<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. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DPEC, INC.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
OHIO 7371 31-1015427
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or 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
DPEC, INC.
851 WEST THIRD AVENUE
COLUMBUS, OHIO 43212
(614) 781-7300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<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
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON SHARES
----------------------------------------------------------------
This is our initial public offering of common shares. We are offering
common shares. No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"DPEC." Anticipated Price Range: $ to $ per share.
INVESTING IN OUR SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 6.
<TABLE>
PER SHARE TOTAL
------------------------- -------------------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to DPEC............................................ $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
common shares on the same terms and conditions as set forth above within 30 days
solely to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expects to deliver the shares on or about , 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 340 in-depth courses" above
and the DPEC logo (the word "DPEC" with a rule line above and below in
red) below.
- Next, a concentric circle labeled "The Internet."
- Next, three more concentric circles indicating our three sales channels as
follows:
- "Direct Sales" to "Large Organization Customers" ("Over 600
Customers").
- Sales to "Small/Medium Business Users" through "Internet Service
Provider Partners" ("Over 1,100 ISP's with access to over 700,000
businesses") and "Other Marketing Partners" ("Over 85 partners").
- Sales to "Home Users" through "Internet Service Provider Partners"
("Over 1,100 ISP's with access to 8.1 million customers") and "Other
Marketing Partners" ("Over 85 partners").
Six photographs representing our customers:
- For "Large Organization Customers," a large city skyline and an office
scene with several people around a computer.
- For "Small/Medium Business Users," a store front and an office scene with
two people at a computer.
- For "Home Users," a house and a mother and daughter at a computer.
At the bottom of the page, the DPEC logo with the tag line
"Customer-powered, Web-based learning at its best"
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
</TABLE>
<TABLE>
Management............................ 36
<CAPTION>
PAGE
--------
<S> <C>
Certain Transactions.................. 44
Principal Shareholders................ 46
Description of Capital Stock.......... 47
United States Federal Income Tax
Consequences to Non-U.S. Holders.... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 55
Legal Matters......................... 58
Experts............................... 58
Additional Information................ 58
Index to Financial Statements......... F-1
</TABLE>
Until , 1999, all dealers selling common shares, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE AUTOMATIC CONVERSION OF OUR OUTSTANDING PREFERRED SHARES INTO COMMON
SHARES UPON CLOSING OF THIS OFFERING; AND
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
DPEC is a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers worldwide. We offer a real-time,
interactive learning experience presented through standard Web browsers
operating over a variety of presentation platforms, including the Internet,
intranets and local-area and wide-area networks. Our courses incorporate
advanced technology to enable our users to learn in a self-paced, easy-to-use
and cost-efficient manner at any time, anywhere. Drawing from our extensive
online training library, our users receive instruction in information
technology, desktop applications and professional and practical skills. We
believe we have achieved, and will be able to maintain, our industry leadership
position due to our comprehensive courses, efficient and flexible technology and
extensive distribution channels.
We distribute our courses through multiple sales channels, enabling us to
effectively reach the large user market we believe exists for our Web-based
training products:
DIRECT SALES. Our internal sales force targets businesses and other large
organizations that we believe have over $50 million in annual revenues or
otherwise possess a need for our courses and services. We currently license
our courses and provide services to over 600 direct sales customers.
INDIRECT SALES. We distribute our courses indirectly to businesses,
organizations and individual consumers through Internet service providers
and other marketing partners:
INTERNET SERVICE PROVIDERS--Internet service providers offer their
subscribers direct access to the Internet. We currently have agreements
with more than 1,100 Internet service providers who offer our courses to
their subscribers and other visitors to their Websites.
OTHER MARKETING PARTNERS--We currently have marketing alliances with over
85 businesses and organizations whose current operations support and
facilitate the sale of our Web-based training courses. These marketing
partners include technology companies that combine our courses with their
products and non-business organizations, such as colleges, universities and
trade associations, that make our courses available to their students,
staff and members.
OUR MARKET OPPORTUNITY
International Data Corporation estimates that Web-based training is the
fastest growing market within the U.S. training industry. IDC estimates that the
total U.S. market for Web-based training will increase from approximately
$550 million in 1998 to approximately $7.1 billion in 2002, a 90% compound
annual growth rate.
Historically, training products and services have been marketed primarily to
large organizations, given the associated cost-efficiencies. With the rapid
adoption of the Internet and an increasing willingness by individual consumers
to purchase goods and services via the Internet, we believe training
1
<PAGE>
products can now be marketed to small organizations and individual consumers in
a cost-efficient manner.
DPEC COMPETITIVE STRENGTHS
We believe we possess the following key competitive strengths:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. We offer users
more than 340 courses in a broad range of topics. In most subjects, we offer
a number of courses from introductory to advanced. For a fixed license fee,
customers can subscribe to our entire library of online courses, a smaller
group of related courses or individual courses.
MULTIPLE DISTRIBUTION CHANNELS. Historically, we have derived the vast
majority of our revenues from the direct sale of our courses to large
organizations. At the end of 1997, we launched our indirect distribution
channels to take advantage of the significant opportunity that we believe
exists in the small organization and individual consumer markets worldwide.
PROPRIETARY COURSE DEVELOPMENT PROCESS. We use a proprietary course
development process that enables us to produce new courses rapidly while
maintaining high-quality course design and content.
UNIQUE THIRD-PARTY CONTENT SOURCING. We use third-party content to provide
a wide variety of topics in a timely and cost-effective manner without the
expense of maintaining a large research staff.
EFFICIENT AND FLEXIBLE TECHNOLOGY. We present all of our courses through
standard Web browsers to eliminate the need for our clients to download our
content and to provide users with direct, immediate access to our courses.
ON-GOING REFERENCE RESOURCE. Our powerful index features allow users to
reference any topic in any licensed course or any group of licensed courses
quickly and easily.
OUR FOCUSED GROWTH STRATEGY
Our goal is to be the leading global provider of high-quality Web-based
training courses and services. The principal elements of our growth strategy are
to:
- continue to target large organizations aggressively;
- expand sales through the Internet and other indirect marketing channels in
the U.S. and abroad rapidly;
- broaden course offerings in new and existing topics and categories and
accelerate course development;
- enhance further our technological infrastructure;
- increase brand awareness in our target markets; and
- seek possible strategic acquisitions of or investments in complementary
businesses, products, services or technologies.
SPONSORSHIP
River Cities Capital Fund II Limited Partnership, which owns 15.81% of our
common shares before this offering, has made several investments in
Internet-related companies, including High Speed Access Corp. and private
companies involved in e-commerce and Web-based content. Affiliates of
2
<PAGE>
Chrysalis Ventures own 3.56% of our common shares before this offering.
Principals of Chrysalis Ventures co-founded and invested in High Speed Access
Corp., Regal Cinemas, Inc. and Regent Communications, Inc., which was
subsequently sold to Jacor Communications. We consider the knowledge of our
sponsors an important asset, on which we may draw as we accelerate our growth.
The investment results that our sponsors may have achieved with respect to their
past investments is not intended to forecast future investment results and you
should not place undue reliance on these results.
THE OFFERING
<TABLE>
<S> <C>
Common shares offered by DPEC................ shares
Common shares to be outstanding after this shares
offering...................................
To expand our business and pay our debt. For
a more detailed description of how we intend
to use the proceeds of this offering, see
"Use of Proceeds" on page 14.
Use of proceeds..............................
Proposed Nasdaq National Market symbol....... "DPEC"
</TABLE>
The common shares to be outstanding after this offering do not include
shares issuable on exercise of outstanding stock options. For information on the
number of common shares reserved for stock options, see "Management--1999
Incentive Stock Plan" on page 41.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes the financial data of our business. The
balance sheet data as of September 30, 1999 and the financial results for the
nine months ended September 30, 1998 and 1999 are unaudited. From August 1, 1996
through September 15, 1998, we elected S-Corporation status and, accordingly,
federal income taxes were the responsibility of the individual shareholders. The
pro forma information for each of the three years in the period ended
December 31, 1998 and the nine months ended September 30, 1998 have been
computed as if we had been subject to corporate income taxes for all periods
presented based on the tax laws in effect during the period. The proforma income
tax provision (benefit) has been offset by a valuation allowance of $535,000 and
$455,000 for the years ended December 31, 1998 and the nine months ended
September 30, 1998, respectively. Prior to August 1, 1996 and subsequent to
September 15, 1998 we are taxed as a C-Corporation.
The pro forma as adjusted basic and diluted net income (loss) per share for
the years ended December 31, 1998 and the nine months ended September 30, 1998
and 1999 give effect to the assumed conversion of our convertible preferred
shares into common shares upon the closing of this offering and the repayment of
related party debt at the beginning of the period from a portion of the offering
proceeds.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------ -------------------
1996 1997 1998 1998 1999(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware sales........................ $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue........................... 2,440 1,731 793 687 55
------- ------- ------- ------- --------
Total revenue........................... 6,845 7,346 7,867 5,384 8,245
Gross profit............................ 6,519 7,035 7,402 5,080 7,690
Net loss................................ (355) (266) (1,698) (1,492) (2,396)
Convertible redeemable preferred stock
dividends............................. -- -- -- -- (20)
Intrinsic value of beneficial conversion
feature of preferred stock............ -- -- -- -- (2,960)
------- ------- ------- ------- --------
Net loss available to common
shareholders.......................... $ (355) $ (266) $(1,698) $(1,492) $ (5,376)
======= ======= ======= ======= ========
Basic and diluted net loss per common
share................................. $ (9.86) $ (8.37) $(50.99) $(45.03) $(159.35)
======= ======= ======= ======= ========
Basic and diluted weighted average
shares used in per share
calculation........................... 35,965 31,737 33,315 33,137 33,737
======= ======= ======= ======= ========
Pro forma net income (loss) before
taxes................................. $ 678 $ (266) $(1,698) $(1,492) --
Pro forma provision (credit) for income
taxes................................. 269 (116) (153) (153)
------- ------- ------- -------
Pro forma net income (loss)............. $ 409 $ (150) $(1,545) $(1,339)
======= ======= ======= =======
Basic and diluted pro forma net income
(loss) per common share:.............. $ 11.38 $ (4.73) $(46.38) $(40.41)
======= ======= ======= =======
Basic and diluted weighted average
shares used in per share
calculation........................... 35,965 31,737 33,315 33,137 33,737
======= ======= ======= ======= ========
Basic and diluted pro forma as adjusted
net income (loss) per common share:...
------- --------
Weighted average shares used in pro
forma as adjusted per share
calculation...........................
------- --------
</TABLE>
- --------------------------
(1) As restated. See Note 10 of Notes to the Financial Statements.
4
<PAGE>
The following table provides a summary of our balance sheet as of
September 30, 1999. The pro forma column reflects the sale of common shares
in this offering at an assumed initial offering price of $ per share, the
mid-point of the estimated offering range, and after deducting the underwriting
discount and estimated offering expenses payable by us and gives effect to the
conversion of all outstanding preferred shares into common shares upon the
closing of this offering. For additional information on this offering and our
capitalization after the offering, see "Use of Proceeds" at page 14 and
"Capitalization" at page 15.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999
---------------------
ACTUAL PRO FORMA
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 4,362 $
Working capital (deficiency)............................. (691)
Total assets............................................. 10,021
Long-term debt, including current maturities............. 1,364
Mandatorily redeemable convertible preferred shares...... 4,853
Total shareholders' equity (deficiency).................. (7,134)
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus or in
any amendment or supplement to this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, common shares only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common shares.
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "seeks," "should" or "will," or the negative
of these terms or other comparable terminology, are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those factors discussed under "Risk
Factors."
DPEC was incorporated in Ohio on July 21, 1981. Our principal executive
offices are located at 851 West Third Avenue, Columbus, Ohio 43212. Our
telephone number is (614) 781-7300 and our Internet address is www.dpec.com.
Information contained on our Website is not intended to be incorporated by
reference in this prospectus and you should not consider that information a part
of this prospectus.
The name "DPEC" is a registered trademark of DPEC, Inc. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE YOU DECIDE TO BUY OUR COMMON SHARES. THESE ARE NOT THE ONLY RISKS AND
UNCERTAINTIES FACING US. IF ANY OF THESE RISKS ACTUALLY OCCURS, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD SUFFER. AS A RESULT, THE
TRADING PRICE OF OUR COMMON SHARES COULD FALL, AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED LOSSES IN THE PAST AND WE EXPECT TO INCUR SUBSTANTIAL LOSSES
FOR THE NEXT SEVERAL YEARS.
We incurred net losses of $937,000 for the twelve months ended July 31,
1995, $523,000 for the five months ended December 31, 1995, $355,000, $266,000
and $1,698,000 for the years ended December 31, 1996, 1997, and 1998,
respectively, and $1,492,000 and $2,396,000 for the nine months ended
September 30, 1998 and 1999, respectively. We intend to increase significantly
expenditures related to:
- marketing additional courses and services to large organizations;
- signing more Internet service providers and other indirect marketing
partners;
- promoting our courses and services; and
- developing new courses to attract small organizations and individual
consumers.
We may not realize incremental revenues from these expenditures for some time,
if ever. Accordingly, we expect to continue to experience net losses and
negative cash flow for the next several years. We may not achieve profitability
if our course development and sales and marketing efforts do not significantly
increase our revenues or if they increase revenues more slowly than we expect.
Even if we do achieve profitability, we may be unable to sustain or increase
profitability on a quarterly or annual basis. Any of these eventualities could
cause our share price to decline.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE DO NOT KNOW WHETHER, OR TO WHAT
EXTENT, BUSINESSES, ORGANIZATIONS AND INDIVIDUAL CONSUMERS WILL ACCEPT WEB-BASED
TRAINING.
Our future revenues, particularly those derived from sales over the Internet
and through our other indirect distribution channels, are subject to a high
degree of uncertainty. In the past, we have derived substantially all of our
revenue from licensing information technology training products directly to
large organizations. Our business plan contemplates rapidly expanding into the
small organization and individual consumer markets through Internet service
providers and other indirect marketing channels. Our experience in these markets
is very limited. Moreover, widespread market acceptance of Web-based training by
small organizations and individual consumers is uncertain. If these markets do
not continue to develop or develop more slowly than we expect, our revenues and
profitability may be lower than expected.
OUR INABILITY TO RETAIN SKILLED PERSONNEL COULD HARM OUR BUSINESS AND
OPERATIONS.
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, including Carol A.
Clark, our Chairperson of the Board of Directors, President and Chief Executive
Officer. The loss of the services of Ms. Clark, any of our other senior level
management personnel or other key employees could hinder or prevent
implementation of our growth strategy and harm our business.
Our success also depends on our ability to attract, motivate and retain
skilled personnel. Competition for personnel in our industry is intense. Our
failure to attract and retain these key
6
<PAGE>
employees could restrict our ability to develop, market and distribute our
courses effectively and to keep pace with developing trends in our industry.
OUR PRIMARY CONTENT PROVIDER CAN TERMINATE ITS CONTRACT WITH US AND WE MAY BE
UNABLE TO ATTRACT ADDITIONAL CONTENT PROVIDERS.
Historically, we have relied on one book publisher, Macmillan Publishing
USA, for substantially all of our content. We cannot assure you that Macmillan
will continue to provide us access to new content. Additionally, there are no
restrictions on its providing content to our competitors. We continually seek
new content providers; however, we cannot assure you that we will be able to
attract, or maintain relationships with, new content providers. Loss of our main
content provider, particularly if coupled with a failure to develop new sources
of content, could increase course development costs and delay introduction of
new courses.
WE MAY NOT BE SUCCESSFUL IN RETAINING OUR CURRENT INTERNET SERVICE PROVIDERS AND
OTHER MARKETING PARTNERS OR REACHING THE SMALL ORGANIZATION AND INDIVIDUAL
CONSUMER MARKETS THROUGH THESE INDIRECT DISTRIBUTION CHANNELS.
We depend on our indirect distribution channels to grow our business by
making our courses available to their Internet access subscribers, customers and
members, which are primarily small organizations and individual consumers. We
may not succeed in these markets if:
- our Internet service providers and other marketing partners do not
promote our courses to their subscribers, customers and members
effectively or at all;
- acceptance of Web-based training by the subscribers, customers and
members of our marketing partners is lower than we or our marketing
partners expect;
- consolidation of or technological changes within the Internet service
provider industry occurs, either of which could eliminate a portion of
our revenue stream if our marketing partners are not the survivors; or
- our marketing partners do not renew their agreements with us or refuse
to renew them on acceptable terms.
Our failure to effectively address these risks could severely restrict the
distribution and marketing of our products and services to a broad population
base, which would adversely affect our ability to generate revenue.
AS A RAPIDLY-GROWING COMPANY IN THE EMERGING WEB-BASED TRAINING MARKET, WE MAY
EXPERIENCE SIGNIFICANT FLUCTUATIONS IN REVENUES AND OPERATING RESULTS, WHICH
WOULD CAUSE OUR SHARE PRICE TO BE VOLATILE.
Due to the emerging nature of the Web-based training market, we may be
unable to forecast our revenues and profitability accurately. We expect our
revenues and operating results to vary significantly from quarter to quarter
depending on:
- our ability to attract and retain corporate customers, Internet service
providers and other marketing partners;
- the number of courses our corporate customers license and the number of
users who license courses through our Internet service providers and
other marketing partners;
- the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, including costs associated
with our introduction of new or enhanced services and with upgrading and
developing our systems and infrastructure;
7
<PAGE>
- the seasonality of our operating results;
- the future development of the Web-based training market; and
- general economic conditions.
Because many of our costs are fixed and are based on anticipated revenue
levels, variations in the timing of revenue recognition could cause significant
variations in operating results from quarter to quarter. As a result, we believe
that quarter-to-quarter comparisons of our sales and operating results are not
necessarily meaningful and may not be accurate indicators of future performance.
If our future operating results are below the expectations of securities
analysts or investors, the trading price of our shares is likely to fall.
IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AWARENESS OF THE DPEC BRAND, OUR
CUSTOMER BASE MAY NOT GROW AS QUICKLY AS EXPECTED.
We believe that developing our brand within our target markets is critical
to achieving widespread acceptance of our courses and a broad customer base. We
may not succeed in developing our brand if our large marketing partners require
extensive private labeling, more successful competitors emerge, we are unable or
fail to devote sufficent resources to marketing efforts, or course performance
problems cause customer dissatisfaction. Our inability to develop our brand
would hinder our growth.
OUR INABILITY TO MANAGE OUR GROWTH EFFECTIVELY COULD PREVENT US FROM
CAPITALIZING ON BUSINESS OPPORTUNITIES THAT MAY ARISE AND STRENGTHENING OUR
CUSTOMER BASE.
Our growth has placed, and any further growth is also likely to place, a
significant strain on our managerial, operational, financial and other
resources. We have grown from 68 employees as of December 31, 1995 to 158
employees as of October 26, 1999. Future growth will require us to implement
additional management information systems; develop further our operating,
administrative, financial and accounting systems; and maintain close
coordination among our departments. Our failure to manage our growth effectively
could limit our ability to capitalize on attractive business opportunities that
may arise, strengthen our customer base and implement our growth strategy.
IF OUR INTERNAL COMPUTER NETWORK OR OUR EXTERNAL LINKS TO THE INTERNET FAIL, WE
MAY BE UNABLE TO MARKET AND DISTRIBUTE OUR COURSES EFFECTIVELY.
The continuing and uninterrupted performance of our internal computer
network and Internet course servers is critical to our success. Any system
failure that causes interruptions or delays in our ability to provide our
courses and services to our customers could reduce customer satisfaction and, if
sustained or repeated, could reduce the attractiveness of our courses and
services. In addition, we must protect our various computer systems against
damage from fire, power loss, telecommunications failures, vandalism and other
malicious acts and similar unexpected adverse events. Despite precautions we
have taken, unanticipated problems affecting our systems have from time to time
in the past caused, and in the future could cause, interruptions or delays in
the delivery of our courses. Any damage or failure that interrupts or delays our
operations could require us to make unanticipated expenditures or harm relations
with our customers.
The failure of our telecommunications provider or our network backbone
provider, which provide us with our Internet connection, to provide the data
communications capacity and network infrastructure in the required time frame
could cause service interruptions or slower response times. This too could
reduce customer demand for our courses and services.
8
<PAGE>
WE INTEND TO EXPAND INTERNATIONALLY AND AS A RESULT WE COULD BECOME SUBJECT TO
NEW RISKS.
We intend to expand our business internationally. In doing so, we could
become subject to new risks, including:
- unexpected changes in regulatory requirements, including the regulation
of Internet access;
- uncertainty regarding liability for information retrieved and replicated
in foreign countries;
- foreign currency fluctuations, which could result in reduced revenues
and increased operating expenses;
- foreign taxes, tariffs and trade barriers;
- potentially longer payment cycles and difficulty in collecting accounts
receivable; and
- burdens of complying with a variety of foreign laws and trade standards.
We could also be subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with our international operations. The risks associated with any
international operations could materially limit the distribution of our courses
and require us to adjust our growth strategy.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND
OUR INTERNET DOMAIN NAMES COULD LEAD TO UNAUTHORIZED USE OF OUR COURSES OR
RESTRICT OUR ABILITY TO MARKET OUR COURSES.
Our success depends, in part, on our ability to protect our proprietary
rights and technology. We rely on a combination of copyrights, trademarks,
service marks, trade secret laws and employee and third-party nondisclosure
agreements to protect our proprietary rights. Despite our efforts to protect
these rights, unauthorized parties may attempt to duplicate or copy aspects of
our courses or services or obtain and use information that we regard as
proprietary. Policing unauthorized use of the software underlying our courses
and services is difficult. While we are unable to determine the extent to which
piracy of our courseware exists, piracy in general will likely be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. As a
consequence, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our courses and
services are made available.
We currently hold various registered Internet domain names. Domain names
generally are regulated by government agencies and their designees. It is
possible, however, that third-parties could acquire domain names that are
substantially similar or conceptually similar to our domain names. This could
decrease the value of our domain names and could hurt our business. The
regulation of domain names in the United States and in foreign countries is
subject to change. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. As a
result, we may not acquire or maintain exclusive rights to our domain names in
the United States or in other countries in which we conduct business.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. Our involvement in any litigation to resolve
such matters would require us to incur substantial costs and divert management's
attention and resources. In addition, we cannot predict the effect of a failure
to prevail in any litigation of this kind.
OUR FAILURE OR THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
CAUSE US TO INCUR SIGNIFICANT COSTS AND LOSE REVENUES.
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Failure of
our internal infrastructure or courses or failure of any third-party equipment
or software to operate properly when the year changes
9
<PAGE>
to 2000 could severely disrupt our operations, divert management's time and
attention and require us to incur significant unanticipated expenses.
In addition, the purchasing patterns of our customers and potential
customers may be affected by actual or perceived concerns about Year 2000
issues. Organizations that need to expend significant resources to correct their
current systems for Year 2000 compliance may have fewer funds available to
purchase our courses and services, which would reduce our revenues and
profitability.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS, OR AT ALL.
We expect the proceeds of this offering, together with cash generated from
operations and our current cash and cash equivalents, will be sufficient for us
to meet our working capital and capital expenditure requirements for at least
the next 18 months. After that time, we may need to obtain additional funds to
finance our operations and sustain our growth. In addition, we intend to pursue
acquisition and investment activities selectively, which could require us to
raise more capital. Additional financing may not be available on terms favorable
to us, or at all, which could require us to revise our growth strategy and
implement changes to our operations.
WE MAY BE SUBJECT TO LEGAL LIABILITY IF THE CONTENT WE DISTRIBUTE IS FACTUALLY
INACCURATE.
We obtain the content contained in our courses from third-parties. Although
we routinely review the content for substantive accuracy, we cannot be sure that
information published in our courses will be factually accurate. Additionally,
we may be unable to update our course content on a timely basis to reflect
advances in technology or other changes relating to the subject matter of our
courses. Our inability to provide factually accurate content could subject us to
costly litigation and force us to divert financial and other resources to
address these issues.
ANY ACQUISITIONS OR INVESTMENTS WE MAKE COULD BE DISRUPTIVE TO OUR BUSINESS,
HAVE ADVERSE ACCOUNTING CONSEQUENCES OR BE DILUTIVE TO OUR INVESTORS.
Although we have no present agreement or understanding relating to any
material acquisition or investment, from time to time we have had discussions
with companies regarding acquiring or investing in their businesses. If we
acquire a company, we could have difficulty in assimilating its operations or
assimilating and retaining its key personnel. These difficulties could disrupt
our ongoing business and distract our management and employees. Also,
acquisitions may result in a variety of accounting charges, such as amortization
of goodwill and the write off of acquired in-process research and development,
that would increase our reported expenses. Furthermore, we may pay for future
acquisitions or investments with debt that reduces our financial flexibility or
equity securities that dilute current shareholders' investments.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN A RAPIDLY CHANGING, HIGHLY COMPETITIVE MARKET, AND WE MAY NOT HAVE
ADEQUATE RESOURCES TO COMPETE SUCCESSFULLY.
The Web-based training market is evolving quickly and is subject to rapid
technological change, shifts in customer demands and evolving industry
standards. To succeed, we must continue to expand our course offerings and
upgrade our technology. We may not be able to do so successfully. Any failure by
us to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in course development or introduction,
could allow our competitors to attract and maintain a greater customer base than
we.
10
<PAGE>
The Web-based training market is characterized by significant price
competition. We expect to face increasing price pressures from competitors as
information systems managers demand more value for their training budgets.
Increased competition or our inability to compete successfully against current
and future competitors could result in reduced operating margins, as well as
loss of market share and brand recognition.
Although the Web-based training market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. Our
competitors vary in size and in the scope and breadth of the courses and
services they offer. Several of our competitors have longer operating histories
and significantly greater financial, technical and marketing resources. We
anticipate that the lack of significant entry barriers to the Web-based training
market will allow other competitors to enter the market, increasing competition.
OUR BUSINESS COULD BE HARMED BY CONSUMERS' CONCERNS ABOUT THE SECURITY OF
TRANSACTIONS OVER THE INTERNET.
We believe that concerns regarding the security of confidential information
transmitted over the Internet, such as credit card numbers, prevent many
potential customers from engaging in online transactions like that required to
initiate one of our training courses. Our success may depend on our ability to
add sufficient security features to our course subscription procedures and to
instill confidence in those features in our customers. If we fail to do so, our
courses may not gain market acceptance.
DUE TO OUR USE OF THE INTERNET, INTRANETS, WEB SERVERS AND BROWSERS AS
PRESENTATION VEHICLES FOR OUR COURSES, OUR SUCCESS DEPENDS ON CONTINUED
DEVELOPMENT AND MAINTENANCE OF THESE TECHNOLOGIES BY OTHER COMPANIES.
Our success is highly dependent on the continued growth and maintenance of
the Internet, intranets, Web servers and browsers over which we present our
courses. There can be no guarantee that the general use of the Internet,
intranets, Web servers or browsers will continue to grow. Several factors over
which we have no control, including concerns related to security, compatibility,
cost, ease of use and access, could limit future growth in Internet, intranet,
Web server and browser use, which would limit or prevent implementation of our
growth strategy.
WE FACE LEGAL UNCERTAINTIES RELATING TO THE INTERNET IN GENERAL AND TO OUR
INDUSTRY IN PARTICULAR AND MAY BECOME SUBJECT TO COSTLY GOVERNMENT REGULATION.
The applicability to the Internet of existing laws is uncertain and
developing with regard to many issues, including sales tax, intellectual
property ownership and infringement, copyright, trademark, trade secret,
obscenity, libel, export of encryption technology and personal privacy.
There are an increasing number of laws and regulations pertaining to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services.
In addition, it is possible that more laws and regulations may be adopted with
respect to the Internet, such as laws or regulations relating to user privacy,
taxation, email, pricing, Internet access, content, copyrights, distribution and
characteristics and quality of products and services. Various state statutes
govern private post-secondary educational institutions. It is uncertain whether
states will attempt to apply these statutes to regulate the offering of courses
over the Internet.
Changes in existing laws and the adoption of additional laws or regulations
may decrease the popularity or limit expansion of the Internet. A decline in the
growth of the Internet could decrease demand for our courses and services and
increase our cost of doing business.
11
<PAGE>
RISKS RELATED TO THE OFFERING
OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US AND MAY BE ABLE
TO DELAY OR PREVENT A CHANGE IN OUR CONTROL.
We anticipate that our executive officers, directors and entities affiliated
with them together will beneficially own approximately % of our
outstanding common shares following the completion of this offering. As a
result, these shareholders will be able to exercise substantial influence over
all matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control.
RESTRICTIONS ON THE RESALE OF COMMON SHARES, OR % OF OUR TOTAL
OUTSTANDING COMMON SHARES, COULD CAUSE THE MARKET PRICE OF OUR COMMON SHARES TO
DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding common shares.
This includes the common shares we are selling in this offering,
which may be resold in the public market immediately. The remaining %, or
common shares, of our total outstanding common shares will become
available for resale in the public market as shown in the chart below, in some
cases subject to legal restrictions on the number of shares that may be sold in
any 90-day period.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES/% OF TOTAL OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET
<S> <C>
/ % 180 days after the date of this prospectus due to
an agreement these shareholders have with the
underwriters. However, the underwriters can
waive this restriction and allow these
shareholders to sell their shares at any time.
/ % Between 90 and 365 days after the date of this
prospectus due to the requirements of the
federal securities laws.
</TABLE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR SHARES, AND OUR SHARE PRICE IS LIKELY TO
BE HIGHLY VOLATILE.
Prior to this offering, there has been no public market for our common
shares. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our shares or how liquid that
market might become. The initial public offering price for the shares will be
determined through negotiations between our board of directors and the
representatives of the underwriters, and may not be indicative of prices that
will prevail in any future trading market. The stock market has experienced
extreme price and volume fluctuations. The market prices of the securities of
Internet-related companies have been especially volatile. In the past, companies
that have experienced volatility in the market price of their shares have been
the object of securities class action litigation. If we were the object of
securities class action litigation, we could face substantial costs and a
diversion of our management's attention and resources.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING.
Our management will have broad discretion over the application of the net
proceeds from this offering, as well as over the timing of the expenditure of
proceeds. As a result, investors will be relying
12
<PAGE>
on management's judgment with only limited information about its specific
intentions for use of the proceeds.
OUR ANTI-TAKEOVER PROVISIONS COULD PREVENT A THIRD-PARTY FROM ACQUIRING YOUR
SHARES AT A PREMIUM TO THE MARKET PRICE.
Various provisions of our articles of incorporation, our code of regulations
and Ohio law, together with the concentration of ownership in our executive
officers, our directors and entities affiliated with them, could make it more
difficult for a third-party to acquire us, even if you believe that doing so
would be beneficial to you and our other shareholders.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT.
Purchasers of common shares in this offering will incur immediate and
substantial dilution of $ in the pro forma net tangible book value per
common share from the assumed initial public offering price. Net tangible book
value represents the amount of our tangible assets less our total liabilities.
To the extent outstanding stock options to purchase common shares are exercised,
there may be further dilution to investors, because all of our outstanding stock
options have an exercise price below the initial public offering price.
13
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds we will receive from this offering will be
approximately $ ($ if the underwriters exercise their over-allotment
option in full) at an assumed initial public offering price of $ per share,
which is the midpoint of the price range set forth on the front cover page of
this prospectus.
We are conducting this offering primarily to increase our equity capital,
create a public market for our common shares and to facilitate future access by
us to public equity markets. We do not have specific uses planned for much of
the offering proceeds. We currently intend to use the net proceeds from this
offering to:
- repay existing indebtedness in the aggregate principal amount of $714,286
as of October 27, 1999 to Carol A. Clark, our Chairperson of the Board,
President and Chief Executive Officer, pursuant to the terms of a
promissory note dated May 10, 1996, that accrues interest at a rate of 1%
over prime and matures in November 2004;
- repay existing indebtedness in the aggregate principal amount of $143,256
as of October 27, 1999 to Frances Papalios, a shareholder and our
co-founder and a former member of our board of directors, pursuant to the
terms of a promissory note dated May 10, 1996, that accrues interest at a
rate of 8% per annum and matures in April 2001; and
- fund general corporate purposes, including anticipated losses, capital
expenditures, development of our courses and services, and expansion of
our sales and marketing activities.
In addition, we may use a portion of the net proceeds from this offering to
acquire complementary businesses, products or technologies. Although we have
from time to time had discussions with companies regarding our acquiring or
investing in their businesses, we have no present agreement or understanding,
and are not currently engaged in negotiations, relating to any material
acquisition or investment.
We have not yet determined the amount of net proceeds to be used
specifically for all of the foregoing purposes. Accordingly, management will
have significant flexibility in applying the net proceeds of this offering.
Pending these uses, we intend to invest the net proceeds from this offering in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common shares in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the development and growth of our business. Any future determination to
pay cash dividends will be at the discretion of our board of directors and will
depend upon our financial condition, operating results, capital requirements and
other factors our board of directors deems relevant. Loan agreements and
contractual arrangements that we enter into in the future also may restrict our
payment of dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of September 30, 1999. Our capitalization is
presented:
- on an actual basis; and
- on a pro forma basis to reflect our receipt of the estimated net proceeds
from the sale of the common shares to be sold in this offering at an
assumed initial public offering price of $ per share, the mid-point of
the anticipated price range, after deducting the underwriting discount and
estimated offering expenses and to give effect to the repayment of related
party debt and the automatic conversion of all outstanding preferred
shares into common shares upon the consummation of this offering.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1999
---------------------
ACTUAL(1) PRO FORMA
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
Cash and cash equivalents................................ $ 4,362 $ --
======= =======
Short-term debt.......................................... $ 335 $ --
======= =======
Long-term debt, less current portion..................... $ 1,029 $ --
Convertible preferred shares, no par value; 8,102 shares
authorized, 8,102 shares issued and outstanding,
actual; none authorized, issued and outstanding, pro
forma.................................................. 4,853 --
Shareholders' equity (deficiency):
Common shares, no par value; 61,898 shares authorized;
44,550 shares issued, actual; and shares issued,
pro forma............................................ 55 --
Additional paid-in capital............................. 5,705
Treasury stock, at cost................................ (935) --
Deferred compensation.................................. (2,437) --
Accumulated deficit.................................... (9,522) --
------- -------
Total shareholders' deficiency........................... (7,134) --
------- -------
Total capitalization (deficit)......................... $(1,252) $ --
======= =======
</TABLE>
- ------------------------
(1) As restated. See Note 10 of the Notes to the Financial Statements.
In addition to the common shares to be outstanding after this offering, as
of September 30, 1999 we may issue additional common shares pursuant to the
following plans and arrangements:
- 1,189 shares underlying stock options issued under the Amended and
Restated Stock Option Plan outstanding, at a weighted average exercise
price of $76.15 per share, of which 844 are currently exercisable; and
- 3,655 shares issuable under our 1998 Stock Option Plan, consisting of:
- 1,445 shares underlying stock options outstanding, at a weighted
average exercise price of $319.84 per share, none of which are
currently exercisable; and
- 2,210 shares available for future grants.
Please read "Selected Financial Data" on page 17 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 19 and the financial statements beginning on page F-1 of this prospectus.
15
<PAGE>
DILUTION
As of September , 1999, our pro forma net tangible book value was $ ,
or approximately $ per share. Pro forma net tangible book value per share
represents the amount of tangible assets less total liabilities, divided by the
number of common shares outstanding on a pro forma basis after giving effect to
the conversion of all outstanding preferred shares into common shares.
Without taking into account any other changes in the net tangible book value
after September , 1999, other than the sale of the shares offered hereby at an
assumed offering price of $ per share, our pro forma net tangible book
value as of September , 1999, would have been $ , or $ per share.
The pro forma net tangible book value assumes that the proceeds to us, net of
offering expenses and underwriting discount, will be approximately $ . This
represents an immediate increase in net tangible book value to existing
shareholders attributable to new investors of $ per share and the immediate
dilution of $ per share to new investors, a significant disparity between
the price paid by new investors for shares sold in the offering and the pro
forma net tangible book value of the shares.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
--------
Pro forma net tangible book value per share before this
offering.............................................. $
--------
Increase per share attributable to new investors........
--------
Pro forma net tangible book value per share after this
offering..............................................
--------
Dilution per share to new investors..................... $
========
</TABLE>
The following table sets forth, on a pro forma basis as of September ,
1999, the differences between existing shareholders and the new investors with
respect to the number of common shares purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by the new investors purchasing common shares in this offering,
at an assumed initial public offering price of $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders............ % $ % $
New investors....................
------ ------ ------- ------
Total............................ $ % $ %
====== ====== ======= ======
</TABLE>
Our calculations do not take into account exercise of the underwriters'
over-allotment option or of any outstanding stock options. As of September ,
1999, there were stock options outstanding to purchase common shares
at a weighted average exercise price of $ per share, as more fully
described on page 15. additional shares were reserved for future grants
under our stock option plans. To the extent that any of these options is
exercised, there will be further dilution to new investors.
Please read the Capitalization table on page 15 together with the sections
of this prospectus entitled "Selected Financial Data" on page 17 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 19 and the financial statements beginning on page F-1 of
this prospectus.
16
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 19 of this prospectus.
We have derived the statement of operations data for the years ended
December 31, 1996, 1997 and 1998, and the balance sheet data as of December 31,
1997 and 1998 from financial statements that Deloitte & Touche LLP, independent
auditors, have audited and that are included beginning on page F-1 of this
prospectus. We have derived the information for fiscal years ended July 31, 1994
and 1995, the five months ended December 31, 1995 and the nine months ended
September 30, 1998 and 1999, from our unaudited financial statements. The
unaudited financial statements have been prepared on substantially the same
basis as the audited financial statements and, in the opinion of management,
these financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for those periods. Historical results are not necessarily indicative
of results to be expected in the future, and results of interim periods are not
necessarily indicative of results for the entire year.
Effective December 31, 1996, we changed our fiscal year end from July 31 to
December 31. References to Fiscal 1994 and Fiscal 1995 refer to our fiscal years
ended July 31 for each respective year. References to the five months ended
December 31, 1995 refer to the transition period to a calendar year. References
to Fiscal 1996, Fiscal 1997 and Fiscal 1998 refer to our fiscal years ended
December 31 for each respective year.
From August 1, 1996 through September 15, 1998, we elected S-Corporation
status and, accordingly, federal income taxes were the responsibility of our
individual shareholders. The pro forma information has been computed as if we
had been subject to corporate income taxes for all periods presented based on
the tax laws in effect during the period. The proforma income tax provision
(benefit) has been offset by a valuation allowance of $535 and $455 for the year
ended December 31, 1998 and the nine months ended September 30, 1998,
respectively. Prior to August 1, 1996 we were, and subsequent to September 15,
1998 we have been, taxed as a C-Corporation.
<TABLE>
<CAPTION>
FIVE MONTHS NINE MONTHS
FISCAL YEAR ENDED YEAR ENDED ENDED
ENDED JULY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------- ------------- ------------------------------ -------------------
1994 1995 1995 1996 1997 1998 1998 1999(1)
-------- -------- ------------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Courseware sales..................... $ 2,983 $ 2,826 $ 1,032 $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue........................ 738 1,148 647 2,440 1,731 793 687 55
------- ------- ------- ------- ------- ------- ------- --------
Total revenue........................ 3,721 3,974 1,679 6,845 7,346 7,867 5,384 8,245
Cost of sales........................ 91 417 69 326 311 465 304 555
------- ------- ------- ------- ------- ------- ------- --------
Gross profit......................... 3,630 3,557 1,610 6,519 7,035 7,402 5,080 7,690
Operating expenses................... 3,410 4,512 2,055 5,691 7,120 8,994 6,459 10,061
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) from operations........ 220 (955) (445) 828 (85) (1,592) (1,379) (2,371)
Interest expense (income)............ (6) 60 33 150 181 106 113 25
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before income taxes.... 226 (1,015) (478) 678 (266) (1,698) (1,492) (2,396)
Provision (benefit) for income
taxes.............................. 170 (78) 45 1,033 -- -- -- --
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).................... $ 56 $ (937) $ (523) $ (355) $ (266) $(1,698) $(1,492) $ (2,396)
Convertible redeemable preferred
stock dividends.................... -- -- -- -- -- -- -- (20)
Intrinsic value of beneficial
conversion feature of preferred
stock.............................. -- -- -- -- -- -- -- (2,960)
------- ------- ------- ------- ------- ------- ------- --------
Net loss available to common
shareholders....................... $ 56 $ (937) $ (523) $ (355) $ (266) $(1,698) $(1,492) $ (5,376)
======= ======= ======= ======= ======= ======= ======= ========
Basic and diluted net income (loss)
available to common shareholders
per share:......................... $ 1.26 $(21.03) $(11.74) $ (9.86) $ (8.37) $(50.99) $(45.03) $(159.35)
======= ======= ======= ======= ======= ======= ======= ========
Pro forma income (loss) before income
taxes.............................. $ 678 $ (266) $(1,698) $(1,492)
Pro forma provision (credit) for
income taxes....................... 269 (116) (153) (153)
------- ------- ------- -------
Pro forma net income (loss).......... $ 409 $ (150) $(1,545) $(1,339)
======= ======= ======= =======
Basic and diluted pro forma net
income (loss) per common share..... $ 11.38 $ (4.73) $(46.38) $(40.41) --
======= ======= ======= =======
Basic and diluted weighted average
shares used in per share
calculations....................... 44,550 44,550 44,550 35,965 31,737 33,315 33,137 33,737
======= ======= ======= ======= ======= ======= ======= ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR FIVE MONTHS
ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, DECEMBER 31,
------------------- ------------- ------------------------------ SEPTEMBER 30,
1994 1995 1995 1996 1997 1998 1999(1)
-------- -------- ------------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 137 $ -- $ 70 $ 8 $ -- $ 1,835 $ 4,362
Working capital (deficiency)............. 314 (618) (1,783) (1,435) (1,778) (802) (691)
Total assets............................. 1,046 2,252 2,047 2,107 2,857 5,273 10,021
Total long-term debt (including current
maturities)............................ 203 772 1,053 2,258 2,344 1,095 1,364
Convertible redeemable preferred
shares................................. -- -- -- -- -- 1,893 4,853
Total shareholders' equity
(deficiency)........................... 519 (418) (941) (2,376) (2,642) (4,761) (7,134)
</TABLE>
- ------------------------------
(1) As restated. See Note 10 of the Notes to the Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" ON PAGE 17 AND OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES BEGINNING ON PAGE F-1 OF THIS PROSPECTUS. THIS DISCUSSION CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FOR A
DISCUSSION OF THE RISKS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, SEE "RISK FACTORS" ON PAGE 6.
OVERVIEW
We are a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers. We license our courses and services
directly to large organizations through our direct sales force and indirectly to
businesses, organizations and individual customers through agreements with our
Internet service providers and other marketing partners.
REVENUES
We derive our revenues from:
- courseware sales, which represent sales of courses we have developed; and
- other revenues, which represent net royalties from sales of courses we
obtained from third-parties.
Currently, we derive our revenues primarily from license agreements under
which our customers license our courses, typically for one, two or three year
periods and generally receive upfront payments for the term of the license.
Until late 1997, we sold our courses primarily on a per-course basis. However,
to provide additional value to our customers, we now group our courses into
standard curricula and offer them on more favorable pricing terms than our
per-course pricing.
In the past, we recognized a substantial portion of revenue from the sale of
courses produced by third-parties. In 1997, we began de-emphasizing the sale of
third-party courses as we increased the development of our own courses. In
August 1998, we made a strategic decision to eliminate third-party courses, and
by February 1999 we had discontinued the sale of third-party courses to new
customers. Decreases in other revenues are due to the decision to de-emphasize,
and later to discontinue, the selling of third-party courses to new customers.
We also provide our courses through Internet service providers and other
marketing partners. Our Internet service providers and other marketing partners
can provide our courses to their customers by either hosting our courses on
their Internet sites or by linking their customers to our Internet site. If the
provider/partner hosts the courses, it bills customers and remits a royalty to
us. If the provider/ partner is linking to our Internet site, we bill the
customers, record revenue from the subscription and expense the royalty. In both
cases, because the customer has access to unspecified additional courses, the
revenue is treated as a subscription and recorded on a straight-line basis over
the term of the subscription. We believe that in the future many of our Internet
service providers and other marketing partners will link their customers to our
Internet site.
In 1999, in connection with the planned registration of our common shares
with the Securities and Exchange Commission, we have retroactively adopted a new
method of accounting for revenue recognition for license agreements with
multiple delivery options (e.g. CD-ROM or electronic delivery) that also allow
our customers to access our courses through the Internet at any time during the
license term. Under the new policy, we recognize revenue over the license term
if the customer has the option to access the courses through our Internet
hosting service. Additionally, the costs of commissions and royalties related to
these licenses will be deferred and amortized over the term of the agreement.
Previously, we recognized revenue and the related commissions and royalties from
these licenses upon
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granting access to our Internet site or upon physical or electronic delivery of
the courses to the customer. We have restated our 1998 and 1997 financial
statements for this accounting change.
EXPENSES
Our expenses are comprised of the following:
COST OF SALES consists primarily of royalties paid to our content providers,
fulfillment costs and materials, such as CD-ROMs, packaging and
documentation.
SALES AND MARKETING EXPENSES consist primarily of salaries, payroll taxes,
commissions and related employee benefits to sales and marketing personnel,
as well as advertising and promotional expenses. To a lesser degree, sales
and marketing expenses include telemarketing, travel and communication
expenses. We expect that our sales and marketing expenses will increase
significantly as we pursue our efforts to enter into more relationships with
Internet service providers and other marketing partners.
PRODUCT DEVELOPMENT EXPENSES consist primarily of salaries, payroll taxes,
incentive compensation and related employee benefits to course developers,
programmers and related support staff. We plan to invest significantly in
the development of new courses to complement and expand our existing library
of courses. We expect that our course development expenses will increase
significantly as we hire additional personnel to increase course production.
GENERAL AND ADMINISTRATIVE EXPENSES consist primarily of salaries, payroll
taxes, incentive compensation and related employee benefits for
administrative, operations and finance personnel as well as expenses for
occupancy and for professional services. We expect to hire additional
support personnel and to incur other expenses associated with being a public
company, including increased legal and accounting fees.
Following this offering, we plan to invest significantly to develop new
courses to complement and expand our existing course library. In addition, we
plan to significantly increase marketing related to our indirect distribution
channels. As a result of planned increases in personnel and marketing costs, we
expect to incur significant operating and net losses for at least the next two
years.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Subsequent to the issuance of our September 1999 unaudited interim financial
statements, management determined that it should have recognized the intrinsic
value at the date of issuance of certain employee stock options granted during
1999. As a result, the 1999 financial statements have been restated from amounts
previously reported to record $308,000 of stock compensation expense and
$2,745,000 of deferred compensation and additional paid-in capital.
Additionally, we determined that we should recognize a beneficial conversion
feature on our series B convertible redeemable preferred stock for the
difference between the amount received per share of common stock, assuming
conversion of the series B convertible redeemable preferred stock, and the
proposed initial public offering price of our common stock. As a result, the
financial statements have been restated from amounts previously recorded to
record $2,960,000 of additional paid-in capital and a deemed dividend for the
intrinsic value of the beneficial conversion feature. The effects of the
restatement have been presented in Note 10 to the Financial Statements.
REVENUES
Total revenues increased $2.8 million, or 60.9%, from $5.4 million for the
first nine months of 1998 to $8.2 million for the comparable 1999 period. This
increase in total revenues was due to a $3.4 million, or 74.4%, increase in
courseware sales to large organizations, partially offset by a $0.6 million
decrease in third-party courseware sales. Revenues related to Internet service
providers increased from
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zero for the first nine months of 1998 to $0.3 million for the comparable 1999
period. Revenues related to other marketing partners increased from zero for the
first nine months of 1998 to $0.3 million for the comparable 1999 period. The
increase in courseware revenues resulted from the growing acceptance of our
curriculum pricing, the expanded number of available courses, customer contract
renewals and increased marketing and sales distribution efforts.
GROSS PROFIT
Gross profit increased $2.6 million, or 51.4%, from $5.1 million in the
first nine months of 1998 to $7.7 million for the comparable 1999 period. The
gross profit margin decreased from 94.3% for the first nine months of 1998 to
93.3% for the comparable 1999 period as a result of additional royalty payments
to content providers.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$1.7 million, or 57.6%, from $3.0 million for the first nine months of 1998 to
$4.7 million for the comparable 1999 period. As a percentage of revenues, sales
and marketing expenses increased slightly from 55.7% for the first nine months
of 1998 to 57.3% for the comparable 1999 period. The increase in sales and
marketing expenses was attributable to additional compensation of $0.8 million
for our sales and marketing staff, which increased from 41 people at
September 30, 1998 to 59 people at September 30, 1999, as we expanded into
indirect distribution channels and to increased promotional expenses of
$0.6 million.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$1.4 million, or 86.2%, from $1.7 million for the first nine months of 1998 to
$3.1 million for the comparable 1999 period. As a percentage of revenues,
product development expenses increased from 30.7% for the first nine months of
1998 to 37.4% for the comparable 1999 period. 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 43 at September 30, 1998 to 62 at
September 30, 1999. We increased staffing in these areas so that we could
accelerate the development of new courses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.4 million, or 24.8%, from $1.8 million for the first nine months of
1998 to $2.2 million for the comparable 1999 period. As a percentage of
revenues, general and administrative expenses decreased from 33.6% for the first
nine months of 1998 to 27.3% for the comparable 1999 period. The increase in
general and administrative expenses was for compensation for our administrative
personnel, which increased from a total of 24 people at September 30, 1998 to 27
people at September 30, 1999.
INTEREST EXPENSE, NET. Interest expense, net of interest income, decreased
from $113,000 for the first nine months of 1998 to $25,000 for the comparable
1999 period due to a reduction in the principal amount of outstanding debt and
an increase in interest income related to short-term investments. Interest
income increased from $7,000 for the first nine months of 1998 to $51,000 for
the comparable 1999 period.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Total revenues, including other revenues, increased $0.5 million, or 7.3%,
from $6.8 million in 1996 to $7.3 million in 1997, and increased $0.6 million,
or 7.1%, from $7.3 million in 1997 to $7.9 million in 1998. The increase in
total revenues from 1996 to 1997 was primarily due to a $1.2 million, or 27.5%,
increase in course sales to large organizations, partially offset by a
$0.7 million decrease in third-party courseware sales. Similarly, the increase
in total revenues from 1997 to 1998 was due to a $1.5 million, or 26.0%,
increase in courseware sales to large organizations, partially offset by a $0.9
million decrease in third-party courseware sales. The increase in revenues from
1996 to 1997, and from 1997 to 1998,
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was the result of an expanded number of courses, the introduction of curriculum
plan pricing, customer contract renewals and increased marketing and sales
distribution efforts. Distributing our courses through Internet service
providers and other marketing partners commenced in late 1997 and accounted for
an aggregate $0.1 million of our revenue increase from 1997 to 1998.
GROSS PROFIT
Gross profit increased $0.5 million, or 7.9%, from $6.5 million in 1996 to
$7.0 million in 1997, and increased $0.4 million, or 5.2%, from $7.0 million in
1997 to $7.4 million in 1998. The gross profit percentage remained approximately
the same at 95.2% in 1996 to 95.8% in 1997, but then decreased to 94.1% in 1998
as a result of additional royalty payments to content providers.
OPERATING EXPENSES
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$0.8 million, or 29.8%, from $2.7 million in 1996 to $3.5 million in 1997, and
increased $0.8 million, or 24.0%, from $3.5 million in 1997 to $4.3 million in
1998. Sales and marketing expenses increased as a percentage of revenues from
39.0% in 1996 to 47.2% in 1997 and to 54.7% in 1998. The increase in sales and
marketing expenses was attributable to an increase in compensation for our sales
and marketing staff, which increased from 32 people at December 31, 1996 to 34
at December 31, 1997 and to 44 at December 31, 1998. Eight of the ten people
added in 1998 were dedicated to the development of indirect distribution
channels.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
$0.5 million, or 38.4%, from $1.5 million in 1996 to $2.0 million in 1997, and
increased $0.4 million, or 16.9%, to $2.4 million in 1998. Product development
expenses increased as a percentage of revenues from 21.5% in 1996 to 27.7% in
1997 and to 30.3% in 1998. The increase in product development expenses was
attributable to an increase in compensation for our product development staff,
as the number of course developers, programmers and other support staff
increased from a total of 22 at December 31, 1996 to 41 at December 31, 1997 and
to 52 at December 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.1 million, or 4.3%, from $1.5 million in 1996 to $1.6 million in
1997, and increased $0.7 million, or 43.2%, from $1.6 million in 1997 to
$2.3 million in 1998. General and administrative expenses decreased as a
percentage of revenues from 22.6% in 1996 to 22.0% in 1997 and increased to
29.4% in 1998. The increase in general and administrative expenses was related
to compensation for our administrative personnel, which increased from 18 people
at December 31, 1996 to 22 at December 31, 1997 to 24 at December 31, 1998.
INTEREST EXPENSE, NET. Interest expense, net increased from $150,000 in
1996 to $181,000 in 1997 and then decreased to $106,000 in 1998. The increase in
1997 was related to increased bank borrowings during the year and to shareholder
loans, which were outstanding for only the last seven months in 1996. In 1998,
interest expense decreased when we paid down and subsequently eliminated our
bank debt in July 1998, principally as a result of significantly increased net
income. Interest income for 1996 and 1997 was insignificant and was $33,000 for
1998.
INCOME TAXES. We were treated as an S-Corporation for federal income tax
purposes from August 1, 1996 to September 15, 1998. During that period the
federal and state taxable income and expenses flowed directly to our
shareholders and were not taxed at the corporate level. At December 31, 1998, we
had net operating loss carryforwards for federal and state tax purposes of
approximately $300,000 that will expire at various times through 2018. At
December 31, 1998, we had a net deferred tax asset of $2,494,000 relating
principally to deferred revenue and our net operating loss carryforwards. Our
ability to realize the value of our deferred tax asset depends on our future
earnings, if any, the timing and amount of which are uncertain. We have recorded
a valuation allowance for the entire net deferred tax asset as a result of those
uncertainties. Accordingly, we did
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not record any income tax benefit for net losses incurred from September 16,
1998 through December 31, 1998.
On August 1, 1996, the date we elected S-Corporation status, we eliminated a
net deferred tax asset of approximately $807,000 from the balance sheet, which
was recognized as income tax expense. For the period from August 1, 1996 through
December 31, 1996 approximately $38,000 of income tax related to our operations
for the period was borne by our shareholders.
On September 15, 1998, the date our S-Corporation status terminated, we
established a net deferred tax asset of approximately $2,359,000, which was
offset by a full valuation reserve, resulting in no income tax benefit. For the
period from January 1, 1998 through September 15, 1998 approximately $465,000 of
income tax benefit related to our operations for the period was utilized by our
shareholders.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased from $2.8 million for
the first nine months of 1998 to $0.4 million for the comparable 1999 period.
This $2.4 million decrease was primarily due to a $0.6 million increase in net
loss and a $1.2 million reduction in the deferred revenue increase.
Net cash provided by operating activities decreased from $0.2 million in
1996 to $0.1 million in 1997 and increased to $2.0 million in 1998. The decrease
in net cash from operating activities in 1997 was primarily due to the
elimination of our deferred tax assets as a result of our change in income tax
status, and the increase in 1998 was primarily due to the increase in deferred
revenue.
Cash and cash equivalents at September 30, 1999 totaled $4.4 million. We had
no cash or cash equivalents as of December 31, 1996 and 1997. Cash and cash
equivalents increased to $1.8 million as of December 31, 1998, due primarily to
deferred revenues and from the proceeds from the sale of convertible preferred
shares in September 1998. This increase was offset by expenditures for property
and equipment, distributions to S-Corporation shareholders to pay income taxes
and repayment of debt.
On July 28, 1999, we entered into a $3,000,000 line of credit and a $500,000
term note with a bank. The line of credit, which expires on October 31, 2001,
bears interest at the bank's prime rate minus 0.5%. No amounts are outstanding
at October 29, 1999. The term note, which matures on July 31, 2004, bears
interest at 8.04%. The line of credit and the term note contain restrictive
covenants which, among others, require the Company to maintain a certain level
of cash flow, as defined. Our other significant commitments consist of two
promissory notes payable to two shareholders, including Carol A. Clark, our
Chairperson of the Board, President and Chief Executive Officer, in the
aggregate principal amount of $857,542 as of October 27, 1999. We intend to use
a portion of the proceeds of this offering to repay these shareholder notes.
Prior to September 1998, we financed the majority of our operations through
bank borrowings and shareholder loans. The $2.0 million net cash provided by
operating activities and the net proceeds of $1.9 million from the sale of
convertible redeemable preferred shares in September 1998 allowed us to repay
bank debt and increase our cash and cash equivalents. In addition, we began to
implement our expansion strategy and incur the related personnel and other
expenses associated with developing additional courses and developing and
promoting our indirect sales channels.
On August 27, 1999 we issued 2,979 series B convertible redeemable preferred
shares for proceeds of $3,000,121. We recorded a beneficial conversion feature
on the preferred shares of $2,960,00 during the nine months ended September 30,
1999.
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
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distribute them through Internet service providers and other marketing partners.
We anticipate that our expenditures will continue to increase for the
foreseeable future. Additionally, we will continue to evaluate possible
acquisitions of or investments in complementary businesses, technologies,
services or products. We currently believe that our available cash and cash
equivalents combined with the net proceeds from this offering will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
the next 18 months. We may need to obtain additional funds, however, in order
to:
- fund more rapid expansion, including significant increases in personnel;
- develop new or enhanced courses or products;
- add new Internet service providers and other marketing partners;
- respond to competitive pressures; or
- to acquire or invest in complementary businesses, technologies, services
or products.
In order to meet our long term liquidity needs, we may need to raise additional
funds, establish an additional credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms or at
all.
YEAR 2000 CONCERNS
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. This could result in system
failures or miscalculations causing disruptions of operations for any company
using these computer programs or hardware, including, among other things, an
inability to connect to the Internet, process transactions, send invoices or
engage in normal business activities. As a result, many companies and
individuals must upgrade or replace their computer systems to avoid "Year 2000"
issues.
We have used internal resources to identify, test and, as necessary, correct
or reprogram our products for Year 2000 compliance. We have determined that our
current software platforms are Year 2000 compliant, except for certain older
software platforms that we have discontinued and do not plan to make Year 2000
compliant. We have tested the software obtained from third-parties that we use
to author and present our courses, but we also intend to seek assurances from
these third-parties that their software is Year 2000 compliant. Despite our
testing or assurances from third-party software providers, there can be no
assurances our products do not contain undetected errors or defects associated
with Year 2000 date functions which may result in delay or loss of revenue,
diversion of development resources, damage to our reputation, costs for
third-party damage claims, or increased service costs, any of which could have a
material adverse effect on our business and financial results.
In addition to our internally developed software, we use software and
hardware developed by third-parties both for our network and internal
information systems. We have conducted testing of third-party software and
hardware to determine Year 2000 compliance. Our testing has indicated that only
a few pieces of software and hardware are not Year 2000 compliant. These are
scheduled to be replaced by November 5, 1999 at a total cost of less than
$100,000. In addition, we have completed the process of obtaining certifications
from our vendors to the effect that their hardware and software is Year 2000
compliant.
We rely on third-party network infrastructure providers to gain access to
the Internet. We also rely on other third-party providers such as utilities who
provide electricity to our physical facilities. If these providers experience
business interruptions as a result of their failure to achieve Year 2000
compliance,
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our ability to provide Internet connectivity, for example, could be impaired,
which could have a material adverse effect on our business and financial
results.
We expect to fund our Year 2000 readiness plan from operating cash flows and
in the past have not separately accounted for these costs. These costs have
principally been the related payroll costs for personnel in the development and
information systems group. We believe that these costs have not been material.
We have a contingency plan to deal with the worst-case scenario that might
occur if technologies upon which we depend are not Year 2000 compliant and fail
to operate effectively. If our present efforts to address our potential Year
2000 compliance issues are not successful, or if our Internet service providers
and other marketing partners, vendors and other third parties with which we
conduct business do not successfully address these issues, our business and
financial results could be materially and adversely affected.
In addition, the purchasing patterns of our customers and potential
customers may be affected by actual or perceived concerns about Year 2000
issues. Organizations that need to expend significant resources to correct their
current systems for Year 2000 compliance may have fewer funds available to
purchase our courses and services. This too could have a material adverse effect
on our business, operating results and financial condition.
We have also engaged a third-party consultant to perform a Year 2000
assessment study. It has reviewed all of the procedures we employed in our Year
2000 reviews and has found them to be consistent with generally accepted
business practices. The consultant did not identify any threats from Year 2000
issues other than those discussed above, none of which might reasonably be
expected to have a material adverse effect on our business and financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" which
addresses software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2" to extend the deferral of the application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. See Note 1 of Notes to Financial
Statements. We do not believe that this pronouncement will have a material
effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 30, 1999, we had no material market risk exposure such as
interest rate risk, foreign currency exchange rate risk or commodity price risk.
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BUSINESS
OVERVIEW
We are a leading provider of Web-based training courses and services
designed to meet the needs of businesses, government agencies, non-profit
organizations and individual consumers worldwide. We offer a real-time,
interactive learning experience presented through standard Web browsers
operating over a variety of presentation platforms, including the Internet,
intranets and local-area and wide-area networks. Our courses enable users to
learn in a self-paced, easy-to-use and cost-effective manner anytime, anywhere.
Our extensive Web-based training library consists of over 340 courses covering a
broad range of topics, including information technology, desktop applications,
professional and managerial skills and practical skills. We distribute our
courses and services directly through our internal sales force and indirectly
through more than 1,100 Internet service providers and over 85 other marketing
partners. We believe we have achieved, and will be able to maintain, our
industry leadership position due to our comprehensive courses, efficient and
flexible technology and extensive distribution channels.
OUR MARKET OPPORTUNITY
International Data Corporation ("IDC") estimates that Web-based training is
the fastest growing segment within the overall U.S. training industry,
displacing other traditional training methods such as instructor-led and
text-based learning. The Web-based training market includes training delivered
over the Internet and Web-based training products, such as authoring and
training management software. IDC estimates that the total U.S. market for
Web-based training will increase from approximately $550 million in 1998 to
approximately $7.1 billion in 2002, a 90% compound annual growth rate. This
anticipated growth rate is significantly higher than the growth rate in the
overall U.S. information technology training industry, estimated at a compound
annual growth rate of approximately 12% over the same period. IDC also estimates
that U.S. revenues from Web-based training will represent approximately 31% of
total U.S. information technology training industry revenues in 2002, up from 5%
in 1998.
According to IDC, demand for Web-based information technology training will
exceed $4 billion by 2002. IDC also estimates that demand for Web-based personal
and professional training will exceed $3 billion by 2002. We believe this
significant anticipated growth will be due to the escalating need for trained
information technology professionals, the rapid adoption of the Internet and the
distribution efficiencies and enhanced accessibility created by the Web-based
training model. Because worldwide demand for skilled information technology
professionals far exceeds the existing supply, there has been a heightened focus
on developing technical, professional and managerial skills through the use of
training and education. We believe that increasing time and budgetary
constraints, coupled with an expanding need to train people across a wide number
of geographic regions, are causing organizations to examine innovative,
technology-based training alternatives, such as multi-media, video and Web-based
learning.
We believe that Web-based learning is the most attractive training
alternative for organizations and individual consumers, due to its:
FLEXIBILITY. Courses can be easily and efficiently modified or replaced
electronically, without the need to distribute new materials manually.
CONVENIENCE AND EASE-OF-ACCESS. Users can take courses at any time from
anywhere in the world simply through accessing the Internet.
COST-EFFECTIVENESS. Web-based training providers do not incur the costs
associated with shipping training materials or the expenses associated with
maintaining and operating learning facilities. Users
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do not incur the travel and lodging costs often associated with attending
seminars or off-site training centers.
REAL-TIME INTERACTIVITY. Web-based training courses can be offered in an
interactive format that allows users to proceed at their own pace and to easily
test their comprehension.
Additionally, we believe that the rapid adoption of the Internet and growth
in consumer spending on the Internet will fuel the demand for Web-based training
products and services. IDC estimates that the number of consumers buying goods
and services over the Internet was approximately 31 million in 1998, which is
expected to increase to approximately 134 million in 2002, representing a
compound annual growth rate of 44%. Furthermore, industry analysts estimate that
annual consumer spending over the Internet was approximately $50 billion in
1998, which is expected to increase to $734 billion in 2002, representing a
compound annual growth rate of approximately 95%.
Historically, training products and services have been marketed primarily to
large organizations, given the associated cost-efficiencies. With the rapid
adoption of the Internet and individual consumers' increasing willingness to
purchase goods and services via the Internet, we believe that training products
can now be targeted to small organizations and individual consumers in a
cost-efficient manner. We believe that significant opportunities exist in these
markets. Businesses and other organizations need employees with strong
technical, professional and managerial skills in order to remain competitive.
Similarly, individual consumers, facing the technical challenges of their
desktop applications, require efficient and cost-effective training that can be
accessed over the Internet at any time and from anywhere in the world.
COMPETITIVE STRENGTHS
We believe the following are our key competitive strengths:
BREADTH, DEPTH AND COST-EFFECTIVENESS OF COURSE OFFERINGS. Our more than
340 courses offer users a broad range of topics. In most subjects, we offer a
number of courses from introductory to advanced, allowing users to select the
courses appropriate for their skill levels.
Our Web-based courses are cost-effective. Customers have the option of
subscribing to our entire library of online courses, a smaller group of related
courses or individual courses. For a fixed license fee, our direct sales
customers receive unlimited access to the courses to which they subscribe for a
specified number of users. Customers accessing our courses through Internet
service providers and other marketing partners pay an annual or monthly fee for
unlimited course access per user at rates set by our marketing partners.
MULTIPLE DISTRIBUTION CHANNELS. Historically, we have derived the vast
majority of our revenues from the direct sale of our courses to large
organizations. At the end of 1997, we launched our indirect distribution
channels to take advantage of the significant opportunity that we believe exists
in the small organization and individual consumer markets. We currently
distribute our courses through the following channels:
DIRECT SALES. Our 30-person internal direct sales force actively markets
our courses and services, targeting businesses and other large organizations
with annual revenues of at least $50 million or that otherwise possess a
need for our courses and services. These customers receive the complete
feature set of our courses and the ability to customize the content of the
standard courses to more closely match their specific training objectives.
We currently have over 600 direct sales customers.
INDIRECT SALES. We license our courses indirectly to businesses,
organizations and individual consumers through our agreements with Internet
service providers and other marketing partners. We grant our indirect
marketing partners the right to license our courses to their customers or
members for a fee set by each marketing partner. In exchange for receiving
access to our courses,
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our indirect marketing partners agree to market and promote our courses to
their customers or members. When a customer subscribes to our courses
through one of these indirect sales channels, we share a portion of the
subscription revenue with the Internet service provider or other marketing
partner.
INTERNET SERVICE PROVIDERS. Our Internet service providers make our
courses available to their Internet access subscribers and other visitors
to their Websites. We offer our Internet service providers an easy and
flexible way to provide training to their customers by installing our
courses on their servers or by linking their Websites directly to our
Website. In return, our Internet service providers give us access to
their customer bases and provide the first level of support to our users.
We currently have agreements with over 1,100 Internet service providers,
including MindSpring Enterprises, Freeserve plc and Verio.
OTHER MARKETING PARTNERS. Our other marketing partners are businesses
and organizations whose current and future operations support and
facilitate the sale of our Web-based training courses. They include
technology companies, who combine our courses with their products, and
non-business organizations such as colleges, universities and trade
associations. Our other marketing partners make our courses available to
businesses, organizations and individual consumers, enabling these
entities to offer their customers, staff, students and members a valuable
service. We currently have over 85 other marketing partners, including
Data General Corporation, Hand Technologies, Ohio University and BATNET,
a consortium reselling our courses to over 30 associations, including the
American Association of Retired Persons and the American Automobile
Association.
SCALEABLE, PROPRIETARY COURSE DEVELOPMENT PROCESS. We follow a four-stage
proprietary course development process that enables our in-house development
staff to produce new courses rapidly, while maintaining high-quality course
design and content. Course set-up includes converting text and graphics supplied
by third-parties into our format, updating tools and templates and adding basic
course elements. During the unit development stage, we create graphics and add
interactive course elements such as questions and simulations. We incorporate
our course navigation features, topic list, index, glossary and skill
assessments in the full-course development stage. Lastly, we conduct quality
assurance testing to ensure that the course is educationally sound, technically
accurate and visually appealing. Throughout each stage, we use proprietary
software tools that we created to automate most of the course development
process.
UNIQUE THIRD-PARTY CONTENT SOURCING. We obtain the content for our courses
from third-parties. Utilizing content from third-parties enables rapid,
cost-effective course production. By using third-party content, we can create a
large number of courses covering a variety of topics without the expense of
maintaining a large research staff. We are also able to respond to our clients'
changing needs quickly.
EFFICIENT AND FLEXIBLE TECHNOLOGY. We design our courses in hypertext
mark-up language, or HTML, a Web document formatting language, specifically for
fast presentation through the Internet and corporate intranets. As a result, our
courses are available at any time, from anywhere in the world. Our HTML course
design also enables us to take advantage of the growing capability of today's
computers to carry voice, data and video information, and should enable us to
incorporate additional features quickly as this capability increases.
We believe we are one of the few Web-based training providers to present all
of our courses through standard Web browsers without the need for users to
download our content. This provides users with direct, immediate access to our
courses without the need to use valuable hard drive space to store our courses.
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Our highly-interactive courses enable users to learn by experience, offering
frequent opportunities for practice in the form of simulations and exercises. We
also incorporate graphics and animation to gain and maintain users' interest
throughout a course.
We present all our courses in a standard format that enables users to become
familiar with the course interface, enhancing ease of use. Our intelligent
technology keeps track of users' progress throughout a course. This enables
users to stop working at any time while taking a course and later resume,
without losing any information and without having to start over from the
beginning.
ONGOING REFERENCE RESOURCE. Our courses can be used as an ongoing and
easy-to-use reference resource. Each course contains an index that allows users
to go directly to the information they want without working through the other
portions of the course. Our powerful index feature also allows users to
reference needed information in any group of licensed courses quickly and
easily. This immediate access to specific course content is highly efficient,
reducing training time by allowing users to focus on those areas where training
is needed.
OUR FOCUSED GROWTH STRATEGY
Our goal is to be the leading global provider of Web-based training courses
and services to businesses, organizations and individual consumers. The
principal elements of our strategy are to:
CONTINUE TO AGGRESSIVELY TARGET LARGE ORGANIZATIONS. Currently, we have
over 600 direct sales customers. With the proceeds of this offering, we intend
to expand our direct sales force and continue to target large organizations for
full scale implementations of Web-based training across corporate intranets and
the Internet. We intend to focus our direct marketing efforts on organizations
that employ a large number of information technology professionals and utilize
desktop applications throughout their operations.
EXPAND RAPIDLY THROUGH THE INTERNET AND OTHER INDIRECT MARKETING CHANNELS IN
THE U.S. AND ABROAD. We currently have agreements with more than 1,100 Internet
service providers. Based on information provided by our Internet service
providers, we believe they can make our courses accessible to over 8.1 million
subscribers, including over 700,000 businesses. We also have agreements with
more than 85 other marketing partners. Over 90% of our agreements with Internet
service providers and other marketing partners are for exclusive three year
terms. We will continue to sign as many Internet service providers and other
marketing partners as possible in order to rapidly expand our reach into the
small organization and individual consumer markets worldwide.
BROADEN COURSE OFFERINGS IN NEW AND EXISTING TOPICS AND CATEGORIES, AND
ACCELERATE COURSE DEVELOPMENT. Our goal is to expand our course offerings by
adding a wide range of categories directed at new markets and rapidly increasing
the number of courses in all of our existing categories. To achieve this goal,
we intend to:
HIRE ADDITIONAL COURSE DEVELOPERS. As of September 30, 1999, our 44 course
developers were producing courses at the rate of 20 to 30 courses every
60 days. We intend to use a portion of the proceeds of this offering to add
a substantial number of qualified developers and significantly increase
course production.
INCREASE NUMBER OF CONTENT PROVIDERS. We are actively pursuing
relationships with additional publishers and with new types of content
providers to develop courses directed toward new markets. For example, we
aim to develop certification, licensing and continuing education courses for
professionals in areas such as insurance, finance, law and accounting.
ENHANCE FURTHER OUR TECHNOLOGY INFRASTRUCTURE. We intend to use part of the
proceeds of this offering to continue our longstanding commitment to investing
in technology. By further enhancing our computer network, hardware and software
applications, we expect to be able to continue providing
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powerful, flexible training tools to our customers. We also believe that
continued technological advances, particularly those involving the Internet,
should provide new opportunities to customize our services further.
INCREASE BRAND AWARENESS IN OUR TARGET MARKETS. We intend to solidify our
position as a leading provider of Web-based training courses and services by
increasing our brand name recognition in all of our target markets.
Occasionally, we co-brand our courses and services on our Internet service
providers' and other marketing partners' Websites. We intend to expand our use
of advertising, public relations and marketing programs to promote our brand and
build loyalty among our small organization and individual customers, as well as
attract potential customers to our Website.
SEEK POSSIBLE STRATEGIC ACQUISITIONS OF OR INVESTMENTS IN COMPLEMENTARY
BUSINESSES, PRODUCTS, SERVICES OR TECHNOLOGIES. We may seek acquisitions of or
investments in complementary businesses, products, services or technologies. We
will focus our acquisition and investment efforts on those companies that we
believe would expand the breadth of our courses and services, increase our
market presence in the U.S. and abroad and introduce new technologies that
should better serve our customers. Although we have from time to time had
discussions with companies regarding our acquiring or investing in their
businesses, we have no present agreement or understanding relating to any
material acquisition or investment.
OUR PRODUCTS AND SERVICES
PRODUCTS. Our diverse online library includes courses designed to meet the
training needs of large organizations, small-to-medium organizations and
individual consumers. We offer over 340 courses in four categories:
INFORMATION TECHNOLOGY AND CERTIFICATION TRAINING. Our course library
includes approximately 230 courses on programming languages, databases and
operating systems. As a Microsoft Independent Courseware Vendor, we offer a
complete set of courses to prepare users for the Microsoft Certified Systems
Engineer (MCSE) exam.
A+ Certification (13 courses)
C (3 courses)
CGI Perl (4 courses)
CICS (5 courses)
Client/Server Technology (1 course)
CMS/XEDIT (2 courses)
COBOL (10 courses)
Data Communication (1 course)
Data Warehousing (2 courses)
DB2 (3 courses)
Dynamic HTML (5 courses)
Easytrieve (1 course)
Exchange Server (19 courses)
FOCUS (11 courses)
GUI Design (3 courses)
HTML (7 courses)
ISPF (2 courses)
JAVA (3 courses)
JCL (7 courses)
LANs (3 courses)
Micro Focus COBOL (5 courses)
Networking Essentials (6 courses)
Object-oriented Analysis & Design (2 courses)
OOP Using C++ (3 courses)
Oracle (13 courses)
PowerBuilder (15 courses)
QMF (2 courses)
RDBMS Fundamentals (1 course)
REXX (1 course)
SAA (2 courses)
SAS (7 courses)
SQL Server (12 courses)
Sybase (7 courses)
TCP/IP (10 courses)
TSO/E (1 course)
UNIX (6 courses)
Visual Basic (15 courses)
Visual InterDev (9 courses)
VSAM (1 course)
Windows NT (9 courses)
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DESKTOP APPLICATIONS AND CERTIFICATION TRAINING. We license approximately
60 training courses designed to improve users' proficiency with widely-used
desktop applications. As a Microsoft Independent Courseware Vendor, we also
provide courses to prepare users for the Microsoft Office User Specialist
(MOUS) certification.
Front Page (2 courses)
Internet/Internet Explorer (4 courses)
Internet/Netscape Navigator (4 courses)
Lotus Notes (2 courses)
Microsoft Access (2 courses)
Microsoft Excel (3 courses)
Microsoft Exchange (2 courses)
Microsoft Word (3 courses)
Microsoft Office 2000 (6 courses)
Microsoft Works (7 courses)
Microsoft Outlook (2 courses)
Microsoft PowerPoint (2 courses)
Microsoft Windows (6 courses)
Microsoft Windows Workstation (2 courses)
Paint Shop (2 courses)
Photoshop (4 courses)
Project 98 (2 courses)
Quicken (2 courses)
QuickBooks (5 courses)
PROFESSIONAL AND MANAGERIAL SKILLS DEVELOPMENT. We offer approximately 25
courses to assist professionals in developing their managerial skills.
Business Communication (3 courses)
Business Management (3 courses)
Concepts of Computing (5 courses)
Customer Service (5 courses)
Negotiating (4 courses)
Time Management (4 courses)
PRACTICAL SKILLS DEVELOPMENT. We license approximately 25 courses to help
individual consumers develop basic skills and improve their daily lives.
Grammar (4 courses)
Home Business (4 courses)
Investing Fundamentals (6 courses)
Math (6 courses)
Money 98 (2 courses)
Retirement Planning (2 courses)
SAT Preparation (3 courses)
COURSE FEATURES. All of our courses contain:
SKILL ASSESSMENTS. Our courses include a complete set of skill assessment
features designed to maximize our users' learning experience. Users have the
option of taking a preliminary test to assess their knowledge of a
particular course. Users can apply the results of the preliminary test to
create individualized learning paths. If users obtain high scores during the
assessment, they can save time by testing out of a course. Each course also
incorporates scored questions which provide users with feedback regarding
course comprehension. After users finish a course, they can take a final
test to evaluate overall course knowledge.
ONLINE REFERENCE CAPABILITY. Our courses contain an index that enables
users to go directly to the information they want without working through
the other portions of the course. Our powerful index feature also allows
users to access needed information in any group of licensed courses quickly
and easily.
In addition, we offer our direct sales customers a broad range of
value-added features that complement our course offerings:
ADMINISTRATION CAPABILITIES. Our courses include comprehensive
administration tools designed to provide meaningful feedback and reduce the
workload of our business customers. Our Web-based
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administration software tracks and reports usage of courses presented
through the Internet or intranets. Organizations can assess the
effectiveness of their training program by selecting either summary or
detailed reports on usage and scores broken down by company, site,
department or individual. Our administration tools also manage user
registration functions.
CUSTOMIZED INSTRUCTION. Our customization tools enable organizations
presenting courses over an intranet to instruct and test their employees on
information unique to their organizations. Customers can customize the text
within a course or insert links to information located at other intranet
sites. Organizations can also add customer-specific questions to our skill
assessments. These questions can be presented in a variety of formats,
including multiple choice, short answer and true/false. This enables
corporate trainers to reinforce crucial skills and to assess knowledge of
customer-specific content. Our customization tools allow organizations to
maximize their training budgets by tailoring training programs to meet their
specific needs.
ONLINE INSTRUCTOR ASSISTANCE. Our instructor online service answers users'
questions regarding selected courses while they are learning. For an
additional annual fee, large organization customers can submit an unlimited
number of questions to a course topic expert and receive a response via
email within one business day. Users can also employ the service to comment
on a course.
OTHER LARGE BUSINESS SERVICES. We offer our large organization customers
on-site product support, including course installation and promotion of our
courses and services within their organizations, at no additional charge. We
offer a variety of licensing options to provide maximum flexibility for
corporate training budgets. Large organization customers may choose to
present our courses through one or more of four presentation
platforms--Internet, intranets, local-area and wide-area networks or
personal computers.
DIRECT SALES CUSTOMERS
We license our Web-based training courses and services to a broad range of
customers in a wide variety of markets. No single customer accounted for more
than 10% of total revenues in 1996, 1997, 1998 or the nine months ended
September 30, 1999. The following table sets forth a representative list of
direct sales customers in various industries from whom we derived more than
$50,000 in revenues during the last year:
<TABLE>
<S> <C>
FINANCIAL/ACCOUNTING HEALTH CARE/INSURANCE
A.G. Edwards & Sons Capital Blue Cross
Bank of America Fireman's Fund Insurance
First Data Resources Traveler's
CONSULTING GOVERNMENT
Computer Horizons Defense Information Systems Agency
Computer Sciences Corporation Florida Department of Health
IMRglobal Social Security Administration
HARDWARE/SOFTWARE NETWORKING/COMMUNICATIONS
American Management Systems Bell South Mobility
Software Synergy Inc. Convergys
Sterling Software Harris Corporation
MANUFACTURING/OTHER RETAIL
Fort James Corporation QVC
The McGraw Hill Companies Saks Incorporated
Southwest Airlines Walgreens
</TABLE>
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COMPETITION
The Web-based training market is evolving quickly and is subject to rapid
technological change. Although the market is highly fragmented, with no single
competitor accounting for a dominant market share, competition is intense. We
anticipate that the lack of significant entry barriers to the Web-based training
market will allow new competitors to enter the market, increasing the level of
competition. Additionally, companies with significantly greater financial
resources are acquiring competitors. We expect that this trend will continue. We
believe that the principal competitive factors in our market include:
- the ability to provide an effective training solution meeting the needs of
users;
- breadth, depth and technical quality of course offerings;
- pricing;
- service features such as adaptability and the capacity to receive
meaningful user feedback;
- quality of implementation, course administration and customer service; and
- company reputation.
Our competitors vary in size and in the scope and breadth of the products
and services they offer. We face significant competition from a variety of
sources, including:
- third-party suppliers of instructor-led training;
- internal corporate training departments;
- providers of custom courses or software businesses can use to create their
own custom courses;
- Web-based training vendors offering off-the-shelf courses; and
- other suppliers of training, including several companies that produce
interactive software training.
As organizations increase their dependence on outside suppliers of training, we
expect to face increasing competition from these sources as training managers
compare a variety of cost-effective training products.
TECHNOLOGY AND INFRASTRUCTURE
We have made substantial investments in our technology infrastructure in
order to employ the best available software and hardware.
TECHNICAL SPECIFICATIONS OF OUR WEBSITE COMPUTER EQUIPMENT. Our Website is
housed by a group of Web servers and database servers. We utilize load balancing
hardware that distributes requests for information evenly among our servers. The
load balancer monitors traffic to each individual server and re-routes network
traffic in the event that a server fails. If the primary load balancing hardware
fails, a second set of load balancing hardware will automatically take over. We
can also add additional hardware and software to our existing Website computer
equipment without affecting the ability of our Website to function.
NETWORK INFRASTRUCTURE. Our network infrastructure consists of widely known
off-the-shelf components designed to create a stable architecture. We use the
Microsoft NT 4.0 network operating system for our servers. We also use the
Windows 95/98 operating system for our desktop computers, as well as Microsoft
Office 2000 and the latest releases of other well known application software.
Data is backed up daily by a 4-drive tape system. Our email server components,
as well as our authentication systems, are integrated into our network operating
system.
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We attempt to maintain a safe and secure data storage and email environment
through continual anti-virus scanning that involves automatic updates for
protection against new viruses. Our network gear, servers and phone switch are
connected to uninterruptible power supplies. Finally, we maintain firewall
technology to protect against security breaches and hackers.
Currently, all of our primary servers are running separate data channels for
redundancy. This allows our servers to be available for production through
multiple network connections. Our servers and network computers are connected to
the network by reliable dual-power network switches that forward data between
servers or desktop computers. This provides dedicated, responsive and fast
network access.
INTELLECTUAL PROPERTY RIGHTS AND TECHNOLOGY
We regard our copyrights, service marks, trademarks, trade secrets,
software, domain names, proprietary technology and similar intellectual property
as critical to our success. To protect our proprietary rights we rely generally
on copyright, trademark and trade secret laws, licenses with customers,
independent contractors and other third-parties, and confidentiality agreements
with employees and others. Despite these protections, it may be possible for
third-parties to copy or otherwise obtain and use our courseware or technology
without our permission or to develop similar courseware or technology
independently. Additionally, our agreements with employees, consultants and
others participating in product and service development may be breached. We may
not have adequate remedies for any breach and our trade secrets may become known
or independently developed by competitors.
We pursue the registration of our trademarks and service marks in the United
States and in other countries, although we have not registered all of our marks.
We have obtained trademark registration in the United States for "DPEC" and
"SmartPro." We have also obtained a trademark registration in the United Kingdom
for "DPEC." We have registered with the United States Copyright Office the
copyright in a significant portion of our courseware. The laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States and effective copyright, patent, trademark and trade secret
protection may not be available in these jurisdictions.
We license our proprietary rights, such as our courseware, trademarks or
copyrighted material, to third-parties. While we attempt to ensure that the
quality of our brand is maintained by these licensees, they may take actions
that harm the value of our proprietary rights or reputation. To license some of
our products, we rely in part on "shrink-wrap" and "clickwrap" licenses that are
not signed by the end user and, therefore, may be unenforceable under the laws
of certain jurisdictions. As with other software products, our products are
susceptible to unauthorized copying and uses that may go undetected. Policing
unauthorized uses is difficult.
While we attempt to avoid infringing known proprietary rights of
third-parties in our product and service development efforts, other parties may
assert claims of infringement of intellectual property or other proprietary
rights against us. We expect to be subject to legal proceedings and claims from
time to time in the ordinary course of business, including claims of alleged
infringement of the proprietary rights of third-parties by us and our licensees.
These claims, even if without merit, could cause us to expend significant
financial and managerial resources. Further, if these claims are successful, we
may be required to change our trademarks, alter our courseware and pay financial
damages, any of which could have a material adverse effect on our business and
financial results.
We rely on proprietary information that we license from third-parties,
including course content we license from book publishers. We also may be
required to obtain licenses from others to refine, develop, market and deliver
new products and services. These third-party licenses may not continue to be
available to us on commercially reasonable terms. The loss of these licenses
could have a material
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adverse effect on our business and financial results. Moreover, rights granted
under any licenses may not be valid and enforceable.
Substantially all of the content for our current courses has been provided
by Macmillan Publishing USA. Under the terms of our agreement, Macmillan gives
us a non-exclusive license to create courses based upon books they provide to us
in exchange for a royalty based on the subscription revenue we receive from our
customers. The license for each course lasts for five years from the date we
release the course to our customers, unless renewed upon mutually agreeable
terms. Macmillan can terminate the license for a course before the end of the
five year license term if we default under the agreement, become bankrupt or
assign the agreement without Macmillan's consent. If a license for a course
expires or is terminated, we must stop licensing that course. We can, however,
continue to serve our customers for the remaining terms of their licenses, fill
existing orders for courses and sell any courses we have on hand for a period of
sixty days from the date the license ends.
We are currently pursuing new content providers and recently added three new
content providers. Although we expect that we will continue to obtain a
substantial amount of content from Macmillan, we also anticipate that we will
obtain an increasing amount of content from other content providers.
EMPLOYEES
As of October 26, 1999, we employed 158 people. None of our employees is
represented by a labor union. We have not experienced any work stoppages and we
consider our relations with our employees to be good.
FACILITIES
Our principal offices currently occupy approximately 30,000 square feet in
Columbus, Ohio, under a sublease that expires on May 10, 2002. The sublease is
renewable at our option for three successive two year periods and one additional
period of 21 months. We believe our existing facilities are adequate for current
requirements and that additional space can be obtained on commercially
reasonable terms to meet future requirements.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings. We may from time to time become
a party to various legal proceedings in the ordinary course of business.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees as of October 28, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- -------- --------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Carol A. Clark........................ 60 Chairperson of the Board of Directors,
President and Chief Executive Officer
Gary W. Qualmann...................... 48 Director, Chief Financial Officer,
Secretary, Treasurer and Vice
President--Finance
H. Neal Ater.......................... 48 Director
Robert J. Massie...................... 50 Director
Murray R. Wilson...................... 38 Director
Paul W. MacCartney.................... 33 Vice President of Development
Gary L. Carabin....................... 48 Vice President and General Manager of
the Corporate Sales Division
James G. Marriott..................... 40 Senior Director and General Manager of
the Internet Service Provider Division
A. Katrina Ramsey..................... 38 Senior Director and General Manager of
the Affinity Channel Partner Division
Dennis E. Yost........................ 48 Senior Director of Marketing
KEY EMPLOYEES
James A. Rubino, Ph.D................. 47 Director of Courseware Design
James T. Talley, Ph.D................. 43 Director of Systems Architecture
James K. Dietz........................ 52 Director of Operations
</TABLE>
- ------------------------
CAROL A. CLARK, a co-founder of DPEC, has served as a Director, President
and Chief Executive Officer since our formation in 1981. Ms. Clark has over
37 years of management and consulting experience and an extensive background in
computer programming and teaching. Before founding DPEC, Ms. Clark served as
manager of customer service for Sterling Software. She also implemented and
taught data security, processing and analysis for a number of organizations,
including Carnegie Mellon University, Bank One, University of Minnesota and IBM.
GARY W. QUALMANN has served as a Director, Chief Financial Officer,
Treasurer and Vice President of Finance since joining us in July 1996.
Mr. Qualmann has also served as our Secretary since September 1998. From May
1988 to July 1995, Mr. Qualmann served as executive vice president and chief
financial officer of Red Roof Inns, a lodging company based in Hilliard, Ohio.
Prior to joining Red Roof Inns, he was a partner in the Columbus, Ohio, office
of Deloitte Haskins & Sells (a predecessor of Deloitte & Touche LLP).
H. NEAL ATER has been a director of DPEC since August 1999. Since June 1999,
Mr. Ater has been Vice President Engineering of VERITAS Software. He is
responsible for over 350 engineers in the Data Protection Group, which provides
storage management software for UNIX, Windows NT and Netware. From May 1996 to
June 1999, Mr. Ater was Vice President--Research & Development at Seagate
Software, NSMG Division, which specialized in systems management software for
Windows NT, Netware and UNIX networks, until VERITAS Software acquired Seagate
Software. He was President of OnDemand Software, a privately-held company
specializing in systems management software for Windows NT and Netware networks
for medium to large scale corporations, from 1994 until Seagate Software
acquired OnDemand in 1996. From 1977 to 1993, Mr. Ater was Senior Vice
President--Research & Development at Goal Systems International, Inc., a
software company specializing in data
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center management software and computer based training software, and Legent
Corp., which acquired Goal in 1992.
ROBERT J. MASSIE has been a director of DPEC since September 1999.
Mr. Massie is currently the Director/Chief Executive Officer of Chemical
Abstracts Service, an operating division of the American Chemical Society. CAS
develops and distributes chemical information databases and related software.
Based in Columbus, Ohio, Chemical Abstracts Service serves a global market of
research professionals in academic, industrial and government organizations.
Prior to joining Chemical Abstracts Service as Director in 1992, Mr. Massie was
President and CEO of Gale Research, a library reference publisher and subsidiary
of the Thomson publishing organization. Prior to that, he held a number of
senior executive positions with the Torstar Corporation, owner of the largest
newspaper in Canada, as well as book publishing and other communications
holdings. Mr. Massie is a former consultant with McKinsey and Co. and practiced
law with the Washington D.C. firm of Covington and Burling.
MURRAY R. WILSON has been a director of DPEC since September 1998. He is a
principal of River Cities Capital Funds, a $140 million family of venture
capital funds in Cincinnati, Ohio. He has been at River Cities, where he
oversees investments primarily involving Internet, software, high technology and
healthcare companies, since 1995. Mr. Wilson came to River Cities after serving
for three years as the senior analyst with Cincinnati-based Blue Chip Venture
Company. Prior to joining Blue Chip, he was an investment officer of Neworld
Bank in Boston. Mr. Wilson is a director or observer of several River Cities
portfolio companies, including Fourthchannel, Inc., CMHC Systems, Inc., TRANSMAP
Corp., Productivity Solutions, Inc., High Speed Access Corp. and Darwin
Networks, Inc.
PAUL W. MACCARTNEY, Vice President of Development, joined DPEC in
January 1996. While at DPEC, he has directed both courseware development and
systems development. Mr. MacCartney managed the conversion of our courses to a
Web-based format. Before joining us, Mr. MacCartney was Manager of Training and
Support at RH Positive Software. He has over 12 years experience in software
development and training.
GARY L. CARABIN has served as our Vice President and General Manager of
Corporate Sales since 1992. Mr. Carabin is in charge of our sales and support
services for our large organization customers. He joined DPEC in 1990 and served
as Director of Sales from 1990 to 1992. From 1982 to 1990, Mr. Carabin held
various sales and management positions at Goal Systems International, Inc. He
also held sales and management positions at Diacon Systems Corporation from 1979
to 1982 and at Burroughs Corporation from 1974 to 1979.
JAMES G. MARRIOTT has served as the Senior Director and General Manager of
our Internet Service Provider Division since August 1997. He was the Eastern
Regional Sales Director for our Corporate Sales Division from October 1993 to
July 1997. Prior to joining us in March 1992, Mr. Marriott was employed at
Automatic Data Processing for more than seven years, becoming the first sales
manager for the Columbus, Ohio, office in 1989, a position he held until joining
DPEC.
A. KATRINA RAMSEY has served, since August 1998, as Senior Director and
General Manager of our Affinity Channel Partner Division, which is responsible
for all indirect marketing partners other than Internet service providers. From
1991 to July 1998, she held various positions within DPEC, including Director of
Strategic Accounts and Western Regional Sales Director, both positions within
the Corporate Sales Division. Prior to joining us, she held various sales and
management positions at OBE/ALCO Standard and Time Services.
DENNIS E. YOST has served as Senior Director of Marketing since
November 1995, managing our corporate and product marketing efforts. From
April 1992 through November 1995, he was employed by Cardinal Business
Media, Inc., where he was publisher and editor-in-chief of two high-technology
publications focused on network integration and database management. He was also
responsible for creating and launching numerous strategic marketing products.
From 1986 to 1992, Mr. Yost was Vice President of Sales and Marketing for
BlueLine Software Inc., a start-up company, where he was
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responsible for establishing worldwide marketing and sales activities. From 1978
to 1986, he held various sales and marketing positions with Goal Systems
International, Inc.
JAMES A. RUBINO, PH.D. has served as Director of Courseware Design since
October 1997. From August 1993 through September 1997, Dr. Rubino served DPEC in
a variety of roles, with a focus on courseware feature design and on writing
software to automate our courseware production and quality assurance. From 1987
through 1993, Dr. Rubino worked as a documentation specialist for Goal Systems
International, Inc. and Legent Corp., writing systems documentation for a
computer-based training software system. Dr. Rubino received a Ph.D. in
Philosophy in 1983 and Masters of Fine Arts in 1987 from The Ohio State
University.
JAMES T. TALLEY, PH.D. has served as Director of Systems Architecture since
October 1997. From July 1991 through September 1997, he held a number of
positions at DPEC, including programming, software design, management of
technical support and management of our computer support. From 1985 through
1991, Dr. Talley worked with faculty at The Ohio State University to develop
computer-based training materials as part of the Computer-Based Instruction
Group in the Center for Teaching Excellence. Dr. Talley received a Ph.D. in
Music Theory in 1989 from The Ohio State University.
JAMES K. DIETZ has served as Director of Operations since March 1995. From
May 1984 to February 1995, he held various positions with Information
Dimensions, Inc., a supplier of document database management systems and
text-retrieval software, including Manager of Prototype Operations, Director of
Facilities, National Software Sales Manager, Vice President of Customer Service
and Vice President of Quality. Mr. Dietz has over 25 years in management of
office facilities, software sales, customer service and quality systems.
TERMS OF DIRECTORS AND OFFICERS
We currently have five directors. Effective upon the closing of this
offering, our board of directors will be divided into two classes, each
consisting of three directors: class I, whose term will expire at the annual
meeting of shareholders to be held in 2000 and class II, whose term will expire
at the annual meeting of shareholders to be held in 2001. The class I directors
will be Gary W. Qualmann and Murray R. Wilson. One vacancy will exist in
class I. The class II directors will be Carol A. Clark, H. Neal Ater and Robert
J. Massie. At each annual meeting of shareholders after a director's initial
term expires, the successors to the directors whose terms have expired will be
elected to two year terms. This classification of our board of directors may
have the effect of delaying or preventing changes in our control or management.
For a more detailed description, see "Description of Capital
Stock--Anti-takeover Effects of Articles of Incorporation, Code of Regulations
and the Ohio General Corporation Law" on page 48.
Under the terms of the series B convertible preferred stock purchase
agreement, dated August 27, 1999, our preferred shareholders have the right to
designate one director. Additionally, Ms. Clark and the other common
shareholders have the right to designate the remaining directors, one of whom
must be Ms. Clark and two of whom must be independent directors reasonably
acceptable to the preferred shareholders. Pursuant to this agreement, the
preferred shareholders have designated Mr. Wilson, and Ms. Clark and the other
common shareholders have designated Ms. Clark and the remaining directors. Upon
the closing of this offering, the series B convertible preferred stock purchase
agreement will terminate automatically.
Each officer is elected by, and serves at the discretion of, our board of
directors. We have agreed to employ Ms. Clark as Chairperson of the Board of
Directors, President and Chief Executive Officer. For a more detailed
description of Ms. Clark's employment agreement, see "--Employment Agreement" on
page 40.
38
<PAGE>
BOARD COMMITTEES
The compensation committee consists of Robert J. Massie, Murray R. Wilson
and H. Neal Ater. The compensation committee reviews and evaluates the salaries,
supplemental compensation and benefits of our officers, reviews general policy
matters relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the board of directors. The
compensation committee also administers our stock option and employee stock
purchase plans. For a more detailed description of our stock option and employee
stock purchase plans, see "--1999 Incentive Stock Plan" on page 41.
The audit committee consists of Carol A. Clark, Murray R. Wilson and H. Neal
Ater. The audit committee reviews with our independent auditor the scope and
timing of its audit services, the auditor's report on our financial statements
following completion of its audit and our policies and procedures with respect
to internal accounting and financial controls. In addition, the audit committee
will make annual recommendations to the board of directors for the appointment
of independent auditors for the ensuing year.
DIRECTOR COMPENSATION
Directors who are officers, employees or who hold or represent persons who
hold more than 5% of our common shares receive no additional compensation for
their services as members of our board of directors or as members of board
committees. Other directors are paid a fee of $1,000 for each meeting of the
board and $750 for each meeting of a board committee they attend and are
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their service as directors, including travel expenses. We also grant each
such director an annual stock option to purchase of our common shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1998 to September 14, 1998, we did not have a compensation
committee. During this time, all decisions regarding executive officer
compensation were made by Carol A. Clark, our President, Chief Executive Officer
and Chairperson of the Board of Directors. When we created our compensation
committee on September 15, 1998, the Board of Directors appointed Ms. Clark and
Murray R. Wilson as its initial members. Ms. Clark remained on our compensation
committee until September 15, 1999. No other former or current member of the
compensation committee was at any time an officer or employee of DPEC. None of
our executive officers serves as a member of the board of directors or
compensation committee of any other entity which has one or more executive
officers serving as a member of our board of directors or compensation
committee.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information on all compensation received during
the year ended December 31, 1998, by each of the named executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND POSITION SALARY BONUS COMPENSATION(1)
- ----------------- -------- -------- --------------------
<S> <C> <C> <C>
Carol A. Clark,
Chairperson of the Board of Directors, President
and Chief Executive Officer...................... $100,000 -- $ 2,632
A. Katrina Ramsey,
Sr. Director and General Manager of the Affinity
Channel Partner Division......................... 182,883 $26,374 28,000
Gary L. Carabin,
Vice President and General Manager of the
Corporate Sales Division......................... 144,402 54,660 28,000
Gary W. Qualmann,
Chief Financial Officer, Secretary, Treasurer and
Vice President--Finance.......................... 140,000 56,525 28,000
James G. Marriott,
Sr. Director and General Manger of the Internet
Service Provider Division........................ 97,025 33,169 27,255
</TABLE>
- ------------------------
(1) The amounts shown in this column for each executive officer consist of
DPEC's matching contribution to the DPEC, Inc. 401(k) Plan. For Ramsey,
Carabin, Qualmann and Marriott also includes $24,000 of non-cash
compensation related to stock options granted at less than fair value.
FISCAL YEAR END OPTION VALUES
The following table provides information concerning unexercised options and
the value of unexercised in-the-money options held as of December 31, 1998 by
each executive officer named in the Summary Compensation Table. No options were
exercised during 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES 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>
A. Katrina Ramsey.............................. -- 55 $ -- $
Gary L. Carabin................................ -- 100 --
Gary W. Qualmann............................... 562 282
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options at fiscal year-end is based on
a price per share of $ , as determined in good faith by our board of
directors, less the exercise price.
EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Carol A. Clark. We have
agreed to employ her as Chairperson of the Board of Directors, President and
Chief Executive Officer. We have also agreed to cause her to be nominated for
re-election as a director for as long as she is employed under the agreement.
40
<PAGE>
The agreement sets a base salary for Ms. Clark of $135,000 that may be
increased, but not decreased, by the compensation committee. In addition to a
base salary, Ms. Clark is eligible for a bonus based on performance goals set by
the compensation committee.
The term of employment under Ms. Clark's employment agreement began
August 1, 1998, and will continue indefinitely unless terminated:
- by us because Ms. Clark is convicted of a felony, engages in willful
misconduct or so neglects her duties as to materially damage our business;
- due to the death or disability of Ms. Clark; or
- by Ms. Clark for any reason.
After termination, we will have no continuing obligation to Ms. Clark, except
that we must pay her salary for 18 months if termination was:
- by us for any reason not listed above; or
- by Ms. Clark if:
- we assign her duties inconsistent with her position as President and
Chief Executive Officer;
- we fail to comply with our obligations under the agreement and shall
not have remedied our failure after receiving notice; or
- we require her to relocate outside of the Columbus, Ohio, metropolitan
area.
The agreement contains non-competition provisions during the term of
employment and for the period two years after termination of employment. The
non-competition provisions do not apply after termination, however, in the
situations when we are required to continue paying Ms. Clark's salary. Under
these provisions, Ms. Clark may not:
- take part in any business that competes with us;
- divert, or try to divert, any of our business; or
- solicit any of our employees.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by
Ms. Clark during the term of the employment agreement.
1999 INCENTIVE STOCK PLAN
We previously established two stock option plans, the DPEC, Inc. Amended and
Restated Incentive Stock Option Plan and the DPEC, Inc. 1998 Stock Option Plan,
to provide our employees an opportunity to own our common shares. Effective
, 1999, our board of directors and shareholders approved and adopted the
DPEC, Inc. 1999 Incentive Stock Plan, which combined the Amended and Restated
Incentive Stock Plan and the 1998 Stock Option Plan into a single plan. The
purpose of the 1999 Incentive Stock Plan is to attract and retain key personnel,
including consultants, advisors and directors, to enhance their interest in our
continued success and to offer all employees the opportunity to own our common
shares.
The 1999 Incentive Stock Plan provides for the grant of incentive and
nonqualified stock options, stock appreciation rights, restricted stock,
performance shares and unrestricted common shares. In addition, the 1999
Incentive Stock Plan permits employees who have satisfied minimum eligibility
requirements to purchase common shares through payroll deductions. No award
under the 1999 Incentive Stock Plan may be granted after . Only
common shares may be issued under the 1999 Incentive Stock Plan, which will be
made available from the authorized but unissued common shares or from common
shares held in treasury. The 1999 Incentive Stock Plan contains customary
provisions for adjustments for stock splits and similar transactions and the
rights of participants upon mergers and other business combinations.
41
<PAGE>
The compensation committee will administer and interpret the 1999 Incentive
Stock Plan. The compensation committee will select the eligible employees who
will receive awards and the terms and conditions applicable to each award. It is
anticipated that the committee's determinations of which eligible individuals
will be granted awards and the terms thereof will be based on each individual's
present and potential contribution to the success of DPEC. The 1999 Incentive
Stock Plan also provides that, on an annual basis, each of our non-employee
directors automatically will receive stock options.
STOCK OPTIONS. The compensation committee may grant non-qualified stock
options to employees, advisors and consultants and may grant incentive stock
options only to employees. The compensation committee has discretion to fix the
exercise price of all stock options, but the exercise price of an incentive
stock option may not be less than the fair market value of the common shares on
the date of grant. In the case of an incentive stock option granted to a 10%
shareholder of DPEC, the exercise price may not be less than 110% of the fair
market value of the common shares at the date of grant. The compensation
committee also has broad discretion as to the terms and conditions under which
options will be exercisable. Incentive stock options will expire not later than
ten years after the grant date (or five years for an incentive stock option
granted to a 10% shareholder). The exercise price of the options may be paid in
cash or, in the discretion of the compensation committee, by exchanging common
shares owned by the participant, or by a combination of either.
DIRECTOR OPTIONS. Each director who is not an employee of DPEC or of a
subsidiary, or who does not hold or represent persons who hold more than 5% of
our common shares, will receive, on the first business day after the effective
date of this offering, a grant of a non-qualified stock option to purchase
common shares at an exercise price equal to the public offering price of
our common shares. Each person who subsequently becomes a director and is not an
employee of DPEC or of a subsidiary, or who does not hold or represent persons
who hold more than 5% of our common shares, will receive, on the first business
day after becoming a director, a grant of a non-qualified option to purchase
common shares at an exercise price equal to the fair market value of the
common shares on the date of grant. In addition, on the first business day after
each succeeding annual meeting of shareholders, each continuing director who is
still eligible to receive a director option will receive a grant of a
non-qualified stock option to purchase common shares at an exercise price
equal to the fair market value of the common shares on the date of grant. A
director option will be exercisable beginning six months after the date of grant
until the tenth anniversary of the date of grant and three months (one year in
the case of a director who becomes disabled or dies) after the date the director
ceases to be a director, whichever occurs first. If a director ceases to be a
director after having been convicted of, or pleading guilty to, a felony, the
director option will be canceled on the date the director ceases to be a
director.
STOCK APPRECIATION RIGHTS. Stock appreciation rights may be awarded either
in tandem with stock options or on a stand-alone basis. The compensation
committee may award tandem stock appreciation rights either at the time the
related option is granted or at any time prior to the exercise, termination or
expiration of the related option. The tandem stock appreciation right will have
the same exercise price as the related option. The compensation committee will
specify at the time of grant the base price of the common shares to be issued
for determining the amount of cash or number of common shares to be distributed
upon the exercise of a nontandem stock appreciate right. The base price of
nontandem stock appreciation rights will not be less than 100% of the fair
market value of our common shares on the date of grant.
Tandem stock appreciation rights are exercisable only to the extent that the
participant may exercise the related option and only for the period determined
by the compensation committee. Upon the exercise of all or a portion of tandem
stock appreciation rights, the related option terminates for an equal number of
our common shares. Similarly, upon exercise of all or a portion of an option,
the related tandem stock appreciation right terminates for an equal number of
our common shares.
42
<PAGE>
When a participant surrenders a tandem stock appreciation right and the
related unexercised option, or surrenders a nontandem stock appreciation right,
the participant will receive common shares with the same economic value as the
stock appreciation right represented. For each common share represented by the
stock appreciation right, this economic value equals the difference between the
fair market value of one common share on the date the participant surrenders the
stock appreciation right and the exercise or base price specified in the stock
appreciation right. The compensation committee may pay cash instead of our
common shares for a surrendered stock appreciation right.
RESTRICTED STOCK AWARDS. An award of restricted stock is an award of our
common shares that is subject to the forfeiture or transfer restrictions imposed
by the compensation committee. The compensation committee may grant awards of
restricted stock for or without consideration. Restrictions on restricted stock
may lapse in installments based on factors determined by the compensation
committee, which may waive or accelerate the lapsing of restrictions in whole or
in part in its sole discretion. Prior to the expiration of the restricted
period, except as the compensation committee may otherwise provide, a
participant will have the rights of a shareholder, including the right to vote
common shares and to receive dividends and other distributions, with respect to
the restricted stock awarded to him. DPEC, or an escrow agent designated by
DPEC, will hold the shares of restricted stock during the restricted period,
which may not be sold, assigned, transferred, pledged or otherwise encumbered
until lapse of these restrictions.
PERFORMANCE SHARE AWARDS. A performance share award is an award of units
giving a participant the right to receive a specified number of common shares or
cash, or both, after specified performance goals are met. The compensation
committee will determine these goals when it makes each performance share award.
The compensation committee has discretion to set the value of each performance
award, to adjust the performance goals as it deems equitable to reflect events
affecting DPEC, changes in law or accounting principles or other factors, and to
determine the form of payment for performance awards.
EMPLOYEE STOCK PURCHASE PLAN. Eligible employees may, from time to time,
have the opportunity to purchase common shares through payroll deductions during
offering periods established by the compensation committee. They will be able to
purchase common shares at a price that is not less than the lesser of 85% of the
fair market values of our common shares on the first or last day of the offering
period. Section 423 of the Internal Revenue Code imposes restrictions on
employee stock purchase plans, including limitations on the maximum value of
common shares an individual employee may purchase in any calendar year. The
first offering period will begin on the effective date of this offering.
UNRESTRICTED SHARES. The 1999 Stock Incentive Plan also permits the
compensation committee to grant unrestricted shares. Unrestricted shares would
entitle a participant to receive common shares without paying DPEC any
consideration for the shares.
The committee has broad discretion as to the specific terms and conditions
of each award and any applicable rules, including the effect, if any, of a
change in control of DPEC. A written instrument delivered to the participant
will evidence the terms of each award. The common shares issued under the 1999
Incentive Stock Plan are subject to applicable tax withholding by us which, to
the extent permitted by Rule 16b-3 under the Exchange Act, may be satisfied by
withholding common shares. A participant may not assign or transfer any awards
except by will or the laws of descent and distribution or under a qualified
domestic relations order.
Our board of directors may amend or terminate the 1999 Incentive Stock Plan
at any time, except that any amendment or termination that adversely affects
rights under any outstanding award would require the consent of the participant.
Our shareholders must approve any amendment the compensation committee
determines is necessary to comply with any tax or regulatory requirement.
43
<PAGE>
CERTAIN TRANSACTIONS
The following are brief descriptions of transactions between us and any of
our directors, executive officers or shareholders known to us to own
beneficially more than 5% of our shares, or any member of the immediate family
of any of those persons, since January 1, 1996, where the amount involved
exceeded $60,000:
PURCHASE OF COMMON SHARES
In May 1996, we purchased 14,850 of our common shares from Frances Papalios,
our co-founder and a former member of our board of directors, for an aggregate
purchase price of $1,250,000. We paid $1,000,000 of the purchase price in cash
and the remaining portion with a promissory note issued to Ms. Papalios in the
original principal amount of $250,000. The promissory note issued to
Ms. Papalios bears interest at the rate of 8% per annum and matures on April 1,
2001. As of October 27, 1999, the outstanding principal on the promissory note
issued to Ms. Papalios was approximately $143,256, and we intend to use a
portion of the proceeds from this offering to repay the balance of the
promissory note issued to Ms. Papalios.
We financed the $1,000,000 cash portion of the purchase price by a
$1,000,000 loan from Ms. Clark. As of October 27, 1999, the outstanding
principal on our loan from Ms. Clark was approximately $714,286, and we intend
to use a portion of the proceeds from this offering to repay the balance of the
loan. We evidenced the loan from Ms. Clark by a promissory note issued to
Ms. Clark that accrues interest at a rate of 1% over prime and matures in
November 2004. Ms. Clark, in turn, financed a portion of her loan to us by a
loan from a bank to her in the original principal amount of $800,000. As a
condition of extending the bank loan to Ms. Clark, we were required by the bank
to guarantee Ms. Clark's obligation under the bank loan. In August 1999,
Ms. Clark repaid the outstanding balance of the bank loan from the proceeds of a
loan from another bank. As part of this refinancing, our guarantee of
Ms. Clark's obligations was released by the first bank and the successor bank
did not require our guarantee.
In connection with our purchase of common shares from Ms. Papalios, we
entered into a noncompetition agreement with Ms. Papalios, pursuant to which we
paid Ms. Papalios the aggregate sum of $330,000 in six equal installments. We
pledged 4,950 common shares to Ms. Papalios as security for our payment
obligations under the promissory note and the noncompetition agreement.
Ms. Papalios has released all but 1,805 of the common shares from the pledge. We
have also entered into a shareholders agreement with Ms. Papalios, Ms. Clark and
their respective trusts. The shareholders agreement imposes certain restrictions
on, and grants certain rights to, the parties to the shareholders agreement with
respect to the ownership, sale or other transfer of their common shares. The
shareholders agreement will terminate when we repay the promissory note issued
to Ms. Papalios.
SALE OF PREFERRED SHARES
In August 1999, we sold 1,490 shares of series B convertible preferred stock
to River Cities Capital Fund II Limited Partnership for a cash purchase price of
$1,007.09 per share (an aggregate purchase price of $1,500,564). We recorded a
beneficial conversion feature on the preferred shares during the nine months
ended September 30, 1999. In September 1998, we sold 5,123 shares of senior
convertible preferred stock to River Cities Capital Group II Limited Partnership
for a cash purchase price of $390.40 per share (an aggregate purchase price of
$2,000,000). In February 1999, River Cities Capital Group II Limited Partnership
transferred all of the senior convertible preferred stock to River Cities
Capital Fund II Limited Partnership. Mr. Wilson, a member of our board of
directors, is a principal of River Cities Capital Fund II Limited Partnership.
44
<PAGE>
REGISTRATION RIGHTS AGREEMENTS
In connection with the sales of our preferred shares, we have entered into a
registration rights agreement that gives the preferred shareholders demand and
piggyback registration rights. Any time after we complete this offering, the
holders of a majority or more of the registrable securities are entitled to
demand that we register their registrable securities under the Securities Act.
Additionally, the holders of the registrable securities are entitled to require
us to include their registrable securities in future registration statements
that we may file.
We also have entered into a registration rights agreement with Carol Clark,
Frances Papalios and Gary Qualmann and their respective trusts that requires us,
upon their request, to include their shares in future registration statements
that we may file. For a more detailed description of these registration rights
agreements, see "Description of Capital Stock--Registration Rights" on page 50.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information regarding beneficial ownership of
our common shares as of , 1999, and as adjusted to reflect the sale
of shares offered hereby, by (1) each of our directors, (2) each executive
officer named in the Summary Compensation Table, (3) each person or group of
affiliated persons known by us to beneficially own more than 5% of our common
shares and (4) all directors and executive officers as a group.
Unless otherwise indicated, the address for each person named in the table
is c/o DPEC, Inc., 851 West Third Avenue, Columbus, Ohio 43212, and each person
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, for all shares listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of common shares outstanding for each
listed person includes any shares the individual has the right to acquire within
60 days. For purposes of calculating each person's or group's percentage
ownership, stock options exercisable within 60 days are included for that person
or group but not for the stock options of any other person or group. Asterisks
(*) indicate beneficial ownership of less than 1% of outstanding common shares.
<TABLE>
<CAPTION>
PERCENT OF
OWNERSHIP
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Carol A. Clark.............................................. 22,275(1) 53.24% %
Gary W. Qualmann............................................ 2,565(2) 6.01
H. Neal Ater................................................ 0 * *
Robert J. Massie............................................ 0 * *
Murray R. Wilson............................................ 6,613(3) 15.81
Frances Papalios(4)......................................... 7,425(5) 17.75
A. Katrina Ramsey........................................... 355(6) * *
Gary L. Carabin............................................. 1,443(7) 3.44
James G. Marriott........................................... 219 * *
River Cities Capital Fund II Limited Partnership(8)......... 6,613(3) 15.81
All directors and executive officers as a group
(10 persons).............................................. 33,780(9) 78.86
</TABLE>
- ------------------------
(1) Includes 4,000 shares held by Ms. Clark's spouse as sole trustee of a trust
created by Ms. Clark.
(2) Includes 844 common shares issuable upon the exercise of stock options and
1,100 shares held by Mr. Qualmann's spouse as sole trustee of a trust
created by Mr. Qualmann.
(3) Shares owned of record by River Cities Capital Fund II Limited Partnership,
the general partner of which is Mayson, Inc. Murray R. Wilson, a director of
DPEC, is a principal of River Cities Capital Fund II Limited Partnership and
may be deemed to have a beneficial ownership interest in the common shares
held by it.
(4) 4170 Waddington Road, Columbus, Ohio 43220.
(5) Includes 7,400 common shares held by Ms. Papalios as sole trustee of a trust
created by Ms. Papalios.
(6) Includes 55 common shares issuable upon the exercise of a stock option that
will vest upon the closing of this offering.
(7) Includes 100 common shares issuable upon the exercise of a stock option that
will vest upon the closing of this offering.
(8) 221 East Fourth Street, Cincinnati, Ohio 45202-4147.
(9) Includes 4,000 shares held by Ms. Clark's spouse as sole trustee of a trust
created by Ms. Clark, 1,100 shares held by Mr. Qualmann's spouse as sole
trustee of a trust created by Mr. Qualmann, 844 common shares issuable upon
the exercise of stock options and 155 common shares issuable upon the
exercise of stock options that will vest upon the closing of this offering.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
OUR AUTHORIZED CAPITAL STOCK
Prior to the closing of this offering, we will have the following authorized
capital stock:
- common shares, no par value;
- 5,123 shares of senior convertible preferred stock, no par value; and
- 2,979 shares of series B convertible preferred stock, no par value.
Upon the closing of this offering, we will have the following authorized
capital stock:
- common shares, no par value; and
- preferred shares, no par value.
Upon the closing of this offering, we will have common shares
outstanding and no preferred shares outstanding.
COMMON SHARES
Voting:
- one vote for each share held of record on all matters submitted to a vote
of shareholders;
- no cumulative voting rights;
- election of directors by plurality of votes cast; and
- all other matters by majority of the votes cast.
Dividends:
- subject to preferential dividend rights of any outstanding preferred
shares, common shareholders are entitled to receive ratably declared
dividends; and
- the board of directors may only declare dividends out of legally available
funds.
Additional Rights:
- subject to the preferential liquidation rights of any outstanding
preferred shares, common shareholders are entitled to receive ratably net
assets, available after the payment of all debts and liabilities, upon our
liquidation, dissolution or winding up;
- no preemptive rights;
- no subscription rights;
- no redemption rights;
- no sinking fund rights; and
- no conversion rights.
The rights and preferences of common shareholders are subject to the right of
any series of preferred stock we may issue in the future.
PREFERRED STOCK
A total of 8,102 shares of preferred stock is outstanding as of the date of
this prospectus, consisting of 5,123 shares of senior convertible preferred
stock, no par value, and 2,979 shares of series B convertible preferred stock,
no par value. All of these outstanding preferred shares will be
47
<PAGE>
converted automatically into common shares concurrently with the
closing of this offering. As a result, there will then be no preferred shares
outstanding and the preferred shares converted into common shares will be
retired automatically. We presently have no plans to issue any additional
preferred shares.
Effective upon the closing of this offering and the filing of the Second
Amended Articles of Incorporation of DPEC, Inc., we may, by resolution of our
board of directors, and without any further vote or action by our shareholders,
authorize and issue, subject to certain limitations prescribed by law, up to an
aggregate of preferred shares. These preferred shares will consist of
voting preferred shares and nonvoting preferred shares. The
preferred shares may be issued in one or more classes or series of shares of any
class or series. With respect to any classes or series, the board of directors
may determine the designation and the number of shares, preferences, limitations
and special rights, including dividend rights, conversion rights, redemption
rights and liquidation preferences. Because of the rights that may be granted,
the issuance of preferred shares may delay, defer or prevent a change of
control.
ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND THE
OHIO GENERAL CORPORATION LAW
There are provisions in our articles of incorporation and code of
regulations, and the Ohio Revised Code that could discourage potential takeover
attempts and make attempts by shareholders to change management more difficult.
These provisions could adversely affect the market price of our shares. In
addition to our preferred shares described above:
STAGGERED BOARD
The board of directors is divided into two classes, with regular two-year
staggered terms and initial terms expiring at the 2000 annual meeting of
shareholders for class I directors and the 2001 annual meeting of shareholders
for class II directors. This classification system increases the difficulty of
replacing a majority of the directors and may tend to discourage a third-party
from making a tender offer or otherwise attempting to gain control of us. It
also may maintain the incumbency of our board of directors.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT
Ohio law generally requires that an action by written consent of the
shareholders in lieu of a meeting be unanimous. One exception is that the code
of regulations may be amended by an action by written consent of holders of
shares entitling them to exercise two-thirds of the voting power unless
otherwise provided in the articles of incorporation or code of regulations. Our
code of regulations provides that no action to amend the code of regulations may
be taken by a written consent of shareholders without a meeting. This provision
may have the effect of delaying, deferring or preventing a tender offer or
takeover attempt that a shareholder might consider in its best interest.
SUPERMAJORITY VOTING PROVISIONS
The following provisions in our code of regulations may not be repealed or
amended without the vote of the holders of not less than 66 2/3% of the total
voting power of DPEC:
- number and classification of directors;
- removal of directors;
- elimination of shareholder action by written consent to amend the code of
regulations;
- indemnification of directors; and
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<PAGE>
- supermajority voting.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
Shareholders who want to bring business before an annual meeting of
shareholders or nominate candidates for election as directors must provide
advanced notice in writing within the time periods and in the form specified in
our code of regulations. Shareholders who do not fully comply with the
requirements of the code of regulations will be unable to bring matters before
the meeting or nominate candidates for election as directors.
MERGER MORATORIUM STATUTE
On completion of this offering, we will be deemed to be an issuing public
corporation under Ohio law. Chapter 1704 of the Ohio Revised Code governs
transactions between an issuing public corporation and
- an "interested shareholder," which, generally, means someone who becomes a
beneficial owner of 10% or more of the shares of the corporation without
the prior approval of the board of directors of the corporation; and
- persons affiliated or associated with an interested shareholder.
For at least three years after an interested shareholder becomes such, the
following transactions are prohibited if they involve both the issuing public
corporation and either an interested shareholder or anyone affiliated or
associated with an interested shareholder:
- the disposition or acquisition of any interest in assets;
- mergers, consolidations, combinations and majority share acquisitions;
- voluntary dissolutions or liquidations; and
- the issuance or transfer of shares or any rights to acquire shares in
excess of 5% of the outstanding shares
Subsequent to the three-year period, these transactions may take place
provided that either of the following conditions are satisfied:
- the transaction is approved by the holders of shares with at least
two-thirds of the voting power of the corporation, or a different
proportion set forth in the articles of incorporation, including at least
a majority of the outstanding shares after excluding shares controlled by
the interested shareholder; or
- the business combination results in shareholders, other than the
interested shareholder, receiving a fair price, as determined by
Section 1704.03(A)(4), for their shares.
If, prior to the acquisition of shares by which a person becomes an
interested shareholder, the board of directors of the corporation approves the
transaction by which the person would become an interested shareholder, then
Chapter 1704's prohibition does not apply. The prohibition imposed by Chapter
1704 continues indefinitely after the initial three-year period unless the
subject transaction is approved by the requisite vote of the shareholders or
satisfies statutory conditions relating to the fairness of consideration
received by shareholders, other than the interested shareholder.
The Merger Moratorium Statute does not apply to a corporation whose articles
of incorporation or code of regulations so provide. We have not opted out of the
application of the Merger Moratorium Statute. The Merger Moratorium Statute also
does not apply to any person who becomes an interested shareholder before the
corporation becomes an issuing public corporation. Upon the completion of this
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offering, Carol A. Clark will not be subject to the Merger Moratorium Statute
because she owned more than 10% of our common shares before completion of this
offering.
CONTROL SHARE ACQUISITION ACT
Section 1701.831 of the Ohio Revised Code, known as the Control Share
Acquisition Act, provides that certain notice and informational filings and
special shareholder meetings and voting procedures must occur prior to
consummation of a proposed "control share acquisition." The Control Share
Acquisition Act does not apply to a corporation whose articles of incorporation
or code of regulations so provide. We have opted out of the application of the
Control Share Acquisition Act.
REGISTRATION RIGHTS
In connection with sales of our preferred shares, we have entered into an
amended and restated registration rights agreement that gives the preferred
shareholders demand and piggyback registration rights. After the completion of
this offering and the automatic conversion of such preferred shares into common
shares, the holders of common shares ("registrable securities") will be
entitled to demand registration of their registrable securities under the
Securities Act. Any time after we complete this offering, the holders of a
majority or more of the registrable securities are entitled to demand that we
register their registrable securities under the Securities Act. In addition, the
holders of registrable securities are entitled to require us to include their
registrable securities in future registration statements that we may file. These
registration rights are subject to various conditions and limitations, including
the right of the underwriters of an offering to limit the number of registrable
securities that may be included in the offering. In addition, holders of all of
these shares are restricted from exercising their demand rights until 180 days
after the date of this prospectus. We are generally required to bear all of the
expenses of these registrations, except underwriting discounts and selling
commissions. Registration of any of the registrable securities held by security
holders with registration rights will result in shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration.
We have also entered into a registration rights agreement with Carol A.
Clark, Frances Papalios, Gary W. Qualmann and their respective trusts. After the
completion of this offering, these shareholders are entitled to require us to
include any of the common shares owned by them in future registration statements
that we may file. These registration rights are subject to various conditions
and limitations, including the right of the underwriters of an offering to limit
the number of registrable securities that may be included in the offering. We
are generally required to bear all of the expenses of these registrations,
except underwriting discounts and selling commissions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common shares is Firstar Bank, N.A.
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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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<PAGE>
be subject to an additional "branch profits tax" at a 30% rate, or any lower
rate that may be applicable under an income tax treaty.
Under current law, dividends paid to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above. The same
presumption applies under the current interpretation of U.S. Treasury
regulations, for purposes of determining the applicability of a tax treaty rate.
Under final U.S. Treasury regulations, effective January 1, 2001, however, a
non-U.S. holder of common shares who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification and
other requirements, including filing a Form W-8 BEN that contains the holder's
name and address. A non-U.S. holder of common shares that is eligible for a
reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain
a refund of any excess amounts currently withheld by filing an appropriate claim
for a refund with the U.S. Internal Revenue Service.
DISPOSITION OF COMMON SHARES. Except as described below, a non-U.S. holder
generally will not be subject to U.S. federal income tax in respect of gain
recognized on a disposition of common shares, provided that
- the gain is not U.S. trade or business income;
- the non-U.S. holder is an individual who is not present in the United
States for 183 or more days in the taxable year of the disposition and who
meets certain other requirements;
- the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. tax law applicable to certain United States expatriates; and
- We have not been and do not become a "United States real property holding
corporation" for U.S. federal income tax purposes.
We believe that DPEC has not been, is not currently, and is not likely to
become, a United States real property holding corporation. However, we cannot
assure you that DPEC will not be a United States real property corporation when
a non-U.S. holder sells its shares of common shares.
FEDERAL ESTATE TAXES. In general, an individual who is a non-U.S. holder
for U.S. estate tax purposes will incur liability for U.S. federal estate tax if
the fair market value of property included in the individual's taxable estate
for U.S. federal estate tax purposes exceeds the statutory threshold amount. For
these purposes, common shares owned or treated as owned, by an individual who is
a non-U.S. holder at the time of death will be included in the individual's
gross estate for U.S. federal tax purposes unless an applicable estate tax
treaty provides otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX. We are
required to report annually to the Internal Revenue Service and to each non-U.S.
holder the amount of dividends paid to, and the tax withheld with respect to,
each non-U.S. holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
non-U.S. holder resides. Under current regulations, the United States backup
withholding tax, which generally is a withholding tax imposed at the rate of 31%
on certain payments to persons that fail to furnish the information reporting
requirements, will generally not apply to dividends paid on the common shares to
a non-U.S. holder at an address outside the United States. Under final Treasury
regulations, effective January 1, 2001, a non-U.S. holder generally would not be
subject to backup withholding at a 31% rate if the beneficial owner certifies to
that owner's foreign status on a valid Form W-8 BEN.
Non-U.S. holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
common shares effected by a foreign office of a foreign broker. If, however the
broker is a U.S. person or a U.S. related person, information reporting,
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<PAGE>
but not backup withholding, would apply unless the broker received a signed
statement from the owner, certifying its foreign status or otherwise
establishing an exemption, or the broker had documentary evidence in its files
as to the non-U.S. holder's foreign status and the broker had no actual
knowledge to the contrary. For this purpose, a "U.S. related person" is
- a controlled foreign corporation for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for the part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business;
- a foreign partnership that is either engaged in a U.S. trade or business
or in which U.S. persons hold more than 50% of the income or capital
interest; or
- certain U.S. branches of foreign banks or insurance companies.
Non-U.S. holders will be subject to information reporting and backup
withholding at a rate of 31% with respect to the payment of proceeds from the
disposition of common shares effected by, to or through the United States office
of a broker, unless the non-U.S. holder certifies as to its foreign status or
otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be allowed as a credit against the non-U.S. holder's U.S.
federal income tax, and any amounts withheld in excess of the non-U.S. holder's
federal income tax liability will be refunded, provided that the required
information is furnished to the Internal Revenue Service.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
shares, and no prediction can be made as to the effect, if any, that market
sales of common shares or the availability of common shares for sale will have
on the market price of our common shares prevailing from time to time.
Nevertheless, sales of substantial amounts of common shares in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common shares and could impair our future ability to
raise capital through the sale of our equity securities.
Upon the closing of this offering, we will have an aggregate of
common shares outstanding, assuming no exercise of the underwriters'
over- allotment option and no exercise of outstanding stock options, and
common shares will be issuable upon exercise of outstanding stock
options. The shares sold in this offering will be freely tradable, except that
any shares held by our "affiliates" (as that term is defined in Rule 144
promulgated under the Securities Act) may only be sold in compliance with the
limitations described below.
The common shares outstanding after this offering and held by our
affiliates will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 promulgated under
the Securities Act, which is summarized below. After taking into account the
180-day lock-up agreements described below and the provisions of Rule 144,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- -------------------------------------
<S> <C>
90 days after the date of this
prospectus
180 days after the date of this
prospectus
At various times after 180 days after
the date of this prospectus
</TABLE>
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<PAGE>
Approximately of the shares that will become eligible for resale after
the expiration of the 180-day lock-up agreements are held by affiliates and,
therefore, will remain subject to the volume limitations and other restrictions
of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
- 1% of the then outstanding common shares (approximately shares
immediately after this offering); or
- the average weekly trading volume in the common shares during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions.
A person who is not deemed to have been an affiliate at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least two years would be entitled to sell such shares without
regard to the requirements described above. To the extent that shares were
acquired from an affiliate, the transferee's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
All of our directors, officers and shareholders, and our option holders,
have agreed that they will not, without the prior written consent of the
representatives of the underwriters, sell or otherwise dispose of any common
shares or options to acquire common shares during the 180-day period following
the date of this prospectus. See "Underwriting."
We intend to file a Form S-8 registration statement under the Securities Act
on or immediately after the date of this prospectus to register all common
shares issuable under the 1999 Incentive Stock Plan and the 1999 Employee Stock
Purchase Plan. This registration statement will automatically become effective
upon filing. Accordingly, shares covered by this registration statement will
thereupon be eligible for sale in the public markets, unless the options are
subject to vesting restrictions or the contractual restrictions described above.
For a more detailed description of our stock option and employee stock purchase
plans, see "Management--1999 Incentive Stock Plan" on page .
We have agreed not to sell or otherwise dispose of any common shares during
the 180-day period following the date of the prospectus, except we may issue,
and grant options to purchase, common shares and we may offer and sell common
shares under our 1999 Incentive Stock Plan. In addition, we may issue common
shares in connection with any acquisition of another company if the terms of the
issuance provide that the common shares may not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence.
Following this offering, in some circumstances and subject to conditions,
holders of our outstanding common shares will have demand registration rights
(subject to the 180-day lock-up arrangement described above) to require us to
register their common shares under the Securities Act, and they will have rights
to participate in any future registration of securities by us. For a more
detailed description of these registration rights, see "Description of Capital
Stock--Registration Rights" on page 50.
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<PAGE>
UNDERWRITING
GENERAL
Under the underwriting agreement, which is filed as an exhibit to the
registration statement of which this prospectus is a part, each of the
underwriters named below, for whom Lehman Brothers Inc., Warburg Dillon Read
LLC, J.C. Bradford & Co. and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, has agreed to
purchase from us the respective number of common shares shown opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
- ------------------------------------------------------------ -------------
<S> <C>
Lehman Brothers Inc.........................................
Warburg Dillon Read LLC.....................................
J.C. Bradford & Co..........................................
Fidelity Capital Markets, a division of National Financial
Services Corporation......................................
-------
Total.......................................................
=======
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase common shares are subject to certain conditions, and that if any of the
foregoing common shares are purchased by the underwriters pursuant to an
underwriting agreement, all of the common shares that the underwriters have
agreed to purchase pursuant to the underwriting agreement must be so purchased.
COMMISSIONS AND EXPENSES
The representatives have advised us that the underwriters propose to offer
the common shares directly to the public at the public offering price set forth
on the cover page of this prospectus, and to certain selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
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<PAGE>
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option to purchase up to an aggregate
of common shares, exercisable solely to cover over-allotments, if any,
at the public offering price less the underwriting discounts and commissions
shown on the cover page of this prospectus. Such option may be exercised at any
time, and from time to time, until 30 days after the date of the underwriting
agreement. To the extent that the underwriters exercise this option, each
underwriter will be committed, subject to certain conditions, to purchase a
number of additional common shares proportionate to such underwriter's initial
commitment, as indicated in the preceding table, and we will be obligated, under
such over-allotment option, to sell such common shares to the underwriters.
LOCK-UP AGREEMENTS
We and all of our directors, officers shareholders and option holders,
holding an aggregate of common shares, have agreed not to offer to
sell, sell or otherwise dispose of, directly or indirectly, any common shares
during the 180-day period following the date of the prospectus without the prior
written consent of Lehman Brothers Inc., except that we may issue, and grant
options to purchase, common shares under our 1999 Incentive Stock Plan. For a
description of the dilution of your investment, see "Risk Factors--You will
experience immediate and substantial dilution in the book value of your
investment" on page 13 and "Shares Eligible for Future Sale" on page 53.
OFFERING PRICE DETERMINATION
Prior to the offering, there has been no public market for the common
shares. The initial public offering price was negotiated between the
representatives and us. In determining the initial public offering price of the
common shares, the representatives considered, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Application has been made to have the common shares approved for quotation
on the Nasdaq National Market under the symbol "DPEC."
INDEMNIFICATION
We have agreed to indemnify the underwriters against liabilities related to
the offering, including liabilities under the Securities Act, and to contribute,
under defined circumstances, to payments that the underwriters may be required
to make in respect thereof.
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase common shares. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common shares. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common shares.
If the underwriters create a short position in the common shares in
connection with the offering (i.e., they sell more shares than are set forth on
the cover page of this prospectus), the representatives may reduce that short
position by purchasing common shares in the open market. The representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of common shares
offered by them. The representatives
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<PAGE>
also may impose a penalty bid on underwriters and selling group members. This
means that if the representatives purchase common shares in the open market to
reduce the underwriters' short position or to stabilize the price of the common
shares, they may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these stabilizing transactions or that these transactions, once
commenced, will not be discontinued without notice.
FIDELITY INVESTMENTS' ONLINE DISTRIBUTION PROCEDURES
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic dissemination of information through the Internet,
intranet and other proprietary electronic technology.
DEAL PROCESS AND PROCEDURES
Fidelity uses the Internet both to broadcast deal-specific announcements and
as an efficient delivery mechanism of preliminary prospectuses to customers. The
broadcast announcements include outgoing emails, pager messages and "passive"
postings on Fidelity's Internet web pages (but do not include allocation
announcements). The deal specific announcements, all of which include disclosure
complying with Rule 134, refer to:
- Participation announcements which summarize key aspects of the offering
for customers;
- Offering updates which communicate changes in the offering, such as
changes in offering size, price/yield level or timing of the offering, to
customers; and
- Pricing announcements which notify customers that the price and/or yield
on the offering has been determined.
Fidelity delivers prospectuses electronically to customers via web-viewable
and web-downloadable files. This delivery mechanism is used for preliminary
prospectuses only. The electronic delivery option is an alternative to
traditional physical delivery (i.e., by mail), which is still available via
phone request to Fidelity's dedicated new issue representative. Customers who
opt for electronic delivery must first consent to such delivery after logging-on
to Fidelity's InstantBroker-SM- web site. This consent, and the online
viewing/download, is recorded in the audit trail files of the core new issue
processing system, which are subject to standard records retention requirements.
In all cases, final prospectuses are delivered to customers via regular mail.
Actual placement of indications of interest, orders and confirmations are
NOT available via online means. These transactions are possible only via phone
with Fidelity's dedicated team of new issue representatives. Thus, Fidelity is
not conducting an electronic distribution of securities via the Internet or
other electronic means to disseminate offering-related information to customers
in accordance with the applicable regulatory rules and requirements. Contact
information, including phone numbers for this team, is included in all
electronic communications.
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<PAGE>
ONLINE PROSPECTUS DELIVERY REQUIREMENT PROCEDURES
Fidelity facilitates electronic delivery of preliminary prospectuses via a
Web-based delivery platform. The preliminary prospectuses are made available for
online viewing and download in a widely-used electronic format (Adobe's Portable
Document Format or "PDF"). Recently, this web-platform was made available to all
Fidelity brokerage customers, who may sign-in to this Website via the same
sign-on and password which allows the customer to access account, portfolio, and
other types of client specific information. In order to access the prospectus,
the customer is presented with disclosure information consistent with
appropriate disclosure of risks and with relevant regulatory requirements (e.g.,
consent to electronic delivery, etc.). The prospectus download/viewing screen is
made available upon customer assent to this disclosure information. Upon
download/viewing of the prospectus, a permanent record of this event is made in
Fidelity's internal systems in similar fashion to the audit trails which are
maintained for traditional telephone and mail-based events.
DIRECTED SHARE PROGRAM
At our request, the underwriters have reserved up to % of the common
shares offered hereby for sale to certain of our employees, directors and
friends at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus and must agree to be
subject to the 180-day lock-up described above. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase such reserved shares.
OFFERS AND SALES OUTSIDE THE UNITED STATES
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which a
sale is made.
Purchasers of the common shares offered in this prospectus may be required
to pay stamp taxes and other charges under the laws and practices of the country
of purchase, in addition to the offering price listed on the cover of this
prospectus.
LEGAL MATTERS
The validity of the common shares offered hereby will be passed upon for
DPEC by Vorys, Sater, Seymour and Pease LLP, Columbus, Ohio. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common shares
offered hereby. This prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in the registration
statement, certain parts of which are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For further information
about us and the common shares offered hereby, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement
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<PAGE>
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 financial statements.
59
<PAGE>
DPEC, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Changes in Shareholders' Deficiency........... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
DPEC, Inc.:
We have audited the accompanying balance sheets of DPEC, Inc. as of
December 31, 1997 and 1998, and the related statements of operations, changes in
shareholders' deficiency, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1999 the Company
retroactively changed its method of accounting for revenue recognition for
Internet related services.
/s/ Deloitte & Touche LLP
Columbus, Ohio
October 26, 1999
F-2
<PAGE>
DPEC, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
SEPTEMBER 30, DEFICIENCY
DECEMBER 31, 1999 SEPTEMBER 30,
------------------- (AS RESTATED; 1999
1997 1998 SEE NOTE 10) (NOTE 9)
-------- -------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ -- $ 1,835 $ 4,362
Accounts receivable, net............................... 2,196 1,966 1,912
Deferred commissions and royalties..................... 228 1,030 1,548
Other prepaid expenses................................. 40 24 432
------- ------- -------
Total current assets............................... 2,464 4,855 8,254
PROPERTY AND EQUIPMENT:
Computer hardware and software......................... 484 691 1,421
Office furniture and equipment......................... 146 168 377
Leasehold improvements................................. -- 72 393
------- ------- -------
Total.............................................. 630 931 2,191
Less accumulated depreciation and amortization......... (360) (534) (769)
------- ------- -------
Property and equipment--net........................ 270 397 1,422
OTHER ASSETS--net........................................ 123 21 345
------- ------- -------
TOTAL.................................................... $ 2,857 $ 5,273 $10,021
======= ======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable....................................... $ 369 $ 417 $ 953
Accrued compensation................................... 328 480 638
Other accrued expenses................................. 176 193 978
Borrowings under line of credit........................ 965 -- --
Current portion of bank note........................... -- -- 111
Current portion of notes payable, related parties...... 275 227 224
Deferred revenue....................................... 2,129 4,340 6,041
------- ------- -------
Total current liabilities.......................... 4,242 5,657 8,945
NOTES PAYABLE:
Bank note--less current portion........................ -- -- 384
Related parties--less current portion.................. 1,104 868 645
------- ------- -------
Total notes payable.................................. 1,104 868 1,029
DEFERRED REVENUE......................................... 153 1,616 2,328
CONVERTIBLE REDEEMABLE PREFERRED STOCK................... -- 1,893 4,853 $ --
COMMITMENTS AND CONTINGENCIES (Notes 3 and 9)
SHAREHOLDERS' DEFICIENCY:
Common stock, no par value, 60,000, 60,000 and 61,898
shares authorized, 44,550 shares issued.............. 28 55 55 6,801
Additional paid-in capital............................. -- -- 5,705 5,705
Treasury stock, at cost................................ (1,108) (935) (935) (935)
Deferred compensation.................................. -- -- (2,437) (2,437)
Accumulated deficit.................................... (1,562) (3,881) (9,522) (9,522)
------- ------- ------- -------
Total shareholders' deficiency..................... (2,642) (4,761) (7,134) $ (388)
------- ------- ------- =======
TOTAL.................................................... $ 2,857 $ 5,273 $10,021
======= ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DPEC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1999
------------------------------ (AS RESTATED;
1996 1997 1998 1998 SEE NOTE 10)
-------- -------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Courseware sales.......................................... $ 4,405 $ 5,615 $ 7,074 $ 4,697 $ 8,190
Other revenue............................................. 2,440 1,731 793 687 55
------- ------- ------- ------- --------
Total revenue......................................... 6,845 7,346 7,867 5,384 8,245
------- ------- ------- ------- --------
COST OF SALES--Courseware product cost and royalties........ 326 311 465 304 555
------- ------- ------- ------- --------
GROSS PROFIT................................................ 6,519 7,035 7,402 5,080 7,690
OPERATING EXPENSES:
Sales and marketing....................................... 2,672 3,469 4,300 2,997 4,724
Product development....................................... 1,471 2,036 2,380 1,655 3,082
General and administrative................................ 1,548 1,615 2,314 1,807 2,255
------- ------- ------- ------- --------
Total operating expenses.............................. 5,691 7,120 8,994 6,459 10,061
------- ------- ------- ------- --------
INCOME (LOSS) FROM OPERATIONS............................... 828 (85) (1,592) (1,379) (2,371)
INTEREST EXPENSE, Net:
Interest expense, related parties......................... 91 130 106 85 65
Interest expense, other................................... 64 54 33 35 11
Interest income........................................... (5) (3) (33) (7) (51)
------- ------- ------- ------- --------
Total interest expense, net........................... 150 181 106 113 25
------- ------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 678 (266) (1,698) (1,492) (2,396)
PROVISION FOR INCOME TAXES.................................. 1,033 -- -- -- --
------- ------- ------- ------- --------
NET LOSS.................................................... $ (355) $ (266) $(1,698) $(1,492) $ (2,396)
CONVERTIBLE REDEEMABLE PREFERRED STOCK DIVIDENDS............ -- -- -- -- (20)
INTRINSIC VALUE OF BENEFICIAL CONVERSION FEATURE OF
PREFERRED STOCK........................................... -- -- -- -- (2,960)
------- ------- ------- ------- --------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS................... $ (355) $ (266) $(1,698) $(1,492) $ (5,376)
======= ======= ======= ======= ========
BASIC AND DILUTED NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE................................................. $ (9.86) $ (8.37) $(50.99) $(45.03) $(159.35)
======= ======= ======= ======= ========
UNAUDITED PRO FORMA INCOME DATA (NOTE 9):
INCOME (LOSS) BEFORE INCOME TAXES........................... $ 678 $ (266) $(1,698) $(1,492)
PROVISION (CREDIT) FOR INCOME TAXES......................... 269 (116) (153) (153)
------- ------- ------- -------
NET INCOME (LOSS)........................................... $ 409 $ (150) $(1,545) $(1,339)
======= ======= ======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE OF COMMON
STOCK..................................................... $ 11.38 $ (4.73) $(46.38) $(40.41)
======= ======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................................... 35,965 31,737 33,315 33,137 33,737
======= ======= ======= ======= ========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
DPEC, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- 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,
1996................... 45 $ .5 -- -- -- -- $ (941) $ (941)
-- ----- ------- -------
Net loss................. -- -- -- -- -- -- (355) (355)
Purchase of treasury
stock.................. -- -- -- 15 $(1,284) -- -- (1,284)
Sale of treasury stock... -- 27.5 -- (2) 176 -- -- 204
-- ----- ------ -- ------- ------- ------- -------
BALANCE--December 31,
1996................... 45 28 -- 13 (1,108) -- (1,296) (2,376)
Net loss................. -- -- -- -- -- -- (266) (266)
-- ----- ------ -- ------- ------- ------- -------
BALANCE--December 31,
1997................... 45 28 -- 13 (1,108) -- (1,562) (2,642)
Net loss................. -- -- -- -- -- -- (1,698) (1,698)
Distributions to common
shareholders........... -- -- -- -- -- -- (621) (621)
Sale of treasury stock... -- 27 -- (2) 173 -- -- 200
-- ----- ------ -- ------- ------- ------- -------
BALANCE--December 31,
1998................... 45 55 -- 11 (935) -- (3,881) (4,761)
Net loss (unaudited) (as
restated; see
Note 10)............... -- -- -- -- -- -- (2,396) (2,396)
Deferred compensation
from grants of stock
options to purchase
common stock
(unaudited) (as
restated; see
Note 10)............... -- -- 2,745 -- -- (2,745) -- --
Amortization of deferred
compensation
(unaudited) (as
restated; see
Note 10)............... -- -- -- -- -- 308 -- 308
Intrinsic value of
conversion feature of
preferred stock
(unaudited) (as
restated; see
Note 10)............... -- -- 2,960 -- -- -- (2,960) --
Preferred stock dividends
(unaudited)............ -- -- -- -- -- -- (20) (20)
Distributions to common
shareholders
(unaudited)............ -- -- -- -- -- -- (265) (265)
-- ----- ------ -- ------- ------- ------- -------
BALANCE--September 30,
1999 (unaudited) (as
restated; see
Note 10)............... 45 $ 55 $5,705 11 $ (935) $(2,437) $(9,522) $(7,134)
== ===== ====== == ======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DPEC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------
1999
(AS
YEAR ENDED DECEMBER 31, RESTATED;
------------------------------ SEE
1996 1997 1998 1998 NOTE 10)
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (355) $ (266) $(1,698) $(1,492) $(2,396)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 127 235 282 196 141
Deferred income taxes................................... 687 -- -- -- --
Non-cash compensation expense from issuance of stock
options............................................... -- -- -- -- 308
Loss on sale of property and equipment.................. 15 -- -- -- --
Decrease (increase) in certain assets:
Accounts receivable................................... (491) (645) 230 780 54
Prepaid expenses and other assets..................... (20) (149) (791) (769) (1,250)
Increase (decrease) in certain liabilities:
Accounts payable...................................... 150 (14) 167 175 194
Accrued expenses...................................... 3 218 169 251 962
Deferred revenues..................................... 110 645 3,674 3,652 2,413
------- ------- ------- ------- -------
Net cash provided by operating activities........... 226 24 2,033 2,793 426
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (157) (198) (302) (156) (863)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long term debt........................... 1,000 -- 250 250 500
Bank overdraft............................................ 39 80 (119) -- --
Principal payments on long term debt...................... (115) (154) (534) (483) (231)
Borrowings under line of credit........................... 1,250 5,127 3,571 3,043 515
Repayments under line of credit........................... (1,475) (4,887) (4,536) (4,008) (515)
Distributions to shareholders............................. -- -- (621) (621) (265)
Proceeds from issuance of preferred stock................. -- -- 1,893 1,916 2,960
Purchase of treasury stock................................ (1,034) -- -- -- --
Sale of treasury stock.................................... 204 -- 200 200 --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities........................................ (131) 166 104 297 2,964
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (62) (8) 1,835 2,934 2,527
CASH AND CASH EQUIVALENTS--Beginning of period.............. 70 8 -- -- 1,835
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS--End of period.................... $ 8 $ -- $ 1,835 $ 2,934 $ 4,362
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR:
Interest.................................................. $ 151 $ 190 $ 150 $ 120 $ 73
======= ======= ======= ======= =======
Income taxes.............................................. $ 254 $ 4 $ -- $ -- $ 10
======= ======= ======= ======= =======
NONCASH TRANSACTIONS:
Non-competition agreement financed through note payable... $ 293
=======
Purchase of treasury shares through note payable.......... $ 250
=======
Property and equipment included in accounts payable....... $ 303
=======
Dividends accrued on preferred stock...................... $ 20
=======
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--DPEC, Inc. (the Company), founded in 1981, is a
leading provider of Web-based training courses and services designed to meet the
needs of businesses, government agencies, non-profit organizations and
individual consumers worldwide.
LONG-LIVED ASSETS--The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. No such impairment losses have been identified
by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the following estimated useful lives: Office furniture and equipment, 5 years;
automobiles and computer hardware and software, 3 years; and leasehold
improvements, the related lease term.
OTHER ASSETS--Other assets includes a non-compete agreement with a former
officer of the Company and deposits. The non-compete agreement is amortized over
30 months, the term of the agreement. The non-compete agreement was fully
amortized in 1998.
The Company recorded amortization expense of approximately $68,000, $117,000
and $108,000 in the years ended December 31, 1996, 1997 and 1998, respectively,
related to the non-compete agreement, which is included in general and
administrative expense. Accumulated amortization is $186,000 at December 31,
1997.
REVENUE RECOGNITION--Beginning in fiscal 1998, the Company adopted Statement
of Position ("SOP") 97-2 "Software Revenue Recognition" as amended by SOP 98-4.
The effect of this adoption did not have a material impact on the Company's
results of operations. Courseware revenues from perpetual licenses, annual
licenses and multi-year licenses are recognized on delivery of the courseware,
provided the fees are fixed and determinable, collections of accounts receivable
are probable and the customer does not have the option to access the courseware
through the internet.
In 1999, in connection with the planned registration of the Company's common
shares with the Securities and Exchange Commission, the Company has
retroactively adopted a new method of accounting for revenue recognition for
license agreements with multiple delivery options (e.g. CD-ROM or electronic
delivery) that also allow its customers to access the Company's courses through
the Internet at any time during the license term. Under the new policy, the
Company will recognize revenue over the license term if the customer has the
option to access the courses through the Company's Internet hosting service.
Additionally, the costs of commissions and royalties related to these licenses
will be deferred and amortized over the term of the agreement. Previously, the
Company recognized revenue and the related commissions and royalties from these
licenses upon granting access to the Company's Internet site or upon physical or
electronic delivery of the courses to the customer. The Company has restated its
1998 and 1997 financial statements for this accounting change.
Certain licenses allow customers to obtain access to other courses in the
Company's library of courseware at specified times during the licensing period.
Because the customer is permitted to access an unspecified number of courses
during the license period, these agreements are accounted for as subscriptions,
with the revenue recognized on a straight-line basis over the license term.
F-7
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides its courses through 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
our courses on their Internet sites or by linking their customers to the
Company's Internet site. If the provider/partner hosts the courses, it bills the
customers and remits a royalty to the Company. If the provider/partner is
linking to the Company's Internet site, the Company bills the customers, records
revenue from the subscription and expenses the royalty. In both cases, because
the customer has access to unspecified additional courses, the revenue is
treated as a subscription and recorded on a straight-line basis over the term of
the subscription.
The cost of providing Post Contract Support ("PCS") is accrued at the time
revenue is recognized, as: 1) PCS fees are included with the initial license and
are for one year or less; 2) the estimated cost of providing PCS during the
license term is insignificant; and 3) unspecified upgrades or enhancements
offered have been and are expected to be minimal and infrequent.
OTHER REVENUE--Prior to February 1999, the Company offered third-party
produced courseware to its customers. The Company recognized a net royalty
related to these sales. As of February 1999 the Company discontinued the
licensing of these products to new customers.
COST OF SALES--Cost of sales includes materials (such as diskettes, compact
discs, packaging and documentation), royalties paid to third parties and
fulfillment costs.
PRODUCT DEVELOPMENT--Product development expenditures are charged to
operations as incurred. Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Development costs incurred by the Company
between completion of the working model and the point at which the product is
ready for general release have been insignificant.
ADVERTISING COSTS--The Company expenses advertising costs as they are
incurred. Advertising expense was $233,000, $336,000, $272,000, $189,000
(unaudited) and $776,000 (unaudited) in 1996, 1997, 1998 and the nine months
ended September 30, 1998 and 1999, respectively.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK--For purposes of computing net
income (loss) per share of common stock, weighted average basic and diluted
shares are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------------------
YEAR ENDED NINE MONTHS ENDED
------------------------------ -----------------------------------------
1996 1997 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Weighted average basic and diluted shares
outstanding..................................... 35,965 31,737 33,315 33,137 33,737
====== ====== ====== ====== ======
</TABLE>
The Company included 309 incremental common shares in the 1996 proforma
diluted per share information related to 450 options considered dilutive for the
period. The following table sets forth
F-8
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
potential shares of common stock that are not included in the diluted net loss
per share of common stock calculation because to do so would be anti-dilutive
for the periods indicated:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------------------
YEAR ENDED NINE MONTHS ENDED
------------------------------ -----------------------------------------
1996 1997 1998 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------- -------- -------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Convertible preferred stock................... -- -- 5,123 5,123 5,123
Stock options................................. 1,294 844 844 844 2,239
----- --- ----- ----- ------
Total......................................... 1,294 844 5,967 5,967 10,391
===== === ===== ===== ======
</TABLE>
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
IMPACT OF NEW ACCOUNTING STANDARDS--In December 1998, the AICPA issued SOP
98-9 "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" which addresses software revenue recognition as it applies
to certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2" to extend the
deferral of the application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Management does not believe that this pronouncement will have a material effect
on its financial statements.
ACCOUNTING FOR INCOME TAXES--The Company accounts for income taxes pursuant
to SFAS No. 109, "Accounting for Income Taxes", which uses the liability method
to calculate deferred income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amount of cash, accounts
receivable, accounts payable and accrued liabilities at December 31, 1997, 1998
and September 30, 1999 approximate the fair value of the financial assets and
liabilities due to the short maturity of the instruments. The carrying amount of
borrowings under the line of credit at December 31, 1997 and the carrying amount
of notes payable at December 31, 1997 and 1998 and September 30, 1999
approximate the fair value of the financial liabilities, due to the instruments
having either variable or fixed rates of interest comparable to the rates
currently available to the Company for debt with similar remaining maturities.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consists principally of cash
investments and trade receivables. The Company invests its excess cash in
deposits with major banks. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal. The principal
market for the Company's products comprises major U.S. national and
multi-national organizations. The Company performs ongoing credit evaluations of
its customers. To date credit losses have been minimal. The Company generally
requires no collateral from its customers.
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
F-9
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
publishers or that it could develop its own course content, the Company has
established a favorable relationship with the publisher. The loss of the
Company's relationship with its current publisher particularly if coupled with a
failure to develop new sources of content, could increase course development
costs and delay introduction of new courses.
INTERIM FINANCIAL INFORMATION--The interim financial statements as of
September 30, 1999 and for the nine months ended September 30, 1998 and 1999 are
unaudited but contain all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of its
results of operations and cash flows for the periods. The financial and other
data disclosed in these notes to the financial statements for these periods are
also unaudited. Operating results for the nine months ended September 30, 1998
and 1999 are not necessarily indicative of results that may be expected for any
future periods.
2. NOTES PAYABLE AND BANK LOANS
Notes payable as of December 31, 1997 and 1998 and September 30, 1999
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Note payable to officer/shareholder, with interest at prime
plus 1% (total of 9.50%, 8.75% and 8.75% at December 31,
1997 and 1998 and September 30, 1999, respectively) and
monthly principal payments of $11,905 commencing November
1997 through November 2004 plus interest through November
2004, unsecured........................................... $ 976 $ 833 $ 726
Note payable to former officer/shareholder with interest at
8%, interest due quarterly through December 1998, and
quarterly principal and interest payments of $25,615
commencing October 1998 through April 2001, secured by
1,805 shares of treasury stock............................ 250 209 143
Note payable to former officer/shareholder with interest at
8%, repaid in 1999........................................ 153 53 --
Bank note, with interest at 8.04% and monthly principal
payments of $8,333 commencing August 1999 through July
2004, collateralized by all assets........................ -- -- 495
------ ------ ------
Total................................................... 1,379 1,095 1,364
Less current portion........................................ 275 227 335
------ ------ ------
Notes payable--long-term.................................... $1,104 $ 868 $1,029
====== ====== ======
</TABLE>
F-10
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE AND BANK LOANS (CONTINUED)
Scheduled maturities of notes payable as of September 30, 1999 (unaudited)
are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................ $ 335
2001................................................ 293
2002................................................ 243
2003................................................ 243
2004................................................ 226
Thereafter.......................................... 24
------
Total............................................... $1,364
======
</TABLE>
On February 23, 1998, the Company amended its bank line of credit agreement.
Under the terms of the amended agreement, the Company obtained a $1,250,000 line
of credit ($965,000 outstanding at December 31, 1997 under the prior agreement),
decreasing to $1,000,000 at September 30, 1998 and bearing interest at prime
plus 1/2%. The agreement expired in 1999.
On July 28, 1999, the Company entered into a $3,000,000 line of credit with
a bank. No amounts were outstanding at September 30, 1999. The line of credit,
which expires on October 31, 2001, bears interest at the lenders' prime rate
less 1/2%, allows borrowings up to 85% of the Company's accounts receivable (not
to exceed $3,000,000) and is secured by all assets of the Company. The line of
credit and the term note contain restrictive covenants which, among others,
require the Company to maintain a certain level of cash flow, as defined.
3. OPERATING LEASES
The Company leases office space and certain equipment under non-cancelable
operating leases. The future minimum lease payments applicable to these
operating leases as of September 30, 1999 (unaudited) are as follows (in
thousands):
<TABLE>
<S> <C>
2000................................................. $246
2001................................................. 241
2002................................................. 163
----
Total future minimum lease payments.................. $650
====
</TABLE>
Total expense incurred by the Company under operating leases for 1996, 1997,
1998 and the nine months ended September 30, 1998 and 1999 totaled $149,000,
$170,000, $257,000, $169,000 (unaudited) and $228,000 (unaudited), respectively.
In 1996, rent expense included $42,000 to a related party.
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK
On September 15, 1998, the Company issued 5,123 shares of senior convertible
redeemable preferred stock (10,000 shares authorized) for proceeds of
$2,000,000.
F-11
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
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 one common share at any time at the option
of the holder or upon the closing of an initial public offering of common
shares, as defined.
- Each share issued and outstanding has the right to vote, as defined in the
document, the number of shares equal to the number of common shares into
which the shares would be convertible.
- Under certain conditions the amended articles of incorporation grant to
the holders of the preferred shares the right to elect a majority of the
board and to possess a majority of the votes upon matters brought before
the shareholders for their consent.
At any time during the period beginning September 1, 2003 and ending
August 31, 2004, as long as there has not occurred a closing of an initial
public offering of common shares, as defined, the holders of a majority of the
shares of preferred shares may demand the Company redeem all, but not less than
all, of the preferred shares and all, or a portion, of the common shares that
the holders have acquired by conversion of preferred shares, at a price equal to
the greater of (i) the original purchase price per share of preferred shares (as
adjusted) or (ii) the fair market value per share at the time of redemption
(taking into consideration the liquidation preference but not considering any
discount for lack of marketability or for minority interest) as determined by a
qualified, independent appraiser.
On August 27, 1999, the Company issued 2,979 shares of series B convertible
redeemable preferred stock (2,979 shares authorized) for 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 1,898 shares of common
stock resulting in a total of 61,898 shares authorized and reduced the number of
authorized senior convertible redeemable preferred shares by 1,898 shares. The
Company recorded a beneficial conversion feature on the preferred shares of
$2,960,000 during the nine months ended September 30, 1999.
5. STOCK OPTIONS
The Company has an Amended and Restated Incentive Stock Option Plan (the
1994 Plan) for its key employees. The 1994 Plan provides for granting options to
purchase up to 3,000 shares of the Company's common shares for an amount not
less than the fair market value of the shares at the date of grant. Options
granted expire ten years from the date of grant and vest over three years. Under
the terms of the convertible redeemable preferred stock agreement (see note 4),
no additional options may be granted under this plan. No options were granted in
fiscal 1998 or during the nine months ended September 30, 1999.
The Company has outstanding a total of 844 options and 345 option
commitments to purchase the Company's common stock under the 1994 Plan as of
September 30, 1999. The exercise of the options under the option commitments is
contingent on a change in control of the Company or the Company becoming a
public entity before January 2005, the expiration date of the commitments. The
exercise price for the options and option commitments was the estimated fair
market value of the common stock at the grant dates, and range from $17.81 to
$100.
F-12
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS (CONTINUED)
In September 1998, the Company adopted a new employee Stock Option Plan (the
1998 Plan). The 1998 Plan provides for granting qualified and non-qualified
options to purchase up to 2,000 shares of the Company's common stock for amounts
determined by the Board of Directors at the date of grant. Options granted
generally expire ten years from the date of grant and will vest over periods
specified at the date of grant. On May 20, 1999 and September 15, 1999 the
Company issued 1,285 and 160 options, respectively, under the 1998 Plan at
option prices of $275 per share and $680 per share, respectively. The 1,285 and
160 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 stock compensation expense of $2,745,000
(unaudited) and $308,000 (unaudited), respectively, during the nine months ended
September 30, 1999. Recognition of this expense will be 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 4,844 common shares.
The following summarizes the stock option and option commitment activity for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1999.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding December 31, 1995................. 795 $ 20.43
Granted....................................... 844 100.00
----- -------
Outstanding December 31, 1996................. 1,639 61.40
Cancelled..................................... (450) 22.43
----- -------
Outstanding December 31, 1997 and 1998........ 1,189 76.15
Granted (unaudited)........................... 1,445 319.84
----- -------
Outstanding September 30, 1999 (unaudited).... 2,634 $209.84
===== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Exercisable at end of period.......... 450 281 563 844
====== ======= ======= ========
Weighted average exercise price of
options exercisable at end of
period.............................. $22.43 $100.00 $100.00 $ 100.00
====== ======= ======= ========
Weighted average fair value of options
granted during period............... $27.37 $ 91.45
====== ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing method with the following weighted-average
assumptions used for 1996 and the nine month period ended September 30, 1999:
expected volatility and dividend yield of 0%, risk-free interest rate of 6.5%
and 6.85%, respectively, and an expected life of five years.
Exercise prices for options totaling 345, 844, 1,285 and 160 shares at
September 30, 1999 are $17.81, $100, $275 and $680, respectively, with weighted
average contractual lives of six, seven, ten and ten years, respectively.
F-13
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS (CONTINUED)
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.
6. 401(k) PLAN
The Company has a 401(k) plan for employees who have completed at least six
months of service. Discretionary employer contributions totaling $22,000,
$53,000, $179,000, $120,000 (unaudited) and $154,000 (unaudited) have been
expensed for the years ended December 31, 1996, 1997 and 1998 and the nine month
period ended September 30, 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 qualifies for "S-Corporation" status effective
September 15, 1998. As a result, effective September 15, 1998, this change
resulted in the recognition of a net deferred tax asset and offsetting valuation
reserve.
The components of income tax expense consisted of the following for the year
ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Current..................................................... $ 346
Deferred.................................................... 687
------
Total income tax expense.................................... $1,033
======
</TABLE>
The income tax expense differs from the amount computed by applying the
statutory federal income tax rate of 34% of pretax earnings as follows (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1998 SEPTEMBER 30, 1999
-------- -------- -------------------
<S> <C> <C> <C>
Income tax (benefit) expense at statutory
rate..................................... $ 231 $ (577) $ (815)
Change in tax status....................... 769 (1,894) --
Change in valuation reserve................ -- 2,494 1,037
Net state income tax (benefit)............. 34 (20) (183)
Other--net................................. (1) (3) (39)
------ ------- ------
Total income tax expense................... $1,033 $ -- $ --
====== ======= ======
</TABLE>
F-14
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
1998 SEPTEMBER 30, 1999
-------- ------------------
<S> <C> <C>
Deferred tax assets:
Deferred revenues................................. $2,543 $3,573
Net operating loss carry forwards................. 128 126
Stock options..................................... -- 131
Non-compete agreement............................. 93 86
Accrued vacation.................................. 24 60
Other............................................. 37 35
Valuation allowance............................... (2,494) (3,531)
------ ------
Total assets.................................... 331 480
------ ------
Deferred tax liabilities:
Prepaid commissions............................... 318 456
Other............................................. 13 24
------ ------
Total liabilities............................... 331 480
------ ------
Net deferred tax asset.............................. $ -- $ --
====== ======
</TABLE>
As of September 30, 1999, the Company had tax net operating loss carry
forwards of approximately $250,000 for federal and state income tax purposes.
These carry forwards begin to expire at various times through 2018. A valuation
allowance has been provided to offset the net deferred tax assets due to the
uncertainty surrounding the realizability of such assets.
8. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. In accordance with SFAS 131, the Company operates in one industry
segment, the development and marketing of interactive education and training
software.
9. PRO FORMA INFORMATION (UNAUDITED)
From August 1, 1996 through September 15, 1998, the Company was treated as
an "S Corporation" (see note 7). Accordingly, the Company had not recorded
federal and state income tax expense for that period. The pro forma income data
for the years ended December 31, 1996, 1997 and 1998 reflects a provision for
income taxes at a combined rate of 40% for all periods presented and includes
the effect of SFAS No. 109 "Accounting for Income Taxes".
Effective upon the closing of this offering, the outstanding shares of
senior convertible redeemable preferred shares and Series B convertible
redeemable preferred shares will automatically convert into 8,102 common shares.
The pro forma effects of these transactions are unaudited and have been
reflected in the accompanying pro forma shareholders' deficiency at
September 30, 1999 and result in 41,839 pro forma shares outstanding at
September 30, 1999.
F-15
<PAGE>
DPEC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
Prior to the Company going public it will declare a stock split. As the
amount of the split is not presently known, the common shares have not been
adjusted to reflect the stock split.
10. RESTATEMENT (UNAUDITED)
Subsequent to the issuance of the Company's September 1999 unaudited interim
financial statements, the Company's management determined that it should have
recognized the intrinsic value at the date of issuance of certain employee stock
options granted during 1999. As a result, the 1999 financial statements have
been restated from amounts previously reported to record $308,000 of stock
compensation expense and $2,745,000 of deferred compensation and additional
paid-in capital. Additionally, the Company determined that it should recognize a
beneficial conversion feature on the Company's Series B convertible redeemable
preferred stock for the difference between the amount received per share of
common stock assuming conversion and the proposed initial public offering price
of the Company's common stock. As a result, the financial statements have been
restated from amounts previously recorded to record $2,960,000 of additional
paid-in capital and a deemed dividend for the intrinsic value of the beneficial
conversion feature.
The following summarizes the restatements to the September 30, 1999
unaudited financial statements (in thousands):
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
At September 30:
Deferred compensation....................................... $ (2,437)
Additional paid-in capital.................................. 5,705
For the nine months ended September 30:
Sales and marketing......................................... $ 4,605 4,724
Product development......................................... 2,944 3,082
General and administrative.................................. 2,204 2,255
Total operating expenses.................................... 9,753 10,061
Loss before income taxes and net loss....................... (2,088) (2,396)
Intrinsic value of beneficial conversion feature of
preferred stock........................................... (2,960)
Net loss available to common shareholders................... (2,108) (5,376)
Basic and diluted net loss available to common
shareholders.............................................. $(62.46) $(159.35)
</TABLE>
* * * * * *
F-16
<PAGE>
[Inside back cover]
A listing of DPEC courses.
<PAGE>
SHARES
[LOGO]
COMMON SHARES
------------------------
PROSPECTUS
, 1999
------------------------
LEHMAN BROTHERS
WARBURG DILLON READ LLC
J.C. BRADFORD & CO.
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
FACILITATING ELECTRONIC DISTRIBUTION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee, the National Association of Securities
Dealers, Inc. filing fee and the NASDAQ National Market listing fee) fees and
expenses payable by Registrant in the distribution of the Common Shares:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $15,985
National Association of Securities Dealers, Inc. filing
fee....................................................... $ 6,250
NASDAQ National Market listing fee.......................... *
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accountants' fees and expenses.............................. *
Blue sky qualification fees and expenses.................... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total................................................... $ *
=======
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by a corporation and provides as follows:
(E)(1) A corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of
the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, member, manager,
or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust
or other enterprise, against expenses, including attorney's fees, judgments,
fines, and amounts paid in settlement actually and reasonably incurred by
him in connection with such action, suit, or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right of the corporation
to procure a judgment in its favor, by reason of the fact that he is or was
a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability company, or a
II-1
<PAGE>
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged
to be liable for negligence or misconduct in the performance of his duty
to the corporation unless, and only to the extent that, the court of
common pleas or the court in which such action or suit was brought
determines, upon application, that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses as the
court of common pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense
of any action, suit, or proceeding referred to in division (E)(1) or (2) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action, suit, or
proceeding.
(4) Any indemnification under division (E)(1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case, upon a determination that indemnification
of the director, trustee, officer, employee, member, manager, or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in division (E)(1) or (2) of this section. Such
determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or
threatened by the action, suit, or proceeding referred to in
division (E)(1) or (2) of this section;
(b) If the quorum described in division (E)(4)(a) of this section is
not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel
other than an attorney, or a firm having associated with it an attorney,
who has been retained by or who has performed services for the
corporation or any person to be indemnified within the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the court in which the action,
suit, or proceeding referred to in division (E)(1) or (2) of this section
was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the corporation under
division (E)(2) of this section, and, within ten days after receipt of such
notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review
the reasonableness of such determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in division (E)(1) or
(2) of this section, the articles or the regulations of a corporation state,
by specific reference to this division, that the provisions of this division
do not apply to the corporation and unless the only liability asserted
against a director in an action, suit, or proceeding referred to in division
(E)(1) or (2) of this section is pursuant to section 1701.95 of the Revised
Code, expenses, including attorney's fees, incurred by a director in
defending the
II-2
<PAGE>
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding, upon receipt of an undertaking by or on behalf of the director
in which he agrees to both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure
to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or undertaken with reckless disregard for
the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the action,
suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director,
trustee, officer, employee, member, manager, or agent in defending any
action, suit, or proceeding referred to in division (E)(1) or (2) of this
section, may be paid by the corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding, as authorized by
the directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, trustee, officer, employee, member, manager, or
agent to repay such amount, if it ultimately is determined that he is not
entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles, the regulations, any agreement,
a vote of shareholders or disinterested directors, or otherwise, both as to
action in their official capacities and as to action in another capacity
while holding their offices or positions, and shall continue as to a person
who has ceased to be a director, trustee, officer, employee, member,
manager, or agent and shall inure to the benefit of the heirs, executors,
and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit,
or self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee,
member, manager, or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or a partnership,
joint venture, trust, or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E)(1) or (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other
protection that may be provided pursuant to divisions (E)(5), (6), and (7)
of this section. Divisions (E)(1) and (2) of this section do not create any
obligation to repay or return payments made by the corporation pursuant to
division (E)(5), (6), or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity, or is or
was serving at the request of such constituent entity as a director,
trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited
liability company, or a partnership, joint venture, trust, or other
enterprise, shall stand in the same position under this section with respect
to the new or surviving corporation as he would if he had served the new or
surviving corporation in the same capacity.
II-3
<PAGE>
Article 5 of the Registrant's Second Amended and Restated Code of
Regulations governs indemnification by Registrant and provides, in part, as
follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall
indemnify any officer or director of the corporation who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including, without limitation, any action threatened or
instituted by or in the right of the corporation), by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
trustee, officer, employee, member, manager or agent of another corporation
(domestic or foreign, nonprofit or for profit), limited liability company,
partnership, joint venture, trust or other enterprise, against expenses
(including, without limitation, attorneys' fees, filing fees, court
reporters' fees and transcript costs), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
no reasonable cause to believe his conduct was unlawful. A person claiming
indemnification under this Section 5.01 shall be presumed, in respect of any
act or omission giving rise to such claim for indemnification, to have acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation, and with respect to any criminal
matter, to have had no reasonable cause to believe his conduct was unlawful,
and the termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
Article Five also substantially incorporates the provisions of
Section 1701.13 of the Ohio Revised Code quoted above.
Reference is also made to Section of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying directors and officers of the Company
against certain liabilities.
In addition, the Registrant intends to purchase insurance coverage which
will insure directors and officers against certain liabilities which might be
incurred by them in such capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 16, 1996, the Registrant has issued and sold the following
unregistered securities:
(i) In March 1998, the Registrant issued and sold an aggregate of 2,000
common shares to a total of seven employees and one director at a
purchase price of $100.00 per share for an aggregate purchase price of
$200,000.
(ii) On May 20, 1999, the Registrant granted stock options under the
Registrant's 1998 Stock Option Plan to purchase an aggregate of 1,285
common shares at an exercise price of $275.00 per share to a total of
15 employees.
(iii) On September 15, 1998, the Registrant issued and sold an aggregate
5,123 shares of senior convertible preferred stock (convertible into
5,123 common shares) to River Cities Capital Fund II Limited
partnership at a price of $390.40 per share for an aggregate purchase
price of $2,000,000.
(iv) On August 27, 1999, the Registrant issued and sold an aggregate of
2,979 shares of series B convertible preferred stock (convertible into
2,979 common shares) to River Cities Capital Fund II Limited
Partnership, JG Funding, LLC, Saunders Capital Group, LLC and Irving
W. Bailey II at a purchase price of $1,007.09 per share for an
aggregate purchase price of $3,000,121.
II-4
<PAGE>
(v) In January 2000, the Registrant sold 1,167 shares of series C
convertible preferred stock and a warrant to purchase 292 of our common
shares to River Cities Capital Fund II Limited Partnership for an
aggregate purchase price of $1,500,000.
The foregoing sales were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) of the Securities Act and/or
Rule 506 of Regulation D promulgated thereunder as transactions by an issuer not
involving a public offering. The recipients of securities in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant or economic buying power, to information about the
Registrant. The purchasers of the common shares and the grantees of the stock
options were all key employees or directors of the Registrant. The purchasers of
the senior convertible preferred stock and the series B convertible preferred
stock were all venture capital companies or their affiliates. No underwriter or
securities broker was involved in any of these transactions and no underwriting
discount or sales commission was paid to any person on account of any of these
transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1.1* Amended and Restated Articles of Incorporation, as amended,
of DPEC, Inc.
3.1.2* Proposed form of Second Amended and Restated Articles of
Incorporation of DPEC, Inc.
3.2* Amended and Restated Code of Regulations of DPEC, Inc.
3.2.2* Proposed form of Second Amended and Restated Code of
Regulations of
DPEC, Inc.
4.1* Form of Stock Certificate for Common Shares of DPEC, Inc.
5.1* Opinion of Vorys, Sater, Seymour and Pease LLP
10.1* DPEC, Inc. 1999 Incentive Stock Plan
10.2+ Employment Agreement, dated September 15, 1998, by and
between DPEC, Inc. and Carol A. Clark.
10.3+ Bonus plans for named executive officers
10.4+ Share Purchase and Sale Agreement, dated May 10, 1996, by
and among Frances Papalios, Carol A. Clark and DPEC, Inc.
10.5+ Senior Convertible Preferred Stock Purchase Agreement, dated
September 15, 1998, by and among River Cities Capital
Group II Limited Partnership, DPEC, Inc. and Carol A.
Clark.
10.6+ Series B Convertible Preferred Stock Purchase Agreement,
dated August 27, 1999, by and among River Cities Capital
Fund II Limited Partnership, JG Funding, LLC, Saunders
Capital Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.7+ Registration Rights Agreement, dated May 10, 1996, by and
among Carol A. Clark, Frances Papalios, Gary W. Qualmann
and DPEC, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.8+ Amended and Restated Registration Rights Agreement, dated
August 27, 1999, by and among River Cities Capital Fund II
Limited Partnership, JG Funding, LLC, Saunders Capital
Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.9+ Fourth Amended and Restated Shareholders Agreement, dated
August 27, 1999, by and among DPEC, Inc. Carol A. Clark,
the Frances Papalios Trust and Frances Papalios.
10.10+ Admission Agreement, dated September 8, 1999, by and between
Robert N. Clark as Trustee under the 1999 Grantor Retained
Annuity Trust Created by Carol A. Clark dated
September 8, 1999 and Carol A. Clark.
10.11+ Admission Agreement, dated September 8, 1999, by and between
Karen L. Qualmann as Trustee under the 1999 Grantor
Retained Annuity Trust Created by Gary W. Qualmann dated
September 8, 1999 and Gary W. Qualmann.
10.12+ $1,000,000 Term Note of DPEC, Inc. in favor of Carol A.
Clark.
10.13+ $250,000 Term Note of DPEC, Inc. in favor of Fran Papalios.
10.14+ Pledge and Security Agreement, dated May 10, 1996, by and
between DPEC, Inc. and Fran Papalios.
10.15+ Software Development and License Agreement, dated
January 25, 1999, by and between Ahsoug, Inc., through its
Macmillan Publishing USA division, and DPEC, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Vorys, Sater, Seymour and Pease LLP (included in
Exhibit 5.1)
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1* Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES:
None.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
II-6
<PAGE>
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or
497(h) under the Securities Act, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 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>
DPEC, 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. 2 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/ 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>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------- -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation, as amended,
of DPEC, Inc.
3.1.2* Proposed form of Second Amended and Restated Articles of
Incorporation of DPEC, Inc.
3.2* Amended and Restated Code of Regulations of DPEC, Inc.
3.2.2* Proposed form of Second Amended and Restated Code of
Regulations of
DPEC, Inc.
4.1* Form of Stock Certificate for Common Shares of DPEC, Inc.
5.1* Opinion of Vorys, Sater, Seymour and Pease LLP
10.1* DPEC, Inc. 1999 Incentive Stock Plan
10.2+ Employment Agreement, dated September 15, 1998, by and
between DPEC, Inc. and Carol A. Clark.
10.3+ Bonus plans for named executive officers.
10.4+ Share Purchase and Sale Agreement, dated May 10, 1996, by
and among Frances Papalios, Carol A. Clark and DPEC, Inc.
10.5+ Senior Convertible Preferred Stock Purchase Agreement, dated
September 15, 1998, by and among River Cities Capital
Group II Limited Partnership, DPEC, Inc. and Carol A.
Clark.
10.6+ Series B Convertible Preferred Stock Purchase Agreement,
dated August 27, 1999, by and among River Cities Capital
Fund II Limited Partnership, JG Funding, LLC, Saunders
Capital Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.7+ Registration Rights Agreement, dated May 10, 1996, by and
among Carol A. Clark, Frances Papalios, Gary W. Qualmann
and DPEC, Inc.
10.8+ Amended and Restated Registration Rights Agreement, dated
August 27, 1999, by and among River Cities Capital Fund II
Limited Partnership, JG Funding, LLC, Saunders Capital
Group, LLC, Irving W. Bailey II and DPEC, Inc.
10.9+ Fourth Amended and Restated Shareholders Agreement, dated
August 27, 1999, by and among DPEC, Inc. Carol A. Clark,
the Frances Papalios Trust and Frances Papalios.
10.10+ Admission Agreement, dated September 8, 1999, by and between
Robert N. Clark as Trustee under the 1999 Grantor Retained
Annuity Trust Created by Carol A. Clark dated
September 8, 1999 and Carol A. Clark.
10.11+ Admission Agreement, dated September 8, 1999, by and between
Karen L. Qualmann as Trustee under the 1999 Grantor
Retained Annuity Trust Created by Gary W. Qualmann dated
September 8, 1999 and Gary W. Qualmann.
10.12+ $1,000,000 Term Note of DPEC, Inc. in favor of Carol A.
Clark.
10.13+ $250,000 Term Note of DPEC, Inc. in favor of Fran Papalios.
10.14+ Pledge and Security Agreement, dated May 10, 1996, by and
between DPEC, Inc. and Fran Papalios.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------------------- -----------
<S> <C> <C>
10.15+ Software Development and License Agreement, dated
January 25, 1999, between Ahsoug, Inc., through its
Macmillan Publishing USA division, and DPEC, Inc.
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Vorys, Sater, Seymour and Pease LLP (included in
Exhibit 5.1)
24.1+ Powers of Attorney
27.1 Financial Data Schedule
99.1* Consent of International Data Corporation
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
II-10
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
333-87273 of DPEC, INC. on Form S-1 of our report dated September 15, 1999,
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.
Deloitte & Touche LLP
Columbus, Ohio
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,362
<SECURITIES> 0
<RECEIVABLES> 2,012
<ALLOWANCES> (100)
<INVENTORY> 0
<CURRENT-ASSETS> 8,254
<PP&E> 2,191
<DEPRECIATION> (769)
<TOTAL-ASSETS> 10,021
<CURRENT-LIABILITIES> 8,945
<BONDS> 0
0
4,853
<COMMON> 55
<OTHER-SE> (7,189)
<TOTAL-LIABILITY-AND-EQUITY> 10,021
<SALES> 8,190
<TOTAL-REVENUES> 8,245
<CGS> 555
<TOTAL-COSTS> 555
<OTHER-EXPENSES> 10,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (2,396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,376)
<EPS-BASIC> (159.35)
<EPS-DILUTED> (159.35)
</TABLE>
