAGE>
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.
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 PRIOR REGISTRATION RIGHTS AGREEMENT. The
Prior Registration Rights Agreement is hereby terminated and shall be of no
further force or effect.
15
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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., Manager
of Chrysalis Ventures,
LLC, the Manager of JG
Funding, LLC
SAUNDERS CAPITAL GROUP, LLC
By: /s/ Robert S. Saunders
-------------------------------
Robert S. Saunders,
Manager
/s/Irving W. Bailey II
----------------------------------
Irving W. Bailey II
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EXHIBIT 10.9
FIFTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
This Fifth Amended and Restated Shareholders Agreement (this
"Agreement") is entered into and made to be effective as of January 7, 2000, 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 Fourth Amended and Restated
Shareholders Agreement dated August 27, 1999, 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 C 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 (l) 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 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
-3-
<PAGE>
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 or 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.
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 Fourth Amended and Restated Shareholders Agreement
dated August 27, 1999.
-8-
<PAGE>
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.
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
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<PAGE>
SIGNATURE PAGE
TO
FIFTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fifth
Amended and Restated Shareholders Agreement dated as of January 7, 2000.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO
BECOME A PARTY TO THE FIFTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
DESCRIBED ABOVE.
Date: January 7, 2000 Carol A. Clark
----------------------------------
Name of Shareholder
/s/ Carol A. Clark
------------------------
Signature
----------------------------------
Title (if applicable)
c/o DPEC, Inc.
851 West Third Street, Bldg. 3
----------------------------------
Street Address
Columbus Ohio 43212
----------------------------------
City State Zip
-10-
<PAGE>
SIGNATURE PAGE
TO
FIFTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fifth
Amended and Restated Shareholders Agreement dated as of January 7, 2000.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO
BECOME A PARTY TO THE FIFTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
DESCRIBED ABOVE.
Date: January 7, 2000 Robert N. Clark, as Trustee under the 1999
Grantor Retained Annuity Trust Created by
Carol A. Clark Dated September 8, 1999
-------------------------------------------
Name of Shareholder
/s/ Robert N. Clark
---------------------------
Signature
Trustee
----------------------------------------
Title (if applicable)
c/o DPEC, Inc.
851 West Third Street, Bldg. 3
----------------------------------------
Street Address
Columbus Ohio 43212
----------------------------------------
City State Zip
-11-
<PAGE>
SIGNATURE PAGE
TO
FIFTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fifth
Amended and Restated Shareholders Agreement dated as of January 7, 2000.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO
BECOME A PARTY TO THE FIFTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
DESCRIBED ABOVE.
Date: January 7, 2000 Frances Papalios
---------------------------------
Name of Shareholder
/s/ Frances Papalios
-----------------------------
Signature
----------------------------------
Title (if applicable)
4170 Waddington Road
----------------------------------
Street Address
Columbus Ohio 43220
----------------------------------
City State Zip
- 12-
<PAGE>
SIGNATURE PAGE
TO
FIFTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
The undersigned hereby agrees to the terms of the DPEC, INC. Fifth
Amended and Restated Shareholders Agreement dated as of January 7, 2000.
BY SIGNING THIS SIGNATURE PAGE, THE UNDERSIGNED HEREBY AGREES TO
BECOME A PARTY TO THE FIFTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
DESCRIBED ABOVE.
Date: January 7, 2000 Frances Papalios, as Grantor and Trustee
Of The Frances Papalios TrusT
----------------------------------
Name of Shareholder
/s/ Frances Papalios
---------------------------
Signature
Grantor and Trustee
----------------------------------
Title (if applicable)
4170 Waddington Road
----------------------------------
Street Address
Columbus Ohio 43220
----------------------------------
City State Zip
-13-
<PAGE>
EXHIBIT 10.16
SERIES C 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
JANUARY 7, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
1. Sale and Issuance of Series C Convertible Preferred Stock and Warrant.........1
2. Closing.......................................................................2
3. Closing Items.................................................................2
4. Benefit Plans.................................................................3
5. Further Assurances............................................................3
6. Representations and Warranties of the Company and Clark.......................3
6.1 Corporate Standing...................................................4
6.2 Authorization........................................................4
6.3 Capitalization.......................................................4
6.4 Validly Issued Shares................................................5
6.5 No Conflict..........................................................6
6.6 Contracts and Other Commitments; Compliance..........................6
6.7 Subsidiaries.........................................................6
6.8 Consents.............................................................6
6.9 Financial Statements.................................................6
6.10 Indebtedness for Borrowed Money; No Undisclosed Liabilities..........7
6.11 Title to Property and Assets; Leases.................................7
6.12 Legal Proceedings....................................................7
6.13 Environmental Matters................................................7
6.14 Licenses and Permits; Compliance with Laws...........................8
6.15 Employee Benefit Plans...............................................8
6.16 Labor Relations......................................................8
6.17 Insurance............................................................9
6.18 Tax Matters..........................................................9
6.19 Changes in Circumstances............................................10
6.20 Patents and Trade Names, Etc........................................11
6.21 Affiliated Transactions.............................................12
6.22 Bank Accounts.......................................................12
6.23 Brokers' and Finders' Fees..........................................12
6.24 Registration Rights.................................................13
6.25 Small Business Concern..............................................13
6.26 Material Facts......................................................13
6.27 Clark Debt Repayment Obligations....................................13
6.28 Year 2000 Compliance................................................14
7. Representations and Warranties of River Cities and other Investors...........14
7.1 Authorization; Binding Agreement....................................14
7.2 Investment Representations..........................................14
7.3 Accredited Investor; Residence......................................14
7.4 Receipt of Information; Restricted Securities.......................14
7.5 Investment Experience...............................................15
8. Survival of Representations and Warranties...................................15
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
9. Indemnification..............................................................15
9.1 Indemnification by the Company......................................15
9.2 Indemnification by Clark............................................16
9.3 Indemnification by Investors........................................16
10. Covenants of the Company (and Clark solely with respect to Section 10.6).....16
10.1 Insurance...........................................................16
10.2 Financial Reporting.................................................16
10.3 Board of Directors..................................................17
10.4 Reservation of Shares...............................................17
10.5 Use of Proceeds.....................................................17
10.6 Clark Debt Repayment Obligations....................................18
10.7 Compliance with Small Business Investment Act.......................18
10.8 Negative Covenants..................................................18
10.9 Definition of a Qualified Sale......................................19
11. Restrictions of Transfers....................................................19
11.1 Notice of Sale by Clark.............................................19
11.2 Definition of Qualified IPO.........................................19
11.3 Co-Sale Right.......................................................19
11.4 Rights of Refusal...................................................20
11.5 Exceptions..........................................................20
11.6 Right of First Refusal..............................................21
11.7 Right of First Offer................................................21
11.8 Restrictive Legend..................................................22
11.9 Preemptive Rights...................................................22
12. Default......................................................................22
12.1 Events of Default...................................................22
12.2 Remedy..............................................................23
12.3 Diversion of Proceeds...............................................24
12.4 Loss of Clark.......................................................24
13. Public Statements............................................................24
14. Notices......................................................................25
15. Parties in Interest; Assignment..............................................26
16. Construction; Governing Law..................................................26
17. Entire Agreement; Amendment and Waiver.......................................26
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......................................................27
25. Termination Upon a Qualified IPO.............................................27
26. Termination of Certain Provisions............................................28
27. Pronouns.....................................................................28
</TABLE>
ii
<PAGE>
SERIES C CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
("Agreement") is made and entered into as of the 7th day of January, 2000, 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 sold, and River Cities Capital Group
II Limited Partnership ("Group") purchased, 5,123 shares of Senior Convertible
Preferred Stock of the Company (the "Senior Preferred Stock") for a price of
$2,000,000;
On February 22, 1999, Group assigned the Senior Preferred Stock to
River Cities;
On August 27, 1999, the Company sold, and the Investors purchased, an
aggregate of 2,979 shares of Series B Convertible Preferred Stock of the Company
(the "Series B Preferred Stock") for an aggregate price of $3,000,121 pursuant
to the terms of a certain Series B Convertible Preferred Stock Purchase
Agreement (the "Prior Stock Purchase Agreement"); and
The Company desires to sell and issue, and River Cities desires to
purchase and acquire, 1,167 shares of the Company's authorized but unissued
Series C Convertible Preferred Stock (the "Series C Preferred Stock") and a
warrant to purchase 292 shares of the Company's authorized but unissued Common
Stock (the "Warrant") for an aggregate price of $1,500,000 pursuant to the terms
and subject to the conditions contained herein. The shares of Senior Preferred
Stock, Series B Preferred Stock and Series C 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 parties hereto agree as follows:
1. SALE AND ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK AND
WARRANT.
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 C 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, River Cities agrees to purchase from the Company, and the Company
agrees to sell, issue and deliver to
<PAGE>
River Cities, 1,167 shares of Series C Preferred Stock and the Warrant for an
aggregate price of $1,500,000.
1.3 Effective upon the Closing, the Company and the Investors
shall enter into the Second Amended and Restated Registration Rights Agreement
in the form attached hereto as EXHIBIT B ("Second Amended and Restated
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 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, to River Cities 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 Second Amended and Restated Registration
Rights Agreement duly executed by the Company;
3.1.4 the Fifth Amended and Restated Shareholders
Agreement among the Company, Clark, a trust created by Clark, Frances
Papalios ("Papalios") and a trust created by Papalios, in the form attached
hereto as EXHIBIT D duly executed by each of such parties (the "Shareholders
Agreement");
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 C Preferred Stock and the Warrant, 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;
3.1.7 the completed United States Small Business
Administration ("SBA") Parts A and B of Form 1031; and
2
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3.1.8 the Warrant issued in River Cities' name in the
form attached hereto as EXHIBIT F and a share certificate in River Cities'
name representing the Series C Preferred Stock.
3.2 At the Closing, River Cities shall deliver, or cause to be
delivered, to the Company $1,500,000 in immediately available funds.
3.3 At the Closing, the Investors shall deliver to the Company
the Second Amended and Restated Registration Rights Agreement, duly executed
by the Investors.
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 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 River Cities (with respect to Sections 6.1
through 6.28 inclusive) and to the other Investors (solely with respect to
Section 6.2) and Clark hereby represents and warrants to
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River Cities (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 Warrant, the Second 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, "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
River Cities.
6.2 AUTHORIZATION. The execution and delivery of this
Agreement, the Warrant, the Second 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 Warrant, the Second 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 70,000 shares of capital stock, including (i) 60,731
shares of Common Stock of which as of the date hereof 33,737 shares are
validly issued and outstanding, fully paid and nonassessable, 5,123 shares of
which have been duly and validly reserved for issuance upon conversion of the
Senior Preferred Stock, 2,979 shares of which have been duly and validly
reserved for issuance upon conversion of the Series B Preferred Stock, 1,167
shares of which have been duly and validly reserved for issuance upon
conversion of the Series C Preferred Stock, 292 shares of which have been
duly and validly reserved for issuance upon exercise of the Warrant and 4,844
shares of which have been duly and validly reserved for issuance upon
exercise of stock options; (ii) 5,123 shares of Senior Preferred Stock, all
of which are validly issued and outstanding, fully paid and nonassessable;
(iii) 2,979 shares of Series B Preferred Stock, all of which are validly
issued and outstanding, fully paid and
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nonassessable; and (iv) 1,167 shares of Series C 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 Prior Purchase Agreement, the
Amended Articles, the Warrant, the Second 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 Prior 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 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 Prior 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 C Preferred
Stock and the Warrant 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 Series C Preferred Stock and
the Warrant to River Cities 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 C Preferred Stock and the Common
Stock issuable upon exercise of the Warrant and payment of the purchase price
of such shares of Common Stock will be, upon issuance and delivery in
accordance with the terms of the Amended Articles and the Warrant, as the
case may be, 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 Series C Preferred Stock
and upon exercise of the Warrant 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
hereof and as of the date of issuance of such Common Stock), and will not
violate the preemptive rights of any person.
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6.5 NO CONFLICT. Except as set forth on SCHEDULE 6.5, the
execution and delivery of this Agreement, the Warrant, the Second 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 River Cities
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 River
Cities 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 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 River
Cities prior to the date hereof the Company's unaudited balance sheet as of
November 30, 1999, and the related unaudited statements of income and cash
flows for the eleven months then ended (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 for
such period and have been prepared
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in all material respects in accordance with GAAP consistently applied during
such period 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 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.
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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
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 River Cities 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.
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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. 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.
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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
November 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;
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 dividend required by the terms of the
Senior Preferred Stock;
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
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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, 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 River Cities 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
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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 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 Second
Amended and Restated Registration Rights Agreement attached hereto as EXHIBIT
B and the Registration Rights Agreement (a copy of which has been previously
provided to River Cities) among the Company, Papalios, a trust created by
Papalios, Clark, a trust created by Clark, Gary W. Qualmann and a trust
created by Gary W. Qualmann, the Company is presently not under any
obligation and has not
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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 hereunder of the
Series C Preferred Stock and the Warrant 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, the
Company has provided River Cities with all the information reasonably
available to the Company that River Cities has requested for deciding whether
to purchase the Series C Preferred Stock and the Warrant. This Agreement and
the documents or written statements furnished by the Company to River Cities
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 "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.
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7. REPRESENTATIONS AND WARRANTIES OF RIVER CITIES AND OTHER INVESTORS.
River Cities (with respect to Sections 7.1 through 7.5 inclusive) and the other
Investors (solely with respect to Section 7.1) hereby represent and warrant to
the Company as follows:
7.1 AUTHORIZATION; BINDING AGREEMENT. Each Investor represents
and warrants that this Agreement and the Second Amended and Restated
Registration Rights Agreement have been duly authorized, executed and
delivered by it and each constitutes its legal, valid and binding obligation,
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. River Cities is acquiring the
Series C Preferred Stock, the Warrant and the Common Stock issuable upon
conversion or exercise 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 River Cities 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 River Cities hereunder and River
Cities 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 and is an "accredited investor" as such term is defined
under Regulation D of the Securities Act.
7.4 RECEIPT OF INFORMATION; RESTRICTED SECURITIES. River Cities
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. River Cities 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.
River Cities 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 C Preferred Stock and the Warrant 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 River Cities or to which River Cities
had access. River Cities' 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 River Cities to rely thereon.
7.5 INVESTMENT EXPERIENCE. River Cities 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 its investment and has such
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knowledge and experience in financial and business matters that it is capable
of evaluating the merits and risks of its investment in the Securities. River
Cities also represents that it has not been organized for the purpose of
acquiring the Series C Preferred Stock and the Warrant.
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, Series C Preferred Stock, the Warrant, 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
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 the Investors 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
any Investor or any of its successors or assigns 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 the Investors for any Loss suffered or incurred by any Investor or
any of its successors or assigns 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
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9.2.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
9.3 INDEMNIFICATION BY INVESTORS. Each 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 such Investor set forth in this Agreement and the Exhibits hereto;
9.3.2 any breach of or noncompliance by any Investor with
any covenant or agreement of such Investor contained in this Agreement; and
9.3.3 any and all actions, suits, proceedings, claims,
demands, assessments and judgments incident to any of the foregoing.
10. COVENANTS OF THE COMPANY (AND CLARK SOLELY WITH RESPECT TO SECTION
10.6).
10.1 INSURANCE. The Company has policies of term life insurance
on the life of Clark in the aggregate face amount of not less than $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 LLP or another independent accounting
firm reasonably acceptable to the Investors and copies thereof shall be
delivered to the Investors on or before the 120th day following the end of the
Company's fiscal year.
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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.
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 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 C
Preferred Stock and the Warrant shall be used by the Company for general working
capital, capital expenditures, acquisitions, legal/IPO expense and other
expenses approved by the Company's Board of Directors.
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 River Cities with sufficient information to permit it 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
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(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. Upon written request, the
President of the Company shall certify to the Investors, within three months
of the date of the 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;
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
dividends required by the terms of the Preferred Stock) 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
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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 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
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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 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.
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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 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 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
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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 C Preferred Stock or the Warrant
issuable under this Agreement, the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock, the Series B Preferred Stock or
the Senior Preferred Stock or the shares of Common Stock issuable upon
exercise of the Warrant; (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 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. Each of JG,
Saunders and Bailey hereby waives its right to purchase any part of the Series C
Preferred Stock and the Warrant being purchased hereunder by River Cities.
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 or
in the Prior Stock Purchase Agreement or the exhibits thereto;
12.1.2 any default in the performance by the Company or
Clark of any other material term of this Agreement or of the Prior Stock
Purchase 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
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12.1.4 the failure of the Company to redeem or repurchase
the Preferred Stock or converted shares in accordance with the terms of this
Agreement, the Prior Stock Purchase Agreement and the Amended Articles.
12.2 REMEDY. Upon the occurrence of any Event of Default, the
holders of a majority of the Preferred Stock then outstanding may, at their
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 Preferred Stock (including repurchase of conversion stock) at a
price equal to the greater of (i) the aggregate original issue price of the
Preferred Stock 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 a majority of the Preferred Stock then outstanding shall have the right to
elect a majority of the Board of Directors of the Company and to vote two
thirds (2/3rds) of the combined voting power of 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 Preferred Stock in accordance with Section
12.2.1 above.
The "Fair Market Value" per share shall take into account
the liquidation preference of the 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 holders of the Preferred Stock) and the holders of a
majority of the Preferred Stock then outstanding. If the holders of a
majority of the Preferred Stock then outstanding 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
Preferred Stock shall be conclusive and binding upon the parties. The fees
and expenses of the 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
23
<PAGE>
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 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
24
<PAGE>
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
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
25
<PAGE>
"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
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 $15,000 of the reasonable legal and
out-of-pocket expenses incurred by River Cities 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 River Cities 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.
26
<PAGE>
23. ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the Warrant, the Second
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
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
Prior 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.
[Remainder of page intentionally left blank]
27
<PAGE>
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 Capital Fund II Limited
Partnership
Address: Suite 1900
221 East Fourth Street
Cincinnati, Ohio 45202-4147
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
28
<PAGE>
/s/ Irving W. Bailey II
---------------------------------------------
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
CLARK
/s/ Carol A. Clark
------------------------------------
Carol A. Clark
Address: 851 West Third Avenue
Building 3
Columbus, Ohio 43212
29
<PAGE>
EXHIBIT 10.17
THIS WARRANT AND ANY COMMON STOCK ACQUIRED UPON THE EXERCISE OF THIS WARRANT
(COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE LAW. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (I) AN
EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (II) AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT
AND SUCH SECURITIES LAWS.
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION
(EACH A "TRANSFER") AND VOTING OF THE SECURITIES ARE RESTRICTED BY THE TERMS OF
THE SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED JANUARY 7,
2000, TO WHICH THE CORPORATION IS A PARTY. THE CORPORATION WILL NOT REGISTER THE
TRANSFER OF THE SECURITIES ON THE BOOKS OF THE CORPORATION UNLESS AND UNTIL THE
TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF SUCH AGREEMENT. THE
CORPORATION WILL MAIL A COPY OF SUCH AGREEMENT, TOGETHER WITH A COPY OF THE
EXPRESS TERMS OF THE SECURITIES AND OF THE OTHER CLASS OR CLASSES AND SERIES OF
SHARES, IF ANY, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, TO THE RECORD
HOLDER OF THIS WARRANT, WITHOUT CHARGE, WITHIN FIVE DAYS AFTER RECEIPT OF A
WRITTEN REQUEST THEREFOR.
- --------------------------------------------------------------------------------
WARRANT NO. 1 292 SHARES
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
DPEC, INC.
(AN OHIO CORPORATION)
PURCHASE PRICE PER SHARE: $1,285.26
EXPIRATION DATE: 5:00 P.M., COLUMBUS, OHIO TIME, ON JANUARY 7, 2005
THIS CERTIFIES that, for value received, River Cities Capital Fund II
Limited Partnership is the registered owner and is entitled, subject to the
terms and conditions of this Warrant, until the Expiration Date, to purchase the
number of shares set forth above of the Common Stock, no par value (the "Common
Stock"), of DPEC, Inc., an Ohio corporation (the "Corporation"), from the
Corporation at the purchase price set forth above. The number of shares of
Common Stock that may be received upon the exercise of this Warrant and the
price to
<PAGE>
be paid for each such share of Common Stock are subject to adjustment from
time to time as hereinafter set forth.
Section 1. EXERCISE OF WARRANT. Subject to the provisions hereof, this
Warrant may be exercised in whole or in part until the Expiration Date, by
delivery of this Warrant to the Corporation with the exercise form duly executed
and payment of the purchase price (in cash or by certified or bank cashier's
check payable to the order of the Corporation) for each share of Common Stock so
purchased.
Section 2. CORPORATION'S COVENANTS AS TO COMMON STOCK. The shares of
Common Stock deliverable on the exercise of this Warrant shall, at delivery, be
fully paid and non-assessable, free from taxes, liens, and charges with respect
to their purchase. The Corporation shall at all times reserve and hold available
a sufficient number of shares of Common Stock to satisfy all purchase rights
under this Warrant.
Section 3. METHOD OF EXERCISE. The purchase rights represented by this
Warrant are exercisable at the option of the registered owner in whole at any
time, or in part, from time to time, within the period above specified. In case
of the exercise of this Warrant for less than all the shares of Common Stock
purchasable hereunder, the Corporation shall cancel this Warrant and execute and
deliver a new Warrant of like tenor and date for the balance of the shares of
Common Stock so purchasable.
Section 4. ADJUSTMENT OF SHARES PURCHASEABLE. The number of shares of
Common Stock purchasable under this Warrant and the purchase price of each such
share of Common Stock are subject to adjustment from time to time as specified
in this Warrant.
Section 5. LIMITED RIGHTS OF OWNER. This Warrant does not entitle the
owner to any voting rights or other rights as a shareholder of the Corporation
or to any other rights whatsoever except the rights herein expressed. No
dividends are payable or will accrue on this Warrant or the shares purchasable
hereunder until, and except to the extent that, this Warrant is exercised.
Section 6. EXCHANGE FOR OTHER DENOMINATIONS. This Warrant is
exchangeable, on its surrender by the registered owner to the Corporation, for
new Warrants of like tenor and date representing in the aggregate the right to
purchase the number of shares purchasable hereunder in denominations designated
by the registered owner at the time of surrender.
Section 7. TRANSFER. Except as otherwise above provided, this Warrant
is transferable only on the books of the Corporation by the registered owner in
person or by attorney, on surrender of this Warrant, properly endorsed. However,
because this Warrant has not been registered under the Securities Act of 1933,
as amended, and applicable state securities laws, this Warrant may not be sold
or transferred in the absence of an effective registration of this Warrant under
such Act and all other applicable securities laws or an opinion of counsel
acceptable to the Corporation that such sale or transfer is not required under
applicable securities laws. Any Common Stock purchased upon exercise of this
Warrant shall also be subject to the
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<PAGE>
same restrictions on transfer and will contain a transfer legend
substantially similar to the one found on the face of this Warrant.
Section 8. RECOGNITION OF REGISTERED OWNER. Prior to due presentment
for registration of transfer of this Warrant, the Corporation may treat the
registered owner as the person exclusively entitled to receive notices and
otherwise to exercise rights hereunder.
Section 9. EFFECT OF STOCK SPLIT, ETC. If the Corporation, by stock
dividend, split, reverse split, reclassification of shares or otherwise, changes
as a whole the outstanding Common Stock into a different number or class of
shares, then: (a) the number and class of shares so changed shall, for the
purposes of this Warrant, replace the shares outstanding immediately prior to
the change; and (b) the Warrant purchase price in effect, and the number of
shares purchasable under this Warrant, immediately prior to the date upon which
the change becomes effective, shall be proportionately adjusted (the price to
the nearest cent). Irrespective of any adjustment or change in the Warrant
purchase price or the number of shares purchasable under this or any other
Warrant of like tenor, the Warrants theretofore and thereafter issued may
continue to express the Warrant purchase price per share and the number of
shares purchasable as were expressed in this Warrant when initially issued.
Section 10. EFFECT OF MERGER, ETC. If the Corporation consolidates
with or merges into another corporation, the registered owner shall thereafter
be entitled on exercise to purchase, with respect to each share of Common Stock
purchasable hereunder immediately before the consolidation or merger becomes
effective, the securities or other consideration to which a holder of one share
of Common Stock is entitled in the consolidation or merger. In any such case,
appropriate adjustment will be made in the application of the provisions of this
Warrant to assure that the provisions of this Warrant shall thereafter be
applicable, as nearly as reasonably may be, to any securities or other
consideration so deliverable on exercise of this Warrant. The Corporation shall
not consolidate or merge unless, prior to consummation, the successor
corporation (if other than the Corporation) assumes the obligations of this
Section 10 by written instrument executed and mailed to the registered owner at
the address of the owner on the books of the Corporation.
Section 11. NOTICE OF ADJUSTMENT. On the happening of an event
requiring an adjustment of the Warrant purchase price or the shares purchasable
hereunder, the Corporation shall forthwith give written notice to the registered
owner stating the adjusted Warrant purchase price and the adjusted number and
kind of securities or other property purchasable hereunder resulting from the
event and setting forth in reasonable detail the method of calculation and the
facts upon which the calculation is based. The board of directors of the
Corporation, acting in good faith, shall determine the calculation.
Section 12. NOTICE AND EFFECT OF DISSOLUTION, ETC. In case a voluntary
or involuntary dissolution, liquidation, or winding up of the Corporation (other
than in connection with a consolidation or merger covered by Section 10 above)
is at any time proposed, the Corporation shall give at least 10 days' written
notice to the registered owner prior to the record date as of which holders of
Common Stock will be entitled to receive distributions as a
-3-
<PAGE>
result of the proposed transaction. Such notice shall contain: (1) the date
on which the transaction is to take place; (2) the record date as of which
holders of Common Stock will be entitled to receive distributions as a result
of the transaction; (3) a brief description of the transaction; (4) a brief
description of distributions to be made to holders of Common Stock as a
result of the transaction; and (5) an estimate of the fair value of the
distributions. On the date of the transaction, if it actually occurs, this
Warrant and all rights hereunder shall terminate.
Section 13. METHOD OF GIVING NOTICE; EXTENT REQUIRED. Notices shall be
given by first class mail, postage prepaid, addressed to the registered owner at
the address of the owner appearing in the records of the Corporation. No notice
to Warrant holders is required except as specified in Sections 11 and 12.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be
signed by its duly authorized officers as of this 7th day of January, 2000.
DPEC, INC.
By: /s/ Carol A. Clark
------------------------------------
Carol A. Clark, President
By: /s/ Gary W. Qualmann
------------------------------------
Gary W. Qualmann, Secretary
-4-
<PAGE>
TRANSFER FORM
For value received, the undersigned hereby sells, assigns, and transfers to
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
this Warrant and irrevocably appoints _____________________________ attorney
(with full power of substitution) to transfer this Warrant on the books of the
Corporation.
Date:
-------------------------
In the presence of -----------------------------------
(Please sign exactly as name
- ------------------------------ appears on Warrant)
Address
----------------------------
-----------------------------------
Taxpayer ID No.
--------------------
Signature guaranteed by
-----------------------------------
-5-
<PAGE>
EXERCISE FORM
The undersigned hereby: (1) irrevocably exercises and
subscribes for ________ shares of Common Stock of DPEC, Inc. pursuant to this
Warrant, and encloses payment of $_________ therefor; (2) requests that a
certificate for the shares be issued in the name of the undersigned and
delivered to the undersigned at the address below; and (3) if such number of
shares is not all of the shares purchasable hereunder, requests that a new
Warrant of like tenor for the balance of the remaining shares purchasable
hereunder be issued in the name of the undersigned and delivered to the
undersigned at the address below.
Date:
----------------------------
--------------------------------------
(Please sign exactly as name appears
on Warrant)
Address:
------------------------------
--------------------------------------
Taxpayer ID No.
-----------------------
-6-
<PAGE>
EXHIBIT 10.18
AGREEMENT OF EMPLOYMENT
-----------------------
THIS AGREEMENT OF EMPLOYMENT ("Agreement") is made and entered into as
of March 13, 2000 by and between DPEC, INC., an Ohio corporation having its
principal office at Building 3, 851 West Third Street, Columbus, Ohio (the
"Company"), and Angus J. Carroll ("Employee").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Employee as the Chief Operating
Officer of the Company and Employee desires to be so employed by the Company;
and
WHEREAS, the Company and Employee desire to enter into this Agreement
to set forth their mutual understanding as to the terms and conditions of
Employee's employment by the Company.
It is therefore agreed between the parties as follows:
1. EMPLOYMENT. The Company agrees to employ Employee as the
Company's Chief Operating Officer and Employee, in consideration of such
employment, hereby accepts such employment. Employee shall report directly to
the Company's Chief Executive Officer and shall be responsible for the
day-to-day operations of the Company. During the term of his employment with the
Company, Employee shall perform faithfully, diligently and competently those
duties and responsibilities given to him from time to time by the Company's
Chief Executive Officer or its Board of Directors. Unless otherwise approved in
advance by the Company's Board of Directors, Employee shall devote his 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. Employee
certifies to the Company that he is eligible to work in the United States during
the entire employment term. Prior to the Commencement Date, Employee shall
provide satisfactory proof to the Company of such eligibility.
2. TERM. Employee's term of employment with the Company pursuant
to this Agreement shall begin as of March 13, 2000 (the "Commencement Date") and
shall continue until terminated by the Company or Employee pursuant to Section 4
hereof. Employee shall be an "employee-at-will" of the Company.
3. COMPENSATION AND BENEFITS. Except as otherwise provided upon a
termination of Employee's employment pursuant to Section 4 hereof, the Company
shall compensate Employee and provide the benefits as set forth in this Section
3. In addition, the Company shall reimburse Employee or pay directly for
reasonable business expenses incurred by him during his employment term in
accordance with the Company's standard policy for reimbursing employment-related
expenses.
<PAGE>
3.1 BASE SALARY. The Company shall pay Employee an annual
base salary of not less than $225,000 (prorated for any partial calendar year)
during each calendar year of employment hereunder. Commencing January 1, 2000,
Employee will also be eligible for an annual salary review by the Compensation
Committee (the "Committee") of the Company's Board of Directors and his annual
base salary for the following calendar year may be increased (but not decreased)
by the Committee based on such criteria as the Committee shall determine.
3.2 BONUS. Employee shall be eligible to participate in
the Company's executive bonus plan, as such plan may be amended from
time-to-time by the Committee. Bonuses will be awarded by the Company to
Employee based upon the achievement of personal performance goals, quarterly
Company goals and quarter-to-date Company goals that are mutually agreeable to
Employee and the Chief Executive Officer and that are approved by the Committee.
During calendar year 2000, Employee's targeted bonus will be $20,000 per
calendar quarter ($80,000 annualized). Any bonus awarded to Employee for a
calendar quarter shall be paid by the Company by the end of the month following
such calendar quarter.
3.3 STOCK OPTIONS. Effective as of the Commencement Date,
the Company shall grant to Employee a stock option to purchase 487 shares of the
Company's common shares at an exercise price equal to the fair market value of
the shares on the Commencement Date, as determined by the Committee in good
faith. In addition, prior to the end of the first quarter of calendar year 2001,
the Company shall grant to Employee a stock option to purchase an additional 243
common shares at an exercise price equal to the fair market value of the shares
on the grant date, as determined by the Committee in good faith. Such options
shall be designed to qualify as "incentive" stock options for federal income tax
purposes and shall vest over three years, one-third of the options shall vest on
each of the first, second and third year anniversaries of the grant date,
subject to accelerated vesting upon a "change of control" of the Company. As a
condition of receiving the initial grant of options, Employee shall execute and
deliver to the Company the standard Employee Buy-Sell Agreement, a copy of which
has previously been provided to Employee.
3.4 RELOCATION EXPENSES. The Company shall reimburse
Employee for his reasonable expenses, but not to exceed $100,000, of relocating
to Columbus, Ohio, which reimbursement shall be made in accordance with the
Company's standard policy for reimbursing employment-related expenses.
3.5 OTHER BENEFITS. Subject to the terms and conditions
of the Company's employee benefit plans and other benefit arrangements, Employee
shall be eligible to participate in the employee benefit plans and other
benefits that the Company makes available from time-to-time to its executive
officers, as such plans and benefits may be amended from time-to-time by the
Company. The plans and benefits that the Company currently offers to its
executive officers are described in its Employee Handbook, a copy of which has
previously been provided to Employee. Notwithstanding anything to the contrary
contained in this Section 3.5, Employee shall not be entitled to participate in
the Company's medical plan during the first six months following the
Commencement Date. In lieu of such participation in the Company's medical plan,
the Company shall reimburse Employee, in an amount not to exceed $750 per month,
for
-2-
<PAGE>
the premiums he is required to pay to maintain coverage during such period
under the medical plan provided by his previous employer, which reimbursement
shall be made in accordance with the Company's standard policy for reimbursing
employment-related expenses.
4. TERMINATION OF AGREEMENT.
4.1 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 his salary
through the effective date of termination and any bonus payments awarded by the
Company 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 (a) conviction
of any felony or crime involving dishonesty; (b) participation in any act of
fraud or dishonesty against or involving the Company; (c) willful breach of any
Company policy; (d) material breach of this Agreement; or (e) conduct by
Employee which in the good faith determination of the Company's Board of
Directors demonstrates Employee's unfitness to serve as Chief Operating Officer
of the Company.
4.2 DISABILITY. Employee's employment may be terminated,
at the option of the Company or 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 his job hereunder for ninety (90) consecutive working days.
Provided, however, that if the question of disability is raised, Employee shall
submit to a medical examination by three physicians who shall determine whether
Employee is disabled, one of whom shall be appointed by the Company, one of whom
shall be appointed by Employee or his 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 his
salary through the end of month in which such termination upon disability occurs
and all bonus payments awarded by the Company but not yet paid to Employee prior
to his termination for disability. Such amounts shall be paid by the Company
within thirty (30) days following the effective date of such termination. This
Section 4.2 will be applied consistent with the Company's obligations under
applicable federal and state law, including without limitation the Americans
with Disabilities Act.
4.3 DEATH. This Agreement shall be terminated on the
death of Employee effective as of the date of his 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 he dies and shall be entitled to all bonus
payments awarded by the Company but not yet paid to Employee prior to his death.
Such amounts shall be paid by the Company within thirty (30) days after the date
of death.
4.4 BY EMPLOYEE OTHER THAN FOR GOOD REASON. If Employee
terminates his employment with the Company other than for good reason (as
defined below), Employee shall
-3-
<PAGE>
receive his salary through the effective date of termination and all bonus
payments awarded by the Company 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.
4.5 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 his employment with the Company for good
reason, the Company shall continue to pay Employee his salary in effect on the
effective date of the termination for a period of twelve (12) months following
the effective date of his termination. In addition, the Company shall pay to
Employee all bonus payments awarded by the Company 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 or responsibilities to Employee
that are inconsistent in any material respect with his position as Chief
Operating Officer of the Company 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 in any material
respect with any 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. 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. COVENANT NOT TO COMPETE.
5.1 NONCOMPETITION. At all times during the term of
Employee's employment, and for a period of one (1) year thereafter, Employee
agrees that he will not, directly or indirectly, anywhere in the Restricted
Territory: (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. For purposes of this Agreement, "Restricted Territory" means (x) during
the term of Employee's employment, anywhere in the World and (y) during the one
(1) year period after the termination of Employee's employment, only those
countries where the Company had a reseller of its products as of the termination
date and/or where the Company did more than $10,000 of business in the one (1)
year period prior to the termination date.
-4-
<PAGE>
5.2 ACKNOWLEDGMENT AND AGREEMENT. The Company and
Employee each hereby acknowledge and agree as follows:
(a) The covenants, restrictions and obligations
set forth in Section 5.1 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 5.1 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. 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 shall not
include any period of violation or period of time required for litigation to
enforce such restriction or covenant; and
6. CONFIDENTIAL INFORMATION AND INVENTIONS.
6.1 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.
6.2 CONFIDENTIAL INFORMATION. For the purpose of this
Agreement, "Confidential Information" shall mean any written or unwritten
information which 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
-5-
<PAGE>
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 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.
6.3 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,
-6-
<PAGE>
and to assign to the Company or its designee such inventions and all patent
applications and patents relating thereto.
6.4 CONFIDENTIALITY OF INVENTIONS. With respect to the
information, inventions and discoveries referred to in Section 6.3, 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 his employment by the Company and relating to any product,
service, 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;
(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 at any time 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.
6.5 DURATION OF OBLIGATIONS. The obligations under
Sections 6.1, 6.3 and 6.4 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.
7. 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
-7-
<PAGE>
business or corporation to which the Company assigned or otherwise
transferred its rights hereunder.
8. COUNTERPARTS. This Agreement may be executed in two
counterparts, any one of which shall constitute an original without reference to
the other.
9. SEVERABILITY. Each of the provisions of this Agreement shall
stand independently and severably, and the invalidity of any one provision 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.
10. APPLICABLE LAW. This Agreement shall be governed in all
respects by the laws of the State of Ohio.
11. ENTIRE AGREEMENT. This Agreement supercedes and replaces all
other understandings and agreements, whether oral or in writing, between the
parties concerning the subject matter of this Agreement, including without
limitation the letter dated February 9, 2000 from Carol Clark to Employee. No
amendment or waiver of this Agreement or any provision hereof shall be binding
upon either party unless it is contained in a writing signed by both parties.
IN WITNESS WHEREOF, the parties have hereunto set their hands as of the
date first above written.
COMPANY
DPEC, INC.
By: /s/ Carol A. Clark
Carol A. Clark, Chief Executive
Officer
EMPLOYEE
/s/ Angus J. Carroll
Angus J. Carroll
-8-
<PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
MINDLEADERS.COM, INC.
COLUMBUS, OHIO
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-87273 of MindLeaders.com, Inc. of our report dated March 16,
2000, except as to note 9 which is March __, 2000, appearing in the Prospectus,
which is part of such Registration Statement, and to the reference to us under
the headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of MindLeaders.com,
Inc., listed in Item 16. This financial statement schedule is the
responsibility of MindLeaders.com, Inc.'s management. Our responsibility is
to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March ___, 2000
The above consent and opinion is the form that will be signed by Deloitte &
Touche LLP upon the approval of the "MindLeaders.com" Amended Artices of
Incorporation and the approval of the 169:1 stock split as discussed in note
9 to the financial statements.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 20, 2000
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or
director of DPEC, Inc. (the "Company"), which has filed with the Securities
and Exchange Commission, Washington, D.C., under the provisions of the
Securities Act of 1933, as amended, a Registration Statement on Form S-1 for
the registration of certain of its common shares in connection with the
public offering of such common shares, hereby constitutes and appoints Carol
A. Clark and Gary W. Qualmann, or either of them, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Registration Statement on Form S-1 and any and all
amendments (including post-effective amendments) and documents related
thereto, and to file the same, and any and all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, and grants unto each of said attorneys-in-fact and agents, and
substitute or substitutes, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all things that each of said
attorneys-in-fact and agents, or any of them or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
13th day of March, 2000.
/s/ Kenneth T. Stevens
--------------------------------
Kenneth T. Stevens
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 538
<SECURITIES> 0
<RECEIVABLES> 4,150
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 6,393
<PP&E> 2,706
<DEPRECIATION> 936
<TOTAL-ASSETS> 8,976
<CURRENT-LIABILITIES> 10,181
<BONDS> 931
4,853
0
<COMMON> 55
<OTHER-SE> (9,436)
<TOTAL-LIABILITY-AND-EQUITY> (9,381)
<SALES> 11,307
<TOTAL-REVENUES> 11,416
<CGS> 802
<TOTAL-COSTS> 802
<OTHER-EXPENSES> 15,460
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (4,873)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,873)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,853)
<EPS-BASIC> (1.38)
<EPS-DILUTED> (1.38)
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<PAGE>
EXHIBIT 99.1
[LETTERHEAD]
March 13, 2000
Ms. Ellen Friedman
International Data Corporation
Five Speen Street
Framingham, MA 01701
Dear Ellen:
On behalf of DPEC, Inc. (the "Company") in connection with the
proposed initial public offering of the Company's common shares, we hereby
request your consent to reference selected portions of the IDC report
entitled "The U.S. Corporate eLearning Market Forecast, 1998-2003" (January
2000) in an amendment to the Company's registration statement on Form S-1,
originally filed on September 17, 1999 with the Securities and Exchange
Commission (the "Registration Statement"), and to file such consent as an
exhibit to the Registration Statement. The current language of the sections
in which the report is cited is attached for your review.
To acknowledge your consent to the foregoing, please execute the
signature block below and on the following page and fax this letter back to
the undersigned at (614) 719-4727. The Company intends to file an amendment
to the Registration Statement, along with its responses to SEC comments, on
Wednesday, March 15, 2000. Therefore, we would appreciate your feedback on
this matter as soon as possible. Please call the undersigned at (614)
464-4727 if you have any questions or require additional materials.
Very truly yours,
/s/ Mary L. Garceau
Mary L. Garceau
Acknowledged and Consented:
INTERNATIONAL DATA CORPORATION
By: /s/ Alexa McCloughan
Name: Alexa McCloughan
Title: Senior Vice President
<PAGE>
Page 2
OUR MARKET OPPORTUNITY (SUMMARY)
With the rapid adoption of the Internet, we believe the advantages of
online training can now be marketed to both large and small businesses, as well
as to home office users, in a cost-efficient manner over the Internet. IDC
estimates that the U.S. corporate market for training and education presented
over the Internet will increase from $550 million in 1998 to approximately $11.4
billion by 2003, an 83% compound annual growth rate.
OUR MARKET OPPORTUNITY (BUSINESS)
IDC estimates that the U.S. corporate market for training and education
presented over the Internet will increase from $550 million in 1998 to
approximately $11.4 billion by 2003, an 83% compound annual growth rate. The
largest component of IDC's corporate learning market is "content," such as our
courses, which it estimates will increase from $391 million in 1998 to
approximately $6 billion by 2003. The second largest component is learning
services, such as needs assessments, program-building components, technical and
systems integration, site management/hosting, maintenance and online monitoring.
Many of these services are incorporated into our courses. IDC estimates that
this component of the market will increase from $99 million in 1998 to
approximately $4 billion by 2003. The balance of the market consists of delivery
solutions, such as authoring tools, course management systems, collaborative
software, virtual classrooms and add-on tools, that we do not provide.
OUR COURSES AND SERVICES
COURSES. IDC divides education and training presented over the Internet
into information technology and non-information technology courses. It estimates
that information technology training, which includes information technology
training and desktop applications training, will increase from $440 million, or
80% of the market, in 1998 to approximately $5 billion by 2003. IDC further
estimates that non-information technology training will increase from $110
million, or 20% of the market, in 1998 to approximately $6 billion, more than
50% of the market, by 2003.
Acknowledged and Consented:
INTERNATIONAL DATA CORPORATION
By: /s/ Alexa McCloughan
Name: Alexa McCloughan
Title: Senior Vice President
