<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1997
REGISTRATION NO. 333-22519
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ADVANTAGE LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
WISCONSIN 7372 39-1559474
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION) 2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN 54495-8036
(715) 424-3636
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MICHAEL H. BAUM, CHIEF EXECUTIVE OFFICER
ADVANTAGE LEARNING SYSTEMS, INC.
2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN 54495-8036
(715) 424-3636
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RANDALL J. ERICKSON WILLIAM N. WEAVER, JR.
GODFREY & KAHN, S.C. SACHNOFF & WEAVER, LTD.
780 NORTH WATER STREET 30 SOUTH WACKER DRIVE, 29TH FLOOR
MILWAUKEE, WISCONSIN 53202-3590 CHICAGO, ILLINOIS 60606-7484
(414) 273-3500 (312) 207-1000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock $0.01 par
value.................. 3,220,000 shares $14.00 $45,080,000 $13,660.61
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</TABLE>
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(1) Includes 420,000 shares subject to an over-allotment option granted to the
underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(3) A registration fee of $13,590.90 was paid with the initial filing of the
Registrant's Form S-1 on February 28, 1997. The number of shares being
registered has been reduced, and the proposed maximum offering price per
share has been increased. The difference between the resulting revised
registration fee and fee already paid is $69.71, which is being
transmitted herewith.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated August 26, 1997
Prospectus
dated , 1997
2,800,000 Shares
LOGO
Common Stock
All of the 2,800,000 shares of Common Stock offered hereby are being issued and
sold by Advantage Learning Systems, Inc. (the "Company"). A significant portion
of the estimated net proceeds of the offering will be used by the Company to
satisfy obligations to its principal shareholders. See "Use of Proceeds." An
aggregate of up to 185,000 shares of the Common Stock offered hereby will be
reserved for sale at the initial public offering price to persons designated by
the Company.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price of the Common Stock offered hereby will be between $12.00
and $14.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"ALSI."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total (3).................................. $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 420,000 additional shares of Common Stock solely to cover
over-allotments, if any, at the per share Price to Public less the
Underwriting Discount. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the certificates representing shares of Common Stock will be
made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about
, 1997.
Piper Jaffray inc. Montgomery Securities
<PAGE>
[PICTURES, GRAPHICAL INFORMATION]
THE ACCELERATED READER(R) AND READING RENAISSANCE(R) ARE REGISTERED TRADEMARKS
OF THE COMPANY. IN ADDITION, STANDARDIZED TEST FOR ASSESSMENT OF READING
(S.T.A.R.)(TM), AR BOOKGUIDE(TM), OBJECTIVE TRACKER(TM), AND MATHCHECK(TM) ARE
COMMON LAW TRADEMARKS OF THE COMPANY. ALL OTHER TRADEMARKS, SERVICE MARKS AND
TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR
RESPECTIVE OWNERS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, the term "Company" includes Advantage Learning Systems,
Inc. ("ALS") and its wholly-owned subsidiaries, IPS Publishing, Inc. ("IPS")
and the Institute for Academic Excellence, Inc. (the "Institute"), including
their operations while owned by affiliates of the Company. The historical
financial information presented herein represents the combined results of these
three entities prior to January 2, 1997, at which time IPS and the Institute
became wholly-owned subsidiaries of ALS. See "Certain Transactions." For
periods subsequent to January 2, 1997, the historical financial information
represents the consolidated results of ALS and its subsidiaries. In addition,
unless otherwise indicated, all information in this Prospectus (i) assumes no
exercise of the Underwriters' over-allotment option, (ii) has been adjusted to
reflect the filing of the Company's Amended and Restated Articles of
Incorporation, and (iii) has been adjusted to reflect a 133.31 for 1 stock
split in the form of two stock dividends.
THE COMPANY
The Company is a leading provider of learning information systems to
kindergarten through senior high
("K-12") schools in the United States and Canada. The Company's learning
information systems consist of computer software and related training designed
to improve student academic performance by increasing the quality, quantity and
timeliness of performance data available to educators and by facilitating
increased student practice of essential skills. The Company's flagship product,
the Accelerated Reader, is software for motivating and monitoring increased
literature-based reading practice. As of June 30, 1997, the Accelerated Reader
had been sold to approximately 29,700, or 24%, of the K-12 schools in the
United States and Canada. In a survey by Quality Education Data, Inc., the
Accelerated Reader was the software product that educators most frequently
cited as being used to improve the quality of education in K-12 schools. The
Company believes that the Accelerated Reader has achieved this leading market
position as a result of its demonstrated effectiveness in improving student
reading levels and overall academic performance. The Company's learning
information system products also include the Standardized Test for Assessment
of Reading (S.T.A.R.), a computer-adaptive reading test and database, and the
Reading Renaissance program, through which the Company provides professional
development training for educators.
Originally introduced in 1986, the Accelerated Reader administers computer-
based multiple choice tests on books popular among students in grades K-12 and
provides educators with more than 20 reports from which to monitor the amount
and quality of each student's reading practice. Through June 30, 1997, the
Company had developed tests on approximately 12,000 books and expects to
develop approximately 1,500 additional tests in the second half of 1997. In
1994, the Company began offering Reading Renaissance training seminars to
provide educators with professional development training to most effectively
use the Accelerated Reader and the information it generates. As of June 30,
1997, approximately 39,500 educators have attended Reading Renaissance training
seminars. In 1996, the Company released S.T.A.R. which enables educators to
quickly obtain student reading scores statistically correlated to national
norms. The results from S.T.A.R. provide educators with a database of
statistically accurate reading level information on their students, from which
they can generate useful reports and adjust instructional strategies
accordingly. To expand its learning information system offerings into
additional academic areas, in August 1996 the Company acquired IPS, a provider
of algorithm-based software for assessment and skills practice in math and
science.
Educators, parents and opinion leaders in the United States are increasingly
focusing on improving essential academic skills of students, and, in
particular, their reading and math proficiency. President Clinton's emphasis on
education in his State of the Union address earlier this year, the Department
of Education's Goals 2000 program, the Learning to Read, Reading to Learn
campaign, an increase in Title I funding, and the activities of the Education
Commission of the States are indicative of this growing focus. This focus and
the resulting initiatives, as well as the growing role of technology in the K-
12 marketplace, have created an increased demand for effective technology-based
solutions which improve academic performance.
3
<PAGE>
The Accelerated Reader, coupled with S.T.A.R. and the techniques taught in
the Reading Renaissance training program, improves student academic performance
by providing educators with an effective system to motivate students to
practice reading. The Company's products also provide educators with objective,
timely and accurate information to manage the learning process. Unlike many
technology-based solutions which compete with the educators' role, the
Company's products support educators and complement their existing curricula
and instructional methodologies. In addition, the Company's products utilize a
school's existing computers and books commonly found in most K-12 school
libraries, while the cost of the Company's products generally enables schools
to purchase such products within their normal budgets.
The Company seeks to establish its products as the de facto standard for
facilitating growth in reading ability, and ultimately in other essential
academic skill areas in grades K-12. The key elements of this strategy consist
of adding new customer schools, intensifying and expanding the use of the
Company's products in existing customer schools, offering new products in other
areas of the curriculum, expanding the Company's international marketing and
sales, and expanding the Company's strategic marketing alliances.
The Company was founded in 1986 and is incorporated under the laws of the
State of Wisconsin. The Company's principal executive offices are located at
2911 Peach Street, Wisconsin Rapids, Wisconsin 54495-8036 and its telephone
number is (715) 424-3636. The Company's World Wide Website is located at
http:\\www.advlearn.com. Information contained in this Website is not deemed to
be a part of this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the 2,800,000 shares
Company...........................
Common Stock to be outstanding 16,489,594 shares(1)
after the Offering................
Use of Proceeds.................... For payment of undistributed S corporation
earnings, repayment of construction-related
indebtedness, repayment of acquisition-re-
lated indebtedness to principal sharehold-
ers, payment to Company employees pursuant
to certain employee benefit plans and gen-
eral corporate purposes, including working
capital and new product development. See
"Use of Proceeds."
Nasdaq National Market symbol...... ALSI
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options outstanding
immediately prior to the Offering (assuming an initial public offering
price of $13.00 per share). See "Certain Transactions" and "Management--
Executive Compensation--1997 Stock Incentive Plan."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL
INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- ---------------
PRO
FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $3,171 $ 5,288 $ 8,251 $12,605 $22,381 $23,062 $ 9,474 $16,545
Gross profit............ 2,742 4,718 7,148 10,542 18,154 18,928 7,875 13,565
Purchased research and
development(2)......... -- -- -- -- 3,400 3,400 -- --
Operating income........ 1,276 2,047 2,999 3,449 3,013 2,784 2,938 5,117
Income before taxes..... 1,298 2,070 3,022 3,462 2,858 2,419 2,955 4,752
Net income(2)........... 1,298 2,070 3,022 3,462 4,460 4,199 2,955 3,151
PRO FORMA DATA:
Income before taxes..... $ 2,419 $ 5,121
Net income(3)........... 1,440 3,047
Net income per share(4). $ 0.11 $ 0.22
Weighted average shares
outstanding(4)......... 13,651 13,651
OTHER OPERATING DATA(5):
Number of Accelerated
Reader customer
schools................ 7,000 10,400 14,500 19,500 26,000 23,500 29,700
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000 8,200 12,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------
AS
ACTUAL ADJUSTED(6)
------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 1,343 $15,269
Total assets............................................... 20,319 34,794
Notes payable and long-term debt, including current
portion................................................... 11,550 --
Shareholders' equity....................................... 2,370 28,873
</TABLE>
- --------
(1) Reflects the acquisition of IPS as if it occurred on January 1, 1996.
Adjustments consist of (i) IPS results for the seven months ended July 31,
1996, (ii) the exclusion of revenues ($744,000) and related costs
($180,000) associated with an IPS contract not acquired in the acquisition,
(iii) additional amortization of intangibles ($143,000), (iv) additional
interest expense ($268,000) and (v) the income tax effect related to such
adjustments ($178,000).
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996. See Note 3 of Notes to the Company's Financial
Statements. As a result, net income exceeds income before taxes in 1996
due to the tax benefit recorded by IPS which is primarily related to the
expensed purchased research and development. Effective January 1, 1997,
IPS elected S corporation status. As a result, the 1997 tax provision
represents the write-off of the deferred tax asset associated with IPS
when it was a C corporation. The previously recognized deferred tax asset
will be reinstated upon the completion of the Offering.
(3) Pro forma net income has been computed as if the Company had been a C
corporation rather than an S corporation for income tax purposes, based
upon an assumed effective federal and state tax rate of 40.5%. See "S
Corporation Distribution."
(4) Pro forma net income per share and weighted average shares outstanding
reflect (i) the shares outstanding as of January 2, 1997, reflecting the
issuance of shares by ALS to acquire IPS and the Institute and (ii) the
133.31 for 1 stock split.
(5) Represents the cumulative number of schools to which the Accelerated
Reader has been sold at year end and the cumulative number of book test
titles available at year end, as indicated.
(6) As adjusted to reflect the sale of 2,800,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $13.00 per
share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating an investment in the Common Stock.
RELIANCE ON SINGLE PRODUCT LINE AND SIGNIFICANT DISTRIBUTOR
The Company's Accelerated Reader software and supplemental Accelerated
Reader test disks accounted for approximately 91.9%, 89.8%, 69.4% and 56.2% of
the Company's net sales in 1994, 1995, 1996 and the first half of 1997,
respectively. Sales of the Accelerated Reader software and supplemental test
disks through one book distributor accounted for 2.6%, 12.5%, 15.2% and 13.6%
of such net sales in 1994, 1995, 1996 and the first half of 1997,
respectively. An overall decline in sales of the Accelerated Reader and
supplemental test disks, including sales through book distributors, would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales, Marketing and
Distribution."
DEPENDENCE ON CONTINUED PRODUCT DEVELOPMENT
The K-12 educational technology and professional development markets in
which the Company competes are characterized by evolving industry standards,
frequent product introductions and, to a lesser extent, technological change.
The Company's future success will depend, to a significant extent, on a number
of factors, including the Company's ability to enhance its existing products
and develop and successfully introduce new products, including new products
designed for use in other areas of the curriculum. The Company attempts to
maintain high standards for the demonstrated academic effectiveness of its
products. The Company's adherence to these standards could delay or inhibit
the introduction of new products. Moreover, there can be no assurance that the
Company's products will not be rendered obsolete or that the Company will have
sufficient resources to make the necessary investments or be able to develop
and market the products required to maintain its competitive position. See
"Business--Product Development."
MANAGEMENT OF GROWTH
The Company has recently experienced rapid growth. If such growth continues,
it may place a strain on the Company's financial, management and other
resources. The Company's ability to manage its growth effectively will require
it to attract, train, motivate, manage and retain key employees and to improve
its operational, financial and management information systems. If the Company
is unable to maintain and manage growth effectively, the Company's business,
financial condition and results of operations would be adversely affected.
OPPOSING EDUCATIONAL PHILOSOPHIES
The Company focuses on developing and marketing educational products and
services that demonstrate effectiveness through measurable results. This
approach, however, is not accepted by all academics and educators, some of
whom formulate opinions about the desirability of a particular educational
product or service based on philosophical or other concerns rather than the
effectiveness of the product. Certain academics and educators are opposed to
the principles and methodologies underlying and associated with the Company's
products, such as the use of objective standards, standardized testing,
computers, and motivational techniques, among others. Some of these
philosophical opponents of the Company's products and services have the
capacity to influence the market for the Company's products, and such
influence could have a material adverse impact on demand for the Company's
products and, thus, the Company's business, financial condition and results of
operations.
DEPENDENCE ON EDUCATIONAL INSTITUTIONS AND GOVERNMENT FUNDING
Substantially all of the Company's revenue is derived from sales to
educational institutions, individual educators and suppliers thereto. There
can be no assurance that educational institutions and/or individual educators
will
6
<PAGE>
continue to invest in technology-based products and professional development
for reading and other curricula or continue to respond favorably to the
Company's marketing. The inability of the Company to increase the number of
products sold or number of schools served would adversely affect the Company's
business, financial condition and results of operations. Because of the
Company's dependence on educational institutions, the funding of which is
largely dependent on government support, a substantial decrease in government
budgets or funding for educational software or technology would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, certain aspects of government sponsored
education initiatives may not endorse, or be complementary to, the principles
and methodologies underlying and associated with the Company's products, which
could adversely affect the Company's business, financial condition and results
of operations.
GEOGRAPHIC CONCENTRATION OF SALES
A substantial portion of the Company's sales are concentrated in several
states, including Texas, Florida, Georgia and North Carolina, which accounted
for approximately $2.6 million, $925,000, $766,000 and $657,000 of the
Company's net software product sales (excluding IPS software sales) in the
first half of 1997 . If large numbers of schools or a district controlling a
large number of schools in such states were to discontinue purchasing the
Company's products, the Company's business, financial condition and results of
operations would be materially adversely affected.
HIGHLY COMPETITIVE INDUSTRY
The K-12 educational technology and professional development markets in
which the Company operates are very competitive. The Company competes
primarily against more traditional methods of education, training and testing,
including pencil and paper testing. In addition, the Company competes with
other companies offering educational software products to schools. Existing
competitors may continue to broaden their product lines, and potential
competitors, including large hardware manufacturers, software developers and
educational publishers, may enter or increase their focus on the school
market, resulting in greater competition for the Company. There can be no
assurance that the Company will continue to be able to market its products
successfully or compete effectively in the educational products marketplace.
See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
active participation of certain key members of management, including Judith
Paul and Terrance Paul, the Chairman and Vice Chairman of the Company,
respectively. In addition to serving as Chairman of the Company, Ms. Paul is a
spokesperson for the Company and coordinates the Company's public relations
and customer communication policies. Mr. Paul is primarily responsible for the
Company's long-term strategic planning and new product development strategy.
Mr. Paul also coordinates the research activities conducted by the Institute.
The Company does not have employment agreements with either of these persons
and has no current intention of entering into any such employment agreements.
Furthermore, the Company has key person life insurance on Mr. Paul. The loss
of services of either of these persons would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management--Directors and Executive Officers."
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's future success will depend, in part, upon its continuing
ability to retain the employees, including senior management personnel, who
have assisted in the development and marketing of the Company's products and
to attract and retain qualified additional employees trained in computer
technology, marketing and finance to enhance the Company's product offerings
and broaden its operations. There can be no assurance that the Company will
continue to be able to attract and retain such personnel. The failure to
attract or retain the necessary personnel would have a material adverse effect
on the Company's business, financial condition and results of operations.
7
<PAGE>
SEASONALITY; LIMITED BACKLOG; FLUCTUATIONS IN QUARTERLY PERFORMANCE
The Company's business may experience a certain degree of seasonality due to
the budget cycles of the Company's school customers. Further, because products
are generally shipped as orders are received, the Company has historically
operated with virtually no backlog. Thus, revenues in any quarter are
substantially dependent on the quantity of product orders received in that
quarter. Seasonal variations in demand may cause significant variations in the
Company's results of operations. The Company's overall gross margins fluctuate
based upon the mix of product sales and service sales. The Company realizes
significantly higher margins on its product sales. The Company's operating
margins also fluctuate based upon a number of other factors including, but not
limited to, the amount of product development expenditures, the timing of the
capitalization of product development expenditures and the timing of certain
marketing activities. In addition, during the second half of 1997, the Company
will incur a $1.3 million one-time compensation expense (assuming an initial
public offering price of $13.00 per share) related to the termination of
certain employee benefit plans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards certain of its technologies as proprietary and relies
primarily on a combination of copyright, trademark and trade secret laws and
employee non-disclosure agreements to establish and protect its proprietary
rights. Although the Company has filed a patent application which covers the
technology developed by IPS to automatically generate and format examinations
that include math expressions, the Company does not currently possess any
patents or other registered intellectual property rights with respect to its
software. There can be no assurance that the steps taken by the Company to
protect its rights will be adequate to prevent or deter misappropriation. In
addition, while the Company does not believe that its products, trademarks or
other proprietary rights infringe upon the proprietary rights of third
parties, there can be no assurance that a third party will not make a contrary
assertion. The cost of responding to such an assertion may be material,
whether or not the assertion is validated. The software market has
traditionally experienced widespread unauthorized reproduction of products in
violation of intellectual property rights. Such activity is difficult to
detect and legal proceedings to enforce intellectual property rights are often
burdensome and involve a high degree of uncertainty and costs. There can be no
assurance that the Company's software products will not experience
unauthorized reproduction, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
S CORPORATION DISTRIBUTION; REPAYMENT OF DEBT TO PRINCIPAL SHAREHOLDERS; USE
OF PROCEEDS
Approximately $10.0 million of the net proceeds to the Company from the
Offering will be used to fund a dividend to the Company's shareholders of
undistributed S corporation earnings. Approximately $5.0 million of the net
proceeds will be used to retire the principal and accrued interest on
acquisition-related debt owed to the Company's principal shareholders.
Accordingly, approximately $15.0 million (45.3%) of the net proceeds from the
Offering will be paid to the Company's shareholders. The Company's management
will have broad discretion with respect to the application of approximately
$9.8 million (29.6%) of the remaining net proceeds of the Offering. See "S
Corporation Distribution," "Certain Transactions" and "Use of Proceeds."
CONCENTRATION OF SHARE OWNERSHIP; CONTROL BY PRINCIPAL SHAREHOLDERS/MANAGEMENT
Upon completion of the Offering, the principal shareholders of the Company,
Judith Paul and Terrance Paul, who are also the Chairman and Vice Chairman of
the Company, respectively, will beneficially own approximately 77.0% of the
outstanding Common Stock. As a result, such principal shareholders will
continue to have the ability to control the Company and direct its business
and affairs. See "Principal Shareholders."
NO PRIOR MARKET; SHARE PRICE VOLATILITY; DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a regular trading market will develop after
the Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock will be determined through negotiations between the Company
and the Representatives of the Underwriters. See
8
<PAGE>
"Underwriting." Numerous factors, many of which are beyond the control of the
Company, may cause the market price of the Common Stock to fluctuate
significantly. These factors include announcements of technological
innovations, customer orders of new products by the Company and its
competitors, earnings releases by the Company and its competitors, market
conditions in the industry and the general state of the securities markets. In
addition, the timing of orders by the Company's customers may cause quarterly
fluctuations of the Company's results of operations which may, in turn, affect
the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon completion of the Offering, the Company will have 16,489,594
shares of Common Stock outstanding, of which the 2,800,000 shares sold in the
Offering (3,220,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company (as such term as
defined under the Securities Act), in which case such shares will be subject
to the resale limitations (but not the holding period requirements) of Rule
144 under the Securities Act. The Company and its principal shareholders, who
hold in the aggregate 13,685,983 shares of Common Stock, have agreed that they
will not, for a period of 180 days from the date of this Prospectus, offer,
sell, contract to sell or otherwise dispose of any of their shares of Common
Stock without the prior written consent of Piper Jaffray Inc. The Company
believes that, following the expiration of such 180-day period, 13,651,133 of
these shares will be eligible for immediate sale in the public market, subject
to the Rule 144 resale limitations. In addition, the Company intends to file a
registration statement under the Securities Act to register an aggregate of
1,500,000 shares of Common Stock reserved for issuance under the Company's
1997 Stock Incentive Plan, which will, when issued in accordance with such
plan, be eligible for immediate sale in the public market, subject to the Rule
144 resale limitations. See "Shares Eligible for Future Sale" and
"Management--Executive Compensation--1997 Stock Incentive Plan."
NO PAYMENT OF CASH DIVIDENDS
The Company does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."
DILUTION TO NEW INVESTORS
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of $11.51 in the consolidated net tangible book value
per share from the assumed initial public offering price of $13.00 per share.
See "Dilution."
POSSIBLE ANTITAKEOVER EFFECTS OF CERTAIN ARTICLES AND BY-LAW PROVISIONS AND
PROVISIONS OF WISCONSIN LAW
The Company's Articles of Incorporation and By-Laws, along with Wisconsin
statutory law, contain provisions that could discourage potential acquisition
proposals and might delay or prevent a change in control of the Company. Such
provisions could result in the Company being less attractive to a potential
acquiror and could result in the shareholders receiving less for their Common
Stock than otherwise might be available in the event of a takeover attempt.
See "Description of Capital Stock--Certain Statutory and Other Provisions."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,800,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share are estimated to be approximately $33.1 million, after
deducting the underwriting discount and estimated offering expenses.
The Company intends to use the net proceeds from the Offering as follows:
(i) approximately $10.0 million will be used to fund a dividend to the
Company's shareholders of undistributed S corporation earnings, (ii)
approximately $7.0 million will be used to retire the construction financing
on the Company's Wisconsin Rapids headquarters (of which $0.2 million is
included in current liabilities), the long-term portion of which bears
interest at a floating rate equal to LIBOR plus 1.25% and matures on March 1,
2002, (iii) approximately $5.0 million will be used to repay the principal and
accrued interest on two loans from the Company's principal shareholders, which
loans funded the acquisition of IPS and which each bear interest at the rate
of 6.5% per annum and mature on January 2, 1998, and (iv) approximately $1.3
million will be used to make a one-time payment to Company employees pursuant
to certain employee benefit plans (assuming an initial public offering price
of $13.00 per share). Such payment will give rise to a compensation charge of
$1.3 million in the Company's second half of 1997. The balance of the
proceeds, estimated to be approximately $9.8 million, will be used for general
corporate purposes, including working capital and new product development.
Accordingly, approximately $15.0 million (45.3%) of the net proceeds from the
Offering will be paid to the Company's shareholders. See "S Corporation
Distribution," "Certain Transactions" and "Management--Executive
Compensation--Phantom Stock Plans."
Pending use of the net proceeds from the Offering as described above, the
Company intends to invest such proceeds in short-term investment grade
securities.
S CORPORATION DISTRIBUTION
Prior to completion of the Offering, ALS, the Institute and IPS were
corporations subject to taxation under Subchapter S of the Internal Revenue
Code of 1986, as amended (an "S corporation"). As a result, substantially all
of the net income of these companies has been attributed, for income tax
purposes, directly to their respective shareholders rather than to the
applicable company. See Note 7 of Notes to the Company's Financial Statements.
The S corporation status of ALS, the Institute and IPS will terminate in
connection with the Offering, and the Company will make a final distribution
to its existing shareholders of undistributed S corporation earnings.
Prior to the consummation of the Offering, the Company will declare a
dividend to its existing shareholders in an aggregate amount representing all
undistributed earnings taxable to its shareholders through the closing of the
Offering (the "S Corporation Dividend"). The S Corporation Dividend is
estimated to be approximately $10.0 million as of the date of this Prospectus
and will be paid by the Company with a portion of the net proceeds received
from the Offering. Purchasers of Common Stock in the Offering will not receive
any portion of the S Corporation Dividend. See "Use of Proceeds."
DIVIDEND POLICY
The Company intends to retain all of its future earnings to fund growth and
the operation of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future operations and earnings, capital
requirements and surplus, general financial condition, contractual
restrictions and such other factors as the Board of Directors may deem
relevant. For the years ended December 31, 1995 and 1996, and the six months
ended June 30, 1997, the Company made S corporation distributions to its
shareholders of $3.9 million, $3.5 million and $4.6 million, respectively. In
addition, the Company expects to make an S corporation distribution to its
shareholders on or before September 15, 1997 of approximately $3.0 million.
10
<PAGE>
CAPITALIZATION
The following table sets forth the actual and as adjusted short-term debt
and capitalization of the Company at June 30, 1997. The as adjusted short-term
debt and capitalization reflect the sale of 2,800,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $13.00 per
share, and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." This table should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Short-term debt, including current amounts due under
construction contract..................................... $ 548 $ 350
======= =======
Notes payable and long-term debt, including current portion
.......................................................... $11,550 $ --
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 13,651,133 actual shares issued and
outstanding, and 16,489,594(1) shares issued and
outstanding, as adjusted................................ 137 165
Additional paid in capital(1)............................ 217 28,708
Retained earnings........................................ 2,016 --
------- -------
Total shareholders' equity............................. 2,370 28,873
------- -------
Total capitalization................................... $13,920 $28,873
======= =======
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $13.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."
11
<PAGE>
DILUTION
The consolidated net tangible book value of the Company as of June 30, 1997
was $764,000, or $0.06 per share of Common Stock. "Consolidated net tangible
book value per common share" represents the amount of (i) the book value of
the Company's total consolidated tangible assets, less total consolidated
liabilities, divided by (ii) the number of shares of Common Stock outstanding
on such date. Without taking into account any changes in consolidated net
tangible book value after June 30, 1997, other than to give effect to the sale
of the Common Stock offered hereby, after deducting the underwriting discount
and estimated expenses of the Offering, and the application of the estimated
net proceeds therefrom, the pro forma consolidated net tangible book value of
the Company as of June 30, 1997 would have been $24.6 million, or $1.49 per
share of Common Stock. This represents an immediate increase in consolidated
net tangible book value of $1.43 per share of Common Stock to existing
shareholders and immediate dilution of consolidated net tangible book value of
$11.51 per share of Common Stock to new investors purchasing Common Stock in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $13.00
Consolidated net tangible book value per share at June 30,
1997........................................................ $0.06
Increase per share attributable to new investors............. 1.43
-----
Pro forma consolidated net tangible book value per share after the
Offering............................................................ 1.49
------
Dilution per share to new investors.................................. $11.51
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1997 the
differences in the total cash consideration paid and the average price per
share paid by the existing shareholders and the new investors (assuming an
initial public offering price of $13.00 per share) with respect to the
2,800,000 shares of Common Stock to be issued by the Company in this Offering:
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 13,689,594 83.0% $ 255,000 0.7% $ 0.02
New investors.................. 2,800,000 17.0 36,400,000 99.3 13.00
---------- ----- ----------- -----
Total...................... 16,489,594 100.0% $36,655,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes 38,461 shares to be issued upon closing of the Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 277,846 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $13.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."
12
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
The following table sets forth certain historical combined financial and
other operating data for the Company as of and for each of the five years
ended December 31, 1996 and certain pro forma combined financial data as of
and for the year ended December 31, 1996. Also presented are certain
historical consolidated financial and other operating data for the Company as
of June 30, 1997 and for the six months ended June 30, 1996 and 1997, and
certain pro forma consolidated financial data for the six months ended June
30, 1997. The historical combined financial data for the three years ended
December 31, 1996 and as of December 31, 1995 and 1996 were derived from the
Financial Statements of the Company included elsewhere in this Prospectus and
have been audited by Arthur Andersen LLP, independent auditors, as indicated
in its report included elsewhere herein. The historical combined financial
data for the two years ended December 31, 1993 and as of December 31, 1992,
1993 and 1994, and the historical consolidated financial data for the six
months ended June 30, 1996 and 1997 and as of June 30, 1997, were derived from
the accounting records of the Company and have not been audited. In the
opinion of management, the historical combined financial data for the two
years ended December 31, 1993 and as of December 31, 1992, 1993 and 1994, and
the historical consolidated financial data for the six months ended June 30,
1996 and 1997 and as of June 30, 1997, include all adjusting entries
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. The historical combined and historical
consolidated financial data presented herein are not necessarily indicative of
the results of operations for any future period. The pro forma combined and
pro forma consolidated financial data are not necessarily indicative of the
results of operations or financial position of the Company had the
transactions reflected therein actually been consummated on the dates assumed
and are not necessarily indicative of the results of operations for any future
period. The financial and other operating data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ ---------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1) 1996 1997
------ ------ ------ ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Products............... $3,171 $5,288 $8,088 $11,602 $18,930 $19,611 $ 8,140 $13,744
Services............... -- -- 163 1,003 3,451 3,451 1,334 2,801
------ ------ ------ ------- ------- ------- ------- -------
Total net sales...... 3,171 5,288 8,251 12,605 22,381 23,062 9,474 16,545
Cost of sales:
Products............... 429 570 937 1,468 2,329 2,236 966 1,675
Services............... -- -- 166 595 1,898 1,898 633 1,305
------ ------ ------ ------- ------- ------- ------- -------
Total cost of sales.. 429 570 1,103 2,063 4,227 4,134 1,599 2,980
Gross profit:
Products............... 2,742 4,718 7,151 10,134 16,601 17,375 7,174 12,068
Services............... -- -- (3) 408 1,553 1,553 701 1,497
------ ------ ------ ------- ------- ------- ------- -------
Total gross profit... 2,742 4,718 7,148 10,542 18,154 18,928 7,875 13,565
Operating expenses:
Product development.... 223 465 358 802 1,555 1,998 494 1,375
Selling and marketing.. 836 1,595 2,551 4,201 6,639 6,892 3,059 4,452
General and
administrative........ 407 611 1,240 2,090 3,547 3,854 1,384 2,621
Purchased research and
development(2)........ -- -- -- -- 3,400 3,400 -- --
------ ------ ------ ------- ------- ------- ------- -------
Total operating
expenses............ 1,466 2,671 4,149 7,093 15,141 16,144 4,937 8,448
Operating income........ 1,276 2,047 2,999 3,449 3,013 2,784 2,938 5,117
Other income (expense),
net.................... 22 23 23 13 (155) (365) 17 (364)
Income tax benefit
(provision)............ -- -- -- -- 1,602 1,780 -- (1,602)
------ ------ ------ ------- ------- ------- ------- -------
Net income.............. $1,298 $2,070 $3,022 $ 3,462 $ 4,460 $ 4,199 $ 2,955 $ 3,151
====== ====== ====== ======= ======= ======= ======= =======
PRO FORMA DATA:
Income before taxes..... $ 2,419 $ 5,121
Net income(3)........... 1,440 3,047
Net income per share(4). $ 0.11 $ 0.22
Weighted average shares
outstanding(4)......... 13,651 13,651
OTHER OPERATING DATA(5):
Number of Accelerated
Reader customer
schools................ 7,000 10,400 14,500 19,500 26,000 23,500 29,700
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000 8,200 12,000
BALANCE SHEET DATA:
Working capital......... $1,263 $2,098 $2,213 $1,105 $ 566 $ 1,343
Total assets............ 1,792 3,063 4,070 4,761 19,855 20,319
Notes payable and long-
term debt, including
current portion........ -- -- -- -- 10,450 11,550
Total equity............ 1,621 2,782 3,065 2,613 3,773 2,370
</TABLE>
13
<PAGE>
- --------
(1) Reflects the acquisition of IPS as if it occurred on January 1, 1996.
Adjustments consist of (i) IPS results for the seven months ended July 31,
1996, (ii) the exclusion of revenues ($744,000) and related costs
($180,000) associated with an IPS contract not acquired in the
acquisition, (iii) additional amortization of intangibles ($143,000), (iv)
additional interest expense ($268,000) and (v) the income tax effect
related to such adjustments ($178,000).
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996. See Note 3 of Notes to the Company's Financial
Statements. As a result, net income exceeds income before taxes in 1996
due to the tax benefit recorded by IPS which is primarily related to the
expensed purchased research and development. Effective January 1, 1997,
IPS elected S corporation status. As a result, the 1997 tax provision
represents the write-off of the deferred tax asset associated with IPS
when it was a C corporation. The previously recognized deferred tax asset
will be reinstated upon the completion of the Offering.
(3) Pro forma net income has been computed as if the Company had been a C
corporation rather than an S corporation for income tax purposes, based
upon an assumed effective federal and state tax rate of 40.5%. See "S
Corporation Distribution."
(4) Pro forma net income per share and weighted average shares outstanding
reflect (i) the shares outstanding as of January 2, 1997, reflecting the
issuance of shares by ALS to acquire IPS and the Institute and (ii) the
133.31 for 1 stock split.
(5) Represents the cumulative number of schools to which the Accelerated
Reader has been sold at year end and the cumulative number of book test
titles available at year end, as indicated.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Historical and Pro Forma Combined and
Consolidated Financial Data" and the financial statements of the Company and
IPS and the accompanying notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company is a leading provider of learning information systems to
kindergarten through senior high ("K-12") schools in the United States and
Canada. The Company's learning information systems consist of computer
software and related training designed to improve student academic performance
by increasing the quality, quantity and timeliness of performance data
available to educators and by facilitating increased student practice of
essential skills. The Company's flagship product, the Accelerated Reader, is
software for motivating and monitoring increased literature-based reading
practice. The Company's learning information system products also include the
Standardized Test for Assessment of Reading (S.T.A.R.), a computer-adaptive
reading test and database, and the Reading Renaissance program, through which
the Company provides professional development training for educators.
The Company's sales are derived primarily from the sale of software
products, software support agreements and training seminars and programs. The
Company recognizes revenue from sales of its off-the-shelf software products
at the time of shipment to customers. Because software products are generally
shipped as orders are received, the Company has historically operated with
virtually no backlog. The Company also develops custom software products
through its subsidiary, IPS. The Company recognizes revenue from the sale of
custom software on the percentage of completion method. The Company records
the estimated cost of returns at the time of sale. Service revenue includes
both revenue relating to the Reading Renaissance professional development
training and revenue from software support agreements for ongoing customer
support and product upgrades. The Company recognizes revenue from sales of its
training seminars and programs primarily at the time the seminar or training
program is conducted. Revenue from software support agreements is reflected as
deferred revenue and is amortized ratably over the 24 month term of the
maintenance period, which begins after the expiration of the six months of
free support included with the purchase of the software. The Company's
deferred revenue represents payments received from customers for services
still to be rendered.
Cost of sales consists of expenses associated with sales of software
products and training seminars and programs. These costs include (i)
personnel-related costs, (ii) costs associated with the manufacture and
assembly of the Company's products, (iii) amortization of capitalized software
development costs and (iv) an allocation of facilities costs. The Company
recognizes significantly higher gross margins on its product sales than on its
service sales. As a result, the Company's total gross margin has declined
since 1994 as service sales have increased as a percent of net sales.
The Company expenses all product development costs associated with a product
until technological feasibility is established, after which time such costs
are capitalized until the product is available for general release to
customers. Capitalized product development costs are amortized into cost of
sales generally using the straight-line method over two years.
In August 1996, an affiliate of the Company acquired substantially all of
the assets of IPS for $5.0 million plus the assumption of certain liabilities
and the obligation to make certain contingent payments which will be satisfied
in connection with the Offering. Effective January 2, 1997, all of the
outstanding capital stock of IPS was contributed to the Company in return for
shares of capital stock of ALS. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the results of operations of IPS
are included in the combined results of operations of the Company effective as
of August 1, 1996. Under the purchase method of accounting, the excess of the
purchase price over the fair value of the net assets acquired is considered
goodwill. The Company is amortizing the goodwill associated with the
acquisition on a straight line basis over seven years. As part of the
acquisition, $3.4 million of the purchase price was allocated to purchased
research and development which was expensed in August 1996. See "Certain
Transactions" and Notes 3 and 5 of Notes to the Company's Financial
Statements.
15
<PAGE>
Immediately prior to completion of the Offering, the Company will terminate
certain employee benefit plans and institute the 1997 Stock Incentive Plan.
Termination of the plans will result in a one-time additional compensation
expense of approximately $1.3 million (assuming an initial public offering
price of $13.00 per share) in the second half of 1997. See "Management--
Executive Compensation."
Upon completion of the Offering, ALS, the Institute and IPS will become C
corporations for tax purposes. See "S Corporation Distribution" and Note 7 of
Notes to the Company's Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth certain combined income statement data as a
percentage of net sales, except that individual components of cost of sales
and gross margin are shown as a percentage of their corresponding component of
net sales:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales:
Products................................... 98.0% 92.0% 84.6% 85.9% 83.1%
Services................................... 2.0 8.0 15.4 14.1 16.9
----- ----- ----- ----- -----
Total net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of sales:
Products................................... 11.6% 12.6% 12.3% 11.9% 12.2%
Services................................... 101.9 59.3 55.0 47.4 46.6
Total cost of sales...................... 13.4 16.4 18.9 16.9 18.0
Gross profit:
Products................................... 88.4 87.4 87.7 88.1 87.8
Services................................... (1.9) 40.7 45.0 52.6 53.4
Total gross profit....................... 86.6 83.6 81.1 83.1 82.0
Operating expenses:
Product development........................ 4.3 6.4 6.9 5.2 8.3
Selling and marketing...................... 30.9 33.3 29.7 32.3 26.9
General and administrative................. 15.1 16.5 15.8 14.6 15.8
Purchased research and development......... -- -- 15.2 -- --
----- ----- ----- ----- -----
Operating income............................. 36.3 27.4 13.5 31.0 31.0
Other income (expense), net.................. 0.3 0.1 (0.7) 0.2 (2.2)
----- ----- ----- ----- -----
Income before taxes.......................... 36.6 27.5 12.8 31.2 28.8
Income tax benefit (provision)............... -- -- 7.1 -- (9.7)
----- ----- ----- ----- -----
Net income................................... 36.6% 27.5% 19.9% 31.2% 19.1%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Sales. The Company's net sales increased by $7.0 million, or 74.6%, to
$16.5 million in the first half of 1997 from $9.5 million in the first half of
1996. Product sales increased by $5.6 million, or 68.9%, to $13.7 million in
the first half of 1997 from $8.1 million in the first half of 1996. The
increase in product sales is primarily attributable to (i) the sale of the
Accelerated Reader to approximately 3,700 new customer schools, (ii) increased
sales of Accelerated Reader test disks to a larger base of Accelerated Reader
schools, including the introduction of approximately 3,800 new book titles on
Accelerated Reader test disks since June 30, 1996, (iii) revenues from
S.T.A.R. for which shipments and recognition of revenue began subsequent to
June 30, 1996, and (iv) inclusion of IPS sales commencing August 1, 1996.
Sales of Accelerated Reader software and supplemental Accelerated Reader test
disks accounted for approximately 69.4% and 56.2% of net sales in the first
half of 1996 and 1997, respectively.
Service revenue, which consists of revenue from sales of training seminars
and programs and software support agreements, increased by $1.5 million, or
109.9%, to $2.8 million in the first half of 1997 from $1.3 million in the
16
<PAGE>
first half of 1996. This increase is primarily attributable to an increased
number of Reading Renaissance training sessions, and, to a lesser extent,
additional revenue from software support agreements principally associated
with increased new product sales.
Cost of Sales. The cost of sales of products increased by $710,000, or
73.5%, to $1.7 million in the first half of 1997 from $966,000 in the first
half of 1996. As a percentage of product sales, the cost of sales of products
remained relatively constant at 12.2% in the first half of 1997 compared to
11.9% in the first half of 1996. The cost of sales of services increased by
$672,000, or 106.1%, to $1.3 million in the first half of 1997 from $633,000
in the first half of 1996. As a percentage of sales of services, the cost of
sales of services declined to 46.6% in the first half of 1997 compared to
47.4% in the first half of 1996, primarily as a result of decreased costs of
delivering training sessions. The Company's overall gross profit margin
declined to 82.0% in the first half of 1997 from 83.1% in the first half of
1996 due primarily to increased sales of services, particularly Reading
Renaissance training sessions, which have a lower gross margin than the
Company's products.
Product Development. Product development expenses increased by $880,000, or
178.0%, to $1.4 million in the first half of 1997 from $494,000 in the first
half of 1996. These expenses increased primarily due to: (i) increased
development staff and consulting costs associated with new products, and (ii)
the inclusion of IPS's product development costs in the first half of 1997. As
a percentage of net sales, product development costs increased to 8.3% in the
first half of 1997 from 5.2% in the first half of 1996. The Company
anticipates that the total dollar amount of product development costs will
increase significantly as the Company extends its product offerings into other
areas of the K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by $1.4
million, or 45.5%, to $4.5 million in the first half of 1997 from $3.1 million
in the first half of 1996. These expenses increased due to an increase in
marketing personnel, participation in more trade shows, the publication of
additional catalogs, and increased advertising in publications. However, as a
percentage of net sales, selling and marketing expenses decreased to 26.9% in
the first half of 1997 from 32.3% in the first half of 1996. This decrease is
primarily due to economies of scale associated with significantly increased
product sales and service sales.
General and Administrative. General and administrative expenses increased by
$1.2 million, or 89.4%, to $2.6 million in the first half of 1997 from $1.4
million in the first half of 1996. The higher expenses for the first half of
1997 are largely due to increased costs associated with the hiring of
additional personnel, including wages and related benefits, and increased
costs associated with the Company's new headquarters building. As a percentage
of net sales, general and administrative costs increased to 15.8% in the first
half of 1997 from 14.6% in the first half of 1996. The Company anticipates
that general and administrative expenses will generally decline as a
percentage of sales in future periods, excluding the effect of non-recurring
charges such as the approximately $1.3 million one-time compensation expense
which will be incurred in the second half of 1997.
Operating Income. Operating income increased by $2.2 million, or 74.2%, to
$5.1 million in the first half of 1997 from $2.9 million in the first half of
1996. As a percentage of net sales, operating income remained constant at
31.0% in the first half of 1997 compared to 31.0% in the first half of 1996.
Interest Expense. In the first half of 1997, interest expense of $369,000
was incurred primarily in connection with loans to finance the acquisition of
IPS and the construction of the Company's new corporate headquarters building.
Income Tax Expense. Income tax expense of $1.6 million was recorded in the
first half of 1997. The expense was incurred as a result of IPS electing S
corporation status for income tax purposes. The expense represents the write
off of the previously recorded deferred tax asset. Immediately after the
Offering, ALS, the Institute and IPS will be taxed as C corporations and,
consequently, deferred taxes will be reinstated on the Company's financial
statements. See Note 7 of the Company's Financial Statements.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Sales. The Company's net sales increased by $9.8 million, or 77.6%, to
$22.4 million in 1996 from $12.6 million in 1995. Product sales increased by
$7.3 million, or 63.2%, to $18.9 million in 1996 from $11.6 million in
17
<PAGE>
1995. The increase in product sales is primarily attributable to (i) the sale
of the Accelerated Reader to approximately 6,500 new customer schools, (ii)
increased sales of Accelerated Reader test disks to Accelerated Reader
schools, including the introduction of Accelerated Reader test disks covering
approximately 2,500 new book titles, and (iii) the introduction of S.T.A.R.,
which was announced in April 1996 and which the Company began shipping in
September 1996. Sales of Accelerated Reader software and supplemental
Accelerated Reader test disks accounted for approximately 89.8% and 69.4% of
net sales in 1995 and 1996, respectively. Sales of the Company's products
through one book distributor contributed significantly to product sales growth
in 1996. Sales through this book distributor, as a percentage of net sales,
increased from 12.5% in 1995 to 15.2% in 1996. The Company believes this
growth represented the maturation of this book distributor's field sales
efforts. The Company does not anticipate that sales to schools through this
book distributor will significantly increase as a percentage of net sales.
Service revenue increased by $2.4 million, or 244.0%, to $3.5 million in
1996 from $1.0 million in 1995. This increase is primarily attributable to an
increased number of Reading Renaissance training sessions, and, to a lesser
extent, additional revenue from software support agreements principally
associated with increased new product sales.
Cost of Sales. The cost of sales of products increased by $862,000, or
58.7%, to $2.3 million in 1996 from $1.5 million in 1995. As a percentage of
product sales, the cost of sales of products remained relatively constant at
12.3% in 1996 compared to 12.6% in 1995. The cost of sales of services
increased by $1.3 million, or 219.0%, to $1.9 million in 1996 from $595,000 in
1995. As a percentage of sales of services, however, the cost of sales of
services decreased to 55.0% in 1996 from 59.3% in 1995, primarily as a result
of greater efficiencies in conducting seminars. The Company's overall gross
profit margin declined to 81.1% in 1996 from 83.6% in 1995 due primarily to
increased sales of services, particularly sales of Reading Renaissance
training sessions, which have a lower gross margin than the Company's
products.
Product Development. Product development expenses increased by $753,000, or
93.9%, to $1.6 million in 1996 from $802,000 in 1995. These expenses increased
primarily due to the increased development staff and consulting costs
associated with new products. As a percentage of net sales, product
development costs increased to 6.9% in 1996 from 6.4% in 1995. The Company
anticipates that product development costs will increase significantly as the
Company expands its product offerings into other areas of the K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by $2.4
million, or 58.0%, to $6.6 million in 1996 from $4.2 million in 1995. These
expenses increased due to an increase in the number of marketing personnel,
participation in more trade shows, the publication of additional catalogs, and
the introduction of the "Model Classroom" program. However, as a percentage of
net sales, selling and marketing expenses decreased to 29.7% in 1996 from
33.3% in 1995. This decrease is due primarily to economies of scale associated
with significantly increased product sales.
General and Administrative. General and administrative expenses increased by
$1.5 million, or 69.6%, to $3.5 million in 1996 from $2.1 million in 1995. The
higher expenses for 1996 are largely due to increased costs associated with
the hiring of additional personnel, including wages and related benefits, and
the write-down of the net book value of the Company's former headquarters. As
a percentage of net sales, however, general and administrative expenses
decreased to 15.8% in 1996 from 16.5% in 1995. This decline is primarily due
to economies of scale associated with significantly increased product sales.
Purchased Research and Development. In connection with the acquisition of
IPS, $3.4 million of the purchase price was allocated to purchased research
and development which was expensed in August 1996.
Operating Income. Operating income decreased by $436,000, or 12.6%, to $3.0
million in 1996 from $3.4 million in 1995, primarily due to the $3.4 million
of purchased research and development expense resulting from the acquisition
of IPS. As a percentage of net sales, operating income decreased to 13.5% in
1996 from 27.4% in 1995. Excluding the purchased research and development
expense, operating income would have increased by $3.0 million, or 86.0%, to
$6.4 million in 1996, or 28.7% of net sales compared to 27.4% of net sales in
1995.
Interest Expense. In 1996, interest expense of $206,000 was incurred
primarily in connection with loans to finance the acquisition of IPS.
18
<PAGE>
Income Tax Benefit. A tax benefit of $1.6 million was recorded in 1996
relating primarily to the expensing of $3.4 million of purchased research and
development. See Note 7 of Notes to the Company's Financial Statements.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Sales. The Company's net sales increased by $4.4 million, or 52.8%, to
$12.6 million in 1995 from $8.3 million in 1994. Product sales increased by
$3.5 million, or 43.4%, to $11.6 million in 1995 from $8.1 million in 1994.
The increase in product sales is primarily attributable to (i) the sale of the
Accelerated Reader to approximately 5,000 new customer schools, and (ii)
increased sales of Accelerated Reader test disks to Accelerated Reader
schools, including the introduction of approximately 2,500 new book titles on
Accelerated Reader test disks. The increase in new Accelerated Reader customer
schools was largely due to the Company's strategic decision to lower the price
of the Accelerated Reader starter kits to accelerate the growth of the
installed base and drive demand for supplemental test disks. The growth in new
customer sales was also due to increased sales through book distributors.
Sales through one book distributor increased to 12.5% of net sales in 1995
from 2.6% of net sales in 1994. Sales of Accelerated Reader software and
supplemental Accelerated Reader test disks accounted for approximately 91.9%
and 89.8% of net sales in 1994 and 1995, respectively.
Service revenue increased by $841,000 to $1.0 million in 1995 from $163,000
in 1994, primarily due to the introduction in 1995 of new seminars and
expanded training programs for Reading Renaissance. In 1994, the Institute was
in a start-up phase. In addition, service revenue for software support
agreements began to be recognized in late 1994, which contributed to the
increase in service revenue.
Cost of Sales. The cost of sales of products increased by $530,000, or
56.6%, to $1.5 million in 1995 from $937,000 in 1994. As a percentage of
product sales, the cost of sales of products increased to 12.6% in 1995 from
11.6% in 1994, primarily because of the Company's new pricing policy for
Accelerated Reader starter and economy kits and the lower gross margin
associated with sales through book distributors. The cost of sales of services
increased by $430,000, or 259.0%, to $595,000 in 1995 from $166,000 in 1994.
As a percentage of sales of services, however, the cost of sales of services
decreased to 59.3% in 1995 from 101.9% in 1994. The Institute was in the
start-up phase in 1994 and, as a result, sales of services were not yet
profitable. The Company's overall gross profit margin decreased to 83.6% in
1995 from 86.6% in 1994 primarily due to the larger percentage of sales
generated by sales of services, particularly sales by the Institute, which
have a lower gross margin than the Company's products.
Product Development. Product development expenses increased by $444,000, or
123.9%, to $802,000 in 1995 from $358,000 in 1994. As a percentage of net
sales, product development costs increased to 6.4% in 1995 from 4.3% in 1994.
Product development expenses increased in 1995 due to the expansion of in-
house product development staff and the costs associated with the development
of S.T.A.R.
Selling and Marketing. Selling and marketing expenses increased by $1.6
million, or 64.7%, to $4.2 million in 1995 from $2.6 million in 1994. As a
percentage of net sales, selling and marketing expenses increased to 33.3% in
1995 from 30.9% in 1994. The increase in selling and marketing expenses is due
to start-up expenses associated with the Institute, an increase in the number
of telemarketing personnel selling the Company's products, increased
investment in lead generation to build prospect lists, and the publication of
additional quantities of catalogs and newsletters.
General and Administrative. General and administrative expenses increased by
$852,000, or 68.7%, to $2.1 million in 1995 from $1.2 million in 1994. As a
percentage of net sales, these costs increased to 16.5% in 1995 from 15.1% in
1994. The higher costs for 1995 compared with 1994 are largely due to
increased personnel and occupancy costs as well as start-up expenses
associated with the Institute.
Operating Income. Operating income increased $450,000, or 15.0%, to $3.4
million in 1995 from $3.0 million in 1994. As a percentage of net sales,
operating income decreased to 27.4% in 1995 from 36.3% in 1994, primarily due
to product development expenses associated with the development of S.T.A.R.
and start-up expenses associated with the Institute.
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<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited combined and consolidated income
statement data for each quarter of the Company's last two fiscal years and two
most recent fiscal quarters. The unaudited quarterly financial information has
been prepared on the same basis as the annual information presented elsewhere
in this Prospectus and, in management's opinion, reflects all adjustments
(consisting of normal recurring entries) necessary for a fair presentation of
the information provided. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996(1) 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Products............... $2,524 $2,851 $2,781 $3,446 $3,818 $4,322 $4,949 $5,841 $6,444 $7,299
Services............... 121 129 258 495 607 728 1,003 1,113 1,369 1,433
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net sales...... 2,645 2,980 3,039 3,941 4,425 5,050 5,952 6,954 7,813 8,732
Cost of sales:
Products............... 283 335 341 509 456 510 595 768 780 895
Services............... 80 110 164 241 345 288 522 743 719 587
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of sales.. 363 445 505 750 801 798 1,117 1,511 1,499 1,482
Gross profit............ 2,282 2,535 2,534 3,191 3,624 4,252 4,835 5,443 6,314 7,250
Operating expenses:
Product development.... 167 235 251 149 227 267 409 652 679 696
Selling and marketing.. 727 928 1,072 1,474 1,567 1,492 1,500 2,080 2,161 2,291
General and
administrative........ 389 483 522 696 638 746 950 1,213 1,164 1,457
Purchased research and
development(2)........ -- -- -- -- -- -- 3,400 -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,283 1,646 1,845 2,319 2,432 2,505 6,259 3,945 4,004 4,444
Operating income........ 999 889 689 872 1,192 1,747 (1,424) 1,498 2,310 2,806
Other income (expense),
net.................... (4) 7 8 2 9 9 (66) (107) (167) (197)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
taxes.................. 995 896 697 874 1,201 1,756 (1,490) 1,391 2,143 2,609
Income tax benefit
(provision)(3)......... -- -- -- -- -- -- 1,467 135 (1,602) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 995 $ 896 $ 697 $ 874 $1,201 $1,756 $ (23) $1,526 $ 541 $2,609
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) The Company acquired IPS in August 1996.
(2) In connection with the acquisition of IPS, $3.4 million of the purchase
price was allocated to purchased research and development which was
expensed in August 1996.
(3) Income tax benefits recorded in 1996 relate to IPS net operating losses
while IPS was a C corporation. Effective January 1, 1997, IPS elected S
corporation status and wrote off the deferred tax asset associated with the
IPS net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash and cash equivalents of
approximately $2.6 million. Historically, the Company has used cash generated
from operations to fund acquisitions of capital equipment, software development
and distributions to shareholders. The Company's operating activities provided
cash of approximately $3.3 million, $4.1 million, $9.2 million and $4.9 million
in 1994, 1995, 1996 and the first half of 1997, respectively. The Company
financed the construction of its new facility in Wisconsin Rapids, Wisconsin
with bank and contractor financing of approximately $6.9 million. The Company
financed the purchase of IPS with loans of approximately $4.7 million and
capital contributions of $200,000 from the Company's principal shareholders.
Both the financing for the construction of the Wisconsin Rapids facility and
the principal and accrued interest on the IPS loans will be repaid from a
portion of the estimated net proceeds of the Offering. See "Use of Proceeds."
The Company has no material commitments with respect to any acquisitions of
other businesses, leases or capital expenditures except as described in the
Notes to the Company's Financial Statements. The Company believes that its
existing sources of liquidity, proceeds from this Offering and anticipated
funds from operations will satisfy the Company's projected working capital and
capital expenditure requirements for the foreseeable future.
20
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is a leading provider of learning information systems to
kindergarten through senior high ("K-12") schools in the United States and
Canada. The Company's learning information systems consist of computer software
and related training designed to improve student academic performance by
increasing the quality, quantity and timeliness of performance data available
to educators and by facilitating increased student practice of essential
skills. Learning information systems provide to educators benefits similar to
those management information systems provide to business managers.
The Company's flagship product, the Accelerated Reader, is software for
motivating and monitoring increased literature-based reading practice. As of
June 30, 1997, the Accelerated Reader had been sold to approximately 29,700, or
24%, of the K-12 schools in the United States and Canada. In a survey by
Quality Education Data, Inc. ("QED"), the Accelerated Reader was the software
product that educators most frequently cited as being used to improve the
quality of education in K-12 schools. The Accelerated Reader was also the
reading software product most frequently named by educators as used in support
of reading and language arts curricula in kindergarten through sixth grade,
according to a survey by Education Market Research ("EMR"). Likewise, in a
survey by Cahners Research ("Cahners") of schools/librarians that use
computerized reading programs, 70% of the respondents cited the Accelerated
Reader as the program they used. The Company believes that the Accelerated
Reader has achieved this leading market position as a result of its
demonstrated effectiveness in improving student reading levels and overall
academic performance. The Company's learning information system products also
include the Standardized Test for Assessment of Reading (S.T.A.R.), a computer-
adaptive reading test and database, and the Reading Renaissance program through
which the Company provides professional development training for educators.
Originally introduced in 1986, the Accelerated Reader administers computer-
based multiple choice tests on books popular among students in grades K-12 and
provides educators with more than 20 reports from which to monitor the amount
and quality of each student's reading practice. Through June 30, 1997, the
Company had developed tests on approximately 12,000 books and expects to
develop approximately 1,500 additional tests in the second half of 1997. In
1994, the Company began offering Reading Renaissance training seminars to
provide educators with professional development training to most effectively
use the Accelerated Reader and the information it generates. As of June 30,
1997, approximately 39,500 educators have attended Reading Renaissance training
seminars. In 1996, the Company released S.T.A.R. which enables educators to
quickly obtain student reading scores statistically correlated to national
norms. The results from S.T.A.R. provide educators with a database of
statistically accurate reading level information on their students from which
they can generate useful reports and adjust instructional strategies
accordingly. The Company began marketing S.T.A.R. in the spring of 1996, and by
the end of the second quarter of 1997, had sold S.T.A.R. to approximately 4,900
schools. To expand its learning information system product offerings into
additional academic areas, in August 1996 the Company acquired IPS, a provider
of algorithm-based software for assessment and skills practice in math and
science.
INDUSTRY BACKGROUND
Educators, parents and opinion leaders in the United States are increasingly
focusing on improving essential academic skills of students, and, in
particular, their reading and math proficiency. President Clinton's emphasis on
education in his State of the Union address earlier this year, the Department
of Education's Goals 2000 program, the Learning to Read, Reading to Learn
campaign, an increase in Title I funding, and the activities of the Education
Commission of the States are indicative of this growing focus. While certain
aspects of these initiatives may not endorse, or be complementary to, the
Company's products, this focus and the resulting initiatives have generally
contributed to an increased demand for more effective methods to improve
academic performance. The Company believes that the general impact of the Goals
2000 program and programs similar to it is to pressure schools and educators to
take action to improve the academic performance of students. Schools have
responded to these demands by investing in computers, software and other
educational technology, testing and other assessment programs to measure
students' progress, and professional development training to help enhance
educators' effectiveness in the classroom.
21
<PAGE>
Based on 1996 data from QED, the K-12 marketplace in the United States
consists of approximately 107,500 public and private schools. According to the
National Center for Education Statistics, the number of students enrolled in
these schools was approximately 51.7 million in 1996 and is expected to
increase to 54.6 million by the year 2006. According to QED, K-12 public
schools in the United States invested $4.1 billion on educational technologies
in 1996. Of this amount, industry sources estimate that approximately $630
million was invested in educational software, which amount is expected to
increase to $1.1 billion by the year 2000, representing a 15% compound annual
increase. Moreover, according to data obtained from the Software Publishers
Association, the installed base of computers in K-12 schools in the United
States will grow from approximately 5.5 million units in 1995 to 10.0 million
units by the year 2000, a 13% compound annual increase.
In addition to this increased spending on educational technologies, the
Company believes that there is a growing trend towards requiring better
assessment of student performance and increased accountability of educators
and school systems. At present, 41 states use some form of norm-referenced
assessment tool to measure student performance in core curriculum areas. The
Company also believes there is a growing trend towards requiring more and
better professional development training for educators, as highlighted in the
Department of Education's Goals 2000 program.
The increased public concern over the effectiveness of K-12 schools in
teaching essential academic skills and the rapidly growing role of technology
in the K-12 marketplace have created an increased demand for technology-based
solutions which measure and improve student academic performance and for
professional development training which enables educators to effectively
implement these solutions. However, few providers of educational technology
products have developed tools with demonstrated effectiveness in improving
student academic performance because most products (i) provide inadequate
feedback useful to educators in tailoring instruction to individual students,
(ii) seek to replace educators by attempting to teach skills rather than
support their efforts by encouraging extensive practice on those skills, (iii)
compete with existing curricula and instructional methodologies, (iv) fail to
maintain student interest and (v) require more advanced technology and/or
larger numbers of computers than are typically available in schools. The
Company believes there is a growing market demand for technology-based
learning information systems that motivate students and achieve measurable
results.
THE ADVANTAGE LEARNING SYSTEMS SOLUTION
The Company develops, markets and supports learning information systems
which improve student academic performance by intensifying literature-based
reading practice and increasing the quality, quantity and timeliness of
information available to educators. Until recently, the Company's products
have focused exclusively on improving reading because reading is fundamental
to a student's overall academic performance. The Company's flagship product,
the Accelerated Reader, administers computer-based multiple choice tests on
approximately 12,000 books popular among students in grades K-12. Each test
verifies that the student has read and comprehended a book. For each book
read, the Accelerated Reader tracks the amount of reading practice by
calculating points based on the length and difficulty of the book and the
student's performance on the test, and makes these data available to educators
through a variety of reports. S.T.A.R., the Company's computer-adaptive
reading test and database, supplies educators with norm-referenced reading
scores for each of their students typically in 10 minutes or less by selecting
test questions based on a student's pattern of previous responses. Because
S.T.A.R. can be administered several times per year, it provides educators
with a database of reading level information that enables tracking of
students' progress through the school year. The Company's Reading Renaissance
professional development training combines the Company's learning information
systems technology and classroom techniques to improve reading performance by
increasing in-school accountable reading practice.
The Company believes the combination of the Accelerated Reader, S.T.A.R. and
Reading Renaissance offers the following key benefits:
Improved Student Academic Performance. The Company is committed to
developing and releasing only those products which have demonstrated
effectiveness in improving student academic performance. The Accelerated
Reader, coupled with the techniques taught in the Reading Renaissance training
program, improves student academic performance by providing educators with an
effective system to motivate students to practice reading and encourage
students to select longer, more challenging books. Independent studies on the
effectiveness of the Accelerated Reader
22
<PAGE>
have demonstrated that use of the Accelerated Reader improves standardized
test performance in reading. A recent study conducted by the Institute based
on publicly available quantitative data confirms this result and indicates
that use of the Accelerated Reader improves standardized test performance in
other academic subject areas as well, including math, science, social studies
and writing.
Ability to Assess Student Progress. The Accelerated Reader and S.T.A.R.
provide educators with timely, accurate information to manage the learning
process within their existing curricula. The objective measurement data
derived from the Company's products enable teachers to continually monitor
students' academic progress and easily identify individual students who may
require special attention.
Suitability for K-12 School Environment. The Accelerated Reader and S.T.A.R.
are easy to use by both students and educators and are capable of running on
substantially all of the computers and hardware platforms currently found in
K-12 schools. Even schools with a limited number of computers can use the
Company's products since these products emphasize literature reading by the
student and do not require extensive individual time on the computer. In
addition, the Accelerated Reader is used in conjunction with books already
commonly found in most K-12 school libraries.
Supportive of Educators. Rather than attempting to teach skills, thereby
replacing educators, the Company's products and services provide educators
with tools to encourage increased skills practice and to track student
academic performance. Due to this focus on practice and measurement, the
Company's products complement, rather than compete with, existing curricula
and instructional methodologies. As a result, educators remain in control of
the learning process.
Cost-Effective Solution. The cost of the Company's products generally
enables schools to purchase such products within their normal budgets. In
addition, schools may purchase the Company's products for use in a single
classroom, and have the flexibility to acquire additional products for more
classrooms as usage increases.
GROWTH STRATEGY
The Company seeks to establish its products as the de facto standard for
facilitating growth in reading ability, and ultimately in other essential
academic skill areas in grades K-12. The key elements of this strategy are as
follows:
Add New Customer Schools. The Company intends to increase its market
penetration by continuing to add new customer schools. As of June 30, 1997,
the Accelerated Reader has been sold to approximately 29,700 K-12 schools,
which represents approximately 24% of the total number of schools in the
United States and Canada and an approximately 29% increase in the number of
schools using the Accelerated Reader over the same period in the prior year.
In addition, as of June 30, 1997, S.T.A.R. has been sold to approximately
4,900 K-12 schools. The Company plans to add new customer schools by
increasing its direct marketing efforts and extending its strategic alliances.
Intensify and Expand Use of Products by Existing Customer Schools. The
Company intends to intensify and expand the use of its products by existing
customers. Although the Accelerated Reader has been sold to approximately 24%
of the K-12 schools in the United States and Canada, most schools begin using
the product as a supplementary or voluntary program in a small percentage of
classrooms, thereby creating the opportunity for the Company to intensify
usage in these classrooms and expand usage to other classrooms and other grade
levels. The Company's experience has been that increased use of the
Accelerated Reader leads to increased sales of supplemental test disks,
S.T.A.R. and Reading Renaissance professional development training. To
increase the use of its products, the Company continuously develops new book
tests, publishes newsletters, catalogs and research relating to the
effectiveness of its products, sponsors seminars and maintains communication
with customers through its telephone sales force. The Company expects to
develop approximately 1,500 additional tests in the second half of 1997.
Offer New Products in Other Curriculum Areas. The Company intends to develop
groups of products similar to its reading products for other areas of the K-12
curriculum. Through its acquisition of IPS, a leading developer of algorithm-
based software for assessment and skills practice in math and science, the
Company has begun to develop math products similar to the Accelerated Reader
and S.T.A.R.
Expand International Marketing and Sales. The Company intends to expand its
international marketing and sales. To date, the Company has marketed and sold
the Accelerated Reader in Canada and to several schools in the
23
<PAGE>
United Kingdom, which have begun using it on a pilot basis. In addition, IPS
markets and sells Spanish bilingual versions of its math products in the
United States and neighboring Spanish-speaking countries. As the Company
develops new products, it plans to expand its marketing and sales efforts into
other foreign countries.
Expand Market Presence Through Strategic Alliances. In order to penetrate
the K-12 marketplace more rapidly, the Company has established strategic
alliances with educational book distributors and publishers. These firms are
particularly receptive to such alliances because use of the Company's products
in schools encourages, rather than competing with, the sale of books and other
products sold by these firms. The Company believes that such firms are under
increasing pressure from many customers to offer products supported by the
Accelerated Reader. In addition, the Company intends to seek strategic
alliances with other firms with an interest in education and literacy.
PRODUCTS
OVERVIEW
The Company offers three core products for use in the K-12 marketplace: the
Accelerated Reader, S.T.A.R. and Reading Renaissance. Together, these learning
information system products improve student academic performance by
intensifying literature-based reading practice and increasing the quality,
quantity and timeliness of information available to educators. The Company's
products historically have concentrated on reading. The Company is expanding
its product offerings into math with the Company's recent acquisition of IPS.
The following table summarizes the Company's primary product offerings and
price ranges as of August 25, 1997:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRICE RANGE
<C> <S> <C>
Accelerated Reader Reading practice management software; $399-$2,999
available in Starter Kits (150-200 book
tests), Economy Kits (850-1,000 book tests
plus a voucher to attend a one-day Reading
Renaissance training seminar) or Super Kits
(includes the Accelerated Reader Economy
Kit, S.T.A.R., Enhanced Support Plans for
the Accelerated Reader and S.T.A.R. and a
voucher to attend a one-day Reading
Renaissance training seminar)
- ------------------------------------------------------------------------------------------
Accelerated Reader Computer disks containing supplemental tests $52-$76
supplemental test on additional books to expand Starter,
disks Economy or Super Kits (approximately 50
tests per disk); currently 12,000 tests
available
- ------------------------------------------------------------------------------------------
S.T.A.R. Computer-adaptive reading test and database $399-$1,499
- ------------------------------------------------------------------------------------------
Enhanced Support Two-year contracts for telephone support of $149-$249 initial
Plans ("ESP") software (available for the Accelerated (also included in Ac-
Reader and S.T.A.R.) celerated Reader
Economy Kits); $149-
$199 renewal
- ------------------------------------------------------------------------------------------
Reading Renais- Professional development training for Scheduled seminars,
sance educators; delivered through scheduled $109-$545 per attend-
seminars and school sponsored events ee; sponsored events,
$1,500-$20,000 per
event
- ------------------------------------------------------------------------------------------
Math and Science Off-the-shelf and custom math and science $295 for off-the-
Products test and worksheet generators, and student shelf
objective and achievement databases products; $5,000-
$40,000 per project
for custom products
- ------------------------------------------------------------------------------------------
Other Related Video and printed training materials, Varies
Products graphics and motivational items
</TABLE>
- -------------------------------------------------------------------------------
24
<PAGE>
THE ACCELERATED READER
The Accelerated Reader is a learning information system for motivating and
monitoring increased literature-based reading practice. As of June 30, 1997,
the Accelerated Reader has been sold to approximately 29,700 K-12 schools in
the United States and Canada and, according to a survey published by EMR in
the fall of 1995, is the reading software product most frequently named by
educators as used in support of reading and language arts curricula in
kindergarten through sixth grade. EMR is an independent research organization
that conducts research and publishes studies on education. The EMR survey was
not commissioned by the Company and was obtained from EMR for $495. In
addition, according to a survey published by QED in December 1994, the
Accelerated Reader is one of the products that educators most frequently cite
as being used to improve the quality of education in K-12 schools. QED is an
independent company which collects and maintains information on educators. The
QED survey was not commissioned by the Company and was obtained free of charge
from QED. Likewise, in a survey sponsored by the School Library Journal and
conducted by Cahners in March 1997, of schools/librarians that use
computerized reading programs, 70% of the respondents cited the Accelerated
Reader as the program they used. The School Library Journal is a publication
of the American Association of School Librarians and Cahners is a publishing
and market research firm. Neither the School Library Journal nor Cahners is
affiliated with the Company. The Cahners study was not commissioned by the
Company and the information contained therein was published in the School
Library Journal and acquired free of charge by the Company. The Accelerated
Reader has received numerous awards and recognition, including the Association
for Supervision and Curriculum Development's "Only the Best" designation.
The Accelerated Reader is designed to be very easy to use by students and
educators alike. A student selects a book from a list of books for which the
school has an Accelerated Reader test at an appropriate reading level and
reads the book. The student then takes a multiple choice test on a computer.
The questions contained in the tests are carefully drafted to ensure that a
student who has thoroughly read a book at the appropriate level will pass. For
each book read, the Accelerated Reader tracks the amount of reading practice
achieved by calculating points based on the length and difficulty of the book
and the student's performance on the test. The information generated from this
process--titles read, percent of comprehension and amount of reading done--
creates a database of student reading achievement. From this database, the
Accelerated Reader generates more than 20 different reports from which
educators can monitor the amount and quality of reading practice for each of
their students and easily identify individual students who may require special
attention. The Company currently has a library of more than 12,000
computerized book tests. The Company developed approximately 2,500 tests in
1996 and expects to develop approximately 1,500 additional tests in the second
half of 1997. Titles on disk are organized by reading level and subject
matter. Continued usage of the Accelerated Reader creates demand for
additional tests, S.T.A.R., Reading Renaissance training and related products.
In addition, the Company has begun to develop a Spanish/English version of the
Accelerated Reader for bilingual students. The Company is also completing
development of AR BookGuide, a database listing of all books covered by
Accelerated Reader tests, in a format allowing searches by author, reading
level, topic and other variables to facilitate creation of custom book lists
for students and for ordering additional tests.
STANDARDIZED TEST FOR ASSESSMENT OF READING (S.T.A.R.)
S.T.A.R. is a computer-adaptive reading test which the Company believes is
the first software to provide reading scores statistically correlated to
national norms in ten minutes or less at the computer. S.T.A.R. administers a
series of multiple choice questions for which students choose the best word to
complete each sentence. S.T.A.R. adapts itself to each student's reading level
by applying a proprietary branching logic which evaluates the pattern of the
student's answers to determine the level of difficulty required for subsequent
questions. The results from this test provide educators with a database of
statistically accurate reading level information on their students from which
they can generate useful reports and adjust instructional strategies
accordingly. S.T.A.R. is easy to use and can be administered several times per
year. The Company announced S.T.A.R. in the spring of 1996 and started
shipping it to customers in the fall of 1996. As of June 30, 1997, S.T.A.R.
has been sold to approximately 4,900 schools. In 1997, Media & Methods
magazine, a professional journal for instructional technology educators,
selected S.T.A.R. as an Awards Portfolio Winner in its annual competition to
determine the best education equipment, resources and system products. Because
of its repeated successes in this competition, the Company has been inducted
into Media & Methods' "Hall of Fame," in recognition of the Company's status
as "a consistent provider of superior quality educational products."
25
<PAGE>
ENHANCED SUPPORT PLANS
The Company offers Enhanced Support Plans which provide users of the
Accelerated Reader and S.T.A.R. access to telephone support beyond the six-
month period of support included with the purchase of the software, and other
benefits such as free or reduced-cost upgrades. Packaged with Accelerated
Reader economy kits and sold as add-ons to buyers of Accelerated Reader starter
kits and S.T.A.R. kits, ESPs entitle educators to expert help resolving
questions regarding technical problems with Company products, networks, and
other software interacting with Company products.
READING RENAISSANCE
The Reading Renaissance program provides educators with professional
development training to most effectively use the Accelerated Reader, S.T.A.R.
and the learning information they generate. This training combines technology
and classroom techniques to increase in-school accountable reading practice.
Through the Institute, the Company offers a variety of Reading Renaissance
seminars and workshops, including one- to three-day scheduled training
programs, which are conducted throughout the year at various hotel locations in
the United States, and on-site training programs pursuant to which the
Institute's training staff visit an individual school, school district or
region to conduct a seminar or workshop. The Institute's training staff
consists of 36 presenters, most of whom are K-12 educators who use the Reading
Renaissance techniques in their own classrooms. Since its inception in late
1993, the Institute has trained approximately 39,500 educators, of whom
approximately 22,000 were trained in 1996.
To encourage educators who have completed Reading Renaissance training to
implement the methodology fully, the Institute in 1995 initiated the "Model
Classroom" certification program. This program recognizes educators who meet
certain objective implementation standards related to the amount of accountable
reading among students, regular diagnosis and intervention with at-risk
students, and other key variables. As of August 25, 1997, the program has
received approximately 1,800 applications and certified 996 "Model Classroom"
teachers, and 37 "Model Schools" in which the majority of classrooms have
"Model Classroom" teachers.
The Company also produces videotapes and manuals to be used in conjunction
with its training programs. Further, through the Institute, the Company
conducts research on best practices, performs field validation of techniques,
and gathers information to guide the development of the Company's learning
information systems.
MATH AND SCIENCE PRODUCTS
Through its subsidiary, IPS, the Company develops algorithm-based software
for assessment and skills practice in math and science. IPS has a proprietary
library of more than 20,000 algorithms, each capable of generating virtually
unlimited variations of specific math and science problems. These algorithms
are incorporated into off-the-shelf software for sale to educators and custom
software developed primarily for educational textbook publishers and school
districts. Current products include Objective Tracker and MathCheck. Objective
Tracker is a test and worksheet generator which allows educators, schools and
school districts to specify precise academic objectives and track the
attainment of those objectives for each student. Objective Tracker is available
in both off-the-shelf and custom forms. The Company has begun to use IPS
products as a basis for developing math products similar to the Accelerated
Reader and S.T.A.R.
OTHER RELATED PRODUCTS
The Company sells other products to support its primary products, including
video and printed training materials, graphics and motivational items.
PRODUCT DEVELOPMENT
The Company believes that continued investment in product development is
required to remain competitive in the K-12 marketplace. The Company invests
continuously in the development of new products, enhancement of
26
<PAGE>
existing products and development of tools to increase the efficiency of
product development. For the years ended December 31, 1994, 1995 and 1996, and
for the six months ended June 30, 1997, the Company expended approximately
$598,000, $919,000, $1.9 million and $1.3 million, respectively, on product
development (including amounts capitalized).
As of June 30, 1997, the Company employed 34 persons dedicated to product
development and software design. The Company expects this number to increase
in the next year. The Company's product development staff has a high level of
expertise in learning information theory, test writing, interface design,
software engineering, quality assurance and technical writing.
The Company generates new product concepts which it believes will help
educators improve student academic performance, based on the Company's
understanding of learning information theory and the need for practice of
essential academic skills. These product concepts are then refined based on
feedback from its customers, which the Company continuously solicits and
incorporates throughout the new product development process. Based on the
refined product concepts, product proposals are then formulated by the product
development group and reviewed by management to determine which should be
developed into prototypes. The product development and software design groups
collaborate to create the prototypes, which are then tested in customer
schools. From this market testing, the Company creates product specifications.
However, before beginning production, management makes a final evaluation of
each new product to determine that it is both desired by educators and
effective in meeting their needs. The Company also continuously expands its
library of book tests by creating supplemental Accelerated Reader test disks
and creates new algorithms and algorithm libraries for MathCheck and Objective
Tracker.
The Reading Renaissance professional development training program was
originally developed, and is continually refined, through field experience
with the Accelerated Reader and research by the Institute staff. Through the
Institute, the Company conducts research into effective education techniques
related to the Company's products and services. This research provides the
staff with a standard against which to develop and refine training programs to
help educators accelerate learning.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products primarily to individual educators in the K-
12 market, including teachers, school librarians and principals. The Company
is also beginning to market its products to entire schools and school
districts. The Company's sales and marketing strategy consists primarily of
direct marketing to potential and existing customers. The Company uses a
variety of lead generating techniques, including trade shows, advertisements
in educational publications, direct mail, Web sites and referrals. Once
product literature has been forwarded to a current or potential customer, one
of the Company's in-house staff of 31 telephone sales representatives contacts
the customer to answer questions and, ultimately, direct the customer to a
purchase. Having an in-house sales force affords the Company better control
over its marketing efforts.
In addition, the Company currently has resale arrangements with five U.S.
and two Canadian book distributors which are authorized to sell the
Accelerated Reader to their customers. Sales to Perma-Bound, a division of
Hertzberg-New Method, Inc. ("Perma-Bound"), accounted for 2.6%, 12.5%, 15.2%
and 13.6% of the Company's net sales in 1994, 1995, 1996 and the first half of
1997, respectively. The Company believes this growth represented maturation of
Perma-Bound's field sales efforts and anticipates that, as a percentage of net
sales, sales to schools through Perma-Bound will not significantly increase.
Under these resale arrangements, distributors take orders which are then
filled by the Company. This control over product shipment ensures premium
customer service and retention of customer contacts for future marketing and
sales opportunities.
In addition to the book distributors which resell the Company's products,
approximately 14 other book distributors and publishers promote the sale of
the Accelerated Reader by publishing special catalogs that advertise book sets
assembled specifically for Accelerated Reader test disks. Further, 31
distributors and publishers have engaged the Company to create test disks to
support their product lines. The Company retains the proprietary rights to all
tests created. The Company intends to seek additional strategic alliances with
book distributors and publishers and
27
<PAGE>
to use alliances formed by IPS to expand its base of strategic partners to sell
its products. Furthermore, the Company plans to continue to develop other
cross-marketing arrangements with third-party firms selling non-competing
products into the education market.
The Company believes it maintains a very high level of customer satisfaction.
Historically, the Company has experienced less than a 2% rate of return for its
products.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Most of the Company's customers have low levels of computer knowledge and do
not have any technical support on-site to assist them. The Company therefore
provides a variety of customer and technical support services to purchasers of
its software products. In order to provide the level of customer service that
results in a consistently high level of customer satisfaction, the Company
employs an experienced staff of technical service representatives who are
capable of answering technical questions relating to the Company's software
products, regardless of platform, as well as questions regarding hardware and
networks. Two full-time computer programmers support the telephone service
representatives by helping to answer customer questions by recreating the
customer's problem in the Company's simulation laboratory.
PRODUCTION
Currently, all of the Company's software products are distributed on
diskettes, except for AR BookGuide which will be distributed on CD-ROM. The
Accelerated Reader and S.T.A.R. disks are duplicated and packaged at Company
headquarters, with the exception of Apple II disks which are produced by a
third-party contractor. Other related products, including videotapes, books,
graphics and motivational items, are purchased from third-party vendors. IPS's
math and science custom software products are produced at its offices in
Vancouver, Washington and provided to customers in master form which allows the
customer to duplicate the software. IPS's off-the-shelf products such as
MathCheck are also produced by in-house staff, but duplicated by a third-party
contractor.
COMPETITION
The K-12 educational technology and professional development markets in which
the Company operates are very competitive. The Company competes primarily
against more traditional methods of education, training and testing, including
pencil and paper testing. In addition, the Company competes with other
companies offering educational software products to schools, including larger
companies with greater resources than the Company, such as International
Business Machines Corporation, Apple Computer, Inc., Broderbund Software, Inc.,
and The Learning Company, Inc. The Company also competes with certain other
companies, including The Electronic Bookshelf Inc. and Booksharp, which offer
software products which are more directly competitive with the products offered
by the Company. Many other companies, including Microsoft Corp. and Walt Disney
Co., provide educational software products which the Company believes are not
marketed primarily to schools. While the Company's existing competitors may
broaden their product lines, and potential competitors, including large
hardware manufacturers, software developers and educational publishers, may
enter or increase their focus on the school market, the Company believes it is
well positioned to continue to compete favorably in the markets in which it
participates.
INTELLECTUAL PROPERTY
The Company regards certain of its technologies as proprietary and relies
primarily on a combination of copyright, trademark and trade secret laws and
employee non-disclosure agreements to establish and protect its proprietary
rights. Although the Company has filed a patent application which covers the
technology developed by IPS to automatically generate and format examinations
that include math expressions, the Company does not currently possess any
patents or other registered intellectual property rights with respect to its
software. There can be no assurance that the steps taken by the Company to
protect its rights will be adequate to prevent or deter misappropriation. The
Company believes that factors such as the technological and creative skills of
its personnel and the quality of the content of its products may be more
important in establishing and maintaining a leadership position within the
industry than are the various legal protections of its technology, but that
such legal protections may also be a part of the Company's long-term strategy.
28
<PAGE>
While the Company believes that its products, trademarks and other
proprietary rights do not infringe upon the proprietary rights of third
parties, as the number of software products in the educational technology
industry increases and the functionality of these products begins to overlap,
software developers may become increasingly subject to infringement claims.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products, trademarks or other Company works or that any such assertion may not
require the Company to enter into royalty arrangements or result in costly
litigation.
The software market has traditionally experienced widespread unauthorized
reproduction of products in violation of intellectual property rights. Such
activity is difficult to detect and legal proceedings to enforce intellectual
property rights are often burdensome and involve a high degree of uncertainty
and costs. While the Company electronically codes its software products to
protect against unauthorized copying and use, there can be no assurance that
the Company's software products will not experience unauthorized reproduction.
EMPLOYEES
As of June 30, 1997, the Company had 274 full and part-time employees. The
Company believes its relations with employees are good. None of the Company's
employees is represented by a union or subject to collective bargaining
agreements.
PROPERTIES
The Company owns a 125,000 square foot facility in Wisconsin Rapids,
Wisconsin which was completed in December 1996. Approximately one-third of the
Wisconsin Rapids facility is currently occupied. The Company leases its former
office facility in Wisconsin Rapids, Wisconsin under a two year lease which
expires in June 1999, and which provides the tenant with an option to purchase
the property. The Institute leases 10,000 square feet of office space in
Madison, Wisconsin, which lease expires in April 2000. IPS leases 3,000 square
feet of office space in Vancouver, Washington, which lease expires in January
1999. While the Company believes its facilities are adequate for its current
operations, the Company anticipates leasing additional office space in Madison
and Vancouver during the next 12 to 18 months.
BACKLOG
Because ALS generally ships products as orders are received, it has
historically operated with very little or no backlog. The Institute and IPS,
however, operate in the normal course of business with backlogs. As of June 30,
1997, the Institute and IPS had backlogs which aggregated approximately
$1,383,000 and $446,000, respectively. With respect to the Institute,
approximately $1,334,000 of this backlog is expected to be eliminated by the
end of 1997, with the remaining amount eliminated by the end of February 1998.
With respect to IPS, all of the backlog that existed as of June 30, 1997 is
expected to be eliminated by the end of 1997.
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to its
business. The Company is not currently a party to any litigation.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of August 25, 1997
are:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------ --- --------------------------------------------------------
<S> <C> <C>
Judith A. Paul.... 50 Chairman of the Board
Terrance D. Paul.. 50 Vice Chairman of the Board
Michael H. Baum... 50 Chief Executive Officer and Director
John R. Hickey.... 41 President and Director
Timothy P. Welch.. 55 Director
Richard W. Fickey. 57 Secretary and Vice President, Finance and Administration
</TABLE>
Judith A. Paul is the co-founder of the Company and has been Chairman of the
Board of Directors since 1986. In addition to her continuing and active
involvement in the daily operations of the Company, including serving as the
Company spokesperson and coordinating the Company's public relations and
customer communication policies, Ms. Paul has published 101 Ways to Motivate
Students to Read (1995), The Family Reading Night Kit (1996) and The Literacy
Partnership Kit (1997). Ms. Paul holds a bachelors degree in elementary
education from the University of Illinois.
Terrance D. Paul is the co-founder of the Company and has been Vice Chairman
of the Board of Directors since July 1996. Mr. Paul is primarily responsible
for the Company's long-term strategic planning and new product development
strategy. Mr. Paul also coordinates the research activities conducted by the
Institute. From November 1995 until July 1996, Mr. Paul served as the
Company's Chief Executive Officer. From January 1992 until August 1993 and
again from September 1994 until November 1995, Mr. Paul served as President of
the Company. For the 12 years prior to 1992, Mr. Paul was President of Best
Power Technology, a manufacturer of uninterruptible power supplies. Mr. Paul
is the author of several publications, including How to Create World-Champion
Readers (1993), Patterns of Reading Practice (1996) and The New Technology of
Learning Information Systems (1997). He is also the general editor of
Fundamentals of Reading Renaissance (1994-1996), the textbook used in seminars
on reading improvement by the Institute. Mr. Paul holds a law degree from the
University of Illinois and an MBA from Bradley University. Terrance Paul is
Judith Paul's husband.
Michael H. Baum has been Chief Executive Officer of the Company since July
1996. Mr. Baum served as President of the Company between November 1995 and
June 1996. From September 1994 until November 1995, Mr. Baum served as the
Managing Director of the Institute and from June 1994 until September 1994, he
served as the Director of Educational Consulting for the Institute. From 1984
until June 1994, Mr. Baum held a variety of positions with Francorp, Inc., an
international management consulting firm based in Chicago, his last position
being that of Executive Vice President, which he held from September 1991
until June 1994. Mr. Baum holds a bachelors degree and a masters degree in
teaching from Yale University and an MBA from Northwestern University.
John R. Hickey has been President of the Company since July 1996. From
January 1996 until June 1996, Mr. Hickey served as Executive Vice President of
R.F. Technologies, Inc., a manufacturer of protection devices, and from
September 1995 until December 1995, he served as Executive Vice President of
Liebert Corporation (a subsidiary of Emerson Electric), a manufacturer of
uninterruptible power supplies. From January 1989 until June 1995, Mr. Hickey
held various senior management positions with Best Power Technology, including
Executive Vice President of Operations, Senior Vice President of Sales and
Marketing and Vice President-International. In addition, Mr. Hickey spent
approximately ten years with Briggs and Stratton, a manufacturer of air-cooled
gasoline engines for outdoor power equipment, headquartered in Milwaukee,
Wisconsin. While at Briggs and Stratton, Mr. Hickey served in various
management positions, eventually rising to the position of the Director of
International Sales and Finance Administration, a position he held from
October 1985 until January 1989. Mr. Hickey holds a bachelors degree in
international business from the University of Wisconsin.
Timothy P. Welch is the founder of the predecessor to IPS. Since June 1997,
Mr. Welch has served as a consultant to IPS. From August 1996 until June 1997,
Mr. Welch served as the Chief Executive Officer of IPS, and
30
<PAGE>
for the 15 years prior thereto, he served as the President of its predecessor.
Mr. Welch is also the founder and Chief Executive Officer of Curriculum
Technologies, Inc., a firm specializing in multi-media compact disc
development for the adult literacy and English as a second language markets.
Mr. Welch holds a bachelors degree in journalism from the University of
Wisconsin.
Richard W. Fickey joined the Company as Secretary and Vice President of
Finance and Administration in January 1997. Prior to that, Mr. Fickey was
employed by Rapid Signs, a sign company which he founded in 1991, and
Independent Systems Consultants, a partnership that provides management and
information systems consulting services, which he co-founded in 1992. For the
24 years prior thereto, Mr. Fickey was employed by Great Northern Nekoosa, a
paper manufacturer, in various positions including, most recently, Treasurer
and Vice President of Administration of the Nekoosa Papers division. Mr.
Fickey holds a bachelors degree in industrial engineering from Iowa State
University and an MBA from the University of Wisconsin.
The Company will add two independent directors to its Board of Directors
(the "Independent Directors") concurrently with the completion of the
Offering. Information concerning these directors, Messrs. Akins and Grunewald,
is set forth below.
Perry S. Akins will be joining the Board of Directors concurrently with the
completion of the Offering. From 1966 to the present, Mr. Akins has been
employed by ELS Educational Services, Inc. ("ELS") (formerly known as
Washington Educational Research Associates, Inc.) in various capacities. He is
currently the President of ELS and has served in that position since 1977. ELS
teaches English as a second language to students and professionals at its
various ELS Language Centers in the United States and abroad. ELS also
publishes and distributes English as a second language materials worldwide.
Mr. Akins holds a bachelors degree in Russian language and history and a
masters degree in education with a minor in Russian language from Southern
Illinois University.
John H. Grunewald will be joining the Board of Directors concurrently with
the completion of the Offering. From September 1993 to January 1997, Mr.
Grunewald served as the Executive Vice President, Chief Financial Officer and
Secretary of Polaris Industries Inc., a manufacturer of snowmobiles, all-
terrain vehicles and personal watercraft. From June 1977 until June 1993, Mr.
Grunewald served as the Vice President of Finance, Chief Financial Officer and
Secretary of Pentair, Inc., a diversified manufacturing company. Mr. Grunewald
currently serves as a director of the Nash Finch Company, a wholesale food
distributor, Braun Engineering, an environmental engineering company, and
Hydrobikes, Inc., a manufacturer of recreational water bikes. Mr. Grunewald
also serves as the Chairman of the Board of Rise, Inc., a charitable
institution providing occupations for handicapped and disabled children, and
as a member of the Board of Governors of the Bethel College Foundation. Mr.
Grunewald holds a bachelors degree in business from St. Cloud State University
and an MBA in business finance from the University of Minnesota.
Directors of the Company are elected at the annual shareholders' meeting to
serve until the next annual meeting of shareholders or until their respective
successors are elected and qualified. Officers of the Company serve at the
discretion of the Board of Directors. Terrance and Judith Paul are husband and
wife. There are no other family relationships among any of the directors or
officers of the Company. Pursuant to his employment agreement with IPS,
Timothy Welch has agreed to serve on the Board of Directors of both IPS and
ALS, subject to shareholder approval, for the term of the agreement. See "--
Management Employment Agreement."
After the Offering, the Board of Directors will establish two standing
committees: the Audit Committee and the Compensation Committee. The Audit
Committee will recommend the appointment of auditors and oversee the
accounting and audit functions of the Company. The Compensation Committee will
determine executive officers' compensation and will administer the Company's
executive compensation plans, including the 1997 Stock Incentive Plan. Messrs.
Akins and Grunewald will comprise both the Audit Committee and the
Compensation Committee.
Each director of the Company who is not an employee of the Company will
receive $1,000 for each meeting of the Board of Directors attended and $500
for each committee meeting attended, plus out-of-pocket expenses incurred in
connection with attendance at such meeting. In addition, concurrently with the
completion of the Offering, each
31
<PAGE>
non-employee director will receive options to purchase a total of 5,000 shares
of Common Stock at the initial public price per share, which options will vest
50% after one year and 50% after two years. The Company will grant an
additional 3,000 shares to each such director at the conclusion of each of the
first and second years of service with the Company (i.e., 6,000 shares total
per director), both of which grants will have two year vesting schedules.
These options will be granted pursuant to the 1997 Stock Incentive Plan. See
"--1997 Stock Incentive Plan."
The Company currently maintains key person life insurance on Messrs. Paul,
Baum and Hickey in the amount of $5.0 million, $1.0 million and $500,000,
respectively.
EXECUTIVE COMPENSATION
Summary Compensation Information. The following table sets forth all cash
compensation paid or accrued for services rendered to the Company for the year
ended December 31, 1996 to the Company's Chief Executive Officer and the other
executive officers whose salary and bonus exceeded $100,000 (collectively, the
"named executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
------------ ------------
PAYOUTS
------------
NAME AND LTIP ALL OTHER
PRNCIPAL POSITIONI SALARY PAYOUTS COMPENSATION(1)
- ------------------ ------------ ------- ---------------
<S> <C> <C> <C>
Judith A. Paul
Chairman of the Board............... $156,184 -- $5,230
Terrance D. Paul
Vice Chairman of the Board.......... 156,184 -- 5,969
Michael H. Baum
Chief Executive Officer............. 141,080 $1,849 5,587
</TABLE>
- --------
(1) Reflects 401(k) plan matching amount paid by the Company.
Compensation Committee Interlocks and Insider Participation. For the year
ended December 31, 1996, the Company did not have a compensation committee.
However, Judith Paul, Terrance Paul and Michael Baum participated in
deliberations concerning executive officer compensation.
Management Employment Agreement. On August 1, 1996, IPS entered into an
Employment Agreement (the "Employment Agreement") with Timothy Welch in
connection with the Company's acquisition of substantially all of the assets
of the IPS business. See "Certain Transactions." Pursuant to such agreement,
Mr. Welch agreed to serve as IPS's Chief Executive Officer and to serve as a
member of the Board of Directors of both IPS and ALS, subject to shareholder
approval, for the term of his Employment Agreement. The Employment Agreement
has a term of two years and provides for an annual salary of $125,000, which
may be increased but not decreased during the term of the agreement. Effective
June 1, 1997, Mr. Welch resigned as Chief Executive Officer of IPS; however,
the Employment Agreement has not been terminated and Mr. Welch remains as a
director of the Company. Mr. Ric Rocca, who previously served as the Sales and
Marketing Manager of IPS, succeeded Mr. Welch as Chief Executive Officer of
IPS. Mr. Welch is also entitled to receive such other benefits generally
available to executive employees of IPS. Mr. Welch is also entitled to receive
deferred compensation under certain employee benefit plans adopted by ALS and
the Institute and to participate in such stock-based incentive plans as the
Company may adopt, including the 1997 Stock Incentive Plan. As of June 30,
1997, Mr. Welch has been awarded an aggregate of 100 shares of phantom stock
under the terms of the phantom stock plans adopted by ALS and the Institute,
for which he will receive a cash payment from the Company following the
Offering of approximately $110,000 (assuming an initial public offering price
of $13.00 per share). See "--Phantom Stock Plans." In addition, pursuant to
the Employment Agreement, Mr. Welch has agreed not to compete with ALS, IPS or
the Institute during his employment and for a period of two years following
termination of his employment and has agreed to maintain as confidential the
Company's proprietary information and trade secrets. IPS and Mr. Welch may
each unilaterally terminate the Employment Agreement under certain
circumstances upon 30 days written notice to the other party.
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<PAGE>
1997 Stock Incentive Plan. The Board of Directors of the Company has adopted
the 1997 Stock Incentive Plan (the "Stock Incentive Plan") to provide officers
and other key employees of the Company and its subsidiaries, as well as
Independent Directors, with additional incentives by increasing their
proprietary interest in the Company. An aggregate of 1,500,000 shares of
Common Stock is subject to the Stock Incentive Plan, of which a maximum of
750,000 are subject to incentive stock options. In addition, no one person may
receive options or rights over more than 750,000 shares during the term of the
Stock Incentive Plan.
The Stock Incentive Plan permits the Company to grant awards in the form of
stock options (including both incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
and non-qualified stock options), stock appreciation rights and restricted
shares of Common Stock (individually, an "Award" and collectively, "Awards").
All stock options awarded under the Stock Incentive Plan will be granted at an
exercise price of no less than fair market value of the Common Stock on the
date of grant. No Award may be granted under the Stock Incentive Plan after
March 28, 2007.
The Stock Incentive Plan will be administered by the Compensation Committee
of the Board, which will have exclusive authority to grant Awards under the
Stock Incentive Plan and to make all interpretations and determinations
affecting the Stock Incentive Plan. The Compensation Committee will have the
discretion to determine the individuals to whom Awards are granted, the amount
of such Award, any applicable vesting schedule and other terms of any Award.
In the event of any changes in the capital structure of the Company, the
Compensation Committee will make equitable adjustments to outstanding Awards
so that the net value of the Award is not changed. Any unvested Awards will
vest upon the occurrence of a Change in Control of the Company (as defined in
the Stock Incentive Plan).
The Company anticipates that prior to the Offering, it will have outstanding
options to purchase a total of approximately 277,846 shares of Common Stock
(assuming an initial public offering price of $13.00 per share) exercisable at
the initial public offering price. The vesting schedule for employees is 25%
per year with each option being fully exercisable four years from the date of
grant. The Company has not granted any other Awards under the Stock Incentive
Plan as of the date hereof.
Phantom Stock Plans. Prior to this Offering, ALS and the Institute each had
in place a phantom stock plan (the "ALS Plan" and the "Institute Plan,"
respectively) for the benefit of certain employees. In 1996, Mr. Baum received
an award of 50 shares of phantom stock under the plans. Under each plan, each
share of phantom stock granted entitles the owner of such share to an annual
payment equal to 0.001% of the respective company's net profits before taxes.
Upon the occurrence of certain "triggering events," including the
effectiveness of a registration statement filed in connection with an initial
public offering of common stock, each share of phantom stock granted to
employees of the affected company is entitled to payment equal to 0.001% of
the difference between the fair market value and the book value per share of
such company as of the end of the month preceding the triggering event.
Although the effectiveness of the registration statement relating to the
Offering is a triggering event under the ALS Plan, it is not a triggering
event under the Institute Plan. Nevertheless, pursuant to authority granted to
it under the terms of each plan, the Board of Directors of the Company
determined that it would be in the best interests of employees to terminate
the Institute Plan concurrently with the ALS Plan, and amend the ALS Plan to
provide for payments based on the fair market value of the Company. In
connection with such determination, the Company will make appropriate payments
to all covered employees and institute the 1997 Stock Incentive Plan. As a
result, approximately $1.3 million will be paid out under the plans, and, of
this amount, Messrs. Baum, Hickey, Welch, and Fickey will receive
approximately $264,000, $176,000, $110,000 and $22,000, respectively (assuming
an initial public offering price of $13.00 per share). See "Use of Proceeds."
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<PAGE>
CERTAIN TRANSACTIONS
Pursuant to an Asset Purchase Agreement dated as of August 1, 1996, as
subsequently amended as of February 25, 1997 (the "Asset Purchase Agreement"),
by and among Welch Publishing, Inc. (formerly known as IPS Publishing, Inc.
("Welch Publishing")), IPS and Timothy P. Welch, individually and as sole
trustee of the Timothy Peter Welch Revocable Trust (the "Welch Trust"), IPS
purchased substantially all of the assets of Welch Publishing for $5.0 million
plus the assumption of certain of its liabilities and the obligation to make
certain future contingent payments in the event of a closing of an initial
public offering by the Company (the "Contingent Payments"). IPS's obligations
under the Asset Purchase Agreement have since been assumed by the Company. Of
the total purchase price, $3.1 million was paid to the Welch Trust at closing,
$1.5 million was deposited pursuant to an Escrow Agreement, which amount will
be paid to the Welch Trust at the closing of the Offering, and the remaining
$350,000 was paid on August 1, 1997. In addition, upon the closing of the
Offering, the Welch Trust and two current employees of IPS will receive an
aggregate of approximately 38,461 shares of Common Stock (assuming an initial
public offering price of $13.00 per share) from the Company in satisfaction of
the Company's obligations with respect to the Contingent Payments. The Welch
Trust, of which Mr. Welch is the trustee and sole beneficiary, will receive
approximately 34,850 of these shares of Common Stock. Mr. Welch also has an
understanding with the Company that he will be able to purchase up to an
aggregate of $500,000 of Common Stock in the Offering. See "Underwriting." In
connection with the Asset Purchase Agreement, Mr. Welch entered into an
Employment Agreement with IPS. See "Management--Management Employment
Agreement."
In order to facilitate the purchase of the assets of the IPS business and to
provide working capital to IPS after the acquisition, Judith Paul and Terrance
Paul, the Company's principal shareholders, each (i) made a capital
contribution of $100,000 to IPS, and (ii) loaned IPS $2.35 million. In
connection with the loans to IPS, IPS issued each of the Pauls a promissory
note in the principal amount of $2.35 million and bearing interest at an
annual rate of 6.5%. The entire balance of principal and accrued interest for
each note is due and payable on January 2, 1998. The notes may be prepaid
without penalty. A portion of the proceeds from the Offering will be used to
prepay the notes. See "Use of Proceeds."
Effective January 2, 1997, Judith Paul and Terrance Paul contributed all of
the outstanding stock of IPS and the Institute to ALS in return for an
aggregate of 319,948 shares of Common Stock.
In August 1997, the Company and its shareholders, including Judith and
Terrance Paul and Mark J. Bradley, as trustee of the Terrance and Judith Paul
Descendants' Trust (collectively, the "Shareholders"), entered into an
agreement whereby the Company has agreed to indemnify the Shareholders for the
taxes attributable to any increase in taxable income allocable to them in the
event of any audit of, or other adjustment to, the Company's tax returns. The
Shareholders have entered into a similar, separate agreement with the
Institute for the years during which the Institute filed an S corporation tax
return.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
concerning the beneficial ownership of the Company's Common Stock immediately
prior to the Offering by (i) each person known to the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock,
(ii) each director, (iii) each named executive, and (iv) all executive
officers and directors as a group. Except as otherwise indicated, the address
of each shareholder listed below is 2911 Peach Street, Wisconsin Rapids,
Wisconsin 54495-8036.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED COMMON STOCK
PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(1)(2)
------------------ ------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Judith A. Paul......................... 6,343,645 46.3% 6,343,645 38.5%
Terrance D. Paul....................... 6,343,645 46.3 6,343,645 38.5
Mark J. Bradley, as Trustee of the
Terrance
and Judith Paul Descendants' Trust(3). 963,843 7.0 963,843 5.8
Michael H. Baum........................ 0 0 0 0
John R. Hickey......................... 0 0 0 0
Timothy P. Welch(4).................... 34,850 * 34,850 *
All executive officers and directors as
a group (6 persons)................... 13,685,983 99.9 13,685,983 82.9
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) Except as otherwise noted, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
listed.
(2) Does not reflect shares of Common Stock which may be purchased in the
Offering.
(3) The address of the Trustee of the Terrance and Judith Paul Descendants'
Trust is 500 Third Street, Suite 700, Wausau, Wisconsin 54403.
(4) Reflects shares of Common Stock to be issued upon the closing of this
Offering to the Welch Trust, of which Mr. Welch is the beneficial owner,
in connection with the Company's acquisition of IPS (assuming an initial
public offering price of $13.00 per share). See "Certain Transactions."
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DESCRIPTION OF CAPITAL STOCK
The following description is a summary only and is qualified in its entirety
by reference to the Company's Amended and Restated Articles of Incorporation
(the "Articles of Incorporation") and Amended and Restated By-Laws (the "By-
Laws") and the Wisconsin Business Corporation Law (the "WBCL").
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Shares"). Immediately prior
to completion of the Offering, there will be 13,689,594 shares of Common Stock
issued and outstanding (including 38,461 shares to be issued upon closing of
the Offering at an assumed initial public offering price of $13.00 per share
in connection with the Company's acquisition of IPS) and no Preferred Shares
issued and outstanding. Following the Offering, there will be 16,489,594
shares of Common Stock outstanding. At August 25, 1997, there were three
record holders of the Common Stock.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders. Voting rights are not cumulative, and,
therefore, holders of a majority of the Common Stock are able to elect all of
the Company's directors. Holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors in its discretion
out of funds legally available therefor. Subject to the rights of any holders
of outstanding Preferred Shares, upon liquidation or dissolution of the
Company, the holders of Common Stock will be entitled to receive on a pro rata
basis all assets remaining for distribution to shareholders. The Common Stock
does not have preemptive or other subscription rights, conversion rights or
sinking fund provisions. All shares of Common Stock currently outstanding are,
and the Common Stock to be issued in the Offering will, upon issuance be,
fully paid and non-assessable except to the extent provided in Section
180.0622(2)(b) of the WBCL. Under Section 180.0622(2)(b), holders of Common
Stock are liable up to the amount equal to the par value of the Common Stock
owned by such holders for all debt owing to Company employees for services
performed for the Company, but not exceeding six months' service in any one
case. Certain Wisconsin courts have interpreted "par value" to mean the full
amount paid upon the purchase of the Common Stock.
PREFERRED SHARES
The Board of Directors of the Company is authorized, without further
shareholder action, to issue Preferred Shares in one or more series and to fix
and determine the relative rights and preferences thereof, including voting
rights, dividend rights, liquidation rights, redemption provisions, sinking
fund provisions and/or conversion rights. Although there is no current
intention to do so, the Board of Directors may issue such Preferred Shares
with voting, dividend, liquidation and/or other rights that could adversely
affect the holders of Common Stock and that could have the effect of delaying,
deferring or preventing a change in control of the Company.
CERTAIN STATUTORY AND OTHER PROVISIONS
The provisions of the Company's Articles of Incorporation and By-Laws and
the WBCL described in this section may delay or make more difficult
acquisitions or changes of control of the Company not approved by the
Company's Board of Directors. Such provisions have been implemented to enable
the Company, particularly (but not exclusively) in the initial years of its
existence as a publicly-traded company, to develop its business in a manner
which will foster its long-term growth without disruption caused by the threat
of a takeover not deemed by its Board of Directors to be in the best interests
of the Company and its shareholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an acquisition or
change of control of the Company, although such proposals, if made, might be
considered desirable by a majority of the Company's shareholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current management of the Company
without the concurrence of the Board of Directors.
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<PAGE>
Number of Directors; Removal; Vacancies. The Articles of Incorporation
provide that the number of directors shall be determined from time to time by
vote of a majority of the directors then in office, provided that in no case
shall the authorized number of directors be less than one or more than 15. The
Articles of Incorporation also provide that the Company's Board of Directors
shall have the exclusive right to fill vacancies on the Board of Directors,
including vacancies created by expansion of the Board or removal of a
director, and that any director elected to fill a vacancy shall serve until
the next annual meeting of shareholders. The Articles of Incorporation further
provide that directors may be removed by the shareholders but only for cause
and only by the affirmative vote of the holders of at least a majority of the
votes then entitled to be cast in an election of directors. This provision, in
conjunction with the provisions of the Articles of Incorporation authorizing
the Board to fill vacant directorships, could prevent shareholders from
removing incumbent directors without cause and fill the resulting vacancies
with their own nominees.
Shareholder Action by Written Consent; Special Meetings. The By-Laws do not
allow shareholders to act without a meeting of shareholders by less than
unanimous written consent. The By-Laws provide that special meetings of
shareholders may be called by either the Company's Chairman of the Board, Vice
Chairman of the Board, President, Chief Executive Officer or a majority of the
Board of Directors, and shall be called, if and as required by the WBCL, upon
written demand by holders of Common Stock with at least 10% of the votes
entitled to be cast at such a meeting.
Advance Notice for Raising Business or Making Nominations at Annual
Meetings. The Company's By-Laws establish an advance notice procedure for
shareholder proposals to be brought before an annual meeting of shareholders
of the Company and for nominations by shareholders of candidates for election
as directors at an annual meeting or a special meeting at which directors are
to be elected. Subject to any other applicable requirements, only such
business may be conducted at an annual meeting of shareholders as has been
brought before the meeting by, or at the direction of, the Company's Board of
Directors, or by a shareholder who has provided the Company timely written
notice of the shareholder's intention to bring such business before the
meeting. Only persons who are nominated by, or at the direction of, the
Company's Board of Directors, or who are nominated at the meeting by a
shareholder who has given timely written notice to the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company.
To be timely, notice of nominations or other business to be brought before
an annual meeting must be received by the Company not later than 120 days
prior to the anniversary date of the annual meeting of shareholders in the
immediately preceding year. All such notices shall include: (i) a
representation that the person sending the notice is a shareholder of record
and will remain such through the record date for the meeting, (ii) the name
and address, as they appear on the Company's books, of such shareholder, (iii)
the class and number of the Company's shares which are owned beneficially and
of record by such shareholders and (iv) a representation that such shareholder
intends to appear in person or by proxy at such meeting to make the nomination
or move for the consideration of other business set forth in the notice.
Notice as to proposals with respect to any business to be brought before the
meeting other than the election of directors shall also set forth the text of
the proposal and may set forth any statement in support thereof that the
shareholder wishes to bring to the attention of the Company, and shall specify
any material interests of such shareholder in such business. Notice as to
nominations of a director shall set forth the name(s) of the nominee(s),
address(es) of each, a description of all arrangements or understandings
between the shareholder and each nominee and any person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder, the written consent of each nominee to serve as a
director if so elected and such other information as would be required to be
included in a proxy statement soliciting proxies for the election of the
nominee(s) of such shareholder.
Amendments to the Articles of Incorporation. The WBCL provides authority to
the Company to amend its Articles of Incorporation at any time to add or
change a provision that is required or permitted to be included in the
Articles of Incorporation or to delete a provision that is not required to be
included in the Articles of Incorporation. The Company's Board of Directors
may propose one or more amendments to the Company's Articles of Incorporation
for submission to shareholders and may condition its submission of the
proposed amendment on any basis if the Board of Directors notifies each
shareholder, whether or not entitled to vote, of the shareholders' meeting at
which the proposed amendment shall be voted upon. The meeting notice shall
state that the purpose, or one of the
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<PAGE>
purposes, of the meeting is to consider and to act upon a proposed amendment
to the Articles of Incorporation. Any such notice shall contain or be
accompanied by a copy of summary of the amendment.
Amendments to By-Laws. The Articles of Incorporation and By-Laws both
provide that the holders of at least two-thirds of all of the Company's Common
Stock then outstanding and entitled to vote thereon shall have the power to
adopt, amend, alter, change or repeal the Company's By-Laws. The By-Laws
further provide that the Company's Board of Directors may amend or repeal the
existing By-Laws and adopt new By-Laws by the vote of at least a majority of
the directors present at a meeting at which a quorum is present, provided
that: (i) no By-Law adopted by shareholders shall be amended, repealed or
readopted by the Board of Directors if the By-Law so adopted so provides and
(ii) a By-Law adopted or amended by the shareholders that fixes a greater or
lower quorum requirement or a greater voting requirement for the Board of
Directors than otherwise provided in the WBCL may not be amended or repealed
by the Board of Directors unless the By-Law expressly provides that it may be
amended or repealed by a specified vote of the Board of Directors. Action by
the Board of Directors to adopt or amend a By-Law that changes the quorum or
voting requirement for the Board of Directors must meet the same quorum
requirement and be adopted by the same vote required to take action under the
quorum and voting requirement then in effect, unless a different voting
requirement is specified as provided by the preceding sentence. A By-Law that
fixes a greater or lower quorum requirement or a greater voting requirement
for shareholders or voting groups of shareholders than otherwise is provided
in the WBCL may not be adopted, amended or repealed by the Board of Directors.
Constituency or Stakeholder Provision. Under Section 180.0827 of the WBCL
(the "Wisconsin Stakeholder Provision"), in discharging his or her duties to
the Company and in determining what he or she believes to be in the best
interests of the Company, a director or officer may, in addition to
considering the effects of any action on shareholders, consider the effects of
the action on employees, suppliers, customers, the communities in which the
Company operates and any other factors that the director or officer considers
pertinent.
Wisconsin Antitakeover Statutes. Sections 180.1140 to 180.1144 of the WBCL
(the "Wisconsin Business Combination Statutes") regulate a broad range of
"business combinations" between a "resident domestic corporation" (which the
Company is) and an "interested stockholder." The Wisconsin Business
Combination Statutes define a "business combination" to include a merger or
share exchange, or a sale, lease, exchange, mortgage, pledge, transfer, or
other disposition of assets equal to at least 5% of the market value of the
stock or assets of the corporation or 10% of its earning power, or the
issuance of stock or rights to purchase stock with a market value equal to at
least 5% of the outstanding stock, the adoption of a plan of liquidation or
dissolution, and certain other transactions involving an "interested
stockholder." An "interested stockholder" is defined as a person who
beneficially owns 10% of the voting power of the outstanding voting stock of
the corporation or who is an affiliate or associate of the corporation and
beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years. Section 180.1141 of the Wisconsin Business
Combination Statute prohibits a corporation from engaging in a business
combination (other than a business combination of a type specifically excluded
from the coverage of the statute) with an interested stockholder for a period
of three years following the date such person becomes an interested
stockholder, unless the board of directors approved the business combination
or the acquisition of the stock that resulted in a person becoming an
interested stockholder before such acquisition. Accordingly, the Wisconsin
Business Combination Statutes' prohibition on business combinations cannot be
avoided during the three-year period by subsequent action of the board of
directors or shareholders. Business combinations after the three-year period
following the stock acquisition date are permitted only if (i) the board of
directors approved the acquisition of the stock by the interested stockholder
prior to the acquisition date, (ii) the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested stockholder, (iii) the consideration to be received by shareholders
meets certain requirements of the statute with respect to form and amount or
(iv) the business combination is excluded from the business combination
restrictions of this section.
In addition, the WBCL provides, in Sections 180.1130 to 180.1133, that
business combinations involving a "significant shareholder" and an "issuing
public corporation" (each as defined below) are subject to a supermajority
vote of shareholders (the "Wisconsin Fair Price Statute"), in addition to any
approval otherwise required. A "significant shareholder," with respect to an
issuing public corporation, is defined as a person who beneficially owns,
directly or indirectly, 10% or more of the voting stock of the corporation, or
an affiliate of the corporation which
38
<PAGE>
beneficially owned, directly or indirectly, 10% or more of the voting stock of
the corporation within the last two years. An "issuing public corporation" is
defined as a Wisconsin corporation that has (i) total assets exceeding $1
million and a class of equity securities held of record by 500 or more persons
and (ii) at least 100 shareholders of record who have unlimited voting rights
and who are residents of Wisconsin. It is anticipated that after completion of
the Offering, the Company will be considered an "issuing public corporation."
Under the WBCL, the business combinations described above must be approved by
80% of the voting power of the corporation's stock and at least two-thirds of
the voting power of the corporation's stock not beneficially held by the
significant shareholder who is party to the relevant transaction or any of its
affiliates or associates, in each case voting together as a single group,
unless the following fair price standards have been met: (i) the aggregate
value of the per share consideration is equal to the higher of (a) the highest
price paid for any common stock of the corporation by the significant
shareholder in the transaction in which it became a significant shareholder or
within two years before the date of the business combination, (b) the market
value of the corporation's shares on the date of commencement of any tender
offer by the significant shareholder, the date on which the person became a
significant shareholder or the date of the first public announcement of the
proposed business combination, whichever is highest, or (c) the highest
liquidation or dissolution distribution to which holders of the shares would
be entitled, and (ii) either cash, or the form of consideration used by the
significant shareholder to acquire the largest number of shares, is offered.
Under Section 180.1150 (the "Wisconsin Control Share Statute") of the WBCL,
the voting power of shares, including shares issuable upon the exercise of
options, of an issuing public corporation held by any person or persons acting
as a group, in excess of 20% of the voting power in the election of directors,
is limited (in voting on any matter) to 10% of the full voting power of those
excess shares. This restriction does not apply to shares acquired
directly from the issuing public corporation, in certain specified
transactions, or in a transaction with respect to which the corporation's
shareholders have voted to approve restoration of the full voting power of
otherwise restricted shares.
Section 180.1134 (the "Wisconsin Defensive Action Restrictions") of the WBCL
provides that, in addition to the vote otherwise required by law or the
articles of incorporation of an issuing public corporation, the approval of
the holders of a majority of the shares entitled to vote is required before
such corporation can take certain action while a takeover offer is being made
or after a takeover offer has been publicly announced and before it is
concluded. Under the Wisconsin Defensive Action Restrictions, shareholder
approval is required for the corporation to (i) acquire more than 5% of the
outstanding voting shares at a price above the market price from any
individual who or organization which owns more than 3% of the outstanding
voting shares and has held such shares for less than two years, unless a
similar offer is made to acquire all voting shares, or (ii) sell or option
assets of the corporation which amount to at least 10% of the market value of
the corporation, unless the corporation has at least three independent
directors (directors who are not officers or employees) and a majority of the
independent directors vote not to have this provision apply to the
corporation. The restrictions described in clause (i) above may have the
effect of deterring a shareholder from acquiring shares of the Company's
Common Stock with the goal of seeking to have the Company repurchase such
shares at a premium over the market price.
Certain Antitakeover Effects. Certain provisions of the Company's Articles
of Incorporation and By-Laws may have significant antitakeover effects,
including the inability of the shareholders to remove directors without cause,
the ability of the remaining directors to fill vacancies, and the ability of
the Board of Directors to issue "blank check" preferred stock which, in turn,
allows the directors to adopt a so-called "rights plan" which would entitle
shareholders (other than a hostile bidder) to acquire stock of the Company at
a discount.
The explicit grant in the Wisconsin Stakeholder Provision of discretion to
directors to consider nonshareholder constituencies could, in the context of
an active "auction" of the Company, have antitakeover effects in situations
where the interests of stakeholders of the Company, including employees,
suppliers, customers and communities in which the Company does business,
conflict with the short-term maximization of shareholder value.
The Wisconsin Control Share Statute may deter any shareholder from acquiring
in excess of 20% of the outstanding voting stock of the Company and the
Wisconsin Fair Price Statute may discourage any attempt by a shareholder to
squeeze out other shareholders without offering an appropriate premium
purchase price. In addition, the Wisconsin Defensive Action Restrictions may
have the effect of deterring a shareholder from acquiring the Company's Common
Stock with the goal of seeking to have the Company repurchase the Common Stock
at a
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<PAGE>
premium. The WBCL statutory provisions and the Company's Articles of
Incorporation and By-Law provisions referenced above are intended to encourage
persons seeking to acquire control of the Company to initiate such an
acquisition through arms-length negotiations with the Company's Board of
Directors, and to ensure that sufficient time for consideration of such a
proposal, and any alternatives, is available. Such measures are also designed
to discourage investors from attempting to accumulate a significant minority
position in the Company and then use the threat of a proxy contest as a means
to pressure the Company to repurchase shares of Common Stock at a premium over
the market value. To the extent that such measures make it more difficult for,
or discourage, a proxy contest or the assumption of control by a holder of a
substantial block of the Company's Common Stock, they could increase the
likelihood that incumbent directors will retain their positions, and may also
have the effect of discouraging a tender offer or other attempt to obtain
control of the Company, even though such attempt might be beneficial to the
Company and its shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company is Firstar Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,489,594 shares of
Common Stock outstanding, excluding shares of Common Stock issuable pursuant
to the 1997 Stock Incentive Plan (assuming an initial public offering price of
$13.00 per share). See "Management -- Executive Compensation." Of these
shares, the 2,800,000 shares of Common Stock sold in the Offering will be
freely tradable without restriction under the Securities Act except for shares
of Common Stock purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, which shares will be subject to
the resale limitations (but not the holding period requirements) of Rule 144.
The remaining 13,689,594 shares will be "restricted securities" under the
Securities Act.
The Company and its principal shareholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any of their shares of Common Stock
in the public market for a period of 180 days after the date of this
Prospectus without the prior written consent of Piper Jaffray Inc. Upon
expiration of the 180-day lock-up period, 13,651,133 shares of Common Stock
will be eligible for immediate sale in the public market, subject to
compliance with the volume and other limitations of Rule 144 described below.
In general, under Rule 144 as in effect on and after April 29, 1997, an
affiliate of the Company, or any other person (or persons whose Common Stock
is aggregated) who has beneficially owned restricted securities for at least
one year but less than two years, will be entitled to sell in any three-month
period a number of shares of Common Stock that does not exceed the greater of
(i) 1% of the outstanding Common Stock (approximately 165,000 shares after
completion of the Offering), or (ii) the average weekly trading volume during
the four calendar weeks immediately preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission (the "SEC"). Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and availability of current public information about the Company.
A person (or persons whose Common Stock is aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least two years is entitled to sell such shares pursuant
to Rule 144(k) without regard to certain limitations described above.
The Company intends to file a registration statement under the Securities
Act to register the 1,500,000 shares of Common Stock issuable pursuant to the
1997 Stock Incentive Plan. Shares of Common Stock covered by this registration
statement will, when issued in accordance with the 1997 Stock Incentive Plan,
be eligible for sale in the public market (subject to the Rule 144 limitations
discussed above for "affiliates" of the Company).
Since there has been no public market for the Common Stock prior to this
Offering, no predictions can be made as to the effect, if any, that market
sales of Common Stock or the availability of such Common Stock for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of such shares.
40
<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters listed in the table below (the "Underwriters"), for whom
Piper Jaffray Inc. and Montgomery Securities are acting as representatives
(the "Representatives"). Subject to the terms and conditions set forth in the
Purchase Agreement, the Company has agreed to sell to each Underwriter, and
the Underwriters have severally agreed to purchase, the number of shares of
Common Stock set forth opposite each Underwriter's name in the table below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Piper Jaffray Inc........................................
Montgomery Securities....................................
---------
Total................................................ 2,800,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement, if any is purchased (excluding Common
Stock covered by the over-allotment option granted to the Underwriters). In
the event of a default by any Underwriter, the Purchase Agreement provides
that, in certain circumstances, purchase commitments of nondefaulting
Underwriters may be increased or the Purchase Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock directly to the public initially at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such public offering price less a concession not in excess of
$ per share. Additionally, the Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the Offering, the public offering price and other selling terms
may be changed by the Underwriters.
Of the 2,800,000 shares of Common Stock offered hereby by the Company, up to
185,000 of such shares will be reserved for sale at the initial public
offering price to persons designated by the Company. Of these shares, Timothy
P. Welch, a Director of the Company, has an understanding with the Company
that he will be entitled to purchase up to an aggregate of $500,000 of Common
Stock (approximately 38,461 shares, assuming an initial public offering price
of $13.00 per share). There can be no assurance that such shares will be
purchased by these persons. Any such reserved shares of Common Stock not so
purchased will be reoffered immediately by the Underwriters to the public at
the initial public offering price.
The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of this Prospectus, to purchase
up to an additional 420,000 shares of Common Stock at the same price per share
to be paid by the Underwriters for the other shares offered hereby. The
Underwriters may exercise such
41
<PAGE>
option solely for the purpose of covering over-allotments incurred in the sale
of shares of Common Stock offered hereby. To the extent such option to
purchase is exercised, each Underwriter will become committed to purchase such
additional shares of Common Stock in approximately the same proportion as set
forth in the above table.
The Representatives have informed the Company that neither they nor any
member of the National Association of Securities Dealers, Inc. participating
in the distribution of the Common Stock will make sales of the Common Stock
offered hereby to accounts over which they exercise discretionary authority
without the prior specific written approval of the customer.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the Offering without notice. The Underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.
The Company and its principal shareholders (holding in the aggregate of
13,685,983 shares of Common Stock upon completion of the Offering) have agreed
not to offer, sell, contract to sell or otherwise dispose of any of their
shares of Common Stock for the 180-day period after the date of this
Prospectus without the prior written consent of Piper Jaffray Inc.
Prior to the Offering, there has been no market for the Common Stock.
Consequently, the initial public offering price of the Common Stock will be
determined through negotiations among the Company and the Representatives.
Among the factors considered in such determination will be prevailing market
and economic conditions, the Company's revenue and earnings, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management and
the consideration of the above factors in relation to the market valuations of
companies in similar businesses. The initial public offering price for the
Common Stock should not be considered an indication of the actual value of the
Common Stock offered hereby. In addition, there can be no assurance that an
active or orderly trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to this Offering at or
above the initial public offering price.
During and after the Offering, the Underwriters may purchase and sell Common
Stock in the open market. These transactions may include overallotment,
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise, and these activities, if commenced,
may be discontinued at any time.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "ALSI."
The Company and, under certain circumstances, Terrence Paul have jointly and
severally agreed to indemnify the Underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act,
or to contribute to payments the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Godfrey & Kahn, S.C., Milwaukee, Wisconsin. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Sachnoff & Weaver, Ltd., Chicago, Illinois.
42
<PAGE>
EXPERTS
The combined financial statements of ALS, the Institute and IPS as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 and the statements of income, changes in shareholders'
equity and cash flows of IPS for the year ended December 31, 1995 and the
seven months ended July 31, 1996 included in this Prospectus and the
Registration Statement of which this Prospectus is a part have been audited by
Arthur Andersen LLP, independent auditors, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
such firm as experts in giving such reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to are not
necessarily complete, and in certain circumstances reference is made to the
copy of such contract agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied at the public reference facilities maintained by the SEC
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 as well
as the regional offices of the SEC located at Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois, 60661 and Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates by writing to the SEC's Public Reference Section
at 450 Fifth Street, N.W., Washington, D.C., 20549. Such information may also
be accessed electronically by means of the SEC's Website on the Internet at
http://www.sec.gov.
As a result of the Offering, the Company will be subject to the requirements
of the Securities Exchange Act of 1934, as amended, and, in accordance
therewith, will file reports, proxy statements and other information with the
SEC on a periodic basis. Such reports, proxy statements and other information
filed by the Company with the SEC can be inspected and copied at the offices
of the SEC, at the Website listed above, and at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by its independent
accountants and quarterly reports containing unaudited financial information
for each of the first three fiscal quarters of each fiscal year.
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-1
Combined Balance Sheets as of December 31, 1995 and 1996, Consolidated
Balance Sheet as of June 30, 1997 (unaudited) and Pro Forma
Consolidated Balance Sheet as of June 30, 1997 (unaudited)............. F-2
Combined Statements of Income for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended June 30, 1996 (unaudited) and
Consolidated Statement of Income for the Six Months Ended June 30, 1997
(unaudited)............................................................ F-3
Statements of Combined Equity for the Years Ended December 31, 1994,
1995 and 1996 and Statement of Consolidated Equity for the Six Months
Ended June 30, 1997 (unaudited)........................................ F-4
Combined Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended June 30, 1996 (unaudited) and
Consolidated Statement of Cash Flows for the Six Months Ended June 30,
1997 (unaudited)....................................................... F-5
Notes to Financial Statements........................................... F-6
IPS PUBLISHING, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-14
Statements of Income for the Year Ended December 31, 1995 and the Seven
Months Ended July 31, 1996............................................. F-15
Statements of Changes in Shareholders' Equity for the Year Ended
December 31, 1995 and the Seven Months Ended July 31, 1996............. F-16
Statements of Cash Flows for the Year Ended December 31, 1995 and the
Seven Months Ended July 31, 1996....................................... F-17
Notes to Financial Statements........................................... F-18
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Advantage Learning Systems, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of Advantage
Learning Systems, Inc. (a Wisconsin corporation) and Affiliates, referred to
as the "Companies" (see Note 1), as of December 31, 1995 and 1996, and the
related combined statements of income, equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion of 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, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Advantage
Learning Systems, Inc. and Affiliates as of December 31, 1995, and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin,
April 8, 1997 (except
for the matter discussed
in Note 14(d) as to
which the date is August
21, 1997).
F-1
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED AND CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
ASSETS 1995 1996 1997 1997
------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 275,762 $ 1,755,866 $ 2,564,407 $ 2,564,407
Accounts receivable, less
allowance of $48,000,
$161,000 and $323,000,
respectively............ 1,688,352 2,523,388 3,393,554 3,393,554
Inventories.............. 232,848 543,902 450,819 450,819
Prepaid expenses......... 325,512 265,026 803,805 803,805
Deferred income taxes.... -- -- -- 974,291
---------- ----------- ----------- -----------
Total current assets... 2,522,474 5,088,182 7,212,585 8,186,876
---------- ----------- ----------- -----------
Property, plant and
equipment:
Land and improvements.... 98,248 744,720 744,720 744,720
Buildings................ 893,488 7,977,735 7,963,118 7,963,118
Furniture, fixtures and
office equipment........ 623,613 1,071,002 1,162,908 1,162,908
Computer and production
equipment............... 805,974 1,531,231 2,071,254 2,071,254
---------- ----------- ----------- -----------
Total property, plant
and equipment......... 2,421,323 11,324,688 11,942,000 11,942,000
---------- ----------- ----------- -----------
Less--Accumulated
depreciation............ (419,574) (746,979) (1,188,798) (1,188,798)
---------- ----------- ----------- -----------
Net property, plant and
equipment............. 2,001,749 10,577,709 10,753,202 10,753,202
Other assets:
Building held for sale... -- 747,392 747,392 747,392
Deferred tax asset....... -- 1,601,708 -- 1,726,986
Intangibles, net......... -- 1,445,798 1,323,155 1,323,155
Capitalized software,
net..................... 237,007 393,956 282,855 282,855
---------- ----------- ----------- -----------
Total other assets..... 237,007 4,188,854 2,353,402 4,080,388
---------- ----------- ----------- -----------
Total assets........... $4,761,230 $19,854,745 $20,319,189 $23,020,466
========== =========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C> <C>
Current liabilities:
Current portion long-term
debt.................... $ -- $ -- $ 700,000 $ 700,000
Accounts payable......... 236,993 332,689 694,451 694,451
Current portion of
deferred revenue........ 725,894 1,442,356 1,814,798 1,814,798
Payroll and employee
benefits................ 334,645 577,613 865,885 865,885
Retainage and amounts due
under construction
contract................ -- 1,151,157 198,382 198,382
Other current
liabilities............. 119,482 668,421 1,246,130 1,246,130
Due to former owner of
IPS..................... -- 350,000 350,000 350,000
Distribution payable to
shareholders............ -- -- -- 8,000,000
Amounts due under phantom
stock plan.............. -- -- -- 1,300,000
---------- ----------- ----------- -----------
Total current
liabilities........... 1,417,014 4,522,236 5,869,646 15,169,646
---------- ----------- ----------- -----------
Long-term debt............. -- 5,750,000 6,150,000 6,150,000
Notes payable to
shareholders.............. -- 4,700,000 4,700,000 4,700,000
Deferred revenue........... 731,198 1,109,519 1,229,990 1,229,990
Total equity............... 2,613,018 3,772,990 2,369,553 (4,229,170)
---------- ----------- ----------- -----------
Total liabilities and
equity................ $4,761,230 $19,854,745 $20,319,189 $23,020,466
========== =========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these balance sheets.
F-2
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
------------------------------------ ----------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales:
Products.............. $8,088,132 $11,601,971 $18,930,334 $8,139,483 $13,743,474
Services.............. 162,726 1,003,417 3,450,758 1,334,389 2,801,307
---------- ----------- ----------- ---------- -----------
Total net sales..... 8,250,858 12,605,388 22,381,092 9,473,872 16,544,781
Cost of sales:
Products.............. 937,393 1,467,559 2,329,171 965,929 1,675,460
Services.............. 165,826 595,362 1,898,175 632,926 1,304,740
---------- ----------- ----------- ---------- -----------
Total cost of sales. 1,103,219 2,062,921 4,227,346 1,598,855 2,980,200
---------- ----------- ----------- ---------- -----------
Gross profit........ 7,147,639 10,542,467 18,153,746 7,875,017 13,564,581
Operating expenses:
Product development... 358,360 802,331 1,555,411 494,410 1,374,651
Selling and marketing. 2,551,070 4,200,701 6,638,822 3,058,705 4,451,930
General and
administrative....... 1,239,039 2,090,560 3,546,144 1,384,263 2,621,425
Purchased research and
development.......... -- -- 3,400,000 -- --
---------- ----------- ----------- ---------- -----------
Total operating
expenses........... 4,148,469 7,093,592 15,140,377 4,937,378 8,448,006
---------- ----------- ----------- ---------- -----------
Operating income.... 2,999,170 3,448,875 3,013,369 2,937,639 5,116,575
Other income (expense):
Interest income....... 24,170 17,068 34,752 8,752 48,916
Interest expense...... (177) -- (205,755) -- (368,920)
Other, net............ (1,159) (3,728) 15,898 9,079 (44,300)
---------- ----------- ----------- ---------- -----------
Income before taxes..... 3,022,004 3,462,215 2,858,264 2,955,470 4,752,271
---------- ----------- ----------- ---------- -----------
Income tax benefit
(expense).............. -- -- 1,601,708 -- (1,601,708)
---------- ----------- ----------- ---------- -----------
Net income.............. $3,022,004 $ 3,462,215 $ 4,459,972 $2,955,470 $ 3,150,563
========== =========== =========== ========== ===========
Pro Forma information
(note 4) (Unaudited)
Income before taxes... $ 2,858,264 $ 4,752,271
Income taxes.......... 1,157,597 1,924,670
----------- -----------
Net income............ $ 1,700,667 $ 2,827,601
=========== ===========
Net income per share.. $ 0.12 $ .20
Weighted average
shares outstanding... 14,266,518 14,266,518
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-3
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
STATEMENTS OF COMBINED AND CONSOLIDATED EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK(1) STOCK(2) ADDITIONAL
------------------- ------------- PAID IN RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... -- $ -- -- $ -- $ -- $ -- $2,866,150
Net income............ -- -- -- -- -- -- 3,022,004
Distributions to
shareholders......... -- -- -- -- -- -- (2,823,021)
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1994................... -- -- -- -- -- -- 3,065,133
Net income............ -- -- -- -- -- -- 3,462,215
Distributions to
shareholders......... -- -- -- -- -- -- (3,914,330)
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1995................... -- -- -- -- -- -- 2,613,018
Net income............ -- -- -- -- -- -- 4,459,972
Distributions to
shareholders......... -- -- -- -- -- -- (3,500,000)
Contribution from
shareholders......... -- -- -- -- -- -- 200,000
---------- -------- --- ------ -------- ---------- ----------
Balance, December 31,
1996................... -- -- -- -- -- -- 3,772,990
Recapitalization...... 13,651,133 136,511 -- -- 217,489 3,418,990 --
Net income............ -- -- -- -- -- 3,150,563 3,150,563
Distributions to
shareholders......... -- -- -- -- -- (4,554,000) (4,554,000)
---------- -------- --- ------ -------- ---------- ----------
Balance, June 30, 1997.. 13,651,133 $136,511 -- $ -- $217,489 $2,015,553 $2,369,553
========== ======== === ====== ======== ========== ==========
</TABLE>
- --------
(1) Common Stock, $0.01 par value, 50,000,000 shares authorized.
(2) Preferred Stock, $0.01 par value, 5,000,000 shares authorized.
The accompanying notes to the financial statements are an integral part of
these statements.
F-4
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reconciliation of net
income to net cash
provided by operating
activities:
Net income............ $ 3,022,004 $ 3,462,215 $ 4,459,972 $2,955,470 $3,150,563
Noncash (income)
expenses included in
net income--
Depreciation and
amortization........ 115,181 325,817 711,135 208,578 681,750
(Gain) Loss on
disposal of assets.. -- 24,925 (239) -- --
Loss on building held
for sale............ -- -- 200,000 -- --
Purchased research
and development..... -- -- 3,400,000 -- --
Deferred income
taxes............... -- -- (1,601,708) -- 1,601,708
Change in assets and
liabilities--
(Increase) decrease
in--
Accounts
receivable........ (509,974) (476,453) (755,765) (432,253) (870,165)
Inventory.......... (12,631) (161,052) (311,054) (192,798) 93,085
Prepaid expenses... (30,325) (204,779) 60,486 (65,938) (538,779)
Increase (decrease)
in--
Accounts payable
and other current
liabilities....... 172,544 352,780 858,332 980,192 1,227,743
Retainage and
amounts due under
construction
contract.......... -- -- 1,151,157 -- (952,775)
Deferred revenue... 586,090 790,517 1,030,783 391,101 492,910
----------- ----------- ----------- ---------- ----------
Net cash provided
by operating
activities....... 3,342,889 4,113,970 9,203,099 3,844,352 4,886,040
----------- ----------- ----------- ---------- ----------
Cash flows from
investing activities:
Purchase of property,
plant and equipment.. (363,866) (1,224,844) (9,897,551) (2,859,233) (619,712)
Capitalized software
development costs.... (240,485) (117,432) (365,444) (210,914) (3,787)
Acquisition of IPS.... -- -- (4,610,000) -- --
----------- ----------- ----------- ---------- ----------
Net cash used in
investing
activities....... (604,351) (1,342,276) (14,872,995) (3,070,147) (623,499)
----------- ----------- ----------- ---------- ----------
Cash flows from
financing activities:
Proceeds from
issuances of stock... -- -- 200,000 -- --
Proceeds from long-
term debt and notes
payable to
shareholders -- -- 10,600,000 914,478 1,100,000
Payments on debt...... -- -- (150,000) -- --
Distributions to
shareholders......... (2,823,021) (3,914,330) (3,500,000) (1,600,000) (4,554,000)
----------- ----------- ----------- ---------- ----------
Net cash provided
by (used in)
financing
activities....... (2,823,021) (3,914,330) 7,150,000 (685,522) (3,454,000)
----------- ----------- ----------- ---------- ----------
Net increase (decrease)
in cash............... (84,483) (1,142,636) 1,480,104 88,683 808,541
Cash and cash
equivalents, beginning
of period............. 1,502,881 1,418,398 275,762 275,762 1,755,866
----------- ----------- ----------- ---------- ----------
Cash and cash
equivalents, end of
period................ $ 1,418,398 $ 275,672 $ 1,755,866 $ 364,445 $2,564,407
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-5
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
(1) COMBINATION
The combined financial statements include the financial results of Advantage
Learning Systems, Inc. ("ALS"), the Institute for Academic Excellence, Inc.
("Institute") and, since its date of acquisition (see Note 3), IPS Publishing,
Inc. ("IPS"), collectively the "Companies." The Companies are all under common
ownership. The Companies conduct their business within one industry segment.
Combined equity represents the combination of the common stock, paid-in
capital and retained earnings of each of the Companies. Effective January 2,
1997, the Institute and IPS became wholly-owned subsidiaries of ALS (see Note
14). As a result, subsequent periods are presented on a consolidated basis.
All significant intercompany transactions have been eliminated in the combined
and consolidated financial statements.
(2) NATURE OF OPERATIONS
ALS is a provider of learning information systems to K-12 schools in the
United States and Canada. ALS's flagship product is the Accelerated Reader, a
learning information system for motivating and monitoring increased
literature-based reading practice. ALS has also developed S.T.A.R., a
computer-adaptive reading test and database which provides reading scores
correlated to national norms in ten minutes or less at the computer.
The Institute develops and delivers the Reading Renaissance program, which
provides educators with professional development training to most effectively
use the Accelerated Reader, S.T.A.R. and the learning information they
generate.
IPS provides algorithm-based software for assessment and skills practice in
math and science, including MathCheck and Objective Tracker.
(3) ACQUISITION
Effective August 1, 1996, IPS Acquisition, Inc. ("Acquisition") acquired
substantially all of the assets of IPS. Acquisition was formed by the
shareholders of ALS for the sole purpose of acquiring certain assets of IPS.
Acquisition was capitalized with $200,000 of equity and $4.7 million of loans
from shareholders. Subsequent to the transaction, Acquisition changed its name
to IPS Publishing, Inc.
The acquisition was accounted for under the purchase method of accounting.
The purchase price ($4,610,000 in cash and $350,000 due in 1997) was allocated
based on fair values as follows:
<TABLE>
<S> <C>
Current assets................................................ $ 101,000
Plant & equipment............................................. 26,000
Intangibles................................................... 4,948,000
Current liabilities........................................... (115,000)
----------
Purchase price............................................ $4,960,000
==========
</TABLE>
A certain portion of the purchase price (approximately $1.5 million) was
placed in escrow. At the discretion of the seller, such amounts can remain in
escrow or be withdrawn. If not withdrawn, the seller will receive additional
consideration as a return on the amount which was placed in escrow. In
addition, the purchaser is allowed to borrow funds in the escrow up to
$400,000. No such borrowings have taken place. The contingent consideration is
equal to the greater of the amount in escrow times (i) 10% or (ii) the
percentage of appreciation of ALS stock between the IPO price and closing
price on December 31, 1997, if ALS completes an IPO prior to December 1, 1997
(see Note 14).
The purchase included the acquisition of certain in process research and
development included in intangibles above, which resulted in a charge to
income of $3,400,000 for the year ended December 31, 1996. The amount
allocated to the in process research and development was determined by
appraisal. The projects in process require resolution of high-risk development
and testing issues in order to reach technological feasibility. At the date of
acquisition, the purchased technology had no alternative uses.
F-6
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Unaudited pro forma results of operations assuming the acquisition of IPS as
of January 1, 1995 and the $3,400,000 write-off of purchased research and
development in 1996 would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $13,733,000 $23,062,000
Net income........................................ 2,972,000 4,199,000
</TABLE>
(4) SIGNIFICANT ACCOUNTING POLICIES
(a) Use of 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 period. Actual results could differ from those estimates.
(b) Revenue recognition
Revenue from product sales is recognized when the products are shipped, net
of estimated allowances for bad debts and for product returns and exchanges.
Insignificant post-contract support obligations, primarily telephone support
provided by ALS, are also accrued for at the time of the sale.
Revenue from IPS's custom products (see Note 2) is recognized on the
percentage of completion method. IPS defers revenue for advance payments from
customers that are in excess of revenues earned. Included in receivables at
December 31, 1996 and June 30, 1997 is $37,000 and $95,000, respectively, of
amounts earned on contracts which are not yet billable.
The Institute generates service revenue both from (i) conducting seminars
and (ii) contracts with schools and school districts to provide training
programs and consulting services. The Institute recognizes revenue from the
seminars at the time the seminar actually takes place. For school and school
district contracts, revenue is generally recognized when the training session
is performed, while certain support services are recognized on a straight-line
basis over the life of the contract. The Institute includes as deferred
revenue (i) prepayments on contract revenues and (ii) payments received for
seminars not yet held.
Service revenues also include separate maintenance fees whereby ALS provides
ongoing customer support and product upgrades. Such contracts are reflected as
deferred revenue and are amortized ratably over the 24 month term of the
maintenance period which begins after the expiration of the six months (twelve
months for contracts sold prior to May 1996) of free support included with the
purchase of the software.
(c) Cash and cash equivalents
For purposes of the Statements of Cash Flows, the Companies consider all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. Cash and cash equivalents are carried at cost,
which approximates fair market value.
(d) Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SIX MONTHS ENDED JUNE 30
----------------- ------------------------
1994 1995 1996 1996 1997
---- ---- ------- ---- --------------
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest.................... -- -- $94,000 -- $ 213,000
Income taxes................ -- -- -- -- --
</TABLE>
F-7
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(e) Inventories
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market. Inventories primarily consist of purchased materials which include
manuals, diskettes and motivational items.
(f) Catalog and advertising costs
Costs related to direct response advertising, primarily catalogs, are
capitalized and amortized over their expected period of future benefits,
generally three to six months. At December 31, 1995 and 1996, and June 30,
1997, capitalized catalog costs of approximately $183,000, $29,000 and
$105,000, respectively, are included in prepaid expenses. All other
advertising costs are expensed the first time the advertising takes place.
Advertising expenses for 1994, 1995 and 1996 were approximately $1,235,000,
$1,854,000 and $2,999,000, respectively. Advertising expenses for the six
months ended June 30, 1996 and 1997 were $1,414,000 and $1,967,000,
respectively.
(g) Property, plant and equipment
Property, plant and equipment are recorded at cost and are depreciated over
the estimated useful lives of the assets using principally the straight-line
method for financial reporting purposes. The estimated useful lives of the
assets are as follows: building--25 to 40 years; furniture, fixtures and
office equipment--5 to 8 years; and computer and production equipment--3 to 5
years. Accelerated depreciation methods are used for income tax purposes.
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are added
to the plant and equipment accounts.
(h) Software development costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Companies capitalize certain software development
costs incurred after technological feasibility is achieved. Capitalized costs
are reported at the lower of unamortized cost or net realizable value.
Capitalized software development costs are amortized on a product-by-product
basis based on the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the estimated economic life of the products which is generally
estimated to be 24 months. Amortization begins when the products are available
for general release to customers. All other research and development
expenditures are charged to product development expense in the period
incurred. Amounts capitalized were approximately $240,000, $117,000 and
$365,000 in 1994, 1995 and 1996, respectively. Amounts capitalized in the six
months ended June 30, 1996 and 1997 were $211,000 and $4,000, respectively.
Amortization expense of approximately $0, $120,000 and $208,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, and $66,000 and $115,000
for the six months ended June 30, 1996 and 1997, respectively, is included in
cost of sales--products in the statements of income. Accumulated amortization
of capitalized software development costs was $120,000, $328,000 and $443,000
as of December 31, 1995 and 1996, and June 30, 1997, respectively.
(i) Sales and concentration of credit risks
For the years ended December 31, 1994, 1995 and 1996, one customer (a book
distributor) contributed 2.6%, 12.5% and 15.2% of total combined revenues,
respectively. For the six months ended June 30, 1996 and 1997, this customer
contributed 16.0% and 13.6%, respectively. No other customer represented more
than 10% of combined revenues. At December 31, 1995 and 1996, and June 30,
1997, this customer had a receivable balance of 17.3%, 12.9% and 16.0% of
combined trade receivables, respectively.
The Companies grant credit to customers in the ordinary course of business.
The majority of the Company's customers are schools and teachers.
Concentrations of credit risk with respect to trade receivables are limited
due to the significant number of customers and their geographic dispersion.
F-8
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(j) Pro forma information (unaudited)
In connection with the initial public offering, ALS, the Institute and IPS
will no longer be treated as S corporations for tax purposes.
Pro forma income taxes reflect the application of statutory corporate income
tax rates to the net income as if the termination of the S corporation status
of the Companies had occurred on January 1, 1996. The effective derived income
tax rate is 40.5%.
Pro forma net income per share and weighted average shares outstanding
reflects (i) the shares outstanding as of January 2, 1997 reflecting the
issuance of shares by ALS to acquire IPS and the Institute, (ii) the stock
dividend, and (iii) the issuance of 615,385 shares (assuming an offering price
of $13 per share) to pay the estimated $8,000,000 S Corporation Distribution.
Historical earnings per share of the Companies have not been presented because
such amounts are not meaningful.
The pro forma balance sheet as of June 30, 1997 reflects the recognition of
a liability for the S corporation distribution, a $1.3 million liability for
payments to be made for the phantom stock plan, both of which will be paid
from the proceeds of the Offering, and the estimated deferred taxes as if the
Companies were C corporations at June 30, 1997. A corresponding reduction in
combined equity is reflected as a result of these liabilities.
(k) Interim Financial Statements
The results of operations for the six months ended June 30, 1996 and 1997
are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of June 30, 1997 and for the six months ended
June 30, 1996 and 1997 is unaudited, but, in the opinion of management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the combined financial position, results of
operations and cash flows of the companies.
(5) INTANGIBLE ASSETS
Intangible assets (acquired in the IPS acquisition) are amortized on the
straight line basis over their estimated useful lives and are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997 USEFUL LIFE
----------------- ------------- -----------
<S> <C> <C> <C>
Algorithms.................... $ 510,000 $ 510,000 5 years
Tradename..................... 210,000 210,000 10 years
Assembled workforce........... 90,000 90,000 7 years
Goodwill...................... 738,000 738,000 7 years
---------- ----------
1,548,000 1,548,000
Accumulated amortization...... (102,202) (224,845)
---------- ----------
Net intangibles............... $1,445,798 $1,323,155
========== ==========
</TABLE>
Management periodically reviews the carrying value of its intangible assets,
including goodwill, for potential impairment. To date, no impairment of these
assets exists.
(6) BUILDING HELD FOR SALE
In December, 1996, ALS completed construction of its new building. The
building previously occupied by ALS is being offered for sale. In 1996, a
reserve of $200,000 was recorded as a component of general and administrative
expense in the combined statements of income to reflect the write-down of the
net book value of the building to its estimated fair value.
F-9
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) INCOME TAXES
The shareholders of ALS and the Institute have elected to have these
companies treated as "S corporations" under the Internal Revenue Code. As an S
corporation, a company's taxable income or loss is includable in the
individual tax returns of its shareholders for Federal and state income tax
purposes. Accordingly, the accompanying financial statements do not include
any provision or liability for current or deferred Federal or state income
taxes related to ALS or the Institute.
IPS was taxed as a C corporation under the provisions of the Internal
Revenue Code and similar state tax laws from the time of its acquisition on
August 1, 1996 through December 31, 1996. Therefore, included in the 1996
combined financial statements are income tax provisions and related deferred
income taxes for IPS from the date of its acquisition until the end of 1996.
Subsequently, the shareholders of IPS elected to be taxed as an S corporation
effective January 1, 1997. Consequently, the deferred tax asset recognized in
1996 was written off in 1997.
Upon completion of the Offering, ALS, the Institute and IPS will become
subject to federal and state income taxes and will recognize deferred taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109") "Accounting for Income Taxes."
The provision for income taxes consists of:
<TABLE>
<CAPTION>
12 MONTHS ENDED
DECEMBER 31,
1996
---------------
<S> <C>
Current--
Federal................................................. $ --
State................................................... --
----------
Total current......................................... --
Deferred.................................................. 1,601,708
----------
Total income tax benefit.............................. $1,601,708
==========
</TABLE>
The following is a reconciliation of IPS's effective income tax rate to the
statutory Federal tax rate:
<TABLE>
<S> <C>
Statutory Federal rate.............................................. 35.0%
State taxes net of Federal benefit.................................. 5.5
----
40.5%
====
</TABLE>
Temporary differences which give rise to the net deferred tax asset are as
follows:
<TABLE>
<S> <C>
Accruals not deductible....................................... $ 2,210
Intangibles................................................... 1,362,727
Net tax operating loss carryforward........................... 236,771
----------
Net deferred tax asset.................................... $1,601,708
==========
</TABLE>
No valuation allowance has been recorded as the net deferred tax assets are
assumed to be realizable through future profitable operations of IPS. The tax
operating loss carryforward expires in 2011.
Upon completion of the Offering, IPS will be subject to federal and state
taxes as a C corporation. Accordingly, the previously recognized deferred tax
asset will be reinstated.
F-10
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) LINE OF CREDIT
The Companies have a bank line of credit through November 1997, which
provides for borrowings of up to $225,000. The line of credit bears interest
at the prime rate (8.25% at December 31, 1996), plus 4.9%. Amounts borrowed,
approximately $2,400 as of December 31, 1995, are included in accounts
payable. The line of credit was not utilized during 1996 or the first half of
1997.
(9) NOTES PAYABLE TO SHAREHOLDERS
Notes payable to shareholders consist of notes payable that financed the
acquisition of IPS. The notes accrue interest at an annual rate of 6.5%. The
entire balance of principal and interest is due on January 2, 1998. Interest
expense for the five month period ended December 31, 1996 and the six month
period ended June 30, 1997 was approximately $127,000 and $153,000,
respectively.
(10) LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996 and June 30,
1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to Woodlands Building Center, due
December 31, 1998, noninterest bearing.............. $ 50,000 $ 50,000
Note payable to bank, payable in annual installments
of $700,000 beginning March 1, 1998 through March 1,
2002 at which time the note is due in full, interest
at the 30-day LIBOR rate (5.53% at December 31,
1996) plus 1.25%, with a maximum interest rate of
8.5%, payable monthly (a)........................... 5,700,000 6,800,000
---------- ----------
Total................................................ 5,750,000 6,850,000
Less--Current maturities............................. -- (700,000)
---------- ----------
Long-term debt....................................... $5,750,000 $6,150,000
========== ==========
</TABLE>
- --------
(a) Borrowings are secured by substantially all assets. The note payable to
bank contains certain covenants, which, among other things, require
maintenance of a minimum tangible net worth and leverage ratio. In 1996,
ALS violated the leverage ratio covenant which has been subsequently
waived by the Bank through December 31, 1997.
Aggregate maturities of long-term debt outstanding at December 31, 1996 and
June 30, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
1997.................................................... $ -- $ --
1998.................................................... 750,000 750,000
1999.................................................... 700,000 700,000
2000.................................................... 700,000 700,000
2001.................................................... 700,000 700,000
Thereafter.............................................. 2,900,000 4,000,000
---------- ----------
$5,750,000 $6,850,000
========== ==========
</TABLE>
The fair value of debt, based on current market rates offered on notes with
similar terms and maturities, approximates carrying value.
F-11
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(11) LEASE COMMITMENTS
The Institute leases its offices under an operating lease agreement
effective May 1, 1995, with a five year term and a renewal option. The lease
calls for a monthly base rent of approximately $7,900 per month plus a pro
rata share of real estate taxes, utilities and insurance, with an annual
escalation rate based on the Consumer Price Index up to 3.5% annually. IPS is
also party to various operating leases for facilities and equipment which
expire at various dates through 1999.
Rent expense for 1994, 1995 and 1996 was approximately $21,000, $116,000 and
$159,000, respectively for the Companies. Rent expense for the six months
ended June 30, 1996 and 1997 was approximately $74,000 and $103,000,
respectively.
Future approximate minimum rental payments (including estimated operating
costs) required under the operating leases as of December 31, 1996, and June
30, 1997, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
1997...................................................... $190,000 $ 96,000
1998...................................................... 179,000 184,000
1999...................................................... 145,000 153,000
2000...................................................... 47,000 51,000
Thereafter................................................ -- --
</TABLE>
(12) DEFINED CONTRIBUTION BENEFIT PLAN
The Companies have a defined contribution benefit plan covering all of its
full-time employees meeting certain service requirements. The plan provides
for matching employer contributions based on 67% of employees' elective
contributions up to 6% of compensation. The plan allows employee contributions
up to 15% of compensation. Discretionary employer contributions may also be
made to the plan. There were no discretionary contributions made in 1994,
1995, 1996 or the six months ended June 30, 1997. Expense under the plan
totaled approximately $42,000 in 1994, $93,000 in 1995 and $192,000 in 1996.
Expense for the six months ended June 30, 1996 and 1997 was $72,000 and
$131,000, respectively.
(13) PHANTOM STOCK PLAN
As an incentive for certain key employees, ALS and the Institute each have a
phantom stock plan. A total of 415 and 585 phantom shares have been issued as
of December 31, 1996 and June 30, 1997, respectively.
The terms of each plan include an annual per share payment in an amount
equal to .001% (.00001) of each of the entities net profit before tax. Expense
under the plans was approximately $4,000, $6,000, $21,000, $10,000 and $25,000
for the years ended December 31, 1994, 1995 and 1996, and the six months ended
June 30, 1996 and 1997, respectively. In addition, the plans call for payments
if a "Triggering Event" occurs which is generally defined as the sale of
substantially all the assets, a change in control or filing of a registration
statement that becomes effective. If such a Triggering Event occurs, each
phantom share will generally be paid an amount equal to .001% of the product
of the fair market value per share less the book value per share multiplied by
the total shares outstanding.
(14) EVENTS SUBSEQUENT TO DECEMBER 31, 1996
(a) Effective January 2, 1997, the shareholders of IPS and the Institute
contributed their shares of IPS and the Institute to ALS in return for shares
of ALS. As a result, IPS and the Institute became wholly owned subsidiaries of
the Company. As of January 2, 1997, there were 15.9 million shares authorized
and 13.7 million shares of ALS stock issued and outstanding. Because the
Companies were under common control, there was no change in the net asset
value of the Institute or IPS as a result of the exchange of shares.
F-12
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(b) The filing of a Registration Statement that becomes effective is a
Triggering Event pursuant to the ALS phantom stock plan. Based on preliminary
estimates, the Company believes approximately $1.3 million will be paid and
expensed in the second half of 1997.
(c) In February 1997, the IPS purchase agreement was amended providing for
the release of the $1.5 million held in escrow and the issuance of $500,000 in
Common Stock in settlement of the contingent consideration, upon closing of
the Offering.
(d) In 1997, the Company executed a 133.31 for 1 stock split in the form of
two stock dividends. All share and per share information has been
retroactively adjusted.
(e) In March 1997, IPS filed an S Corporation election effective January 1,
1997. The provisions of SFAS 109 require that deferred tax assets and
liabilities should be eliminated at the date an enterprise ceases to be a
taxable entity. Accordingly, the previously recorded deferred tax asset of
$1.6 million was charged to income during the first quarter of 1997. The
deferred tax asset will be reinstated upon the completion of the Offering.
As discussed in Note 7, effective with the Offering, the Companies will no
longer be treated as S corporations for tax purposes. The Companies will be
subject to federal and state income taxes and will recognize deferred taxes in
accordance with SFAS 109. The impact of the change in taxpayer status upon
completion of the Offering is reflected in the pro forma balance sheet.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of IPS Publishing, Inc.:
We have audited the accompanying statements of income, changes in
shareholder's equity and cash flows of IPS Publishing, Inc. (a Washington
corporation) for the year ended December 31, 1995 and the seven months ended
July 31, 1996. 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, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of IPS
Publishing, Inc. for the year ended December 31, 1995 and the seven months
ended July 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin,
January 10, 1997.
F-14
<PAGE>
IPS PUBLISHING, INC.
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................ $1,670,934 $1,425,639
Operating expenses:
Production............................................. 203,296 86,660
Product development.................................... 441,151 442,951
Selling and marketing.................................. 338,214 252,989
General and administrative............................. 394,187 164,734
---------- ----------
1,376,848 947,334
---------- ----------
Income from operations................................... 294,086 478,305
Other income............................................. 9,302 58,113
---------- ----------
Net income............................................... $ 303,388 $ 536,418
========== ==========
</TABLE>
The accompanying footnotes are an integral part of these statements.
F-15
<PAGE>
IPS PUBLISHING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
TREASURY UNDISTRIBUTED GAINS ON
STOCK EARNINGS INVESTMENTS TOTAL
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994...... $(165,000) $ 365,240 $ 21,168 $ 221,408
Net income.................... -- 303,388 -- 303,388
Unrealized gains.............. -- -- 27,752 27,752
--------- --------- -------- ---------
BALANCE, December 31, 1995...... (165,000) 668,628 48,920 552,548
Net income.................... -- 536,418 -- 536,418
Distribution.................. -- (430,000) -- (430,000)
Sale of investments........... -- -- (48,920) (48,920)
--------- --------- -------- ---------
BALANCE, July 31, 1996.......... $(165,000) $ 775,046 $ -- $ 610,046
========= ========= ======== =========
</TABLE>
The accompanying footnotes are an integral part of these statements.
F-16
<PAGE>
IPS PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Cash provided by operations:
Net income................ $303,388 $ 536,418
Depreciation.............. 14,660 8,081
Gain on sale of
investments.............. -- (60,081)
Changes in current assets
and liabilities--
Accounts receivable...... (48,412) (562,166)
Accounts payable......... 6,185 12,720
Accrued liabilities...... (37,541) 338,540
Deferred revenue......... 165,878 (242,710)
Other.................... 1,377 (11,001)
-------- ---------
Net cash provided by
operations............. 405,535 19,801
Cash provided by (used for)
investment activities:
Proceeds from sale of
investments.............. -- 210,237
Purchases of property..... (18,053) (3,000)
Dividends reinvested...... (6,287) --
-------- ---------
Net cash provided by
(used for) investment
activities............. (24,340) 207,237
Cash (used for) financing
activities:
Shareholder distribution.. -- (430,000)
-------- ---------
Net increase (decrease) in
cash....................... 381,195 (202,962)
Cash, beginning of year..... 186,944 568,139
-------- ---------
Cash, end of year........... $568,139 $ 365,177
======== =========
</TABLE>
The accompanying footnotes are an integral part of these statements.
F-17
<PAGE>
IPS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JULY 31, 1996
(1) BUSINESS DESCRIPTION
IPS Publishing, Inc. ("IPS") develops, produces and markets software that
uses proprietary algorithms to generate test questions for the education
industry. IPS has two major sources of revenue: off-the-shelf software and
custom software.
Off-the-Shelf Software--Off-the-shelf software consists of proven products
which are copyrighted such as Exam in a Can, MathCheck and ScienceCheck (to be
released). Exam in a Can consists of algorithm generated questions relating to
standard mathematic concepts (e.g. algebra, calculus, etc.) using the DOS and
Macintosh platforms. MathCheck and ScienceCheck use the Windows platform to
run the software. The off-the-shelf products are purchased primarily by
teachers and distributors of education products.
Custom Software--Custom software consists of customized software development
and production performed primarily for various publishers of educational
textbooks and school districts. IPS is contracted to develop and manufacture
the software that will be used to test concepts within the publisher's or
school district's textbooks. This software uses algorithms to enable the users
of the textbooks to customize tests.
(2) USE OF 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 period. Actual results could differ from those estimates.
(3) ACQUISITION
Effective August 1, 1996, IPS Acquisition, Inc. ("Acquisition") acquired
substantially all of the assets of IPS. Acquisition was formed by the
shareholders of Advantage Learning Systems, Inc. ("ALS") for the sole purpose
of acquiring certain assets of IPS. Acquisition was capitalized with $200,000
of equity and $4.7 million of loans from shareholders. Subsequent to the
transaction, Acquisition changed its name to IPS Publishing, Inc.
Excluded from the transaction described above was a custom contract on which
IPS recognized revenues of $542,000 and $744,000 in the accompanying financial
statements for the year ended December 31, 1995 and the seven months ending
July 31, 1996, respectively.
(4) REVENUE RECOGNITION
Revenue from sales of IPS's off-the-shelf products is recognized upon
shipment. Revenue from IPS's custom products is recognized on the percentage
of completion method. IPS defers revenue for advance payments from customers
that are in excess of revenues earned. Receivables include amounts billed as
well as amounts earned on contracts which are not yet billable.
(5) INVENTORIES
IPS expenses as incurred various materials (diskettes) and supplies used to
produce, package and ship its products.
(6) PLANT AND EQUIPMENT
Plant and equipment, which consists primarily of office and computer
equipment, is stated at cost and is depreciated over the estimated useful
lives of the assets (five years) using the double declining method.
F-18
<PAGE>
IPS PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) SOFTWARE DEVELOPMENT COSTS
IPS expenses all research and development costs associated with establishing
technological feasibility as incurred. From the time a software product is
technically feasible until the product is released, all research and
development costs are capitalized as computer software development costs.
During 1995 and 1996, there were no research and development costs
capitalized. In addition, there was no amortization of capitalized software.
(8) COMMITMENTS
IPS is party to various operating leases for facilities and equipment. Rent
expenses were $37,423 for the year ended December 31, 1995 and $17,390 for the
seven months ended July 31, 1996.
(9) CAPITAL STOCK
IPS has 100,000 shares of no par common stock authorized of which 5,555
shares are issued and 3,056 shares are outstanding.
(10) BENEFIT PLANS
IPS had a profit sharing plan under which discretionary amounts could be
paid to eligible employees. $90,000 and $67,350 was expensed under this plan
in the year ended December 31, 1995 and the seven months ended July 31, 1996,
respectively.
(11) INVESTMENTS
Investments consist of marketable equity securities and mutual funds.
Investments are accounted for according to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." IPS's investments are classified
as available-for-sale and are adjusted to their fair market value, with any
unrealized gains or losses being recorded as a separate component of
stockholders equity. Prior to the sale to Acquisition, all investments were
liquidated with all realized gains being recognized in the statement of
income.
(12) ROYALTIES
IPS was party to various royalty agreements which have since expired. Under
the terms of these contracts, $22,050 and $22,101 in royalty costs were
incurred for the year ended December 31, 1995 and the seven months ending July
31, 1996, respectively.
(13) INCOME TAXES
Under provisions of the Internal Revenue Code and similar state tax laws,
the shareholders have elected to treat IPS as an S Corporation for both
Federal and state income taxes. In lieu of corporate income taxes, the
shareholders of an S Corporation are taxed on their proportionate share of
IPS's taxable income. Therefore, no provision or liability for income taxes
has been included in the accompanying financial statements. Cash payments to
shareholders are treated as distributions and are made primarily to fund the
shareholders' estimated tax liabilities that result from reporting this
income.
F-19
<PAGE>
NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OF-
FER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 10
S Corporation Distribution................................................ 10
Dividend Policy........................................................... 10
Capitalization............................................................ 11
Dilution.................................................................. 12
Selected Historical and Pro Forma Combined and Consolidated Financial
Data..................................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 30
Certain Transactions...................................................... 34
Principal Shareholders.................................................... 35
Description of Capital Stock.............................................. 36
Shares Eligible for Future Sale........................................... 40
Underwriting.............................................................. 41
Legal Matters............................................................. 42
Experts................................................................... 43
Additional Information.................................................... 43
Index to Financial Statements............................................. 44
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, 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.
2,800,000 Shares
LOGO
Common Stock
----------------
PROSPECTUS
----------------
Piper Jaffray inc.
Montgomery Securities
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
Offering described in this Registration Statement (other than the underwriting
discount) will be as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 13,661
NASD Filing Fee................................................. 4,985
Nasdaq National Market Listing Fee.............................. 55,000
Blue Sky Fees and Expenses...................................... 5,000
Printing Expenses............................................... 115,000
Accounting Fees and Expenses.................................... 220,000
Legal Fees and Expenses......................................... 310,000
Registrar and Transfer Agent's Fees and Expenses................ 10,000
Miscellaneous................................................... 16,354
--------
Total....................................................... $750,000
========
</TABLE>
All amounts except the SEC Registration Fee, the NASD Filing Fee and the
Nasdaq National Market Listing Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 180.0850 to 180.0859 of the Wisconsin Statutes require a
corporation to indemnify any director or officer who is a party to any
threatened, pending or completed civil, criminal, administrative or
investigative action, suit, arbitration or other proceeding, whether formal or
informal, which involves foreign, federal, state or local law and which is
brought by or in the right of the corporation or by any other person. A
corporation's obligation to indemnify any such person includes the obligation
to pay any judgment, settlement, penalty, assessment, forfeiture or fine,
including any excise tax assessed with respect to an employee benefit plan,
and all reasonable expenses including fees, costs, charges, disbursements,
attorney's and other expenses except in those cases in which liability was
incurred as a result of the breach or failure to perform a duty which the
director or officer owes to the corporation and the breach or failure to
perform constitutes: (i) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director or
officer has a material conflict of interest; (ii) a violation of criminal law,
unless the person has reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful; (iii) a
transaction from which the person derived an improper personal profit; or (iv)
willful misconduct.
Unless otherwise provided in a corporation's articles of incorporation or
by-laws or by written agreement, an officer or director seeking
indemnification is entitled to indemnification if approved in any of the
following manners: (i) by majority vote of a disinterested quorum of the board
of directors, or if such quorum of disinterested directors cannot be obtained,
by a majority vote of a committee of two or more disinterested directors; (ii)
by independent legal counsel; (iii) by a panel of three arbitrators; (iv) by
affirmative vote of shareholders; (v) by a court; or (vi) with respect to any
additional right to indemnification granted by any other method permitted in
Section 180.0858 of the Wisconsin Statutes.
Reasonable expenses incurred by a director or officer who is a party to a
proceeding may be reimbursed by a corporation at such time as the director or
officer furnishes to the corporation written affirmation of his good faith
belief that he has not breached or failed to perform his duties and a written
undertaking to repay any amounts advanced if it is determined that
indemnification by the corporation is not required.
II-1
<PAGE>
The indemnification provisions of Sections 180.0850 to 180.0859 are not
exclusive. A corporation may expand an officer's or director's right to
indemnification (i) in its articles of incorporation or by-laws; (ii) by
written agreement; (iii) by resolution of its board of directors; or (iv) by
resolution of a majority of all of the corporation's voting shares then issued
and outstanding.
As permitted by Section 180.0858, the Registrant has adopted indemnification
provisions in its By-Laws which closely track the statutory indemnification
provisions with certain exceptions. In particular, Article VII of the
Registrant's By-Laws provides (i) that an individual shall be indemnified
unless it is proven by a final judicial adjudication that indemnification is
prohibited, and (ii) payment or reimbursement of expenses, subject to certain
limitations, will be mandatory rather than permissive. Pursuant to Article VII
of the Registrant's By-Laws, the Registrant expects to obtain directors' and
officers' liability insurance to insure the Registrant's officers and
directors against certain liabilities, including those which may arise under
the Securities Act.
Reference is made to the Purchase Agreement filed as Exhibit 1.1 hereto for
provisions relating to indemnification of officers and directors of the
Company by the Underwriters.
The Company intends to obtain directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this Registration Statement, the
Registrant has issued the following securities which were not registered under
the Securities Act of 1933:
1. On December 20, 1995, ALS issued an aggregate of 20,000 shares of
Class A common stock and 80,000 shares of Class B common stock
(representing 13,331,185 shares of the Registrant's Common Stock after
completion of the 133.31 for 1 stock split in the form of two separate
stock dividends) to Judith and Terrance Paul in exchange for their shares
of ALS common stock pursuant to a reorganization. The shares of the Class A
and Class B common stock were issued without registration under the
Securities Act in reliance on Section 3(a)(9) and Section 4(2) thereunder.
2. On January 2, 1997, ALS issued an aggregate of 480 shares of Class A
common stock and 1,920 shares of Class B common stock (representing 319,948
shares of the Registrant's Common Stock after completion of the 133.31 for
1 stock split in the form of two separate stock dividends) to Judith and
Terrance Paul in exchange for their shares of IPS and the Institute
pursuant to a reorganization. See "Certain Transactions" in the Prospectus.
The shares of Class A and Class B common stock were issued without
registration under the Securities Act in reliance on Section 3(a)(9) and
Section 4(2) thereunder.
3. Pursuant to an Asset Purchase Agreement dated as of August 1, 1996, as
subsequently amended as of February 25, 1997, the Registrant agreed to
issue upon closing of the Offering $500,000 of the Registrant's Common
Stock at the initial public offering price to the Timothy Peter Welch
Revocable Trust, of which Timothy P. Welch is the beneficial owner, and two
current employees of IPS as partial consideration for the Registrant's
acquisition of IPS. See "Certain Transactions" in the Prospectus. The
shares of common stock have been sold without registration under the
Securities Act in reliance on Section 4(2) thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- -------------------
<C> <S> <C>
1.1 Form of Purchase Agreement
3.1 Amended and Restated Articles of Incorporation**
3.2 Amended and Restated By-Laws**
4.1 Form of Common Stock Certificate**
5.1 Legal Opinion of Godfrey & Kahn, S.C.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- -------------------
<C> <S> <C>
10.1 Asset Purchase Agreement dated as of August 1, 1996 by and
among IPS Acquisition, Inc., IPS Publishing, Inc. and
Timothy P. Welch, individually and as sole Trustee of the
Timothy P. Welch Revocable Trust*
10.2 Supplement to Asset Purchase Agreement dated as of
February 25, 1997, by and among IPS Publishing, Inc.
(f/k/a IPS Acquisition, Inc.), Welch Publishing, Inc.
(f/k/a IPS Publishing, Inc.) and Timothy P. Welch,
individually and as sole Trustee of the Timothy P. Welch
Revocable Trust*
10.3 Employment Agreement between IPS Publishing, Inc. (f/k/a
IPS Acquisition, Inc.) and Timothy P. Welch dated as of
August 1, 1996*
10.4 1997 Stock Incentive Plan*
10.5 Advantage Learning Systems, Inc. Phantom Stock Plan*
10.6 Institute for Academic Excellence, Inc. Phantom Stock
Plan*
10.7 Accelerated Reader Resale Agreement dated May 1, 1994,
between Advantage Learning Systems, Inc. and Perma-Bound,
a division of Hertzberg-New Method, Inc.*
10.8 Promissory Note dated August 1, 1996 in the principal
amount of $2,350,000 from IPS Publishing, Inc. to Judith
A. Paul*
10.9 Promissory Note dated August 1, 1996 in the principal
amount of $2,350,000 from IPS Publishing, Inc. to Terrance
D. Paul*
10.10 Loan Agreement dated June 21, 1996, by and between M&I
Mid-State Bank, N.A. and Advantage Learning Systems, Inc.*
10.11 Form of Tax Indemnification Agreement between Terrance
Paul, Judith Paul, Mark J. Bradley, as Trustee of the
Terrance and Judith Paul Descendants' Trust, and Advantage
Learning Systems, Inc.
10.12 Form of Tax Indemnification Agreement between Terrance
Paul, Judith Paul, Mark J. Bradley, as Trustee of the
Terrance and Judith Paul Descendants' Trust, and the
Institute for Academic Excellence, Inc.
21.1 Subsidiaries of Advantage Learning Systems, Inc.*
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney*
27.1 Financial Data Schedule
99.1 Consent of John H. Grunewald pursuant to Rule 438 under
the Securities Act of 1933**
99.2 Consent of Perry S. Akins pursuant to Rule 438 under the
Securities Act of 1933**
</TABLE>
- --------
*Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on February 28,
1997 (Regis. No. 333-22519).
**Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on April 14, 1997
(Regis. No. 333-22519).
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because the required information is not present or
is not present in amounts sufficient to require submission of a schedule or
because the information required is included in the consolidated financial
statements of the Registrant or notes thereto or the schedule is not required
or inapplicable under the related instructions.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that:
(1) For purposes or determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
II-3
<PAGE>
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WISCONSIN RAPIDS, STATE
OF WISCONSIN, ON AUGUST 25, 1997.
Advantage Learning Systems, Inc.
/s/ Michael H. Baum
By___________________________________
Michael H. Baum
Chief Executive Officer and a
Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
* August 25, 1997
___________________________________________
Judith A. Paul
Chairman of the Board
* August 25, 1997
___________________________________________
Terrance D. Paul
Vice Chairman of the Board
/s/ Michael H. Baum August 25, 1997
___________________________________________
Michael H. Baum
Chief Executive Officer and a Director
(Principal Executive Officer)
* August 25, 1997
___________________________________________
John R. Hickey
President and a Director
* August 25, 1997
___________________________________________
Richard W. Fickey
Secretary and Vice President, Finance and
Administration
(Principal Financial and Accounting
Officer)
* August 25, 1997
___________________________________________
</TABLE> Timothy P. Welch
Director
/s/ Michael H. Baum
*By: ________________________________
(as attorney-in-fact pursuant to
authoritygranted by power of
attorney included on this
signature page in initial filing
of thisRegistration Statement)
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S> <C>
1.1 Form of Purchase Agreement
3.1 Amended and Restated Articles of Incorporation**
3.2 Amended and Restated By-Laws**
4.1 Form of Common Stock Certificate**
5.1 Legal Opinion of Godfrey & Kahn, S.C.
10.1 Asset Purchase Agreement dated as of August 1, 1996 by and among
IPS Acquisition, Inc., IPS Publishing, Inc. and Timothy P.
Welch, individually and as sole Trustee of the Timothy P. Welch
Revocable Trust*
10.2 Supplement to Asset Purchase Agreement dated as of February 25,
1997, by and among IPS Publishing, Inc. (f/k/a IPS Acquisition,
Inc.), Welch Publishing, Inc. (f/k/a IPS Publishing, Inc.) and
Timothy P. Welch, individually and as sole Trustee of the
Timothy P. Welch Revocable Trust*
10.3 Employment Agreement between IPS Publishing, Inc. (f/k/a IPS
Acquisition, Inc.) and Timothy P. Welch dated as of August 1,
1996*
10.4 1997 Stock Incentive Plan*
10.5 Advantage Learning Systems, Inc. Phantom Stock Plan*
10.6 Institute for Academic Excellence, Inc. Phantom Stock Plan*
10.7 Accelerated Reader Resale Agreement dated May 1, 1994, between
Advantage Learning Systems, Inc. and Perma-Bound, a division of
Hertzberg-New Method, Inc.*
10.8 Promissory Note dated August 1, 1996 in the principal amount of
$2,350,000 from IPS Publishing, Inc. to Judith A. Paul*
10.9 Promissory Note dated August 1, 1996 in the principal amount of
$2,350,000 from IPS Publishing, Inc. to Terrance D. Paul*
10.10 Loan Agreement dated June 21, 1996, by and between M&I Mid-State
Bank, N.A. and Advantage Learning Systems, Inc.*
10.11 Form of Tax Indemnification Agreement between Terrance Paul,
Judith Paul, Mark J. Bradley, as Trustee of the Terrance and
Judith Paul Descendants' Trust, and Advantage Learning Systems,
Inc.
10.12 Form of Tax Indemnification Agreement between Terrance Paul,
Judith Paul, Mark J. Bradley, as Trustee of the Terrance and
Judith Paul Descendants' Trust, and the Institute for Academic
Excellence, Inc.
21.1 Subsidiaries of Advantage Learning Systems, Inc.*
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney*
27.1 Financial Data Schedule
99.1 Consent of John H. Grunewald pursuant to Rule 438 under the
Securities Act of 1933**
99.2 Consent of Perry S. Akins pursuant to Rule 438 under the
Securities Act of 1933**
</TABLE>
- --------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on February 28,
1997 (Regis. No. 333-22519).
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on April 14, 1997
(Regis. No. 333-22519).
<PAGE>
Page 2 of the Prospectus contains the following graphical material:
------------------------------------------------------------------
1. A picture of a man and a child looking at a computer and using the
Accelerated Reader.
2. A picture of a report generated by the Accelerated Reader.
3. The Company's logo and the Accelerated Reader's logo.
4. The statement "A leader in learning information systems."
The inside back cover of the Prospectus contains the following graphical
------------------------------------------------------------------------
material:
- --------
1. A picture of a woman and a child reading a book.
2. A picture of a report generated by S.T.A.R.
3. The Company's mission statement.
4. The Company's logo and its product logos.
5. A graphic showing the results of a survey involving the Accelerated
Reader.
<PAGE>
Exhibit 1.1
-----------
2,800,000 Shares/1/
ADVANTAGE LEARNING SYSTEMS, INC.
Common Stock
PURCHASE AGREEMENT
------------------
September__ , 1997
PIPER JAFFRAY INC.
MONTGOMERY SECURITIES
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen and Ladies:
Advantage Learning Systems, Inc., a Wisconsin corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters") an aggregate of 2,800,000 shares (the "Firm Shares")
of Common Stock, $0.01 par value per share (the "Common Stock"), of the Company.
The Company further proposes to grant to the several Underwriters an option to
purchase up to 420,000 additional shares of Common Stock, on the terms and for
the purposes set forth in Section 3 hereof (the "Option Shares"). The Firm
Shares and any Option Shares purchased pursuant to this Purchase Agreement are
herein collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of the
Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. Registration Statement. A registration statement on Form S-1 (File No.
333-22519) with respect to the Securities, including a preliminary form of
prospectus, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations ("Rules and Regulations")
- ------------------------
/1/ Plus an option to purchase up to 420,000 additional shares to cover
over-allotments.
<PAGE>
of the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission; one or more amendments to such registration
statement have also been so prepared and have been, or will be, so filed. Copies
of such registration statement and amendments and each related preliminary
prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, it will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. Such registration
statement as amended at the time it is or was declared effective by the
Commission, and, in the event of any amendment thereto after the effective date
and prior to the First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A(b), if applicable,
is hereinafter called the "Registration Statement." The prospectus included in
the Registration Statement at the time it is or was declared effective by the
Commission is hereinafter called the "Prospectus," except that if any prospectus
filed by the Company with the Commission pursuant to Rule 424(b) of the Rules
and Regulations or any other prospectus provided to the Underwriters by the
Company for use in connection with the offering of the Securities (whether or
not required to be filed by the Company with the Commission pursuant to Rule
424(b) of the Rules and Regulations) differs from the prospectus on file at the
time the Registration Statement is or was declared effective by the Commission,
the term "Prospectus" shall refer to such differing prospectus from and after
the time such prospectus is filed with the Commission or transmitted to the
Commission for filing pursuant to such Rule 424(b) or from and after the time it
is first provided to the Underwriters by the Company for such use. The term
"Preliminary Prospectus" as used herein means any preliminary prospectus
included in the Registration Statement prior to the time it becomes or became
effective under the Act and any prospectus subject to completion as described in
Rule 430A of the Rules and Regulations.
2. Representations and Warranties of the Company and the Principal
Shareholder.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof, did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; except
that the foregoing shall not apply to statements in or
2
<PAGE>
omissions from any Preliminary Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation
thereof. If the Registration Statement has been declared effective by the
Commission, no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceeding for that purpose has been
initiated or, to the Company's knowledge, threatened by the Commission.
(ii) As of the time the Registration Statement (or any post-effective
amendment thereto) is or was declared effective by the Commission, upon the
filing or first delivery to the Underwriters of the Prospectus (or any
supplement to the Prospectus) and at the First Closing Date and Second
Closing Date (as hereinafter defined), (A) the Registration Statement and
Prospectus (in each case, as so amended or supplemented) will conform or
conformed in all material respects to the requirements of the Act and the
Rules and Regulations, (B) the Registration Statement (as so amended) will
not and did not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (C) the Prospectus (as so
supplemented) will not and did not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they are or were made, not misleading; except that
the foregoing shall not apply to statements in or omissions from any such
document in reliance upon, and in conformity with, written information
furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof.
(iii) The financial statements of the Company, together with the notes
thereto, set forth in the Registration Statement and Prospectus comply in
all material respects with the requirements of the Act and fairly present
the financial condition of the Company as of the dates indicated and the
results of operations and changes in cash flows for the periods therein
specified in conformity with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise
stated therein); and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. No
other financial statements or schedules are required to be included in the
Registration Statement or Prospectus. Arthur Andersen LLP, which have
expressed their opinion with respect to the financial statements and
schedules filed as a part of the Registration Statement and included in the
Registration Statement and Prospectus, are independent public accountants
as required by the Act and the Rules and Regulations.
(iv) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. Each of the Company and its subsidiaries
has full corporate power and authority to own its properties and conduct
its business as
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currently being carried on and as described in the Registration Statement
and Prospectus, and is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its business makes such
qualification necessary and in which the failure to so qualify would cause
a material adverse change in the condition (financial or otherwise),
business, net worth or results of operations of the Company and its
subsidiaries, taken as a whole, or could reasonably be expected to have a
material adverse effect on the prospects of the Company and its
subsidiaries, taken as a whole (collectively, any such change being
referred to as a "Material Adverse Change").
(v) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, (A) neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct
or contingent, or entered into any material transactions other than
transactions with customers in the ordinary course of business, or declared
or paid any dividends or made any distribution of any kind with respect to
its capital stock; and (B) there has not been any change in the capital
stock (other than a change in the number of outstanding shares of Common
Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any material change in the short-term or long-term
debt, or any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock, of the Company or any of its
subsidiaries, or any Material Adverse Change.
(vi) Except as set forth in the Prospectus, there is not pending or,
to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company or any of its subsidiaries is a
party before or by any court or governmental agency, authority or body, or
any arbitrator, which could reasonably be expected to result in any
Material Adverse Change.
(vii) There are no contracts or documents of the Company or any of
its subsidiaries that are required to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have
not been so filed.
(viii) This Agreement has been duly authorized, executed and delivered
by the Company, and constitutes a valid, legal and binding obligation of
the Company, enforceable in accordance with its terms, except as rights to
indemnity hereunder may be limited by federal or state securities laws and
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity. The execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute, any
agreement or instrument to which the Company is a party or by which it is
bound or to which any of its property is subject, the Company's charter
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or by-laws, or any order, rule, regulation or decree of any court or
governmental agency or body having jurisdiction over the Company or any of
its properties; no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement or for the
consummation of the transactions contemplated hereby, including the
issuance or sale of the Securities by the Company, except such as may be
required under the Act or state securities or blue sky laws; and the
Company has full power and authority to enter into this Agreement and to
authorize, issue and sell the Securities as contemplated by this Agreement.
(ix) All of the issued and outstanding shares of capital stock of the
Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable (except to the
extent provided under Wis. Stat. Section 180.0622(2)(b)), have been issued
in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the holders thereof are not
subject to personal liability by reason of being such holders; the
Securities which may be sold hereunder by the Company have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms hereof, will have been validly issued and will be fully paid and
nonassessable (except to the extent provided under Wis. Stat. Section
180.0622(2)(b)), and the holders thereof will not be subject to personal
liability by reason of being such holders (except to the extent provided
under Wis. Stat. Section 180.0622(2)(b)); and the capital stock of the
Company, including the Common Stock, conforms to the description thereof in
the Registration Statement and Prospectus. Except as otherwise stated in
the Registration Statement and Prospectus, there are no preemptive rights
or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the
Company's charter, by-laws or any agreement or other instrument to which
the Company is a party or by which the Company is bound. Neither the filing
of the Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights for or relating to
the registration of any shares of Common Stock or other securities of the
Company. All of the issued and outstanding shares of capital stock of each
of the Company's subsidiaries have been duly and validly authorized and
issued and are fully paid and nonassessable (except, as to the subsidiaries
organized under Wisconsin law, to the extent provided under Wis. Stat.
Section 180.0622(2)(b)), and, except as otherwise described in the
Registration Statement and Prospectus, the Company owns of record and
beneficially, free and clear of any security interests, claims, liens,
proxies, equities or other encumbrances, all of the issued and outstanding
shares of such stock. Except as described in the Registration Statement and
the Prospectus, there are no options, warrants, agreements, contracts or
other rights in existence to purchase or acquire from the Company or any
subsidiary of the Company any shares of the capital stock of the Company or
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<PAGE>
any subsidiary of the Company. The Company has an authorized and
outstanding capitalization as set forth in the Registration Statement and
the Prospectus.
(x) The Company and each of its subsidiaries holds, and is operating
in compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and
orders of any governmental or self-regulatory body required for the conduct
of its business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and in
full force and effect; and the Company and each of its subsidiaries is in
compliance in all material respects with all applicable federal, state,
local and foreign laws, regulations, orders and decrees.
(xi) The Company and its subsidiaries have good and marketable title
to all property described in the Registration Statement and Prospectus as
being owned by them, in each case free and clear of all liens, claims,
security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus; the property held under
lease by the Company and its subsidiaries is held by them under valid,
subsisting and enforceable leases with only such exceptions with respect to
any particular lease as do not interfere in any material respect with the
conduct of the business of the Company or its subsidiaries; the Company and
each of its subsidiaries owns or possesses the rights to use all patents,
patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses,
inventions, trade secrets and rights (collectively, "Intellectual
Property") necessary for the conduct of the business of the Company and its
subsidiaries as currently carried on and as described in the Registration
Statement and Prospectus, the absence of which could reasonably be expected
to result in a Material Adverse Change; except as stated in the
Registration Statement and Prospectus, and to the knowledge of the Company,
no name which the Company or any of its subsidiaries uses and no other
aspect of the business of the Company or any of its subsidiaries will
involve or give rise to any infringement of, or license or similar fees
for, any other party's Intellectual Property which is material to the
business of the Company and neither the Company nor any of its subsidiaries
has received any notice alleging any such infringement or fee.
(xii) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws or in breach of or otherwise in
default in the performance of any material obligation, agreement or
condition contained in any bond, debenture, note, indenture, loan agreement
or any other material contract, lease or other instrument to which it is
subject or by which any of them may be bound, or to which any of the
material property or assets of the Company or any of its subsidiaries is
subject, except for breaches or which would not, individually or in the
aggregate, give rise to a Material Adverse Change.
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(xiii) The Company and its subsidiaries have filed all federal, state,
local and foreign income and franchise tax returns required to be filed,
except those returns as to which the failure to file would not,
individually or in the aggregate, give rise to a Material Adverse Change,
and are not in default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto, other
than any which the Company or any of its subsidiaries is contesting in good
faith.
(xiv) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and
sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xv) The Securities have been conditionally approved for listing on
the Nasdaq National Market and, on the date the Registration Statement
became or becomes effective, the Company's Registration Statement on Form
8-A or other applicable form under the Securities Exchange Act of 1934
became or will become effective.
(xvi) Other than the subsidiaries of the Company listed in Exhibit 21
to the Registration Statement, the Company owns no capital stock or other
equity interest in any corporation, partnership, limited liability company,
association, trust or other entity.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xviii) Other than as contemplated by this Agreement, the Company has
not incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby.
(xix) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or affiliate
located in Cuba.
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(b) Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(c) Terrance D. Paul (the "Principal Shareholder") represents
to the Underwriters as follows:
Such Principal Shareholder has reviewed the Registration
Statement and Prospectus and, although such Principal Shareholder has not
independently verified the accuracy or completeness of all the information
contained therein and is not guaranteeing the accuracy thereof, nothing has
come to the attention of such Principal Shareholder that would lead such
Principal Shareholder to believe that on the Effective Date, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or that,
on the Effective Date, the Prospectus contained any untrue statement of a
material fact or omitted to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
3. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue 2,800,000 Firm Shares, to the
several Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto. The purchase
price for each Firm Share shall be $ per share. In making this Agreement,
each Underwriter is contracting severally and not jointly; except as
provided in paragraph (c) of this Section 3 and in Section 8 hereof, the
agreement of each Underwriter is to purchase only the respective number of
Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds
payable to the order of the Company, at the offices of Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or
such other location as may be mutually acceptable, at 9:00 a.m.,
Minneapolis time, on the fourth full business day following the date
hereof, or at such other time as you and the Company determine, such time
and date of delivery being herein referred to as the "First Closing Date."
The Firm Shares, in definitive form and in such denominations and
registered in such names as you may request upon at least two business
days' prior notice to the Company, will be made available for checking and
packaging at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may
be mutually acceptable, at least one business day prior to the First
Closing Date.
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<PAGE>
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters an option
to purchase all or any portion of the Option Shares at the same purchase
price as the Firm Shares, for use solely in covering any over-allotments
made by the Underwriters in the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the effective date of this Agreement upon
notice (confirmed in writing) by the Representatives to the Company,
setting forth the aggregate number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in
which the certificates for the Option Shares are to be registered and the
date and time, as determined by you, when the Option Shares are to be
delivered, such time and date being herein referred to as the "Second
Closing" and "Second Closing Date", respectively; provided, however, that
the Second Closing Date shall not be earlier than the First Closing Date,
nor earlier than the second business day after the date on which the option
shall have been exercised. If the option is exercised, the number of Option
Shares to be purchased by each Underwriter shall be the same percentage of
the total number of Option Shares to be purchased by the several
Underwriters as the number of Firm Shares to be purchased by such
Underwriter is of the total number of Firm Shares to be purchased by the
several Underwriters, as adjusted by the Representatives in such manner as
the Representatives deem advisable to avoid fractional shares. No Option
Shares shall be sold and delivered unless the Firm Shares previously have
been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds
payable to the order of the Company at the offices of Piper Jaffray Inc.,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or
such other location as may be mutually acceptable at 9:00 a.m., Minneapolis
time, on the Second Closing Date. The Option Shares in definitive form and
in such denominations and registered in such names as you have set forth in
your notice of option exercise, will be made available for checking and
packaging at the office of Piper Jaffray Inc., Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota, or such other location as may
be mutually acceptable, at least one business day prior to the Second
Closing Date.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be
obligated to) make payment to the Company on behalf of any Underwriter for
the Securities to be purchased by such Underwriter. Any such payment by you
shall not relieve any such Underwriter of any of its obligations hereunder.
Nothing herein contained shall constitute any of the Underwriters an
unincorporated association or partner with the Company.
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4. Covenants.
The Company covenants and agrees with the several Underwriters as
follows:
(i) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause
the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify you
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed and of any request by the
Commission for any amendment or supplement to the Registration Statement or
Prospectus or additional information; if the Company has elected to rely on
Rule 430A of the Rules and Regulations, the Company will file a Prospectus
containing the information omitted therefrom pursuant to such Rule 430A
with the Commission within the time period required by, and otherwise in
accordance with the provisions of, Rules 424(b) and 430A of the Rules and
Regulations; the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus that, in your opinion, may be
necessary or advisable in connection with the distribution of the
Securities by the Underwriters; and the Company will not file any amendment
or supplement to the Registration Statement or Prospectus to which you
shall reasonably object by notice to the Company after having been
furnished a copy a reasonable time prior to the filing.
(ii) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation
or threatening of any proceeding for any such purpose; and the Company will
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such a stop order should be issued.
(iii) Within the time during which a prospectus relating to the
Securities is required to be delivered under the Act, the Company will
comply as far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations, as
from time to time in force, so far as necessary to permit the continuance
of sales of or dealings in the Securities as contemplated by the provisions
hereof and the Prospectus. If during such period any event occurs as a
result of which the Prospectus would include an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the
Registration
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Statement or supplement the Prospectus to comply with the Act, the Company
will promptly notify you and will amend the Registration Statement or
supplement the Prospectus (at the expense of the Company) so as to correct
such statement or omission or effect such compliance.
(iv) The Company will use its best efforts to qualify the
Securities for sale under the securities laws of such jurisdictions as you
reasonably designate and to continue such qualifications in effect so long
as required for the distribution of the Securities, except that the Company
shall not be required in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process in any
state.
(v) The Company will furnish to the Underwriters copies of the
Registration Statement (three of which will be signed in conformity with
the Act and will include all exhibits), each Preliminary Prospectus, the
Prospectus, and all amendments and supplements to such documents, in each
case as soon as available and in such quantities as you may from time to
time reasonably request.
(vi) During a period of five years commencing with the date
hereof, the Company will furnish to the Representatives, and to each
Underwriter who may so request in writing, copies of all periodic and
special reports furnished to the shareholders of the Company and all
information, documents and reports filed with the Commission (other than
exhibits thereto), the Nasdaq National Market, the National Association of
Securities Dealers, Inc. ("NASD") or any securities exchange.
(vii) The Company will make generally available to its security
holders as soon as practicable, but in any event not later than 15 months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning
after the effective date of the Registration Statement that shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
(viii) The Company, whether or not the transactions contemplated
hereunder are consummated or this Agreement is prevented from becoming
effective under the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to the Underwriters of the Securities, (B) all expenses and fees
(including, without limitation, fees and expenses of the Company's
accountants and counsel but, except as otherwise provided below, not
including fees of the Underwriters' counsel) in connection with the
preparation, printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all amendments,
schedules, and exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or
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supplement thereto, and the printing, delivery, and shipping of this
Agreement and other underwriting documents, including Blue Sky Memoranda,
(C) all filing fees and fees and disbursements of the Underwriters' counsel
incurred in connection with the qualification of the Securities for
offering and sale by the Underwriters or by dealers under the securities or
blue sky laws of the states and other jurisdictions which you shall
designate in accordance with Section 4(d) hereof, which fees of
Underwriters' counsel shall not exceed $5,000 without the prior approval of
the Company, (D) the fees and expenses of any transfer agent or registrar,
(E) the filing fees incident to any required review by the NASD's Division
of Corporation Finance of the terms of the sale of the Securities, (F)
listing fees, if any, and (G) all other costs and expenses incident to the
performance of its obligations hereunder that are not otherwise
specifically provided for herein. If the sale of the Securities provided
for herein is not consummated by reason of action by the Company pursuant
to Section 9(a) hereof which prevents this Agreement from becoming
effective, or by reason of any failure, refusal or inability on the part of
the Company to perform any agreement on its part to be performed, or
because any other condition of the Underwriters' obligations hereunder
required to be fulfilled by the Company is not fulfilled, the Company will
reimburse the several Underwriters for all out-of-pocket disbursements
(including reasonable fees and disbursements of counsel) incurred by the
Underwriters in connection with their investigation, preparing to market
and marketing the Securities or in contemplation of performing their
obligations hereunder. The Company shall not in any event be liable to any
of the Underwriters for loss of anticipated profits from the transactions
covered by this Agreement.
(ix) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder for the purposes set forth in the
Prospectus and will file such reports with the Commission with respect to
the sale of the Securities and the application of the proceeds therefrom as
may be required in accordance with Rule 463 of the Rules and Regulations.
(x) The Company will not, for a period of 180 days after the
commencement of the public offering of the Securities by the Underwriters
(the "Lock-Up Period"), without the prior written consent of Piper Jaffray
Inc., offer for sale, sell, contract to sell, grant any option for the sale
of, pledge or otherwise directly or indirectly issue or dispose of
(collectively, a "Disposition"), any shares of Common Stock, securities
convertible into or exchangeable or any other rights to purchase or
acquire, Common Stock (collectively, including Common Stock, "Company
Securities"), provided that the foregoing provisions shall not prohibit (A)
the sale of the Securities to the Underwriters pursuant to this Agreement
or (B) the Company's grant, pursuant to its 1997 Stock Incentive Plan, of
any options to purchase stock, provided that such options are, by their
terms, not exercisable within the Lock-Up Period.
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(xi) The Company either has caused to be delivered to you or will
cause to be delivered to you prior to the First Closing Date a letter from
each of the Company's directors, executive officers and shareholders owning
in excess of 1% of the Company's Common Stock immediately prior to the
First Closing Date, stating that such person agrees that he or she will
not, during the Lock-Up Period, without the prior written consent of Piper
Jaffray Inc., effect any Disposition of any Company Securities.
(xii) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities, and has not effected any sales of Common
Stock which are required to be disclosed in response to Item 701 of
Regulation S-K under the Act which have not been so disclosed in the
Registration Statement.
(xiii) The Company will not incur any liability for any finder's or
broker's fee or agent's commission in connection with the execution and
delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xiv) The Company will inform the Florida Department of Banking
and Finance at any time prior to the consummation of the distribution of
the Securities by the Underwriters if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba. Such information will be provided within 90 days after the
commencement thereof or after a change occurs with respect to previously
reported information.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company contained herein, to the performance by
the Company of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Minneapolis time, on the date of this Agreement, or such
later time and date as you, as Representatives of the several Underwriters,
shall approve and all filings required by Rule 424 and Rule 430A of the Rules
and Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
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(b) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto, contains an untrue statement of fact which, in your opinion, is
material, or omits to state a fact which, in your opinion, is material and is
required to be stated therein or necessary to make the statements therein not
misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions other than transactions with customers in
the ordinary course of business, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there shall not
have been any change in the capital, or any material change in the short-term or
long-term debt of the Company, or except as described in the Prospectus, any
issuance of options, warrants, convertible securities or other rights to
purchase the capital stock of the Company or any of its subsidiaries, or any
Material Adverse Change (whether or not arising in the ordinary course of
business) that, in your judgment, makes it impractical or inadvisable to offer
or deliver the Securities on the terms and in the manner contemplated in the
Prospectus.
(d) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Godfrey & Kahn,
S.C., counsel for the Company, dated such Closing Date and addressed to you, to
the effect that:
(i) Each of the Company and its subsidiaries is validly existing as
a corporation in good standing (meaning in Wisconsin that such corporation
has filed its most recent annual report and has not filed articles of
dissolution) under the laws of its jurisdiction of incorporation. Each of
the Company and its subsidiaries has all requisite corporate power and
authority to own its properties and, to the best of such counsel's
knowledge, to conduct its business as currently being carried on and as
described in the Registration Statement and Prospectus. The Company's
subsidiary, the Institute for Academic Excellence, Inc., is duly qualified
to do business as a foreign corporation in the states of Florida, North
Carolina, Tennessee, Texas and California. Neither the Company nor its
other subsidiary, IPS Publishing, Inc., is qualified as a foreign
corporation in any state of the United States.
(ii) The capital stock of the Company conforms as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and outstanding shares of
the capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable (except to the extent provided
for in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law as
interpreted by applicable court decisions), and the holders thereof are not
subject to personal liability by reason of being such holders (except to
the extent provided for in Section 180.0622(2)(b) of the Wisconsin Business
Corporation Law as interpreted by applicable court
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decisions). The Securities to be issued and sold by the Company hereunder
have been duly authorized and, when issued, delivered and paid for in
accordance with the terms of this Agreement, will have been validly issued
and will be fully paid and nonassessable (except to the extent provided for
in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law as
interpreted by applicable court decisions), and the holders thereof will
not be subject to personal liability by reason of being such holders
(except to the extent provided for in Section 180.0622(2)(b) of the
Wisconsin Business Corporation Law as interpreted by applicable court
decisions). Except as otherwise stated in the Registration Statement and
Prospectus, there are no preemptive rights or other rights to subscribe for
or to purchase, or any restriction upon the voting or transfer of, any
shares of Common Stock pursuant to the Company's articles of incorporation
or by-laws or, to the best of such counsel's knowledge, any agreement or
other instrument to which the Company is a party or by which the Company is
bound. To the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any rights for or relating to
the registration of any shares of Common Stock or other securities of the
Company.
(iii) All of the issued and outstanding shares of capital stock of
each of the Company's subsidiaries have been duly authorized and validly
issued and are fully paid and nonassessable (except to the extent provided
for in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law as
interpreted by applicable court decisions) and, to the best of such
counsel's knowledge, except as otherwise described in the Registration
Statement, the Company owns of record and beneficially, free and clear of
any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding shares of such stock. To
the best of such counsel's knowledge, except as described in the
Registration Statement and Prospectus, there are no options, warrants,
agreements, contracts or other rights in existence to purchase or acquire
from the Company or any subsidiary any shares of the capital stock of the
Company or any subsidiary of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of
such counsel, threatened by the Commission.
(v) The descriptions in the Registration Statement and Prospectus of
statutes, legal and governmental proceedings, and contracts are accurate
and fairly present the information required to be shown in all material
respects; and such counsel does not know of any statutes or legal or
governmental proceedings required to be described in the Prospectus that
are not described as required, or of any contracts or documents of a
character required to be described in the
15
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Registration Statement or Prospectus or included as exhibits to the
Registration Statement that are not described or included as required.
(vi) The Company has the requisite corporate power and authority to
enter into this Agreement, and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid, legal and
binding obligation of the Company enforceable in accordance with its terms
(except as rights to indemnity hereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting the rights
of creditors generally and subject to general principles of equity); the
execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, rule or regulation of the United States or the state of
Wisconsin or otherwise known by such counsel to be applicable or under any
agreement or instrument filed as an Exhibit to the Registration Statement
or the Company's articles of incorporation or by-laws, or any order or
decree known to such counsel of any court or governmental agency or body
having jurisdiction over the Company, its subsidiaries or any of their
respective properties; and no consent, approval, authorization or order of,
or filing with, any court or governmental agency or body is required under
the laws of the United States or the state of Wisconsin or under any other
laws known by such counsel to be applicable for the execution, delivery and
performance of this Agreement or for the consummation of the transactions
contemplated hereby, including the issuance or sale of the Securities by
the Company, except such as may be required under the Act or state or other
applicable securities laws.
(vii) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries is in violation of its respective articles of
incorporation or by-laws. To the best of such counsel's knowledge, neither
the Company nor any of its subsidiaries is in breach of or otherwise in
default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note, indenture, loan agreement or any
other contract filed as an Exhibit to the Registration Statement.
(viii) The Registration Statement and the Prospectus, and any
amendment thereof or supplement thereto, comply as to form in all material
16
<PAGE>
respects with the requirements of the Act and the Rules and Regulations;
and on the basis of conferences with officers of the Company, examination
of documents referred to in the Registration Statement and Prospectus and
such other procedures as such counsel deemed appropriate, nothing has come
to the attention of such counsel that causes such counsel to believe that
the Registration Statement or any amendment thereof, at the time the
Registration Statement became effective and as of such Closing Date,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (as of its date
and as of such Closing Date), as amended or supplemented, includes any
untrue statement of material fact or omits to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; it being understood that such
counsel need express no opinion as to the financial statements or other
financial data included in any of the documents mentioned in this clause.
(ix) Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to matters of
law other than Wisconsin and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company and its subsidiaries
provided that the extent of such reliance is specified in such opinion.
(e) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, such opinion or opinions Sachnoff &
Weaver, Ltd., counsel for the several Underwriters, dated such Closing Date and
addressed to you, with respect to the formation of the Company, the validity of
the Securities, the Registration Statement, the Prospectus and other related
matters as you reasonably may request, and such counsel shall have received such
papers and information as they request to enable them to pass upon such matters.
(f) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter Arthur Andersen LLP, dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission, and stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of
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this Agreement, and the effect of the letter so to be delivered on such Closing
Date shall be to confirm the conclusions and findings set forth in such prior
letter.
(g) On each Closing Date, there shall have been furnished to you, as
Representatives of the Underwriters, a certificate, dated such Closing Date and
addressed to you, signed by the chief executive officer and by the chief
financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, in all material respects, as if made at and
as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date;
(ii) No stop order or other order suspending the effectiveness of the
Registration Statement or any amendment thereof or the qualification of the
Securities for offering or sale has been issued, and no proceeding for that
purpose has been instituted or, to the best of their knowledge, is
contemplated by the Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus, and any amendments thereof or
supplements thereto, and, to the best of their respective knowledge (A)
such documents contain all statements and information required to be
included therein, the Registration Statement, or any amendment thereof,
does not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented, does not include any untrue statement of material fact or
omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, (B)
since the effective date of the Registration Statement there has occurred
no event required to be set forth in an amended or supplemented prospectus
which has not been so set forth, (C) subsequent to the respective dates as
of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has incurred
any material liabilities or obligations, direct or contingent, or entered
into any material transactions, not in the ordinary course of business, or
declared or paid any dividends or made any distribution of any kind with
respect to its capital stock, and except as disclosed in the Prospectus,
there has not been any change in the capital stock (other than a change in
the number of outstanding shares of Common Stock due to the issuance of
shares upon the exercise of outstanding options or warrants), or any
material change in the short-term or long-term debt, or any issuance of
options, warrants, convertible securities or other rights to purchase the
capital stock, of the Company, or any of its subsidiaries, or any Material
Adverse Change or any development involving a prospective material adverse
change
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(whether or not arising in the ordinary course of business), in the general
affairs, condition (financial or otherwise), business, key personnel,
property, prospects, net worth or results of operations of the Company and
its subsidiaries, taken as a whole, and (D) except as stated in the
Registration Statement and the Prospectus, there is not pending, or, to the
knowledge of the Company, threatened or contemplated, any action, suit or
proceeding to which the Company or any of its subsidiaries is a party
before or by any court or governmental agency, authority or body, or any
arbitrator, which might result in any Material Adverse Change.
(h) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or
they may have reasonably requested.
(i) Prior to the Closing Date, the shares to be issued and sold by
the Company shall have been duly authorized for listing by The Nasdaq
National Market upon official notice of issuance.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and counsel for the Underwriters.
The Company will furnish you with such conformed copies of such opinions,
certificates, letters and other documents as you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company and the Principal Shareholder jointly and severally
agree to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter
may become subject, under the Act or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company and the Principal Shareholder), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant
to Rule 430A, if applicable, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
jointly and severally agree to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending against such loss, claim, damage, liability or action; provided,
however, (i) that neither the Company nor the Principal Shareholder shall be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with written
information furnished to the
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Company by you, or by any Underwriter through you, specifically for use in
the preparation thereof and (ii) the Principal Shareholder shall only be
liable under this paragraph with respect to (A) information pertaining to
Terrance D. Paul or Judith A. Paul furnished by them or on their behalf
expressly for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto or (B) facts what would constitute or demonstrate a breach of any
representation or warranty of the Principal Shareholder set forth in
Section 2(c) hereof.
In addition to its other obligations under this Section 6(a), the
Company agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 6(a), it will reimburse each Underwriter on a
monthly basis for all reasonable legal fees or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of
a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the
Underwriter that received such payment shall promptly return it to the
party or parties that made such payment, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from
time to time by First Bank Minneapolis N.A. (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within
30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise (including in
settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by you, or by such Underwriter through you, specifically for use in
the preparation thereof, and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in
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connection with investigating or defending against any such loss, claim,
damage, liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve the indemnifying
party from any liability that it may have to any indemnified party. In case
any such action shall be brought against any indemnified party, and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of the indemnifying party's election so to assume the
defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided,
however, that if, in the sole judgment of the Representatives, it is
advisable for the Underwriters to be represented as a group by separate
counsel, the Representatives shall have the right to employ a single
counsel, reasonably acceptable to the Company and the Principal
Shareholder, to represent the Representatives and all Underwriters who may
be subject to liability arising from any claim in respect of which
indemnity may be sought by the Underwriters under subsection (a) of this
Section 6, in which event the reasonable fees and expenses of such separate
counsel shall be borne by the indemnifying party or parties and reimbursed
to the Underwriters as incurred (in accordance with the provisions of the
second paragraph in subsection (a) above). An indemnifying party shall not
be obligated under any settlement agreement relating to any action under
this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or (b)
above, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Principal Shareholder on the one
hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Principal Shareholder on the one hand and the
Underwriters on the other in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as
any other relevant equitable considerations. The relative benefits received
by the Company and the Principal Shareholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting
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expenses) received by the Company, or paid to the Principal Shareholder,
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Principal Shareholder
or the Underwriters and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Principal Shareholder and the Underwriters
agree that it would not be just and equitable if contributions pursuant to
this subsection (d) were to be determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this subsection (d).
The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this subsection
(d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending against any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several
in proportion to their respective underwriting obligations and not joint.
(e) The obligations of under this Section 6 shall be in addition
to any liability which the Company or the Principal Shareholder may
otherwise have and shall extend, upon the same terms and conditions, to
each person, if any, who controls any Underwriter within the meaning of the
Act; and the obligations of the Underwriters under this Section 6 shall be
in addition to any liability that the respective Underwriters may otherwise
have and shall extend, upon the same terms and conditions, to each director
of the Company (including any person who, with his consent, is named in the
Registration Statement as about to become a director of the Company), to
each officer of the Company who has signed the Registration Statement and
to each person, if any, who controls the Company within the meaning of the
Act.
(f) Notwithstanding any other provision hereof, the liability of
the Principal Shareholder under his representations and warranties
contained in subparagraph (c) of Section 2 hereof and under the related
indemnity and reimbursement agreements contained in the provisions of this
Section 6 shall be limited to an amount equal to one half of the total cash
dividend of undistributed S corporation earnings which is paid by the
Company after the date of this Agreement from the proceeds of the sale of
the Securities. The Company and the Principal Shareholder may agree, as
among themselves and without limiting the rights of the
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Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible. Further, the
Underwriters agree that they will not seek indemnification and contribution
against the Principal Shareholder under this Agreement unless and until the
Company (and its insurers if any and if applicable) is unable to provide
indemnification due to the Underwriters hereunder.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company and the
Principal Shareholders herein or in certificates delivered pursuant hereto,
and the agreements of the several Underwriters, the Principal Shareholders
and the Company contained in Section 6 hereof, shall remain operative and
in full force and effect regardless of any investigation made by or on
behalf of any Underwriter or any controlling person thereof, or the Company
or any of its officers, directors, or controlling persons, and shall
survive delivery of, and payment for, the Securities to and by the
Underwriters hereunder.
8. Substitution of Underwriters.
(a) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or
Underwriters to be purchased hereunder, upon tender of such Firm Shares in
accordance with the terms hereof, and the amount of Firm Shares not
purchased does not aggregate more than 10% of the total amount of Firm
Shares set forth in Schedule I hereto, the remaining Underwriters shall be
obligated to take up and pay for (in proportion to their respective
underwriting obligations hereunder as set forth in Schedule I hereto except
as may otherwise be determined by you) the Firm Shares that the withdrawing
or defaulting Underwriters agreed but failed to purchase.
(b) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or
Underwriters to be purchased hereunder, upon tender of such Firm Shares in
accordance with the terms hereof, and the amount of Firm Shares not
purchased aggregates more than 10% of the total amount of Firm Shares set
forth in Schedule I hereto, and arrangements satisfactory to you for the
purchase of such Firm Shares by other persons are not made within 36 hours
thereafter, this Agreement shall terminate. In the event of any such
termination, the Company shall not be under any liability to any
Underwriter (except to the extent provided in Section 4(a)(viii), Section
4(b)(ii) and Section 6 hereof) nor shall any Underwriter (other than an
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the amount of Firm Shares agreed by such
Underwriter to be purchased hereunder) be under any liability to the
Company (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the
necessary changes in the Registration Statement,
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Prospectus and any other documents, as well as any other arrangements, may
be effected. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 8.
9. Effective Date of this Agreement and Termination.
(a) If this Registration Statement is not effective at the time
this Agreement is executed, this Agreement shall become effective at the
time the Registration Statement is declared effective; provided, that if
the Registration Statement is effective at the time this Agreement is
executed, this Agreement shall become effective at such time. By giving
notice as hereinafter specified before the time this Agreement becomes
effective, you, as Representatives of the several Underwriters, or the
Company may prevent this Agreement from becoming effective without
liability of any party to any other party, except that the provisions of
Section 4(viii) and Section 6 hereof shall at all times be effective.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time at or prior to the First Closing Date,
and the option referred to in Section 3(b), if exercised, may be canceled
at any time prior to the Second Closing Date, if (i) the Company shall have
failed, refused or been unable, at or prior to such Closing Date, to
perform any agreement on its part to be performed hereunder, (ii) any other
condition of the Underwriters' obligations hereunder is not fulfilled,
(iii) trading on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market shall have been wholly suspended for a period
of at least one trading day, (iv) minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall
have been required, on the New York Stock Exchange or the American Stock
Exchange, by such Exchange or by order of the Commission or any other
governmental authority having jurisdiction, (v) a banking moratorium shall
have been declared by Federal or New York authorities, or (vi) there has
occurred and is continuing any material adverse change in the financial
markets in the United States or an outbreak of major hostilities (or an
escalation thereof) in which the United States is involved, a declaration
of war by Congress, any other substantial national or international
calamity or any other event or occurrence of a similar character shall have
occurred since the execution of this Agreement that, in your reasonable
judgment, makes it impractical or inadvisable to proceed with the
completion of the sale of and payment for the Securities. Any such
termination shall be without liability of any party to any other party
except that the provisions of Section 4(viii) and Section 6 hereof shall at
all times be effective.
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(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section, the
Company shall be notified promptly by you by telephone or telegram,
confirmed by letter. If the Company elects to prevent this Agreement from
becoming effective, you shall be notified by the Company by telephone or
telegram, confirmed by letter.
10. Information Furnished by Underwriters. The statements set forth
in the last paragraph of the cover page and under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by or on behalf of the
Underwriters referred to in Section 2 and Section 6 hereof.
11. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to the Representatives c/o Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402, except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address stated in
the Underwriters' Questionnaire furnished by such Underwriter in connection
with this offering; if to the Company, shall be mailed, telegraphed or
delivered to it 2911 Peach Street, Wisconsin Rapids, WI 54995 Attention:
Chief Executive Officer; if to the Principal Shareholder, shall be mailed,
telegraphed or delivered to Terrance D. Paul, 2911 Peach Street, Wisconsin
Rapids, WI 54995; or in any case to such other address as the person to be
notified may have requested in writing. All notices given by telegram shall
be promptly confirmed by letter. Any party to this Agreement may change
such address for notices by sending to the parties to this Agreement
written notice of a new address for such purpose.
12. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended
or shall be construed to give to any other person, firm or corporation any
legal or equitable remedy or claim under or in respect of this Agreement or
any provision herein contained. The term "successors and assigns" as herein
used shall not include any purchaser, as such purchaser, of any of the
Securities from any of the several Underwriters.
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13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
ADVANTAGE LEARNING
SYSTEMS, INC.
By:
-----------------------------------
[Title]
--------------------------------------
Terrance D. Paul
Terrance D. Paul is executing this Agreement solely with respect to his
representations and warranties set forth in subparagraph (c) of Section 2, and
the notice provision in Section 11, and for the purposes of evidencing his
related obligations as provided in Sections 6 and 7 hereof, and in order to
induce the Underwriters to enter into and perform this Agreement.
Confirmed as of the date first above
mentioned, on behalf of themselves and
the other several Underwriters named
in Schedule I hereto.
PIPER JAFFRAY INC.
MONTGOMERY SECURITIES
BY: PIPER JAFFRAY INC.
By:
------------------------
Managing Director
26
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION> Number of
Underwriter Firm Shares /(1)/
- ----------- -----------------
<S> <C>
Piper Jaffray Inc......................................
Montgomery Securities..................................
---------
Total............................................... 2,800,000
=========
</TABLE>
_________________
(1) The Underwriters may purchase up to an additional 420,000 Option Shares, to
the extent the option described in Section 3 of the Agreement is exercised, in
the proportions and in the manner described in the Agreement.
<PAGE>
Exhibit 5.1
-----------
GODFREY & KAHN, S.C.
780 NORTH WATER STREET
MILWAUKEE, WI 53202-3590
TEL. 414-273-3500
FAX. 414-273-5198
August 25, 1997
Advantage Learning Systems, Inc.
2911 Peach Street
Wisconsin Rapids, Wisconsin 54495-8036
Ladies and Gentlemen:
We have acted as your counsel in connection with the public offering by
Advantage Learning Systems, Inc., a Wisconsin corporation (the "Company"), of
up to 3,220,000 shares of common stock, $.01 par value (the "Shares") as
described in the Company's Registration Statement on Form S-1 (the
"Registration Statement")(Reg. No. 333-22519), and related prospectus included
therein (the "Prospectus").
We have examined: (a) the Prospectus and the Registration Statement, (b)
the Company's Amended and Restated Articles of Incorporation and Amended and
Restated By-Laws, (c) certain resolutions of the Company's Board of Directors
and (d) such other proceedings, documents and records as we have deemed
necessary to enable us to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance in accordance with the Registration Statement, will be duly
authorized and validly issued, fully paid and nonassessable except to the
extent provided in Section 180.0622(2)(b) of the Wisconsin Statutes, or any
successor provision, which provides that shareholders of a corporation
organized under Chapter 180 of the Wisconsin Statutes may be assessed up to
the par value of their shares to satisfy the obligations of such corporation
to its employees for services rendered, but not exceeding six months service
in the case of any individual employee (certain Wisconsin courts have
interpreted "par value" to mean the full amount paid by the purchaser of
shares upon the issuance thereof).
We consent to the use of this opinion as an exhibit to Registration
Statement. In giving this consent, however, we do not admit that we are
"experts" within the meaning of Section 11 of the Securities Act of 1933, as
amended, or within the category of persons whose consent is required by
Section 7 of said Act.
Very truly yours,
/s/ Godfrey & Kahn, S.C.
GODFREY & KAHN, S.C.
<PAGE>
Exhibit 10.11
-------------
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of this _____ day of
____________, 1997, is entered into by Advantage Learning Systems, Inc., a
Wisconsin corporation (the "Company"), and Judith A. Paul, Terrance D. Paul and
Mark J. Bradley, as Trustee of the Terrance and Judith Paul Descendants' Trust
(individually, a "Stockholder" and collectively, the "Stockholders");
RECITALS:
WHEREAS, the Stockholders hold all of the outstanding shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock").
WHEREAS, the Company has elected to be taxed as an S corporation under the
Code.
WHEREAS, the Company is now contemplating offering and selling shares of
its Common Stock to the public (the "Public Offering").
WHEREAS, the Company plans, just prior to the completion of the Public
Offering, to terminate its S corporation election.
WHEREAS, after the termination of the Company's S corporation election, the
Stockholders individually will continue to be liable for their own federal,
state, and local income taxes on the Company's Tax Items that pass through to
the Stockholders under the provisions of Subchapter S of the Code and any
similar provisions of state and local law for all periods prior to the time the
Company ceases to be an S Corporation.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which hereby are acknowledged, the parties agree as follows:
Article I
PURPOSE
The purpose of this Agreement is to set forth the agreement of the Company
and its Stockholders with respect to certain adjustments to the federal, state
and local personal income tax liability of the Stockholders attributable to the
Tax Items of the Company that pass through to the Stockholders under the
provisions of Subchapter S of the Code and any similar provisions of
<PAGE>
state and local law for periods during which the Company is an S Corporation,
which adjustments arise after the termination of the Company's S election.
Article II
DEFINITIONS
Section 2.1 For purposes of this Agreement, the following definitions
shall apply:
(a) "Adjustment" shall mean any proposed or final change in any S
Corporation Tax Liability initiated by the IRS, state or local taxing authority
or any other relevant taxing authority or as a result of the filing of an
amended return for the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended and in
effect for the taxable period in question.
(c) "Final Determination" shall mean the final resolution of any Income Tax
liability (including all related interest and penalties) for a taxable period.
A Final Determination shall result from the first to occur of:
(i) the expiration of thirty (30) days after IRS acceptance of a
Waiver, unless, within such period, the taxpayer gives notice to the other
party of the taxpayer's intention to attempt to recover all or part of any
amount paid pursuant to the Waiver by the filing of a timely claim for
refund;
(ii) a decision, judgment, decree or other order by a court of
competent jurisdiction that is not subject to further judicial review (by
appeal or otherwise) and has become final;
(iii) the execution of a closing agreement under Section 7121 of the
Code or the acceptance by the IRS or its counsel of an offer in compromise
under Section 7122 of the Code or comparable agreements under the laws of
other jurisdictions;
(iv) the expiration of the time for filing a claim for refund or for
instituting suit in respect of a claim for refund disallowed in whole or
part by the IRS or other relevant taxing authority;
(v) any other final disposition of the Income Tax liability for such
period by reason of the expiration of the applicable statute of
limitations; or
(vi) any other event that the parties agree is a determination of the
liability at issue, including the filing of an amended return.
2
<PAGE>
(d) "Income Tax" shall mean federal income taxes and state and local taxes
imposed upon, or measured by, income. Income Tax includes interest, penalties,
additions to tax and additional amounts and any related reasonable professional
fees and costs or other expenses.
(e) "IRS" shall mean the United States Internal Revenue Service or any
successor, including, but not limited to, its agents, representatives and
attorneys.
(f) "Pro Rata Share" shall mean each Stockholder's proportionate share of
Common Stock owned on the relevant date or held during the relevant period,
which proportionate share shall be a fraction, the numerator of which is the
number of shares of Common Stock held by the Stockholder on the relevant date or
during the relevant period and the denominator of which is the number of shares
of Common Stock held by all Stockholders as of the relevant date or during the
relevant period.
(g) "S Corporation" shall mean an S Corporation within the meaning of
Section 1361 of the Code.
(h) "S Corporation Tax Liability" shall mean the personal Income Tax
liability of a Stockholder for Income Taxes attributable to (a) the Company's
Tax Items that pass through to the Stockholder under the provisions of
Subchapter S of the Code and any similar provisions of state and local law. or
(b) a Stockholder's receipt of indemnity payments hereunder.
(i) "Tax Benefit" shall mean a reduction in the personal Income Tax
liability of a Stockholder (as a result of Tax Items of the Company and all
other Tax Items reflected on the Stockholder's tax return) for any taxable
period and any interest paid in connection therewith by the relevant taxing
authority. The Stockholder shall be deemed to have realized or received a Tax
Benefit from a Tax Item in a taxable period only if and to the extent that the
Stockholder's personal Income Tax liability for such period is less than it
would have been if such liability were determined without regard to such Tax
Item. The Stockholder shall be deemed to have realized or received a Tax
Benefit with respect to a carryover only if, when and to the extent the
carryover is used to produce a Tax Benefit.
(j) "Tax Item" shall mean any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item which increases or decreases
Income Taxes paid or payable by the Stockholder (when the Company is an S
Corporation) or by the Company.
(k) "Waiver" shall mean a Waiver of Restrictions on Assessment and
Collection of Deficiency in Tax and Acceptance of Overassessment on Federal
Revenue Form 870 or 870-AD (or any successor comparable form or the expiration
of a comparable period with respect to any comparable agreement or form under
the laws of other jurisdictions).
3
<PAGE>
Article III
INDEMNIFICATION FOR CERTAIN TAXES
Section 3.1 Each Stockholder severally, but not jointly, shall pay to the
Company an amount equal to any Tax Benefit realized or received by such
Stockholder arising from an Adjustment with respect to a Tax Item of the Company
for any taxable period in which the Company was taxable as an S Corporation to
the extent such Adjustment would reduce the Accumulated Adjustments Account (the
"AAA") below the amount determined as of the last day of the short S year ending
in 1997 for purposes of distributing cash to the Shareholders in connection with
the Public Offering (ignoring any post-termination distributions to
Stockholders).
Section 3.2 The Company shall pay and indemnify the Stockholders for any S
Corporation Tax Liability arising from an Adjustment with respect to a Tax Item
of the Company to the extent such Adjustment would increase the AAA above the
amount determined as of the last day of the short S year ending in 1997 for
purposes of distributing cash to the Shareholders in connection with the Public
Offering (ignoring any post-termination distributions to Stockholders).
Section 3.3 Any payment required under this Article II shall be made by
the earlier of (i) thirty (30) days after a Stockholder receives a refund or
credit, (ii) thirty (30) days after a Final Determination with respect to such
tax, (iii) with respect to a carry over, thirty (30) days after a Stockholder
files a tax return on which the carryover produces a Tax Benefit, or (iv) thirty
(30) days after the determination by the parties or pursuant to Article IV that
such payment is due.
Article IV
COOPERATION AND EXCHANGE OF INFORMATION
Section 4.1 Whenever any Stockholder or the Company becomes aware of an
issue which it believes gives rise to payment or indemnification from the other
party under Article III, the Stockholder or the Company (as the case may be)
shall promptly give notice of the issue to the other party. The Company shall
provide copies of any such notice it gives or receives under this Section 4.1 to
each of the Stockholders within ten (10) days after giving or receiving such
notice. The indemnitor and its representatives, at the indemnitor's expense,
shall be entitled to participate in all conferences, meetings or proceedings
with the IRS or other taxing authority with respect to the issue. If the
indemnitor is more than one Stockholder, the Stockholders liable to provide such
indemnification shall agree among themselves upon one representative to
participate in such conferences, meetings and proceedings with the Company, the
IRS or the applicable taxing authority.
Section 4.2 The parties agree to consult and cooperate with each other in
the negotiation and settlement or litigation of any Adjustment that may give
rise to any payment or
4
<PAGE>
an indemnification obligation under this Agreement. All decisions with respect
to such negotiation and settlement or litigation shall be made by the parties
after full, good faith consultation or pursuant to the dispute resolution
provisions set forth in Article V hereof. No such representative of the
Stockholders shall be permitted to settle any litigation or agree to any
Adjustment or indemnification payment without the prior consent of the
Stockholders whose combined Pro Rata Shares exceed fifty percent (50%) of the
outstanding number of shares of Common Stock held by all Stockholders as of the
relevant or the period in controversy.
Article V
DISPUTES
Section 5.1. If the parties are, after negotiation in good faith, unable
to agree upon the appropriate application of this Agreement, the controversy
shall be settled by the accounting firm remaining on the list of firms set forth
on Schedule A hereto after the Company and the representative of the
Stockholders, commencing with the Company, shall have objected seriatim to the
other firms on the list (the "Accounting Firm"). The decision of the Accounting
Firm shall be final, and each of the Company and the Stockholders agree
immediately to pay to the other any amount due under this Agreement pursuant to
such decision. The expenses of the Accounting Firm shall be borne one-half by
the company and one-half by the Stockholders, on a Pro Rata Share basis, unless
the Accounting Firm specifies otherwise.
Article VI
MISCELLANEOUS
Section 6.1. Term of Agreement. This Agreement shall become effective as
of the date of its execution and shall continue in full force and effect until
terminated by mutual written agreement of all of the parties hereto.
Section 6.2. Severability. If any term of this Agreement is held by a
court of competent jurisdiction to be unenforceable, the remainder of the terms
set forth herein shall remain in full force and effect and shall in no way be
impaired. The parties stipulate that they would have executed the remaining
terms without including any which may hereafter be declared unenforceable. In
the event that any term is held to be unenforceable, the parties shall use their
best efforts to find an alternative means to achieve the same or substantially
the same result as that contemplated by such term.
Section 6.3. Assignment. Except by operation of law or in connection with
the sale of all or substantially all the assets of a party, this Agreement shall
not be assignable, in whole or in part, directly or indirectly, by any
Stockholder without the written consent of the Company or by the Company without
the written consent of the Stockholders whose combined Pro Rata Shares exceed
fifty percent (50%) of the outstanding number of shares of Common Stock held by
all Stockholders at the time such consent is requested. Any attempt to assign
any right or obligations arising under this Agreement without such consent shall
be void. However, the
5
<PAGE>
provisions of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties and their respective successors and permitted
assigns.
Section 6.4. Further Assurances. Subject to the provisions of this
Agreement, the parties shall acknowledge such other instruments and documents,
and take all other actions, as may be reasonably required in order to effectuate
the purposes of this Agreement.
Section 6.5. Parties in Interest. Except as herein otherwise specifically
provided, nothing in this Agreement expressed or implied is intended to confer
any right or benefit upon any person, firm or corporation other than the parties
and their respective successors and permitted assigns.
Section 6.6. Waivers, Etc. No failure or delay on the part of any party
in exercising any power or right under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by any party therefrom shall in any event be
effective unless it shall be in writing, and then such waiver or consent shall
be effective only in the specific instance and for the purpose which given.
Section 6.7. Set-off. All payments to be made by any party under this
Agreement shall be made without set-off, counterclaim or withholding, all of
which are expressly waived.
Section 6.8. Change of Law. If, due to any change in applicable law or
regulation or the interpretation thereof by any court or other governing body
having jurisdiction subsequent to the date of this Agreement, performance of any
provision of this Agreement shall be impracticable or impossible, the parties
shall use their best efforts to find alternative means to achieve the same or
substantially the same results as are contemplated by such provision.
Section 6.9. Headings. Descriptive headings are for convenience only and
shall not control or affect the meaning of any provision of this Agreement.
Section 6.10. Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties and each
executed counterpart shall be an original instrument.
Section 6.11. Notices. All notices provided of in this Agreement shall be
validly given if in writing and (i) delivered personally or (ii) sent by
certified mail, postage prepaid, return receipt requested to the address set
forth below:
If to the Company:
2911 Peach Street
P.O. Box 8036
6
<PAGE>
Wisconsin Rapids, Wisconsin 54495-8036
If to a Stockholder:
At the address set forth in Schedule B hereto
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner to each other party hereto. Notice given
in person shall be deemed delivered when received (or when delivery is first
refused) and notice given by mail shall be deemed delivered five (5) calendar
days after the date mailed.
Section 6.12. Governing Law. This Agreement shall be governed by the laws
of the State of Wisconsin.
IN WITNESS WHEREOF, the undersigned have caused this Tax Indemnification
Agreement to be duly executed as of the day and year first written above.
ADVANTAGE LEARNING SYSTEMS, INC.
By:
----------------------------------------
Michael H. Baum, Chief Executive Officer
-------------------------------------------
JUDITH A. PAUL
-------------------------------------------
TERRANCE D. PAUL
TERRANCE AND JUDITH PAUL DESCENDANTS'
TRUST
By:
----------------------------------------
Mark J. Bradley, Trustee
7
<PAGE>
SCHEDULE A
Accounting Firms
Arthur Andersen, LLP
KPMG Peat Marwick LLP
Coopers & Lybrand LLP
Deloitte & Touche
Price Waterhouse LLP
Ernst & Young LLP
8
<PAGE>
Exhibit 10.12
-------------
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT, dated as of this _____ day of
____________, 1997, is entered into by Institute for Academic Excellence, Inc.,
a Wisconsin corporation (the "Company"), and Judith A. Paul, Terrance D. Paul
and Mark J. Bradley, as Trustee of the Terrance and Judith Paul Descendants'
Trust (individually, a "Stockholder" and collectively, the "Stockholders");
RECITALS:
WHEREAS, the Stockholders held all of the outstanding shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock") prior to
January 2,1997.
WHEREAS, the Company has elected to be taxed as an S corporation under the
Code.
WHEREAS, the Company's parent, Advantage Learning Systems, Inc., is now
contemplating offering and selling shares of its Common Stock to the public (the
"Public Offering").
WHEREAS, the Company plans, just prior to the completion of the Public
Offering, to terminate its S corporation election.
WHEREAS, after the termination of the Company's S corporation election, the
Stockholders individually will continue to be liable for federal, state, and
local income taxes on the Company's Tax Items that pass through to the
Stockholders under the provisions of Subchapter S of the Code and any similar
provisions of state and local law for all periods prior to the time the Company
ceases to be an S corporation.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which hereby are acknowledged, the parties agree as follows:
Article I
PURPOSE
The purpose of this Agreement is to set forth the agreement of the Company
and its Stockholders with respect to certain adjustments to the federal, state
and local personal income tax liability of the Stockholders attributable to the
Tax Items of the Company that pass through to the Stockholders under the
provisions of Subchapter S of the Code and any similar provisions of
<PAGE>
state and local law for periods during which the Company is an S Corporation,
which adjustments arise after the termination of the Company's S election.
Article II
DEFINITIONS
Section 2.1 For purposes of this Agreement, the following definitions
shall apply:
(a) "Adjustment" shall mean any proposed or final change in any S
Corporation Tax Liability initiated by the IRS, state or local taxing authority
or any other relevant taxing authority or as a result of the filing of an
amended return for the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended and in
effect for the taxable period in question.
(c) "Final Determination" shall mean the final resolution of any Income
Tax liability (including all related interest and penalties) for a taxable
period. A Final Determination shall result from the first to occur of:
(i) the expiration of thirty (30) days after IRS acceptance of a
Waiver, unless, within such period, the taxpayer gives notice to the other
party of the taxpayer's intention to attempt to recover all or part of any
amount paid pursuant to the Waiver by the filing of a timely claim for
refund;
(ii) a decision, judgment, decree or other order by a court of
competent jurisdiction that is not subject to further judicial review (by
appeal or otherwise) and has become final;
(iii) the execution of a closing agreement under Section 7121 of the
Code or the acceptance by the IRS or its counsel of an offer in compromise
under Section 7122 of the Code or comparable agreements under the laws of
other jurisdictions;
(iv) the expiration of the time for filing a claim for refund or for
instituting suit in respect of a claim for refund disallowed in whole or
part by the IRS or other relevant taxing authority;
(v) any other final disposition of the Income Tax liability for such
period by reason of the expiration of the applicable statute of
limitations; or
(vi) any other event that the parties agree is a determination of the
liability at issue, including the filing of an amended return.
2
<PAGE>
(d) "Income Tax" shall mean federal income taxes and state and local taxes
imposed upon, or measured by, income. Income Tax includes interest, penalties,
additions to tax and additional amounts and any related reasonable professional
fees and costs or other expenses.
(e) "IRS" shall mean the United States Internal Revenue Service or any
successor, including, but not limited to, its agents, representatives and
attorneys.
(f) "Pro Rata Share" shall mean each Stockholder's proportionate share of
Common Stock owned on the relevant date or held during the relevant period,
which proportionate share shall be a fraction, the numerator of which is the
number of shares of Common Stock held by the Stockholder on the relevant date or
during the relevant period and the denominator of which is the number of shares
of Common Stock held by all Stockholders as of the relevant date or during the
relevant period.
(g) "S Corporation" shall mean an S Corporation within the meaning of
Section 1361 of the Code.
(h) "S Corporation Tax Liability" shall mean the personal Income Tax
liability of a Stockholder for Income Taxes attributable to (a) the Company's
Tax Items that pass through to the Stockholder under the provisions of
Subchapter S of the Code and any similar provisions of state and local law. or
(b) a Stockholder's receipt of indemnity payments hereunder.
(i) "Tax Benefit" shall mean a reduction in the personal Income Tax
liability of a Stockholder (as a result of Tax Items of the Company and all
other Tax Items reflected on the Stockholder's tax return) for any taxable
period and any interest paid in connection therewith by the relevant taxing
authority. The Stockholder shall be deemed to have realized or received a Tax
Benefit from a Tax Item in a taxable period only if and to the extent that the
Stockholder's personal Income Tax liability for such period is less than it
would have been if such liability were determined without regard to such Tax
Item. The Stockholder shall be deemed to have realized or received a Tax
Benefit with respect to a carryover only if, when and to the extent the
carryover is used to produce a Tax Benefit.
(j) "Tax Item" shall mean any item of income, gain, loss, deduction,
credit, recapture of credit, or any other item which increases or decreases
Income Taxes paid or payable by the Stockholder (when the Company is an S
Corporation) or by the Company.
(k) "Waiver" shall mean a Waiver of Restrictions on Assessment and
Collection of Deficiency in Tax and Acceptance of Overassessment on Federal
Revenue Form 870 or 870-AD (or any successor comparable form or the expiration
of a comparable period with respect to any comparable agreement or form under
the laws of other jurisdictions).
3
<PAGE>
Article III
INDEMNIFICATION FOR CERTAIN TAXES
Section 3.1 Each Stockholder severally, but not jointly, shall pay to the
Company an amount equal to any Tax Benefit realized or received by such
Stockholder arising from an Adjustment with respect to a Tax Item of the Company
for any taxable period in which the Company was taxable as an S Corporation to
the extent such Adjustment would reduce the Accumulated Adjustments Account (the
"AAA") below the amount determined as of the last day of the short S year ending
in 1997 for purposes of distributing cash to the Shareholders in connection with
the Public Offering (ignoring any post-termination distributions to
Stockholders).
Section 3.2 The Company shall pay and indemnify the Stockholders for any S
Corporation Tax Liability arising from an Adjustment with respect to a Tax Item
of the Company to the extent such Adjustment would increase the AAA above the
amount determined as of the last day of the short S year ending in 1997 for
purposes of distributing cash to the Shareholders in connection with the Public
Offering (ignoring any post-termination distributions to Stockholders).
Section 3.3 Any payment required under this Article II shall be made by
the earlier of (i) thirty (30) days after a Stockholder receives a refund or
credit, (ii) thirty (30) days after a Final Determination with respect to such
tax, (iii) with respect to a carry over, thirty (30) days after a Stockholder
files a tax return on which the carryover produces a Tax Benefit, or (iv) thirty
(30) days after the determination by the parties or pursuant to Article IV that
such payment is due.
Article IV
COOPERATION AND EXCHANGE OF INFORMATION
Section 4.1 Whenever any Stockholder or the Company becomes aware of an
issue which it believes gives rise to payment or indemnification from the other
party under Article III, the Stockholder or the Company (as the case may be)
shall promptly give notice of the issue to the other party. The Company shall
provide copies of any such notice it gives or receives under this Section 4.1 to
each of the Stockholders within ten (10) days after giving or receiving such
notice. The indemnitor and its representatives, at the indemnitor's expense,
shall be entitled to participate in all conferences, meetings or proceedings
with the IRS or other taxing authority with respect to the issue. If the
indemnitor is more than one Stockholder, the Stockholders liable to provide such
indemnification shall agree among themselves upon one representative to
participate in such conferences, meetings and proceedings with the Company, the
IRS or the applicable taxing authority.
Section 4.2 The parties agree to consult and cooperate with each other in
the negotiation and settlement or litigation of any Adjustment that may give
rise to any payment or an indemnification obligation under this Agreement. All
decisions with respect to such negotiation and settlement or litigation shall be
made by the parties after full, good faith
4
<PAGE>
consultation or pursuant to the dispute resolution provisions set forth in
Article V hereof. No such representative of the Stockholders shall be permitted
to settle any litigation or agree to any Adjustment or indemnification payment
without the prior consent of the Stockholders whose combined Pro Rata Shares
exceed fifty percent (50%) of the outstanding number of shares of Common Stock
held by all Stockholders as of the relevant or the period in controversy.
Article V
DISPUTES
Section 5.1. If the parties are, after negotiation in good faith, unable
to agree upon the appropriate application of this Agreement, the controversy
shall be settled by the accounting firm remaining on the list of firms set forth
on Schedule A hereto after the Company and the representative of the
Stockholders, commencing with the Company, shall have objected seriatim to the
other firms on the list (the "Accounting Firm"). The decision of the Accounting
Firm shall be final, and each of the Company and the Stockholders agree
immediately to pay to the other any amount due under this Agreement pursuant to
such decision. The expenses of the Accounting Firm shall be borne one-half by
the company and one-half by the Stockholders, on a Pro Rata Share basis, unless
the Accounting Firm specifies otherwise.
Article VI
MISCELLANEOUS
Section 6.1. Term of Agreement. This Agreement shall become effective as
of the date of its execution and shall continue in full force and effect until
terminated by mutual written agreement of all of the parties hereto.
Section 6.2. Severability. If any term of this Agreement is held by a
court of competent jurisdiction to be unenforceable, the remainder of the terms
set forth herein shall remain in full force and effect and shall in no way be
impaired. The parties stipulate that they would have executed the remaining
terms without including any which may hereafter be declared unenforceable. In
the event that any term is held to be unenforceable, the parties shall use their
best efforts to find an alternative means to achieve the same or substantially
the same result as that contemplated by such term.
Section 6.3. Assignment. Except by operation of law or in connection with
the sale of all or substantially all the assets of a party, this Agreement shall
not be assignable, in whole or in part, directly or indirectly, by any
Stockholder without the written consent of the Company or by the Company without
the written consent of the Stockholders whose combined Pro Rata Shares exceed
fifty percent (50%) of the outstanding number of shares of Common Stock held by
all Stockholders at the time such consent is requested. Any attempt to assign
any right or obligations arising under this Agreement without such consent shall
be void. However, the provisions of this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and permitted assigns.
5
<PAGE>
Section 6.4. Further Assurances. Subject to the provisions of this
Agreement, the parties shall acknowledge such other instruments and documents,
and take all other actions, as may be reasonably required in order to effectuate
the purposes of this Agreement.
Section 6.5. Parties in Interest. Except as herein otherwise specifically
provided, nothing in this Agreement expressed or implied is intended to confer
any right or benefit upon any person, firm or corporation other than the parties
and their respective successors and permitted assigns.
Section 6.6. Waivers, Etc. No failure or delay on the part of any party
in exercising any power or right under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by any party therefrom shall in any event be
effective unless it shall be in writing, and then such waiver or consent shall
be effective only in the specific instance and for the purpose which given.
Section 6.7. Set-off. All payments to be made by any party under this
Agreement shall be made without set-off, counterclaim or withholding, all of
which are expressly waived.
Section 6.8. Change of Law. If, due to any change in applicable law or
regulation or the interpretation thereof by any court or other governing body
having jurisdiction subsequent to the date of this Agreement, performance of any
provision of this Agreement shall be impracticable or impossible, the parties
shall use their best efforts to find alternative means to achieve the same or
substantially the same results as are contemplated by such provision.
Section 6.9. Headings. Descriptive headings are for convenience only and
shall not control or affect the meaning of any provision of this Agreement.
Section 6.10. Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties and each
executed counterpart shall be an original instrument.
Section 6.11. Notices. All notices provided of in this Agreement shall be
validly given if in writing and (i) delivered personally or (ii) sent by
certified mail, postage prepaid, return receipt requested to the address set
forth below:
If to the Company:
455 Science Drive
Suite 200
Madison, Wisconsin 53711
6
<PAGE>
If to a Stockholder:
At the address set forth in Schedule B hereto
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner to each other party hereto. Notice given
in person shall be deemed delivered when received (or when delivery is first
refused) and notice given by mail shall be deemed delivered five (5) calendar
days after the date mailed.
Section 6.12. Governing Law. This Agreement shall be governed by the laws
of the State of Wisconsin.
IN WITNESS WHEREOF, the undersigned have caused this Tax Indemnification
Agreement to be duly executed as of the day and year first written above.
INSTITUTE FOR ACADEMIC EXCELLENCE, INC.
By:
------------------------------------
Title:
---------------------------------
---------------------------------------
JUDITH A. PAUL
---------------------------------------
TERRANCE D. PAUL
TERRANCE AND JUDITH PAUL DESCENDANTS'
TRUST
By:
------------------------------------
Mark J. Bradley, Trustee
7
<PAGE>
SCHEDULE A
Accounting Firms
Arthur Andersen, LLP
KPMG Peat Marwick LLP
Coopers & Lybrand LLP
Deloitte & Touche
Price Waterhouse LLP
Ernst & Young LLP
8
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin
August 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,564,407
<SECURITIES> 0
<RECEIVABLES> 3,716,554
<ALLOWANCES> 323,000
<INVENTORY> 450,819
<CURRENT-ASSETS> 7,212,585
<PP&E> 11,942,000
<DEPRECIATION> (1,188,798)
<TOTAL-ASSETS> 20,319,189
<CURRENT-LIABILITIES> (5,869,646)
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (2,369,553)
<TOTAL-LIABILITY-AND-EQUITY> (20,319,189)
<SALES> (13,743,474)
<TOTAL-REVENUES> (16,544,781)
<CGS> 1,675,460
<TOTAL-COSTS> 2,980,200
<OTHER-EXPENSES> 8,448,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,920
<INCOME-PRETAX> (4,752,271)
<INCOME-TAX> 1,601,708
<INCOME-CONTINUING> (3,150,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,150,563)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
