<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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
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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
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) (2) FEE
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<S> <C> <C> <C> <C>
3,450,000
Common Stock, $0.01 par value.. shares $13.00 $44,850,000 $13,590.90
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</TABLE>
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(1) Includes 450,000 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.
----------------
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 February 28, 1997
Prospectus
dated , 1997
3,000,000 Shares
LOGO
Common Stock
All of the 3,000,000 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."
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 $11.00
and $13.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application is
being made to list the Common Stock 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 450,000 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), Reading Renaissance(R) and Exam in a Can(R) are
registered trademarks of the Company. In addition, Standardized Test for
Assessment of Reading (S.T.A.R.)(TM), Objective Tracker(TM), MathCheck(TM) and
ScienceCheck(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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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 Combined 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." 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
106 for 1 stock split in the form of a stock dividend effected immediately
prior to the Offering.
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 December 31, 1996, the Accelerated
Reader had been sold to approximately 26,000, or 21%, 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 December 31, 1996, the
Company had developed tests on approximately 10,000 books and expects to
develop approximately 4,000 additional tests in 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. To date, approximately 26,000
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, the Company
recently 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 have increasingly
focused on improving essential academic skills of students, and, in particular,
their reading and math proficiency. President Clinton's emphasis on education
in his recent State of the Union address, 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.
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 Web site is located at
http:\\www.advlearn.com. This Web site is not deemed to be a part of this
Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the 3,000,000 shares
Company...........................
Common Stock to be outstanding 13,896,066 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."
Proposed Nasdaq National Market ALSI
symbol............................
</TABLE>
- --------
(1) Includes 41,666 shares to be issued upon closing of this Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $12.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 289,583 shares were subject to options outstanding
immediately prior to the Offering (assuming an initial public offering
price of $12.00 per share). See "Certain Transactions" and "Management--
Executive Compensation--1997 Stock Incentive Plan."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
----------- ---------- ------ ------- ------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $3,171 $5,288 $8,251 $12,605 $22,381 $23,062
Gross profit............ 2,742 4,718 7,148 10,542 18,154 18,928
Purchased research and
development(2)......... -- -- -- -- 3,400 3,400
Operating income........ 1,276 1,985 2,999 3,449 3,013 2,784
Income before taxes..... 1,298 2,008 3,022 3,462 2,858 2,419
Net income(2)........... 1,298 2,008 3,022 3,462 4,460 4,199
PRO FORMA DATA:
Operating income........ $ 2,784
Income before taxes(3).. 2,739
Net income(4)........... 1,630
Net income per share(5). $ 0.12
Weighted average shares
outstanding(5)......... 13,854
OTHER OPERATING DATA(6):
Number of Accelerated
Reader customer
schools................ 6,880 10,200 14,500 19,500 26,000
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------
AS
ACTUAL ADJUSTED(7)
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 566 $14,948
Total assets............................................... 19,855 32,959
Long-term debt............................................. 10,450 --
Combined equity............................................ 3,773 --
Shareholders' equity....................................... -- 28,605
</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 Combined
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.
(3) Reflects an adjustment to reduce interest expense ($320,000) related to
the portion of Offering proceeds used to retire indebtedness. See "Use of
Proceeds" and "Capitalization."
(4) 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." The impact of recording the deferred income
taxes associated with the change from S corporation to C corporation
status is immaterial.
(5) 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, (ii) the 106
for 1 stock split and (iii) the issuance of the 3,000,000 shares of Common
Stock offered hereby.
(6) 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.
(7) As adjusted to reflect the sale of 3,000,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $12.00 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 91.4%, 87.1% and 67.3% of the
Company's net sales in 1994, 1995 and 1996, respectively. Sales of the
Accelerated Reader software and supplemental test disks through one book
distributor accounted for 2.6%, 12.5% and 15.2% of such net sales in 1994,
1995 and 1996, 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 express 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. In addition, 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.
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 test delivery. 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. The Company does not have employment agreements with either of
these persons and has no current intention of entering into any such
employment agreements. 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.
SEASONALITY; FLUCTUATIONS IN QUARTERLY PERFORMANCE; LIMITED BACKLOG
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. The Company expects that income from operations in the
second quarter of 1997 may not exceed income from operations in the first
quarter of 1997 or the second quarter of 1996, primarily as a result of a
higher percentage of service sales and increased product development expenses.
In addition, during the second quarter of 1997, the Company will incur a $1.0
million one-time compensation expense (assuming an initial public offering
price of $12.00 per share) related to the termination of certain employee
benefit plans. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
7
<PAGE>
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. The Company does not 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 $8.7 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 $4.8 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. The
Company's management will have broad discretion with respect to the
application 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 72.6% 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 "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 13,896,066
shares of Common Stock outstanding, of which the 3,000,000 shares sold in the
Offering (3,450,000 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), which 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 10,892,153 shares of Common Stock, have agreed that
8
<PAGE>
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,
10,600,000 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 $10.19 in the consolidated net tangible book value
per share from the assumed initial public offering price of $12.00 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."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share are estimated to be approximately $32.7 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 $8.7 million will be used to fund a dividend to the
Company's shareholders of undistributed S corporation earnings, (ii)
approximately $6.9 million will be used to retire the construction financing
on the Company's Wisconsin Rapids headquarters (of which $1.2 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 $4.8 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 $1.0
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 $12.00 per share). Such payment will give rise to a compensation charge of
$1.0 million in the Company's second quarter of 1997. The balance of the
proceeds, estimated to be approximately $11.3 million, will be used for
general corporate purposes, including working capital and new product
development. 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.
9
<PAGE>
S CORPORATION DISTRIBUTION
Prior to completion of the Offering, ALS and the Institute 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 Combined Financial Statements.
The S corporation status of both ALS and the Institute 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 $8.7 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 December 31, 1996, the
Company made S corporation distributions to its shareholders of $3.9 million
and $3.5 million, respectively.
10
<PAGE>
CAPITALIZATION
The following table sets forth the actual and as adjusted short-term debt
and capitalization of the Company at December 31, 1996. The as adjusted short-
term debt and capitalization reflect the sale of 3,000,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $12.00
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
Combined Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
ACTUAL AS ADJUSTED
---------------- -------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Short-term debt, including current amounts
due under construction contract........... $ 1,501 $ 350
================ ================
Long-term debt ............................ $ 10,450 $ --
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, 13,896,066 shares
issued and outstanding, as
adjusted(1)(2).......................... -- 139
Additional paid in capital(1)(2)......... -- 28,466
Combined equity(2)......................... 3,773 --
---------------- ----------------
Total equity........................... 3,773 28,605
---------------- ----------------
Total capitalization................... $ 14,223 $ 28,605
================ ================
</TABLE>
- --------
(1) Includes 41,666 shares to be issued upon closing of this Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $12.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 289,583 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $12.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."
(2) Represents the reclassification of combined equity to Common Stock at par
value and additional paid in capital.
11
<PAGE>
DILUTION
The combined net tangible book value of the Company as of December 31, 1996
was $332,000, or $0.03 per share of Common Stock. "Combined net tangible book
value per common share" represents the amount of (i) the book value of the
Company's total combined tangible assets, less total combined liabilities,
divided by (ii) the number of shares of Common Stock outstanding on such date.
Without taking into account any changes in combined net tangible book value
after December 31, 1996, 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 combined net tangible book value of the Company as of
December 31, 1996 would have been $25.2 million, or $1.81 per share of Common
Stock. This represents an immediate increase in combined net tangible book
value of $1.78 per share of Common Stock to existing shareholders and
immediate dilution of combined net tangible book value of $10.19 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...................... $12.00
Combined net tangible book value per share at December 31,
1996........................................................ $0.03
Increase per share attributable to new investors............. 1.78
-----
Pro forma combined net tangible book value per share after the
Offering............................................................ 1.81
------
Dilution per share to new investors.................................. $10.19
======
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1996
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 $12.00 per share) with respect to the
3,000,000 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)...... 10,896,066 78.4% $ 255,000 0.7% $ 0.02
New investors.................. 3,000,000 21.6 36,000,000 99.3 12.00
---------- ----- ----------- -----
Total...................... 13,896,066 100.0% $36,255,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes 41,666 shares to be issued upon closing of this Offering in
connection with the Company's acquisition of IPS (assuming an initial
public offering price of $12.00 per share). Excludes 1,500,000 shares of
Common Stock reserved for issuance pursuant to the Company's 1997 Stock
Incentive Plan, of which 289,583 shares were subject to options
outstanding immediately prior to the Offering (assuming an initial public
offering price of $12.00 per share). See "Certain Transactions" and
"Management--Executive Compensation--1997 Stock Incentive Plan."
12
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED 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. 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 Combined 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 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
include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The historical combined financial data presented herein are not necessarily
indicative of the results of operations for any future period. The pro forma
combined 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 Combined Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
----------- ----------- ------ ------- ------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Products............... $3,171 $5,288 $8,088 $11,602 $18,930 $19,611
Services............... -- -- 163 1,003 3,451 3,451
------ ------ ------ ------- ------- -------
Total net sales...... 3,171 5,288 8,251 12,605 22,381 23,062
Cost of sales:
Products............... 429 570 937 1,468 2,329 2,236
Services............... -- -- 166 595 1,898 1,898
------ ------ ------ ------- ------- -------
Total cost of sales.. 429 570 1,103 2,063 4,227 4,134
Gross profit:
Products............... 2,742 4,718 7,151 10,134 16,601 17,375
Services............... -- -- (3) 408 1,553 1,553
------ ------ ------ ------- ------- -------
Total gross profit... 2,742 4,718 7,148 10,542 18,154 18,928
Operating expenses:
Product development... 223 481 358 802 1,555 1,998
Selling and marketing. 836 1,619 2,551 4,201 6,639 6,892
General and
administrative....... 407 633 1,239 2,091 3,546 3,854
Purchased research and
development(2)....... -- -- -- -- 3,400 3,400
------ ------ ------ ------- ------- -------
Total operating
expenses............ 1,466 2,733 4,148 7,094 15,140 16,144
Operating income........ 1,276 1,985 2,999 3,449 3,013 2,784
Other income (expense),
net.................... 23 23 23 13 (187) (455)
Income tax benefit...... -- -- -- -- 1,602 1,780
------ ------ ------ ------- ------- -------
Net income.............. $1,298 $2,008 $3,022 $ 3,462 $ 4,460 $ 4,199
====== ====== ====== ======= ======= =======
PRO FORMA DATA:
Operating income........ $ 2,784
Income before taxes(3).. 2,739
Net income(4)........... 1,630
Net income per share(5). $ 0.12
Weighted average shares
outstanding(5)......... 13,854
OTHER OPERATING DATA(6):
Number of Accelerated
Reader customer
schools................ 6,880 10,200 14,500 19,500 26,000
Number of Accelerated
Reader book test
titles................. 1,700 2,800 5,000 7,500 10,000
BALANCE SHEET DATA (AT
DECEMBER 31):
Working capital......... $1,263 $2,098 $2,213 $1,105 $ 566
Total assets............ 1,792 3,063 4,070 4,761 19,855
Long-term debt.......... -- -- -- -- 10,450
Combined equity......... 1,621 2,719 3,065 2,613 3,773
</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 a 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 Combined
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
(3) Reflects an adjustment to reduce interest expense ($320,000) related to
the portion of the Offering proceeds used to retire indebtedness. See "Use
of Proceeds" and "Capitalization."
(4) 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." The impact of recording the deferred income
taxes associated with the change from S corporation to C corporation
status is immaterial.
(5) 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, (ii) the 106
for 1 stock split and (iii) the issuance of the 3,000,000 shares of Common
Stock offered hereby.
(6) 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
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 IPS subsidiary. 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 this 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 of IPS has been accounted for
using the purchase method of accounting and, 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 IPS 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 Combined
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 $1.0 million in the Company's second quarter of 1997.
See "Management--Executive Compensation."
Upon completion of the Offering, ALS and the Institute will become C
corporations for tax purposes. See "S Corporation Distribution" and Note 7 of
Notes to the Company's Combined Financial Statements.
RESULTS OF THE 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>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales:
Products................................................. 98.0% 92.0% 84.6%
Services................................................. 2.0 8.0 15.4
----- ----- -----
Total net sales........................................ 100.0% 100.0% 100.0%
===== ===== =====
Cost of sales:
Products................................................. 11.6% 12.6% 12.3%
Services................................................. 101.9 59.3 55.0
----- ----- -----
Total cost of sales.................................... 13.4 16.4 18.9
Gross margin:
Products................................................. 88.4 87.4 87.7
Services................................................. (1.9) 40.7 45.0
----- ----- -----
Total gross margin..................................... 86.6 83.6 81.1
Operating expenses:
Product development...................................... 4.3 6.4 6.9
Selling and marketing.................................... 30.9 33.3 29.7
General and administrative............................... 15.0 16.6 15.8
Purchased research and development....................... -- -- 15.2
----- ----- -----
Operating income........................................... 36.2 27.3 13.5
Other income (expense), net................................ 0.4 0.2 (0.7)
----- ----- -----
Income before taxes........................................ 36.6 27.5 12.8
Income tax benefit......................................... -- -- 7.1
----- ----- -----
Net income................................................. 36.6% 27.5% 19.9%
===== ===== =====
</TABLE>
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 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 approximately 2,500 new book titles on
Accelerated Reader test disks, 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 87.1% and
16
<PAGE>
67.3% 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, which consists of revenue from sales of training seminars
and programs and software support agreements, increased by $2.4 million, or
244%, 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 $861,000, 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 16.6% 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 27.3% in 1995. Excluding the purchased research and development
expense, operating income would have increased by $3.0 million, or 86.5%, to
$6.4 million in 1996, or 28.7% of net sales compared to 27.3% 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.
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 Combined Financial
Statements.
17
<PAGE>
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 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 91.4% and 87.1% of net sales in 1994
and 1995, respectively.
Service revenue increased by $840,000 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 $531,000, or
56.7%, 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 $429,000, or 258.4%, 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
124.0%, 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 $1.7
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 68.8%, to $2.1 million in 1995 from $1.2 million in 1994. As a
percentage of net sales, these costs increased to 16.6% in 1995 from 15.0% 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 27.3% 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.
18
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited combined income statement data for
each quarter of the Company's last two fiscal years. 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,
1995 1995 1995 1995 1996 1996 1996(1) 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <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 $5,842
Services............... 121 129 258 496 607 728 1,003 1,113
------ ------ ------ ------ ------ ------ ------ ------
Total net sales...... 2,645 2,980 3,038 3,942 4,424 5,049 5,952 6,955
Cost of sales:
Products............... 283 335 341 508 456 510 595 768
Services............... 80 110 164 241 345 288 522 743
------ ------ ------ ------ ------ ------ ------ ------
Total cost of sales.. 363 445 505 750 801 798 1,117 1,511
Gross profit............ 2,282 2,535 2,533 3,192 3,624 4,251 4,834 5,444
Operating expenses:
Product development.... 168 235 251 149 227 267 409 652
Selling and marketing.. 726 928 1,072 1,474 1,567 1,492 1,500 2,080
General and
administrative........ 388 483 521 697 638 746 950 1,212
Purchased research and
development(2)........ -- -- -- -- -- -- 3,400 --
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,283 1,646 1,845 2,320 2,432 2,505 6,259 3,944
Operating income........ 999 889 689 872 1,192 1,746 (1,424) 1,500
Other income (expense),
net.................... (4) 7 8 2 (1) 1 (66) (107)
Income (loss) before
taxes.................. 995 896 697 874 1,201 1,755 (1,490) 1,393
Income tax benefit...... -- -- -- -- -- -- 1,467 135
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 995 $ 896 $ 697 $ 874 $1,201 $1,755 $ (23) $1,528
====== ====== ====== ====== ====== ====== ====== ======
</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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $1.8 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, and $9.2
million in 1994, 1995 and 1996, 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 Combined 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.
19
<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
December 31, 1996, the Accelerated Reader had been sold to approximately
26,000, or 21%, 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"). 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 December 31, 1996, the
Company had developed tests on approximately 10,000 books and expects to
develop approximately 4,000 additional tests in 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. To date, approximately 26,000
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 that year, had
sold S.T.A.R. to approximately 2,400 schools. To expand its learning
information system product offerings into additional academic areas, the
Company recently 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 have
increasingly focused on improving essential academic skills of students, and,
in particular, their reading and math proficiency. President Clinton's
emphasis on education in his recent State of the Union address, 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 have contributed to an increased demand for more
effective methods to improve academic performance. 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.
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 54.4 million by the
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<PAGE>
year 2000. 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, the Software
Publishers Association estimates that the installed base of computers in K-12
schools in the United States will grow from 6.5 million units in 1995 to 14.2
million units by the year 2000, a 17% 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 10,000 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 have demonstrated that use of the
Accelerated Reader improves standardized test performance in reading. A recent
21
<PAGE>
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 December 31,
1996, the Accelerated Reader has been sold to approximately 26,000 K-12
schools, which represents approximately 21% of the total number of schools in
the United States and Canada and an approximately 34% increase in the number
of schools using the Accelerated Reader over the prior year. In addition,
S.T.A.R. was sold to approximately 2,400 K-12 schools in 1996. 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 21%
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 4,000 additional tests in 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 United Kingdom,
which have begun using it on a pilot basis. In addition, IPS markets and sells
Spanish bilingual
22
<PAGE>
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 current product offerings and
price ranges:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRICE RANGE
<C> <S> <C>
Accelerated Reader Reading practice management software; $399-$1,473
available in Starter Kits (150-200 book
tests) or Economy Kits (850-1,000 book
tests)
- ------------------------------------------------------------------------------------------
Accelerated Reader Computer disks containing supplemental tests $56-$76
supplemental test on additional books to expand Starter or
disks Economy Kits (approximately 50 tests per
disk); currently 10,000 tests available
- ------------------------------------------------------------------------------------------
S.T.A.R. Computer-adaptive reading test and database $399-$1,499
- ------------------------------------------------------------------------------------------
Enhanced Support Two-year contracts for telephone support of $199-$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 $99-$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>
- -------------------------------------------------------------------------------
THE ACCELERATED READER
The Accelerated Reader is a learning information system for motivating and
monitoring increased literature-based reading practice. As of December 31,
1996, the Accelerated Reader has been sold to approximately 26,000 K-12
23
<PAGE>
schools in the United States and Canada and, according to studies conducted by
EMR, is the number one reading software in kindergarten through sixth grade.
In addition, according to a survey by QED, the Accelerated Reader is one of
the products that educators most frequently cite as being used to improve the
quality of education in the K-12 market today. 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 10,000
computerized book tests. The Company developed approximately 2,500 tests in
1996 and expects to develop approximately 4,000 additional tests in 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.
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 in which students choose the best word to
complete each sentence. S.T.A.R. adapts itself to each student's reading
level, as S.T.A.R.'s proprietary branching logic 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 December 31, 1996,
S.T.A.R. has been sold to approximately 2,400 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."
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- or three-day scheduled training
programs, which are conducted throughout the year at various hotel locations
in the United States, and on-site
24
<PAGE>
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 27 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 26,000 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. In its first year, the program
received approximately 2,000 applications and certified 400 "Model Classroom"
teachers, and 10 "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 IPS subsidiary, 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 MathCheck and Exam in a Can. In the final
stages of testing are ScienceCheck and Objective Tracker. 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 will be 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 existing
products and development of tools to increase the efficiency of product
development. For the years ended December 31, 1994, 1995 and 1996, the Company
expended approximately $598,000, $919,000 and $1.9 million, respectively, on
product development (including amounts capitalized).
As of December 31, 1996, the Company employed 30 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.
25
<PAGE>
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 30 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 has resale arrangements with three 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% and 15.2% of the Company's net
sales in 1994, 1995 and 1996, 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 12 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, 24
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 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 1% 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. 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
26
<PAGE>
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 test delivery. In addition, the Company competes
with other companies offering educational software products 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. The Company does not 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.
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 December 31, 1996, the Company had 238 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 also owns and is
currently seeking to sell its former office facility in Wisconsin Rapids,
Wisconsin. 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.
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.
27
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of February 28, 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... 49 Chief Executive Officer and Director
John R. Hickey.... 41 President and Director
Timothy P. Welch.. 54 Chief Executive Officer of IPS and Director
Richard W. Fickey. 56 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, 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. 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 IPS. Mr. Welch has served as the Chief
Executive Officer of IPS since August 1996, and for the 15 years prior
thereto, he served as its President. 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. Mr. Welch has informed the Company that during
1997, he intends to move to another position with IPS. When this occurs, the
Company expects that Mr. Ric Rocca, who is currently the Sales and Marketing
Manager of IPS, will succeed Mr. Welch as Chief Executive Officer of IPS.
28
<PAGE>
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.
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. After the Offering, the Company intends
to add two independent unaffiliated directors to its Board of Directors (the
"Independent Directors"). 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. Both
the Audit Committee and the Compensation Committee will comprise the
Independent Directors.
Each director of the Company who is not an employee of the Company receives
an annual retainer of $ for each meeting of the Board of Directors
attended and $ for each committee meeting attended, plus out-of-pocket
expenses incurred in connection with attendance at such meeting.
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 has 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
29
<PAGE>
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. 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 January 1, 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 $86,000 (assuming an initial public offering price of $12.00 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.
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
February , 2007.
The Stock Incentive Plan is administered by the Compensation Committee of
the Board, which has 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 has 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 must 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 289,583 shares of Common Stock
(assuming an initial public offering price of $12.00 per share) exercisable at
the initial public offering price. The vesting schedule 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 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 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 $1.0 million will be paid out under the plans, and, of
this amount, Messrs. Baum, Hickey, Welch, and Fickey will receive
approximately $207,000, $138,000, $86,000 and $17,000, respectively (assuming
an initial public offering price of $12.00 per share). See "Use of Proceeds."
30
<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
Acquisition 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 this Offering, and the remaining $350,000 is due on August 1, 1997. In
addition, upon the closing of this Offering, the Welch Trust and two current
employees of IPS will receive an aggregate of approximately 41,666 shares of
Common Stock (assuming an initial public offering price of $12.00 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 37,753 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 254,400 shares of Common Stock.
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........................ 5,044,010 46.3% 5,044,010 36.3%
Terrance D. Paul...................... 5,044,010 46.3 5,044,010 36.3
Mark J. Bradley, as Trustee of the
Terrance
and Judith Paul Descendants'
Trust(3)............................. 766,380 7.0 766,380 5.5
Michael H. Baum....................... 0 0 0 0
John R. Hickey........................ 0 0 0 0
Timothy P. Welch(4)................... 37,753 * 37,753 *
All executive officers and directors
as a group (6 persons)............... 10,892,153 99.9 10,892,153 78.4
</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 $12.00 per share). See "Certain Transactions."
31
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock assumes the
Company's Amended and Restated Articles of Incorporation (the "Articles of
Incorporation"), which, among other things, converts all outstanding shares of
ALS' capital stock to Common Stock on a one for one basis, has been filed. The
following description is a summary only and is qualified in its entirety by
reference to the Company's Articles of Incorporation and Amended and Restated
By-Laws (the "By-Laws") and the Wisconsin Business Corporation Law (the
"WBCL").
GENERAL
Immediately prior to completion of the Offering, the Company's authorized
capital stock will consist 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"). At such time, there will be 10,896,066 shares
of Common Stock issued and outstanding (including 41,666 shares to be issued
upon closing of the Offering at an assumed initial public offering price of
$12.00 per share in connection with the Company's acquisition of IPS) and no
Preferred Shares issued and outstanding. Following the Offering, there will be
13,896,066 shares of Common Stock outstanding. At February 28, 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
32
<PAGE>
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.
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 then authorized number of directors, 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 Articles of
Incorporation 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
33
<PAGE>
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 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 By-Laws 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.
34
<PAGE>
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 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 Provisions of discretion to
directors to consider nonshareholder constituencies could, in the context of
an active "auction" of the Company, have antitakeover effects in situations
35
<PAGE>
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 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 .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 13,896,066 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
$12.00 per share). See "Management -- Executive Compensation." Of these
shares, the 3,000,000 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 10,896,066 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, 10,600,000 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 , 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 138,961 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.
36
<PAGE>
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.
37
<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................................................ 3,000,000
=========
</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 3,000,000 shares of Common Stock offered hereby by the Company, up to
200,000 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 41,666 shares, assuming an initial public offering price
of $12.00 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 450,000 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 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.
38
<PAGE>
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
10,892,153 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.
The Company is applying for listing of the Common Stock on the Nasdaq
National Market, under the symbol "ALSI."
The Company has 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.
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.
39
<PAGE>
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,
Suite 1400, 500 West Madison Street, Chicago, Illinois, 60661 and Seven World
Trade Center, 13th Floor, Suite 1300, 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.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
INDEX TO COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-1
Combined Balance Sheets as of December 31, 1995 and 1996................ F-2
Combined Statements of Income for the Years Ended December 31, 1994,
1995 and 1996.......................................................... F-3
Statements of Combined Equity for the Years Ended December 31, 1994,
1995 and 1996.......................................................... F-4
Combined Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996.......................................................... F-5
Notes to Combined Financial Statements.................................. F-6
IPS PUBLISHING, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................ F-13
Statements of Income for the Year Ended December 31, 1995 and the Seven
Months Ended July 31, 1996............................................. F-14
Statements of Changes in Shareholders' Equity for the Year Ended
December 31, 1995 and the Seven Months Ended July 31, 1996............. F-15
Statements of Cash Flows for the Year Ended December 31, 1995 and the
Seven Months Ended July 31, 1996....................................... F-16
Notes to Financial Statements........................................... F-17
</TABLE>
41
<PAGE>
After the stock split is effected, as discussed in Note 14(d) to the
Combined Financial Statements, we expect to be in a position to render the
following report of independent public accountants.
Arthur Andersen LLP
January 24, 1997.
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.
Arthur Andersen LLP
Milwaukee, Wisconsin.
F-1
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ ---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 275,762 $ 1,755,866
Accounts receivable, less allowance of $48,000 and
$161,000, respectively............................. 1,688,352 2,523,388
Inventories......................................... 232,848 543,902
Prepaid expenses.................................... 325,512 265,026
---------- -----------
Total current assets.............................. 2,522,474 5,088,182
---------- -----------
Property, plant and equipment:
Land and improvements............................... 98,248 744,720
Buildings........................................... 893,488 7,977,735
Furniture, fixtures and office equipment............ 623,613 1,071,002
Computer and production equipment................... 805,974 1,531,231
---------- -----------
Total property, plant and equipment............... 2,421,323 11,324,688
---------- -----------
Less--Accumulated depreciation...................... (419,574) (746,979)
---------- -----------
Net property, plant and equipment................. 2,001,749 10,577,709
Other assets:
Building held for sale.............................. -- 747,392
Deferred tax asset.................................. -- 1,601,708
Intangibles, net.................................... -- 1,445,798
Capitalized software, net........................... 237,007 393,956
---------- -----------
Total other assets................................ 237,007 4,188,854
---------- -----------
Total assets...................................... $4,761,230 $19,854,745
========== ===========
<CAPTION>
LIABILITIES AND COMBINED EQUITY
-------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 236,993 $ 332,689
Current portion of deferred revenue................. 725,894 1,442,356
Payroll and employee benefits....................... 334,645 577,613
Retainage and amounts due under construction
contract........................................... -- 1,151,157
Other current liabilities........................... 119,482 668,421
Due to former owner of IPS.......................... -- 350,000
---------- -----------
Total current liabilities......................... 1,417,014 4,522,236
---------- -----------
Long-term debt........................................ -- 5,750,000
Notes payable to shareholders......................... -- 4,700,000
Deferred revenue...................................... 731,198 1,109,519
Combined equity....................................... 2,613,018 3,772,990
---------- -----------
Total liabilities and combined equity............. $4,761,230 $19,854,745
========== ===========
</TABLE>
The accompanying notes to the combined financial statements are an integral
part of these combined balance sheets.
F-2
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Net sales:
Products.............................. $8,088,132 $11,601,971 $18,930,334
Services.............................. 162,726 1,003,417 3,450,758
---------- ----------- -----------
Total net sales..................... 8,250,858 12,605,388 22,381,092
Cost of sales:
Products.............................. 937,393 1,467,559 2,329,171
Services.............................. 165,826 595,362 1,898,175
---------- ----------- -----------
Total cost of sales................. 1,103,219 2,062,921 4,227,346
---------- ----------- -----------
Gross profit........................ 7,147,639 10,542,467 18,153,746
Operating expenses:
Product development................... 358,360 802,331 1,555,411
Selling and marketing................. 2,551,070 4,200,701 6,638,822
General and administrative............ 1,239,039 2,090,560 3,546,144
Purchased research and development.... -- -- 3,400,000
---------- ----------- -----------
Total operating expenses............ 4,148,469 7,093,592 15,140,377
---------- ----------- -----------
Operating income.................... 2,999,170 3,448,875 3,013,369
Other income (expense):
Interest income....................... 24,170 17,068 34,752
Interest expense...................... (177) -- (205,755)
Other, net............................ (1,159) (3,728) (15,898)
---------- ----------- -----------
Income before taxes..................... 3,022,004 3,462,215 2,858,264
---------- ----------- -----------
Income tax benefit...................... -- -- 1,601,708
---------- ----------- -----------
Net income.............................. $3,022,004 $ 3,462,215 $ 4,459,972
========== =========== ===========
Pro Forma information (note 4)
(Unaudited)
Income before taxes................... $ 2,858,264
Income taxes.......................... 1,157,597
-----------
Net income............................ $ 1,700,667
===========
Net income per share.................. $ 0.15
Weighted average shares outstanding... 11,429,400
===========
</TABLE>
The accompanying notes to the combined financial statements are an integral
part of these combined statements.
F-3
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
STATEMENTS OF COMBINED EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<S> <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
==========
</TABLE>
The accompanying notes to the combined financial statements are an integral
part of these combined statements.
F-4
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <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
Noncash (income) expenses included in
net income--
Depreciation and amortization........ 115,181 325,817 711,135
(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)
Change in assets and liabilities--
(Increase) decrease in--
Accounts receivable................ (509,974) (476,453) (755,765)
Inventory.......................... (12,631) (161,052) (311,054)
Prepaid expenses................... (30,325) (204,779) 60,486
Increase (decrease) in--
Accounts payable and other current
liabilities....................... 172,544 352,780 858,332
Retainage and amounts due under
construction contract............. -- -- 1,151,157
Deferred revenue................... 586,090 790,517 1,030,783
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,342,889 4,113,970 9,203,099
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment............................ (363,866) (1,224,844) (9,897,551)
Capitalized software development
costs................................ (240,485) (117,432) (365,444)
Acquisition of IPS.................... -- -- (4,610,000)
----------- ----------- -----------
Net cash used in investing
activities....................... (604,351) (1,342,276) (14,872,995)
----------- ----------- -----------
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
Payments on debt...................... -- -- (150,000)
Distributions to shareholders......... (2,823,021) (3,914,330) (3,500,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities............. (2,823,021) (3,914,330) 7,150,000
----------- ----------- -----------
Net increase (decrease) in cash........ (84,483) (1,142,636) 1,480,104
Cash and cash equivalents, beginning of
year.................................. 1,502,881 1,418,398 275,762
----------- ----------- -----------
Cash and cash equivalents, end of year. $ 1,418,398 $ 275,672 $ 1,755,866
=========== =========== ===========
</TABLE>
The accompanying notes to the combined financial statements are an integral
part of these combined statements.
F-5
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(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. All significant intercompany
transactions have been eliminated in the combined 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 student
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.
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.
F-6
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED 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 is $156,000 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
-----------------
1994 1995 1996
---- ---- -------
<S> <C> <C> <C>
Cash paid for:
Interest.............................................. -- -- $94,000
Income taxes.......................................... -- -- --
</TABLE>
F-7
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED 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, capitalized
catalog costs of approximately $183,000 and $29,000, 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.
(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. Amortization expense of
approximately $0, $120,000 and $208,000 for the years ended December 31, 1994,
1995 and 1996, respectively, is included in cost of sales--products in the
statements of income. Accumulated amortization of capitalized software
development costs was $120,000 and $328,000 as of December 31, 1995 and 1996,
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. No other customer represented more than 10% of combined
revenues. At December 31, 1995 and 1996, this customer had a receivable
balance of 17.3% and 12.9% 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 COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(j) Pro forma information (unaudited)
In connection with the initial public offering, ALS and the Institute 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 575,000 shares (assuming an offering price
of $12 per share) to pay the estimated $6,900,000 S Corporation Distribution.
Historical earnings per share of the Companies have not been presented because
such amounts are not meaningful.
(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 USEFUL LIFE
----------------- -----------
<S> <C> <C>
Algorithms.................................. $ 510,000 5 years
Tradename................................... 210,000 10 years
Assembled workforce......................... 90,000 7 years
Goodwill.................................... 738,000 7 years
----------
1,548,000
Accumulated amortization.................... (102,202)
----------
Net intangibles............................. $1,445,798
==========
</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.
(7) INCOME TAXES
The shareholders of ALS and the Institute have elected to be treated as an
"S corporation" 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. These companies will be subject to federal and state income
taxes and will recognize deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109. The temporary difference existing as
of December 31, 1996 and related deferred tax assets and liabilities are not
material.
IPS is organized as a C corporation under the provisions of the Internal
Revenue Code and similar state laws. Therefore, included in the 1996 combined
financial statements are income tax provisions and related deferred income
taxes for IPS's activities since its acquisition on August 1, 1996.
F-9
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of:
<TABLE>
<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.
(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.
(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 was approximately
$127,000.
(10) LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Note payable to Woodlands Building Center, due December 31,
1998, noninterest bearing................................... $ 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
Less--Current maturities..................................... --
----------
Total long-term debt......................................... $5,750,000
==========
</TABLE>
F-10
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(a) The loan agreement provides for total borrowings of $7,000,000 through
March 31, 1997. 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 are
as follows:
<TABLE>
<S> <C>
1997........................................................... $ --
1998........................................................... 750,000
1999........................................................... 700,000
2000........................................................... 700,000
2001........................................................... 700,000
Thereafter..................................................... 2,900,000
----------
$5,750,000
==========
</TABLE>
The fair value of debt, based on current market rates offered on notes with
similar terms and maturities, approximates carrying value.
(11) LEASE COMMITMENT
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.
Future approximate minimum rental payments (including estimated operating
costs) required under the operating leases as of December 31, 1996, are as
follows:
<TABLE>
<S> <C>
1997............................................................. $190,000
1998............................................................. 179,000
1999............................................................. 145,000
2000............................................................. 47,000
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
or 1996. Expense under the plan totaled approximately $42,000 in 1994, $93,000
in 1995 and $192,000 in 1996.
F-11
<PAGE>
ADVANTAGE LEARNING SYSTEMS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(13) PHANTOM STOCK PLAN
As an incentive for certain key employees, ALS and the Institute have a
joint phantom stock plan. A total of 415 phantom shares have been issued as of
December 31, 1996.
The terms of the 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 plan was approximately $4,000, $6,000 and $21,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. In addition, the plan calls
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. 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) SUBSEQUENT EVENTS
(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 10.9 million shares of ALS
stock outstanding.
(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 $1.0 million will be paid and
expensed in the second quarter 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) Immediately prior to the Initial Public Offering, the Company plans to
execute a 106 for 1 stock split in the form of a dividend. All share and per
share information has been retroactively adjusted.
F-12
<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.
Arthur Andersen LLP
Milwaukee, Wisconsin,
January 10, 1997.
F-13
<PAGE>
IPS PUBLISHING, INC.
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECENBER 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-14
<PAGE>
IPS PUBLISHING, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE 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-15
<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 (used for)
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
(used for) 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-16
<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 (i.e. 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-17
<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-18
<PAGE>
[PICTURES, GRAPHICAL INFORMATION]
<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.............................................................. 7
Use of Proceeds........................................................... 10
S Corporation Distribution................................................ 11
Dividend Policy........................................................... 11
Capitalization............................................................ 12
Dilution.................................................................. 13
Selected Historical and Pro Forma Combined Financial Data................. 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 21
Management................................................................ 29
Certain Transactions...................................................... 32
Principal Shareholders.................................................... 32
Description of Capital Stock.............................................. 33
Shares Eligible for Future Sale........................................... 37
Underwriting.............................................................. 39
Legal Matters............................................................. 40
Experts................................................................... 40
Additional Information.................................................... 41
Index to Financial Statements............................................. 42
</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.
3,000,000 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............................................ $ 13,591
NASD Filing Fee................................................. *
Nasdaq National Market Listing Fee.............................. *
Blue Sky Fees and Expenses...................................... 5,000
Printing Expenses............................................... *
Accounting Fees and Expenses.................................... *
Legal Fees and Expenses......................................... *
Registrar and Transfer Agent's Fees and Expenses................ *
Miscellaneous................................................... *
--------
Total....................................................... $750,000
========
</TABLE>
- --------
* To be completed by amendment
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 10,600,000 shares of the Registrant's Common Stock after
completion of the 106 for 1 stock split in the form of a stock dividend) 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 254,400
shares of the Registrant's Common Stock after completion of the 106 for 1
stock split in the form of a stock dividend) 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 Purchase Agreement*
3.1 Current Articles of Incorporation, as amended
3.2 Form of Amended and Restated Articles of Incorporation
3.3 Current By-Laws
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
------- -------------------
<C> <S> <C>
3.4 Form of 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.
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 (included on the signature page of this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment
(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 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.
II-3
<PAGE>
(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 FEBRUARY 28, 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. EACH PERSON WHOSE SIGNATURE TO THIS
REGISTRATION STATEMENT APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS MICHAEL
H. BAUM AND JOHN R. HICKEY, AND EACH OF THEM, AS HIS OR HER TRUE AND LAWFUL
ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION, TO SIGN ON HIS OR
HER BEHALF INDIVIDUALLY AND IN THE CAPACITY STATED BELOW AND TO PERFORM ANY
ACTS NECESSARY TO BE DONE IN ORDER TO FILE ALL AMENDMENTS AND POST-EFFECTIVE
AMENDMENTS TO THIS REGISTRATION STATEMENT, AND ANY AND ALL INSTRUMENTS OR
DOCUMENTS FILED AS PART OF OR IN CONNECTION WITH THIS REGISTRATION STATEMENT
OR THE AMENDMENTS THERETO AND EACH OF THE UNDERSIGNED DOES HEREBY RATIFY AND
CONFIRM ALL THAT SAID ATTORNEY-IN-FACT AND AGENT, OR HIS SUBSTITUTES, SHALL DO
OR CAUSE TO BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ Judith A. Paul February 28, 1997
___________________________________________
Judith A. Paul
Chairman of the Board
/s/ Terrance D. Paul February 28, 1997
___________________________________________
Terrance D. Paul
Vice Chairman of the Board
/s/ Michael H. Baum February 28, 1997
___________________________________________
Michael H. Baum
Chief Executive Officer and a Director
(Principal Executive Officer)
/s/ John R. Hickey February 28, 1997
___________________________________________
John R. Hickey
President and a Director
/s/ Richard W. Fickey February 28, 1997
___________________________________________
Richard W. Fickey
Secretary and Vice President, Finance and
Administration
(Principal Financial and Accounting
Officer)
/s/ Timothy P. Welch February 28, 1997
___________________________________________
Timothy P. Welch
Director
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S> <C>
1.1 Purchase Agreement*
3.1 Current Articles of Incorporation, as amended
3.2 Form of Amended and Restated Articles of Incorporation
3.3 Current By-Laws
3.4 Form of 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.
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 (included on the signature page of this
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
Executed by the undersigned for the purpose of forming a Wisconsin corporation
under the "Wisconsin Business Corporation Law", Chapter 180 of the Wisconsin
Statutes:
Article 1. The name of the corporation is READ UP, INCORPORATED.
Article 2. The period of existence shall be perpetual.
Article 3. The purposes shall be to engage in any lawful activities
authorized by Chapter 180 of the Wisconsin Statutes.
Article 4. The number of shares which it shall have authority to issue,
itemized by classes, par value of shares, shares without par value, and series,
if any, with a class, is:
Series Number of
Class (if any) Shares Par Value Per Share
----- -------- --------- -------------------
A None 100,000 $0.01 (one cent) par value per share
Article 5. All shares have equal and full rights there being no
preferences or limitations.
Article 6. The initial registered office is located in Wood County,
Wisconsin and the address of such registered office is:
1081 Wisconsin River Drive
Port Edwards, WI 54469
Article 7. Name of initial registered agent at such address is Terrance D.
Paul.
Article 8. The number of directors constituting the board of directors
shall be fixed by by-law.
Article 9. The names of the initial directors are: Judith A. Paul and
Terrance D. Paul.
Article 10. These articles may be amended in the manner authorized by law
at the time of amendment.
Article 11. The name and address of incorporator is : Terrance D. Paul,
1081 Wisconsin River Drive, Port Edwards, WI 54469.
Executed in triplicated on the 10th day of June, 1986. /s/ Terrance D. Paul
------------------------
Terrance D. Paul,
Incorporator
STATE OF WISCONSIN )
County of Wood )ss.
)
Personally came before me this 10th day of June A.D., 1986 the aforenamed
incorporator Terrance D. Paul to me known to be the person who executed the
foregoing instrument, and acknowledged the same.
[NOTARY SEAL]
This document was drafted by Terrance D. Paul -------------------------------
Notary Public
My Commission Expires: 6/21/1990
---------
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
READ UP, INCORPORATED
A. The name of the corporation is Read up, Incorporated, a Wisconsin
corporation (the "Corporation").
B. Article 1 of the Corporation's Articles of Incorporation is hereby
amended in its entirety to provide as follows:
The name of the Corporation is Advantage Learning Systems, Inc.
C. The foregoing amendment to the Corporation's Articles of Incorporation
was adopted on July 1, 1991 by consent of the shareholders of the Corporation's
voting common stock, $.01 par value.
D. The foregoing amendment to the Corporation's Articles of Incorporation
was submitted to the shareholders by the Board of Directors of the Corporation
and was adopted by the shareholders in accordance with Section 180.1003 of
Wisconsin Business Corporation Law.
Executed on behalf of the Corporation and dated as of the 15th day of July,
1991.
/s/ Judith A. Paul
--------------------------------
Judith A. Paul, President
This instrument was drafted by and should be returned to Steven R.
Suleski of the firm of Foley & Lardner, P.O. Box 1497, Madison, Wisconsin 53701.
<PAGE>
ARTICLE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
ADVANTAGE LEARNING SYSTEMS, INC.
1. The name of the Corporation is Advantage Learning Systems, Inc.
2. Articles 4 and 5 of the Articles of Incorporation of the Corporation are
hereby amended to read as follows:
Article 4. The number of shares which it shall have authority to
issue, itemized by classes, par value of classes, shares without par
value, and series, if any within a class is:
Par Value
Class No. of Shares per Share
----- ------------- ---------
Class A
Common Stock 20,000 $.01 par value
Class B
Common Stock 80,000 $.01 par value
Article 5. There shall be no difference in the preferences,
limitations, designations and relative rights of each Class, except
that the Class B Common Stock shall have no voting rights.
3. The foregoing amendments were proposed on November 28, 1995 by the Board of
Directors and adopted on November 28, 1995 by the Shareholders, pursuant to
Section 180.1003, Wisconsin Statutes.
4. The Shareholder of record as of the date of the amendments shall, within
thirty (30) days after the filing of these Articles of Amendment, exchange
the shares of Common Stock they currently hold for shares of new Common
Stock so that after the exchange each Shareholder will hold a percentage
interest in all of the authorized Class A Common Stock and Class B Common
Stock equal to the percentage interest each
<PAGE>
currently holds in the outstanding Common Stock of the Corporation.
Executed as of the 14th day of December, 1995.
/s/ Michael H. Baum
--------------------------
Michael H. Baum, President
Drafted By: Return To:
- ----------- ----------
Mark J. Bradley, Esq Cindy M. Dahlke, Paralegal
Ruder, Ware & Michler, S.C. Ruder, Ware & Michler, S.C.
P.O. Box 8050 P.O. Box 8050
Wausau, WI 54402-8050 Wausau, WI 54402-8050
-2-
<PAGE>
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION
------------------------------------------------------
OF
--
ADVANTAGE LEARNING SYSTEMS, INC.
---------------------------------
Pursuant to the unanimous written consent of the Board of Directors and
shareholders of Advantage Learning Systems, Inc., and in accordance with Section
180.1003 of the Wisconsin Statutes, the following resolution amending the
Articles of Incorporation of Advantage Learning Systems, Inc. was duly adopted
on December 18, 1996:
BE IT RESOLVED, that Article 4 of the Articles of Incorporation of the
Corporation shall be, and it hereby is, amended to read as follows:
Article 4. The number of shares which it shall have authority to
issue, itemized by classes, par value of classes, shares without par
value, and series, if any, within a class is:
Par Value
Class No. of Shares Per Share
----- ------------ ---------
Class A 30,000 $.01 par value
Common Stock
Class B 120,000 $.01 par value
Common Stock
IN WITNESS WHEREOF, Advantage Learning Systems, Inc. has caused
duplicate originals of these Articles of Amendment to be executed on this 19th
day of December, 1996.
ADVANTAGE LEARNING SYSTEMS, INC.
By: /s/ Michael H. Baum
--------------------------------
Michael H. Baum,
Chief Executive Officer
This instrument was drafted by:
Andrew R. Lauritzen
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
<PAGE>
Exhibit 3.2
FORM OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ADVANTAGE LEARNING SYSTEMS, INC.
These amended and restated Articles of Incorporation supersede and
replace the heretofore existing Articles of Incorporation of Advantage Learning
Systems, Inc., as amended, a corporation organized under Chapter 180 of the
Wisconsin Statutes:
ARTICLE I
The name of the Corporation is Advantage Learning Systems, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The Corporation is authorized to engage in any lawful activity for
which corporations may be organized under Chapter 180 of the Wisconsin Statutes
and any successor provisions.
ARTICLE IV
The aggregate number of shares which the Corporation shall have the
authority to issue, the designation of each class of shares, the authorized
number of shares of each class and the par value thereof per share shall be as
follows:
<TABLE>
<CAPTION>
Designation Par Value Authorized
of Class Per Share Number of Shares
----------- --------- ----------------
<S> <C> <C>
Common Stock..... $.01 50,000,000
Preferred Stock.. $.01 5,000,000
</TABLE>
Upon effectiveness of these Amended and Restated Articles of
Incorporation, the outstanding shares of the Corporation's Class A common stock
and Class B common stock shall be converted to Common Stock as follows:
<PAGE>
(i) each issued and outstanding share of Class A common stock, $.01 par value
per share, of the Corporation held of record by shareholders of the
Corporation immediately prior to such effectiveness shall automatically and
without need of any further action on the part of any shareholder be
converted into one (1) share of Common Stock;
(ii) each issued and outstanding share of Class B common stock, $.01 par value
per share, of the Corporation held of record by shareholders of the
Corporation immediately prior to such effectiveness shall automatically and
without need of any further action on the part of any shareholder be
converted into one (1) share of Common Stock.
The preferences, limitations and relative rights of shares of each
class and the authority of the Board of Directors of the Corporation to create
and to designate series of Preferred Stock and to determine the preferences,
limitations and relative rights as between series shall be as follows:
A. Common Stock.
1. Voting. Except as otherwise provided by law and except as may
be determined by the Board of Directors of the Corporation with respect to
shares of Preferred Stock as provided in Section B, below, only the holders
of shares of Common Stock shall be entitled to vote for the election of
directors of the Corporation and for all other corporate purposes. Except
as otherwise provided by law, upon any such vote, each holder of Common
Stock shall be entitled to one vote for each share of Common Stock held of
record by such shareholder.
2. Dividends. Subject to the provisions of paragraph (2) of
Section B, below, the holders of Common Stock shall be entitled to receive
such dividends as may be declared thereon from time to time by the Board of
Directors of the Corporation, in its discretion, out of any funds of the
Corporation at the time legally available for payment of dividends.
3. Liquidation. In the event of the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, after there have
been paid to or set aside for the holders of shares of Preferred Stock the
full preferential amounts, if any, to which they are entitled as provided
in paragraph (3) of Section B, below, the holders of outstanding shares of
Common Stock shall be entitled to share ratably, according to the number of
shares held by each, in the remaining assets of the Corporation available
for distribution.
2
<PAGE>
B. Preferred Stock.
1. Series and Variations Between Series. The Board of Directors
of the Corporation is authorized, to the full extent permitted under the
Wisconsin Business Corporation Law and the provisions of this Section B, to
provide for the issuance of the Preferred Stock in one or more series, each
of such series to be distinctively designated, and to have such voting
rights, redemption or conversion rights, dividend or distribution rights,
preferences with respect to dividends or distributions, or other
preferences, limitations or relative rights as shall be provided by the
Board of Directors of the Corporation consistent with the provisions of
this Article IV. The Board of Directors of the Corporation, unless
otherwise provided when the series is established, may increase or decrease
the number of shares of any series, provided that the number of shares of
any series shall not be reduced below the number of shares then
outstanding.
2. Dividends. Before any dividends (other than a dividend
payable solely in Common Stock) shall be paid or set apart for payment upon
shares of Common Stock, the holders of each series of Preferred Stock shall
be entitled to receive dividends at the rate (which may be fixed or
variable) and at such times as specified in the particular series, if any.
The holders of shares of Preferred Stock shall have no rights to
participate with the holders of shares of Common Stock in any dividends in
excess of the preferential dividends, if any, fixed for such Preferred
Stock.
3. Liquidation. In the event of liquidation, dissolution or
winding up (whether voluntary or involuntary) of the Corporation, the
holders of shares of Preferred Stock shall be entitled to be paid the full
amount payable on such shares upon the liquidation, dissolution or winding
up of the Corporation fixed by the Board of Directors with respect to such
shares, if any, before any amount shall be paid to the holders of the
Common Stock.
ARTICLE V
No holder of any shares of the Corporation shall have any pre-emptive
or subscription rights nor be entitled, as of right, to purchase or subscribe
for any part of the unissued shares of the Corporation or of any additional
shares issued by reason of any increase of authorized shares of the Corporation
or other securities whether or not convertible into shares of the Corporation.
ARTICLE VI
A dividend payable in shares of any class or series of the Corporation
may be paid in shares of any other class or series.
3
<PAGE>
ARTICLE VII
The address of the initial registered office of the Corporation is
44 East Mifflin Street, Madison, Wisconsin 53703 The name of its initial
registered agent at such address is CT Corporation.
ARTICLE VIII
The number of directors (exclusive of directors, if any, elected by
the holders of one or more series of Preferred Stock established pursuant to
Article IV of these Articles of Incorporation) shall not be less than one (1)
nor more than fifteen (15) directors, the exact number of directors to be
determined from time to time by resolution adopted by the affirmative vote of a
majority of the entire Board of Directors then in office.
The term of office of each director shall be one year. A director
shall hold office until the next annual meeting following his or her election
and until his or her successor shall be elected and shall qualify. Any newly
created directorship resulting from an increase in the number of directors and
any other vacancy on the Board of Directors, however caused, shall be filled by
the vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. Any director so elected to fill any
vacancy in the Board of Directors, including a vacancy created by an increase in
the number of directors, shall hold office until the next annual meeting
following his or her election and until his or her successor shall be elected
and shall qualify.
Exclusive of directors, if any, elected by the holders of one or more
series of Preferred Stock, no director of the Corporation may be removed from
office, except for Cause and by the affirmative vote of a majority of the
outstanding shares of the Corporation entitled to vote at a meeting of
shareholders duly called for such purpose. As used in this Article VIII, the
term "Cause" shall mean solely malfeasance arising from the performance of a
director's duties which has a materially adverse effect on the business of the
Corporation.
ARTICLE IX
Articles VIII, IX and X of these Articles of Incorporation may be
amended, altered or repealed, and new Articles VII, IX and X of these Articles
of Incorporation may be enacted, only by the affirmative vote of the holders of
not less than a majority of the outstanding total shares of the Corporation
entitled to vote at a meeting of shareholders duly called for such purpose and
by the affirmative vote of the holders of not less than a majority of the shares
of each class or series, if any, entitled to vote thereon at such meeting;
provided, however, that this Article IX shall not limit the power of the
Corporation's Board of Directors to make certain amendments to the Articles of
4
<PAGE>
Incorporation under Chapter 180 of the Wisconsin Statutes and any successor
provisions without shareholder approval.
ARTICLE X
The Corporation's By-Laws may be amended, altered or repealed, and new
By-Laws may be enacted, only by the affirmative vote of the holders of not less
than two-thirds of the outstanding shares of the Corporation entitled to vote at
a meeting of shareholders duly called for such purpose and by the affirmative
vote of the holders of not less than two-thirds of the shares of each class or
series, if any, entitled to vote thereon at such meeting, or by the affirmative
vote of not less than a majority of the entire Board of Directors then in
office.
5
<PAGE>
Exhibit 3.3
BY-LAWS
-------
OF
--
ADVANTAGE LEARNING SYSTEMS, INC.
--------------------------------
ARTICLE I. OFFICES
-------------------
SECTION 1.01. Principal Office. The principal office of the
Corporation shall be located at any place either within or outside the state of
Wisconsin as designated in the Corporation's most current Annual Report filed
with the Wisconsin Secretary of State. The executive offices of the Corporation
shall be located at the principal office.
SECTION 1.02. Registered Office. The registered office of the
Corporation, as required by the Wisconsin Business Corporation Law (the "WBCL"),
shall be located within Wisconsin and may, but need not, be the same as any of
its places of business. The address of the registered office may be changed from
time to time.
ARTICLE II. SHAREHOLDERS
-------------------------
SECTION 2.01. Annual Shareholder Meeting. The annual meeting of the
shareholders shall be held within 90 days after the close of the Corporation's
fiscal year, at such time and date as determined by the Corporation's Board of
Directors, for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. If the election of directors
shall not be held on the day designated herein for the annual meeting of the
shareholders, or at any subsequent continuation after adjournment thereof, the
Board of Directors shall cause the election to be held at a special meeting of
the shareholders as soon thereafter as is convenient.
SECTION 2.02. Special Shareholder Meetings. Special meetings of the
shareholders, for any purpose or purposes, described in the meeting notice, may
be called by the President, or by the Board of Directors, and shall be called by
the President at the request of the holders of not less than one-tenth of all
outstanding votes of the Corporation entitled to be cast on any issue at the
meeting.
SECTION 2.03. Place of Shareholder Meeting. The Board of Directors
may designate any place, either within or without the State of Wisconsin, as the
place of meeting for any annual or any special meeting of the shareholders,
unless all
<PAGE>
shareholders entitled to vote at the meeting designate, by unanimous written
consent, a different place, either within or without the State of Wisconsin, as
the place for the holding of such meeting. If no designation is made by either
the directors or unanimous action of the voting shareholders, the place of
meeting shall be the principal office of the Corporation in the State of
Wisconsin.
SECTION 2.04. Notice of Shareholder Meeting.
-----------------------------
2.04.1. Required Notice. Except as otherwise required by the
WBCL, written notice stating the date, time and place of each annual or
special shareholder meeting shall be delivered not less than 10 nor more
than 60 days before the date of the meeting, either personally or by mail,
by or at the direction of the President, the Board of Directors, or other
persons calling the meeting, to each shareholder or record, entitled to
vote at such meeting and to any other shareholder entitled by the WBCL or
the Corporation's Articles of Incorporation to receive notice of the
meeting. Notice may be communicated in person, by telephone, telegraph,
teletype, facsimile or other forms of wire or wireless communication, or by
mail or private carrier. Written notice to a shareholder shall be deemed to
be effective on the earlier of: (a) the date received; (b) the date it is
deposited in the United States mail when addressed to the shareholder's
address shown in the Corporation's current record of shareholders, with
postage prepaid; (c) the date shown on the receipt, if sent by registered
or certified mail, return receipt requested, and the receipt is signed by
or on behalf of the addressee; (d) the date sent, if transmitted by
telegraph, teletype, facsimile or other form of wire or wireless
communication; or (e) the date delivered to a courier or deposited in a
designated receptacle, if sent by private carrier, when addressed to the
shareholder's address shown in the Corporation's current record of
shareholders.
2.04.2. Adjourned Meeting. If any shareholder meeting is
adjourned to a different date, time, or place, notice need not be given of
the new date, time, and place, if the new date, time, and place is
announced at the meeting before adjournment. But if a new record date for
the adjourned meeting is, or must be fixed (see Section 2.05 of this
Article II), then notice must be given pursuant to the requirements of
Section 2.04.1, above, to those persons who are shareholders as of the new
record date.
2
<PAGE>
2.04.3. Waiver of Notice. Any shareholder may waive notice of
the meeting (or any notice required by the WBCL, the Corporation's Articles
of Incorporation or By-Laws), by a writing signed by the shareholder
entitled to the notice, which is delivered to the Corporation (either
before or after the date and time stated in the notice) for inclusion in
the corporate records. A shareholder's attendance at a meeting, in person
or by proxy:
(a) waives objection to lack of notice or defective notice
of the meeting, unless the shareholder at the beginning of the meeting
or promptly upon arrival objects to holding the meeting or transacting
business at the meeting;
(b) waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to
considering the matter when it is presented.
2.04.4. Contents of Notice. The notice of each special
shareholder meeting shall include a description of the purpose or purposes
for which the meeting is called and such other information as may be
required by the WBCL. Except as provided in this Section 2.04.4, or as
provided in the Corporation's Articles of Incorporation or otherwise in the
WBCL, the notice of an annual shareholder meeting need not include a
description of the purpose or purposes for which the meeting is called.
2.04.5. Special Transactions and Dissenters' Rights. If a
purpose of any shareholder meeting is to consider either: (a) a proposed
amendment to the Corporation's Articles of Incorporation (including any
restated articles requiring shareholder approval); (b) a plan of merger or
share exchange; (c) the sale, lease, exchange or other disposition of all,
or substantially all of the Corporation's property; (d) the dissolution of
the Corporation; or (e) the removal of a director, the notice must so state
and must be accompanied by, respectively, a copy or summary of the: (i)
articles of amendment; (ii) plan of merger or share exchange; or (iii) a
description of the transaction for disposition of all the Corporation's
property and must be given a sufficient number of days in advance of the
meeting to comply with the WBCL. If the proposed corporate action creates
dissenters' rights, the notice must state that shareholders are, or may be,
entitled
3
<PAGE>
to assert dissenters' rights, and must be accompanied by a
copy of Subchapter XIII of the WBCL.
SECTION 2.05. Fixing of Record Date.
---------------------
2.05.1. Meetings, Distributions, Etc. For the purpose of
determining shareholders of any voting group entitled to notice of a
shareholders' meeting, to demand a special meeting, or to vote or take any
other action, or shareholders entitled to receive payment of any
distribution or share dividend, the Board of Directors may fix in advance a
date as the record date. Such record date shall not be more than 70 days
prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is so fixed
by the Board of Directors for the determination of shareholders entitled to
notice of, or to demand or vote at a meeting of shareholders, or
shareholders entitled to receive a share dividend or distribution, the
record date for determination of such shareholders shall be at the close of
business on:
(a) With respect to an annual shareholder meeting or any
special shareholder meeting called by the Board of Directors or any
person specifically authorized by the Board of Directors or these By-
laws to call a meeting, the day before the first notice is delivered
to shareholders;
(b) with respect to a special shareholders' meeting
demanded by the shareholders, the date the first shareholder signs the
demand;
(c) with respect to the payment of a share dividend, the
date the Board of Directors authorizes the share dividend;
(d) with respect to actions taken in writing without a
meeting (pursuant to Section 2.12 of this Article II), the date the
first shareholder signs a consent; and
(e) with respect to a distribution to shareholders, (other
than one involving a purchase, redemption or other acquisition of the
Corporation's shares), the date the Board of Directors authorizes the
distribution.
2.05.2. Adjournment. When a determination of shareholders
entitled to vote at any shareholders' meeting
4
<PAGE>
has been made as provided in this Section 2.05, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date which it must do if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
SECTION 2.06. Shareholder List. After fixing a record date for a
meeting of shareholders, the corporation shall prepare a list of the names of
all its shareholders who are entitled to notice of the shareholders' meeting.
The list be arranged by class or series of shares and show the address of and
the number of shares held by each shareholder. the shareholders' list shall be
available for inspection by any shareholder beginning two business days after
notice of the meeting is given of which the list was prepared and continuing
through the meeting. The list shall be available at the Corporation's principal
office or at a place identified in the meeting notice in the city where the
meeting is to be held. A shareholder, or his or her agent or attorney, is
entitled, on written demand, to inspect and provided, that the shareholder, or
his or her agent or attorney, demonstrates to the satisfaction of the
corporation he or she satisfies the applicable requirements of the WBCL, to copy
the list during regular business hours and at his expense, during the period it
is available for inspection. The Corporation shall make the shareholders' list
available at the meeting and any shareholder, or his or her agent or attorney,
may inspect the list at any time during the meeting or any adjournment thereof.
Refusal or failure to prepare or make available the shareholders' list shall not
affect the validity of any action taken at such meeting.
SECTION 2.07. Shareholder Quorum, Voting Requirements and Voting
Groups.
2.07.1. Quorum. Shares entitled to vote as a separate voting
group may take action on a matter at a meeting only if a quorum of those shares
exists with respect to that matter. Unless the Corporation's Articles of
Incorporation, a By-law adopted under the authority granted in the Corporation's
Articles of Incorporation or the WBCL provides otherwise, a majority of the
votes entitled to be cast on the matter by the voting group constitutes a quorum
of that voting group for action on that matter.
2.07.2. Voting Requirements. Once a share is represented for
any purpose at a meeting, other than for the purpose of objecting to holding the
meeting or transacting business at the meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any
5
<PAGE>
adjournment of that meeting unless a new record date is or must be set for
that adjourned meeting. If a quorum exists, action on a matter (other than
the election of directors) by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes cast opposing
the action, unless the Articles of Incorporation or a By-law adopted under
authority granted in the Corporation's Articles of Incorporation or the
WBCL requires a greater number of affirmative votes.
2.07.3. Voting Groups. If the Corporation's Articles of
Incorporation, a By-law adopted under authority granted in the
Corporation's Articles of Incorporation or the WBCL provides for voting by
a single voting group on a matter, action that matter is taken when voted
upon by that voting group. If the Articles of Incorporation or the WBCL
provides for voting by two or more voting groups on a matter, action on
that matter is taken only when voted upon by each of those voting groups
counted separately. Action may be taken by one voting group on a matter
even though no action is taken by another voting group entitled to vote on
the matter.
SECTION 2.08. Proxies. At all meetings of shareholders, a
shareholder may vote in person, or vote by proxy pursuant to an appointment
of proxy that is executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Such appointment of a proxy shall be filed
before or at the time of the meeting with the Secretary of the Corporation
or other person authorized to tabulate votes. No appointment of a proxy
shall be valid after 11 months from the date of its execution unless
otherwise provided in the appointment of the proxy.
SECTION 2.09. Voting of Shares.
----------------
2.09.1. Generally. Except as provided otherwise in the WBCL or
in the Corporation's Article of Incorporation, each outstanding share
entitled to vote shall be entitled to one vote upon each matter submitted
to a vote at a meeting of shareholders.
2.09.2. Shares Held by a controlled Corporation. No shares held
by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the
total number of outstanding shares at any given time for purposes of any
meeting. The foregoing, however, shall not limit the
6
<PAGE>
power of the Corporation to vote any shares, including its own shares, held
by it in a fiduciary capacity.
2.09.3. Redeemable Shares. Redeemable shares are not entitled to
vote after notice of redemption is mailed to the holders thereof and a sum
sufficient to redeem the shares has been deposited with a bank, trust
company, or other financial institution under an irrevocable obligation to
pay the holders the redemption price on surrender of the shares.
SECTION 2.10. Corporation's Acceptance of Votes.
2.10.1 Shareholder Name. If the name signed on a vote, consent,
waiver, or proxy appointment corresponds to the name of a shareholder, the
Corporation, if acting in good faith, is entitled to accept the vote,
consent, waiver, or proxy appointment and give it effect as the act of the
shareholder.
2.10.2 Other Name. If the name signed on a vote, consent, waiver,
or proxy appointment does not correspond to the name of its shareholder,
the Corporation, if acting in good faith, is nevertheless entitled to
accept the vote, consent, waiver, or proxy appointment and give it effect
as the act of the shareholder if:
(a) the shareholder is an entity as defined in the Wisconsin
Business Corporation Law and the name signed purports to be that of an
officer or agent of the entity;
(b) the name signed purports to be that of a personal
representative, administrator, executor, guardian, or conservator
representing the shareholder and, if the Corporation requests,
evidence of fiduciary status acceptable to the Corporation has been
presented with respect to the vote, consent, waiver, or proxy
appointment;
(c) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the corporation
requests, evidence of this status acceptable to the Corporation has
been presented with respect to the vote, consent, waiver, or proxy
appointment;
(d) the name signed purports to be that of pledgee,
beneficial owner, or attorney-in-fact of the
7
<PAGE>
shareholder and, if the Corporation requests, evidence acceptable to
the Corporation of the signatory's authority to sign for the
shareholder has been presented with respect to the vote, consent,
waiver, or proxy appointment; or
(e) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least
one of the co-owners and the person signing appears to be acting on
behalf of all the co-owners.
2.10.3. Invalid Signature. The Corporation is entitled to reject
a vote, consent, waiver, or proxy appointment if the Secretary or other
officer or agent authorized to tabulate votes, acting in good faith, has
reasonable basis for doubt about the validity of the signature or about the
signatory's authority to sign for the shareholder.
2.10.4. No Liability. The Corporation and its officers or agents
who accept or reject a vote, consent, waiver, or proxy appointment in good
faith and in accordance with the standards of this Section are not liable
in damages to the shareholder for the consequences of the acceptance or
rejection.
2.10.5. Presumption of Validity. Corporate action based on the
acceptance or rejection of a vote, consent, waiver, or proxy appointment
under this Section 2.10 is valid unless a court of competent jurisdiction
determines otherwise.
SECTION 2.11. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if one or more written consents, setting forth the action so taken, are
signed by all of the shareholders entitled to vote with respect to the subject
matter thereof and are delivered to the Corporation for inclusion in the minute
book. If the action to be taken requires that notice be given to non-voting
shareholders, the Corporation shall give the non-voting shareholders written
notice of the proposed action at least 10 days before the action is taken, which
notice shall contain or be accompanied by the same material that would have been
required if a formal meeting had been called to consider the action. Action
taken by consents is effective when the last such written consent is delivered
to the Corporation, unless the consent specifies a different effective date. A
8
<PAGE>
consent signed under this Section has the effect of a meeting vote and may be
described as such in any document.
SECTION 2.12. Voting for Directors. Except as provided in Section
2.11, above, directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. In this Section 2.12, "plurality" means that the individuals with the
largest number of votes are elected as directors up to the maximum number of
directors to be chosen at the election. Votes cast against a candidate are not
given legal effect and are not counted as votes cast in an election of
directors.
ARTICLE III. BOARD OF DIRECTORS
--------------------------------
SECTION 3.01. General Powers. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
SECTION 3.02. Number, Tenure, and Qualifications of Directors. The
number of directors of the Corporation shall be two (2). Each director shall
hold office until the next annual meeting of shareholders or until his earlier
removal or resignation. However, if his term expires, he shall continue to serve
until his successor shall have been elected qualified or until there is a
decrease in the number of directors. Directors need not be residents of the
State of Wisconsin or shareholders of the Corporation unless so required by the
Corporation's Articles of Incorporation.
SECTION 3.03. Regular Meetings of the Board of Directors. A regular
meeting of the Board of Directors shall be held without other notice than this
By-law immediately after, and at the same place as, the annual meeting of
shareholders. The President of the Corporation, or in his absence, the Board of
Directors may provide, by resolution, the time and place, only within the county
where this Corporation's principal office is located, for the holding of
additional regular meetings without other notice than such resolution. Any such
regular meeting may be held by telephone in accordance with Section 3.07, below.
SECTION 3.04. Special Meeting of the Board of Directors. Special
meetings of the Board of Directors may be called by or at the request of the
President or any one director. The person authorized to call special meetings of
the Board of Directors may fix any place, only within the county where this
Corporation's principal office is located, for holding any special meeting of
the Board of Directors. Any such special
9
<PAGE>
meeting may be held by telephone in accordance with Section 3.07, below.
SECTION 3.05. Notice of, and Waiver of Notice for, Special Director
Meetings. Notice of meetings, except the regular annual meeting of the Board of
Directors, shall be given at least five (5) days prior to the date set for any
such meeting. Notice may be communicated in person, by telephone, telegraph,
teletype, facsimile or other form of wire or wireless communication, or by mail
or private carrier. Written notice shall be deemed to be effective on the
earlier of: (a) the date received; (b) the date it is deposited in the United
States mail when addressed to the director at his business or home address as it
appears in the Corporation's records, with postage prepaid; (c) the date shown
on the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by or on behalf of the addressee; (d) the
date sent, if transmitted by telegraph, teletype, facsimile or other form of
wire or wireless communication; or (e) the date delivered to a courier or
deposited in a designated receptacle, if sent by private carrier, when addressed
to the director at his business or home address as it appears in the
Corporation's records. Oral notice shall be deemed effective when communicated.
Whenever any notice whatever is required to be given to any director of the
Corporation under these By-laws, the Corporation's Articles of Incorporation or
the WBCL, a waiver thereof in writing, signed at any time whether before or
after the time of meeting, by the director entitled to such notice, shall be
deemed equivalent to timely notice. A director's attendance at, or participation
in, a meeting waives any required notice unless the director at the beginning of
the meeting or promptly upon his or her arrival objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting. Neither the business to be transacted at,
nor the purposes of, any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of such meeting.
SECTION 3.06. Director Quorum and Votes.
3.06.1. Quorum. A majority of the number of directors specified
in Section 3.02, above, shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors.
3.06.2. Votes. The affirmative vote of the majority of the
directors present at a meeting at which a quorum is present when the vote
is taken shall be the act of the Board of Directors.
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SECTION 3.07. Meetings; Assent.
3.07.1. Telephonic Meetings. Any or all directors may participate
in a regular or special meeting by, or conduct the meeting through the use
of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting and all communication
during the meeting is immediately transmitted to each participating
director and each participating director is able to immediately send
messages to all other participating directors. If the meeting is to be
conducted through the use of any such means of communication all
participating directors must be informed that a meeting is taking place at
which official business may be transacted. A director participating in a
meeting by any such means of communication is deemed to be present in
person at the meeting.
3.07.2. Presumption of Assent. A director who is present at a
meeting of the Board of Directors or a committee of the Board of Directors
when corporate action is taken is deemed to have assented to the action
taken unless: (a) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding the meeting or transacting business at the
meeting; or (b) he dissents or abstains from the action taken and minutes
of the meeting are prepared that show his dissent or abstention from the
action taken; or (c) he delivers written notice of his dissent or
abstention to the presiding officer of the meeting before its adjournment
or to the Corporation immediately after adjournment of the meeting; or (d)
he dissents or abstains form the action taken and minutes of the meeting
are prepared that fail to show his dissent or abstention and he delivers
written notice of that failure to the Corporation promptly after receiving
the minutes. The right of dissent or abstention is not available to a
director who votes in favor of the action taken.
SECTION 3.08. Director Action Without a Meeting. Any action required
or permitted to be taken by the Board of Directors at a meeting may be taken
without a meeting if the action is taken by all members of the Board of
Directors. The action shall be evidenced by one or more written consents
describing the action taken, signed by each director and retained by the
Corporation. Action taken by consents is effective when the last director signs
the consent, unless the consent specifies a different effective date. A signed
consent has the effect of a meeting vote and may be described as such in any
document.
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SECTION 3.09. Removal and Resignation of Directors.
3.09.1. Removal. The shareholders may remove one or more
directors only at a meeting called for that purpose if notice has been
given to the shareholders that a purpose of the meeting is such removal.
The removal may be with or without cause. If a director is elected by a
voting group, only the shareholders of that voting group may participate in
the vote to remove that director. A director may be removed only if the
number of votes cast to remove him exceeds the number of votes cast not to
remove him.
3.09.2. Resignation. A director may resign at any time by
delivering written notice to the Board of Directors or to the Corporation.
A resignation is effective when such notice is delivered to the Corporation
unless the notice specifies a later effective date.
SECTION 3.10. Board of Director Vacancies.
3.10.1. Filling of Vacancies, Generally. Unless the Corporation's
Articles of Incorporation provide otherwise, if a vacancy occurs on the
Board of Directors, including a vacancy resulting from an increase in the
number of directors, the shareholders may fill the vacancy. During such
time that the shareholders fail or are unable to fill such vacancies then
and until the shareholders act:
(a) the Board of Directors may fill the vacancy; or
(b) if the directors remaining in office constitute fewer than a
quorum of the Board of Directors, they may fill the vacancy by the
affirmative vote of a majority of all the directors remaining in office.
3.10.2. Vacancy for Director Elected by a Voting Group. If the
vacant office was held by a director elected by a voting group of
shareholders, only the holders of shares of that voting group may vote to
fill the vacancy if it is filled by the shareholders, and only the
remaining directors elected by that voting group may vote to fill the
vacancy if it is filled by the directors.
3.10.3. Filling of Vacancy Due to Deferred Resignation. A vacancy
that will occur at a specific later date by reason of a resignation
effective at a later date may be filled before the vacancy occurs but the
new director may not take office until the vacancy occurs.
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3.10.4. Term of Replacement Director. The term of a director
elected to fill a vacancy expires at the next shareholders' meeting at
which directors are elected. However, if his term expires, he shall
continue to serve until his successor is elected and qualified or until
there is a decrease in the number of directors.
SECTION 3.11. Director Compensation. Unless the Corporation's Articles
of Incorporation provide otherwise, the Board of Directors, by resolution and
irrespective of any personal interest of any of its members, may provide that
each director be paid his expenses, if any, of attendance at each meeting of the
Board of Directors, and a stated salary as director or a fixed sum for
attendance at each meeting of the Board of Directors or both. No such payment
shall preclude any director from serving the Corporation in any capacity and
receiving compensation therefor.
SECTION 3.12. Director Committees.
3.12.1. Creation of Committees. The Board of Directors may create
one or more committees and appoint members of the Board of Directors to
serve on them. Each committee must have two or more members, who serve at
the pleasure of the Board of Directors.
3.12.2. Selection of Members. The creation of a committee and
appointment of members to it must be approved by the greater of (1) a
majority of all the directors in office when the action is taken or (2) the
number of directors required by the Articles of Incorporation to take such
action (or, if none is specified in the Corporation's Articles of
Incorporation, the number required by Section 3.06, above, to take action).
3.12.3. Required Procedures. Sections 3.03, 3.04, 3.05, 3.06,
3.07 and 3.08, above, which govern meetings, notice and waiver of notice,
quorum and voting, and action without meetings, of the Board of Directors,
apply to committees and their members.
3.12.4. Authority. Each committee may exercise those aspects of
the authority of the Board of Directors which the Board of Directors
confers upon such committee in the resolution creating the committee except
that a committee may not do any of the following:
(a) authorize distributions of assets of the Corporation;
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(b) approve or propose to shareholders action that the WBCL
requires be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any of
its committees, unless the Board of Directors has specifically granted
such authority to the committee;
(d) amend the Articles of Incorporation pursuant to the
authority of directors to do so granted by Section 180.1002 of the
WBCL or any successor thereto;
(e) adopt, amend, or repeal By-laws;
(f) approve a plan of merger not requiring shareholder
approval;
(g) authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the Board of Directors;
or
(h) authorize or approve the issuance or sale or contract
for sale of shares or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except that
the Board of Directors may authorize a committee (or a senior executive
officer of the Corporation) to do so within limits specifically
prescribed by the Board of Directors.
ARTICLE IV. OFFICERS
SECTION 4.01. Number of Officers. The officers of the Corporation may
consist of the offices of chairman of the board, president, vice-president,
secretary, and treasurer, each of whom shall be appointed by the Board of
Directors. The Board of Directors may appoint such other officers and assistant
officers as it deems necessary. If specifically authorized by the Board of
Directors, an officer may appoint one or more officers or assistant officers.
The same individual may simultaneously hold more than one office in the
Corporation.
SECTION 4.02. Appointment and Term of Office. The officers of the
Corporation shall be appointed by the Board of Directors for a term as
determined by the Board of Directors. If no term is specified, they shall hold
office until the first meeting of the Board of Directors held after the next
annual
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meeting of shareholders. If the appointment of officers shall not be made at
such meeting, such appointment shall be made as soon thereafter as is
convenient. Each officer shall hold office until his successor shall have been
duly appointed and shall have been qualified, until his death, or until he shall
resign or shall have been removed in the manner provided in Section 4.03,
below. The designation of a specified term does not grant to the officer any
contract rights, and the Board of Directors may remove the officer at any time
prior to the termination of such term.
SECTION 4.03. Removal of Officers. Any officer or agent may be removed
by the Board of Directors at any time, with or without cause. Such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Appointment of an officer or agent shall not of itself create contract rights.
SECTION 4.04. Vacancies. A vacancy in any principal officer because of
death, resignation, removal, disqualification or otherwise, shall be filled by
the Board of Directors for the unexpired portion of the term.
SECTION 4.05. Chairman of the Board. The Chairman of the Board shall
be the principal executive officer of the Corporation and, subject to the
control of the Board of Directors, shall in general supervise and control all of
the business and affairs of the Corporation. He shall, when present, preside at
all meetings of the shareholders and of the Board of Directors. He may sign
certificates for shares of the Corporation's capital stock and deeds, mortgages,
bonds, contracts, or other instruments necessary or proper to be executed in the
course of the Corporation's regular business or which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
By-laws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of chairman of the board and such other duties as
may be prescribed by the Board of Directors from time to time. Except as
otherwise provided by the WBCL or the Board of Directors, the Chairman of the
Board may authorize any President, Vice-President or other officer or agent of
the Corporation to sign, execute and acknowledge such documents or instruments
in his place and stead.
SECTION 4.06. President. The President shall be the chief operating
officer of the Corporation. He shall, in the absence of the Chairman of the
Board, preside at all meetings of
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the shareholders and of the Board of Directors. In the absence of the Chairman
of the Board or in the event of his death, inability or refusal to act, the
President shall perform the duties of the Chairman of the Board, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Chairman of the Board. The President may sign certificates for shares of the
Corporation's capital stock and deeds, mortgages, bonds, contracts, or other
instruments necessary or proper to be executed in the course of the
Corporation's regular business or which the Board of Directors has authorized to
be executed, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors or by these By-laws to some other
officer or agent of the Corporation, or shall be required by law to be otherwise
signed or executed; and in general shall perform all duties incident to the
office of president and such other duties as may be prescribed by the Board of
Directors from time to time. Except as otherwise provided by the WBCL or the
Board of Directors, the President may authorize any Vice-President or other
officer or agent of the Corporation to sign, execute and acknowledge such
documents or instruments in his place and stead.
SECTION 4.07. The Vice-Presidents. In the absence of the President or
in the event of his death, inability or refusal to act, the Vice-President, if
one has been elected (or in the event that there is more than one Vice-
President, the Vice-Presidents in the order designated at the time of their
appointment, or in the absence of any designation, then in the order of their
appointment), shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Any Vice-President may sign certificates for shares of the
Corporation's capital stock, the issuance of which have been authorized by
resolution of the Board of Directors; and shall perform such other duties as
from time to time may be assigned to him by the Chairman of the Board or by the
Board of Directors.
SECTION 4.08. The Secretary. The Secretary shall: (a) keep the minutes
of the proceedings of the shareholders and of the Board of Directors in one or
more books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these By-laws or as required by the WBCL; (c)
be custodian of the corporate records and of any seal of the Corporation and, if
there is a seal of the Corporation, see that it is affixed to all documents, the
execution of which on behalf of the Corporation under its seal is duly
authorized; (d) when requested or required, authenticate any records of the
Corporation; (e) keep a register of the post office address of each shareholder
which shall be furnished to the Secretary by such
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shareholder or delegate that responsibility to a stock transfer agent approved
by the Board of Directors; (f) sign, with the Chairman of the Board, the
President or a Vice-President, certificates for shares of the Corporation's
capital stock, the issuance of which has been authorized by resolution of the
Board of Directors; (g) have general charge of the stock transfer books of the
Corporation; and (h) in general perform all duties incident to the office of
secretary and such other duties as from time to time may be assigned to him by
the Chairman of the Board or by the Board of Directors.
SECTION 4.09. The Treasurer. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the Corporation;
(b) receive and give receipts for moneys due and payable to the Corporation from
any source whatsoever, and deposit all such moneys in the name of the
Corporation in such banks, trust companies, or other depositaries as shall be
selected by the Board of Directors; and (c) in general perform all of the duties
incident to the office of treasurer and such other duties as from time to time
may be assigned to him by the Chairman of the Board or by the Board of
Directors. If required by the Board of Directors, the Treasurer shall give a
bond for the faithful discharge of his duties in such sum and with such surety
or sureties as the Board of Directors shall require.
SECTION 4.10. Assistant Secretaries and Assistant Treasurers. The
Assistant Secretaries, when authorized by the Board of Directors, may sign with
the Chairman of the Board, the President or a Vice-President Certificates for
shares of the Corporation the issuance of which shall have been authorized by a
resolution of the Board of Directors. The Assistant Treasurers shall
respectively, if required by the Board of Directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the Board of
Directors shall determine. The Assistant Secretaries and Assistant Treasurers,
in general, shall perform such duties as shall be assigned to them by the
Secretary or the Treasurer, respectively, or by the Chairman of the Board or the
Board of Directors.
SECTION 4.11. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors.
ARTICLE V. LIABILITY AND INDEMNIFICATION
----------------------------------------
OF DIRECTORS, OFFICERS AND EMPLOYEES
------------------------------------
SECTION 5.01. Definitions Applicable to Indemnification and Insurance
Provisions.
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5.01.1 Director, Officer or Employee. "Director, Officer or
Employee" means any of the following:
(a) A natural person who is or was a director, officer or
employee of the Corporation.
(b) A natural person who, while a director, officer or
employee of the Corporation, is or was serving either pursuant to the
Corporation's specific request or as a result of the nature of such
person's duties to the Corporation as a director, officer, partner,
trustee, member of any governing or decision-making committee,
employee or agent of another corporation or foreign corporation,
partnership, joint venture, trust or other enterprise.
(c) A natural person who, while a director, officer or
employee of the Corporation, is or was serving an employee benefit
plan because his or her duties to the Corporation also impose duties
on, or otherwise involve services by, the person to the plan or to
participants in or beneficiaries of the plan.
(d) Unless the context requires otherwise, the estate or
personal representative of a director, officer or employee.
5.01.2. Expenses. "Expenses" include fees, costs, charges,
disbursements, attorney fees and any other expenses incurred in connection
with a Proceeding (as defined below in Subsection 5.01.5).
5.01.3. Liability. "Liability" includes the obligation to pay a
judgment, settlement, penalty, assessment, forfeiture or fine, including an
excise tax assessed with respect to an employee benefit plan, and
reasonable expenses.
5.01.4. Party. "Party" includes a natural person who was or is,
or who is threatened to be made, a named defendant or respondent in a
Proceeding (as defined below in Subsection 5.01.5).
5.01.5. Proceeding. "Proceeding" means 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
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or in the right of the Corporation or by any other person or entity.
SECTION 5.02. Indemnification of Officers, Directors and Employees.
5.02.01. Successful Defense. The Corporation shall indemnify a
Director, Officer or Employee to the extent he has been successful on the
merits or otherwise in the defense of a Proceeding for all reasonable
Expenses incurred in connection with the Proceeding if such person was a
party because he is a Director, Officer or Employee. Indemnification under
this Subsection 5.02.1 shall be made within 10 days of receipt of a written
demand for indemnification.
5.02.2. Other Cases. In cases not included under Subsection
5.02.1, the Corporation shall indemnify a Director, Officer or Employee
against Liability and Expenses incurred by such person in connection with a
Proceeding to which such person was party because he is a Director, Officer
or Employee, unless it shall have been proven by final judicial
adjudication that such person breached or failed to perform a duty owed to
the Corporation which constitutes:
(a) A willful failure to deal fairly with the Corporation
or its shareholders in connection with a matter in which the Director,
Officer or Employee has a material conflict of interest;
(b) A violation of criminal law, unless the Director,
Officer or Employee had reasonable cause to believe his conduct was
lawful or no reasonable cause to believe his conduct was unlawful;
(c) A transaction from which the Director, Officer or
Employee derived an improper personal profit; or
(d) Willful misconduct.
Indemnification required under this Subsection 5.02.2 shall be made within
30 days of receipt of a written demand for indemnification.
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SECTION 5.03. Determination that Indemnification is Proper.
5.03.1. Means of Determining whether Indemnification is Required.
Unless provided otherwise in the Corporation's Articles of Incorporation or
by a written agreement between the Director, Officer or Employee and the
Corporation, determination of whether indemnification is required under
Section 5.02 shall be made by any one of the following means selected by
the Director, Officer or Employee seeking indemnification:
(a) By a majority vote of a quorum of the Board of
Directors consisting of directors not at the time Parties to the same
or related Proceedings. If a quorum of disinterested directors cannot
be obtained, such determination may be made by majority vote of a
committee duly appointed by the Board of Directors and consisting
solely of two or more directors not at the time Parties to the same or
related Proceedings. Directors who are Parties to the same or related
Proceedings may participate in the designation of members of the
committee.
(b) By independent legal counsel selected by a quorum of
the Board of Directors or its committee in the manner prescribed in
Subsection 5.03.1(a), above, or, if unable to obtain such a quorum or
committee, by a majority vote of the full Board of Directors,
including directors who are Parties to the same or related
Proceedings.
(c) By a panel of three arbitrators consisting of one
arbitrator selected by those directors entitled under Subsection
5.03.1(b), above, to select independent counsel, one arbitrator
selected by the Director, Officer or Employee seeking indemnification,
and one arbitrator selected by the two arbitrators previously
selected.
(d) By an affirmative vote of a majority of the outstanding
shares. Shares owned by, or voted under the control of, persons who
are at the time Parties to the same or related Proceedings, whether as
plaintiffs or defendants or in any other capacity, may not be voted in
making the determination.
(e) By court order.
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5.03.2. Effect of Termination of Proceeding. The termination of
a Proceeding by judgment, order, settlement or conviction, or upon a plea
of no contest or an equivalent plea, does not, by itself, create a
presumption that indemnification of the Director, Officer or Employee is
not required under this Article V.
5.03.3. Request for Indemnification & Assignment of Claims
Required. A Director, Officer or Employee who seeks indemnification under
this Article V shall make a written request to the Corporation. As a
further pre-condition to any right to receive indemnification, the writing
shall contain a declaration that the Corporation shall have the right to
exercise all rights and remedies available to such Director, Officer or
Employee against any other person, corporation, foreign corporation,
partnership, joint venture, trust or other enterprise, arising out of, or
related to, the Proceeding which resulted in the Liability and Expense for
which such Director, Officer or Employee is hereby deemed to have assigned
to the Corporation all such rights and remedies.
5.03.4. Indemnification Not Required. Indemnification under
this Article V is not required to the extent the Director, Officer or
Employee has previously received indemnification or allowance of expenses
from any person or entity, including the Corporation, in connection with
the same Proceeding.
5.03.5. Allowance of Expenses as Incurred. Upon written request
by a Director, Officer or Employee who is a Party to a Proceeding, the
Corporation shall pay or reimburse his reasonable expenses as incurred if
the Director, Officer or Employee provides the Corporation with all of the
following:
(a) A written affirmation of his good faith belief that he
has not breached or failed to perform his duties to the Corporation;
and
(b) A written undertaking, executed personally or on his
behalf, to repay the allowance without interest to the extent that it
is ultimately determined by a court order that indemnification under
Subsection 5.02.2 is prohibited.
The undertaking under this Subsection shall be accepted without reference
to the Director's, Officer's or Employee's
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ability to repay the allowance. The undertaking shall be unsecured.
5.03.6. Subsequent Limitation of Right to Indemnification. The
right to indemnification under this Article V may only be reduced by the
subsequent affirmative vote of not less than two-thirds of the votes cast
by the holders of the Corporation's outstanding capital stock entitled to
vote on such matter. Any reduction in the right to indemnification may only
be prospective from the date of such vote.
SECTION 5.04. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is a Director, Officer or Employee against
any Liability asserted against or incurred by the individual in any such
capacity or arising out of his status as such, regardless of whether the
Corporation is required or authorized to indemnify or allow expenses to the
individual under this Article V.
SECTION 5.05. Severability. If this Article V or any portion
thereof is invalidated on any ground by any court of competent jurisdiction, the
Corporation shall indemnify the Director, Officer or Employee as to Expenses and
Liabilities paid in settlement with respect to any Proceeding to the full extent
permitted by any applicable portion of this Article V that is not invalidated or
by applicable law.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 6.01. Certificates for Shares.
6.01.1. Content. Certificates representing shares of the
Corporation shall at minimum, state on their face the name of the
Corporation and that it is formed under the laws of Wisconsin; the name of
the person to whom issued; and the number and class of shares and the
designation of the series, if any, the certificate represents, and be in
such form as determined by the Board of Directors. Such certificates shall
be signed (either manually or by facsimile) by the President or Vice
President or any other two officers of the Corporation. Each certificate
for shares shall be consecutively numbered or otherwise identified.
6.01.2. Legend as to Class or Series. If the Corporation is
authorized to issue different classes of shares or different series within
a class, the designations, relative rights, preferences, and limitations
applicable to
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each class and the variations in rights, preferences, and limitations
determined for each series (and the authority of the Board of directors to
determine variations for future series) must be summarized on the front or
back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
shareholder this information on request, in writing and without charge.
6.01.3. Shareholder List. The name and address of the person to
whom the shares respresented by each stock certificate are issued, with the
number of shares and date of issue, shall be entered on the stock transfer
books of the Corporation.
6.01.4. Transferring Shares. All certificates surrendered to the
Corporation for transfer shall be cancelled and no new certificate shall
be issued until the former certificate for a like number of shares shall
have been surrendered and cancelled, except that in case of a lost,
destroyed, or mutilated certificate a new one may be issued therefor upon
such terms and indemnity to the Corporation as the Board of Directors may
prescribe.
SECTION 6.02. Registration of the Transfer of Shares. Registration of
the transfer of shares of the Corporation shall be made only on the stock
transfer books of the Corporation. In order to register a transfer, the record
owner shall surrender the shares to the Corporation for cancellation, properly
endorsed by the appropriate person or persons with reasonable assurances that
the endorsements are genuine and effective. Unless the Corporation has
established a procedure by which a beneficial owner of shares held by a nominee
is to be recognized by the Corporation as the owner, the person in whose name
shares stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
SECTION 6.03. Acquisition of Shares. The Corporation may acquire its
own shares and all shares so acquired constitute treasury shares, which shall be
considered issued but not outstanding shares, unless (a) the Corporation's
Articles of Incorporation prohibit treasury shares or prohibit the reissuance of
acquired shares; or (b) the Board of Directors, by resolution, cancels the
acquired shares, in which event the shares are restored to the status of
authorized but unissued shares. If the Articles of Incorporation prohibit
treasury shares but do not prohibit the reissuance of acquired shares, all of
the Corporation's shares acquired by it shall be restored to the status of
authorized but unissued shares. If the articles of Incorporation
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prohibit the reissuance of acquired shares, the number of authorized shares of
the Corporation is reduced by the number of shares acquired by the Corporation,
effective upon amendment of the Articles of Incorporation, including pursuant to
articles of amendment adopted by the Board of Directors without shareholder
action pursuant to Section 180.0631(3)(b) of the WBCL, which contain the
information required thereby or by any successor to Section 180.0631(3)(b) of
the WBCL.
ARTICLE VII. DISTRIBUTIONS
--------------------------
The Board of Directors may authorize, and the Corporation may make,
distributions (including dividends on its outstanding shares) in the manner and
upon the terms and conditions provided by the WBCL and any other applicable law
and in the Corporation's Articles of Incorporation.
ARTICLE VIII. AMENDMENTS
------------------------
SECTION 8.01. By the Board of Directors. The Corporation's Board of
Directors may amend or repeal the Corporation's By-laws unless:
(a) the Corporation's Articles of Incorporation or the WBCL
reserve this power exclusively to the shareholders in whole or part; or
(b) the shareholders in adopting, amending, or repealing a
particular By-law provide expressly that the Board of Directors may not amend or
repeal that By-law.
SECTION 8.02. By the Shareholders. The Corporation's shareholders
may amend or repeal the Corporation's By-laws even though the By-laws may also
be amended or repealed by its Board of Directors.
SECTION 8.03. Implied Amendments. Any action taken or authorized by
the shareholders by the affirmative vote of the holders of a majority of the
shares of each voting group entitled to vote thereon or by the Board of
Directors by affirmative vote of a majority of the directors, shall be given the
same effect as though the By-laws had been temporarily amended so far as is
necessary to permit the specific action so taken or authorized.
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Exhibit 3.4
FORM OF
AMENDED AND RESTATED BY-LAWS
OF
ADVANTAGE LEARNING SYSTEMS, INC.
ARTICLE I. OFFICES
-------------------
SECTION 1.1. Principal and Other Offices. The principal office of the
Corporation shall be located at any place either within or outside the State of
Wisconsin as designated in the Corporation's most current Annual Report filed
with the Wisconsin Secretary of State. The Corporation may have such other
offices, either within or outside the State of Wisconsin, as the Board of
Directors may designate or as the business of the Corporation may require from
time to time.
SECTION 1.2. Registered Office. The registered office of the
Corporation required by the Wisconsin Business Corporation Law to be maintained
in the State of Wisconsin may, but need not, be the same as any of its places of
business. The registered office may be changed from time to time.
SECTION 1.3. Registered Agent. The registered agent of the
Corporation required by the Wisconsin Business Corporation Law to maintain a
business office in the State of Wisconsin may, but need not, be an officer or
employee of the Corporation. The registered agent may be changed from time to
time.
ARTICLE II. SHAREHOLDERS
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SECTION 2.1. Annual Meeting. The annual meeting of shareholders shall
be held on the first Tuesday in May of each year at 10:00 a.m. (local time) or
at such other date and time as shall be fixed by, or at the direction of, the
Board of Directors, for the purpose of electing directors and for the
transaction of such other business as may have been properly brought before the
meeting in compliance with the provisions of Section 2.5. If the day fixed for
the annual meeting shall be a legal holiday in the State of Wisconsin, such
meeting shall be held on the next succeeding business day.
SECTION 2.2. Special Meetings. Except as otherwise required by
applicable law, special meetings of shareholders of the Corporation may only be
called by the Chairman of the Board, the Vice Chairman of the Board, the Chief
Executive Officer, the President or by not less than a majority of the Board of
Directors; provided, however, that the Corporation shall hold a special meeting
of shareholders of the Corporation if a signed and dated written demand or
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demands by the holders of at least 10% of all the votes entitled to be cast on
any issue proposed to be considered at the proposed special meeting is delivered
to the Corporation as required under the Wisconsin Business Corporation Law,
which demand or demands must describe one or more purposes for which the
shareholders demand a meeting be called, and the shareholders demanding the
meeting pay to the Corporation, or make satisfactory arrangements with the
Corporation for payment of, the Corporation's anticipated costs of holding the
meeting, including the costs of printing and mailing any proxy materials. Only
business within the purpose described in the notice required by Section 2.4 may
be conducted at a special shareholders' meeting.
SECTION 2.3. Place of Meeting. The Board of Directors, the Chairman
of the Board, the Vice Chairman of the Board, the Chief Executive Officer or the
President may designate any place, within or outside the State of Wisconsin, as
the place of meeting for the annual meeting or for any special meeting. If no
designation is made the place of meeting shall be the principal office of the
Corporation, but any meeting may be adjourned to reconvene at any place
designated by vote of a majority of the shares represented thereat.
SECTION 2.4. Notice of Meeting. The Corporation shall notify
shareholders of the date, time and place of each annual and special
shareholders' meeting. Notice of a special meeting shall include a description
of each purpose for which the meeting is called. Notice of all meetings need be
given only to shareholders entitled to vote, unless otherwise required by the
Wisconsin Business Corporation Law, and shall be given not less than ten nor
more than sixty days before the meeting date. The Corporation may give notice
in person, by telephone, teletype, facsimile, electronic mail or other forms of
wire or wireless communication, or by mail or private carrier, and, if these
forms of personal communication are impracticable, notice may be communicated by
a newspaper of general circulation in the area where published, or by radio,
television or other form of public broadcast communication. Written notice
shall be deemed to be effective at the earlier of receipt or mailing and may be
addressed to the shareholder's address shown in the Corporation's current record
of shareholders. The Corporation may give oral notice and such oral notice
shall be deemed to be effective when communicated. Notice by newspaper, radio,
television or other form of public broadcast communication shall be deemed to be
effective on the date of publication or broadcast.
SECTION 2.5. Advance Notice Shareholder-Proposed Business at Annual
Meeting. At an annual meeting of shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) specified in
the notice of meeting (or any amendment or supplement thereto) given in
accordance with Section 2.4, (b) otherwise properly brought before the meeting
by or at the direction of the Board of Directors, the Chairman of the Board or
the President, or (c) otherwise properly brought before the meeting by a
shareholder. In addition to any other requirements under applicable law, the
Articles of Incorporation or the By-Laws for business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be received at the principal office of the
Corporation, not less than 120 days prior to the anniversary date of the annual
meeting of shareholders in the immediately preceding year. A shareholder's
notice to the Secretary shall set forth as to each matter the shareholder
proposes to bring before the annual
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meeting (i) the text of such proposal or a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and record address of the
shareholder proposing such business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder, (iv) any interest
of the shareholder in such business, (v) a representation that the person
sending the notice is a shareholder of record and will remain such through the
record date for the meeting, and (vi) a representation that such shareholder
intends to appear in person or by proxy at such meeting to move for the
consideration of the business set forth in the notice. In addition, any such
shareholder shall be required to provide such further information as may be
requested by the Corporation in order to comply with federal and state
securities laws, and rules and regulations thereunder. The Corporation may
require evidence by any person giving notice under this Section 2.5 that such
person is a bona fide beneficial owner of the Corporation's shares.
Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2.5; provided, however, that nothing in
this Section 2.5 shall be deemed to preclude discussion by any shareholder of
any business properly brought before the annual meeting in accordance with said
procedure.
The presiding officer at an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Section
2.5, and if he or she should so determine, he or she shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
SECTION 2.6. Procedure for Nomination of Directors. Only persons
nominated in accordance with all of the procedures set forth in the
Corporation's Articles of Incorporation and By-Laws shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders by or at
the direction of the Board of Directors, by any nominating committee or persons
appointed by the Board, or by any shareholder of the Corporation entitled to
vote for election of directors at the meeting who complies with all of the
notice procedures set forth in this Section 2.6.
Nominations other than those made by or at the direction of the Board
of Directors or any nominating committee or person appointed by the Board shall
be made pursuant to timely notice in proper written form to the Secretary of the
Corporation. To be timely, a shareholder's request to nominate a person for
director, together with the written consent of such person to serve as a
director, must be received by the Secretary of the Corporation at the
Corporation's principal office (i) with respect to an election held at an annual
meeting of shareholders, not less than 120 days prior to the anniversary date of
the annual meeting of shareholders in the immediately preceding year, or (ii)
with respect to an election held at a special meeting of shareholders for the
election of directors, not less than the close of business on the eighth day
following the date of the earlier of public announcement or notice of such
meeting. To be in proper written form, such shareholder's notice shall set
forth in writing (a) as to each person whom the shareholder proposes to nominate
for election or reelection as a director (i) the name, age, business address and
residence
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address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of stock of the Corporation which
are beneficially owned by such person, and (iv) such other information relating
to such person as would be required to be disclosed in solicitations of proxies
for election of directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, and any successor to such Regulation; and (b)
as to the shareholder giving the notice (i) the name and address, as they appear
on the Corporation's books, of such shareholder, (ii) the class and number of
shares of the Corporation which are owned beneficially and of record by such
shareholder, (iii) a representation that the shareholder is a holder of record
of shares of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice, and (iv) a representation that the person sending the
notice is a shareholder of record and will remain such through the record date
for the meeting. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of the
Corporation or the shareholder to nominate the proposed nominee. The presiding
officer at the meeting shall, if the facts so warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures or
other requirements prescribed by the Corporation's Articles of Incorporation and
By-Laws; and if he or she should so determine, such presiding officer shall so
declare to the meeting and the defective nomination(s) shall be disregarded.
SECTION 2.7. Fixing of Record Date. For the purpose of determining
shareholders of any voting group entitled to notice of or to vote at any meeting
of shareholders or any adjournment thereof, or shareholders entitled to receive
payment of any distribution or dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders.
Such record date shall not be more than 70 days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
If no record date is so fixed for the determination of shareholders entitled to
notice of, or to vote at a meeting of shareholders, or shareholders entitled to
receive a share dividend or distribution, the record date for determination of
such shareholders shall be at the close of business on:
(a) With respect to an annual shareholders meeting or any
special shareholders meeting called by the Board of Directors or any person
specifically authorized by the Board of Directors or these By-Laws to call
a meeting, the day before the first notice is mailed to shareholders;
(b) With respect to a special shareholders meeting demanded by
the shareholders, the date the first shareholder signs the demand;
(c) With respect to the payment of a share dividend, the date
the Board of Directors authorizes the share dividend; and
(d) With respect to a distribution to shareholders (other than
one involving a repurchase or reacquisition of shares), the date the Board
of Directors authorizes the distribution.
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SECTION 2.8. Voting Lists. After fixing a record date for a meeting,
the Corporation, shall prepare a list of the names of all its shareholders who
are entitled to notice of a shareholders meeting. The list shall be arranged by
class or series of shares and show the address of and the number of shares held
by each shareholder. The shareholders list must be available for inspection by
any shareholder, beginning two business days after notice of the meeting is
given for which the list was prepared and continuing to the date of the meeting.
The list shall be available at the Corporation's principal office or at a place
identified in the meeting notice in the city where the meeting is to be held.
Subject to the provisions of the Wisconsin Business Corporation Law, a
shareholder or his or her agent or attorney may, on written demand, inspect and
copy the list during regular business hours and at his or her expense, during
the period that it is available for inspection. The Corporation shall make the
shareholders list available at the meeting, and any shareholder or his or her
agent or attorney may inspect the list at any time during the meeting or any
adjournment thereof. Refusal or failure to prepare or make available the
shareholders list shall not affect the validity of any action taken at such
meeting.
SECTION 2.9. Shareholder Quorum and Voting Requirements. Shares
entitled to vote as a separate voting group may take action on a matter at a
meeting only if a quorum of those shares exists with respect to that matter.
Unless the Articles of Incorporation, By-Laws adopted under authority granted in
the Articles of Incorporation or the Wisconsin Business Corporation Law provide
otherwise, a majority of the votes entitled to be cast on the matter by the
voting group constitutes a quorum of that voting group for action on that
matter.
If the Articles of Incorporation or the Wisconsin Business Corporation
Law provide for voting by two or more voting groups on a matter, action on that
matter is taken only when voted upon by each of those voting groups counted
separately. Action may be taken by one voting group on a matter even though no
action is taken by another voting group entitled to vote on the matter.
Once a share is represented for any purpose at a meeting, other than
for the purpose of objecting to holding the meeting or transacting business at
the meeting, it is deemed present for purposes of determining whether a quorum
exists, for the remainder of the meeting and for any adjournment of that meeting
to the extent provided in Section 2.14.
If a quorum exists, action on a matter by a voting group is approved
if the votes cast within the voting group favoring the action exceed the votes
cast opposing the action, unless the Articles of Incorporation, the By-Laws or
the Wisconsin Business Corporation Law require a greater number of affirmative
votes; provided, however, that for purposes of electing directors, unless
otherwise provided in the Articles of Incorporation, directors are elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present. For purposes of electing directors, (i) a
"plurality" means that the individuals with the largest number of votes are
elected as directors up to the maximum number of directors to be chosen at the
election, and (ii) votes against a candidate are not given legal effect and are
not counted as votes cast in an election of directors.
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SECTION 2.10. Proxies. For all meetings of shareholders, a
shareholder may appoint a proxy to vote or otherwise act for the shareholder by
signing an appointment form, either personally or by a duly authorized attorney-
in-fact. Such proxy shall be effective when filed with the Secretary of the
Corporation or other officer or agent authorized to tabulate votes before or at
the time of the meeting. No proxy shall be valid after eleven months from the
date of its execution, unless otherwise provided in the proxy.
SECTION 2.11. Voting of Shares. Unless otherwise provided in the
Articles of Incorporation or the Wisconsin Business Corporation Law, each
outstanding share entitled to vote shall be entitled to one vote upon each
matter submitted to a vote at a meeting of shareholders.
No shares in the Corporation held by another corporation may be voted
if the Corporation owns, directly or indirectly, a sufficient number of shares
entitled to elect a majority of the directors of such other corporation;
provided, however, that the Corporation shall not be limited in its power to
vote any shares, including its own shares, held by it in a fiduciary capacity.
SECTION 2.12. Voting Shares Owned by the Corporation. Shares of the
Corporation belonging to it shall not be voted directly or indirectly at any
meeting and shall not be counted in determining the total number of outstanding
shares at any given time, but shares held by this Corporation in a fiduciary
capacity may be voted and shall be counted in determining the total number of
outstanding shares at any given time.
SECTION 2.13. Acceptance of Instruments Showing Shareholder Action.
(a) If the name signed on a vote, consent, waiver or proxy
appointment corresponds to the name of a shareholder, the Corporation, if
acting in good faith, may accept the vote, consent, waiver or proxy
appointment and give it effect as the act of the shareholder.
(b) If the name signed on a vote, consent, waiver or proxy
appointment does not correspond to the name of its shareholder, the
Corporation, if acting in good faith, may accept the vote, consent, waiver
or proxy appointment and give it effect as the act of the shareholder if
any of the following apply:
(1) the shareholder is an entity, within the meaning of the
Wisconsin Business Corporation Law, and the name signed purports to be
that of an officer or agent of the entity;
(2) the name signed purports to be that of a personal
representative, administrator, executor, guardian or conservator
representing the shareholder and, if the Corporation or its agent
requests, evidence of fiduciary status acceptable to the Corporation
is presented with respect to the vote, consent, waiver or proxy
appointment;
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(3) the name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the Corporation or
its agent requests, evidence of this status acceptable to the
Corporation is presented with respect to the vote, consent, waiver or
proxy appointment;
(4) the name signed purports to be that of a pledgee,
beneficial owner, or attorney-in-fact of the shareholder and, if the
Corporation or its agent requests, evidence acceptable to the
Corporation of the signatory's authority to sign for the shareholder
is presented with respect to the vote, consent, waiver or proxy
appointment; or
(5) two or more persons are the shareholder as co-tenants
or fiduciaries and the name signed purports to be the name of at least
one of the co-owners and the person signing appears to be acting on
behalf of all co-owners.
(c) The Corporation may reject a vote, consent, waiver or proxy
appointment if the Secretary or other officer or agent of the Corporation
who is authorized to tabulate votes, acting in good faith, has reasonable
basis for doubt about the validity of the signature on it or about the
signatory's authority to sign for the shareholder.
SECTION 2.14. Adjournments. An annual or special meeting of
shareholders may be adjourned at any time, including after action on one or more
matters, by a majority of shares represented, even if less than a quorum. The
meeting may be adjourned for any purpose, including, but not limited to,
allowing additional time to solicit votes on one or more matters, to disseminate
additional information to shareholders or to count votes. Upon being reconvened,
the adjourned meeting shall be deemed to be a continuation of the initial
meeting.
(a) Quorum. Once a share is represented for any purpose at the
original meeting, other than for the purpose of objecting to holding the
meeting or transacting business at a meeting, it is considered present for
purposes of determining if a quorum exists, for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is
or must be set for that adjourned meeting.
(b) Record Date. When a determination of shareholders entitled
to notice of or to vote at any meeting of shareholders has been made as
provided in Section 2.7, such determination shall be applied to any
adjournment thereof unless the Board of Directors fixes a new record date,
which it shall do if the meeting is adjourned to a date more than 120 days
after the date fixed for the original meeting.
(c) Notice. Unless a new record date for an adjourned meeting
is or must be fixed pursuant to Section 2.14(b), the Corporation is not
required to give notice of the new date, time or place if the new date,
time or place is announced at the meeting before adjournment.
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SECTION 2.15. Polling. In the sole discretion of the presiding
officer of an annual or special meeting of shareholders, polls may be closed at
any time after commencement of any annual or special meeting. When there are
several matters to be considered at a meeting, the polls may remain open during
the meeting as to any or all matters to be considered, as the presiding officer
may declare. Polls will remain open as to matters to be considered at any
adjournment of the meeting unless the presiding officer declares otherwise. At
the sole discretion of the presiding officer, the polls may remain open after
adjournment of a meeting for not more than 72 hours for the purpose of
collecting proxies and counting votes. All votes submitted prior to the
announcement of the results of the balloting shall be valid and counted. The
results of balloting shall be final and binding after announcement of such
results.
SECTION 2.16. Waiver of Notice by Shareholders. A shareholder may
waive any notice required by the Wisconsin Business Corporation Law, the
Articles of Incorporation or the By-Laws before or after the date and time
stated in the notice. The waiver shall be in writing and signed by the
shareholder entitled to the notice, contain the same information that would have
been required in the notice under any applicable provisions of the Wisconsin
Business Corporation Law, except that the time and place of the meeting need not
be stated, and be delivered to the Corporation for inclusion in the
Corporation's records. A shareholder's attendance at a meeting, in person or by
proxy, waives objection to (i) lack of notice or defective notice of the
meeting, unless the shareholder at the beginning of the meeting or promptly upon
arrival objects to the holding of the meeting or transacting business at the
meeting, and (ii) consideration of a particular matter at the meeting that is
not within the purpose described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
SECTION 2.17. Unanimous Consent without Meeting. Any action required
or permitted to be taken at a meeting of shareholders may be taken without a
meeting only by unanimous written consent or consents signed by all of the
shareholders of the Corporation and delivered to the Corporation for inclusion
in the Corporation's records. Such consent must describe the action taken and
must be delivered to the corporation for inclusion in the corporate records.
The record date for determining shareholders entitled to take action under this
section is the date that the first shareholder signs the consent. A consent
signed under this section has the effect of a meeting vote and may be described
as such in any document.
ARTICLE III. BOARD OF DIRECTORS
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SECTION 3.1. General Powers. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
managed under the direction of, its Board of Directors, subject to any
limitations set forth in the Articles of Incorporation.
SECTION 3.2. Number, Tenure, Qualifications and Term.
(a) Number. Except as otherwise provided in the Articles of
Incorporation, the number of directors (exclusive of directors, if any,
elected by the holders of one or more series of Preferred Stock, voting
separately as a series pursuant to the provisions of the
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Articles of Incorporation) shall be not less than one (1) nor more than
fifteen (15) directors, the exact number of directors to be determined from
time to time by resolution adopted by affirmative vote of a majority of the
entire Board of Directors then in office.
(b) Tenure. A director shall hold office until the next annual
meeting following his or her election and until his or her successor shall
be duly elected and shall qualify.
(c) Qualifications. A director need not be a resident of the
state of Wisconsin or a shareholder of the Corporation except if required
by the Articles of Incorporation. The Board of Directors, at its
discretion, may establish any qualifications for directors, which
qualifications, if any, shall only be applied for determining
qualifications of a nominee for director as of the date of the meeting at
which such nominee is to be elected or appointed.
(d) Term. The term of office of each director shall be one
year.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of the Articles of Incorporation applicable thereto. Directors so elected
shall not be divided into classes unless expressly provided by such Articles,
and during the prescribed terms of office of such directors, the Board of
Directors shall consist of such directors in addition to the number of directors
determined as provided in Section 3.2(a).
SECTION 3.3. Removal. Exclusive of directors, if any, elected by the
holders of one or more classes of Preferred Stock, no director of the
Corporation may be removed from office except for Cause and by the affirmative
vote of a majority of the outstanding shares of the Corporation entitled to vote
at a meeting of shareholders duly called for such purpose. As used in this
Section 3.3, the term "Cause" shall mean solely malfeasance arising from the
performance of a director's duties which has a materially adverse effect on the
business of the Corporation.
SECTION 3.4. Resignation. A director may resign at any time by
delivering written notice to the Board of Directors, the Chairman of the Board
or to the Corporation (which shall be directed to the Secretary). Such
resignation is effective when the notice is delivered unless the notice
specifies a later effective date.
SECTION 3.5. Vacancies. Exclusive of a vacancy in directors, if any,
elected by the holders of one or more series of Preferred Stock, any vacancy on
the Board of Directors, however caused, including, without limitation, any
vacancy resulting from an increase in the number of directors, shall be filled
by the vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. Any director so elected to fill any
vacancy in the Board of Directors, including a vacancy created by an increase in
the number of directors, shall hold office until the next annual meeting
following his or her election and until his or her successor
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shall be elected and shall qualify. A vacancy that will occur at a specific
later date may be filed before the vacancy occurs, but the new director will not
take office until the vacancy occurs.
SECTION 3.6. Committees. The Board of Directors by resolution adopted
by the affirmative vote of a majority of the number of directors fixed by
Section 3.2(a) then in office may create one or more committees, appoint members
of the Board of Directors to serve on the committees and designate other members
of the Board of Directors to serve as alternates. Each committee shall consist
of two or more members of the Board of Directors. Unless otherwise provided by
the Board of Directors, members of the committee shall serve at the pleasure of
the Board of Directors. Each committee may exercise those aspects of the
authority of the Board of Directors which are within the scope of the
committee's assigned responsibilities or which the Board of Directors otherwise
confers upon such committee; provided, however, a committee may not do any of
the following:
(a) authorize distributions;
(b) approve or propose to shareholders action that the Wisconsin
Business Corporation Law requires be approved by shareholders;
(c) fill vacancies on the Board of Directors or, unless the
Board of Directors has specifically granted authority to the committee, its
committees;
(d) amend the Articles of Incorporation pursuant to the
authority of directors to do so granted by the Wisconsin Business
Corporation Law;
(e) adopt, amend, or repeal by-laws;
(f) approve a plan of merger not requiring shareholder approval;
(g) authorize or approve reacquisition of shares, except
according to a formula or method prescribed by the Board of Directors; or
(h) authorize or approve the issuance or sale or contract for
sale of shares or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee (or a senior executive officer
of the Corporation, including without limitation the President and any Vice
President) to do so within limits prescribed by the Board of Directors.
Except as required or limited by the Articles of Incorporation, the By-Laws, the
Wisconsin Business Corporation Law, or resolution of the Board of Directors,
each committee shall be authorized to fix its own rules governing the conduct of
its activities. Each committee shall make such reports to the Board of
Directors of its activities as the Board of Directors may request.
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SECTION 3.7. Compensation. Except as provided in the Articles of
Incorporation, the Board of Directors, irrespective of any personal interest of
any of its members, may fix the compensation of directors.
SECTION 3.8. Regular Meeting. A regular meeting of the Board of
Directors shall be held without other notice than this By-Law immediately after,
and at the same place as, the annual meeting of shareholders, and each adjourned
session thereof. A regular meeting of a committee, if any, shall be at such
date, place, either within or outside the State of Wisconsin, and time as such
committee determines. Other regular meetings of the Board of Directors shall be
held at such dates, times and places, either within or outside the State of
Wisconsin, as the Board of Directors may provide by resolution, which resolution
shall constitute exclusive notice of such meeting.
SECTION 3.9. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
Vice Chairman of the Board, the Chief Executive Officer, the President or a
majority of the members of the Board of Directors. Special meetings of a
committee may be called by or at the request of the Chairman of a committee or a
majority of the committee members. The person or persons authorized to call
special meetings of the Board of Directors or a committee may fix any date, time
and place, either within or outside the State of Wisconsin, for any special
meeting of the Board of Directors or committee called by them.
SECTION 3.10. Notice; Waiver. Notice of meetings, except for regular
meetings, shall be given at least five days previously thereto and shall state
the date, time and place of the meeting of the Board of Directors or committee.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors or committee need be specified in the
notice of such meeting. Notice may be communicated in person, by telephone,
telegraph, teletype, facsimile or other form of wire or wireless communication,
or by mail or private carrier. Written notice is effective at the earliest of
the following: (1) when received; (2) on the date shown on the return receipt,
if sent by registered or certified mail, return receipt requested, and the
receipt is signed by or on behalf of the addressee; or (3) two days after it is
deposited with a private carrier. Oral notice is deemed effective when
communicated. Facsimile notice is deemed effective when sent.
A director may waive any notice required by the Wisconsin Business
Corporation Law, the Articles of Incorporation or the By-Laws before or after
the date and time stated in the notice. The waiver shall be in writing, signed
by the director entitled to the notice and retained by the Corporation.
Notwithstanding the foregoing, a director's attendance at or participation in a
meeting waives any required notice to such director of the meeting unless the
director at the beginning of the meeting or promptly upon such director's
arrival objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
SECTION 3.11. Quorum; Voting. Unless otherwise provided in the
Articles of Incorporation or the Wisconsin Business Corporation Law, a majority
of the number of directors
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fixed by Section 3.2(a) or appointed by the Board of Directors to a committee
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors or committee; provided, however, that even though less than
such quorum is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice. Except as
otherwise provided in the Articles of Incorporation, the By-Laws or the
Wisconsin Business Corporation Law, if a quorum is present when a vote is taken,
the affirmative vote of a majority of directors present is the act of the Board
of Directors or committee.
SECTION 3.12. Presumption of Assent. A director of the Corporation
who is present and is announced as present at a meeting of the Board of
Directors or a committee thereof at which action on any corporate matter is
taken is deemed to have assented to the action taken unless (i) such director
objects at the beginning of the meeting or promptly upon arrival to holding the
meeting or transacting business at the meeting, (ii) such director dissents or
abstains from an action taken and minutes of the meeting are prepared that show
the director's dissent or abstention from the action taken, (iii) such director
delivers written notice of his or her dissent or abstention to the presiding
officer of the meeting before its adjournment or to the Corporation (directed to
the Secretary) immediately after adjournment of the meeting, or (iv) such
director dissents or abstains from an action taken, minutes of the meeting are
prepared that fail to show the director's dissent or abstention from the action
taken and the director delivers to the Corporation (directed to the Secretary) a
written notice of that failure promptly after receiving the minutes. A director
who votes in favor of action taken may not dissent or abstain from that action.
SECTION 3.13. Informal Action Without Meeting. Any action required or
permitted by the Articles of Incorporation, the By-Laws or the Wisconsin
Business Corporation Law to be taken by the Board of Directors or a committee at
a meeting may be taken without a meeting if the action is taken by all of the
directors or committee members then in office. The action shall be evidenced by
one or more written consents describing the action taken, signed by each
director and retained by the Corporation. Any such consent is effective when
the last director signs the consent, unless the consent specifies a different
effective date. A consent signed under this section has the effect of a
unanimous vote taken at a meeting at which all directors were present, and may
be described as such in any document.
SECTION 3.14. Telephonic or Other Meetings. Unless the Articles of
Incorporation provide otherwise, any or all directors may participate in a
regular or special meeting of the Board of Directors or any committee thereof
by, or conduct the meeting through the use of, any means of communication by
which (i) all directors participating may simultaneously hear each other during
the meeting, (ii) all communication during the meeting is immediately
transmitted to each participating director, and (iii) each participating
director is able to immediately send messages to all other participating
directors. If the meeting is to be conducted through the use of any such means
of communication all participating directors shall be informed that a meeting is
taking place at which official business may be transacted. A director
participating in a meeting by this means is deemed to be present in person at
the meeting. Notwithstanding the foregoing, the Chairman of the Board, or other
presiding officer, shall, at any time, have the authority to deem any business
or resolution not appropriate for meetings held pursuant to this Section 3.14.
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ARTICLE IV. OFFICERS
--------------------
SECTION 4.1. Number. The principal officers of the Corporation shall
be a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive
Officer, a President, one or more Vice Presidents, any number of whom may be
designated as Senior Executive Vice President, Executive Vice President or
Senior Vice President, a Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors. Until such time as the Board of Directors
shall deem it desirable to elect a Chairman of the Board such office may remain
vacant, and while such office is vacant, the powers and duties of the Chairman
of the Board shall vest in and be performed by the President of the Corporation.
Such other officers as may be deemed necessary may be elected or appointed by
the Board of Directors. Such other assistant officers as may be deemed
necessary may be appointed by the Board of Directors or the President for such
term as is specified in the appointment. The same natural person may
simultaneously hold more than one office in the Corporation.
SECTION 4.2. Election and Term of Office. The officers of the
Corporation to be elected by the Board of Directors shall be elected annually by
the Board of Directors at the first meeting of the Board of Directors held after
the annual meeting of the shareholders. If the election of officers shall not
be held at such meeting, such election shall be held as soon thereafter as
convenient. Each officer shall hold office until his or her successor shall
have been duly elected or until his or her death or until he or she shall resign
or shall have been removed in the manner hereinafter provided.
SECTION 4.3. Resignation and Removal. An officer may resign at any
time by delivering notice to the corporation (directed to the Secretary). The
resignation is effective when the notice is delivered, unless the notice
specifies a later effective date and the corporation accepts the later effective
date. If a resignation is effective at a later date, the Board of Directors may
fill the pending vacancy before the effective date if the Board of Directors
provides that the successor may not take office until the effective date. The
Board of Directors may remove any officer at any time with or without cause and
notwithstanding the contract rights, if any, of the officer removed. The Board
of Directors or the President may remove any assistant officer who was appointed
by the Board or the President. The appointment of an officer or assistant
officer does not itself create contract rights.
SECTION 4.4. Vacancies. A vacancy in any principal office because of
death, resignation, removal, disqualification or otherwise, shall be filled by
the Board of Directors for the unexpired portion of the term. A vacancy in any
assistant office because of death, resignation, removal, disqualification or
otherwise may be filled by the Board of Directors or the President.
SECTION 4.5. Chairman of the Board. The Chairman of the Board shall
preside at all annual and special meetings of shareholders and all regular and
special meetings of the Board of Directors, shall advise and counsel with the
Chief Executive Officer and shall be responsible for the administration and
management of the areas of the business and affairs of the Corporation assigned
to him or her from time to time by the Board of Directors.
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SECTION 4.6. Vice Chairman of the Board. The Vice Chairman of the
Board shall advise and counsel with the Chief Executive Officer and shall be
responsible for the administration and management of the areas of the business
and affairs of the Corporation assigned to him or her from time to time by the
Board of Directors.
SECTION 4.7. Chief Executive Officer. The Chief Executive Officer
shall be the principal executive officer of the Corporation and, subject to the
control of the Board of Directors, shall have general supervision and control of
the business and affairs of the Corporation and its officers. The Chief
Executive Officer shall have the authority, subject to such rules as may be
prescribed by the Board of Directors, to appoint such agents and employees of
the Corporation as the Chief Executive Officer deems necessary, prescribe their
powers, duties and compensation, and delegate authority to them. Such agents
and employees shall hold offices at the discretion of the Chief Executive
Officer. The Chief Executive Officer shall have authority to sign, execute and
acknowledge, on behalf of the Corporation, all deeds, mortgages, bonds, stock
certificates, contracts, leases, reports and all other documents or instruments
necessary or proper to be executed in the course of the Corporation's regular
business or which shall be authorized by the Board of Directors. Except as
otherwise provided by the WBCL or the Board of Directors, the Chief Executive
Officer may authorize any other officer or agent of the Corporation to sign,
execute and acknowledge such documents in his or her place and stead. In
general, the Chief Executive Officer shall have all authority and perform all
duties incident to the office of the chief executive offices and such other
duties as may be prescribed by the Board of Directors from time to time.
SECTION 4.8 President. In the absence of the Chief Executive Officer
or in the event of his or her death, inability or refusal to act, the President
shall perform the duties of the Chief Executive Officer, and when so acting
shall have all the powers and duties of the Chief Executive Officer. In
addition, the President shall be responsible for the administration and
management of the areas of the business and affairs of the Corporation assigned
to him from time to time by the Board of Directors or the Chief Executive
Officer.
SECTION 4.9. Vice Presidents. One or more of the Vice Presidents may
be designated as Senior Executive Vice President, Executive Vice President or
Senior Vice President. In the absence of the President or in this event of his
or her death, inability or refusal to act, the Vice Presidents in the order
designated at the time of their election, shall perform the duties of the
President and when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Any Vice President may sign with the
Secretary or Assistant Secretary certificates for shares of the Corporation.
Any Vice President shall perform such other duties as are incident to the office
of Vice President or as may be prescribed from time to time by the Board of
Directors or the President.
SECTION 4.10. Secretary. The Secretary shall: (i) keep the minutes
of the shareholders and Board of Directors meetings in one or more books
provided for that purpose, (ii) see that all notices are duly given in
accordance with the provisions of the By-Laws or as required by law, (iii) be
custodian of the Corporation's records and of the seal of the Corporation, (iv)
see that the seal of the Corporation is affixed to all appropriate documents the
execution of which on
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behalf of the Corporation under its seal is duly authorized, (v) keep a register
of the address of each shareholder which shall be furnished to the Secretary by
such shareholder, and (vi) perform all duties incident to the office of
Secretary and such other duties as may be prescribed from time to time by the
Board of Directors or the President.
SECTION 4.11. Treasurer. The Treasurer shall: (i) have charge and
custody of and be responsible for all funds and securities of the Corporation,
(ii) receive and give receipts for moneys due and payable to the Corporation
from any source whatsoever, and deposit all such moneys in the name of the
Corporation, and (iii) in general perform all of the duties incident to the
office of Treasurer and have such other duties and exercise such other authority
as from time to time may be delegated or assigned by the Board of Directors or
the President.
SECTION 4.12. Assistant Secretaries and Assistant Treasurers. An
Assistant Secretary, if any, when authorized by the Board of Directors, may sign
with the President or any Vice President certificates for shares of the
Corporation, the issuance of which shall have been authorized by a resolution of
the Board of Directors. An Assistant Treasurer, if any, shall, if required by
the Board of Directors, give bonds for the faithful discharge of his or her
duties in such sums and with such sureties as the Board of Directors shall
determine. The Assistant Secretaries and Assistant Treasurers, in general,
shall perform such duties as shall be assigned to them by the Board of
Directors, the President or the Secretary or the Treasurer, respectively.
SECTION 4.13. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors or a committee authorized by the
Board to fix the same, and no officer shall be prevented from receiving such
salary by reason of the fact that he or she is also a director of the
Corporation or a member of such committee.
ARTICLE V. CONTRACTS; VOTING OF STOCK IN OTHER CORPORATIONS
-----------------------------------------------------------
SECTION 5.1. Contracts. The Board of Directors may authorize any
officer or officers, committee, or any agent or agents to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Corporation, and such authorization may be general or confined to specific
instances.
SECTION 5.2. Voting of Stock in Other Corporations. The Board of
Directors by resolution shall from time to time designate one or more persons to
vote all stock held by this Corporation in any other corporation or entity, may
designate such persons in the alternative and may empower them to execute
proxies to vote in their stead. In the absence of any such designation by the
Board of Directors, the President shall be authorized to vote any stock held by
the Corporation or execute proxies to vote such stock.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
------------------------------------------------------
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SECTION 6.1. Certificates for Shares. Certificates representing
shares of the Corporation shall be in such form as shall be determined by, or
under the authority of a resolution of, the Board of Directors, which shall be
consistent with the requirements of the Wisconsin Business Corporation Law.
Such certificates shall be signed by the President or a Vice President and by
the Secretary or an Assistant Secretary. The validity of a share certificate is
not affected if a person who signed the certificate no longer holds office when
the certificate is issued. All certificates for shares shall be consecutively
numbered or otherwise identified. The name and address of the person to whom
the shares represented thereby are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that in case
of a lost, destroyed or mutilated certificate a new one may be issued therefor
upon such terms and indemnity to the Corporation as the Board of Directors or
its designee may prescribe.
SECTION 6.2. Transfer of Shares. Transfer of shares of the
Corporation shall be made only on the stock transfer books of the Corporation by
the holder of record thereof or by his or her legal representative, who shall
furnish proper evidence of authority to transfer or by his or her attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation, and on surrender for cancellation of the
certificate for such shares. The person in whose name shares stand on the books
of the Corporation shall be deemed by the Corporation to be the owner thereof
for all purposes, except as otherwise required by the Wisconsin Business
Corporation Law.
SECTION 6.3. Stock Regulations. The Board of Directors shall have the
power and authority to make all such further rules and regulations not
inconsistent with the statutes of the State of Wisconsin as they may deem
expedient concerning the issue, transfer and registration of certificates
representing shares of the Corporation, including the appointment or designation
of one or more stock transfer agents and one or more stock registrars.
ARTICLE VII. INDEMNIFICATION; INSURANCE
---------------------------------------
SECTION 7.1. Indemnity of Directors, Officers, Employees and
Designated Agents.
(a) Definitions to Indemnification and Insurance Provisions.
(1) "Director, Officer, Employee or Agent" means any of the
following: (i) a natural person who is or was a director, officer,
employee or agent of the Corporation; (ii) a natural person who, while
a director, officer, employee or agent of the Corporation, is or was
serving either pursuant to the Corporation's specific request or as a
result of the nature of such person's duties to the Corporation as a
director, officer, partner, trustee, member of any governing or
decision-making committee, manager, employee or agent of another
corporation or foreign
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corporation, partnership, joint venture, trust or other enterprise;
(iii) a natural person who, while a director, officer, employee or
agent of the Corporation, is or was serving an employee benefit plan
because his or her duties to the Corporation also impose duties on, or
otherwise involve services by, the person to the plan or to
participants in or beneficiaries of the plan; or (iv) unless the
context requires otherwise, the estate or personal representative of a
director, officer, employee or agent. Notwithstanding the foregoing,
an agent falls within the foregoing definition only upon resolution of
the Board of Directors or committee appointed thereby that such agent
shall be entitled to the indemnification provided herein.
(2) "Expenses" means all reasonable fees, costs, charges,
disbursements, attorneys' fees and any other expenses incurred in
connection with a Proceeding.
(3) "Liability" means the obligation to pay a judgment,
penalty, assessment, forfeiture or fine, including an excise tax
assessed with respect to an employee benefit plan, the agreement to
pay any amount in settlement of a Proceeding (whether or not approved
by a court order), and reasonable expenses and interest related to the
foregoing.
(4) "Party" means a natural person who was or is, or who is
threatened to be made, a named defendant or respondent in a
Proceeding.
(5) "Proceeding" means any threatened, pending or completed
civil, criminal, administrative or investigative action, suit,
arbitration or other proceeding, whether formal or informal (including
but not limited to any act or failure to act alleged or determined to
have been negligent, to have violated the Employee Retirement Income
Security Act of 1974, or to have violated Section 180.0833 of the
Wisconsin Statutes, or any successor thereto, regarding improper
dividends, distributions of assets, purchases of shares of the
Corporation, or loans to officers), 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 or entity.
(b) Indemnification of Officers, Directors, Employees and
Agents.
(1) The Corporation shall indemnify a Director, Officer,
Employee or Agent to the extent he or she has been successful on the
merits or otherwise in the defense of any Proceeding, for all
reasonable Expenses incurred in the Proceeding if the Director,
Officer, Employee or Agent was a Party because he or she is a
Director, Officer, Employee or Agent of the Corporation.
(2) In cases not included under subsection (1), the
Corporation shall indemnify a Director, Officer, Employee or Agent
against Liability and Expenses incurred in a Proceeding to which the
Director, Officer, Employee or Agent was a Party because he or she is
a Director, Officer, Employee or Agent of the
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Corporation, unless it is determined by final judicial adjudication
that such person breached or failed to perform a duty such person owed
to the Corporation and the breach or failure constitutes any of the
following:
(i) A willful failure to deal fairly with the
Corporation or its shareholders in connection with a matter in
which the Director, Officer, Employee or Agent has a material
conflict of interest;
(ii) A violation of criminal law, unless the Director,
Officer, Employee or Agent had reasonable cause to believe that
his or her conduct was lawful or no reasonable cause to believe
his or her conduct was unlawful;
(iii) A transaction from which the Director, Officer,
Employee or Agent derived an improper personal profit; or
(iv) Willful misconduct.
(3) Indemnification under this Section 7.1 is not required
to the extent the Director, Officer, Employee or Agent has previously
received indemnification or allowance of expenses from any person or
entity, including the Corporation, in connection with the same
Proceeding.
(4) Indemnification required under subsection (b) (1) shall
be made within 10 days of receipt of a written demand for
indemnification. Indemnification required under subsection (b) (2)
shall be made within 30 days of receipt of a written demand for
indemnification.
(5) Upon written request by a Director, Officer, Employee
or Agent who is a Party to a Proceeding, the Corporation shall pay or
reimburse his or her reasonable Expenses as incurred if the Director,
Officer, Employee or Agent provides the Corporation with all of the
following:
(i) A written affirmation of his or her good faith
belief that he or she is entitled to indemnification under
Section 7.1; and
(ii) A written undertaking, executed personally or on
his or her behalf, to repay all amounts advanced without interest
to the extent that it is ultimately determined that
indemnification under Section 7.1(b)(2) is prohibited. The
undertaking under this subsection shall be accepted without
reference to the ability of the Director, Officer, Employee or
Agent to repay the allowance. The undertaking shall be
unsecured.
(c) Determination that Indemnification is Proper.
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(1) Unless provided otherwise by a written agreement
between the Director, Officer, Employee or Agent and the Corporation,
determination of whether indemnification is required under subsection
(b) shall be made by one of the following methods, which in the case
of a Director or Officer seeking indemnification shall be selected by
such Director or Officer: (i) by a majority vote of a quorum of the
Board of Directors consisting of directors who are not at the time
Parties to the same or related Proceedings or, if a quorum of
disinterested directors cannot be obtained, by a majority vote of a
committee duly appointed by the Board of Directors (which appointment
by the Board may be made by directors who are parties to the
Proceeding) consisting solely of two or more directors who are not at
the time parties to the same or related Proceedings, (ii) by
independent legal counsel selected by a quorum of the Board of
Directors or its committee constituted as required under (i) above or,
if unable to obtain such a quorum or constitute such committee, by a
majority vote of the full Board of Directors, including directors who
are parties to the same or related Proceedings, (iii) by a panel of
three arbitrators consisting of (a) one arbitrator selected by a
quorum of the Board of Directors or its committee constituted as
required under (i), above, or, if unable to obtain such a quorum or
committee, by a majority vote of the full Board of Directors,
including directors who are parties to the same or related
Proceedings, (b) one arbitrator selected by the director or officer
seeking indemnification and (c) one arbitrator selected by the other
two arbitrators, (iv) by an affirmative vote of shareholders as
provided under Section 2.9, except that shares owned by, or voted
under the control of, persons who are at the time parties to the same
or related proceedings, whether as plaintiffs or defendants or in any
other capacity, may not be voted in making the determination, or (v)
by a court of competent jurisdiction as permitted under the Wisconsin
Business Corporation Law; provided, however, that with respect to any
additional right to indemnification permissible under the Wisconsin
Business Corporation Law and granted by the Corporation, the
determination of whether such additional right of indemnification is
required shall be made by any method permissible under the Wisconsin
Business Corporation Law, as such methods may be limited by the grant
of such additional right to indemnification. The termination of a
Proceeding by judgment, order, settlement or conviction, or upon a
plea of no contest or an equivalent plea, does not, by itself create a
presumption that indemnification of the Director, Officer, Employee or
Agent is not required under this Article.
(2) A Director, Officer, Employee or Agent who seeks
indemnification under this Section 7.1 shall make a written request to
the Corporation. As a further pre-condition to any right to receive
indemnification, the writing shall contain a declaration that the
Corporation shall have the right to exercise all rights and remedies
available to such Director, Officer, Employee or Agent against any
other person, corporation, foreign corporation, partnership, joint
venture, trust or other enterprise, arising out of, or related to, the
Proceeding which resulted in the Liability and the Expense for which
such Director, Officer, Employee or Agent is seeking indemnification,
and that the Director, Officer, Employee or
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Agent is hereby deemed to have assigned to the Corporation all such
rights and remedies.
(d) Severability. The provisions of this Section 7.1 shall not
apply in any circumstance where a court of competent jurisdiction
determines that indemnification would be invalid as against public policy,
but such provisions shall not apply only to the extent that they are
invalid as against public policy and shall otherwise remain in full force
and effect.
(e) Limitation or Expansion of Indemnification. The right to
indemnification under this Section 7.1 may be limited or reduced only by
subsequent affirmative vote of not less than two-thirds of the
Corporation's outstanding shares entitled to vote on such matters. Any
limitation or reduction in the right to indemnification may only be
prospective from the date of such vote. The Board of Directors, however,
shall have the authority to expand the indemnification permitted under this
Section 7.1 to the fullest extent permissible under the Wisconsin Business
Corporation Law as in effect on the date of any such resolution with or
without further amendment to this Section 7.1.
SECTION 7.2. Insurance. The Corporation shall have the power to
purchase and maintain insurance on behalf of any person who is a Director,
Officer, Employee or Agent against any Liability asserted against or incurred by
the individual in any such capacity or arising out of his or her status as such,
regardless of whether the Corporation is required or authorized to indemnify or
allow expenses to the individual under Section 7.1.
ARTICLE VIII. AMENDMENTS
------------------------
SECTION 8.1. Amendment by the Board of Directors. The By-Laws of the
Corporation may be amended or repealed by the Board of Directors unless any of
the following apply:
(a) The Articles of Incorporation, the particular by-law or the
Wisconsin Business Corporation Law reserve this power exclusively to the
shareholders in whole or part;
(b) The shareholders in adopting, amending, or repealing a
particular by-law provide expressly within the by-law that the Board of
Directors may not amend, repeal or readopt that by-law; or
(c) The by-law fixes a greater or lower quorum requirement or
greater voting requirement for the Board of Directors, unless the
shareholders in adopting or amending such by-law provide expressly within
the by-law that it may be amended or repealed by a specified vote of the
Board of Directors.
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The Corporation's By-Laws may be amended, altered, or repealed, and new By-Laws
may be enacted, only by the affirmative vote of not less than a majority of the
entire Board of Directors then in office. 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, except where a different voting requirement is specified as provided
in Section 8.1(c). 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 provided in the Wisconsin Business Corporation Law may not be
adopted, amended or repealed by the Board of Directors.
SECTION 8.2. Amendment by the Corporation's Shareholders. The
Corporation's shareholders may amend or repeal the Corporation's By-Laws or
adopt new by-laws even though the Board of Directors may also amend or repeal
the Corporation's By-Laws or adopt new by-laws. The Corporation's By-Laws may be
amended, altered or repealed, and new By-Laws may be enacted, only by the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares of the Corporation entitled to vote at a meeting of shareholders duly
called for such purpose and by the affirmative vote of the holders of not less
than two-thirds of the shares of each class or series, if any, entitled to vote
thereon at such meeting. The adoption or amendment of a by-law that adds,
changes or deletes a greater or lower quorum requirement or a greater voting
requirement for shareholders or the Board of Directors must meet the same quorum
and voting requirement then in effect.
SECTION 8.3. Implied Amendments. Any action taken or authorized by
the Board of Directors or by the shareholders which would be inconsistent with
the By-Laws then in effect but which is taken or authorized by affirmative vote
of not less than the number of directors or the shares required to amend the By-
Laws so that the By-Laws would be consistent with such action shall be given the
same effect as though the By-Laws had been temporarily amended or suspended so
far, but only so far, as is necessary to permit the specific action so taken or
authorized.
ARTICLE IX. CORPORATE SEAL
--------------------------
SECTION 9.1. Corporate Seal. The Board of Directors may provide for a
corporate seal which may be circular in form and have inscribed thereon any
designation including the name of the Corporation, Wisconsin as the state of
incorporation, and the words "Corporate Seal." Any instrument executed in the
corporate name by the proper officers of the Corporation under any seal,
including the words "Seal," "Corporate Seal" or similar designation, is sealed
even though the corporate seal is not used.
ARTICLE X. EMERGENCY BY-LAWS
----------------------------
SECTION 10.1. Emergency By-Laws. Unless the Articles of Incorporation
provide otherwise, the following provisions of this Article X shall be effective
during an "Emergency,"
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which is defined as a catastrophic event that prevents a quorum of the
Corporation's directors from being readily assembled.
SECTION 10.2. Notice of Board Meetings. During an Emergency, any one
member of the Board of Directors or any one of the following officers: Chairman
of the Board, Vice Chairman of the Board, President, Chief Executive Officer,
any Vice-President, Secretary or Treasurer, may call a meeting of the Board of
Directors. Notice of such meeting need be given only to those directors whom it
is practicable to reach, and may be given in any practical manner, including by
publication or radio. Such notice shall be given at least six hours prior to
commencement of the meeting.
SECTION 10.3. Temporary Directors and Quorum. One or more officers of
the Corporation present at the Emergency meeting of the Board of Directors, as
is necessary to achieve a quorum, shall be considered to be directors for the
meeting, and shall so serve in order of rank, and within the same rank, in order
of seniority. In the event that less than a quorum (as determined by Section
3.11) of the directors are present (including any officers who are to serve as
directors for the meeting), those directors present (including the officers
serving as directors) shall constitute a quorum.
SECTION 10.4. Actions Permitted To Be Taken. The Board of Directors
as constituted in Section 10.3, and after notice as set forth in Section 10.2
may:
(a) Officers' Powers. Prescribe emergency powers to any officers
of the Corporation;
(b) Delegation of Any Power. Delegate to any officer or
director, any of the powers of the Board of Directors;
(c) Lines of Succession. Designate lines of succession of
officers and agents, in the event that any of them are unable to discharge
their duties;
(d) Relocate Principal Place of Business. Relocate the principal
place of business, or designate successive or simultaneous principal places
of business; and
(e) All Other Action. Take any and all other action, convenient,
helpful, or necessary to carry on the business of the Corporation.
Corporate action taken in good faith in accordance with the emergency by-laws
binds the Corporation and may not be used to impose liability on any of the
Corporation's directors, officers, employees or agents.
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Exhibit 10.1
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT is made as of the date set forth on the
signature page hereto, by and among IPS ACQUISITION, INC. ("Purchaser"), a
Washington corporation, IPS PUBLISHING, INC. ("Seller"), a Washington
corporation, and TIMOTHY P. WELCH ("Welch") individually and as sole trustee of
the TIMOTHY PETER WELCH REVOCABLE TRUST dated September 4, 1992 (the "Trust").
BACKGROUND:
Seller is engaged in the business of writing, selling and licensing
software and algorithms for use by, among others, publishers of mathematics and
science textbooks and by mathematics and science teachers and students (the
"Business"). The Trust is the sole shareholder of Seller, and Welch is the sole
current beneficiary of the Trust. Purchaser desires to purchase substantially
all of Seller's rights and assets, including the Business, and Seller, the Trust
and Welch desire to sell the same to Purchaser.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
---------
Purchase and Sale of Assets.
---------------------------
1.1. Subject Assets. At Closing (as defined below), Seller shall
sell to Purchaser, and Purchaser shall purchase from Seller, all of the assets
and properties, real and personal, tangible and intangible, of Seller (except
for the Excluded Assets, as defined below) as the same may exist on the date of
the Closing (the "Subject Assets"), including, but not limited to, all assets
used, owned or employed in connection with the Business and all of the following
assets of Seller:
(a) Cash. All cash, cash deposits, bank accounts, certificates
of deposit, money market shares, negotiable securities and other cash
equivalents (the "Cash");
(b) Accounts Receivable. All accounts, notes and other
receivables (the "Accounts Receivable");
(c) Inventory. All software media, packaging materials,
supplies, promotional and advertising materials, printed or written
materials, finished goods and other items of inventory (the "Inventory");
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(d) Equipment. All computers, data processing equipment,
machinery, equipment, replacement parts, furniture, fixtures and leasehold
improvements, vehicles and other tangible assets of every kind and
description, including, without limitation, those items described in
Section 4.10 of the Disclosure Schedule (as defined below) (the
"Equipment");
(e) Intellectual Property. All patents, patent applications,
inventions, designs, models, processes, formulations, know-how and
schematics, all trade names, trademarks, service marks and copyrights and
all registrations thereof, all mask works, algorithms, authoring tools,
computer software programs or applications (in both source code and object
code form) and documentation relating thereto and/or explaining the use
thereof and all tangible or intangible proprietary information or material
owned by Seller and/or used in the Business, and all goodwill related to
any of the foregoing (the "Intellectual Property"), including, without
limitation, the intellectual property identified in Exhibit 1.1(e), hereto;
(f) Seller Contracts. Each contract, oral or written,
identified in Exhibit 1.1(f), hereto (the "Seller Contracts");
(g) Prepayments, Claims, Licenses. All prepayments and customer
deposits, all rights under Seller's insurance policies, all claims, causes
of action, refunds, rights of recovery, rights of set off and rights of
recoupment of any kind, all franchises, approvals, permits, licenses,
orders, registrations, certificates, variances and similar rights obtained
from governments and governmental agencies, and all rights to all workers
and unemployment compensation accounts and deposits of Seller;
(h) Records. All accounting books and records and all quality
control records, customer records, credit files, correspondence, market
studies, consultant reports, product specifications and records, research
and development studies, product development studies or reports, capital
expenditure budgets or proposals, personnel and payroll records, and all
other books, records and files owned by Seller or relating to the Business
(the "Records");
(i) Name. All rights to the names "IPS," "IPS Publishing" and
"International Publishing Services" or any derivations thereof and all
goodwill of the Business; and
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(j) Other Assets. Any and all other rights and assets owned by
Seller and/or used by Seller in the operation of the Business as conducted
since January 1, 1995, excluding the Excluded Assets.
1.2. Excluded Assets. Section 1.1, hereof, notwithstanding, the
Subject Assets shall not include the following (the "Excluded Assets"):
(a) IBM Receivable. Any right or interest in the payment to be
made pursuant to Section 5.2 of that certain Licensing Agreement (the "IBM
Contract") dated as of November 30, 1995 entered into by Seller (under the
name International Publishing Services, Inc.) and International Business
Machines Corporation ("IBM").
(b) Corporate Records. Seller's corporate minute book, stock
transfer records and other corporate records.
(c) Personal Effects. The personal items owned by Welch and
described in the Disclosure Schedule (as defined below).
1.3. Cash. Paragraph 1.1(a), hereof, notwithstanding, but subject to
Section 3.3, hereof, Seller may exclude any and all of its cash, cash deposits,
bank accounts, certificates of deposit, money market shares, negotiable
securities and other cash equivalents from the "Subject Assets," and any such
items so excluded shall constitute "Excluded Assets" for purposes hereof.
ARTICLE II
----------
Assumption of Liabilities
-------------------------
2.1. Assumption of Liabilities. At Closing, Purchaser shall assume
the following liabilities and obligations of Seller (the "Assumed Liabilities"):
(a) Seller Contracts. All of Seller's liabilities and
obligations under the Seller Contracts to be satisfied or performed on or
after the Closing Date (excluding, except as set forth in Paragraphs (b)
and (c), below, liabilities, obligations, penalties or damages arising
thereunder in connection with breaches or defaults, if any, occurring prior
to the Closing Date);
(b) Standard Representations and Warranties. All of Seller's
liabilities and obligations, if any, arising from the breach of any
representation or warranty (excluding
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any representation or warranty covering Seller's title or infringement)
included in Seller's standard terms and conditions covering any standard,
non-customized product sold or licensed by Seller prior to the Closing
Date;
(c) Bug Fixes. All of Seller's liabilities and obligations, if
any, under the Seller Contracts to correct software Errors (as defined
below) in the software subject thereto. For purposes hereof, an "Error"
shall mean: (i) an error which causes the software or a major component to
stop or renders it otherwise unusable, or a data corruption error; (ii) an
error in which functional behavior of a component differs from the behavior
as described in the specifications for the software or an error which
causes a component to default without rendering the software unusable;
and/or (iii) an error in which a component differs from specified behavior
in a minor or nonfunctional way (e.g., an incorrect error return or a
misspelled text message);
(d) Current Liabilities. Accrued vacation pay for 1996 and
other Current Liabilities of Seller (as defined in Paragraph 4.9(c) shown
on the certificate to be delivered at Closing as provided in Section 10.5,
below, in an amount not exceeding Fifty Thousand and no/100 Dollars
($50,000.00) (the "Assumed Current Liabilities"); and
(e) Real Estate Lease. All of Seller's liabilities and
obligations under the Real Estate Lease (as defined in Section 4.11) to be
satisfied or performed on and after the Closing Date excluding (except to
the extent, if any, included in Assumed Current Liabilities), any
obligation for any rent or other amounts payable by the Seller under the
Real Estate Lease attributable to any period prior to the Closing Date and
any liabilities, obligations, penalties or damages in connection with any
breaches or defaults, if any, under the Real Estate Lease occurring prior
to the Closing Date.
2.2. Excluded Liabilities. Except for the Assumed Liabilities
referred to in Section 2.1, Purchaser shall not assume and shall not be
obligated to pay, perform or discharge, any liabilities or obligations of
Seller, the Business, Welch and/or the Trust, including, without limitation, any
of the following:
(a) Seller Contracts. Except to the extent assumed under
Paragraphs 2.1(b) and 2.1(c), hereof, any liabilities, obligations,
penalties or damages arising under
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the Seller Contracts in connection with any breaches or defaults, if any,
occurring thereunder prior to the Closing Date, including, without
limitation, any claims relating to any breaches by Seller of any warranty
or representation by Seller as to ownership of any software sold or
licensed under any Seller Contract;
(b) Real Estate Lease. Any liabilities, obligations, penalties
or damages arising under the Real Estate Lease in connection with any
breaches or defaults, if any, occurring thereunder prior to the Closing
Date;
(c) Taxes. Except to the extent, if any, included in Assumed
Current Liabilities, and except as set forth in Section 15.1, hereof, any
assessments, claims or liabilities (including interest and/or penalties)
for federal, state or local income, sales, use, franchise or other taxes
relating to, imposed upon or assessed against the sales, income, property
or business of Seller for periods ending on or before the Closing Date
and/or, resulting from the sale of the Subject Assets hereunder;
(d) Operating Liabilities. Except to the extent, assumed under
Paragraphs 2.1(b) and 2.1(c), hereof, or included in Assumed Current
Liabilities, any claim, cause of action, damages, fine, penalty, assessment
and/or interest ("Claims") arising out of any act, omission or occurrence
in Seller's operation of the Business on or before the Closing Date,
including, without limitation, any Claim relating to or arising out of
breach of warranty, any product liability or other claim for personal
injury or for property damage and/or any claim for violation of wage and
hour laws or employment discrimination; or
(e) Employees. Except to the extent, if any, included in
Assumed Current Liabilities, any liabilities with respect to any former
employee of Seller, any current employee of Seller who is not employed by
Purchaser as of the Closing Date or any current employee of Seller who is
employed by Purchaser as of the Closing Date relating to or arising out of
periods prior to the Closing, including any liabilities to any such
employees for employee benefits, accrued vacation pay, wages, bonuses,
payroll taxes or contributions accrued as of the Closing Date.
Seller agrees to pay, perform and discharge all liabilities and obligations of
Seller and the Business other than the Assumed Liabilities (the "Excluded
Liabilities").
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ARTICLE III
-----------
Closing
-------
3.1. Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") shall take place by mail effective as of
12:01 a.m., Vancouver time, on August 1, 1996 (the "Closing Date"). All
transactions which take place at the Closing shall be deemed to have taken place
simultaneously, and no delivery or payment shall be considered to have been made
until all transactions to be made at the Closing have been completed.
3.2. Purchase Price. Subject to reduction for any Working Capital
Deficiency (as defined below) as hereafter provided, the purchase price for the
Subject Assets (the "Purchase Price") shall be Five Million Two Hundred Fifty
Thousand Dollars ($5,250,000.00), plus the value of the "Assumed Liabilities,"
which shall be payable as follows:
(a) Downpayment. Subject to the terms and conditions of a
Letter of Intent dated May 30, 1996, Purchaser has paid Twenty-Five
Thousand Dollars ($25,000.00) to Seller as a downpayment on the Subject
Assets (the "Downpayment") which shall be applied against the Purchase
Price at Closing.
(b) Closing Payment. At Closing, Purchaser shall pay Four
Million Eight Hundred Seventy-Five Thousand Dollars ($4,875,000.00), less
the Deferred Amount (as defined below) and less the amount of any Working
Capital Deficiency to the Seller in immediately available funds by wire
transfer to such account as Seller may designate in writing. The amount
paid at Closing pursuant to this Paragraph 3.2(b) is referred to herein as
the "Closing Payment."
(c) Contingency Amount. On the first anniversary of the Closing
Date, Purchaser shall pay to Seller, in immediately available funds by wire
transfer to such account as Seller may designate in writing, the sum of
Three Hundred Fifty Thousand Dollars ($350,000.00) (the "Contingency
Amount"), less such amount as Purchaser may set off against the Contingency
Amount pursuant to Section 13.10, hereof, together with interest on the
amount so paid from the Closing Date to the date paid at the rate of ten
percent (10%) per annum.
(d) Deferred Amount. By written notice to Purchaser given not
less than ten (10) days prior to the
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Closing Date, Seller may direct Purchaser to deliver up to Two Million Six
Hundred Twenty-Five Thousand Dollars ($2,625,000.00) to Bank of America
Northwest, N.A. (the "Escrow Agent") on the Closing Date to be held by the
Escrow Agent and to be paid to Seller by the Escrow Agent, together with
certain interest and contingent payments in accordance with the terms of
the Escrow Agreement, a copy of which is attached hereto as Exhibit 3.2(d).
The amount paid to the Escrow Agent on the Closing Date for later payment
to Seller is referred to herein as the "Deferred Amount."
(e) Assumed Liabilities. On the Closing Date, Purchaser shall
assume the Assumed Liabilities by execution of the Assignment and
Assumption Agreement referred to in Section 11.7, below.
3.3. Price Reduction for Working Capital Deficiency. If at Closing
the Cash transferred to Purchaser by Seller hereunder does not equal at least
Two Hundred Ninety Thousand Dollars ($290,000.00), the Purchase Price and the
Closing Payment shall be reduced by the amount of such deficiency (the "Working
Capital Deficiency").
ARTICLE IV
----------
Representations and Warranties of Seller, Welch and the Trust
-------------------------------------------------------------
Seller, the Trust and Welch, jointly and severally, represent and
warrant to Purchaser, which representations and warranties shall be true and
correct as of the Closing Date and which shall, except as set forth in Paragraph
13.3(c), hereof, survive the Closing notwithstanding any investigation made by
or information furnished to Purchaser in connection herewith that, except as set
forth in the Disclosure Schedule attached hereto (the "Disclosure Schedule")
and/or the documents referred to therein:
4.1. Due Incorporation. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Washington.
4.2. Authority of Seller and the Trust. Seller has full corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery hereof, and the
consummation of the transactions contemplated hereby, have been duly and validly
authorized by all necessary corporate action on the part of Seller. The Trust
has all requisite power and authority under the terms of its governing
instrument to enter into this
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Agreement and Welch is authorized to execute this Agreement as trustee on behalf
of the Trust and is the sole trustee of the Trust.
4.3. No Breach of Law by Seller. The execution and delivery hereof,
the consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof by Seller, Welch and the Trust will not: (i)
conflict with or result in a violation under Seller's Certificate of
Incorporation or By-Laws and/or any agreements governing the organization of
Seller and/or the Trust; (ii) contravene any applicable law, rule or regulation,
or any order, writ, judgment, injunction, decree, determination or award which
binds or may materially and adversely affect Seller, Welch, the Trust or any of
their assets; (iii) require any consent, approval, authorization, license,
permit, registration, filing, recording or waiver under any applicable law, rule
or regulation, under any order, writ, judgment, injunction, decree,
determination or award which affects or binds Seller, Welch or the Trust, or
under any governmental or judicial license, franchise, permit or approval held
by Seller, Welch or the Trust or which binds or may materially and adversely
affect them or any of their assets; or (iv) result in the creation or imposition
of any lien, claim or encumbrance upon any assets of Seller, Welch or the Trust.
4.4. No Breach of Contract. The execution and delivery hereof, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof by Seller, Welch and the Trust, will not: (i)
conflict with or result in a breach of or default under, or cause or permit the
termination or acceleration of the maturity of, or otherwise impair any
contract, agreement, lease, commitment, license, indenture, loan or credit
agreement or any other agreement or instrument or obligation to which Seller,
Welch or the Trust is a party or by which any of them or any of their properties
may be affected or is bound; or (ii) require any consent, approval or waiver
under any contract, agreement, lease, commitment, license, indenture, loan or
credit agreement or any other agreement or instrument or obligation to which
Seller, Welch or the Trust is a party or by which any of them or any of their
properties may be affected or is bound.
4.5. Articles and By-Laws. The copies of Seller's Articles of
Incorporation and By-laws previously delivered to Purchaser are true, complete
and correct and are in full force and effect without further amendment or
modification.
4.6. Enforceability. This Agreement has been duly executed and
delivered by Seller, Welch and the Trust and
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constitutes a legal, valid and binding obligation of each such party enforceable
against such party in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by the application of general
principles of equity.
4.7. Capital Stock. The Trust is the sole shareholder of the Seller.
The authorized capital stock of Seller consists of 100,000 shares of common
stock, no par value, (the "Common Stock"), of which 3,056 shares are validly
issued and outstanding, fully paid and nonassessable and owned by the Trust.
Seller is not authorized to issue any other class of capital stock. Seller holds
no shares of its capital stock in its treasury. No shares of the Common Stock or
any other securities issued by Seller have been issued in violation of any
preemptive rights or any applicable securities or other laws, and there are no
existing options, warrants, rights, calls, puts or commitments of any character
relating to authorized but unissued shares of Seller's capital stock, to any of
the Common Stock, or to any other securities issued or to be issued by Seller.
There are no voting agreements, understandings or arrangements, whether written
or oral, which govern the voting of Seller's capital stock or, except for
Seller's Articles of Incorporation or By Laws and resolutions identifying the
persons elected as officers and directors of Seller, the management of Seller.
4.8. Subsidiaries. Since the date of its incorporation, Seller has
not owned, and does not now own, any capital stock of, any equity in, or any
other ownership or investment interest in, any corporation, limited liability
company, partnership, joint venture or other business entity, except Seller
invests in publicly traded mutual funds which in turn invest in publicly traded
operating companies. No other corporation has been merged with or consolidated
into Seller, except that, in order to reincorporate in Washington, Seller's
predecessor, IPS Publishing, Inc., a California corporation, was merged with and
into Seller in 1994.
4.9. Financial Statements and Information .
(a) Seller has delivered to Purchaser the following financial
statements (the "Financial Statements") of Seller:
(i) Unaudited compiled Statements of Assets, Liabilities
and Equity-Cash Basis as of December 31, 1989, 1990, 1991, 1992, 1993,
1994 and 1995 and the related statements of Revenues, Expenditures and
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Retained Earnings-Cash Basis for the years ended on such dates; and
(ii) An unaudited compiled Statement of Assets, Liabilities
and Equity-Cash Basis as of May 31, 1996 and related statements of
Revenues, Expenditures and Retained Earnings for the five (5) month
period then ended. The Statement of Assets, Liabilities and Equity-
Cash Basis dated May 31, 1996 is referred to herein as the "May
Balance Sheet."
(b) The Financial Statements have been prepared in accordance
with the books and records of Seller and, to Welch's knowledge, except as
noted in the footnotes thereto, in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis, and, subject
to customary year-end adjustments in the case of the May 31, 1996
statements (including, without limitation, a year-end adjustment to
Seller's deferred income account), fairly present the financial condition
and results of operations of Seller as of the dates and for the periods
indicated on a cash basis.
(c) To Welch's knowledge, Seller has no liabilities which would
be required to be disclosed on a balance sheet according to GAAP, except
accounts payable and other current liabilities incurred in the ordinary
course of business which are due within sixty (60) days, tax liabilities
which, in any case, are not past due or delinquent and accrued vacation pay
for 1996 ("Current Liabilities").
4.10. Tangible Personal Property.
(a) Seller owns or leases all of the tangible personal property
and assets used by Seller in connection with the conduct of the Business as
historically conducted except inventory and obsolete equipment sold in the
ordinary course of business. All of the tangible personal property owned or
leased by Seller is currently in its possession and located on the Premises
(as defined below). All machinery, office equipment and other tangible
property owned or leased by Seller, including all of Seller's computer and
data processing equipment, is in operating condition.
(b) Except for leased tangible personal property, Seller has
good and marketable title to all tangible personal property used in the
conduct of the Business, free and clear of all liens, claims and
encumbrances.
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(c) The Disclosure Schedule identifies each lease under which
Seller has rights in tangible personal property.
(d) The inventory of Seller is of a quality and quantity useable
and saleable in the ordinary course of the Business as conducted on the
date hereof and does not include any obsolete, discontinued, or surplus
items.
4.11. Real Property. Seller occupies premises at 12606 Northeast
95th Street, Suite C-110 (the "Premises") under a lease dated March 11, 1994 (as
extended by Amendment to Lease Renewal dated December 14, 1995, the "Real Estate
Lease") by and between Seller and Eastridge Business Park. The Premises
constitute all of real property used by Seller in connection with the conduct of
the Business. To Welch's knowledge, Seller's use of the Premises is in
compliance with all applicable zoning laws, all local, state and federal laws,
ordinances and regulations affecting the use and occupancy of the Premises and
the terms and restrictions of the industrial parks, if any, in which the
Premises are located. To Welch's knowledge, the current use of the Premises is
not a special use exception or a nonconforming use. Seller has not received any
notice of and Welch has no knowledge of any: (i) planned or actually commenced
improvements which may result in an assessment involving the Premises; (ii) any
governmental agency or court orders requiring the repair, alteration or
correction of any existing condition with respect to the Premises; or (iii)
other matters adversely affecting Seller involving the Premises. To Welch's
knowledge, the Premises are in good condition and repair and adequate for
Seller's use.
4.12. Intangible Personal Property.
(a) Seller has delivered to Purchaser a true and complete aging
schedule of Seller's receivables as of May 31, 1996.
(b) The Disclosure Schedule identifies: (i) all patents owned
and patent applications made by Seller and the jurisdictions by which each
such patent has been issued or in which each such application has been
filed (including registration and application numbers); (ii) all trade
names, trademarks and service marks used by Seller whether or not owned by
Seller; (iii) all registrations made and registration applications filed by
Seller for trade names, trademarks and service marks owned by Seller, and
the jurisdictions by which each such registration has been issued or in
which each such application has been filed; and (iv) all registrations made
and registration applications
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filed by Seller for copyrights owned by Seller and each jurisdiction by
which each such registration has been issued or in which each such
application has been filed.
(c) The Disclosure Schedule lists: (i) all licenses,
sublicenses and other agreements under which any person is authorized to
use any Intellectual Property owned by Seller; and (ii) all licenses,
sublicenses and other agreements under which Seller is authorized to use
any patents, inventions, designs, models, processes, formulations, know-how
or schematics, any trade names, trademarks, service marks or copyrights
and/or any mask works, algorithms, authoring tools, computer software
programs or applications or other proprietary information or material owned
by third parties (the "Third Party Intellectual Property").
(d) Except for the Third Party Intellectual Property which
Seller has a right to use under the agreements listed on the Disclosure
Schedule, and except for rights existing under the agreements referred to
clause (c)(i) above, Seller is the sole and exclusive owner of, with all
right, title and interest in and to, free and clear of all liens, valid
claims and encumbrances, the Intellectual Property with the exclusive right
to the use thereof. There are no trademarks, service marks, copyrights,
mask works, algorithms, authoring tools, computer software programs or
applications, documentation or other intellectual property or proprietary
rights used by Seller or relating to the Business except for the Third
Party Intellectual Property and the Intellectual Property to be transferred
and conveyed to Purchaser pursuant hereto. To the knowledge of Welch, all
patents and all registered trademarks, service marks, copyrights and mask
works included in the Intellectual Property are valid and subsisting, and
no Intellectual Property has been declared invalid or, in whole or in part,
been abandoned, dedicated, disclaimed or allowed to lapse for nonpayment of
fees or taxes or for any other reason. No claims with respect to the
Intellectual Property or the Third Party Intellectual Property (to the
extent arising out of any use, reproduction or distribution of such Third
Party Intellectual Property by Seller) are currently pending or, to the
knowledge of Welch, threatened by any person, nor does Welch know of any
valid grounds for any bona fide claims: (i) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or
licensed by Seller or any use by Seller of any Intellectual Property
infringes upon any patent, trademark, service mark, copyright, mask work or
trade secret or
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other proprietary right owned or used by any other person; (ii) against the
use by Seller of any Intellectual Property; (iii) challenging the
ownership, validity or effectiveness of any Intellectual Property; or (iv)
challenging Seller's license or legally enforceable right to use any Third
Party Intellectual Property. To the knowledge of Welch, there is no
unauthorized use, infringement or misappropriation of any of the
Intellectual Property by any third party, including any employee or former
employee of Seller.
(e) Copies of all algorithms, tools and other software and all
source and object programs and codes and related documentation are located
on the Premises or at off-premises sites under Seller's control as
identified in the Disclosure Schedule. Such algorithms, tools, software,
programs, codes and documentation are fully useable and understandable by
persons ordinarily skilled in computer programming and are sufficient to
permit the maintenance and further development of all software products and
rights currently sold or licensed by Seller. Without limitation, Seller's
source code includes a full source language statement of the programs
comprising all of Seller's software, including any support utilities which
are not commercially available and which are required to build the object
code from the source code.
(f) The Disclosure Schedule accurately identifies and lists the
amounts paid to each supplier or licensor of Intellectual Property that
received more than $1,000 from Seller in 1995 or will be paid more than
$1,000 by Seller in 1996 under currently existing arrangements.
4.13. Contracts and Commitments.
(a) The Disclosure Schedule identifies each material contract,
oral or written: (i) to which Seller is a party; (ii) by which Seller or
any of its assets is or may become bound or under which Seller has or may
become subject to any obligation; (iii) under which Seller has or may
acquire any right or interest; or (iv) with respect to which Seller is or
may become subject to any liability.
(b) Except as set forth on the Disclosure Schedule and except
for Plans (as defined below), Seller is not a party to nor bound by: (i)
any contract or arrangement with employees, agents, sales representatives,
consultants, distributors or dealers; or (ii) any agreements or
arrangements involving employees of Seller that contain any severance or
termination pay liabilities or obligations; or
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(iii) any bonus, vacation pay, sick pay, group insurance, deferred
compensation, stock purchase, stock option, profit sharing, pension,
retirement, fringe benefit or other employee benefit plans involving such
employees.
(c) The Disclosure Schedule identifies all policies of insurance
owned by Seller as of the date hereof. The Disclosure Schedule sets forth a
current summary description of each claim made by Seller under, or which
has been made against Seller and has been paid or defended in accordance
with the terms of, any insurance policy of Seller within two (2) years
prior to the date hereof.
(d) Seller has provided Purchaser with true and complete copies
of the Real Estate Lease and each other written Seller Contract identified
in the Disclosure Schedule, except that Seller has not provided Purchaser
with copies of those Seller Contracts which are marked with asterisks in
Exhibit 4.4 of the Disclosure Schedule. Each Seller Contract marked with an
asterisk on Exhibit 4.4 to the Disclosure Schedule is identical, except as
to date, title of publication covered and price, to a contract otherwise
identified in Exhibit 4.4, a true and complete copy of which Seller has
provided to Purchaser. Each of the Seller Contracts is valid and
enforceable and in full force and effect. Seller has not materially
breached, violated or committed a default under, or committed or omitted
any act which, with notice or lapse of time, or both, would constitute a
breach or violation of, or default under, any Seller Contract. Welch has no
knowledge that any other party is in breach or violation of, or default
under, or has committed or omitted any act which, with notice or lapse of
time, or both, would constitute a breach or violation of, or default under,
any such Seller Contract.
(e) The Disclosure Schedule identifies each Seller Contract for
the license or development of algorithms or other software which has not
been delivered or under which Seller has any continuing development or
maintenance obligations and describes the work required to complete each
such contract (the "Unfinished Contracts").
4.14. Licenses, Permits and Authorizations. To Welch's knowledge, Seller
has all approvals, authorizations, consents, licenses, franchises, orders and
other permits of, and has made all filings with, any governmental authority,
whether foreign, federal, state, regional or local, which are required for the
conduct of the Business as historically conducted, and all such licenses,
permits and other authorizations are listed on the Disclosure Schedule. To
Welch's knowledge, all such approvals, authorizations, consents, licenses,
franchises, orders and other permits are in full force and effect, and all fees
and charges payable with respect thereto have been paid.
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4.15. Taxes.
(a) Seller has filed an election (an "S Election") in accordance
with the provisions of Section 1362 of the Internal Revenue Code of 1986,
as amended (the "Code") and the applicable provisions of the laws of each
state or other jurisdiction where Seller is subject to tax which has rules
corresponding to subchapter S of the Code, and each of Seller's
shareholders has filed a timely consent to such election pursuant to
Section 1362 of the Code or applicable provisions of the laws of any such
other jurisdiction. Seller's predecessor's S election was in effect
continuously for all taxable years from the taxable year ended December 31,
1981 until Seller's predecessor was merged into Seller, and Seller's S
election has been in effect since it commenced business operations and will
remain in effect through the Closing.
(b) To Welch's knowledge, Seller and its shareholders have
timely filed all federal, state, local and foreign tax returns and reports
required under applicable law to be filed with respect to Seller's income,
operations and/or assets (including income, sales, use and employment tax
returns), and each such return or report is complete and correct, and the
tax liability with respect to Seller's income, operations and/or assets is
properly reflected thereon. To Welch's knowledge, all taxes, assessments
and other governmental charges reflected on such tax returns and reports
which are due and payable by Seller have been paid, other than those taxes
which are currently payable without penalty or interest but for which
adequate reserves have been set aside on the books of Seller. To Welch's
knowledge, Seller has withheld amounts from its employees to the extent
required by law, and has filed all federal, foreign, state and local
returns and reports with respect to employee income tax withholding and
social security and unemployment taxes in compliance with the tax
withholding provisions of the Code and other applicable federal, foreign,
state or local laws. No currently effective waiver or extension of any
statute of limitations relating to taxes or other governmental charges has
been executed or given by Seller, and no requests for such waivers are
pending.
(c) Neither Seller nor its shareholders has been notified that
it is currently under examination by the Internal Revenue Service or any
other taxing authority; neither the Internal Revenue Service, nor any other
taxing authority, is now asserting or, to the knowledge of Welch,
threatening to assert against Seller any adjustment,
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deficiency, lien or claim for additional taxes or interest thereon or
penalties in connection therewith; and all returns filed by Seller and its
shareholders with the Internal Revenue Service or any other taxing
authority through the taxable years or periods ended December 31, 1991 have
been examined and closed or are returns with regard to which the statute of
limitations for the assessment of additional tax has expired.
4.16. Labor Practices and Labor Matters.
(a) The Disclosure Schedule identifies each of Seller's
employees and each consultant or contractor currently engaged by Seller
together with the title or a description of the services performed and
salary, wage rate or other compensation arrangement with each such person.
(b) Seller is in compliance with the Federal Fair Labor
Standards Act and all federal, state and local laws, ordinances, rules,
regulations and orders relating to employment discrimination, employee
welfare and labor standards which are applicable to Seller, including
without limitation: (i) any laws, rules or regulations relating to the
employment of any person not a citizen of the United States; and (ii) any
provisions thereof relating to wages, bonuses, collective bargaining, equal
pay and the payment of social security and similar payroll taxes. To the
knowledge of Welch, there is no basis for any claim by any past or present
employee of Seller that such employee was wrongfully discharged or subject
to any employment discrimination by Seller or its management arising out of
or relating to such employee's race, sex, color, religion, handicap or any
other protected characteristic under applicable law. No proceedings are
pending before any court, government agency or instrumentality or
arbitrator relating to labor matters, and there is no pending investigation
by any governmental agency or, to the knowledge of Welch, threatened claim
by any such agency or other person relating to labor or employment matters.
(c) Seller is not a party to any agreement or contract with any
union, labor organization, employee group, or other entity or individual
which affects the employment of employees of Seller, including without
limitation, any collective bargaining agreements or labor contracts.
(d) To the knowledge of Welch, none of the employees of Seller
is in the process of being organized by or into labor unions or
associations. Since December 31,
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1991, Seller has not been subject to a strike or other work stoppage and,
to the knowledge of Welch, there are no strikes or work stoppages
contemplated or threatened against Seller.
(e) The Disclosure Schedule lists each of the states where
Seller has or maintains any unemployment or workers compensation accounts.
Since December 31, 1991, Seller has not had any adverse change in its
contribution rate or its experience rating for unemployment or workers'
compensation purposes in any state. No unemployment or workers' account of
Seller has a negative balance.
(f) To the knowledge of Welch, Seller is in full compliance with
the Occupational Safety and Health Act of 1970, as amended, ("OSHA") and
all other federal, state or local laws or ordinances, including orders,
rules and regulations thereunder, regulating or otherwise affecting health
and safety of the work place ("OSHA Laws").
4.17. Plans. Each employee pension benefit plan (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
("ERISA")) and each employee welfare benefit plan (as defined in Section 3(i) of
ERISA) to which Seller is required to make contributions for the benefit of
Seller's employees is identified and described on the Disclosure Schedule (the
"Plans"). Each of the Plans which is intended to qualify under Section 401(a) of
the Code is so qualified and Seller has received a favorable determination
letter to such effect from the Internal Revenue Service. To Welch's knowledge,
each such Plan, and the administration of each such Plan, is in full compliance
with ERISA and the Code.
4.18. Depositories, Powers of Attorney. The Disclosure Schedule
sets forth: (i) the name of each bank or similar entity in which Seller has an
account, lockbox or safe deposit box and the names of all persons authorized to
draw thereon or to have access thereto; and (ii) the name of each person,
corporation, firm or other entity holding a general or special power of attorney
from Seller and a description of the terms thereof.
4.19. Customers and Suppliers. The Disclosure Schedule identifies
each of Seller's Major Customers and Major Suppliers (both as defined below) and
states the revenues and payments received and made to such persons during 1995
and the five (5) months ended May 31, 1996. For purposes of this Section 4.19,
"Major Customer" shall mean each of Seller's twenty (20) largest customers, by
sales volume, during 1995 or the five (5) months ended May 31, 1996. For the
purposes of this Section
17
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4.19, "Major Supplier" shall mean each of Seller's ten (10) largest vendors, by
purchase volume, during 1995 and the five (5) months ended May 31, 1996. Seller
has not received any notice or communication from any Major Customer or Major
Supplier to the effect that such person intends to cease doing business or to
materially reduce its business with Seller or to terminate any agreement with
Seller.
4.20. Compliance With Laws. Seller has complied with all material
provisions of all applicable laws, ordinances and governmental regulations
(including, without limitation, laws and regulations regulating or otherwise
affecting the environment and/or the disposal of waste or other materials
("Environmental Laws"), noncompliance with which would have a material adverse
effect on Seller or the Business, and all services and products provided by
Seller, and all marketing material and distribution arrangements used or
employed by Seller, conform to all requirements of all material provisions of
all applicable laws, rules and regulations. Seller is not subject to any
judgment, decree, order or citation related to or arising out of Environmental
Laws, and Seller has disposed of all waste in full compliance with all
Environmental Laws.
4.21. Payments. Neither Seller nor any of its officers, directors,
employees or agents, has, directly or indirectly, given or made, or agreed to
give or make, any illegal political contributions or any illegal commission,
payment, gratuity, gift, or similar benefit, in each case on behalf of Seller,
to any candidate, government official, customer, supplier or other person
(foreign or domestic) who is in or may be in a position to help or hinder the
business of Seller or to assist Seller with any actual or proposed transaction.
4.22. Related Party Transactions. Since December 31, 1994, no
Related Party (as defined below) has had, any interest in any transaction,
lease, contract or other arrangement with Seller. Without limitation to the
foregoing, since December 31, 1994, no Related Party has or has had: (i) any
interests in any entity which has purchased, sold or furnished to Seller any
goods or services; (ii) a beneficial interest in any lease, contract, commitment
or understanding to which Seller is a party or by which it is bound or affected;
(iii) any interest or claim against Seller or any assets of Seller; or (iv) any
interest in any assets used in the Business. For purposes hereof, each of the
following shall be deemed to be a "Related Party": (a) Welch; (b) each
individual who is, or who has at any time been, an officer or director of
Seller; (c) each member of the family of any of the individuals referred to in
clauses (a) and/or (b), above; (d) the Trust; and (e) any entity (other than
Seller) in
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which any of the individuals referred to in clauses (a), (b) and/or (c), above,
or the Trust holds, beneficially or otherwise, a voting, proprietary or equity
interest.
4.23. Product Warranties. Except as set forth on the Disclosure
Schedule: (i) all software and other products sold or licensed by Seller (and
the delivery thereof) have been in conformity with all applicable contractual
commitments and all expressed or implied warranties; and (ii) no liability for
any warranty claims exists for the replacement thereof or otherwise. Seller has
not made any guaranties or warranties with respect to any product heretofore
sold or licensed by Seller other than as set forth in the Seller Contracts or in
the standard terms and conditions used by Seller in connection with the sale or
license of any standard, non-customized product, copies of which have been
furnished to Purchaser. All product labeling is in conformity with all
applicable laws. To Welch's knowledge, there are no pending claims by any of
Seller's end-users for the correction of any so called "bug," and Welch does not
know of any so called "bugs" in the software subject to the Seller Contracts
which may form the basis for any such claim. It is not the intention of Seller
or Purchaser that this Section 4.23 negate the obligations of Purchaser pursuant
to Section 2.1(b) and (c).
4.24. Absences of Certain Changes or Events. Since May 31, 1996,
Seller has not: (i) taken any action which would have constituted a violation
under Section 6.1 hereof if Seller had then been bound by Section 6.1 hereof; or
(ii) failed to take any action which would have been required by Section 6.1
hereof, if Seller had then been bound by Section 6.1 hereof. Since the May 31,
1996 Balance Sheet, there has not been: (i) any material adverse change in the
Business and/or the assets, liabilities, properties (tangible or intangible),
operations, financial condition or results of operations of Seller; or (ii) any
material damage, destruction, loss or claim, whether or not covered by
insurance, adversely affecting the Business and/or the assets, properties
(tangible or intangible), operations, financial condition or results of
operations of Seller.
4.25. Finder's Fees. None of Seller, Welch or the Trust is obligated
to pay any agent, finder, broker or other representative any fee or commission
in connection with the consummation of the transactions contemplated hereby.
4.26. Litigation.
(a) There is no claim, action, suit, proceeding, arbitration or
to Welch's knowledge, any investigation or inquiry before any federal,
state, municipal, foreign or
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other court or governmental or administrative body or agency, any
securities or commodities exchange, other regulatory body or any private
arbitration tribunal now pending, or, to the knowledge of Welch,
threatened, against, relating to or affecting: (i) Seller, Welch or the
Trust which would adversely affect Seller's ability to consummate the
transactions contemplated hereby; or (ii) Seller, or the Business, or any
director, officer or other employee thereof in his capacity as such, or the
assets or properties of Seller, nor, to the knowledge of Welch, does any
basis exist for any such claim, action, suit, proceeding, arbitration,
investigation or inquiry.
(b) Neither Seller nor, to Welch's knowledge, any of its
officers, directors or employees, currently is or has been permanently or
temporarily enjoined or prohibited by any order, judgment or decree of any
court or governmental or administrative body or agency, or any other
regulatory body, from engaging in or continuing any conduct or practice in
connection with the Business.
(c) There is not in existence any order, judgment or decree of
any court or governmental or administrative body or agency, or any other
regulatory body, enjoining or prohibiting Seller from taking, or requiring
Seller to take, any action of any kind or to which Seller, the Business
and/or any of Seller's properties or assets are subject or bound.
(d) Seller is not in default under any order, writ, injunction
or decree of any court or governmental or administrative body or agency or
any other regulatory body.
4.27. Undisclosed Liabilities. Seller is not obligated as a
guarantor or cosigner or otherwise liable for any obligation of any kind of any
other person or entity. Seller is not subject to any obligation, liability, debt
or commitment, contingent or otherwise except for: (i) liabilities under the
Seller Contracts not required to be disclosed on a balance sheet in accordance
with GAAP; (ii) current liabilities described in Paragraph 4.9(c), hereof; (iii)
liabilities not required to be disclosed on a balance sheet in accordance with
GAAP but which are otherwise disclosed herein; (iv) liabilities arising
hereunder.
4.28. No Material Omissions. No representation or warranty by
Seller, Welch and/or the Trust contained herein or in any writing furnished
pursuant hereto to Purchaser contains any untrue statement of fact or omits to
state any material fact
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required to make the statements herein or therein contained not misleading.
Welch has disclosed to Purchaser all material adverse facts known to Welch
relating to the Business and/or Seller and/or its assets.
ARTICLE V
---------
Representations and Warranties
of Purchaser
------------
Purchaser represents and warrants to Seller, which representations and
warranties shall (except as set forth in Paragraph 13.3(c), hereof) survive the
Closing notwithstanding any investigation made by or information furnished to
Seller in connection herewith as follows:
5.1. Due Incorporation. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Washington.
Terrance D. and Judith A. Paul own all of the issued and outstanding capital
stock of Purchaser.
5.2. Authority of Purchaser. Purchaser has full corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery hereof, and the consummation of
the transactions contemplated hereby, have been duly and validly authorized by
all necessary corporate action on the part of Purchaser.
5.3. No Breach of Law by Purchaser. The execution and delivery
hereof, the consummation of the transactions contemplated hereby, and compliance
with the terms and provisions hereof, by Purchaser will not: (i) conflict with
or result in a violation under Purchaser's Articles of Incorporation or By-Laws
and/or any agreement governing the organization of Purchaser; (ii) contravene
any applicable law, rule or regulation, or any order, writ, judgment,
injunction, decree, determination or award which affects or binds Purchaser;
(iii) require any consent, approval, authorization, license, permit,
registration, filing, recording or waiver under any applicable law, rule or
regulation, under any order, writ, judgment, injunction, decree, determination
or award which affects or binds Purchaser, or under any governmental or judicial
license, franchise, permit or approval held by Purchaser or which binds or may
affect Purchaser or any of its assets; or (iv) result in the creation or
imposition of any lien, claim or encumbrance upon any assets of Purchaser.
5.4. No Breach of Contract by Purchaser. The execution and delivery
hereof, the consummation of the transactions contemplated hereby, and compliance
with the terms and
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provisions hereof by Purchaser will not: (i) conflict with or result in a breach
of or default under, or cause or permit the termination or acceleration of the
maturity of, or otherwise impair any contract, agreement, lease, commitment,
indenture, loan or credit agreement or any other agreement or instrument to
which Purchaser is a party or by which Purchaser or any of its assets may be
affected or is bound; or (ii) require any consent, approval or waiver under any
contract, agreement, lease, commitment, indenture, loan or credit agreement or
any other agreement or instrument to which Purchaser is a party or by which
Purchaser or any of its assets may be affected or is bound.
5.5. Enforceability. This Agreement has been duly executed and
delivered by Purchaser and constitutes a legal, valid and binding obligation of
Purchaser enforceable against it in accordance with its terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally or by the application of general
principles of equity.
5.6. Finder's Fees. Purchaser is not obligated to pay any agent,
finder, broker or other representative any fee or commission in connection with
the consummation of the transactions contemplated hereby. 5.7. Litigation. There
is no claim, action, suit, proceeding or arbitration, or to Purchaser's
knowledge, any investigation or inquiry before any federal, state, municipal,
foreign or other court or governmental or administrative body or agency, any
securities or commodities exchange, other regulatory body or any private
arbitration tribunal now pending, or, to Purchaser's knowledge, threatened,
against, relating to or affecting Purchaser, Advantage Learning Systems, Inc.,
Terrance D. and/or Judith A. Paul which would adversely affect Purchaser's
ability to consummate the transactions contemplated hereby.
5.7. Litigation. There is no claim, action, suit, proceeding or
arbitration, or to Purchaser's knowledge, any investigation or inquiry before
any federal, state, municipal, foreign or other court or governmental or
administrative body or agency, any securities or commodities exchange, other
regulatory body or any private arbitration tribunal now pending, or, to
Purchaser's knowledge, threatened, against, relating to or affecting Purchaser,
Advantage Learning Systems, Inc., Terrance D. and/or Judith A. Paul which would
adversely affect Purchaser's ability to consummate the transactions contemplated
hereby.
5.8. No Material Omissions. No representation or warranty by
Purchaser contained herein or in any writing furnished pursuant hereto to Seller
contains any untrue statement of fact or omits to state any material fact
required to make the statements herein or therein contained not misleading.
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ARTICLE VI
----------
Seller's, Welch's and the Trust's Pre-Closing Covenants
-------------------------------------------------------
Except and to the extent Purchaser may otherwise permit in writing,
Seller, Welch and the Trust covenant and agree as follows:
6.1. Conduct of Business in Ordinary Course. Until the Closing,
Seller shall carry on its business diligently and substantially in the manner as
heretofore conducted, and Seller shall not make or initiate any unusual or novel
methods of purchase, sale, management, accounting or operation, or make any
adjustments in the pricing of its products or services not consistent with its
past business practices. Seller shall not enter into any contract or commitment
to engage in any transaction not in the ordinary course of its business or not
consistent with its past business practices. Seller shall use its best efforts
to preserve for Purchaser its business organization, including present
employees, and its relationships with suppliers, customers and others having
business relations with Seller. Without limiting the scope of the foregoing,
Seller shall:
(a) Use, preserve and maintain its properties and assets on a
basis consistent with past practices;
(b) Maintain all insurance covering Seller and its business,
properties or assets in effect as of the date hereof;
(c) Pay all debts and obligations incurred by Seller in the
operation of its business in accordance with its customary practices as the
same become due and payable, except to the extent Seller is contesting such
debts or obligations in good faith by appropriate proceedings and has
established appropriate reserves therefor; and
(d) Maintain its books, accounts and records in the usual manner
and on a basis consistent with past practice.
Furthermore, and without limiting the scope of the foregoing, Seller shall not:
(e) Make any capital expenditures, or commitments with respect
thereto (including, without limitation, capital leases), other than capital
expenditures or commitments not
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in excess of Ten Thousand Dollars ($10,000.00) in the aggregate;
(f) Enter into any agreement or agreements for the sale of
assets or properties, other than agreements for the sale of inventory or
software licenses made in the ordinary course of business on a basis
consistent with past practice and approved by Purchaser in writing;
(g) Enter into or modify any employment agreements with
employees, agents and/or representatives;
(h) Except as contemplated by Section 6.6, hereof, adopt or
amend or increase compensation or benefits payable under, or take any
actions which might result in adverse tax or other consequences with
respect to, any bonus, profit sharing, compensation, stock option, pension,
retirement, deferred compensation, collective bargaining agreement, or
other plan, agreement, trust, fund or arrangement for the benefit of any
employee or class of employees;
(i) Commit any act or omit to do any act, or permit any act or
omission to act, which will or may cause a material breach of any Seller
Contract;
(j) Change its prices or credit policies;
(k) Incur any indebtedness other than indebtedness for accounts
payable to trade creditors incurred in the ordinary course of business in
connection with obtaining materials or services;
(l) Authorize or issue any capital stock or securities
convertible into capital stock, including without limitation, options,
warrants, convertible debt or other rights to acquire capital stock; and
(m) Except as contemplated by Section 10.9, hereof, amend its
Articles of Incorporation, other charter documents or By-Laws.
6.2. Inspection. Until the Closing, Seller shall provide Purchaser
and its authorized representatives and agents: (i) full access during normal
business hours to the Premises and all books, records, contracts and documents
of Seller; and (ii) all such information with respect to the business and
affairs of Seller as it may reasonably request. No review, examination,
inspection, study or audit made by Purchaser pursuant hereto
24
<PAGE>
shall be deemed to be a waiver by Purchaser of, or a release of Seller, Welch or
the Trust from, any representations, warranties, covenants, conditions,
liabilities or obligations set forth in this Agreement.
6.3. No Solicitation. Until the Closing, or termination of this
Agreement as provided in Article XIV, below, neither Seller, Welch nor the
Trust shall, directly or indirectly, solicit, initiate, encourage or enter
into any discussions or negotiations with, or provide any assistance or
information to, or enter into any agreement with, any person or group of
persons (other than Purchaser) concerning any acquisition, directly or
indirectly, of an equity interest in, or merger, consolidation,
recapitalization, liquidation, dissolution or similar transaction
involving, or any purchase of all or a substantial portion of the assets
of, Seller (any such proposal or offer being an "Acquisition Proposal"), or
assist or participate in, facilitate or encourage any effort or attempt by
any other person to do or seek to do any of the foregoing; provided,
however, that receipt of and response by Seller or Welch to an unsolicited
Acquisition Proposal by any other person without any solicitation,
initiation, encouragement, assistance or participation after the date of
this Agreement and without entering into any discussions or negotiations
with respect to any such unsolicited Acquisition Proposal will not
constitute a violation hereof, provided Seller or Welch promptly advises
Purchaser of the identity of any such person and advises such person that
negotiations are not permitted pursuant hereto.
6.4. Interim Financial Statements and Aging Schedules. Until the
Closing, Seller shall furnish to Purchaser, promptly upon completion
thereof, the financial statements of Seller (including a balance sheet and
a statement of results of operations) for each month after May, 1996, and
the then ending year to date period, together with financial statements as
of the corresponding dates and for the corresponding periods during the
preceding fiscal year, which financial statements shall be prepared in
accordance with past practice consistently applied subject only to usual
and customary year end adjustments. Seller shall also furnish to Purchaser
current accounts receivable aging schedules as and when requested by
Purchaser.
6.5. Best Efforts. Until the Closing, Seller and Welch shall use
their best efforts to take or cause to be taken all actions and to do or
cause to be done all things necessary, proper or advisable under applicable
laws and regulations to satisfy the conditions set forth in Articles VIII
and IX, hereof, and to consummate and make effective the transactions
contemplated hereby.
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6.6. Profit Sharing and Bonus Plans. On or before the Closing Date,
Seller shall make appropriate contributions, consistent with past practices, to
Seller's profit sharing plan for the period from January 1, 1996 through the
Closing Date and shall pay such bonuses as may be required under Seller's 1996
bonus plan. In Seller's discretion, Seller may pay to Seller's employees such
additional cash bonuses as the Seller deems appropriate in connection with the
transactions contemplated hereby.
6.7. Delivery of Documentation. On or before the Closing Date,
Seller shall assure that duplicate copies of all of Seller's algorithms,
authoring tools and other software and all source and object programs and codes
and related documentation reproduced in written form or stored on disks or other
appropriate software media are stored in an off-site location in the Vancouver,
Washington area which will be accessible by Purchaser after the Closing.
6.8. Delivery of Records. On or before the Closing Date, Seller,
Welch and the Trust shall cause to be delivered to the Premises all files,
records, documents and other information and records relating to Seller and/or
the Business which are in the possession or under the control of Seller, Welch
or the Trust and which are not then located at such facility.
ARTICLE VII
-----------
Purchaser's Pre-Closing Covenants
---------------------------------
Except and to the extent Seller may otherwise permit in writing,
Purchaser covenants and agrees that until the Closing Purchaser shall use its
best efforts to take or cause to be taken all actions and to do or cause to be
done all things necessary, proper or advisable under applicable laws and
regulations to satisfy the conditions set forth in Articles VIII and IX, hereof,
and to consummate or make effective the transactions contemplated hereby.
ARTICLE VIII
------------
Conditions to Seller's, Welch's and the Trust's Obligations
-----------------------------------------------------------
Each and every obligation of Seller, Welch and/or the Trust under this
Agreement shall be subject to the fulfillment, prior to or at the Closing, of
each of the following conditions:
8.1. Purchaser's Representations and Warranties . Each
representation and warranty made by Purchaser herein shall be true and correct
on and as of the Closing Date with the same
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<PAGE>
effect as though each such representation or warranty had been made or given on
and as of the Closing Date.
8.2. Purchaser's Covenants. Purchaser shall have performed and
complied with all of the terms, covenants and conditions set forth herein which
are to be performed or complied with by Purchaser before or as of the Closing
Date.
8.3. Escrow Agreement. Purchaser, Seller and the Escrow Agent shall
have entered into the Escrow Agreement dated as of the Closing Date.
8.4. Opinion of Counsel. Godfrey & Kahn, S.C., counsel for
Purchaser, shall have delivered to Seller an opinion dated the Closing Date in
form and substance satisfactory to Seller and Seller's counsel.
8.5. Legal Actions or Proceedings. No suit, action, investigation,
inquiry or other proceeding by any governmental authority or other person or
legal or administrative proceeding shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
or which otherwise seeks to affect, or could affect, the transactions
contemplated hereby or impose damages or penalties upon any party hereto if such
transactions are consummated.
8.6. Nelson Employment Agreement. Purchaser and Ms. Kaye Nelson
shall have entered into an Employment Agreement as contemplated by Section 9.7,
below.
8.7. Purchaser's Deliveries . Purchaser shall have tendered delivery
of the items contemplated by Article XI, hereof.
If any of the conditions to Closing set forth in this Article VIII shall not
have been satisfied, Seller may elect to terminate this Agreement as
contemplated by Article XIV, hereof, or to consummate the transactions
contemplated herein despite such failure, in which case Seller shall retain all
of its rights to indemnification pursuant to Article XIII, hereof.
ARTICLE IX
----------
Conditions to Purchaser's Obligations
-------------------------------------
Each and every obligation of Purchaser under this Agreement shall be
subject to the fulfillment, prior to or at Closing, of each of the following
conditions:
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<PAGE>
9.1. Seller's, Welch's and the Trust's Representations and
Warranties. Each representation and warranty made by Seller, Welch and/or the
Trust herein shall be true and correct on and as of the Closing Date with the
same effect as though each such representation and warranty had been made or
given on and as of the Closing Date.
9.2. Seller's, Welch's and the Trust's Covenants . Seller, Welch and
the Trust shall have performed and complied with all of the terms, covenants and
conditions set forth herein which are to be performed or complied with by
Seller, Welch and/or the Trust before or as of the Closing Date.
9.3. Escrow Agreement. Purchaser, Seller and the Escrow Agent shall
have entered into the Escrow Agreement dated as of the Closing Date.
9.4. Opinion of Counsel. Heurlin & Potter, P.S., Seller's, Welch's
and the Trust's counsel, shall have delivered to Purchaser an opinion dated the
Closing Date in form and substance satisfactory to Purchaser and Purchaser's
counsel.
9.5. Legal Actions or Proceedings . No suit, action, investigation,
inquiry or other proceeding by any governmental authority or other person or
legal or administrative proceeding shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
or which otherwise seeks to affect, or could affect, the transactions
contemplated hereby or impose damages or penalties upon any party hereto if such
transactions are consummated.
9.6. Seller's, Welch's and the Trust's Deliveries . Seller, Welch
and the Trust shall have tendered delivery of the items contemplated by Article
X, hereof.
9.7. Nelson Employment Agreement. Purchaser shall have entered into
an employment agreement with Ms. Kaye Nelson on terms and conditions
satisfactory to Purchaser under which Ms. Nelson will serve as the President of
Purchaser in Vancouver, Washington for a two year period following the Closing
Date with responsibilities, compensation and benefits substantially similar to
those provided under her current employment arrangements with Seller.
9.8. Royalty Payments. Seller shall have made appropriate
arrangements with Mr. Norman Sanford and any other persons entitled to royalty
payments or other payments based upon Seller's sales or earnings (excluding
persons entitled to such payments under Seller's licenses for "Applications in
Basic Math"
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<PAGE>
and "Equation Editor") to terminate or release all rights to such payments.
9.9. Manager's Certificate. Ms. Kaye Nelson shall have delivered a
certificate to Purchaser dated the Closing Date to the effect that: (i) she has
reviewed Articles IV and VI, hereof; (ii) except as noted in such certificate,
she has no actual knowledge that any representation or warranty made by Seller,
the Trust and/or Welch herein is not true and correct on and as of the date of
such certificate with the same effect as though such representation or warranty
had been made on such date; and (iii) she does not have any actual knowledge
that Seller, the Trust and/or Welch has not performed or complied with all of
the covenants set forth herein which are to be performed or complied with before
or as of the Closing Date.
9.10. Approvals and Consents . Purchaser shall have received, at or
before Closing, all consents, approvals, permits and licenses ("Consents") which
Purchaser reasonably deems necessary to operate the Business or to assume and
continue the Seller Contracts after the Closing, including, but not limited to,
consents from governmental and regulatory agencies, lenders, equipment lessors,
landlords, suppliers, customers, software licensees and licensors and other
parties whose approval may be necessary to avoid the acceleration of any
indebtedness or the termination of any contracts, licenses or permits affecting
Seller, the Business and/or Seller's properties or for the assignment thereof to
Purchaser.
9.11. Intellectual Property Assignments. Purchaser shall have
received, at or before Closing, such copyright assignments, licenses,
confirmations or other documents as Purchaser reasonably deems necessary to
confirm and perfect Seller's and Purchaser's title to the algorithms, software
and other Intellectual Property to be transferred to Purchaser pursuant hereto,
including, but not limited to, copyright assignments from software developers or
other third parties engaged to write or develop any of Seller's software or
other Intellectual Property.
9.12. Due Diligence. Purchaser and its accountants and counsel shall
have had an opportunity to examine and review all aspects of the operation of
Seller and the Business, and Purchaser and its representatives shall be
satisfied in their absolute discretion as to the results of such examination and
review and of their continuing due diligence investigations and evaluations of
Seller and the Business, including, without limitation: (i) the adequacy of
Seller's books, records and accounting systems and methods; (ii) Seller's rights
and title to
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its software and other Intellectual Property; (iii) Seller's obligations under
the contracts to which it is a party and the anticipated cost to complete such
contracts; and (iv) Purchaser's ability to continue Seller's relationships and
agreements with its major customers and suppliers. No such review, examination,
inspection, study or audit shall be deemed to be a waiver by Purchaser of, or a
release of Seller, Welch and/or the Trust from any representations, warranties,
covenants, conditions, liabilities or obligations as set forth in this
Agreement.
If any of the conditions to Closing set forth in this Article IX shall not have
been satisfied, Purchaser may elect to terminate this Agreement as contemplated
by Article XIV, hereof, or to consummate the transactions contemplated hereby
despite such failure, in which case Purchaser shall retain all of its rights to
indemnification pursuant to Article XIII, hereof.
ARTICLE X
---------
Seller's, Welch's and the Trust's Deliveries at Closing
-------------------------------------------------------
At Closing, Seller, Welch and the Trust shall deliver the following to
Purchaser:
10.1. Subject Assets. Actual or constructive possession of the
Premises and the Subject Assets, including the Inventory, the Equipment and the
Records.
10.2. Cash. Checks, wire transfers, duly endorsed share certificates
and documentation reasonably satisfactory to Purchaser sufficient to transfer to
Purchaser all of Seller's Cash and control over any bank, mutual fund or other
accounts in or to which any of Seller's Cash is deposited or credited.
10.3. Bill of Sale. A warranty bill of sale and such assignments,
certificates of title and other instruments of conveyance as Purchaser shall
reasonably request, in a form satisfactory to Purchaser and its counsel duly
executed by Seller, conveying to Purchaser the Subject Assets free and clear of
all liens, claims and encumbrances.
10.4. Intangible Assets. One or more assignments in a form
satisfactory to Purchaser and its counsel assigning to Purchaser those items of
Seller's Intellectual Property for which Purchaser may request a specific
assignment and an executed Assignment and Assumption Agreement (the "Assignment
and Assumption Agreement"), in a form satisfactory to Purchaser and its counsel,
assigning to Purchaser all of Seller's right, title and interest in and to the
Seller Contracts.
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10.5. Current Liability Certificate. A certificate signed by Seller,
Welch and the Trust dated as of the Closing Date totaling Seller's Cash as of
the Closing Date and listing each account payable or other Current Liability of
Seller as of the Closing Date to be assumed by Purchaser as provided in
Paragraph 2.1(d).
10.6. Bring Down Certificate. A Bring Down Certificate signed by
Seller, Welch and the Trust dated as of the Closing Date to the effect that,
except as noted in such certificate, each representation and warranty made by
Seller, Welch and/or the Trust herein is true and correct on and as of the date
of such certificate with the same effect as though each such representation or
warranty had been made or given on and as of such date, and that Seller, Welch
and the Trust have performed and complied with all of the terms, covenants and
conditions set forth herein which are to be performed or complied with by
Seller, Welch and/or the Trust before or as of the Closing.
10.7. Welch Employment Agreement. An employment, consulting and
noncompetition agreement in the form of Exhibit 10.7, hereto, (the "Welch
Employment Agreement") executed by Welch as of the Closing Date.
10.8. Resolutions. A certificate from the Secretary of Seller in
form and substance reasonably satisfactory to Purchaser setting forth
resolutions duly adopted by the Board of Directors and Shareholders of Seller
pursuant to the Washington General Corporation Law (the "WGCL") approving the
execution and delivery of this Agreement and the transactions contemplated
thereby.
10.9. Change of Name. An amendment to Seller's Articles of
Incorporation and other documentation reasonably acceptable to Purchaser and its
counsel suitable for filing with the appropriate agencies of the State of
Washington pursuant to which Seller shall change its corporate name to a name
which is not confusingly similar to the names "IPS," "IPS Publishing, Inc." or
"International Publishing Services, Inc."
ARTICLE XI
----------
Purchaser's Deliveries at Closing
---------------------------------
At Closing, Purchaser shall deliver the following to Seller:
11.1. Closing Payment. Payment of the Closing Payment as
contemplated by Paragraph 3.2(b), hereof.
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11.2. Deferred Amount. Payment of the Deferred Amount, if any, as
contemplated by Paragraph 3.2(d), hereof, by delivery to the Escrow Agent.
11.3. Bring Down Certificate. A Bring Down Certificate dated as of
the Closing Date executed by Purchaser to the effect that, except as noted in
such certificate, each representation and warranty made by Purchaser herein is
true and correct on and as of the date of such certificate with the same effect
as though each such representation or warranty had been made or given on and as
of such date and that Purchaser has performed and complied with all the terms,
covenants and conditions set forth herein which are to be performed or complied
with by Purchaser before or as of the Closing.
11.4. Welch Employment Agreement. The Welch employment agreement
executed by Purchaser as of the Closing Date.
11.5. Nelson Employment Agreement. An Employment Agreement in the
form of Exhibit 11.5, hereto (the "Nelson Employment Agreement") executed by
Purchaser as of the Closing Date.
11.6. Resolutions. A certificate from the Secretary of Purchaser in
form and substance reasonably satisfactory to Seller setting forth resolutions
adopted by the Board of Directors of Purchaser pursuant to the WGCL authorizing
the execution and delivery of this Agreement and the transactions contemplated
thereby.
11.7. Assignment and Assumption Agreement. The Assignment and
Assumption Agreement, duly executed by Purchaser, pursuant to which Purchaser
shall agree to pay and perform the Assumed Liabilities.
ARTICLE XII
-----------
Conduct Subsequent to Closing
-----------------------------
12.1. Purchase Price Allocation. As soon as practicable following
the Closing, Seller and Purchaser shall allocate the Purchase Price among the
Subject Assets as Seller and Purchaser may mutually agree. Seller and Purchaser
agree that such allocation shall be binding upon them and their respective
successors and permitted assigns, and that each of them shall report the
transactions contemplated hereby in accordance with such allocation. Each of
Seller and Purchaser shall file a Form 8594, prepared in accordance with the
allocation agreed to under this Section 12.1, with its federal income
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tax returns. Notwithstanding the foregoing, if Seller and Purchaser are unable
to agree upon an allocation of the Purchase Price among the Subject Assets, then
each of Seller and Purchaser shall file the forms and tax returns described in
this Section 12.1 in the manner that it, in its discretion, determines to be
appropriate.
12.2. Execution and Delivery of Further Instruments by Seller.
Seller, Welch and the Trust shall, at any time and from time to time after the
Closing upon the reasonable request of Purchaser, execute, acknowledge and
deliver to Purchaser such further instruments and take such other actions as
Purchaser may reasonably request in order to consummate the transactions
contemplated by this Agreement.
12.3. Execution and Delivery of Further Instruments by Purchaser.
Purchaser shall at any time, and from time to time after the Closing upon the
reasonable request of Seller, Welch or the Trust execute, acknowledge and
deliver to Seller, Welch or the Trust such further instruments and take such
other actions as Seller, Welch or the Trust may reasonably request in order more
effectively to consummate the transactions contemplated by this Agreement.
12.4. Noncompetition and Nondisclosure.
(a) Welch and Seller each agree that he(it) shall not for a
period of five (5) years from the date of Closing, directly or indirectly,
as employee, consultant, representative, trustee, partner, owner,
proprietor or otherwise: (i) acquire an interest in, work for, render
advice or assistance to or otherwise participate or engage in the business
of, any "Mathematics and/or Science Software Publisher" (as defined below)
other than Purchaser; (ii) divert, or attempt to divert, any Mathematics
and/or Science Software Publishing business from or persuade, or attempt to
persuade, any Customer (as defined below) not to do business with
Purchaser; (iii) induce, or attempt to induce, any employee of or
consultant engaged by Purchaser to leave the employ of Purchaser or in any
way interfere with the relationship between Purchaser and any employee or
consultant thereof; or (iv) disclose to any person other than an employee,
consultant or agent of Purchaser having a need to know such information in
the ordinary course of business any trade secret, confidential proprietary
information or any other information not generally known to the public
relating to the Business or the Intellectual Property, or otherwise
relating to the software, assets or business of Seller or Purchaser.
Notwithstanding the foregoing: (i) nothing
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herein shall prevent Welch from acquiring for investment up to 1% of the
outstanding shares of any Mathematics and/or Science Software Publisher
provided that Welch does not render advice or assistance to such entity;
and (ii) Purchaser acknowledges that Welch's engagement in business
ventures relating to CD Roms for Classic Comics and software for non-native
English speakers and his service on the Board of Directors of the
Assessment Training Institute will not be considered to be in violation of
the agreements set forth in this Paragraph 12.4(a). For purposes hereof,
the term "Mathematics and/or Science Software Publisher" shall mean any
business which is engaged in the development, sale, licensing, use and/or
publication of any software or other products of the type sold or licensed
by Seller on the date hereof, including any software algorithms and/or
authoring tools designed to create mathematics and/or science problems or
tests and/or useful for mathematics and/or science performance assessment
or instruction, or otherwise to teach, develop or improve mathematics
and/or science knowledge and skills. For purposes hereof, a "Customer"
shall mean any person who has been a customer of Seller prior to Closing,
any potential customer with whom Seller has engaged in negotiations prior
to Closing, any customer of Purchaser and/or any potential customer of
Purchaser with which Purchaser has engaged in negotiations.
(b) Welch and Seller acknowledge and agree that a breach of the
provisions of Paragraph 12.4(a), above, will cause irreparable injury to
Purchaser, and Purchaser shall be entitled to an injunction enjoining and
restraining Welch and/or Seller from doing or continuing to do any such act
or creating any other violations or threatened violations of said
paragraph.
(c) Welch and Seller agree that the terms and conditions of this
Paragraph 12.4 are reasonable and necessary for the protection of
Purchaser, and the trade secrets and confidential information acquired by
Purchaser pursuant hereto and for the prevention of damage or loss to
Purchaser as a result of action taken by Welch and/or Seller.
12.5. Assumed Liabilities. From and after the Closing, Purchaser
shall pay, perform and discharge as and when due each of the Assumed
Liabilities.
12.6. Excluded Liabilities. From and after the Closing, Seller shall
pay, perform and discharge when due each of the Excluded Liabilities.
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12.7. Name. From and after the Closing, Seller shall not use the
names "IPS," "IPS Publishing," "International Publishing Services, Inc." and/or
any name confusingly similar thereto.
12.8. Access to Records. After the Closing, each of Seller and
Purchaser shall provide to the other and its representatives the opportunity,
upon reasonable request, to examine and make copies of the Records and other
documents and records relating to the Business in its custody, and to consult
with its officers, employees, directors, accountants and other representatives,
in connection with any bona fide business purpose, including, without
limitation, the preparation of tax returns and financial statements and/or any
audit with respect thereto. For a period of six (6) years after the Closing,
neither party shall dispose of any records relating to the Business in its
custody at the Closing unless it has first given the other party at least thirty
(30) days prior written notice of its intention to do so and afforded the other
party the opportunity to take possession of such records prior to their
disposition.
ARTICLE XIII
------------
Indemnification
---------------
13.1. Indemnification by Seller, Welch and the Trust. Seller, Welch
and the Trust, jointly and severally, shall indemnify and hold Purchaser, its
shareholders, directors, officers, employees and agents and their respective
successors and assigns, harmless from and against any and all losses,
liabilities, damages, claims, costs, expenses and/or assessments, including
attorneys' and other professional fees and costs as well as fines, penalties
and/or interest (collectively "Losses") suffered or incurred by any of them
which result from or arise out of:
(i) the falsity or breach of any representation or warranty made
by Seller, Welch and/or the Trust herein or in any agreement, instrument or
certificate delivered pursuant hereto;
(ii) the failure of Seller, Welch and/or the Trust to comply
with or perform any covenant or agreement of Seller, Welch and/or the Trust
set forth herein or in any agreement, instrument or certificate delivered
pursuant hereto, including, without limitation, any failure to pay or
satisfy any of the Excluded Liabilities;
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(iii) any assessments, claims or liabilities (including interest
and penalties) for federal, state or local income, sales, use, franchise or
other taxes relating to, imposed upon or assessed against the sales,
income, property or business of Seller for all periods ending on or before
the Closing Date;
(iv) any third party claims (including fines and penalties
sought to be imposed or enforcement proceedings commenced by governmental
agencies) based upon, alleging or arising out of any act, omission or
occurrence by or relating to Seller or the Business on or before the
Closing Date, including, without limitation, any Loss relating to or
arising out of any nonperformance or breach of contract or warranty, any
product liability or other claim for personal injury or property damage
and/or any claim for violation of wage/hour laws or employment
discrimination;
(v) any rights of ownership, use or other interest held or
claimed by any third party in or with respect to any algorithms, code,
software, Intellectual Property or other Subject Assets transferred
hereunder and/or any claim that the use of any such Assets infringes upon
the rights of others, including, without limitation, (a) any claim by any
person who has developed software for the Seller to any rights in such
software, (b) any claim by any person to entitlement to any rights to any
source code comprising a part of the Intellectual Property under any
agreement entered into by Seller before the Closing, and/or (c) any claim
by any person alleging or arising out of the matters discussed in the
Fenwick & West letter dated November 13, 1995 addressed to Mr. Richard
Breene (a copy of which has been provided to Seller); provided, however,
that the foregoing indemnification shall not extend to (y) any claim by any
person to rights to use any of Seller's Intellectual Property solely in
connection with a publication or application specifically identified in an
agreement described in Exhibit 4.4 to the Disclosure Schedule pursuant to
rights granted under such agreement or derived therefrom or (z) to any
claim by any customer of the Business with respect to the right to use
Seller's "Exam in a Can" software under the terms of Seller's standard form
license agreement attached as Exhibit ___ to the Disclosure Schedule; and
(vi) any third party claim based upon or alleging a failure to
obtain any private third party consent in connection with the transactions
contemplated hereby.
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13.2. Indemnification by Purchaser. Purchaser shall indemnify and
hold Seller, Welch, the Trust and their respective trustees, shareholders,
directors, officers, employees, agents, successors and/or assigns harmless from
and against any and all Losses suffered or incurred by any of them which result
from or arise out of:
(i) the falsity or breach of any representation or warranty made
by Purchaser herein or in any instrument or certificate delivered pursuant
hereto;
(ii) the failure by Purchaser to comply with or perform any
covenant or agreement of Purchaser set forth herein or in any agreement,
instrument or certificate delivered pursuant hereto, including the failure
to perform any obligation under any of the Seller Contracts to be performed
after the Closing Date; or
(iii) any third party claims (including fines and penalties
sought to be imposed or enforcement proceedings commenced by governmental
agencies) based upon, alleging or arising out of any act, omission or
occurrence by or relating to the Business after the Closing Date,
including, without limitation, any Loss relating to any claim for
nonperformance or breach of contract or warranty, any product liability or
other claim for personal injury or property damage and/or any claim for
violation of wage/hour laws or employment discrimination.
13.3. Limitation on Liability. Anything in this Agreement to the
contrary notwithstanding:
(a) No party shall be required to indemnify or make any payment
hereunder with respect to any Loss arising under clause 13.1(i) or 13.2(i),
hereof, or the failure to comply with or perform any covenant or agreement
to be complied with or performed by such party prior to the Closing if the
falsity or breach in question or the failure to comply or nonperformance in
question, as the case may be, was disclosed in the Bring Down Certificate
delivered by such party pursuant to Section 10.6 or 11.3, hereof, as the
case may be.
(b) No party shall be required to indemnify or make any payment
hereunder with respect to any Loss arising under clause 13.1(i) or 13.2(i),
hereof, or the failure to comply with or perform any covenant or agreement
to be complied with or performed by such party before the Closing
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unless and until the aggregate amount of such Losses for which such party
would otherwise be liable hereunder exceeds $52,500 (the "Basket Amount"),
but if and when the aggregate amount of such Losses exceed the Basket
Amount, then such party shall be liable for all of such Losses in excess of
the Basket Amount; provided, however, that the maximum aggregate amount
against which any party may be required to provide indemnification or which
any party may be required to pay hereunder with respect to such Losses
shall be Five Million Two Hundred Fifty Thousand Dollars ($5,250,000).
(c) No person shall be entitled to indemnification or any
payment hereunder from any party hereto pursuant to this Article XIII
unless the Indemnified Party (as defined below) shall have provided the
Indemnifying Party (as defined below) with notice of its claim to
indemnification as provided in Section 13.4, hereof: (i) within twenty-four
(24) months after the Closing Date in the case of Losses arising out of any
falsity or breach of warranty described in clause 13.1(i) or 13.2(i) other
than Losses arising out of the representations and warranties set forth in
Sections 4.1 through 4.8, 4.10, 4.12(b), (c) and (d), 4.15, 4.25, 4.26 and
5.1 through 5.7, hereof (the "Title Warranties"); (ii) within twenty-four
(24) months after the Closing Date in the case of Losses arising out of any
failure to comply or nonperformance described in clauses 13.1(ii) or
13.2(ii) other than Losses arising out of the noncompliance with or
nonperformance of any covenants or agreements to be complied with or
performed by the Indemnifying Party after the Closing Date (the "Post-
Closing Covenants"); and (iii) within the period of the applicable statute
of limitation in all other cases, including any Losses arising out of the
falsity or breach of any Title Warranty or the failure to comply with or
perform any Post-Closing Covenant.
(d) Purchaser shall not be entitled to indemnification or any
payment from Seller, Welch or the Trust with respect to any claims arising
out of any obligations assumed by Purchaser pursuant to Paragraphs 2.1(b)
and 2.1(c) of which Welch had no knowledge as of the date hereof.
13.4. Disclosure Schedule. To the extent a matter is disclosed in
the Disclosure Schedule, it shall limit the obligations of Seller, Welch and/or
the Trust, and it shall limit the rights of Purchaser, under clause 13.1(i),
hereof, but it shall not limit the obligations of Seller, Welch and/or the
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Trust, or the rights of Purchaser, under any other clause of Section 13.1,
hereof.
13.5. Notice of Claims. Promptly after any person entitled to
indemnification hereunder (A) receives notice of any claim or the commencement
of any action or proceeding against it, or (B) has knowledge of any claim,
action or proceeding against it or any Loss for which it intends to seek
indemnification hereunder, such person shall, if a claim for reimbursement with
respect thereto is to be made against any party hereto obligated to provide
indemnification (the "Indemnifying Party") hereunder, promptly give the
Indemnifying Party written notice of such claim or Loss or the commencement of
such action or proceeding, provided, however, that failure to give such
notification shall not affect indemnification hereunder, except to the extent
that (X) the Indemnifying Party is unable to defend any such claim or is
required to pay a greater amount or accrue additional expenses with respect to
any such claim or Loss as a result of such failure to provide prompt notice, or
(Y) such notice is not given within the period, if any, specified in Section
13.3, hereof.
13.6. Compromise of Third Party Claims. The Indemnifying Party shall
have the right to compromise or defend, at its own expense and by its counsel,
any third party claim made against the person seeking indemnification (the
"Indemnified Party"); provided, however, that no compromise of any claim shall
be made without the consent of the Indemnified Party unless such compromise
results in the full and unconditional release of all claims against the
Indemnified Party by the person asserting such claim. If the Indemnifying Party
shall undertake to compromise or defend any such third party claim, it shall
promptly notify the Indemnified Party of its intention to do so. The Indemnified
Party shall cooperate with the Indemnifying Party or its counsel in the defense
against any such third party claim and in any compromise thereof. Such
cooperation shall include, but not be limited to, furnishing the Indemnifying
Party with any books, records or information reasonably requested by the
Indemnifying Party. After the Indemnifying Party has notified the Indemnified
Party of its intention to undertake to compromise or defend any such third party
claim, the Indemnifying Party shall not be liable for any additional legal
expense incurred by the Indemnified Party. However, the Indemnified Party shall
have the right to retain its own counsel and participate in the defense of such
claim at the expense of the Indemnified Party, in which case the Indemnifying
Party shall cooperate in providing information to and consulting with the
Indemnified Party about the claim. If the Indemnifying Party does not assume the
defense of such claim, the Indemnified Party may defend against or settle such
claim in such manner and on such terms as it deems appropriate, and shall
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be indemnified by the Indemnifying Party for the amount of any judgment or
settlement and for all losses or expenses, including attorneys' and other
professional fees and costs, incurred by the Indemnified Party in connection
with the defense or settlement of such claim.
13.7. Payment. If any Indemnified Party shall incur any Loss for
which it is entitled to indemnification hereunder, the Indemnifying Party shall
make the indemnification payment required under this Article XIII within ten
(10) days after receipt by the Indemnifying Party of written notice from the
Indemnified Party stating the amount of the Loss and of the indemnification
payment requested. Any indemnification payment required under this Section 13.7
which is not made when due shall bear interest at the Prime Rate (as defined
below) plus 2% per annum from the date due until paid. For purposes hereof, the
"Prime Rate" shall mean the rate announced as the "Prime Rate" from time to time
by the Wall Street Journal, Midwest Edition, with such rate to be adjusted as
and when such "Prime Rate" as announced in the Wall Street Journal, Midwest
Edition, is adjusted.
13.8. Adjustment to Final Purchase Price. Seller and Purchaser agree
that any indemnification payment made under this Article XIII shall constitute
and be treated as an adjustment to the Purchase Price for the Subject Assets for
tax purposes.
13.9. Attorneys Fees. If any dispute between Seller, Welch, the
Trust and/or Purchaser under this Agreement or with respect to the transactions
contemplated hereby is determined, resolved or adjudicated by a court or public
or private tribunal or panel, the party prevailing in such dispute shall be
entitled to recover from the other its reasonable attorneys fees and other
professional fees and costs incurred in such disputes.
13.10. Setoff. From and after the Closing Date, in the event
Purchaser has a claim for indemnification against Seller, Welch and/or the
Trust, Purchaser shall be entitled to set off the amount of such claim against
the Contingent Amount. Prior to making any set off pursuant to this Section
13.10, Purchaser shall first give Seller a written notice of its intention to
make a set off (the "Set Off Notice") which shall specify the reasons for such
set off and the amount thereof. Such set off shall be final and binding on
Seller, Welch and/or the Trust unless, within fifteen (15) days after the date
of the Set Off Notice, Seller gives a notice of objection (the "Objection
Notice") to Purchaser stating in reasonable detail the nature of Seller's
objections. The parties shall thereafter negotiate in good faith to resolve such
objections and, if they
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are unable to reach agreement with respect to the proposed set off within thirty
(30) days after the giving of the Objection Notice, either Seller or Purchaser
shall have the right to submit the dispute for resolution by arbitration in the
manner set forth in Section 13.11.
13.11. Arbitration. Any controversy or claim arising out of this
Article XIII or the breach thereof shall be submitted to and settled by
arbitration in accordance with the then prevailing rules of the American
Arbitration Association. The dispute shall be submitted to a single arbitrator
agreed to by Seller and Purchaser or, if such parties are unable to agree upon a
single arbitrator, to three arbitrators selected in accordance with such rules.
All filing fees and other expenses in connection with the conduct of such
arbitration shall be shared by the parties, but may be awarded to the prevailing
party as determined by the arbitrator(s).
ARTICLE XIV
-----------
Termination
-----------
14.1. Termination. This Agreement, and the transactions contemplated
hereby, may not be terminated except as follows:
(a) Upon the mutual consent of Seller and Purchaser;
(b) By Seller, if any of the conditions to Seller's, Welch's and
the Trust's obligations set forth in Article VIII, hereof, shall not have
been satisfied or waived at the time of Closing;
(c) By Purchaser, if any of the conditions to Purchaser's
obligations set forth in Article IX, hereof, shall not have been satisfied
or waived at the time of Closing; or
(d) By Seller or Purchaser, if the Closing has not occurred on
or before August 15, 1996 (or such later date as may have been approved by
Seller and Purchaser); provided, however, that the right to terminate this
Agreement under this Section 14.1(d) shall not be available to any party whose
failure to fulfill or perform any obligation under this Agreement has been the
cause of, or has resulted in, the failure of the Closing to occur on or before
such date.
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14.2. Remedies. If Seller or Purchaser shall terminate this
Agreement pursuant to the provisions of this Article XIV, such termination shall
not waive or terminate any rights or remedies which the terminating party may
have against any other party hereto, whether at law or equity. Nothing contained
herein shall be deemed to require any party to terminate this Agreement rather
than to proceed with the Closing if a condition precedent to the obligations of
such party has not been satisfied. The parties hereto acknowledge that the
Business constitutes unique property and that there is no adequate remedy at law
for the damage which any party might sustain as a result of the failure by any
other party hereto to consummate the transactions contemplated hereby, and,
accordingly, that each of the parties hereto is entitled to the remedy of
specific performance to enforce the consummation of the transactions
contemplated hereby.
ARTICLE XV
----------
Miscellaneous
-------------
15.1. Expenses and Taxes. Each party shall pay its own expenses and
costs relating to the negotiation, execution and performance of this Agreement.
The forgoing notwithstanding: (i) all sales taxes, use taxes, stock transfer
fees, stamp taxes and other transfer taxes or fees incurred in connection with
the transactions contemplated hereby shall be borne equally by Seller and
Purchaser; and (ii) Seller shall pay all other taxes incident to the
consummation of the transactions contemplated hereby. The party upon whom any
sales, use or other transfer taxes may be imposed shall prepare the applicable
return, if any, and shall submit such return to the other party for its review
and timely consent, which consent shall not be unreasonably withheld. Payment of
a party's share of any such taxes shall be made to the party upon whom the tax
in question is imposed in sufficient time so that such tax payment may be timely
made to the taxing authority in question.
15.2. Governing Law. The parties hereto agree that all terms and
conditions of this Agreement and the documents delivered in connection herewith
shall be governed by, construed and enforced in accordance with the laws of the
State of Wisconsin, without giving effect to any choice of law or conflict
provision or rule that would cause the application of the laws of any
jurisdiction other than the State of Wisconsin.
15.3. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when hand delivered, including,
42
<PAGE>
without limitation, by courier or overnight delivery service, or when sent by
facsimile (transmission confirmed), or two (2) days after being mailed,
certified or registered mail, with postage prepaid addressed as follows (or to
such other person or address as the party to receive such notice may have
designated from time to time by notice in writing pursuant hereto):
If to Seller, Welch
and/or the Trust: c/o IPS Publishing, Inc.
12606 N.E. 95th Street
C-110 Vancouver, WA 98682
Fax: (360) 944-9156
With copies to: Brian R. Heurlin
Heurlin & Potter, P.S.
610 Esther Street, Suite 225
P. O. Box 611
Vancouver, WA 98666-0611
Fax: (360) 750-7548
If to Purchaser: c/o Terrance D. Paul
Advantage Learning Systems, Inc.
P. O. Box 8036
Wisconsin Rapids, WI 54495-0036
Fax: (715) 424-4242
With copies to: Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
Attention: Andrew R. Lauritzen
Fax: (414) 273-5198
15.4. Certain Definitions; Interpretation. Unless the context
clearly otherwise requires, as used herein, the term "Agreement" means this
Agreement and the Exhibits hereto. The words "herein," "hereof" and "hereunder"
and other words of similar import refer to this Agreement as a whole and not to
any particular Article, Section or other subdivision. The use of the neuter
pronoun "it" shall also refer as appropriate to the masculine and/or feminine
gender, and vice versa. The use of the singular herein shall, where appropriate,
be deemed to include the plural and vice versa. As used herein, the word
"person" refers to any individual, corporation, limited liability company,
partnership, trust, governmental body or authority or other organization or
entity. As used herein, the term "including" means "including, without
limitation." As used herein, matters stated "to the knowledge" or "to be known"
or as to which a person has "no knowledge" or similar references to the
knowledge or state of mind of a person shall be deemed to refer to the
43
<PAGE>
actual knowledge of such person. In the case of such references when referring
to the "knowledge" of Welch or the Trust, Welch and the Trust shall be
considered to have knowledge of any matters actually known to Welch and/or Kaye
Nelson after due inquiry of employees of Seller who might reasonably be expected
to have knowledge of specific relevant matters. The Disclosure Schedule and
other exhibits hereto shall not vary, change or alter the literal meaning of any
representation of warranty of Seller and/or Welch contained in this Agreement
other than by creating exceptions and setting forth information with respect
thereto. Exceptions and information set forth on the Disclosure Schedule for one
representation or warranty shall be considered set forth for all representations
or warranties to the extent applicable.
15.5. Headings. The headings to Articles and Sections of this
Agreement are for reference only and shall not be used in construing the
provisions hereof or otherwise affect the meaning hereof.
15.6. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original but all of which shall
constitute but one and the same agreement and shall become binding upon the
parties when each party hereto has executed one or more counterparts.
15.7. Entire Agreement. This Agreement embodies the entire agreement
and understanding among Seller, Welch, the Trust and Purchaser, and supersedes
all prior agreements and understandings related to the subject matter hereof.
There are no representations, warranties, covenants, promises or agreements on
the part of any party hereto to any other party hereto which are not explicitly
set forth herein.
15.8. Modifications, Waivers. Any modification or amendment of or
with respect to any provisions of this Agreement or any agreement, instrument or
document delivered pursuant hereto shall not be effective unless it shall be in
writing and signed by Seller, Welch, the Trust and Purchaser, and shall
designate specifically the terms and provisions so modified. Any waiver of or
with respect to any provisions of this Agreement or any agreement, instrument or
document delivered pursuant hereto shall not be effective unless it shall be in
writing and signed by the party against whom it is sought to be enforced.
15.9. Benefit; Assignment. This Agreement shall be binding upon and
inure to the benefit of Seller, Welch, the Trust and Purchaser and their
respective successors and permitted assigns. Except as provided in Sections 13.1
and 13.2, hereof,
44
<PAGE>
this Agreement shall not be deemed to confer any rights or remedies upon any
person other than the parties hereto and their respective successors and
permitted assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 1st day of August, 1996.
PURCHASER:
IPS ACQUISITION, INC.
By: /s/ Terrance D. Paul
--------------------------------
Terrance D. Paul, President
SELLER:
IPS PUBLISHING, INC.
By: /s/ Timothy P. Welch
--------------------------------
Timothy P. Welch, CEO
/s/ Timothy P. Welch
------------------------------------
Timothy P. Welch
THE TIMOTHY P. WELCH REVOCABLE
TRUST dated September 4, 1992
By: /s/ Timothy P. Welch
--------------------------------
Timothy P. Welch, sole Trustee
GUARANTY
--------
The undersigned, being the sole shareholders of Purchaser, hereby
guaranty timely payment and performance by Purchaser of all its obligations
under the foregoing Asset Purchase Agreement, and agree to pay when due any
amount not timely paid by Purchaser thereunder and to cause Purchaser to
45
<PAGE>
timely comply with and perform each of its undertakings and agreements set forth
therein.
/s/ Terrance D. Paul
------------------------------------
Terrance D. Paul
/s/ Judith A. Paul
------------------------------------
Judith A. Paul
August 1, 1996.
46
<PAGE>
EXHIBIT INDEX
1.1(e) Intellectual Property
1.1(f) Seller Contracts
3.2(d) Form of Escrow Agreement
10.7 Form of Welch Employment Agreement
11.5 Form of Nelson Employment Agreement
<PAGE>
Exhibit 1.1(e)
Intellectual Property
---------------------
Patents: None
- -------
Trade Names, Trademarks, Service Marks:
- --------------------------------------
Exam in a Can, Objective Tracker, MathCheck, Science Check, Standard
Tracker, Outcome Tracker, ipsTest, TestPrep, ExamPrep
Registrations:
Mark Issuer Number
---- ------ ------
Exam in a Can US PTO 1,613,668
Objective Tracker Washington State 023810
Registration Applications:
Mark Issuer Number
---- ------ ------
MathCheck and design US PTO 75084855
Science Check and design US PTO 75084856
Standard Tracker and design US PTO Not Yet Assigned
Outcome Tracker and design US PTO Not Yet Assigned
Copyrights:
- ----------
Registrations:
Title Issuer Number
----- ------ ------
ipsTest II US Copyright Office TX 2-126-504
(IBM Edition)
ipsTest IV US Copyright Office TX 2-513-118
(IBM Edition)
<PAGE>
Exhibit 1.1(f)
Seller Contracts
----------------
<PAGE>
ABACUS
Distribution Agreement 695
Achterbosch, Jurgen Non Disclosure 640
ADDISION-WESLEY
Access to Algebra and Geometry DOS 612
Access to Alg & Geom MAC 613
Addison-Wesley Indemnification
Agreement 514
Alg, Alg & Trig, Geometry Upgrade 614
Angel/Porter
Survey of Mathematics IBM 523
Survey Macintosh 523-1
Survey with Applications Omni3 720
Survey with Applications Mac 719
Auvil
Elementary Algebra Library IBM 495
Billstein
Math for Teachers IBM 539
Billstein/Libeskind/Lott
Problem solving approach to Math
Omni 3 717 Mac 718
Bittinger
Calculus 5/e IBM 510
Bittinger
Calculus IBM 668
Calculus Macintosh 669
Bittinger
Applied Calc Upgrade 555
Bittinger
Development Math DOS 677
Bittinger
PreAlgebra 96 IBM 682
PreAlgebra 96 Macintosh 683
Bittinger/Beecher
Coll. Alg. Library IBM 556
Bittinger/Beecher
Algebra & Trig IBM 560
Bittinger/Keedy
Basic Math 7/e Macintosh 602
Introductory Algebra 7/e Macintosh 602
Intermediate Algebra 7/e Macintosh 602
Bittinger/Keedy/Ellenbogen
Library Intermediate Algebra 4/e IBM 579
Intermediate Algebra 4/e Macintosh 580
Bittinger/Keedy/Ellenbogen Library
Elementary Algebra 4/e Macintosh 584
Elementary Algebra 4/e IBM 585
Bittinger/Keedy/Ellenbogen
Elem & Inter Alg Concepts & Applications
OmniTest 3 674
Bittinger/Keedy/Ellenbogen
Elem & Int Alg Concepts & Applications
Macintosh 675
Demana
College Algebra 2/e 493
Demana/Waits
College Algebra 492
Demana/Waits
Algebra and Trig and Pre calculus 494
Demana/Waits 1997
PreCalc Functions/Graphs IBM 699
PreCalc Functions/Graphs Mac 700
Demana/Waits/Clemens
Precalc Math Functions & Graphs IBM 558
Precalc Math Functions & Graphs Mac 559
Demana/Waits/Clements/Greene
Intermediate Alg: Graphing Approach IBM
593
Intermediate Alg: Graphing Approach Mac
594
Dugopolski
Elementary Algebra IBM 509
Elementary Alg 2/e IBM 664
Elementary Alg 2/e Mac 665
Intermediate Alg 2/e IBM 666
Intermediate Alg 2/e Mac 667
Intermediate Algebra IBM 508
College Alg & Trig III IBM 615
College Alg III IBM 615-1
College Alg & Trig Mac 616
College Alg Mac 616-1
Extension of Exclusive Agreement 417-A
Exclusive Fourth Addendum 417-B
Finney/Thomas
Calculus 2/e IBM 586
Futura Confidentiality 599
Jones/Childers
Contemp Physics 2e IBM 551
Contemp Physics 2e Macintosh 552
Keedy/Bittinger
Essentials of Math IBM 513
Keedy/Bittinger/Rudolph
Developmental Math IBM 512
Keedy/Bittinger
Alg & Trig IBM 557
Keedy/Bittinger
Basic Math 7/e IBM and Macintosh
<PAGE>
Introductory Alg 7/e IBM and Macintosh
Intermediate Alg 7/e IBM and Macintosh..602
Lotus 123 Lauden O Leary and Zak
Bus Specified IBM 498 498-1 498-2
Release of Exclusive on OmniTest II 641
Thomas/Finney, 9/e
Calculus and Analytic Geometry
Library Edition...655
Triola
Elementary Statistics IBM 501
Elementary Statistics 6/e IBM 617
Elementary Stats 6/e Macintosh 627
Triola/Franklin
Elementary Business Statistics IBM 595
Washington
Technical Math w/Calculus IBM 638
Technical Math w/Calculus Macintosh 639
Weiss
Elementary Stats Upgrade 554
Introductory Statistics 4e IBM 596
Introductory Stats 4/e Macintosh 626
Elementary Statistics Omni 3 670
Elementary Statistics Macintosh 671
Young
Physics Macintosh 553
ADDISON-WESLEY CANADA
Minds on Math IBM 672
Minds on Math Macintosh 673
ADDISON WESLEY SCHOOL
School Division Alg & Trig Macintosh 562
School Division Algebra Macintosh 561
School Division Geometry Macintosh 563
School Division Access to Alg & Geom 604
School Division Alg, Alg & Trig, Geom 605
School Division Access to Alg / Geo 6.0 606
School Division Alg & Trig DOS 647
School Division Alg & Trig Mac 648
School Division Focus on Alg DOS 649
School Division Focus on Alg Mac 650
School Division Focus on Geo DOS 643
School Division Focus on Geometry Mac 644
School Division Foundations DOS 645
School Division Foundations Mac 646
School Division Chemistry Practice DOS 691
School Division Chemistry Practice Mac 692
BENN INGRID Rep Puerto Rico 508
CHANCERY SOFTWARE
License Agreement EIAC 550
CHAPIN Richard
Non Disclosure 656
CHEESEMAN Kevin
Work for Hire 598 611 628 642
Non Disclosure 608
COMPUTER CURRICULUM CORP
Software Design and Development 1994 625
Amendment 9-5-95 Milestone Payment 625-1
COMPUTER RESULTS
Keith Sweitzer 527
CCC Agreement 698
CURRICULUM NETWORKING SPEC.
ILS Exam in a Can + 502
CNS License Agreement 532
DATAPAK Software PAIGE 686
Licensed..Computer Results Using
DC HEATH
Bello
Topics in Contemporary Math Mac 533
Topics in Contemporary Math IBM 533-1
Clast to Accompany Topics IBM 533-2
Intermediate Algebra IBM 590
Beginning Algebra IBM 591
Geometry Test Bank IBM & Mac 662
Larson/Hostetler
College Algebra IBM 568
College Algebra Macintosh 569
Algebra & Trigonometry IBM 570
Algebra & Trigonometry Macintosh 571
Pre calculus IBM 572
Pre calculus Macintosh 573
1996 Larson/Harshbarger Series
IBM Mac 697
Passport to Algebra & Geometry
1995 702
DELLEN
Dellen Use of Algorithms 1992 542
Barnett/Ziegler IBM/MAC M/C F/R 534
Barnett/Ziegler F/R M/C
Applied Calculus IBM Mac 588
<PAGE>
Applied Math IBM Mac 588-7
Sullivan IBM Mac M/C F/R 534
DESIGN SCIENCE
License Agreement 652
GARNER, Steve
Telemarketing Agreement 578
GLENCOE
Adv Math Concepts IBM 581 Mac 581-1
Merrill
Math Connections Pre Algebra
Algebra 1 Algebra 2 w/Trig
Macintosh 517
Middle School 1 Middle School 2
Middle School 3 Geometry
IBM Mac Apple 528 1-11
Merrill Physics Mac 532
Merrill Chemistry 535
Updates
Doco 637
Math 1,2,3 636
Tippens Physics 5/e 651
HOUSTON Independent School District
District License EIAC Geometry 587
HOUGHTON-MIFFLIN/McDougal Littell
Integrated Math 1 Mac and IBM 654
Integrated Math 2 Mac and IBM 658
Integrated Math 3 Mac and IBM 688
Algebra 1 IBM Mac 701
IBM Contract & Amendment 600
IBM Title Transfer Agreement 607
IBM Evaluation Agreement 689
IBM Product Remarketing Agreement 690
School Vista Agreement SCR950366 696
New Agreement for Remarketing 703
IBM License Source Code
SCR950585 710
IDEAL LEARNING
License Agreement 526
LAURA Speek
Promissory Note 505
Purchase of Stock 506
Indemnification Agreement 507
KERR Eugene DR
Strategic Alliances 520
Addendum 520-1
KARAS Mike
Non disclosure 574
LEASE
Vancouver 110 & 120 564
Lease updated 92 & 93 530
Lease Termination Westlake 575
MAKE TEST
License Agreement 582
MCDOUGAL LITTELL
Algebra 1 Macintosh 547
Algebra 2 Macintosh 548
Geometry Macintosh 549
Gateways IBM 565
Gateways Apple 566
Gateways Macintosh 567
Project Plan 2 Leiva
Algebra 2 IBM & Mac 722
McGRAW-HILL RYERSON
Math Power Series
Math 7 IBM Mac 704 705
Math 8 IBM Mac 706 707
Math 9 IBM Mac 708 709
Black line masters IBM 715
(Math 7,8,9)
Black Line masters Mac 714
LOI OT Agreement 723
OT Agreement 724
MEAD, Matthew
Non Disclosure 609
Non Disclosure Termination
Work for Hire Contract 721
MERRILL
Bill Speers Todays Math 715
MOSHOFSKY, Emily
Work for Hire D.C. Heath 693
NATIONAL SCIENCE FOUNDATION
Non Disclosure 504
<PAGE>
Algo Specifications Math Algos 521
O'DONNELL Nancy
Work for Hire 603
PAIGE
Data Pak Software 686
Renewal of Service Agreement
PARKHURST Mike
Non Disclosure 522
PHARLAP
License Agreement 663
PKWARE 563
License Agreement
PRENTICE HALL
Angel
Interm Alg for College Students IBM 515
Intermediate Algebra 4/e IBM 684
Elementary Algebra 4/e IBM 685
Blitzer
Intermediate Algebra IBM 634
Intermediate Algebra Macintosh 635
Introductory Algebra IBM 632
Introductory Algebra Macintosh 633
Exley/Smith
College Alg and Trig IBM 546
Elem Alg for College Students IBM 516
Fishbane
Physics for Scientists & Engineers IBM 524
Macintosh for above 525
Amendment to 524 1996
Martin Gay
Prealgebra IBM 543
Beginning Algebra IBM 544
Intermediate Algebra IBM 545
Middle Grade Math
6,7,8 IBM and Macintosh 601
Sobel
College Algebra IBM 631
College Algebra & Trigonometry IBM 630
Precalculus IBM 629
Sullivan
659;660;661...All rewritten as:
Sullivan Texts IBM 679, Macintosh 680
Tobey/Slater
Basic Math IBM 618 Mac 619
Beginning Algebra IBM 620 Mac 621
Intermediate Alg IBM 622 Mac 623
World Geography & US History
IBM and Macintosh.....610
PROJECTED LEARNING PROGRAMS
Reseller Letter of Agreement Oct 93 597
Rauch Ron
Mexico 518
RICK PAGE & ASSOCIATES
Advertising Service Agreement
January 1996 712
SANFORD Norm
Promissory Note 503 624
Addendum Contract to #360
Buy out 716-1 716-2
SCANTRON
License Agreement OT 93 592
SKILLS BANK CORPORATION
License Agreement... 657
Amendment #1 To License Agreement 657-1
SMARTSTUFF SOFTWARE
Non Disclosure...656
SEABYTE Educational Consultants
Distribution Agreement 588
SMITH Arnold
Tycho Software Work for Hire gr edit 531
TRADEMARK
OT 676
TIMMONS, Anne
Work for Hire DC Heath 694
VISUAL TOUCH AMERICA
Larry Bergman Non Disclosure 577
WICAT SYSTEMS/JOSTENS
Letter of intent - addendum 491
Non exclusive distribution of Can
Non Disclosure 496
Jostens Addendum buy out 491-1
<PAGE>
WORLD BOOK
Agreement dated 4-27-95 678
<PAGE>
[LETTERHEAD OF INTERNATIONAL PUBLISHING SERVICES, INC.]
-------------------------------------------------------
Classroom Assessment Software and Instructional Management Systems
IPS Publishing, Inc.
Consumer Products
dealer discount structure
11/06/95
Except for the following list, all authorized Exam in a Can resellers receive a
standard 40% discount from the suggested (US currency) list price.
* Addison-Wesley, Canada -- 50% discount from list price.
Cambridge Development Laboratories -- 50% discount from list price.
IBM Eduquest -- 55% discount from list price.
* Interware, Ltd. -- 58% discount from list price.
* SeaByte Educational Consultants -- 45% discount from list price.
* Sigma Software -- 50% discount from list price.
* International Dealers
<PAGE>
Unfinished Contracts
<TABLE>
<CAPTION>
Publisher Contract # Book (Project) Platform Work completed Work required
<S> <C> <C> <C> <C> <C>
Addison-Wesley 717 Billstein DOS matrix, all ch printouts make any revisions
College Problem Solving to publisher build disks/QC/deliver disks
ipsTest
718 MAC none pickup algorithms
build disks/QC/deliver disks
720 Angel/Porter DOS Ch 1 & 2 matrix and pickup algorithms and static,
Survey of Math printouts to publisher send chapters to author
ipsTest build disks/QC/deliver disks
719 MAC none pick up algorithms and static,
build disks/QC/deliver disks
Glencoe 729 Algebra 1 DOS algorithms approved static being reviewed
ipsTest some static sent for review building disks/QC/deliver disks
MAC none pick up algorithms and static,
build disks/QC/deliver disks
730 Algebra 2 DOS matrix algorithms being reviewed
ipsTest submit and keyboard static items
build disks/QC/deliver disks
</TABLE>
Page 1
<PAGE>
Unfinished Contracts
<TABLE>
<CAPTION>
Publisher Book (Project) Platform Work completed Work required
<S> <C> <C> <C> <C> <C>
McGraw Hill 725 Math 7 WIN algorithms authored send chapters for approval
Ryerson OT make revisions
build disks/QC/deliver disks
725 Math 8 WIN none author algorithms
OT send chapters for approval
make revisions
build disks/QC/deliver disks
725 Math 9 WIN none author algorithms
OT send chapters for approval
make revisions
build disks/QC/deliver disks
Prentice Hall 726 Martin-Gay DOS matrix, Chapter printouts approval from author,
College Beginning Algebra make revisions
ipsTest build disks/QC/deliver disks
727 MAC none pickup algorithms
build disks/QC/deliver disks
726 WIN none convert algorithms to Windows
build disks/QC/deliver disks
Worth Publish- dated 6-11-96 Rood and Schell WIN none need contract signed - matrix,
ing ipsTest not signed College Algebra author algorithms, send chapter
printouts
build disks/QC/deliver disks
MAC none pickup algorithms
build disks/QC/deliver disks
</TABLE>
Page 2
<PAGE>
Unfinished Contracts
<TABLE>
<CAPTION>
Publisher Book (Project) Platform Work completed Work required
<S> <C> <C> <C> <C> <C>
IBM SCR950585 Development WIN design, coding, delivery Final Testing
testing
IBM SCR950366 ITBS/SAT/TAAS/ WIN keyboarding author algorithms/complete key
CTBS boarding static/build/QC/deliver
</TABLE>
Page 3
<PAGE>
Source Code License Agreement between Datapak Software, Inc. and
Seller dated July 25, 1996.
Reseller Agreement dated March 19, 1996 by and between Seller and
GW International.
Reseller Agreement dated November 2, 1993 by and between Seller and Software
Express.
Reseller Agreement dated January 25, 1996 by and between Seller and Heartsoft.
Letter of Agreement dated October 11, 1993 by and between Seller and
Projected Learning Programs, Inc.
Reseller Agreement dated December 29, 1993 by and between Seller and the
Computer CenterLine.
Equation Editor License Agreement between Seller and Design Science, Inc.
dated November, 1994.
License Agreement for Instalit between Seller and Helpful Programs, Inc.
License Agreement between Seller and Abacus-NCS dated September 6, 1995.
License Agreement dated January 18, 1995 between Seller and PharLap Software,
Inc.
License Agreement dated November 3, 1994 between Seller and Data Pack Software,
Inc.
<PAGE>
Exhibit 3.2(d)
ESCROW AGREEMENT
----------------
THIS ESCROW AGREEMENT is made and entered into as of the date set
forth on the signature page hereto by and among SEATTLE FIRST NATIONAL BANK, a
banking corporation organized under the laws of the United States (the "Escrow
Agent"), IPS PUBLISHING, INC. (f/k/a IPS ACQUISITION, INC.), a Washington
corporation (the "Purchaser"), and ________________________ (f/k/a IPS
Publishing, Inc.) (the "Seller").
BACKGROUND:
As of the date hereof, under the terms of an Asset Purchase Agreement
(the "Purchase Agreement") dated as of ___________, 19__, the Purchaser has
acquired substantially all of the assets and business of the Seller, and each
party has changed its corporate name. Under the terms of the Purchase
Agreement, the Seller was given the right to defer payment of a portion of the
purchase price to be held by the Escrow Agent and paid to the Seller in
accordance with the terms of this Agreement. The Seller has elected to defer
payment of the sum of $_____________, and the parties desire to set forth herein
their agreement with respect to the payment of such amount to Seller together
with certain supplemental payments as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Escrow Deposit.
1.1. Escrow Deposit. The Seller has directed the Purchaser to
deliver the sum of $___________ to the Escrow Agent to be held by the Escrow
Agent under the terms of this Escrow Agreement. The Escrow Agent hereby
acknowledges receipt of such amount and agrees to hold such amount pursuant to
the terms hereof. The amount deposited for the Seller hereunder is referred to
herein as the "Cash Amount."
1.2. Escrow Fund. The escrow fund (the "Escrow Fund") shall consist
of the following, whether now or hereafter acquired, together, in each case,
with the proceeds thereof: (a) the Cash Amount; and (b) the investments in
which the Escrow Agent may invest the Cash Amount hereunder.
1.3. Earnings. Interest and other income, if any, resulting from the
investment of the Escrow Fund shall inure to the Purchaser, shall not become
part of the Escrow Fund and shall be distributed to the Purchaser as and when
requested by the Purchaser.
<PAGE>
2. Escrow Agent Provisions.
2.1. Investments. The Escrow Agent shall hold and safeguard the
Escrow Fund, shall treat such fund as a trust fund in accordance with the terms
of this Escrow Agreement and shall invest and reinvest the Escrow Fund, as
directed by the Purchaser in: (i) bankers acceptances and bank certificates of
deposit (if issued by a bank organized under the laws of the United States or
any State within the United States); (ii) marketable commercial paper maturing
within one year and rated "Single A" or higher by either Standard & Poor's
Corporation or Moody's Investor Services, Inc.; (iii) marketable obligations
issued or guaranteed by the United States government or any agency thereof; (iv)
municipal bonds rated, or having an underlying credit rating of "Single A" or
higher by either Standard & Poor's Corporation or Moody's Investor Services,
Inc.; and/or (v) repurchase agreements for underlying securities of the type
described in clause (iii), hereof and entered into with any bank meeting the
qualifications of clause (i), hereof. The Escrow Agent shall provide the
Purchaser with statements of earnings as reasonably requested by the Purchaser.
2.2. Fees and Expenses. The Escrow Agent shall be entitled to charge
its reasonable and customary fees in connection with its services as Escrow
Agent hereunder, and such fees shall be paid by the Purchaser.
2.3. Exculpation. The duties and obligations of the Escrow Agent
shall be determined solely by the express provisions of this Escrow Agreement,
and the Escrow Agent shall not be liable except for the performance of such
duties and obligations as are specifically set forth in this Escrow Agreement.
The Escrow Agent shall not be responsible in any manner whatsoever for any
failure or inability of any party to the Purchase Agreement to perform or comply
with any of the provisions of the Purchase Agreement or this Escrow Agreement.
2.4. Indemnification. The Purchaser and the Seller will reimburse
and indemnify the Escrow Agent for, and hold the Escrow Agent harmless against,
any loss, liability or expense, including, but not limited to, reasonable
attorneys' fees, incurred without bad faith or willful misconduct on the part of
the Escrow Agent arising out of or in connection with the acceptance or
performance of its duties and obligations under this Escrow Agreement as well as
the reasonable costs and expenses (including, without limitation, attorneys'
fees) of defending against any claims or liabilities arising out of or relating
to this Escrow Agreement. The Escrow Agent shall be
2
<PAGE>
fully protected in acting in reliance upon any written notice, direction,
request, waiver, consent, receipt or other paper or document which the Escrow
Agent in good faith believes to be genuine and duly authorized and to have been
signed and presented by the proper party or parties. The Escrow Agent shall not
be liable for any error of judgment, or for any action taken or omitted by the
Escrow Agent in good faith, or for any mistake in fact or law, or for anything
which the Escrow Agent may do or refrain from doing in connection with this
Escrow Agreement, except for its own willful misconduct or negligence. The
Escrow Agent may (at the expense of the Purchaser) seek the advice of legal
counsel in the event of any dispute or question as to the construction of any of
the provisions of this Escrow Agreement or its duties hereunder, and the Escrow
Agent shall incur no liability and shall be fully protected with respect to any
action taken, omitted, or suffered by the Escrow Agent in good faith and in
accordance with the opinion of such counsel.
2.5. Resignation. The Escrow Agent shall have the right to resign at
any time on thirty (30) days prior written notice thereof to the Purchaser and
the Seller. In the event of any such resignation, the Purchaser and the Seller
shall agree upon a successor Escrow Agent and, in the event that the Purchaser
and the Seller shall fail or refuse to so agree, the Escrow Agent may appoint a
successor. Any successor Escrow Agent shall have, from and after appointment as
successor hereunder, all of the titles, interests, duties and powers, including
discretionary rights, powers and immunities, which are by the provisions of this
Escrow Agreement granted to and vested in the Escrow Agent named in this Escrow
Agreement. Upon such resignation, all obligations of the Escrow Agent so
succeeded shall terminate.
3. Payments.
3.1. Withdrawals by the Purchaser. Subject to the Purchaser's
obligation to redeliver the amounts so withdrawn as set forth below, to fund the
Purchaser's working capital requirements, the Purchaser may, from time to time,
withdraw, redeliver and rewithdraw portions of the Cash Amount, provided the
aggregate portion of the Cash Amount which the Purchaser has so withdrawn and
which the Purchaser has not redelivered shall at no time exceed Four Hundred
Thousand Dollars ($400,000.00). To make a withdrawal of any portion of the Cash
Amount hereunder, the Purchaser shall give a written notice to the Escrow Agent
specifying the portion of the Cash Amount which the Purchaser wishes to withdraw
and the account to which the Escrow Agent is to wire transfer the portion of the
Cash Amount to be withdrawn. Simultaneously with the delivery of any such
notice to the Escrow
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Agent, the Purchaser shall deliver a copy of such notice to the Seller. Ten
(10) banking days after the Escrow Agent receives any such notice from the
Purchaser, the Escrow Agent shall pay the portion of the Cash Amount requested
by the Purchaser in immediately available funds by wire transfer to such account
as the Purchaser has specified in its written notice. If the Seller shall give
written notice to the Escrow Agent under Section 3.2, hereof, and if the amount
to be withdrawn by the Seller pursuant to such notice is greater than the Cash
Amount then on deposit with the Escrow Agent hereunder by virtue of withdrawals
made by the Purchaser pursuant to this Section 3.1, the Escrow Agent shall
immediately provide written notice to the Purchaser of the deficiency resulting
from the Seller's request for withdrawal (with a copy of said notice being sent
to the Seller). The Purchaser shall, within thirty (30) days of receiving a
copy of such notice, redeliver to the Escrow Agent so much of the Cash Amount
then withdrawn by the Purchaser under this Section 3.1 as may be necessary to
enable the Seller to make its desired withdrawal. In any case, on or before
January 2, 1998, the Purchaser shall redeliver to the Escrow Agent all portions
of the Cash Amount withdrawn by the Purchaser hereunder.
3.2. Withdrawals by the Seller. Not more frequently than once in
each calendar quarter, the Seller may at any time withdraw all or any part of
the Cash Amount. To make such a withdrawal, the Seller shall give written
notice to the Escrow Agent specifying the amount which the Seller wishes to
withdraw and the account to which the Escrow Agent is to wire transfer the
amount to be withdrawn. Simultaneously with the delivery of any such notice to
the Escrow Agent, the Seller shall deliver a copy of such notice to the
Purchaser. Ten (10) banking days after the Escrow Agent receives any such
notice from the Seller, the Escrow Agent shall pay the withdrawal amount
requested by the Seller in immediately available funds by wire transfer to such
account as the Seller has specified in its written withdrawal notice. The
foregoing notwithstanding, if the amount to be withdrawn by the Seller pursuant
to any notice given under this Section 3.2 is greater than the Cash Amount then
on deposit with the Escrow Agent hereunder by virtue of withdrawals made by the
Purchaser pursuant to Section 3.1, hereof, then the Escrow Agent shall pay to
the Seller in immediately available funds by wire transfer to such account as
the Seller has specified in its written withdrawal notice: (i) within ten (10)
banking days after the Escrow Agent receives the notice in question from the
Seller, the entire Cash Amount then on deposit hereunder; and (ii) when the
Purchaser redelivers the portion of the Cash Amount necessary to make such
payment, the balance of the withdrawal amount requested by the Seller. Upon any
payment of any portion of the Cash Amount to the Seller by the Escrow Agent
under this Section 3.2,
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the Purchaser shall simultaneously pay to the Seller in immediately available
funds by wire transfer to such account as the Seller has designated in its
written withdrawal notice interest on the amount so paid to the Seller
calculated at the rate of 10% per annum from the date hereof through the date
such amount is paid to the Seller by the Escrow Agent hereunder.
3.3. Final Payment. If the Seller has not withdrawn the full Cash
Amount pursuant to Section 3.1, hereof, before January 2, 1998, on January 2,
1998, the Escrow Agent shall pay to the Seller in immediately available funds by
wire transfer to such account as the Seller may specify in writing any portion
of the Cash Amount not previously withdrawn by the Seller (the Seller's
"Balance"). Upon payment by the Escrow Agent of the Seller's Balance to the
Seller, the Purchaser shall simultaneously pay to the Seller in immediately
available funds by wire transfer to such account as the Seller may designate in
writing the greater of: (i) interest on the Seller's Balance calculated at the
rate of 10% per annum from the date hereof through January 2, 1998; or (ii) if
Advantage Learning Systems, Inc. ("ALS") has closed an Initial Public Offering
(as defined below) of its common stock before December 1, 1997, an amount equal
to the ALS Appreciation Factor (as defined below) times the Seller's Balance.
For purposes hereof, an "Initial Public Offering" by ALS shall mean the offer
and sale of the common stock of ALS under Section 5 of the Securities Act of
1933, as amended, by a registered broker/dealer in a so-called "firm commitment
underwriting," provided ALS has more than 300 registered shareholders after such
sale. For purposes hereof, the "ALS Appreciation Factor" shall equal: (i) the
ALS Share Price (as defined below) minus the ALS IPO Price divided by (ii) the
ALS IPO Price. For purposes hereof, the "ALS IPO Price" shall be the per share
price at which ALS common stock is issued in the ALS Initial Public Offering,
and the "ALS Share Price" shall mean the arithmetic mean (rounded to two decimal
places) of the closing prices (or the closing bids) for shares of the ALS common
stock on the principal exchange (or market) therefor as reported in The Wall
Street Journal or other recognized reference source reasonably selected by the
Purchaser for the 15 trading days preceding January 2, 1998. If ALS has closed
an Initial Public Offering of its common stock before December 1, 1997, then on
January 2, 1998, the Purchaser shall provide to the Seller a written calculation
of the ALS Appreciation Factor together with supporting documentation, and the
Escrow Agent shall have no responsibility for determining the ALS Appreciation
Factor or for forwarding interest or the ALS Appreciation Factor as contemplated
above.
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3.4. Interest. Any amount not paid by the Purchaser to Seller when
due hereunder shall bear interest at the rate of fifteen percent (15%) per annum
from the date due until paid in full.
4. Miscellaneous.
4.1. Right of Setoff. The Purchaser hereby acknowledges that the
Seller's rights to payments hereunder are absolute and unconditional, and that
the Purchaser shall not have any right of setoff against the Escrow Fund. The
Purchaser therefore hereby agrees not to take or attempt to take any action, or
exercise any right of setoff, against the Escrow Fund.
4.2. Attorney's Fees. In the event suit or action is instituted to
enforce any of the terms of this Agreement, the prevailing party shall be
entitled to recover from the other party such sum as the court may judge as
reasonable attorneys' fees, including any fees incurred at trial or on appeal of
such suit or action or in any bankruptcy or insolvency proceedings.
4.3. Nonliability for Defaults of Escrow Agent. The Seller
acknowledges that Purchaser shall have no liability for any act, omission or
default by the Escrow Agent in performing its obligations hereunder or for any
loss on any investments of the Escrow Fund and agrees not to assert any claims
against Purchaser with respect to any such matters.
4.4. Governing Law. The parties hereto agree that all terms and
conditions of this Escrow Agreement shall be governed by, construed and enforced
in accordance with the laws of the State of Washington, without giving effect to
any choice of law or conflict provision or rule that would cause the application
of the laws of any jurisdiction other than the State of Washington.
4.5. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when hand delivered, including, without limitation, by courier or
overnight delivery service, or when sent by facsimile (transmission confirmed),
or two (2) days after being mailed, certified or registered mail, with postage
prepaid addressed as follows (or to such other person or address as the party to
receive such notice may have designated from time to time by notice in writing
pursuant hereto):
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If to the Seller: c/o IPS Publishing, Inc.
12606 N.E. 95th Street
C-110 Vancouver, WA 98682
Fax: (360) 944-9156
If to the Purchaser: c/o Terrance D. Paul
Advantage Learning Systems, Inc.
P.O. Box 8036
Wisconsin Rapids, WI 54495-0036
Fax: 715-424-4242
If to the Escrow
Agent: ______________________
______________________
______________________
______________________
Fax: ________________
4.6. Headings. The headings to Articles and Sections of this Escrow
Agreement are for reference only and shall not be used in construing the
provisions hereof or otherwise affect the meaning hereof.
4.7. Counterparts. This Escrow Agreement may be executed in two or
more counterparts, each of which shall be an original but all of which shall
constitute but one and the same agreement and shall become binding upon the
parties when each party hereto has executed one or more counterparts.
4.8. Entire Agreement. This Escrow Agreement embodies the entire
agreement and understanding between the Seller, the Purchaser and the Escrow
Agent, and supersedes all prior agreements and understandings related to the
subject matter hereof. There are no representations, warranties, covenants,
promises or agreements on the part of any party to any other party hereto which
are not explicitly set forth herein.
4.9. Modifications, Waivers. Any modification or amendment of or
with respect to any provisions of this Escrow Agreement shall not be effective
unless it shall be in writing and signed by the Seller, the Purchaser and the
then current Escrow Agent, and shall designate specifically the terms and
provisions so modified. Any waiver of or with respect to any provisions of this
Escrow Agreement shall not be effective unless it shall be in writing and signed
by the party against whom it is sought to be enforced.
4.10. Benefit; Assignment . This Escrow Agreement shall be binding
upon and inure to the benefit of the Seller, the
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Purchaser and the Escrow Agent and their respective successors and permitted
assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the _____ day of July, 1996.
ESCROW AGENT:
___________________________________
By: _______________________________
(Title)
PURCHASER:
IPS PUBLISHING, INC.
By: _______________________________
Terrance D. Paul, President
SELLER:
___________________________________
By: ______________________________
Timothy P. Welch, President
GUARANTY
--------
The undersigned hereby guaranty timely payment and performance by the
Purchaser of all of its obligations under the foregoing Escrow Agreement, and
agree to pay when due any amount not timely paid by the Purchaser thereunder and
to cause the Purchaser to timely comply with and perform each of its
undertakings and agreements set forth therein.
___________________________________
Terrance D. Paul
___________________________________
Judith A. Paul
Date: July __, 1996
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Exhibit 10.7
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the date set forth below
by and between IPS PUBLISHING, INC., a Washington corporation (the "Company"),
and TIMOTHY WELCH (the "Executive").
BACKGROUND:
As of the date hereof, under the terms of an Asset Purchase Agreement
dated as of August ____, 1996 (the "Purchase Agreement"), the Company (formerly
known as IPS Acquisition, Inc.) has acquired substantially all of the assets and
business of IPS Publishing, Inc. ("OldCo"), and has changed its name to "IPS
Publishing, Inc." Executive was the principal shareholder and Chief Executive
Officer of OldCo and the Company and the Executive desire to provide for
Executive's continued employment by the Company.
NOW, THEREFORE, the Company and the Executive, in consideration of the
foregoing and the mutual promises herein-after set forth, promise and agree as
follows:
ARTICLE I
General Terms of Employment
---------------------------
1.1. General Duties. During the term hereof, the Company shall employ
Executive and the Executive shall serve the Company in the capacity of Chief
Executive Officer. In such capacity, subject to the supervision and control of
the Company's Chairman, the Executive shall perform such duties and render such
services consistent with his experience and previous duties with OldCo as the
Company's Chairman may determine after consultation with Executive.
1.2. Fulltime Duties. During the Executive's employment hereunder, the
Executive shall devote his best efforts on a full-time basis to the business and
affairs of the Company and shall not, without the prior approval of the
Company's Chairman, directly or indirectly, engage in outside business
activities in such a manner as to interfere with his performance of services for
the Company. The Company hereby acknowledges that the Executive is involved with
Curriculum Technologies, Inc. and agrees that Executive may provide services to
Curriculum Technologies, Inc. at home, on weekends and evenings, without
interfering with his duties hereunder.
<PAGE>
1.3. Board of Directors. For so long as he is employed hereunder, the
Executive shall, subject to election by such corporation's shareholders, serve
as a member of the Company's Board of Directors and as a member of the Board of
Directors of the Company's affiliate, Advantage Learning Systems, Inc.
ARTICLE II
Compensation; Employee Benefits
-------------------------------
2.1. Salary. The Company shall pay Executive an initial salary of One
Hundred Twenty-Five Thousand Dollars ($125,000.00) per year. Executive's salary
will be reviewed annually and may be increased (but not decreased) over such
initial annual salary from time to time in the sole discretion of the Company's
Board of Directors. Executive's salary shall be paid to him in equal
installments at such intervals as other executive employees of the Company
receive payment for their employment services.
2.2. Incentive Plans. In addition to the salary set forth in Section
2.1, above, Executive shall also be entitled to received deferred compensation
under the phantom stock plans adopted by the Company affiliates, Advantage
Learning Systems, Inc. and Institute for Academic Excellence, Inc., in
accordance with the terms of such plans. Effective as of the date hereof,
Executive shall be awarded 25 shares and effective as of January 1, 1997
Executive shall be awarded an additional 25 shares of "phantom stock" under the
terms of each of such plans. Executive's rights to deferred compensation under
such plans shall be as provided in such plans and subject to the terms and
conditions thereof. In addition, if and when the Company and its affiliates are
merged and an initial public offering completed, the Company, or its successor,
shall cause the Executive to participate in such stock based incentive plans as
the Company, or its successor, may adopt from time to time on a basis comparable
to executives of the Company, or its successor, having similar responsibilities.
2.3. Expenses. During the Executive's employment hereunder, the
Company shall pay or reimburse the Executive for all reasonable out-of-pocket
expenses incurred by the Executive in connection with rendering services
hereunder, including, without limitation, reasonable out-of-pocket travel, meal
and lodging expenses incurred by the Executive in connection with overnight
travel on Company business, cellular and other telephone expenses incurred in
connection with the business of the Company and, subject to approval in advance
by the Company's
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Chairman, entertainment expenses. The Executive shall be required to submit an
itemized account of such expenditures and such proof thereof as the Company
customarily requires of its executive employees generally. In addition, through
December, 1996, the Company shall make the monthly lease payments of $648.18
each on the Ford Explorer currently utilized by Executive. Executive shall
reimburse the Company for the reasonable costs of Executive's personal use
thereof as agreed to from time to time by Executive and the Company.
2.4. Vacation. Executive shall be entitled to six (6) weeks of
vacation per year or such greater amount as the Board of Directors of the
Company may from time to time establish. Vacation time shall be noncumulative,
but Executive shall be entitled to reimbursement for vacation time not taken in
any year in accordance with the vacation reimbursement policies from time to
time established by the Company for its employees generally, provided Executive
shall not be reimbursed for more than four (4) weeks of unused vacation with
respect to any year.
2.5. Other Benefits. In addition to the benefits expressly set forth
herein, Executive shall also be entitled during the term hereof to receive such
other fringe benefits and to participate in such benefit programs as the Company
may from time to time determine to make available to its executive employees
generally, including, but not limited to, health insurance, life insurance and
401(k) plan participation to the extent offered by the Company. Executive
acknowledges that he shall have no vested rights under any such benefit programs
except as expressly provided by the terms thereof and that such programs may be
terminated or enhanced at any time without obligation to Executive.
ARTICLE III
Termination of Employment
-------------------------
3.1. Term. Unless otherwise terminated as provided in Section 3.2,
hereof, the Executive's employment shall commence as of the date hereof and
shall continue for a period of two (2) years. Thereafter, either the Company or
the Executive may terminate the Executive's employment hereunder at any time by
thirty (30) days' prior written notice to the other.
3.2. Causes for Termination. Notwithstanding the term set forth in
Section 3.1, above, the Executive's employment hereunder shall terminate upon
the occurrence of any of the following events:
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3.2.1. Upon the Executive's death.
3.2.2. At the option of the Company upon notice to the Executive in
the event of the Executive's disability. For purposes hereof, the Executive
shall be considered to be disabled if he has been, or if it is apparent to a
reasonable degree of medical certainty that he will be, unable to perform the
regular duties of his employment hereunder for a continuous period of sixty (60)
days by reason of physical or mental illness or incapacity. If there is any
dispute as to whether the Executive is or was disabled, such question shall be
submitted to a licensed physician reasonably designated by the Company and the
determination of such physician shall be conclusive. The Executive shall submit
to such examinations and provide such information as any such physician may
request.
3.2.3. By the Company forthwith upon notice to the Executive, if the
Executive shall commit any act or omission constituting "Cause" for the
termination of his employment. For purposes hereof, the Company shall be deemed
to have "Cause" for the termination of the Executive's employment if the
Executive should: (i) breach any provision of this Agreement and fail to cure
such breach within ten (10) days after written notice to Executive from the
Company; (ii) commit any act of dishonesty or disloyalty involving the Company;
(iii) or commit any act or omission which, in the reasonable judgment of the
Company's Board of Directors, is likely to have a material adverse effect upon
the business or reputation of the Executive or the Company.
3.3. Consequences of Termination. Except as provided in Section 3.4,
in the event of the termination of Executive's employment, the Company's sole
obligation shall be to pay to Executive (or his estate) his salary at the annual
rate then in effect prorated through the date of termination.
3.4. Additional Voluntary Termination. Section 3.1, hereof,
notwithstanding: (i) the Executive may, at any time, terminate the Executive's
employment hereunder upon thirty (30) days' prior written notice to the Company
if the Company moves its headquarters from the Vancouver, Washington area; and
(ii) the Company may, at any time, terminate the Executive's employment
hereunder upon thirty (30) days' prior written notice to the Executive; provided
that, if any such termination occurs before that date six (6) months after the
date hereof the Company shall continue until that date six (6) months after the
date hereof to: (i) pay the Executive when and as the same would otherwise have
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<PAGE>
been payable hereunder, his salary at the annual rate then in effect; and (ii)
provide the Executive when and as the same would otherwise have been provided
hereunder, the health and life insurance benefits specified in Section 2.5,
hereof.
3.5. Benefits. In addition to any other payments set forth in this
Article III to which the Executive may be entitled upon termination of his
employment, the Executive shall also be entitled to receive upon or following
the termination of his employment any payments, benefits or rights due or
exercisable by him under any life or disability policies, 401(k) or phantom
stock plans or other benefit programs or incentive compensation plans
established by the Company and in which the Executive is a participant at the
time of his termination and in accordance with the terms of such plans.
ARTICLE IV
Covenant Not to Compete; Confidentiality
----------------------------------------
4.1. Noncompetition. Executive agrees that he shall not, without the
prior written consent of the Company, at any time while he is employed by the
Company or at any time during the period of two (2) years following the
termination of his employment for any reason, either directly or indirectly, as
employee, consultant, representative, trustee, partner, owner, proprietor or
otherwise: (i) acquire an interest in, work for, render advice or assistance to
or otherwise participate or engage in the business of, any "Competing Business"
(as defined below); (ii) divert or attempt to divert any business from, or
persuade or attempt to persuade, any Customer (as defined below) not to do
business with the Company; or (iii) induce or attempt to induce any employee of
or consultant engaged by the Company or any of its Affiliates (as defined below)
to leave the employ of the Company or any of its Affiliates or in any way
interfere with the relationship between the Company or any of its Affiliates and
any employee or consultant thereof. Notwithstanding the foregoing: (i) nothing
herein shall prevent the Executive from acquiring for investment up to one
percent (1%) of the outstanding shares of any Competing Business provided that
he does not render advice or assistance to such entity; and (ii) the Company
acknowledges that the Executive's engagement in business ventures relating to CD
roms for Classic Comics and software for non-native English speakers and his
services on the Board of Directors of Assessment Training Institute will not be
considered to be in violation of the restrictions set forth in this Section 4.1.
For purposes hereof, the term "Competing Business" shall mean any business which
is engaged in the development, sale, licensing, use and/or publication of any
software or other products of the type sold or
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<PAGE>
licensed by the Company or any of its Affiliates while Executive is employed by
the Company or, in the case of the termination of his employment, during the six
(6) month period prior to such termination, including any software designed to
teach, assess or improve reading skills and any software, algorithms and/or
authoring tools designed to create mathematics and/or science problems or tests
and/or useful for mathematics and/or science performance assessment or
instruction, or otherwise to teach, develop or improve mathematics and/or
science knowledge and skills. For purposes hereof, a "Customer" shall mean,
while Executive is employed by the Company, any person who has been an actual or
potential customer of the Company or any of its Affiliates and, in the case of
the termination of Executive's employment, any person who has been a customer of
the Company or any of its Affiliates within the period of six months prior to
the termination of Executive's employment or a potential customer with whom the
Company or any of its Affiliates has engaged in negotiations within such six
month period. For purposes hereof, "Affiliate" of the Company shall mean any
corporation or other entity which directly or indirectly through one or more
subsidiaries or other intermediaries is controlled by, is under common control
with or which controls the Company. For purposes hereof, the term "control"
shall mean, in the case of a corporation, ownership of 50% or more of the shares
of such corporation which have the power to elect a majority of the Board of
Directors or, in the case of any other entity, the power to direct the affairs
of such corporation or to elect a majority of the persons having such power. As
of the date hereof, the Affiliates of the Company include Advantage Learning
Systems, Inc., a Wisconsin corporation, and Institute for Academic Excellence,
Inc,. a Wisconsin corporation.
4.2. Confidentiality and Assignment of Rights. Simultaneously with the
execution hereof, Executive shall execute and deliver to the Company a
Confidential Information and Business Ideas Assignment Agreement (the
"Confidentiality Agreement") in the form attached hereto, the terms of which are
hereby incorporated by reference.
EXECUTIVE ACKNOWLEDGES AND REPRESENTS THAT THE SCOPE OF THE RESTRICTIONS IN
SECTIONS 4.1 AND 4.2 HEREOF, INCLUDING THE RESTRICTIONS SET FORTH IN THE
CONFIDENTIALITY AGREEMENT, ARE APPROPRIATE, NECESSARY AND REASONABLE FOR THE
PROTECTION OF THE BUSINESS, GOODWILL AND PROPERTY RIGHTS OF THE COMPANY AND THE
COMPANY AND WILL NOT PREVENT EXECUTIVE FROM EARNING A LIVING IN THE EVENT OF,
AND AFTER, TERMINATION OF HIS EMPLOYMENT BY THE COMPANY.
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<PAGE>
4.3. Injunction. Executive recognizes that irreparable and
incalculable injury may result to Company, its business and property, in the
event of a breach by him of any of the restrictions imposed by this Article IV
and agrees that if he shall engage in any acts in violation of the provisions
hereof, Company shall be entitled, in addition to such other remedies and
damages as may be available, to an injunction prohibiting him from engaging in
such acts.
4.4. Subsequent Employment. In the event of the expiration or
termination of Executive's employment with the Company, Executive agrees, prior
to the commencement of any new employment, to advise any new employer who is or
subsequently becomes a Competing Business of the terms of this Agreement and the
Confidentiality Agreement and to furnish such new employer with a copy of such
agreements. Executive further agrees that the Company may furnish copies of this
Agreement and the Confidentiality Agreement to any such new employer.
ARTICLE V
Miscellaneous
-------------
5.1. Withholding Taxes. The Company shall deduct from all payments to
the Executive under this Agreement any federal, state or local withholding or
other taxes or charges which the Company is from time to time required to deduct
under applicable law, and all amounts payable to the Executive hereunder are
stated herein before any such deductions.
5.2. Notices. Any notice required or permitted to be given or made by
either party to the other hereunder shall be sufficient if hand delivered,
mailed postage prepaid, sent by prepaid express or courier service or sent by
facsimile transmission and actually received to the parties at their respective
addresses set forth opposite the signatures hereto or to such changed address as
either party shall designate by proper notice to the other.
5.3. Waiver of Breach. The waiver by the Company of the breach of any
provisions of this Agreement or the Confidentiality Agreement by the Executive
shall not be deemed a waiver by the Company of any subsequent breach.
5.4. Assignment. The Company may not assign this Agreement without the
written consent of the Executive, except that if the Company shall liquidate,
merge, or consolidate with or into, or transfer substantially all of its assets,
including, goodwill, to another corporation or other form of business
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organization, this Agreement shall be binding upon and inure to the benefit of
the successor corporation in such liquidation, merger, consolidation or
transfer. The Executive may not assign, pledge or encumber any interest in this
Agreement or any part thereof without the prior written consent of the Company.
5.5. Governing Law. This Agreement and all questions of its
interpretation, performance, enforceability and the rights and remedies of the
parties hereto, shall be governed by and determined in accordance with the
internal laws of Washington.
5.6. Noncompetition; Confidentiality. The Executive hereby
acknowledges that he has agreed, on the terms and conditions set forth in the
Purchase Agreement, not to compete with the Company for a period of five (5)
years from the date hereof, and not to disclose proprietary or other
confidential information of the Company, and that his agreement set forth in
Article IV, hereof, and the Confidentiality Agreement are in addition to, and
not by way of limitation to, his agreements in the Purchase Agreement.
5.7. Severability. The parties agree that if any provision of this
Agreement shall under any circumstances be deemed invalid or inoperative, this
Agreement shall be construed with the invalid or inoperative provision deleted,
and the rights and obligations of the parties shall be construed and enforced
accordingly.
IN WITNESS WHEREOF, the parties have executed this Agreement as of this
_____ day of August, 1996.
Address for Notice: COMPANY:
c/o Terrance D. Paul IPS PUBLISHING, INC.
Advantage Learning
Systems, Inc.
2610 Industrial Street
P. O. Box 8036 By: _______________________________
Wisconsin Rapids, WI 54495 (Title)
fax No. 715-424-4242
Address for Notice: EXECUTIVE:
c/o IPS Publishing, Inc.
12606 N.E. 95th Street
C-110 Vancouver, WA 98682 ___________________________________
fax No. 360-944-9156 Timothy Welch
8
<PAGE>
By this Agreement you are agreeing that you will transfer to the Companies
all rights you may have or acquire in copyrights, inventions and
discoveries, protect the Companies' trade secrets and keep information
confidential. If you have questions about your obligations or rights, you
should seek independent legal advice.
CONFIDENTIAL INFORMATION AND BUSINESS IDEAS
ASSIGNMENT AGREEMENT
This Agreement is made and entered into as of the date set forth below
by the undersigned Employee of IPS PUBLISHING, INC., ADVANTAGE LEARNING SYSTEMS,
INC., INSTITUTE FOR ACADEMIC EXCELLENCE, INC. and/or their Affiliates
(collectively called herein, the "Companies"). As a condition to my employment,
I agree that:
1. Trade secrets and confidential information about the Companies'
business which may be disclosed to me or of which I may learn during the course
of my employment are not to be disclosed. One of my important duties as an
employee, and even after my employment terminates, is to use my best efforts to
safeguard the Companies' trade secrets and to keep information about the
Companies confidential. Unless I am expressly authorized to do so in writing, I
will not disclose any of the Companies' trade secrets or any confidential
information about the Companies other than to other employees of the Companies
who have a need to know such secrets or information. I will assume any
particular information about the Companies' business is confidential until I am
informed it is not or until it has been published or is generally or publicly
known outside the Companies. I understand that "confidential information",
includes, without limitation, (i) all source codes, algorithms and other
programming data and technical information relating to the Companies' software
products; (ii) any information concerning any product under development or being
tested by any of the Companies but not yet offered for sale; (iii) any
information concerning the pricing policies of the Companies, the prices charged
by any of the Companies to any customer, the volume of orders of any customer
and all other information concerning the transactions of the Companies with any
customer or proposed customer; (iv) any information concerning the marketing
programs or strategies of any of the Companies; (v) any financial information
concerning any of the Companies; and (vi) any information concerning the
salaries or wages to be paid to, the work records of or any other personnel
information relating to any employee of any of the Companies other than the
undersigned.
2. The Companies will own, and I hereby assign to the Companies, all
rights in all Business Ideas (as hereafter defined) which I originate or develop
either alone or working with others while I am employed by any of the Companies.
All Business
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<PAGE>
Ideas which are or form the basis for copyrightable works shall be considered
"works for hire" as that term is defined by U.S. Copyright Law and are hereby
assigned to the Companies.
3. While I am employed by any of the Companies and after my employment
terminates:
(a) I will promptly disclose all Business Ideas to the Companies;
and
(b) I will promptly execute all documents which any of the
Companies may reasonably require to perfect its patent, copyright and other
rights to such Business Ideas throughout the world.
4. The term "Business Ideas" as used in this Agreement means all
ideas, inventions, data, software, developments and copyrightable works, whether
or not patentable or registerable, which I originate or develop, either alone or
jointly with others while I am employed by any of the Companies and which are
either (i) related to any business known to me to be engaged in or contemplated
by any of the Companies, (ii) originated or developed during my working hours,
or (iii) originated or developed in whole or in part using materials, labor,
facilities or equipment furnished by any of the Companies. Notwithstanding the
foregoing, the term "Business Ideas" as used in this Agreement, shall not
include inventions for which no equipment, supplies, facility or trade secret
information of the Companies was used and which was developed entirely on my own
time, unless (a) the invention relates (i) directly to the business of the
Companies, or (ii) to the Companies' actual or demonstrably anticipated research
or development, or (b) the invention results from any work performed by me for
the Companies.
Nothing in this Agreement will prevent me, after my employment
terminates, from using general skills and knowledge I gained while employed by
any of the Companies.
Dated this ____ day of _______________, 19___.
_____________________________
(Employee)
The foregoing is hereby accepted as of its date.
IPS PUBLISHING, INC.
By: ___________________________
(Title)
<PAGE>
Exhibit 11.5
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the date set forth below
by and between IPS PUBLISHING, INC., a Washington corporation (the "Company"),
and KAYE NELSON (the "Executive").
BACKGROUND:
The Company (formerly known as IPS Acquisition, Inc.) has acquired
substantially all of the assets and business of IPS Publishing, Inc. ("OldCo"),
and has changed its name to "IPS Publishing, Inc." Executive has heretofore been
employed as President of OldCo and the Company and the Executive desire to
provide for Executive's continued employment by the Company on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, the Company and the Executive, in consideration of the
foregoing and the mutual promises herein-after set forth, promise and agree as
follows:
ARTICLE I
General Terms of Employment
---------------------------
1.1. General Duties. During the term hereof, the Company shall employ
Executive and Executive shall serve the Company in the capacity of President or
in such other senior executive capacity as Executive and the Company may
hereafter agree. In such capacity, Executive shall have, subject to the
direction and control of the Company's Board of Directors and Chief Executive
Officer, such responsibilities for the conduct of the daily operations and
business of the Company as may from time to time be assigned to Executive by the
Board of Directors or Chief Executive Officer.
1.2. Executive Shall Serve Company Exclusively. During Executive's
employment hereunder, Executive shall devote her entire working time and her
best efforts to the business and affairs of the Company and shall not, without
the prior approval of the Company's Board of Directors, directly or indirectly,
engage in, or provide advice or assistance to any other business enterprise,
whether or not competitive with the Company.
<PAGE>
ARTICLE II
Compensation, Expenses and Benefits
-----------------------------------
2.1. Salary. The Company shall pay Executive an initial salary of
Ninety-Eight Thousand Dollars ($98,000.00) per year. Executive's salary will be
reviewed annually and may be increased over such initial annual salary from time
to time in the sole discretion of the Company's Board of Directors. Executive's
salary shall be paid to her in equal installments at such intervals as other
executive employees of the Company receive payment for their employment
services.
2.2. Incentive Plans. In addition to the salary set forth in Section
2.1, above, Executive shall also be entitled to receive deferred compensation
under the phantom stock plans adopted by the Company's Affiliates, Advantage
Learning Systems, Inc. and Institute for Academic Excellence, Inc., in
accordance with the terms of such plans and, effective as of the date hereof,
Executive shall be awarded 20 shares of "phantom stock" under the terms of each
of such plans. Executive's right to deferred compensation under such plans shall
be as provided in such plans and subject to the terms and conditions thereof.
2.3. Expenses. The Company shall pay or reimburse Executive for all
reasonable transportation, meal, lodging and other out-of-pocket expenses
incurred by her in the course of performing her duties on behalf of the Company.
Executive shall keep accurate records and receipts of such expenditures and
shall submit such accounts and proof thereof as may from time to time be
required in accordance with such expense account or reimbursement policies as
the Company may establish for its executive employees generally.
2.4. Vacation. Executive shall be entitled to four (4) weeks of
vacation per year or such greater amount as the Board of Directors of the
Company may from time to time establish. Vacation time shall be noncumulative,
but Executive shall be entitled to reimbursement for any vacation time not taken
in any year in accordance with the vacation reimbursement policies from time to
time established by the Company for its employees generally.
2.5. Other Benefits. In addition to the benefits expressly set forth
herein, Executive shall also be entitled during the term hereof to receive such
other fringe benefits and to participate in such benefit programs as the Company
may from time to time determine to make available to its salaried employees
generally, including, but not limited to, health insurance, life insurance and
401(k) plan participation to the extent offered by the Company. Executive
acknowledges that she
2
<PAGE>
shall have no vested rights under any such benefit programs except as expressly
provided by the terms thereof and that such programs may be terminated or
enhanced at any time without obligation to Executive.
ARTICLE III
Term and Termination of Employment
----------------------------------
3.1. Term. Unless otherwise terminated as provided in Section 3.2, the
Executive's employment hereunder shall commence as of the date hereof and shall
continue for a period of two (2) years (the "Original Term"). At the expiration
of the Original Term or any renewal term hereof, the Executive's employment
hereunder shall automatically be renewed for a one (1) year period, unless
either party provides notice to the other of it's election to terminate the
Executive's employment hereunder at least Ninety (90) days prior to the
expiration of the Original Term or any renewal term.
3.2. Causes for Termination. Notwithstanding the term set forth in
Section 3.1, the Executive's employment under this Agreement shall terminate
upon the occurrence of any of the following events:
3.1.1. Upon the Executive's death.
3.1.2. At the option of the Company upon notice to the Executive
in the event of the Executive's disability. For purposes hereof, the
Executive shall be considered to be disabled if she has been, or if it is
apparent to a reasonable degree of medical certainty that she will be,
unable to perform the regular duties of her employment hereunder for a
continuous period of ninety (90) days by reason of physical or mental
illness or incapacity. If there is any dispute as to whether the Executive
is or was disabled, such question shall be submitted to a licensed
physician reasonably designated by the Company and the determination of
such physician shall be conclusive. The Executive shall submit to such
examinations and provide such information as any such physician may
request.
3.1.3. By the Company forthwith upon notice to Executive if
Executive shall commit any act or omission constituting "Cause" for the
termination of her employment. For purposes hereof, the Company shall be
deemed to have "Cause" for the termination of Executive's employment if
Executive should (i) breach any provision of this Agreement and fail to
cure breach within ten (10) days after written notice to Executive from the
Company, (ii) commit any act of dishonesty or disloyalty involving the
Company, (iii) be
3
<PAGE>
chronically absent from work other than by reason of illness, (iv) use
alcohol or drugs in such a manner as to interfere with the performance of
her duties for the Company, or (v) commit a felony or misdemeanor or other
act or omission which, in the reasonable judgment of the Company's Board of
Directors, is likely to have a material adverse effect upon the business or
reputation of Executive or the Company.
3.3. Consequences of Termination. Except as provided in Section 3.4,
in the event of the termination of Executive's employment with the Company, the
Company's sole obligation shall be to pay to Executive (or her estate) her
salary at the annual rate then in effect prorated through the date of
termination.
3.4. Additional Voluntary Terminations. Section 3.1, hereof,
notwithstanding, the Company may, at any time, terminate Executive's employment
forthwith upon thirty (30) days prior written notice to Executive; provided
that, if such termination occurs during the Original Term, the Company shall
continue to pay Executive when and as the same would otherwise have been payable
hereunder, her salary set forth in Section 2.1 hereof for a period of one year
from the effective date of termination or for the balance of the Original Term,
whichever is less.
3.5. Benefits. In addition to any other payments set forth in this
Article III to which Executive may be entitled upon termination of her
employment, Executive shall also be entitled to receive or exercise upon or
following the termination of her employment any payments, benefits or rights due
or exercisable by her under any life or disability insurance policies, 401(k) or
phantom stock plans or other benefit programs or incentive compensation plans
established by the Company and in which Executive is a participant at the time
of her termination in accordance with the terms of such plans.
ARTICLE IV
Covenant Not to Compete; Confidentiality
----------------------------------------
4.1. Noncompetition. Executive agrees that she shall not, without the
prior written consent of the Company, at any time while she is employed by the
Company or at any time during the period of two (2) years following the
termination of her employment for any reason, either directly or indirectly, as
employee, consultant, representative, trustee, partner, owner, proprietor or
otherwise: (i) acquire an interest in, work for, render advice or assistance to
or otherwise participate or engage in the business of, any "Competing Business"
(as defined below); (ii) divert or attempt to divert any business from, or
persuade or attempt to persuade, any Customer (as defined below) not to do
4
<PAGE>
business with the Company; or (iii) induce or attempt to induce any employee of
or consultant engaged by the Company or any of its Affiliates (as defined below)
to leave the employ of the Company or any of its Affiliates or in any way
interfere with the relationship between the Company or any of its Affiliates and
any employee or consultant thereof. For purposes hereof, the term "Competing
Business" shall mean any business which is engaged in the development, sale,
licensing, use and/or publication of any software or other products of the type
sold or licensed by the Company or any of its Affiliates while Executive is
employed by the Company or, in the case of the termination of her employment,
during the six (6) month period prior to such termination, including any
software designed to teach, assess or improve reading skills and any software,
algorithms and/or authoring tools designed to create mathematics and/or science
problems or tests and/or useful for mathematics and/or science performance
assessment or instruction, or otherwise to teach, develop or improve mathematics
and/or science knowledge and skills. For purposes hereof, a "Customer" shall
mean, while Executive is employed by the Company, any person who has been an
actual or potential customer of the Company or any of its Affiliates and, in the
case of the termination of Executive's employment, any person who has been a
customer of the Company or any of its Affiliates within the period of six months
prior to the termination of Executive's employment or a potential customer with
whom the Company or any of its Affiliates has engaged in negotiations within
such six month period. Notwithstanding the foregoing, nothing herein shall
prohibit Executive from working as a regular full-time employee of a textbook
publisher following the termination of her employment by the Company provided
that she perform services solely for such employer and does not, directly or
indirectly, through such employer or otherwise, write algorithms or software or
otherwise provide services for use or publication by persons other than such
employer. For purposes hereof, "Affiliate" of the Company shall mean any
corporation or other entity which directly or indirectly through one or more
subsidiaries or other intermediaries is controlled by, is under common control
with or which controls the Company. For purposes hereof, the term "control"
shall mean, in the case of a corporation, ownership of 50% or more of the shares
of such corporation which have the power to elect a majority of the Board of
Directors or, in the case of any other entity, the power to direct the affairs
of such corporation or to elect a majority of the persons having such power. As
of the date hereof, the Affiliates of the Company include Advantage Learning
Systems, Inc., a Wisconsin corporation, and Institute for Academic Excellence,
Inc,. a Wisconsin corporation.
4.2. Confidentiality and Assignment of Rights. Simultaneously with the
execution hereof, Executive shall execute and deliver to the Company a
Confidential Information and Business Ideas Assignment Agreement (the
"Confidentiality Agreement") in
5
<PAGE>
the form attached hereto, the terms of which are hereby incorporated by
reference.
EXECUTIVE ACKNOWLEDGES AND REPRESENTS THAT THE SCOPE OF THE RESTRICTIONS IN
SECTIONS 4.1 AND 4.2 HEREOF, INCLUDING THE RESTRICTIONS SET FORTH IN THE
CONFIDENTIALITY AGREEMENT, ARE APPROPRIATE, NECESSARY AND REASONABLE FOR THE
PROTECTION OF THE BUSINESS, GOODWILL AND PROPERTY RIGHTS OF THE COMPANY AND THE
COMPANY AND WILL NOT PREVENT EXECUTIVE FROM EARNING A LIVING IN THE EVENT OF,
AND AFTER, TERMINATION OF HER EMPLOYMENT BY THE COMPANY.
4.3. Injunction. Executive recognizes that irreparable and
incalculable injury may result to Company, its business and property, in the
event of a breach by her of any of the restrictions imposed by this Article IV
and agrees that if she shall engage in any acts in violation of the provisions
hereof, Company shall be entitled, in addition to such other remedies and
damages as may be available, to an injunction prohibiting her from engaging in
such acts.
4.4. Subsequent Employment. In the event of the expiration or
termination of Executive's employment with the Company, Executive agrees, prior
to the commencement of any new employment, to advise any new employer who is or
subsequently becomes a Competing Business of the terms of this Agreement and the
Confidentiality Agreement and to furnish such new employer with a copy of such
agreements. Executive further agrees that the Company may furnish copies of this
Agreement and the Confidentiality Agreement to any such new employer.
ARTICLE V
Miscellaneous
-------------
5.1. Withholding Taxes. The Company shall deduct from all payments to
the Executive under this Agreement any federal, state or local withholding or
other taxes or charges which the Company is from time to time required to deduct
under applicable law, and all amounts payable to the Executive hereunder are
stated herein before any such deductions.
5.2. Notices. Any notice required or permitted to be given or made by
either party to the other hereunder shall be sufficient if hand delivered,
mailed postage prepaid, sent by prepaid express or courier service or sent by
facsimile transmission and actually received to the parties at their respective
addresses set forth opposite the signatures hereto or to such changed address as
either party shall designate by proper notice to the other.
6
<PAGE>
5.3. Waiver of Breach. The waiver by the Company of the breach of any
provisions of this Agreement or the Confidentiality Agreement by the Executive
shall not be deemed a waiver by the Company of any subsequent breach.
5.4. Assignment. The Company may not assign this Agreement without the
written consent of the Executive, except that if the Company shall liquidate,
merge, or consolidate with or into, or transfer substantially all of its assets,
including, goodwill, to another corporation or other form of business
organization, this Agreement shall be binding upon and inure to the benefit of
the successor corporation in such liquidation, merger, consolidation or
transfer. The Executive may not assign, pledge or encumber any interest in this
Agreement or any part thereof without the prior written consent of the Company.
5.5. Definition of Affiliate. As used herein and in the
Confidentiality Agreement, an "Affiliate" of the Company shall mean a parent,
subsidiary, brother or sister corporation or other corporation or entity which
the Company controls or which is controlled by or under common control with the
Company. For purposes hereof, "control" means, in the case of a corporation,
direct or indirect ownership of more than 50% of the interest entitled to a vote
for a majority of the Board of Directors or equivalent body or, in the case of a
partnership, limited liability company or other entity, direct or indirect
ownership of the right to receive more than 50% of the profits thereof. As of
the date hereof, the Affiliates of the Company are Advantage Learning Systems,
Inc. and Institute for Academic Excellence, Inc., each of which are Wisconsin
corporations under common control with the Company.
5.6. Governing Law. This Agreement and all questions of its
interpretation, performance, enforceability and the rights and remedies of the
parties hereto, shall be governed by and determined in accordance with the
internal laws of Washington.
5.7. Severability. The parties agree that if any provision of this
Agreement shall under any circumstances be deemed invalid or inoperative, this
Agreement shall be construed with the invalid or inoperative provision deleted,
and the rights and obligations of the parties shall be construed and enforced
accordingly.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
this _____ day of August, 1996.
Address for Notice: COMPANY:
c/o Terrance D. Paul IPS PUBLISHING, INC.
Advantage Learning Systems, Inc.
2610 Industrial Street
P. O. Box 8036
Wisconsin Rapids, WI 54495-8036 By: ________________________
Fax: (715) 424-4242 (Title)
Address for Notice: EXECUTIVE:
______________________
______________________
______________________ ____________________________
Fax: _________________ Kaye Nelson
8
<PAGE>
By this Agreement you are agreeing that you will transfer to the Companies
all rights you may have or acquire in copyrights, inventions and
discoveries, protect the Companies' trade secrets and keep information
confidential. If you have questions about your obligations or rights, you
should seek independent legal advice.
CONFIDENTIAL INFORMATION AND BUSINESS IDEAS
ASSIGNMENT AGREEMENT
This Agreement is made and entered into as of the date set forth below
by the undersigned Employee of IPS PUBLISHING, INC., ADVANTAGE LEARNING SYSTEMS,
INC., INSTITUTE FOR ACADEMIC EXCELLENCE, INC. and/or their Affiliates
(collectively called herein, the "Companies"). As a condition to my employment,
I agree that:
1. Trade secrets and confidential information about the Companies'
business which may be disclosed to me or of which I may learn during the course
of my employment are not to be disclosed. One of my important duties as an
employee, and even after my employment terminates, is to use my best efforts to
safeguard the Companies' trade secrets and to keep information about the
Companies confidential. Unless I am expressly authorized to do so in writing, I
will not disclose any of the Companies' trade secrets or any confidential
information about the Companies other than to other employees of the Companies
who have a need to know such secrets or information. I will assume any
particular information about the Companies' business is confidential until I am
informed it is not or until it has been published or is generally or publicly
known outside the Companies. I understand that "confidential information",
includes, without limitation, (i) all source codes, algorithms and other pro-
gramming data and technical information relating to the Companies' software
products; (ii) any information concerning any product under development or being
tested by any of the Companies but not yet offered for sale; (iii) any
information concerning the pricing policies of the Companies, the prices charged
by any of the Companies to any customer, the volume of orders of any customer
and all other information concerning the transactions of the Companies with any
customer or proposed customer; (iv) any information concerning the marketing
programs or strategies of any of the Companies; (v) any financial information
concerning any of the Companies; and (vi) any information concerning the
salaries or wages to be paid to, the work records of or any other personnel
information relating to any employee of any of the Companies other than the
undersigned.
2. The Companies will own, and I hereby assign to the Companies, all
rights in all Business Ideas (as hereafter defined) which I originate or develop
either alone or working with others while I am employed by any of the Companies.
All Business Ideas which are or form the basis for copyrightable works shall be
considered "works for hire" as that term is
<PAGE>
defined by U.S. Copyright Law and are hereby assigned to the Companies.
3. While I am employed by any of the Companies and after my employment
terminates:
(a) I will promptly disclose all Business Ideas to the Companies;
and
(b) I will promptly execute all documents which any of the
Companies may reasonably require to perfect its patent, copyright and other
rights to such Business Ideas throughout the world.
4. The term "Business Ideas" as used in this Agreement means all
ideas, inventions, data, software, developments and copyrightable works, whether
or not patentable or registerable, which I originate or develop, either alone or
jointly with others while I am employed by any of the Companies and which are
either (i) related to any business known to me to be engaged in or contemplated
by any of the Companies, (ii) originated or developed during my working hours,
or (iii) originated or developed in whole or in part using materials, labor,
facilities or equipment furnished by any of the Companies. Notwithstanding the
foregoing, the term "Business Ideas" as used in this Agreement, shall not
include inventions for which no equipment, supplies, facility or trade secret
information of the Companies was used and which was developed entirely on my own
time, unless (a) the invention relates (i) directly to the business of the
Companies, or (ii) to the Companies' actual or demonstrably anticipated research
or development, or (b) the invention results from any work performed by me for
the Companies.
Nothing in this Agreement will prevent me, after my employment
terminates, from using general skills and knowledge I gained while employed by
any of the Companies.
Dated this ____ day of _______________, 19___.
_____________________________
(Employee)
The foregoing is hereby accepted as of its date.
IPS PUBLISHING, INC.
By: ___________________________
(Title)
2
<PAGE>
Exhibit 10.2
SUPPLEMENT
TO
ASSET PURCHASE AGREEMENT
THIS AMENDMENT TO ASSET PURCHASE AGREEMENT is made and entered into as of
the 25th day of February, 1997, by and among Advantage Learning Systems, Inc.
("ALS") as successor with respect to certain obligations of IPS Publishing, Inc.
(f/k/a IPS Acquisition, Inc.), a Washington corporation (the "Purchaser"), Welch
Publishing, Inc. (f/k/a IPS Publishing, Inc.), a Washington corporation (the
"Seller"), and Timothy P. Welch ("Welch") individually and as sole trustee of
the TIMOTHY PETER WELCH REVOCABLE TRUST dated September 4, 1992 (the "Trust").
BACKGROUND
The Purchaser, Seller, Welch and the Trust are parties to a certain Asset
Purchase Agreement dated as of August 1, 1996 (the "Asset Purchase Agreement")
pursuant to which Seller sold substantially all of its assets and business to
Purchaser. The Purchaser and Seller are also parties to a certain Escrow
Agreement dated as of August 1, 1996 (the "Escrow Agreement") pursuant to which
Seller deposited with the Escrow Agent (as defined in the Escrow Agreement)
certain proceeds from such sale. Pursuant to an Assumption Agreement dated
February 24, 1997, Purchaser's obligations under the Asset Purchase and Escrow
Agreements to make certain purchase price payments were assumed by ALS and
Purchaser was released from any obligation therefor. Under the terms of the
Purchase Agreement, the Seller was given the right to defer payment of a portion
of the Purchase Price received in connection with the sale of its assets and
business to be held by the Escrow Agent and paid to the Seller in accordance
with the terms of the Escrow Agreement. Under the current terms of the Asset
Purchase Agreement and the Escrow Agreement, the Seller is to receive on January
2, 1998, all funds previously deposited with the Escrow Agent and not previously
withdrawn by Seller (the "Escrow Funds"). In addition, on such date, Seller is
entitled to certain additional payments as described in Section 3.3 of the
Escrow Agreement (the "Additional Payments"). The parties desire to amend the
Asset Purchase Agreement to provide that in the event of an Initial Public
Offering by ALS (as defined in the Escrow Agreement), the Seller shall withdraw
all Escrow Funds from the Escrow Agent and in lieu of receiving the Additional
Payments, the Seller shall receive shares of common stock of ALS, which shares
Seller may direct to be issued to certain individuals and/or the Trust. Terms
used in this Agreement with initial capital letters which are not otherwise
defined herein shall have the meanings assigned to such terms in the Escrow
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Supplement to Asset Purchase Agreement. Subject to and conditioned
upon the closing by ALS of an Initial Public Offering (an "IPO") before December
1, 1997, the Seller shall withdraw the Escrow Funds and, in lieu of and as a
substitute for the Additional Payments and any other payments to be made by ALS
pursuant to the Escrow Agreement, the Seller agrees
<PAGE>
to accept, and ALS agrees to issue, the number of shares of common stock of ALS
set forth in Paragraph (b) below (the "ALS Shares"). The Seller agrees that,
upon the issuance of the ALS Shares as provided herein, it shall have no further
rights to or claims for payments from ALS under the Escrow Agreement, including
any rights to or claims for payment of interest or the ALS Appreciation Factor.
In order to effect the withdrawal of the Escrow Funds and the issuance of the
ALS Shares, the parties agree as follows:
(a) As soon as practicable, but in no event later than ten (10) days
after the closing of the IPO, the Seller shall give a notice of withdrawal
to the Escrow Agent in the manner set forth in Section 3.2 of the Escrow
Agreement and the parties shall take such actions as may be reasonably
required to cause the Escrow Agent to pay and distribute the remaining
balance of the Escrow Funds to the Seller. Notwithstanding the provisions
of Section 3.2 of the Escrow Agreement, no interest payments shall be made
by ALS as successor to the Purchaser upon payment of the Escrow Funds to
the Seller.
(b) Upon the closing of the IPO (but subject to reduction as provided
in Section 2, below), ALS shall deliver to the Seller or its designees as
hereafter provided that number of shares of ALS common stock determined by
dividing $500,000 by the ALS IPO Price, rounded to the nearest whole share.
(c) At the Seller's request and as an accommodation to the Seller
(but conditioned upon execution of Acceptance Agreements as provided in
Section 3), the ALS shares shall be issued to the following shareholders
and/or former employees of the Seller in the following percentages (with
any fractional shares otherwise issuable being rounded to the nearest whole
share):
Recipient of ALS Shares Percentage of ALS Shares
----------------------- ------------------------
Trust 90.61%
Kaye Nelson 6.47%
Ruth McBratney 2.91%
If, for any reason any such shareholder or employee does not execute an
Acceptance Agreement as provided in Section 3 simultaneously with the execution
hereof by the Seller, the ALS shares otherwise issuable to such person(s) shall
be issued to and registered in the name of the Seller.
2. Adjustment for Withdrawal of Escrow Funds. If the Seller withdraws any
of the Escrow Funds prior to the Closing of the IPO, the number of ALS Shares to
be issued as described in Section 1, above, shall be reduced in proportion to
the amount of Escrow Funds so withdrawn by the Seller.
3. Condition to Receipt of ALS Shares. As a condition to receiving ALS
Shares pursuant hereto, each of the Trust, Kaye Nelson and Ruth McBratney must
execute and deliver to ALS, upon execution hereof by the Seller, an Acceptance
Agreement in the form attached hereto.
2
<PAGE>
4. Initial Public Offering or Termination. In the event ALS does not
close an IPO before December 1, 1997, this Supplemental Agreement shall be null
and void and of no effect.
5. No Other Supplement. Except as specifically provided herein, the
Purchase Agreement shall remain in full force and effect without additional
supplement.
IN WITNESS WHEREOF, the parties hereto have executed this Supplement as of
the date first above written.
ADVANTAGE LEARNING SYSTEMS, INC.
(as successor to IPS Publishing, Inc.
f/k/a IPS Acquisition, Inc.)
By: /s/ Michael H. Baum
-----------------------------------------
Michael H. Baum, Chief Executive Officer
WELCH PUBLISHING, INC.
(f/k/a IPS Publishing, Inc.)
By: /s/ Timothy P. Welch
-----------------------------------------
Timothy P. Welch, Chief Executive Officer
By: /s/ Timothy P. Welch
-----------------------------------------
Timothy P. Welch
THE TIMOTHY P. WELCH REVOCABLE
TRUST dated September 4, 1992
By: /s/ Timothy P. Welch
-----------------------------------------
Timothy P. Welch, sole Trustee
3
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the date set forth below
by and between IPS PUBLISHING, INC., a Washington corporation (the "Company"),
and TIMOTHY WELCH (the "Executive").
BACKGROUND:
As of the date hereof, under the terms of an Asset Purchase
Agreement dated as of August 1, 1996 (the "Purchase Agreement"), the Company
(formerly known as IPS Acquisition, Inc.) has acquired substantially all of the
assets and business of IPS Publishing, Inc. ("OldCo"), and has changed its name
to "IPS Publishing, Inc." Executive was the principal shareholder and Chief
Executive Officer of OldCo and the Company and the Executive desire to provide
for Executive's continued employment by the Company.
NOW, THEREFORE, the Company and the Executive, in consideration of the
foregoing and the mutual promises hereinafter set forth, promise and agree as
follows:
ARTICLE I
General Terms of Employment
---------------------------
1.1. General Duties. During the terms hereof, the Company shall
employ Executive and the Executive shall serve the Company in the capacity of
Chief Executive Officer. In such capacity, subject to the supervision and
control of the Company's Chairman, the Executive shall perform such duties and
render such services consistent with his experience and previous duties with
OldCo as the Company's Chairman may determine after consultation with Executive.
1.2. Fulltime Duties. During the Executive's employment hereunder,
the Executive shall devote his best efforts on a full-time basis to the business
and affairs of the Company and shall not, without the prior approval of the
Company's Chairman, directly or indirectly, engage in outside business
activities in such a manner as to interfere with his performance of services for
the Company. The Company hereby acknowledges that the Executive is involved with
Curriculum Technologies, Inc. and agrees that Executive may provide services to
Curriculum Technologies, Inc. at home, on weekends and evenings, without
interfering with his duties hereunder.
1.3. Board of Directors. For so long as he is employed hereunder,
the Executive shall, subject to election
<PAGE>
by such corporation's shareholders, serve as a member of the Company's Board of
Directors and as a member of the Board of Directors of the Company's affiliate,
Advantage Learning Systems, Inc.
ARTICLE II
Compensation; Employee Benefits
-------------------------------
2.1. Salary. The Company shall pay Executive an initial salary of
One Hundred Twenty-Five Thousand Dollars ($125,000.00) per year. Executive's
salary will be reviewed annually and may be increased (but not decreased) over
such initial annual salary from time to time in the sole discretion of the
Company's Board of Directors. Executive's salary shall be paid to him in equal
installments at such intervals as other executive employees of the Company
receive payment for their employment services.
2.2. Incentive Plans. In addition to the salary set forth in Section
2.1, above, Executive shall also be entitled to receive deferred compensation
under the phantom stock plans adopted by the Company affiliates, Advantage
Learning Systems, Inc. and Institute for Academic Excellence, Inc., in
accordance with the terms of such plans. Effective as of the date hereof,
Executive shall be awarded 25 shares and effective as of January 1, 1997
Executive shall be awarded an additional 25 shares of "phantom stock" under the
terms of each of such plans. Executive's rights to deferred compensation under
such plans shall be as provided in such plans and subject to the terms and
conditions thereof. In addition, if and when the Company and its affiliates are
merged and an initial public offering completed, the Company, or its successor,
shall cause the Executive to participate in such stock based incentive plans as
the Company, or its successor, may adopt from time to time on a basis comparable
to executives of the Company, or its successor, having similar responsibilities.
2.3. Expenses. During the Executive's employment hereunder, the
Company shall pay or reimburse the Executive for all reasonable out-of-pocket
expenses incurred by the Executive in connection with rendering services
hereunder, including, without limitation, reasonable out-of-pocket travel, meal
and lodging expenses incurred by the Executive in connection with overnight
travel on Company business, cellular and other telephone expenses incurred in
connection with the business of the Company and, subject to approval in advance
by the Company's Chairman, entertainment expenses. The Executive shall be
required to submit an itemized account of such expenditures and
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such proof thereof as the Company customarily requires of its executive
employees generally. In addition, through December, 1996, the Company shall
make the monthly lease payments of $648.18 each on the Ford Explorer currently
utilized by Executive. Executive shall reimburse the Company for the reasonable
costs of Executive's personal use thereof as agreed to from time to time by
Executive and the Company.
2.4. Vacation. Executive shall be entitled to six (6) weeks of
vacation per year or such greater amount as the Board of Directors of the
Company may from time to time establish. Vacation time shall be noncumulative,
but Executive shall be entitled to reimbursement for vacation time not taken in
any year in accordance with the vacation reimbursement policies from time to
time established by the Company for its employees generally, provided Executive
shall not be reimbursed for more than four (4) weeks of unused vacation with
respect to any year.
2.5. Other Benefits. In addition to the benefits expressly set forth
herein, Executive shall also be entitled during the term hereof to receive such
other fringe benefits and to participate in such benefit programs as the Company
may from time to time determine to make available to its executive employees
generally, including, but not limited to, health insurance, life insurance and
401(k) plan participation to the extent offered by the Company. Executive
acknowledges that he shall have no vested rights under any such benefit programs
except as expressly provided by the terms thereof and that such programs may be
terminated or enhanced at any time without obligation to Executive.
ARTICLE III
Termination of Employment
-------------------------
3.1. Term. Unless otherwise terminated as provided in Section 3.2,
hereof, the Executive's employment shall commence as of the date hereof and
shall continue for a period of two (2) years. Thereafter, either the Company or
the Executive may terminate the Executive's employment hereunder at any time by
thirty (30) days' prior written notice to the other.
3.2. Causes for Termination. Notwithstanding the term set forth in
Section 3.1, above, the Executive's employment hereunder shall terminate upon
the occurrence of any of the following events:
3.2.1. Upon the Executive's death.
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3.2.2. At the option of the Company upon notice to the Executive
in the event of the Executive's disability. For purposes hereof, the
Executive shall be considered to be disabled if he has been, or if it is
apparent to a reasonable degree of medical certainty that he will be,
unable to perform the regular duties of his employment hereunder for a
continuous period of sixty (60) days be reason of physical or mental
illness or incapacity. If there is any dispute as to whether the Executive
is or was disabled, such question shall be submitted to a licensed
physician reasonably designated by the Company and the determination of
such physician shall be conclusive. The Executive shall submit to such
examinations and provide such information as any such physician may
request.
3.2.3. By the Company forthwith upon notice to the Executive, if
the Executive shall commit any act or omission constituting "Cause" for the
termination of his employment. For purposes hereof, the Company shall be
deemed to have "Cause" for the termination of the Executive's employment
if the Executive should: (i) breach any provision of this Agreement and
fail to cure such breach within ten (10) days written notice to Executive
from the Company; (ii) commit any act of dishonesty or disloyalty involving
the Company; (iii) or commit any act or omission which, in the reasonable
judgement of the Company's Board of Directors, is likely to have a material
adverse effect upon the business or reputation of the Executive or the
Company.
3.3. Consequences of Termination. Except as provided in Section 3.4,
in the event of the termination of Executive's employment, the Company's sole
obligation shall be to pay to Executive (or his estate) his salary at the annual
rate then in effect prorated through the date of termination.
3.4. Additional Voluntary Termination. Section 3.1, hereof,
notwithstanding: (i) the Executive may, at any time, terminate the Executive's
employment hereunder upon thirty (30) days' prior written notice to the Company
if the Company moves its headquarters from the Vancouver, Washington area; and
(ii) the Company may, at any time, terminate Executive's employment hereunder
upon thirty (30) day's prior written notice to the Executive; provided that, if
any such termination occurs before that date six (6) months after the date
hereof the Company shall continue until that date six (6) months after the date
hereof to: (i) pay the Executive when and as the same would otherwise have been
payable hereunder, his salary at the annual rate then in effect; and (ii)
provide the Executive when and as the same would
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otherwise have been provided hereunder, the health and life insurance benefits
specified in Section 2.5, hereof.
3.5. Benefits. In addition to any other payments set forth in this
Article III to which the Executive may be entitled upon termination of his
employment, the Executive shall also be entitled to receive upon or following
the termination of his employment any payments, benefits or rights due or
exercisable by him under any life or disability policies, 401(k) or phantom
stock plans or other benefit programs or incentive compensation plans
established by the Company and in which the Executive is a participant at the
time of his termination and in accordance with the terms of such plans.
ARTICLE IV
Covenant Not to Compete; Confidentiality
----------------------------------------
4.1. Noncompetition. Executive agrees that he shall not, without the
prior written consent of the Company, at any time while he is employed by the
Company or at any time during the period of two (2) years following the
termination of his employment for any reason, either directly or indirectly, as
employee, consultant, representative, trustee, partner, owner, proprietor or
otherwise: (i) acquire an interest in, work for, render advice or assistance to
or otherwise participate or engage in the business of, any "Competing Business"
(as defined below); (ii) divert or attempt to divert any business from, or
persuade or attempt to persuade, any Customer (as defined below) not to do
business with the Company; or (iii) induce or attempt to induce any employee of
or consultant engaged by the Company or any of its Affiliates (as defined below)
to leave the employ of the Company or any of its Affiliates or in any way
interfere with the relationship between the Company or any of its Affiliates and
any employee or consultant thereof. Notwithstanding the foregoing: (i) nothing
herein shall prevent the Executive from acquiring for investment up to one
percent (1%) of the outstanding shares of any Competing Business provided that
he does not render advice or assistance to such entity; and (ii) the Company
acknowledges that the Executive's engagement in business ventures relating to CD
roms for Classic Comics and software for non-native English speakers and his
services on the Board of Directors of Assessment Training Institute will not be
considered to be in violation of the restrictions set forth in this Section 4.1.
For purposes hereof, the term "Competing Business" shall mean any business which
is engaged in the development, sale, licensing, use and/or publication of any
software or other products of the type sold or licensed by the Company or any of
its Affiliates while Executive is employed by the Company or, in the case of the
termination of
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his employment, during the six (6) month period prior to such termination,
including any software designed to teach, assess or improve reading skills and
any software, algorithms and/or authoring tools designed to create mathematics
and/or science problems or tests and/or useful for mathematics and/or science
performance assessment or instruction, or otherwise to teach, develop or improve
mathematics and/or science knowledge and skills. For purposes hereof, a
"Customer" shall mean, while Executive is employed by the Company, any
person who has been an actual or potential customer of the Company or any of its
Affiliates and, in the case of the termination of Executive's employment, any
person who has been a customer of the Company or any of its Affiliates within
the period of six months prior to the termination of Executive's employment or a
potential customer with whom the Company or any of its Affiliates has engaged in
negotiations within such six month period. For purposes hereof, "Affiliate" of
the Company shall mean any corporation or other entity which directly or
indirectly through one or more subsidiaries or other intermediaries is
controlled by, is under common control with or which controls the Company. For
purposes hereof, the term "control" shall mean, in the case of a corporation,
ownership of 50% or more of the shares of such corporation which have the power
to elect a majority of the Board of Directors or, in the case of any other
entity, the power to direct the affairs of such corporation or to elect a
majority of the persons having such power. As of the date hereof, the Affiliates
of the Company include Advantage Learning Systems, Inc., a Wisconsin
corporation, and Institute for Academic Excellence, Inc,. a Wisconsin
corporation.
4.2. Confidentiality and Assignment of Rights. Simultaneously with the
execution hereof, Executive shall execute and deliver to the Company a
Confidential Information and Business Ideas Assignment Agreement (the
"Confidentiality Agreement") in the form attached hereto, the terms of which are
hereby incorporated by reference.
EXECUTIVE ACKNOWLEDGES AND REPRESENTS THAT THE SCOPE OF THE RESTRICTIONS IN
SECTIONS 4.1 AND 4.2 HEREOF, INCLUDING THE RESTRICTIONS SET FORTH IN THE
CONFIDENTIALITY AGREEMENT, ARE APPROPRIATE, NECESSARY AND REASONABLE FOR THE
PROTECTION OF THE BUSINESS, GOODWILL AND PROPERTY RIGHTS OF THE COMPANY AND THE
COMPANY AND WILL NOT PREVENT EXECUTIVE FROM EARNING A LIVING IN THE EVENT OF,
AND AFTER, TERMINATION OF HIS EMPLOYMENT BY THE COMPANY.
4.3. Injunction. Executive recognizes that irreparable and
incalculable injury may result to Company, its business and property, in the
event of a breach by him of any of the
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restrictions imposed by this Article IV and agrees that if he shall engage in
any acts in violation of the provisions hereof, Company shall be entitled, in
addition to such other remedies and damages as may be available, to an
injunction prohibiting him from engaging in such acts.
4.4. Subsequent Employment. In the event of the expiration or
termination of Executive's employment with the Company, Executive agrees, prior
to the commencement of any new employment, to advise any new employer who is or
subsequently becomes a Competing Business of the terms of this Agreement and the
Confidentiality Agreement and to furnish such new employer with a copy of such
agreements. Executive further agrees that the Company may furnish copies of this
Agreement and the Confidentiality Agreement to any such new employer.
ARTICLE V
Miscellaneous
-------------
5.1. Withholding Taxes. The Company shall deduct from all payments
to the Executive under this Agreement any federal, state or local withholding or
other taxes or charges which the Company is from time to time required to deduct
under applicable law, and all amounts payable to the Executive hereunder are
stated herein before any such deductions.
5.2. Notices. Any notice required or permitted to be given or made
by either party to the other hereunder shall be sufficient if hand delivered,
mailed postage prepaid, sent by prepaid express or courier service or sent by
facsimile transmission and actually received to the parties at their respective
addresses set forth opposite the signatures hereto or to such changed address as
either party shall designate by proper notice to the other.
5.3. Waiver of Breach. The waiver by the Company of the breach of
any provisions of this Agreement or the Confidentiality Agreement by the
Executive shall not be deemed a waiver by the Company of any subsequent breach.
5.4. Assignment. The Company may not assign this Agreement without
the written consent of the Executive, except that if the Company shall
liquidate, merge, or consolidate with or into, or transfer substantially all of
its assets, including, goodwill, to another corporate or other form of business
organization, this Agreement shall be binding upon and inure to the benefit of
the successor corporation in such liquidation, merger, consolidation or
transfer. The Executive may not assign,
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<PAGE>
pledge or encumber any interest in this Agreement or any part thereof without
the prior written consent of the Company.
5.5. Governing Law. This Agreement and all questions of its
interpretation, performance, enforceability and the rights and remedies of the
parties hereto, shall be governed by and determined in accordance with
the internal laws of Washington.
5.6. Noncompetition; Confidentiality. The Executive hereby
acknowledges that he has agreed, on the terms and conditions set forth in the
Purchase Agreement, not to compete with the Company for a period of five (5)
years from the date hereof, and not to disclose proprietary or other
confidential information of the Company, and that his agreement set forth in
Article IV, hereof, and the Confidentiality Agreement are in addition to, and
not by way of limitation to, his agreements in the Purchase Agreement.
5.7. Severability. The parties agree that if any provision of this
Agreement shall under any circumstances by deemed invalid or inoperative, this
Agreement shall be construed with the invalid or inoperative provision deleted,
and the rights and obligations of the parties shall be construed and enforced
accordingly.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
this 1st day of August, 1996.
Address for Notice: COMPANY:
c/o Terrance D. Paul IPS PUBLISHING, INC.
Advantage Learning
Systems, Inc.
2610 Industrial Street
P.O. Box 8036 By: /s/ Terrance D. Paul, VP/Sec
Wisconsin Rapids, WI 54495 ----------------------------
fax No. 715-424-4242 (Title)
Address for Notice: EXECUTIVE:
c/o/ IPS Publishing, Inc.
12606 N.E. 95th Street /s/ Timothy Welch
C-110 Vancouver, WA 98682 ------------------------------
fax No. 360-944-9156 Timothy Welch
8
<PAGE>
By this Agreement you are agreeing that you will transfer to the Companies
all rights you may have or acquire in copyrights, inventions and
discoveries, protect the Companies' trade secrets and keep information
confidential. If you have questions about your obligations or rights, you
should seek independent legal advice.
CONFIDENTIAL INFORMATION AND BUSINESS IDEAS
ASSIGNMENT AGREEMENT
This Agreement is made and entered into as of the date set forth below
by the undersigned Employee of IPS PUBLISHING, INC., ADVANTAGE LEARNING SYSTEMS,
INC., INSTITUTE FOR ACADEMIC EXCELLENCE, INC. and/or their Affiliates
(collectively called herein, the "Companies"). As a condition to my employment,
I agree that:
1. Trade secrets and confidential information about the Companies'
business which may be disclosed to me or of which I may learn during the course
of my employment are not to be disclosed. One of my important duties as an
employee, and even after my employment terminates, is to use my best efforts to
safeguard the Companies' trade secrets and to keep information about the
Companies confidential. Unless I am expressly authorized to do so in writing, I
will not disclose any of the Companies' trade secrets or any confidential
information about the Companies other than to other employees of the Companies
who have a need to know such secrets or information. I will assume any
particular information about the Companies' business is confidential until I am
informed it is not or until it has been published or is generally or publicly
known outside the Companies. I understand that "confidential information",
includes, without limitation, (i) all source codes, algorithms and other
programming data and technical information relating to the Companies' software
products; (ii) any information concerning any product under development or being
tested by any of the Companies but not yet offered for sale; (iii) any
information concerning the pricing policies of the Companies, the prices charged
by any of the Companies to any customer, the volume of orders of any customer
and all other information concerning the transactions of the Companies with any
customer or proposed customer; (iv) any information concerning the marketing
programs or strategies of any of the Companies; (v) any financial information
concerning any of the Companies; and (vi) any information concerning the
salaries or wages to be paid to, the work records of or any other personnel
information relating to any employee of any of the Companies other than the
undersigned.
2. The Companies will own, and I hereby assign to the Companies, all
rights in all Business ideas (as hereafter defined) which I originate or develop
either alone or working with others while I am employed by any of the Companies.
All Business
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Ideas which are or form the basis for copyrightable works shall be considered
"works for hire" as that term is defined by U.S. Copyright Law and are hereby
assigned to the Companies.
3. While I am employed by any of the Companies and after my employment
terminates:
(a) I will promptly disclose all Business Ideas to the Companies;
and
(b) I will promptly execute all documents which any of the
Companies may reasonably require to perfect its patent, copyright and other
rights to such Business Ideas throughout the world.
4. The term "Business Ideas" as used in this Agreement means all
ideas, inventions, data, software, developments and copyrightable works, whether
or not patentable or registerable, which I originate or develop, either alone or
jointly with others while I am employed by any of the Companies and which are
either (i) related to any business known to me to be engaged in or contemplated
by any of the Companies, (ii) originated or developed during my working hours,
or (iii) originated or developed in whole or in part using materials, labor,
facilities or equipment furnished by any of the Companies. Notwithstanding the
foregoing, the term "Business Ideas" as used in this Agreement, shall not
include inventions for which no equipment, supplies, facility or trade secret
information of the Companies was used and which was developed entirely on my own
time, unless (a) the invention relates (i) directly to the business of the
Companies, or (ii) to the Companies' actual or demonstrably anticipated research
or development, or (b) the invention results from any work performed by me for
the Companies.
Nothing in this Agreement will prevent me, after my employment
terminates, from using general skills and knowledge I gained while employed by
any of the Companies.
Dated this 1st day of August, 1996.
/s/ Timothy Welch
----------------------------------------
(Employee)
The foregoing is hereby accepted as of its date.
IPS PUBLISHING, INC.
By: /s/ Terrance Paul VP/Sec
------------------------------------
(Title)
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Exhibit 10.4
ADVANTAGE LEARNING SYSTEMS, INC.
1997 STOCK INCENTIVE PLAN
1. Objectives. The Advantage Learning Systems, Inc. 1997 Stock
Incentive Plan is designed to attract and retain certain selected officers and
key employees and non-employee directors whose skills and talents are important
to the Company's operations, and reward them for making major contributions to
the success of the Company. These objectives are accomplished by making awards
under the Plan, thereby providing Participants with a proprietary interest in
the growth and performance of the Company.
2. Definitions.
(a) "Award" shall mean the grant of any form of stock option,
stock appreciation right, or stock award, whether granted singly, in
combination or in tandem, to a Plan Participant pursuant to such terms,
conditions, performance requirements, and limitations as the Board or
Committee may establish in order to fulfill the objectives of the Plan.
(b) "Award Agreement" shall mean an agreement between the
Company and a Participant that sets forth the terms, conditions,
performance requirements, and limitations applicable to an Award.
(c) "Board" shall mean the Board of Directors of Advantage
Learning Systems, Inc.
(d) "Cause" shall mean termination of a Participant's employment
with the Company for (i) any failure of the Participant to substantially
perform his duties with the Company (other than by reason of illness) which
occurs after the Company has delivered to the Participant a demand for
performance which specifically identifies the manner in which the Company
believes the Participant has failed to perform his duties, (ii) the
commission by the Participant of any act of dishonesty or disloyalty
involving the Company or its business, or (iii) the conviction of the
Participant of a felony or misdemeanor which, in the reasonable judgment of
the Committee, is substantially related to the employee's position with the
Company.
(e) "Change in Control" shall mean any of the following events:
i) the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3
<PAGE>
promulgated under the Exchange Act) of 20% or more of either (a) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (b) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election
of directors (the "Outstanding Company Voting Securities"); provided,
however, that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of Control: (a) any acquisition
directly from the Company, (b) any acquisition by the Company, (c) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company, (d) any acquisition by any corporation pursuant
to a transaction which complies with clauses (a), (b) and (c) of subsection
(iii) of this Section 2(e) or (e) any acquisition by a "related person" as
defined below; or
ii) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then constituting the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of an actual or threatened election contest
with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a person
other than the Board; or
iii) consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company for which approval of the shareholders of the Company is required
(a "Business Combination"), in each case, unless, immediately following
such Business Combination, (a) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 60% of, respectively, the then outstanding shares
of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors,
as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (b) no Person
(excluding any employee benefit plan (or related trust) of the Company
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<PAGE>
or such corporation resulting from such Business Combination or a related
person, as defined below) beneficially owns, directly or indirectly, 20% or
more of, respectively, the then outstanding Common Stock of the Corporation
resulting from such Business Combination or the combined voting power of
the then outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business Combination and
(c) at least a majority of the members of the Board of Directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of he initial agreement, or of
the action of the Board, providing for such Business Combination; or
iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
For the purposes hereof, a "related person" shall mean any one or more
members of a group consisting of (a) Terrence and Judith Paul, their issue
and/or spouses of their issue; (b) a trust or estate of which one or more
persons described in (a) are beneficiaries; (c) a corporation or other
entity in which any one or more persons, trusts or estates described in (a)
and/or (b) own a majority of the profits of such entity; or (d) any
corporation or other entity which is controlled by any corporation or other
entity described in (c), above.
(f) "Common Stock" or "stock" shall mean the authorized and
issued or unissued $0.01 par value common stock of the Company.
(g) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(h) "Committee" shall mean the Compensation Committee of the
Board of Directors of Advantage Learning Systems Inc. The Committee shall
be comprised of at least two non-employee directors, all of whom are
"disinterested" within the meaning of Rule 16b-3 promulgated under the
Exchange Act and "outside directors" within the meaning of Section 162(m)
of the Code.
(i) "Company" shall mean Advantage Learning Systems, Inc. and
its subsidiaries including subsidiaries of subsidiaries and partnerships
and other business ventures in which Advantage Learning Systems Inc. has a
significant equity interest, as determined in the sole discretion of the
Committee.
(j) "Fair Market Value" shall mean the closing sale price of
Common Stock on the NASDAQ National Market System as reported in the
Midwest Edition of
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<PAGE>
the Wall Street Journal for the date in question, provided that, if no
sales of Common Stock were made on said exchange on that date, "Fair Market
Value" shall mean the closing sale price of Common Stock as reported for
the most recent preceding day on which sales of Common Stock were made on
exchange, or, failing any such sales, such other market price as the Board
or the Committee may determine in conformity with pertinent law and
regulations of the Treasury Department.
(k) "Participant" shall mean an employee or non-employee
director of the Company to whom an Award has been made under the Plan.
(l) "Plan" shall mean the Advantage Learning Systems, Inc. 1997
Stock Incentive Plan.
(m) "Retirement" shall mean termination of employment with the
Company or service as a member of the Board after age 55 with at least ten
years of service with the Company or the Board.
3. Eligibility. Employees and non-employee directors of the Company
eligible for an Award under the Plan are those who hold positions of
responsibility and whose performance, in the judgment of the Board, the
Committee or the management of the Company, can have a significant effect on the
success of the Company.
4. Common Stock Available for Awards. The number of shares that may
be issued under the Plan for Awards granted wholly or partly in stock during the
term of the Plan is 1,500,000, subject to adjustment as provided in Section 14
hereof, provided that not more than 750,000 shares may be subject to incentive
stock options. Included in this share limit are Awards denominated in units of
stock that may be redeemed or exercised for cash as well as for stock. The
Company shall take whatever actions are necessary to file required documents
with the U.S. Securities and Exchange Commission and any other appropriate
governmental authorities and stock exchanges to make shares of Common Stock
available for issuance pursuant to Awards. Common Stock related to Awards that
are forfeited, terminated, expire unexercised, settled in cash in lieu of stock
or in such manner that all or some of the shares covered by an Award are not
issued to a Participant, shall immediately become available for Awards. No
employee shall be eligible to receive Awards aggregating more than 750,000
shares of Common Stock reserved under the Plan during the term of the Plan,
subject to adjustment as provided in Section 14 hereof.
5. Administration. The Plan shall be administered by the Board prior
to the initial public offering of the Common Stock (the "IPO"), and after the
IPO by the Committee,
4
<PAGE>
which shall respectively have full and exclusive power to interpret the Plan, to
determine which employees and non-employee directors are Plan Participants, to
grant waivers of Award restrictions, and to adopt such rules, regulations and
guidelines for carrying out the Plan as it may deem necessary or proper, all of
which powers shall be executed in the best interests of the Company and in
keeping with the objectives of the Plan. These powers include the adoption of
modifications, amendments, procedures, subplans and the like as are necessary to
comply with provisions of the laws and regulations of the countries in which the
Company operates in order to assure the viability of Awards granted under the
Plan and to enable Participants regardless of where employed to receive
advantages and benefits under the Plan and such laws and regulations.
Notwithstanding the foregoing, any Award made to a non-employee director must be
approved by the Board.
6. Delegation of Authority. The Committee may delegate to the chief
executive officer and to other senior officers of the Company its duties under
the Plan pursuant to such conditions or limitations as the Committee may
establish.
7. Awards. The Committee shall determine the type or types of
Award(s) to be made to each Participant and shall set forth in the related Award
Agreement the terms, conditions, performance requirements, and limitations
applicable to each Award including, but not limited to, continuous service with
the Company, achievement of specific business objectives, increases in specified
indices, attaining growth rates, and other comparable measurements of Company
performance. Awards may include, but are not limited to, those listed in this
Section 7. Awards may be granted singly, in combination or in tandem. Awards
may also be made in combination or in tandem with, in replacement of, or as
alternatives to, grants or rights under any other employee plan of the Company,
including the plan of any acquired entity. In all events, upon the occurrence
of a Change in Control, all Awards will become fully vested and immediately
exercisable.
(a) Stock Option. A grant of a right to purchase a specified
number of shares of Common Stock the purchase price of which shall be not
less than 100% of Fair Market Value on the date of grant, as determined by
the Committee. A stock option may be in the form of a nonqualified stock
option or an incentive stock option ("ISO"). An ISO, in addition to being
subject to applicable terms, conditions and limitations established by the
Committee, complies with Section 422 of the Code which, among other
limitations, provides that the aggregate Fair Market Value (determined at
the time the option is granted) of Common Stock for which ISOs are
exercisable for the first time by a Participant during any calendar year
shall not exceed $100,000; that ISOs shall be priced at not less than 100%
of the Fair Market Value on the date of the grant (110% in the case of a
Participant who is a 10% shareholder of the Company within the meaning of
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Section 422 of the Code); and that ISOs shall be exercisable for a period
of not more than ten years (five years in the case of a Participant who is
a 10% shareholder of the Company).
(b) Stock Appreciation Right. A right to receive a payment, in
cash and/or Common Stock, equal to the excess of the Fair Market Value of a
specified number of shares of Common Stock on the date the stock
appreciation right ("SAR") is exercised over the Fair Market Value on the
date of grant of the SAR as set forth in the applicable Award Agreement.
(c) Stock Award. An Award made in stock or denominated in units
of stock. Such Awards may be based on Fair Market Value or other specified
valuation with the eventual payment amount subject to future service and
such other restrictions and conditions as may be established by the
Committee and as set forth in the Award Agreement.
8. Payment of Awards. Payment of Awards may be made in the form of
cash, stock or combinations thereof and may include such restrictions as the
Committee shall determine, including in the case of stock, restrictions on
transfer and forfeiture provisions. When transfer of stock is so restricted or
subject to forfeiture provisions, it is referred to as "Restricted Stock." The
Committee may permit selected Participants to elect to defer payments of some or
all types of Awards in accordance with procedures established by the Committee
which are intended to permit such deferrals to comply with applicable
requirements of the Code including, at the choice of Participants, the
capability to make further deferrals for payment after retirement. Dividends or
dividend equivalent rights may be extended to and made part of any Award
denominated in stock or units of stock, subject to such terms, conditions and
restrictions as the Committee may establish. The Committee may also establish
rules and procedures for the crediting of interest on deferred cash payments and
dividend equivalents for deferred payments denominated in stock or units of
stock.
9. Stock Option Exercise. The price at which shares of Common Stock
may be purchased under a Stock Option shall be paid in full at the time of the
exercise in cash or, if permitted by the Committee, by means of tendering Common
Stock, either directly or by attestation, valued at Fair Market Value on the
date of exercise, or any combination thereof.
10. Tax Withholding. The Company shall have the right to deduct
applicable taxes from any Award payment and withhold, at the time of delivery or
vesting of shares under the Plan, an appropriate number of shares for payment of
taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for
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withholding of such taxes. The Company may defer making delivery with respect to
cash and/or Common Stock obtained pursuant to an Award hereunder until
arrangements satisfactory to it have been made with respect to any such
withholding obligation. If Common Stock is used to satisfy tax withholding, such
stock shall be valued based on the Fair Market Value when the tax withholding is
required to be made.
11. Amendment, Modification, Suspension or Discontinuance of the
Plan. The Board may terminate the Plan or make such modifications or amendments
thereto as it shall deem advisable in order to conform to any law or regulation
applicable thereto; provided, however, that the Board may not, unless otherwise
permitted under applicable law, without further approval of the shareholders of
the Company, adopt any amendment to the Plan which would cause the Plan to no
longer comply with Section 162(m) of the Code, or any successor provision or
other regulatory requirements. No such termination, modification or amendment
of the Plan may, without the consent of a Participant, adversely affect the
rights of such Participant under an outstanding Award then held by the
Participant.
12. Termination of Employment. If the employment of a Participant
terminates, or a non-employee director no longer serves on the Board, other than
pursuant to paragraphs (a) through (c) of this Section 12, all unexercised,
deferred and unpaid Awards shall terminate 90 days after such termination of
employment or service, unless the Award Agreement provides otherwise, and during
such 90-day period shall be exercisable only to the extent provided in the Award
Agreement. Notwithstanding the foregoing, if a Participant's employment is
terminated for Cause, to the extent the Award is not effectively exercised or
has not vested prior to such termination, it shall lapse or be forfeited to the
Company immediately upon termination. In all events, an Award will not be
exercisable after the end of its term as set forth in the Award Agreement.
(a) Retirement. When a Participant's employment or service
terminates as a result of Retirement, or early retirement with the consent
of the Committee, the Committee (in the form of an Award Agreement or
otherwise) may permit Awards to continue in effect beyond the date of
Retirement, or early retirement, and/or the exercisability and vesting of
any Award may be accelerated.
(b) Resignation in the Best Interests of the Company. When a
Participant resigns from the Company or the Board and, in the judgment of
the chief executive officer or other senior officer designated by the
Committee, the acceleration and/or continuation of outstanding Awards would
be in the best interests of the Company, the Committee may (i) authorize,
where appropriate, the acceleration and/or continuation of all or any part
of Awards granted prior to such termination and (ii) permit the exercise,
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vesting and payment of such Awards for such period as may be set forth in
the applicable Award Agreement.
(c) Death or Disability of a Participant.
(i) In the event of a Participant's death, the
Participant's estate or beneficiaries shall have a period specified in
the Award Agreement within which to receive or exercise any
outstanding Award held by the Participant under such terms, and to the
extent, as may be specified in the applicable Award Agreement. Rights
to any such outstanding Awards shall pass by will or the laws of
descent and distribution in the following order: (a) to beneficiaries
so designated by the Participant; if none, then (b) to a legal
representative of the Participant; if none, then (c) to the persons
entitled thereto as determined by a court of competent jurisdiction.
Subject to subparagraph (iii) below, Awards so passing shall be
exercised or paid out at such times and in such manner as if the
Participant were living.
(ii) In the event a Participant is deemed by the Company to
be disabled within the meaning of Section 22(e)(3) of the Code, the
Award shall be exercisable for the period, and to the extent,
specified in the Award Agreement. Awards and rights to any such
Awards may be paid to or exercised by the Participant, if legally
competent, or a legally designated guardian or representative if the
Participant is legally incompetent by virtue of such disability.
(iii) After the death or disability of a Participant, the
Committee may in its sole discretion at any time (1) terminate
restrictions in Award Agreements; (2) accelerate any or all
installments and rights; and (3) instruct the Company to pay the total
of any accelerated payments in a lump sum to the Participant, the
Participant's estate, beneficiaries or representative, notwithstanding
that, in the absence of such termination of restrictions or
acceleration of payments, any or all of the payments due under the
Awards might ultimately have become payable to other beneficiaries.
(iv) In the event of uncertainty as to interpretation of or
controversies concerning this paragraph (c) of Section 12, the
Committee's determinations shall be binding and conclusive.
(d) No Employment Rights. The Plan shall not confer upon any
Participant any right with respect to continuation of employment by the
Company or
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service on the Board, nor shall it interfere in any way with the right of
the Company to terminate any Participant's employment or service on the
Board at any time.
13. Nonassignability. Except as provided in subsection (c) of
Section 12 and this Section 13, no Award or any other benefit under the Plan
shall be assignable or transferable, or payable to or exercisable by anyone
other than the Participant to whom it was granted. Notwithstanding the
foregoing, the Committee (in the form of an Award Agreement or otherwise) may
permit Awards to be transferred to members of the Participant's immediate
family, to trusts for the benefit of the Participant and/or such immediate
family members, and to partnerships or other entities in which the Participant
and/or such immediate family members own all the equity interests. For purposes
of the preceding sentence, "immediate family" shall mean a Participant's spouse,
issue, and spouses of his issue.
14. Adjustments. In the event of any change in the outstanding
Common Stock of the Company by reason of a stock split, stock dividend,
combination or reclassification of shares, recapitalization, merger, or similar
event, the Committee may adjust proportionally (a) the number of shares of
Common Stock (i) reserved under the Plan, (ii) available for ISOs, (iii) for
which Awards may be granted to an individual Participant, and (iv) covered by
outstanding Awards denominated in stock or units of stock; (b) the stock prices
related to outstanding Awards; and (c) the appropriate Fair Market Value and
other price determinations for such Awards. In the event of any other change
affecting the Common Stock or any distribution (other than normal cash
dividends) to holders of Common Stock, such adjustments as may be deemed
equitable by the Committee, including adjustments to avoid fractional shares,
shall be made to give proper effect to such event. In the event of a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Committee shall be authorized to issue or
assume Stock Options, whether or not in a transaction to which Section 424(a) of
the Code applies, by means of substitution of new Stock Options for previously
issued Stock Options or an assumption of previously issued Stock Options.
15. Notice. Any notice to the Company required by any of the
provisions of the Plan shall be addressed to the chief human resources officer
or to the chief executive officer of the Company in writing, and shall become
effective when it is received by the office of either of them.
16. Unfunded Plan. The Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
cash, Common Stock or rights thereto under the Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor shall the Plan be construed as
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providing for such segregation, nor shall the Company nor the Board nor the
Committee be deemed to be a trustee of any cash, Common Stock or rights thereto
to be granted under the Plan. Any liability of the Company to any Participant
with respect to a grant of cash, Common Stock or rights thereto under the Plan
shall be based solely upon any contractual obligations that may be created by
the Plan and any Award Agreement; no such obligation of the Company shall be
deemed to be secured by any pledge or other encumbrance on any property of the
Company. Neither the Company nor the Board nor the Committee shall be required
to give any security or bond for the performance of any obligation that may be
created by the Plan.
17. Governing Law. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by the laws of the
United States, shall be governed by the laws of the State of Wisconsin and
construed accordingly.
18. Effective and Termination Dates. The effective date of the Plan
is February __, 1997. The Plan shall terminate on February __, 2007 subject to
earlier termination by the Board pursuant to Section 11, after which no Awards
may be made under the Plan, but any such termination shall not affect Awards
then outstanding or the authority of the Committee to continue to administer the
Plan.
19. Other Benefit and Compensation Programs. Payments and other
benefits received by a Participant pursuant to an Award shall not be deemed a
part of such Participant's regular, recurring compensation for purposes of the
termination, indemnity or severance pay law of any country and shall not be
included in, nor have any effect on, the determination of benefits under any
other employee benefit plan, contract or similar arrangement, unless the
Committee expressly determines otherwise.
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Exhibit 10.5
ADVANTAGE LEARNING SYSTEMS, INC.
--------------------------------
PHANTOM STOCK PLAN
------------------
ARTICLE I
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Establishment and Purpose of Plan
---------------------------------
1.1. Establishment of Plan. Advantage Learning Systems, Inc. (the
"Company") hereby establishes the Advantage Learning Systems, Inc. Phantom Stock
Plan (the "Plan") effective as of the date of its adoption by the Board of
Directors of the Company.
1.2. Purpose of Plan. The purpose of the Plan is to provide a means for
the Company to attract and retain key employees whose decisions and services
will have a substantial impact upon the profitability and growth of the Company
and the products and services the Company provides to its customers.
ARTICLE II
----------
Definitions
-----------
2.1. "Account" means the account established and administered for the
benefit of a Participant under the Plan.
2.2. "Board of Directors" means the Board of Directors of the Company as
it is constituted from time to time.
2.3. "Book Value" as of any date shall mean the consolidated shareholders'
equity of the Company, determined in accordance with GAAP and as reflected on
the interim financial statements of the Company prepared on a monthly basis for
the month prior to such date, or, if the previous month end was audited, the
regular audited financial statements of the Company prepared as of the close of
such month. If at any time there are any issued and outstanding shares of
preferred stock of the Company, other than shares of preferred stock issued with
respect to its Common Stock either as a stock dividend or pursuant to a plan of
reorganization or recapitalization, then for purposes of determining the Book
Value, the Company's consolidated shareholders' equity shall be adjusted by
subtracting therefrom the amount of capital and surplus attributable to such
preferred stock.
2.4. "Cause" for termination of a Participant's employment with the
Company means (i) any failure of the Participant to substantially perform his
duties with the Company
<PAGE>
(other than by reason of illness) which occurs after the Company has delivered
to the Participant a demand for performance which specifically identifies the
manner in which the Company believes the Participant has failed to perform his
duties, (ii) the commission by the Participant of any act of dishonesty or
disloyalty involving the Company or its business, or (iii) the conviction of the
Participant of a felony or misdemeanor which impairs his ability to perform his
duties for the Company.
2.5. "CD Rate" means the rate of interest in effect on the first day of
any Fiscal Year at Wood County Bank of Wisconsin Rapids, Wisconsin, or any
successor thereto, for five year certificates of deposit.
2.6. "Code" means the Internal Revenue Code of 1986, as amended.
2.7. "Common Stock" means the Company's $.01 par value common stock.
2.8. "Company" means Advantage Learning Systems, Inc., a Wisconsin
corporation, or any successor to such corporation.
2.9. "Declining Balance Method" means a method to determine the amount of
each of a series of periodic distributions in which each distribution is a
fraction of the amount available on the distribution date. The numerator of the
fraction shall be one and the denominator shall be the remaining number of
unpaid periodic distributions at each distribution date (including the
distribution to be made on that date).
2.10. "Disability" means a Participant's total disability as defined in
such long-term disability insurance plan for salaried employees as the Company
may, from time to time, have in effect or, if at any time no such plan is in
effect, a Participant shall be considered to be disabled if he has been unable
to perform, or if it is apparent to a reasonable degree of medical certainty
that he will be unable to perform, his regular duties for the Company for a
continuous period of 180 consecutive days by reason of physical or mental
illness or incapacity. If there is any dispute as to whether a Participant is
or was disabled, such questions shall be submitted to a licensed physician
designated by the Company in good faith and the determination of such physician
shall be conclusive. The Participant shall submit to such examinations and
provide such information as any such physician may request. A disability shall
be deemed to be continuous unless the Participant performs his regular duties
for the Company for a continuous period of one month.
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2.11. "Fiscal Year" means the fiscal year of the Company ending on such
date as is established from time to time.
2.12. "GAAP" means generally accepted accounting principles.
2.13. "IAE" means Institute for Academic Excellence, Inc., a Wisconsin
corporation, or any successor to such corporation.
2.14. "Loss Carryforward Account" means an account, the balance of which
shall initially be zero, which is (A) increased by the Company's net loss as
computed for book purposes determined in accordance with GAAP and as reflected
on the Company's year-end financial statements for any prior Fiscal Year and (B)
decreased, but not below zero, by the net profit before tax as computed for book
purposes determined in accordance with GAAP and as reflected on the Company's
year-end financial statements for any prior Fiscal Year.
2.15. "Net Profit Before Tax" means, for any fiscal Year, (A) the
Company's net profit before tax for that year as computed for book purposes
determined in accordance with GAAP but without regard to any expense for amounts
paid or accrued under the Plan for such year less (B) the Loss Carryforward
Account, if any.
2.16. "Participant" means any employee of either the Company or IAE who
has been designated by the Board of Directors, in its sole discretion, as a
Participant pursuant to Paragraph 3.1, below, and who remains employed by either
the Company or IAE, it being contemplated that any employee of the Company may
become an employee of IAE and vice versa, while continuing to remain a
Participant hereunder.
2.17. "Phantom Stock" means up to 100,000 shares of phantom stock which
entitle any holder of one or more shares to an interest in the Net Profit Before
Tax and Triggering Event Price.
2.18. "Retirement" means the termination of a Participant's employment
with the Company or IAE (other than for Cause) at or after the later of (A) age
55, or (B) five full years of employment with the Company or IAE, or in any
individual case, after a Participant has met other criteria or passed other
milestones established by the Board of Directors.
2.19. "Share" means an interest equal to .001% of the Net Profit Before
Tax and .001% of the Triggering Event Price.
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2.20. "Triggering Event" means (A) the acquisition in any one transaction
or a series of related transactions by one or more persons who are not "related
persons" of (i) all or substantially all of the assets of the Company, or (ii)
more than fifty percent (50%) of the Common Stock or (B) the filing by the
Company of a Registration Statement under the Securities Act of 1933, as amended
(the "Act") which becomes effective under the Act. For purposes hereof,
"related persons" shall mean any one or more members of a group consisting of
(a) Terrence and Judith Paul, their issue and/or spouses of their issue; (b) a
trust or estate of which one or more persons described in (a) are beneficiaries;
(c) a corporation or other enterprise in which any one or more persons, trusts
or estates described in (a) and/or (b) own at least a majority of the
outstanding stock entitled to vote in the election of such corporation's Board
of Directors or, in the case of an unincorporated enterprise, the right to
receive at least a majority of the profits of such enterprise; or (d) any
corporation or other entity which is controlled by any corporation described in
(c), above.
The date or time a Triggering Event shall be deemed to occur shall be the
date of closing for a sale of assets, the date of closing of the last of the
related transactions pursuant to which any person or persons acquire more than
fifty percent (50%) of the Common Stock, or the date of sale of stock of the
Company pursuant to the Registration Statement.
2.21. "Triggering Event Price" means the excess, if any, of (A) (i) with
respect to a Triggering Event consisting of an acquisition of all or
substantially all of the Company's assets, the Book Value of the Company as
defined in Section 2.3 but determined immediately after such Triggering Event
and after giving effect thereto; (ii) with respect to a Triggering Event
consisting of an acquisition of Common Stock, the fair market value of the
Company based on the average price per share of Common Stock received by the
person or persons selling stock in such Triggering Event and (iii) with respect
to a Triggering Event consisting of a Registration Statement which becomes
effective, the fair market value of the Company based on the public offering
price per share of Common Stock, as set forth in the Prospectus which is part of
the Registration Statement over (B) Book Value at the end of the month
immediately preceding the Triggering Event.
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ARTICLE III
-----------
Participation and Accounts
--------------------------
3.1. Participation and Initial Credit of Shares. The Participants in the
Plan shall be those employees of the Company or IAE who are from time to time
designated as Participants by the Board of Directors. Effective as of the date
of their designation as Participants, an initial credit shall be made to each
Participant's Account of such number of Shares of Phantom Stock as may be
determined by the Board of Directors at the time of designation. The Board of
Directors may, in its sole discretion, at any time or times thereafter credit
additional Shares to a Participant's Account. Within 10 days after such
designation has been made, the Board of Directors shall direct the Secretary of
the Company to notify each Participant in writing of such designation and of the
number of Shares allocated to his Account and shall provide a certificate to
such Participant evidencing such Participant's participation in the Plan, and in
connection therewith, each Participant shall execute an acknowledgment on the
face of such certificate that such Participant has received and reviewed a copy
of the Plan and has agreed to be bound by the terms of such Plan.
3.2. Establishment of Account. The Company shall establish on its books
of account a separate Account in each Participant's name which shall be used for
the purpose of determining the benefits to which Participants shall from time to
time be entitled hereunder. There shall be recorded in each such Account:
(a) The number of Shares from time to time credited to such
Account pursuant to the Plan;
(b) The dollar amounts, if any, credited to such Account
pursuant to Paragraphs 4.2 and 4.3 of the Plan; and
(c) Interest, if any, credited to such Account as provided in
Paragraph 4.2 of the Plan.
Such Accounts shall be maintained solely for accounting purposes, and no assets
of the Company shall be segregated or subject to any trust for a Participant's
benefit by reason of the establishment of such Account nor shall a Participant
acquire any rights by reason of the establishment thereof otherwise than as
provided in this Plan. A Participant shall have no interest in any fund or in
any specific asset or assets of the Company by reason of his participation in
the Plan.
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3.3. Vesting. If the Board of Directors so determines, the Shares
awarded to a Participant may be subject to a vesting schedule such that a
Participant is only entitled to the full number of Shares credited to his
Account from time to time after completing a certain number of years of service
with the Company. The Shares will become fully vested upon the occurrence of a
Triggering Event or the death, Disability or Retirement of a Participant. In
addition, any dollar amounts credited or paid pursuant to Paragraph 4.1 shall,
using the vesting schedule determined by the Board of Directors, be adjusted
based on the time expired since the crediting of each Share.
3.4. Forfeiture of Shares. Notwithstanding any other provision
hereof, if a Participant ceases to be employed by either the Company or IAE for
any reason, then such Participant automatically shall forfeit his Shares and no
further amounts shall be credited to his Account other than as provided in
Article IV hereof; provided that no transfer of employment of a Participant from
the Company to IAE, or vice versa, shall cause such forfeiture.
ARTICLE IV
----------
Determination and Payment of Benefits
-------------------------------------
4.1. Payment of Net Profit Before Tax. Within 90 days after the end
of each Fiscal Year during which a Participant is employed by the Company or IAE
and within 90 days after the end of each of the 5 Fiscal Years after the Fiscal
Year in which a Participant's employment by the Company or IAE terminates (if
such termination occurs because of death, Disability or Retirement), each
Participant shall be paid in cash an amount equal to .001% (.00001) of the
Company's Net Profit Before Tax for such Fiscal Year for each Share of Phantom
Stock credited to his Account as of the close of the Fiscal Year for which
payment is made or at the time of termination of his employment, as the case may
be. No payment shall be made to a Participant under this Paragraph 4.1 after
the termination of his employment if his employment has terminated other than
because of death, Disability or Retirement. Payments pursuant to this Section
4.1 with respect to Net Profit Before Tax for the Fiscal Year in which any
Shares are first credited to a Participant's Account shall, if such Shares are
not credited as of the first day of such Fiscal Year, be reduced prorata in
proportion to the number of days elapsed prior to the date such Shares are
credited. For example, if the Company's Fiscal Year is a calendar year and
Shares are first credited to a Participant's Account on April 1, the payments
made to the Participant for such initial Fiscal Year
with respect to such Shares shall be reduced by 25% of the amount otherwise
payable under this Section 4.1.
4.2. Deferral Election. Notwithstanding the provisions of Paragraph
4.1, a Participant may elect to defer payment of all or any portion of the Net
Profit Before Tax attributable to his Shares for any Fiscal Year. Such election
shall be made in writing in the form of the election attached hereto as Exhibit
A, shall be irrevocable and shall specify the percentage of the Participant's
profit share for any Fiscal Year which the Participant desires to defer. Such
election must be
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made (A) with respect to the first Fiscal Year in which an employee is
designated as a Participant, within thirty days after his designation by the
Board of Directors, and (B) with respect to each subsequent Fiscal Year, prior
to the commencement of such Fiscal Year. If a Participant elects to defer all or
any portion of his profit share for any Fiscal Year, the amount so deferred will
be credited to his Account as of the beginning of the subsequent Fiscal Year and
shall be paid to him upon the termination of his employment or upon the
occurrence of a Triggering Event as provided in Paragraphs 4.4 or 4.5, below.
Interest shall accrue on the unpaid balance of each Participant's Account during
each Fiscal Year at the CD Rate in effect for such Fiscal Year and shall be
credited to each Account on the last day of each Fiscal Year and upon payment of
the Account balance in full.
4.3. Occurrence of Triggering Event. If a Triggering Event occurs
(A) while a Participant is employed by the Company or IAE, (B) within five years
after the termination of his employment because of death, Disability or
Retirement or (C) within two years after the termination of his employment if
such termination is effected by the Company or IAE other than for Cause, the
Participant's Account shall be credited with an amount equal to .001% (.00001)
of the Triggering Event Price for each Share credited to the Participant's
Account at the time of the Triggering Event or the termination of his
employment, as the case may be, reduced, in the case of a Participant whose
employment has terminated at the time of the Triggering Event, by 20% for each
full year elapsed from the time of termination of employment to the occurrence
of the Triggering Event. The amount so credited, together with any amounts
credited to the Participant's Account pursuant to Paragraph 4.2, shall be paid
to the Participant as provided in Paragraph 4.5. No credit shall be made to a
Participant's Account under this Paragraph 4.3 if his employment has terminated
other than because of death, Disability or Retirement or more than five years
before the occurrence of a Triggering Event or, in the case of a Participant
whose employment is terminated by the Company or IAE other than for Cause, more
than two years before the occurrence of a Triggering Event.
4.4. Payment of Account Balance as a Result of Termination of
Employment. If a Participant's employment with the Company and/or IAE is
terminated other than in connection with a Triggering Event, the balance
credited to a Participant's Account pursuant to this Article IV shall be payable
to such Participant annually in five periodic distributions determined under the
Declining Balance Method. The first such distribution shall be made not later
than sixty days after the termination of
7
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such Participant's employment and the remaining distributions shall be made on
successive anniversaries of the date of the first distribution. If a Triggering
Event occurs after the termination of a Participant's employment, but before he
has been paid the entire unpaid balance in his Account, the Company shall pay
the remaining unpaid balance in his Account to him in a lump sum no later than
sixty days after the occurrence of a Triggering Event. Notwithstanding what is
provided above, if the amount otherwise distributable to a Participant on any
payment date would be less than $10,000, the Company shall pay to the
Participant an amount equal to the lesser of $10,000 or the entire balance then
remaining in his Account. In addition, the Board of Directors may, in its sole
discretion, elect to prepay in whole or in part at any time any Participant's
Account balance under the Plan.
4.5. Payment of Account Balance as a Result of a Triggering Event.
If a Triggering Event occurs, the balance credited to a Participant's Account
pursuant to this Article IV shall be paid to such Participant in a lump sum no
later than sixty days after the occurrence of the Triggering Event.
Notwithstanding the foregoing, if payment of the balance in a Participant's
Account would be subject to the limitations on deductibility of compensation
contained in Section 162(m) of the Code or any successor thereto, the balance in
his Account shall be paid out over such period of time as required so that the
deductibility of the payments will not be limited by Section 162(m), but in no
event longer than five (5) years. In each year, payments from the Account will
be in the greatest amount possible while still complying with the limits of
Section 162(m) of the Code. Interest shall be credited on any balance not paid
in a lump sum in the same manner as provided in Paragraph 4.2 hereof.
4.6. Beneficiary Designation. If a Participant dies prior to the
distribution to him of all amounts payable to him under the Plan, the amounts
otherwise distributable to the Participant shall be distributed to such
beneficiary or beneficiaries as may have been last designated by such
Participant in a written beneficiary designation delivered to the Secretary of
the Company, which shall be in the form attached hereto as Exhibit B. If the
Participant has not made any effective beneficiary designation or the
beneficiary or all beneficiaries designated by the Participant predecease the
Participant, then the amounts otherwise payable to the Participant under the
Plan shall be paid to the Participant's estate unless, in the latter event, the
Participant's beneficiary designation provides otherwise. If a beneficiary
designated by the Participant shall survive the Participant but die before
payment of all of the amounts payable
8
<PAGE>
to such beneficiary under the Plan, then the amounts otherwise payable hereunder
to the deceased beneficiary shall be paid to the deceased beneficiary's estate
unless the Participant's beneficiary designation provides otherwise. The Company
shall have no responsibility with respect to the validity of any beneficiary
designation made by the Participant and shall be fully protected if it acts
thereon in good faith.
4.7. Withholding. The Company shall deduct from all payments made
under the Plan any social security taxes, federal, state or local income tax
withholding or other payroll deductions which the Company believes it is
required to make, and all amounts payable or distributable under the Plan are
stated herein before any such deductions. The Company shall have the right to
rely on an opinion of its legal counsel or its independent auditors as to the
amount to be so deducted.
4.8. Termination for Cause. Notwithstanding anything provided herein
to the contrary, if a Participant's employment with the Company and/or IAE is
terminated for Cause, all Shares and balances credited to the Participant's
Account shall be forfeited and the Participant shall be entitled to no rights or
payments under the Plan.
ARTICLE V
---------
Administration
--------------
5.1. Duties of the Board of Directors. The Plan shall be
administered by the Board of Directors. Subject to the provisions of the Plan,
the Board of Directors shall have the exclusive power to select Participants to
participate in the Plan and to determine the Shares to be granted to such
Participants and the timing of such grants. The Board of Directors shall have
the authority to prescribe the form or forms evidencing the granting of Shares
and to establish, adopt or revise such rules and regulations as it deems
necessary or appropriate for administration of the Plan, provided that such
rules and regulations are not inconsistent with the provisions of the Plan.
5.2. Determinations of the Board of Directors. All determinations of
the Board of Directors, irrespective of their character or nature, including,
but not limited to, all questions of construction and interpretation of the
Plan, shall be final, binding and conclusive. Without limiting the generality
of the foregoing, the determination of the Board of Directors as to whether a
Participant has terminated his employment with the Company and the date and
cause thereof shall be final, binding and conclusive. If a Participant is, at
any time after the grant
9
<PAGE>
to him of Shares under the Plan, also a director of the Company, such
Participant shall abstain from voting with respect to any such determinations
or, if his vote is necessary for such determination to legally constitute the
act of the Board of Directors, he shall cast his vote in accordance with the
vote of a majority of the other directors voting on the matter.
5.3. Advice of Counsel. The Company and the Board of Directors may
each consult with legal counsel, who may be counsel regularly employed by the
Board of Directors or independent legal counsel, with respect to its obligations
and duties hereunder or with respect to any action or proceeding or any other
question of law and shall not be liable for any action taken or omitted by it in
good faith pursuant to the advice of such counsel.
5.4. Accounting Determinations. All accounting determinations and
financial calculations made under the Plan, including the determinations of Book
Value and the Triggering Event Price shall be made in accordance with GAAP
consistently applied. Any dispute with respect to any accounting determinations
or calculations, including determinations of the balance due to a Participant
under the Plan, at the request of such Participant or the Company, shall be
submitted to the Company's regular independent accountants and the decision of
such accountants shall be final, binding and conclusive. The fees for any such
services rendered upon a dispute shall be divided evenly between the Company and
the Participant involved.
5.5. Books and Records. The Secretary of the Company shall be
responsible for maintaining the books and records for the Plan. Such books and
records shall only be open for examination by a Participant or his duly
designated beneficiary to the extent that they specifically involve his Account
or any payments which are to be made to him or his beneficiary hereunder. All
beneficiary designations and notices hereunder shall be filed with the Secretary
of the Company.
ARTICLE VI
----------
Certain Rights and Obligations of Participants
----------------------------------------------
6.1. Copies of Plan. Each Participant shall be entitled to receive
an updated copy of the Plan upon his designation as such. Thereafter as long as
he remains a Participant, he shall be entitled to receive copies of any
amendments to the Plan within sixty (60) days after their adoption by the Board
of Directors.
10
<PAGE>
6.2. No Right to Employment. The designation of an employee of the
Company or IAE as a Participant under this Plan shall not be construed as
conferring upon such employee any right to remain in the employ of the Company
or, if a Participant is at any time after the grant to him of Shares also a
director of the Company, any right to remain a member of the Board of Directors.
The right of the Company to discipline or discharge an employee shall not be
affected in manner by reason the designation of such employee as a Participant
under the Plan.
ARTICLE VII
-----------
Nontransferability of Shares or Benefits
----------------------------------------
Except as otherwise specifically provided in Paragraph 4.6, above, and
to the extent permitted by law, the right of any Participant or any beneficiary
to receive any payment hereunder shall not be subject to alienation, sale,
transfer, assignment, pledge, attachment, garnishment or encumbrance of any
kind, and no payments due hereunder shall in any manner be subject to the debts
or liabilities of any Participant or beneficiary. Any attempt to alienate,
sell, transfer, assign, pledge or otherwise encumber any such payments, whether
presently or thereafter payable, shall be null and void and without any legal
effect.
ARTICLE VIII
------------
Amendment, Suspension and Termination of the Plan
-------------------------------------------------
The Board of Directors may terminate the Plan at any time or from time
to time amend or suspend the Plan, except that no amendment, suspension or
termination of the Plan shall alter or impair any of the rights or obligations
with respect to any Shares theretofore granted to Participants under the Plan
without the consent of Participants holding a majority of the Shares then issued
to Participants in the Plan who are then employees of the Company or IAE.
ARTICLE IX
----------
Miscellaneous
-------------
9.1. Expenses. All expenses of administering the Plan shall be paid
by the Company except as expressly provided herein to the contrary.
9.2. Costs of Legal Proceedings. If any legal proceedings are
instituted by any Participant or the Company against the other with respect to
any dispute arising under the Plan or
11
<PAGE>
to collect any benefits due under the Plan, the prevailing party in such
proceedings shall be entitled to recover the costs of litigation and reasonable
attorneys fees from the other party; provided, however, that if the Company or
the Participant, his beneficiary or any other person claiming an interest by or
through the Participant shall commence an action or proceeding the principal
purpose of which is to effect a division of, or to determine entitlement to,
payments hereunder, the costs of defending or bringing such action shall be
charged and offset against any amounts payable to such Participant, his
beneficiaries or his or their successors pursuant hereto.
9.3. Governing Law. The Plan shall be construed, administered and
governed in all respects under and by the applicable laws of the State of
Wisconsin.
9.4. Use of Words. Wherever the context so requires, words in the
masculine gender include the feminine, words in the feminine include the
masculine, and words in the singular include the plural.
9.5. Binding Effects. In consideration of the benefits conferred
hereunder, each Participant shall be conclusively presumed to have agreed to be
bound by all of the terms and conditions of this Plan as presently constituted
and as it may be amended from time to time.
9.6. Independence of Plan. It is intended that the Plan be construed
and administered independent of any and all other employee benefit plans, fringe
benefit programs or compensation arrangements of the Company. Accordingly,
except as otherwise determined by the Board of Directors, neither the Plan nor
any of the benefits payable hereunder shall be construed, administered or
considered so as to have any effect on any existing or future pension, profit-
sharing, incentive compensation or other employee benefit program or plan of the
Company and no such program or plan of the Company shall be construed or
administered to have any effect on the Plan.
9.7. Separability. If any provision of this Plan is held for any
reason to be unenforceable by a court of competent jurisdiction, the remainder
of this Plan shall, nevertheless, remain in full force and effect in such
jurisdiction.
9.8. Notices. Any notice required or permitted to be given under the
Plan shall be sufficient if hand delivered or if mailed or sent by commercial
delivery service, postage or other fees prepaid, to the Company at its main
corporate office or to a Participant at his latest address on the records of the
Company.
12
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9.9. Headings. The headings of Articles and Paragraphs of the Plan
are for convenience of reference only and shall not control or affect the
meaning or construction of any of its provisions.
13
<PAGE>
EXHIBIT A
---------
Deferral Election
-----------------
The undersigned, as a participant in the Advantage Learning Systems,
Inc. Phantom Stock Plan (the "Plan") is entitled to receive a payment under
Paragraph 4.1 of the Plan for the fiscal year of Advantage Learning Systems,
Inc. ending ______________ (the "Fiscal Year"), hereby elects to defer _____% of
such payment for the Fiscal Year, and directs Advantage Learning Systems, Inc.
to make such deferral in accordance with the terms of the Plan.
IN WITNESS WHEREOF, the undersigned has executed this Deferral
Election on the _____ day of ____________, 19___.
___________________________________
<PAGE>
EXHIBIT B
---------
Beneficiary Designation
-----------------------
The undersigned, as a participant in the Advantage Learning Systems,
Inc. Phantom Stock Plan (the "Plan") hereby designates, pursuant to Paragraph
4.6 of the Plan, ______________ as the undersigned's beneficiary to receive
payments under the Plan until and unless the undersigned changes such
designation pursuant to Paragraph 4.6 of the Plan.
IN WITNESS WHEREOF, the undersigned has executed this Beneficiary
Designation on the _____ day of _______________, 19___.
___________________________________
<PAGE>
Exhibit 10.6
INSTITUTE FOR ACADEMIC EXCELLENCE, INC.
---------------------------------------
PHANTOM STOCK PLAN
------------------
ARTICLE I
---------
Establishment and Purpose of Plan
---------------------------------
1.1. Establishment of Plan. Institute for Academic Excellence, Inc. (the
"Company") hereby establishes the Institute for Academic Excellence, Inc.
Phantom Stock Plan (the "Plan") effective as of the date of its adoption by the
Board of Directors of the Company.
1.2. Purpose of Plan. The purpose of the Plan is to provide a means for
the Company to attract and retain key employees whose decisions and services
will have a substantial impact upon the profitability and growth of the Company
and the products and services the Company provides to its customers.
ARTICLE II
----------
Definitions
-----------
2.1. "Account" means the account established and administered for the
benefit of a Participant under the Plan.
2.2. "ALS" means Advantage Learning Systems, Inc., a Wisconsin
corporation, or any successor to such corporation.
2.3. "Board of Directors" means the Board of Directors of the Company as
it is constituted from time to time.
2.4. "Book Value" as of any date shall mean the consolidated shareholders'
equity of the Company, determined in accordance with GAAP and as reflected on
the interim financial statements of the Company prepared on a monthly basis for
the month prior to such date, or, if the previous month end was audited, the
regular audited financial statements of the Company prepared as of the close of
such month. If at any time there are any issued and outstanding shares of
preferred stock of the Company, other than shares of preferred stock issued with
respect to its Common Stock either as a stock dividend or pursuant to a plan of
reorganization or recapitalization, then for purposes of determining the Book
Value, the Company's consolidated shareholders' equity shall be adjusted by
subtracting therefrom the amount of capital and surplus attributable to such
preferred stock.
<PAGE>
2.5. "Cause" for termination of a Participant's employment with the
Company means (i) any failure of the Participant to substantially perform his
duties with the Company (other than by reason of illness) which occurs after the
Company has delivered to the Participant a demand for performance which
specifically identifies the manner in which the Company believes the Participant
has failed to perform his duties, (ii) the commission by the Participant of any
act of dishonesty or disloyalty involving the Company or its business, or (iii)
the conviction of the Participant of a felony or misdemeanor which impairs his
ability to perform his duties for the Company.
2.6. "CD Rate" means the rate of interest in effect on the first day of
any Fiscal Year at Wood County Bank of Wisconsin Rapids, Wisconsin, or any
successor thereto, for five year certificates of deposit.
2.7. "Code" means the Internal Revenue Code of 1986, as amended.
2.8. "Common Stock" means the Company's $.01 par value common stock.
2.9. "Company" means Institute for Academic Excellence, Inc., a Wisconsin
corporation, or any successor to such corporation.
2.10. "Declining Balance Method" means a method to determine the amount of
each of a series of periodic distributions in which each distribution is a
fraction of the amount available on the distribution date. The numerator of the
fraction shall be one and the denominator shall be the remaining number of
unpaid periodic distributions at each distribution date (including the
distribution to be made on that date).
2.11. "Disability" means a Participant's total disability as defined in
such long-term disability insurance plan for salaried employees as the Company
may, from time to time, have in effect or, if at any time no such plan is in
effect, a Participant shall be considered to be disabled if he has been unable
to perform, or if it is apparent to a reasonable degree of medical certainty
that he will be unable to perform, his regular duties for the Company for a
continuous period of 180 consecutive days by reason of physical or mental
illness or incapacity. If there is any dispute as to whether a Participant is
or was disabled, such questions shall be submitted to a licensed physician
designated by the Company in good faith and the determination of such physician
shall be conclusive. The Participant shall submit to such examinations and
provide such
2
<PAGE>
information as any such physician may request. A disability shall be deemed to
be continuous unless the Participant performs his regular duties for the Company
for a continuous period of one month.
2.12. "Fiscal Year" means the fiscal year of the Company ending on such
date as is established from time to time.
2.13. "GAAP" means generally accepted accounting principles.
2.14. "Loss Carryforward Account" means an account, the balance of which
shall initially be zero, which is (A) increased by the Company's net loss as
computed for book purposes determined in accordance with GAAP and as reflected
on the Company's year-end financial statements for any prior Fiscal Year and (B)
decreased, but not below zero, by the net profit before tax as computed for book
purposes determined in accordance with GAAP and as reflected on the Company's
year-end financial statements for any prior Fiscal Year.
2.15. "Net Profit Before Tax" means, for any fiscal Year, (A) the
Company's net profit before tax for that year as computed for book purposes
determined in accordance with GAAP but without regard to any expense for amounts
paid or accrued under the Plan for such year less (B) the Loss Carryforward
Account, if any.
2.16. "Participant" means any employee of either the Company or ALS who
has been designated by the Board of Directors, in its sole discretion, as a
Participant pursuant to Paragraph 3.1, below, and who remains employed by either
the Company or ALS, it being contemplated that any employee of the Company may
become an employee of ALS and vice versa, while continuing to remain a
Participant hereunder.
2.17. "Phantom Stock" means up to 100,000 shares of phantom stock which
entitle any holder of one or more shares to an interest in the Net Profit Before
Tax and Triggering Event Price.
2.18. "Retirement" means the termination of a Participant's employment
with the Company or ALS (other than for Cause) at or after the later of (A) age
55, or (B) five full years of employment with the Company or ALS, or in any
individual case, after a Participant has met other criteria or passed other
milestones established by the Board of Directors.
3
<PAGE>
2.20. "Share" means an interest equal to .001% of the Net Profit Before
Tax and .001% of the Triggering Event Price.
2.21. "Triggering Event" means (A) the acquisition in any one transaction
or a series of related transactions by one or more persons who are not "related
persons" of (i) all or substantially all of the assets of the Company, or (ii)
more than fifty percent (50%) of the Common Stock or (B) the filing by the
Company of a Registration Statement under the Securities Act of 1933, as amended
(the "Act") which becomes effective under the Act. For purposes hereof,
"related persons" shall mean any one or more members of a group consisting of
(a) Terrence and Judith Paul, their issue and/or spouses of their issue; (b) a
trust or estate of which one or more persons described in (a) are beneficiaries;
(c) a corporation or other enterprise in which any one or more persons, trusts
or estates described in (a) and/or (b) own at least a majority of the
outstanding stock entitled to vote in the election of such corporation's Board
of Directors or, in the case of an unincorporated enterprise, the right to
receive at least a majority of the profits of such enterprise; or (d) any
corporation or other entity which is controlled by any corporation described in
(c), above.
The date or time a Triggering Event shall be deemed to occur shall be the
date of closing for a sale of assets, the date of closing of the last of the
related transactions pursuant to which any person or persons acquire more than
fifty percent (50%) of the Common Stock, or the date of sale of stock of the
Company pursuant to the Registration Statement.
2.22. "Triggering Event Price" means the excess, if any, of (A) (i) with
respect to a Triggering Event consisting of an acquisition of all or
substantially all of the Company's assets, the Book Value of the Company as
defined in Section 2.3 but determined immediately after such Triggering Event
and after giving effect thereto; (ii) with respect to a Triggering Event
consisting of an acquisition of Common Stock, the fair market value of the
Company based on the average price per share of Common Stock received by the
person or persons selling stock in such Triggering Event and (iii) with respect
to a Triggering Event consisting of a Registration Statement which becomes
effective, the fair market value of the Company based on the public offering
price per share of Common Stock, as set forth in the Prospectus which is part of
the Registration Statement over (B) Book Value at the end of the month
immediately preceding the Triggering Event.
4
<PAGE>
ARTICLE III
-----------
Participation and Accounts
--------------------------
3.1. Participation and Initial Credit of Shares. The Participants in the
Plan shall be those employees of the Company or ALS who are from time to time
designated as Participants by the Board of Directors. Effective as of the date
of their designation as Participants, an initial credit shall be made to each
Participant's Account of such number of Shares of Phantom Stock as may be
determined by the Board of Directors at the time of designation. The Board of
Directors may, in its sole discretion, at any time or times thereafter credit
additional Shares to a Participant's Account. Within 10 days after such
designation has been made, the Board of Directors shall direct the Secretary of
the Company to notify each Participant in writing of such designation and of the
number of Shares allocated to his Account and shall provide a certificate to
such Participant evidencing such Participant's participation in the Plan, and in
connection therewith, each Participant shall execute an acknowledgment on the
face of such certificate that such Participant has received and reviewed a copy
of the Plan and has agreed to be bound by the terms of such Plan.
3.2. Establishment of Account. The Company shall establish on its books
of account a separate Account in each Participant's name which shall be used for
the purpose of determining the benefits to which Participants shall from time to
time be entitled hereunder. There shall be recorded in each such Account:
(a) The number of Shares from time to time credited to such
Account pursuant to the Plan;
(b) The dollar amounts, if any, credited to such Account
pursuant to Paragraphs 4.2 and 4.3 of the Plan; and
(c) Interest, if any, credited to such Account as provided in
Paragraph 4.2 of the Plan.
Such Accounts shall be maintained solely for accounting purposes, and no assets
of the Company shall be segregated or subject to any trust for a Participant's
benefit by reason of the establishment of such Account nor shall a Participant
acquire any rights by reason of the establishment thereof otherwise than as
provided in this Plan. A Participant shall have no interest in any fund or in
any specific asset or assets of the Company by reason of his participation in
the Plan.
5
<PAGE>
3.3. Vesting. If the Board of Directors so determines, the Shares awarded
to a Participant may be subject to a vesting schedule such that a Participant is
only entitled to the full number of Shares credited to his Account from time to
time after completing a certain number of years of service with the Company. The
Shares will become fully vested upon the occurrence of a Triggering Event or the
death, Disability or Retirement of a Participant. In addition, any dollar
amounts credited or paid pursuant to Paragraph 4.1 shall, using the vesting
schedule determined by the Board of Directors, be adjusted based on the time
expired since the crediting of each Share.
3.4. Forfeiture of Shares. Notwithstanding any other provision hereof, if
a Participant ceases to be employed by either the Company or ALS for any reason,
then such Participant automatically shall forfeit his Shares and no further
amounts shall be credited to his Account other than as provided in Article IV
hereof; provided that no transfer of employment of a Participant from the
Company to ALS, or vice versa, shall cause such forfeiture.
ARTICLE IV
----------
Determination and Payment of Benefits
-------------------------------------
4.1. Payment of Net Profit Before Tax. Within 90 days after the end of
each Fiscal Year during which a Participant is employed by the Company or ALS
and within 90 days after the end of each of the 5 Fiscal Years after the Fiscal
Year in which a Participant's employment by the Company or ALS terminates (if
such termination occurs because of death, Disability or Retirement), each
Participant shall be paid in cash an amount equal to .001% (.00001) of the
Company's Net Profit Before Tax for such Fiscal Year for each Share of Phantom
Stock credited to his Account as of the close of the Fiscal Year for which
payment is made or at the time of termination of his employment, as the case may
be. No payment shall be made to a Participant under this Paragraph 4.1 after the
termination of his employment if his employment has terminated other than
because of death, Disability or Retirement. Payments pursuant to this Section
4.1 with respect to Net Profit Before Tax for the Fiscal Year in which any
Shares are first credited to a Participant's Account shall, if such Shares are
not credited as of the first day of such Fiscal Year, be reduced prorata in
proportion to the number of days elapsed prior to the date such Shares are
credited. For example, if the Company's Fiscal Year is a calendar year and
Shares are first credited to a Participant's Account on April 1, the payments
made to the Participant for such initial Fiscal Year with respect to such Shares
shall be reduced by 25% of the amount otherwise payable under this Section 4.1.
4.2. Deferral Election. Notwithstanding the provisions of Paragraph
4.1, a Participant may elect to defer payment of all or any portion of the Net
Profit Before Tax attributable to his Shares for any Fiscal Year. Such election
shall be made in writing in the form of the election attached hereto as Exhibit
A, shall be irrevocable and shall specify the percentage of the Participant's
profit share for any Fiscal Year which the Participant desires to defer. Such
election must be
6
<PAGE>
made (A) with respect to the first Fiscal Year in which an employee is
designated as a Participant, within thirty days after his designation by the
Board of Directors, and (B) with respect to each subsequent Fiscal Year, prior
to the commencement of such Fiscal Year. If a Participant elects to defer all or
any portion of his profit share for any Fiscal Year, the amount so deferred will
be credited to his Account as of the beginning of the subsequent Fiscal Year and
shall be paid to him upon the termination of his employment or upon the
occurrence of a Triggering Event as provided in Paragraphs 4.4 or 4.5, below.
Interest shall accrue on the unpaid balance of each Participant's Account during
each Fiscal Year at the CD Rate in effect for such Fiscal Year and shall be
credited to each Account on the last day of each Fiscal Year and upon payment of
the Account balance in full.
4.3. Occurrence of Triggering Event. If a Triggering Event occurs
(A) while a Participant is employed by the Company or ALS, (B) within five years
after the termination of his employment because of death, Disability or
Retirement or (C) within two years after the termination of his employment if
such termination is effected by the Company or ALS other than for Cause, the
Participant's Account shall be credited with an amount equal to .001% (.00001)
of the Triggering Event Price for each Share credited to the Participant's
Account at the time of the Triggering Event or the termination of his
employment, as the case may be, reduced, in the case of a Participant whose
employment has terminated at the time of the Triggering Event, by 20% for each
full year elapsed from the time of termination of employment to the occurrence
of the Triggering Event. The amount so credited, together with any amounts
credited to the Participant's Account pursuant to Paragraph 4.2, shall be paid
to the Participant as provided in Paragraph 4.5. No credit shall be made to a
Participant's Account under this Paragraph 4.3 if his employment has terminated
other than because of death, Disability or Retirement or more than five years
before the occurrence of a Triggering Event or, in the case of a Participant
whose employment is terminated by the Company or ALS other than for Cause, more
than two years before the occurrence of a Triggering Event.
4.4. Payment of Account Balance as a Result of Termination of
Employment. If a Participant's employment with the Company and/or ALS is
terminated other than in connection with a Triggering Event, the balance
credited to a Participant's Account pursuant to this Article IV shall be payable
to such Participant annually in five periodic distributions determined under the
Declining Balance Method. The first such distribution shall be made not later
than sixty days after the termination of
7
<PAGE>
such Participant's employment and the remaining distributions shall be made on
successive anniversaries of the date of the first distribution. If a Triggering
Event occurs after the termination of a Participant's employment, but before he
has been paid the entire unpaid balance in his Account, the Company shall pay
the remaining unpaid balance in his Account to him in a lump sum no later than
sixty days after the occurrence of a Triggering Event. Notwithstanding what is
provided above, if the amount otherwise distributable to a Participant on any
payment date would be less than $10,000, the Company shall pay to the
Participant an amount equal to the lesser of $10,000 or the entire balance then
remaining in his Account. In addition, the Board of Directors may, in its sole
discretion, elect to prepay in whole or in part at any time any Participant's
Account balance under the Plan.
4.5. Payment of Account Balance as a Result of a Triggering Event.
If a Triggering Event occurs, the balance credited to a Participant's Account
pursuant to this Article IV shall be paid to such Participant in a lump sum no
later than sixty days after the occurrence of the Triggering Event.
Notwithstanding the foregoing, if payment of the balance in a Participant's
Account would be subject to the limitations on deductibility of compensation
contained in Section 162(m) of the Code or any successor thereto, the balance in
his Account shall be paid out over such period of time as required so that the
deductibility of the payments will not be limited by Section 162(m), but in no
event longer than five (5) years. In each year, payments from the Account will
be in the greatest amount possible while still complying with the limits of
Section 162(m) of the Code. Interest shall be credited on any balance not paid
in a lump sum in the same manner as provided in Paragraph 4.2 hereof.
4.6. Beneficiary Designation. If a Participant dies prior to the
distribution to him of all amounts payable to him under the Plan, the amounts
otherwise distributable to the Participant shall be distributed to such
beneficiary or beneficiaries as may have been last designated by such
Participant in a written beneficiary designation delivered to the Secretary of
the Company, which shall be in the form attached hereto as Exhibit B. If the
Participant has not made any effective beneficiary designation or the
beneficiary or all beneficiaries designated by the Participant predecease the
Participant, then the amounts otherwise payable to the Participant under the
Plan shall be paid to the Participant's estate unless, in the latter event, the
Participant's beneficiary designation provides otherwise. If a beneficiary
designated by the Participant shall survive the Participant but die before
payment of all of the amounts payable
8
<PAGE>
to such beneficiary under the Plan, then the amounts otherwise payable hereunder
to the deceased beneficiary shall be paid to the deceased beneficiary's estate
unless the Participant's beneficiary designation provides otherwise. The Company
shall have no responsibility with respect to the validity of any beneficiary
designation made by the Participant and shall be fully protected if it acts
thereon in good faith.
4.7. Withholding. The Company shall deduct from all payments made
under the Plan any social security taxes, federal, state or local income tax
withholding or other payroll deductions which the Company believes it is
required to make, and all amounts payable or distributable under the Plan are
stated herein before any such deductions. The Company shall have the right to
rely on an opinion of its legal counsel or its independent auditors as to the
amount to be so deducted.
4.8. Termination for Cause. Notwithstanding anything provided herein
to the contrary, if a Participant's employment with the Company and/or ALS is
terminated for Cause, all Shares and balances credited to the Participant's
Account shall be forfeited and the Participant shall be entitled to no rights or
payments under the Plan.
ARTICLE V
---------
Administration
--------------
5.1. Duties of the Board of Directors. The Plan shall be
administered by the Board of Directors. Subject to the provisions of the Plan,
the Board of Directors shall have the exclusive power to select Participants to
participate in the Plan and to determine the Shares to be granted to such
Participants and the timing of such grants. The Board of Directors shall have
the authority to prescribe the form or forms evidencing the granting of Shares
and to establish, adopt or revise such rules and regulations as it deems
necessary or appropriate for administration of the Plan, provided that such
rules and regulations are not inconsistent with the provisions of the Plan.
5.2. Determinations of the Board of Directors. All determinations of
the Board of Directors, irrespective of their character or nature, including,
but not limited to, all questions of construction and interpretation of the
Plan, shall be final, binding and conclusive. Without limiting the generality
of the foregoing, the determination of the Board of Directors as to whether a
Participant has terminated his employment with the Company and the date and
cause thereof shall be final, binding and conclusive. If a Participant is, at
any time after the grant
9
<PAGE>
to him of Shares under the Plan, also a director of the Company, such
Participant shall abstain from voting with respect to any such determinations
or, if his vote is necessary for such determination to legally constitute the
act of the Board of Directors, he shall cast his vote in accordance with the
vote of a majority of the other directors voting on the matter.
5.3. Advice of Counsel. The Company and the Board of Directors may
each consult with legal counsel, who may be counsel regularly employed by the
Board of Directors or independent legal counsel, with respect to its obligations
and duties hereunder or with respect to any action or proceeding or any other
question of law and shall not be liable for any action taken or omitted by it in
good faith pursuant to the advice of such counsel.
5.4. Accounting Determinations. All accounting determinations and
financial calculations made under the Plan, including the determinations of Book
Value and the Triggering Event Price shall be made in accordance with GAAP
consistently applied. Any dispute with respect to any accounting determinations
or calculations, including determinations of the balance due to a Participant
under the Plan, at the request of such Participant or the Company, shall be
submitted to the Company's regular independent accountants and the decision of
such accountants shall be final, binding and conclusive. The fees for any such
services rendered upon a dispute shall be divided evenly between the Company and
the Participant involved.
5.5. Books and Records. The Secretary of the Company shall be
responsible for maintaining the books and records for the Plan. Such books and
records shall only be open for examination by a Participant or his duly
designated beneficiary to the extent that they specifically involve his Account
or any payments which are to be made to him or his beneficiary hereunder. All
beneficiary designations and notices hereunder shall be filed with the Secretary
of the Company.
ARTICLE VI
----------
Certain Rights and Obligations of Participants
----------------------------------------------
6.1. Copies of Plan. Each Participant shall be entitled to receive
an updated copy of the Plan upon his designation as such. Thereafter as long as
he remains a Participant, he shall be entitled to receive copies of any
amendments to the Plan within sixty (60) days after their adoption by the Board
of Directors.
10
<PAGE>
6.2. No Right to Employment. The designation of an employee of the
Company or ALS as a Participant under this Plan shall not be construed as
conferring upon such employee any right to remain in the employ of the Company
or, if a Participant is at any time after the grant to him of Shares also a
director of the Company, any right to remain a member of the Board of Directors.
The right of the Company to discipline or discharge an employee shall not be
affected in manner by reason the designation of such employee as a Participant
under the Plan.
ARTICLE VII
-----------
Nontransferability of Shares or Benefits
----------------------------------------
Except as otherwise specifically provided in Paragraph 4.6, above, and
to the extent permitted by law, the right of any Participant or any beneficiary
to receive any payment hereunder shall not be subject to alienation, sale,
transfer, assignment, pledge, attachment, garnishment or encumbrance of any
kind, and no payments due hereunder shall in any manner be subject to the debts
or liabilities of any Participant or beneficiary. Any attempt to alienate,
sell, transfer, assign, pledge or otherwise encumber any such payments, whether
presently or thereafter payable, shall be null and void and without any legal
effect.
ARTICLE VIII
------------
Amendment, Suspension and Termination of the Plan
-------------------------------------------------
The Board of Directors may terminate the Plan at any time or from time
to time amend or suspend the Plan, except that no amendment, suspension or
termination of the Plan shall alter or impair any of the rights or obligations
with respect to any Shares theretofore granted to Participants under the Plan
without the consent of Participants holding a majority of the Shares then issued
to Participants in the Plan who are then employees of the Company or ALS.
ARTICLE IX
----------
Miscellaneous
-------------
9.1. Expenses. All expenses of administering the Plan shall be paid
by the Company except as expressly provided herein to the contrary.
9.2. Costs of Legal Proceedings. If any legal proceedings are
instituted by any Participant or the Company against the other with respect to
any dispute arising under the Plan or
11
<PAGE>
to collect any benefits due under the Plan, the prevailing party in such
proceedings shall be entitled to recover the costs of litigation and reasonable
attorneys fees from the other party; provided, however, that if the Company or
the Participant, his beneficiary or any other person claiming an interest by or
through the Participant shall commence an action or proceeding the principal
purpose of which is to effect a division of, or to determine entitlement to,
payments hereunder, the costs of defending or bringing such action shall be
charged and offset against any amounts payable to such Participant, his
beneficiaries or his or their successors pursuant hereto.
9.3. Governing Law. The Plan shall be construed, administered and
governed in all respects under and by the applicable laws of the State of
Wisconsin.
9.4. Use of Words. Wherever the context so requires, words in the
masculine gender include the feminine, words in the feminine include the
masculine, and words in the singular include the plural.
9.5. Binding Effects. In consideration of the benefits conferred
hereunder, each Participant shall be conclusively presumed to have agreed to be
bound by all of the terms and conditions of this Plan as presently constituted
and as it may be amended from time to time.
9.6. Independence of Plan. It is intended that the Plan be construed
and administered independent of any and all other employee benefit plans, fringe
benefit programs or compensation arrangements of the Company. Accordingly,
except as otherwise determined by the Board of Directors, neither the Plan nor
any of the benefits payable hereunder shall be construed, administered or
considered so as to have any effect on any existing or future pension, profit-
sharing, incentive compensation or other employee benefit program or plan of the
Company and no such program or plan of the Company shall be construed or
administered to have any effect on the Plan.
9.7. Separability. If any provision of this Plan is held for any
reason to be unenforceable by a court of competent jurisdiction, the remainder
of this Plan shall, nevertheless, remain in full force and effect in such
jurisdiction.
9.8. Notices. Any notice required or permitted to be given under the
Plan shall be sufficient if hand delivered or if mailed or sent by commercial
delivery service, postage or other fees prepaid, to the Company at its main
corporate office or to a Participant at his latest address on the records of the
Company.
12
<PAGE>
9.9. Headings. The headings of Articles and Paragraphs of the Plan
are for convenience of reference only and shall not control or affect the
meaning or construction of any of its provisions.
13
<PAGE>
EXHIBIT A
---------
Deferral Election
-----------------
The undersigned, as a participant in the Institute for Academic
Excellence, Inc. Phantom Stock Plan (the "Plan") is entitled to receive a
payment under Paragraph 4.1 of the Plan for the fiscal year of Institute for
Academic Excellence, Inc. ending ______________ (the "Fiscal Year"), hereby
elects to defer _____% of such payment for the Fiscal Year, and directs
Institute for Academic Excellence, Inc. to make such deferral in accordance with
the terms of the Plan.
IN WITNESS WHEREOF, the undersigned has executed this Deferral
Election on the _____ day of ____________, 19___.
___________________________________
<PAGE>
EXHIBIT B
---------
Beneficiary Designation
-----------------------
The undersigned, as a participant in the Institute for Academic
Excellence, Inc. Phantom Stock Plan (the "Plan") hereby designates, pursuant to
Paragraph 4.6 of the Plan, ______________ as the undersigned's beneficiary to
receive payments under the Plan until and unless the undersigned changes such
designation pursuant to Paragraph 4.6 of the Plan.
IN WITNESS WHEREOF, the undersigned has executed this Beneficiary
Designation on the _____ day of _______________, 19___.
___________________________________
<PAGE>
Exhibit 10.7
ACCELERATED READER RESALE AGREEMENT
Agreement, made in duplicate this 1st day of May, 1994, between Advantage
Learning Systems, Inc., a Wisconsin corporation of Wisconsin Rapids, Wisconsin,
hereinafter called ALS, and Perma-Bound, a Division of Hertzberg-New Method,
Inc., of Jacksonville, Illinois, hereinafter called Perma-Bound.
Whereas, ALS is engaged in the publishing and sale of reading management
software and other related products which are sold exclusively to schools under
its Accelerated Reader trademark, which software is hereinafter called AR;
Whereas, Perma-Bound is an important seller of books to the school library
and reading market in the USA and Canada; and
Whereas, sales of AR tends to significantly increase the demand for books;
and
Whereas, ALS and Perma-Bound wish to cooperate for the purpose of selling
AR;
Now, therefore, in consideration of the premises, it is agreed as follows:
1. Appointment. ALS hereby appoints Perma-Bound as a non-exclusive
distributor of AR for the United States and Canada during the term hereof.
Perma-Bound agrees to sell AR on a best-efforts basis. There shall be no minimum
purchase requirement. BRW 4 May 1994 Anb 5 May 94.
2. Restricted to School Customers. Perma-Bound shall sell AR only to
accredited public or private schools, school districts, or other organizations
for use in schools. Perma-Bound shall not sell AR to public or private
libraries, non-school commercial tutoring companies, or to any other person or
organization where AR is not intended to be used in a school. For purposes of
this agreement, a home school is not considered to be a school.
3. Shipment. ALS will ship AR the next working day for orders received
before noon on a best-efforts basis.
4. Prices and Discounts. [Pricing and discount information deleted]
All other prices, discounts, and special promotional pricing will be jointly
reviewed and agreed to in advance of any official announcement.
5. Primary Focus. The primary focus of Perma-Bound's AR selling activity
will be to sell AR kits to schools which are not currently using the program.
6. Training. ALS will provide training once per year at a site to be
determined, and at other times mutually agreed to.
7. Promotional Materials. [Description of promotional materials deleted]
<PAGE>
required by Perma-Bound and Reps in their selling activity at no charge. For
videos supplied to Perma-Bound, ALS modify them to include Perma-Bound's
name, telephone, and address information.
8. On-line Support. ALS will provide Perma-Bound field sales
representatives with on-line sales and technical support assistance by assigning
an ALS telephone account representative to each Perma-Bound sales
representative.
9. AR Customer List. For purposes of initial start-up, ALS will provide
to Perma-Bound a subset of existing installed users within the geographic
territory of Perma-Bound rep for purposes of introduction and better
understanding of AR and how it is used.
10. Customer Registration. Upon making an AR kit sale, Perma-Bound shall
provide ALS customer name and address information including contact name, school
name, address, quantity purchased, ALS part number, and Perma-Bound's sales
rep's name. In the case of kit sales to district offices or other offices acting
as the purchasing authority for a school, both the district or other purchasing
authority and the using school, contact name, and address shall be provided if
it is available. ALS will compare the Perma-Bound school customers who have
purchased a kit to the existing ALS customer database. If there is no match, the
school will be considered a "Perma-Bound Source Customer." If there is a match,
the school will not be considered a Perma-Bound Source Customer. ALS will insert
a Perma-Bound flyer and no other book flyer with all software shipments ALS
makes to Perma-Bound Source Customers for as long as Perma-Bound continues as a
reseller.
11. Warranty Service and Technical Support. ALS shall be responsible for
all warranty service and technical support to Perma-Bound Source Customers on
the same basis as such warranty service and technical support is provided to all
ALS customers.
12. Trademarks. Perma-Bound shall not use the signature, monogram, or any
other trademark or name that is now or may hereafter be owned by ALS, except in
a manner, and to an extent that ALS may consent in writing. If any trademark or
name is used by Perma-Bound with the written approval of ALS, Perma-Bound on the
termination of this agreement shall discontinue all such use, and shall not
thereafter use any name, title, or expression in connection with any business in
which Perma-Bound may thereafter be engaged which resembles any trademark or
name, owned by ALS as may be likely to lead to confusion or uncertainty on the
part of the public.
13. Term. This agreement shall be for a term of two years and four months
(5/1/94 through 8/31/96) from the date first set out in this agreement and
continue from year to year thereafter until either of the parties shall give two
months' written notice to the other prior to the end of any such term that this
agreement shall not be renewed.
14. Termination for Cause. Each party hereto reserves the right, in case
the other party fails to carry out any material conditions of this agreement, to
cancel the agreement after due demand in writing addressed to the other party.
If at the end of 30 days from the date of the receipt of such demand or the date
when said demand should be received in the normal course of the mails, the other
party has not complied with the demand, the agreement shall immediately end,
without the necessity of any other steps being taken.
15. Non-assignability. This agreement shall not be assigned or
transferred by Perma-Bound directly or indirectly without the written consent of
ALS.
16. Relationship of Parties. This agreement does not constitute Perma-
Bound or any representative the agent or legal representative of ALS for any
purpose whatsoever. Perma-Bound is not granted any right or authority to assume
or to create any obligation or responsibility, express or implied in behalf of
or in the name of ALS or to bind ALS in any manner or thing whatsoever.
<PAGE>
17. Modifications. No change, addition, or erasure of any portion of this
agreement shall be valid or binding upon either party. It is declared by both
parties that there are no oral or other agreements or understandings between
them affecting this agreement, or related to the selling or servicing of said
products. This agreement supersedes all previous agreements between the parties.
18. No Implied Waivers. The failure of either party at any time to
require performance by the other party of any provision hereof shall in no way
effect the full right to require such performance at any time thereafter. Nor
shall the waiver by either party of a breach of any provision hereof be taken or
held to be a waiver of any succeeding breach of such provision or as a waiver of
the provision itself.
19. Governing Law. This agreement is to be governed by and construed
according to the laws of the State of Illinois. It is understood, however, that
this is a general form of agreement, designed for use in the United States of
America, and that if any provision herein which may for any reason be determined
to be void by any enforcing jurisdiction, the void provision shall be severable
and the remaining part of the agreement shall continue to valid.
20. Matters to be Submitted to Arbitration. All disputes and
controversies of every kind and nature between the parties arising out of or in
connection with this agreement as to the existence, construction, validity,
interpretation or meaning, performance, non-performance, enforcement, operation,
breach, continuance, or termination thereof shall be submitted to arbitration
following 30 days of good faith negotiation between the parties after written
notice of a dispute including the particulars. Arbitration shall be conducted
pursuant to the procedures and rules as set forth by the American Arbitration
Association and any dispute or controversy so submitted shall be binding on the
parties.
21. Notices. Any notice provided for or concerning this agreement shall
be in writing and be deemed sufficiently given three days after being sent by
certified or registered mail, if sent to the respective address and title of the
person for each party as set forth below:
For ALS: For Perma-Bound:
Harry N. Barfoot III Benson Mangum
President National Marketing Manager
Advantage Learning Systems, Inc. Perma-Bound
P.O. Box 8036 Vandalia Road
Wisconsin Rapids, WI 54495-8036 Jacksonville, IL 62650
IN WITNESS WHEREOF, the parties have executed this agreement to be
effective on the day and year first above written.
Advantage Learning Systems, Inc. Perma-Bound
a division of Hertzberg-New Method, Inc.
By /s/ H. N. Barfoot III By /s/ Benson R. Mangum
------------------------ ----------------------
Title President Title National Mkt Mgr
--------------------- -------------------
Date 5/2/94 Date 5/4/94
---------------------- --------------------
<PAGE>
[ADVANTAGE LOGO] ADVANTAGE
----------------------
Learning Systems, Inc.
July 12, 1996
Mr. Ben Magnum
Natl Marketing & Sales Manager
Perma-Bound
Vandalia Road
Jacksonville, IL 62650
Fax: 800-861-8143
Dear Ben:
As agreed over the phone, the discount structure that will apply to sales of the
S.T.A.R. reading test is as follows:
[Pricing information deleted]
This additional discount will apply for sales made from now through June 30,
1997, at which time we will both re-examine the program and determine whether
and how to continue it.
It was also agreed that your regional managers will come into our headquarters
in Wisconsin Rapids for a full day of training on AR, AR implementation issues,
S.T.A.R., and any other products that we may mutually agree to add to our
arrangement in the future. This training will be held annually, with dates to be
agreed upon, and will be presented at our expense, with your managers' travel
and lodging to be at your expense. Sonja Swanson will be in touch with you next
week to arrange dates for this year's training.
- -------------------Publishers of the Accelerated Reader/TM/--------------------
Box 8036 / Wisconsin Rapids, Wisconsin 54495-8036 / Toll-Free (800) 338-4204 or
(715) 424-3636 / Fax: (715) 424-4242
<PAGE>
Mr. Ben Magnum
July 12, 1996
Page 2
Please sign and return this letter as indication of acceptance. Ben, we look
forward to working with you on S.T.A.R.
Sincerely,
/s/ Michael H. Baum
Michael H. Baum
Chief Executive Officer
MHB/rm
cc: John Hickey
Scott Knickelbine
Sonja Swanson
Robert Meyer
Accepted:
Perma-Bound Books
By:
/s/ Benson Magnum
- ----------------------------------
Benson Magnum
National Marketing & Sales Manager
<PAGE>
Exhibit 10.8
PROMISSORY NOTE
---------------
$2,350,000.00 August 1, 1996
FOR VALUE RECEIVED, IPS PUBLISHING, INC., a Washington corporation
("Maker"), unconditionally promises to pay to the order of JUDITH A. PAUL
("Payee") at its principal office or at such other place as the Payee may direct
in writing, the principal sum of Two Million Three Hundred Fifty Thousand and
No/100's Dollars ($2,350,000.00) together with interest accruing from and after
the date hereof on the unpaid principal balance hereof from time to time
outstanding at the rate of six and one-half percent (6.5%) per annum. The entire
balance of principal and accrued interest shall be payable in a single payment
on January 2, 1998.
The Maker reserves and shall have the right to prepay all or any portion of
the unpaid principal balance hereof at any time without premium or penalty.
Payments hereon shall be applied first against interest accrued to the date of
prepayment and then to principal.
The Maker hereby waives presentment, demand, protest and notice of any
kind. No failure to exercise and no delay in exercising any rights hereunder on
the part of the Payee or any other holder hereof shall operate as a waiver
thereof. In the event of a default hereunder, the Maker agrees to pay all costs
of collection, including reasonable attorneys' fees.
IPS PUBLISHING, INC.
/s/ Kaye Nelson
---------------------------
Kaye Nelson, President
Attest:
/s/ Terrance D. Paul
---------------------------
Terrance D. Paul, Secretary
<PAGE>
Exhibit 10.9
PROMISSORY NOTE
---------------
$2,350,000.00 August 1, 1996
FOR VALUE RECEIVED, IPS PUBLISHING, INC., a Washington corporation
("Maker"), unconditionally promises to pay to the order of TERRANCE D. PAUL
("Payee") at its principal office or at such other place as the Payee may direct
in writing, the principal sum of Two Million Three Hundred Fifty Thousand and
No/100's Dollars ($2,350,000.00) together with interest accruing from and after
the date hereof on the unpaid principal balance hereof from time to time
outstanding at the rate of six and one-half percent (6.5%) per annum. The entire
balance of principal and accrued interest shall be payable in a single payment
on January 2, 1998.
The Maker reserves and shall have the right to prepay all or any portion of
the unpaid principal balance hereof at any time without premium or penalty.
Payments hereon shall be applied first against interest accrued to the date of
prepayment and then to principal.
The Maker hereby waives presentment, demand, protest and notice of any
kind. No failure to exercise and no delay in exercising any rights hereunder on
the part of the Payee or any other holder hereof shall operate as a waiver
thereof. In the event of a default hereunder, the Maker agrees to pay all costs
of collection, including reasonable attorneys' fees.
IPS PUBLISHING, INC.
/s/ Kaye Nelson
---------------------------
Kaye Nelson, President
Attest:
/s/ Terrance D. Paul
---------------------------
Terrance D. Paul, Secretary
<PAGE>
Exhibit 10.10
LOAN AGREEMENT
THIS LOAN AGREEMENT is made and entered into on the 21st day of June,
1996, by and between M&I Mid-State Bank, NA, Wisconsin banking corporation
("M&I"), and Advantage Learning Systems, Inc., a Wisconsin corporation
("Borrower").
IN CONSIDERATION of the mutual covenants, conditions and agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Loan Agreement, the following terms shall have the
meanings specified:
1.1 Advance. "Advance" shall mean the advance by M&I to the Borrower pursuant
to Article II hereof.
1.2 Affiliate. "Affiliate" shall mean any Person:
(a) that directly or indirectly controls, or is controlled by, or is
under common control with, the Borrower;
(b) that directly or indirectly beneficially owns or holds five percent
(5%) or more of any class of voting stock of the Borrower;
(c) five percent (5%) or more of the voting stock of which Person is
directly or indirectly beneficially owned or held by the Borrower;
(d) that is an officer or director of the Borrower;
(e) of which an Affiliate is an officer or director; or
(f) who is related by blood, adoption or marriage to an Affiliate.
The term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
1.3 Architect. "Architect" shall mean Planning Associates, Inc., 8025
Excelsior Drive, Madison, Wisconsin 53717.
<PAGE>
1.4 Architect's Contract. "Architect's Contract" shall mean the Agreement
between the Borrower and the Architect as to preparation of the Drawings and
Specifications and construction of the Project.
1.5 Assignment of Architect's Contract. "Assignment of Architect's Contract"
shall mean the agreement which assigns, as additional security for payment of
the Note, the Borrower's interest in the Architect's Contract and the Drawings
and Specifications.
1.6 Assignment of Construction Contract. "Assignment of Construction Contract"
shall mean the agreement which assigns, as additional security for repayment of
the Note, the Borrower's interest in the Construction contract.
1.7 Automatic Event of Default. "Automatic Event of Default" shall mean any one
or more of the following:
(a) the Borrower shall become insolvent or generally not pay, or be
unable to pay, or admit in writing its inability to pay, its debts as
they mature; or
(b) the Borrower shall make a general assignment for the benefit of
creditors or to an agent authorized to liquidate any substantial
amount of its assets; or
(c) the Borrower shall become the subject of an "order for relief" within
the meaning of the United States Bankruptcy Code, or shall file a
petition in bankruptcy, for reorganization or to effect a plan or
other arrangement with creditors; or
(d) the Borrower shall have a petition or application filed against it in
bankruptcy or any similar proceeding, or shall have such a proceeding
commenced against it, and such petition, application or proceeding
shall remain undismissed for a period of sixty (60) days or more, or
the Borrower shall file and answer to such a petition or application,
admitting the material allegations thereof; or
(e) the Borrower shall apply to a court for the appointment of a receiver
or custodian for any of its assets or properties, or shall have a
receiver or custodian appointed for any of its assets or properties,
with or without consent, and such receiver shall not be discharged
within thirty (30) days after his appointment or; or
(f) the Borrower shall adopt a plan of complete liquidation of its
assets.
2
<PAGE>
1.8 Borrower. "Borrower" shall mean Advantage Learning Systems, Inc., a
Wisconsin corporation.
1.9 Business Day. "Business Day" shall mean any day other than a Saturday,
Sunday, public holiday or other day when commercial banks in Wisconsin are
authorized or required by Law to close.
1.10 Closing. "Closing" shall mean consummation of the loan transactions
contemplated by this Loan Agreement.
1.11 Closing Date. "Closing Date" shall mean the date of this Loan Agreement.
1.12 Collateral Documents. "Collateral Documents" shall mean the Mortgage,
Security Agreement, Financing Statements, Assignment of Construction Contract
and Assignment of Architect's Contract.
1.13 Commitment. "Commitment" means the commitment of M&I hereunder to make
Advances to the Borrower in an aggregate principal amount of up to and including
$7,000,000.00 for Borrower's construction of the Project.
1.14 Commitment Termination Date. "Commitment Termination Date" shall mean the
Completion Date, or the date of the termination of M&I's Commitment pursuant to
the terms of this Loan Agreement, whichever date occurs earlier.
1.15 Completion Date. "Completion Date" shall mean March 1, 1997 (provided
that if M&I shall extend such date in writing, then the Completion Date shall be
such later date), being the date of required completion of the Project.
1.16 Contractor. "Contractor" shall mean any person, including the General
Contractor, who shall be engaged to work on, or to furnish materials and
supplies for, the Project.
1.17 Construction Contract. "Construction Contract" shall mean the agreement
between the Borrower and the General Contractor as to construction of the
Project.
1.18 Debt Service Ratio. "Debt Service Ratio" shall mean the ratio of the
Borrower's earnings before interest expense, depreciation and amortization
expenses minus capital expenditures and accrued but unpaid taxes to required
payments under the Obligations.
1.19 Default. "Default" shall mean any event which would constitute an Event
of Default but for the requirement that notice be given or time elapse, or both.
3
<PAGE>
1.20 Disbursing Agent. "Disbursing Agent" shall mean McDonald Title Company,
Attn: Mr. Robert E. McDonald, 1059 Clark Street, Stevens Point, Wisconsin 54481.
1.21 Disbursing Agreement. "Disbursing Agreement" shall the Disbursing
Agreement of even date herewith, executed by M&I and the Disbursing Agent,
pertaining to disbursement of the Advances to the Borrower.
1.22 Draw Request. "Draw Request" shall mean the form, substantially in the
form of Exhibit A attached hereto, which is submitted to M&I when an Advance is
requested and which is referred to in Section 2.2 hereof.
1.23 Drawings and Specifications. "Drawings and Specifications" shall mean the
drawings and specifications prepared by the Architect and identified to this
Agreement by the Architect, the Borrower and M&I.
1.24 Environmental Assessments. "Environmental Assessment" means a review for
the purpose of determining whether the Borrower is in compliance with any
Environmental Laws and whether there exists any condition or circumstance which
requires or will require an investigation, clean-up, removal or other remedial
action under the Environmental Laws on the part of the Borrower, including, but
not limited to, some or all of the following:
(a) on-site inspection, including review of site geology, hydorgeology,
demography, land use and population;
(b) taking and analyzing soil borings, installing ground water monitoring
wells and analyzing samples taken from such wells;
(c) reviewing plant permits, compliance records and regulatory
correspondence and interviewing enforcement staff at regulatory
agencies;
(d) reviewing the operations, procedures and documentation of the
Borrower;
(e) interviewing past and present employees of the Borrower; and
(f) reviewing all records and information regarding the past activities
of prior owners and prior or current tenants of the Facilities.
1.25 Environmental Laws. "Environmental Laws" means all Laws, judgments,
decrees, permits, licenses, agreements and other governmental restrictions, now
or at any time hereafter in effect, relating to:
4
<PAGE>
(a) the emission, discharge or release of pollutants, petroleum or
petroleum products, chemicals or industrial, toxic or hazardous
substances, materials or wastes into the environment, or
(b) the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, petroleum products,
chemicals or industrial, toxic or hazardous substances or wastes, or
(c) the investigation, clean-up or remediation thereof.
These Environmental Laws shall include but not be limited to the Federal Solid
Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Federal Superfund Amendments and Reauthorization Act of 1986, regulations of
the Environmental Protection Agency, regulations of the Nuclear Regulatory
Agency, regulation of any state department of natural resources or state
environmental protection agency now or at any time hereafter in effect and local
health department ordinances.
1.26 Equity. "Equity" shall mean the difference between the Total Project Cost
and the Commitment, being the amount the Borrower is required to invest in the
Project in accordance with the provisions of Section 3.1K. It is the intent of
the parties that the Borrower will invest a minimum of twenty-five (25%) of the
Total Project Cost. However, Borrower may elect to have the following considered
as part of Borrower's required investment in the Project:
(a) seventy-five percent (75%) of Borrower's accounts receivable under
ninety (90) days,
(b) fifty percent (50%) of the Borrower's furniture, fixtures and
equipment at net book value, and
(c) fifty percent (50%) of the Borrower's inventory at cost.
1.27 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended and as in effect from time to time.
1.28 Event of Default. "Event of Default" shall mean any Automatic Event of
Default or any Notice Event of Default.
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1.29 Financing Statement. "Financing Statement" shall mean the financing
statement in substantially the form of Exhibit E attached to this Loan
Agreement.
1.30 General Contractor. "General Contractor" shall mean Planning Associates,
Inc., 8025 Excelsior Drive, Madison, Wisconsin 53717.
1.31 Hard Costs. "Hard Costs" shall mean the costs of constructing the Project
which are set forth as Hard Costs on the Total Project Cost Statement.
1.32 Indebtedness. "Indebtedness" shall mean all liabilities or obligations of
the Borrower whether primary or secondary, absolute or contingent:
(a) for borrowed money or for the deferred purchase price of property or
services (excluding trade obligations incurred in the ordinary
course of business, which are not the result of any borrowing);
(b) as lessee under leases that have been or should be capitalized
according to generally accepted accounting principles;
(c) evidenced by notes, bonds, debentures or similar obligations;
(d) under any guaranty or endorsement (other than in connection with the
deposit and collection of checks in the ordinary course of business),
and other contingent obligations to purchase, provide funds for
payment, supply funds to invest in any Person, or otherwise assure a
creditor against loss; or
(e) secured by and Liens on assets of the Borrower, whether or not the
obligations secured have been assumed by the Borrower.
1.33 Investment. "Investment" shall mean:
(a) any transfer or delivery of cash, stock or other property or value by
such Person in exchange for Indebtedness, stock or any other
security of another Person;
(b) any loan, advance or capital contribution to or in any other Person;
(c) any guaranty, creation or assumption of any liability or obligation
of any other Person; and
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(d) any investment in any fixed property or fixed assets other than fixed
properties and fixed assets acquired and used in the ordinary course
of the business of that Person.
1.34 LIBOR Rate. "LIBOR Rate" shall be computed in accordance with the
following formula:
LIBOR RATE = LONDON INTERBANK RATE
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1.00 -- Reserve Percentage.
The "London Interbank Rate" means the average rate at which U.S. dollar deposits
with a term equal to the applicable LIBOR interest period and in an amount equal
to the LIBOR rate portion are offered to M&I on the London Interbank market.
"Reserve Percentage" means the Federal Reserve system requirement (expressed as
a percentage) applicable to the dollar deposits used in calculating the LIBOR
Rate above.
1.35 Law. "Law" shall mean any federal, state, local or other law, rule,
regulation or governmental requirement of any kind, and the rules, regulations,
written interpretations and orders promulgated thereunder.
1.36 Leverage Ratio. "Leverage Ratio" shall mean the ratio, at a particular
time, of the Borrower's liabilities to Tangible Net Worth.
1.37 Lien. "Lien" shall mean, with respect to any assets:
(a) any mortgage, pledge, lien, charge, security interest or encumbrance
of any kind in respect of such asset; or
(b) the interest of a vendor or lessor under any conditional sale
agreement, financing lease or other title retention agreement
relating to such asset.
1.38 Loans. "Loan" shall mean the loans provided for in this Loan Agreement.
1.39 Loan Agreement. "Loan Agreement" shall mean this Loan Agreement,
together with the Exhibits attached hereto, as the same shall be amended from
time to time in accordance with the terms hereof.
1.40 Mortgage. "Mortgage" shall mean the real estate mortgage from the
Borrower to M&I on the Mortgaged Premises, in substantially the form of Exhibit
C attached to this Loan Agreement.
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1.41 Mortgaged Premises. "Mortgaged Premises" means the real property
described on Exhibit F attached to this Loan Agreement.
1.42 Note. "Note" shall mean the Promissory Note of the Borrower in the form
of Exhibit B attached hereto evidencing the Advances to be made hereunder.
1.43 Notice Event of Default. "Notice Event of Default" shall mean any one or
more of the following:
(a) the Borrower shall fail to pay any installment of principal of, or
interest on, any of the Obligations, or any fee, expense or other
amount due under any of the Obligations, within ten (10) days after
any such amount shall be due and payable; or
(b) there shall be a default in the performance or observance of any of
the covenants and agreements contained in Article VI of this Loan
Agreement; or
(c) there shall be a default in the performance or observance of any of
the covenants and agreements contained in Article VII of this Loan
Agreement, however for Sections 7.2 through 7.15 such default shall
have continued for a period of thirty (30) days; or
(d) there shall be a default in the performance or observance of any of
the other covenants, agreements or conditions contained in this Loan
Agreement, the Notes, the Collateral Documents or any other
documents or materials to be delivered by the Borrower to M&I to the
Borrower specifying such default and requiring it to be remedied,
provided, however, that if the nature of the default involves
noncompliance with ERISA or Environmental Laws which, due to
circumstances beyond the Borrower's reasonable control, cannot be
cured within thirty (30) days, the Borrower shall have such period of
additional time to cure such default as may be reasonably required,
provided that the Borrower promptly commences the cure of such
default and diligently pursues such cure to its completion; or
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(e) any representation or warranty made by the Borrower in this Loan
Agreement or in any document or financial statement delivered
pursuant to this Loan Agreement shall prove to have been false in any
material respect as of the time when made or given; or
(f) any final judgment shall be entered against the Borrower which, when
aggregated with other outstanding final judgments against the
Borrower, exceeds $50,000.00, and shall remain outstanding and
unsatisfied, unbonded or unstayed by a good faith appeal after thirty
(30) days from the date of entry thereof; provided that no final
judgment shall be included in the calculation under this subsection
to the extent that the claim underlying such judgment is covered by
insurance and defense of such claim has been tendered to and accepted
by the insurer without reservation; or
(g) (i) any reportable Event (as defined in ERISA) shall have occurred
which constitutes grounds for the termination of any Plan by the PBGC
or for the appointment of a trustee to administer any Plan, or any
Plan shall be terminated within the meaning of Title IV of ERISA, or
a trustee shall be appointed by the appropriate court to administer
any Plan, or the PBGC shall institute proceedings to terminate any
Plan or to appoint a trustee to administer any Plan, or a Borrower or
any trade or business which together with the Borrower would be
treated as a single employer under Section 4001 of ERISA shall
withdraw in whole or in part from a multi-employer Plan, and (ii) the
aggregate amount of the Borrower's liability for all such
occurrences, whether to a Plan, the PBGC or otherwise, may exceed
$50,000, and such liability is not covered for the benefit of the
Borrower by insurance: or
(h) the Borrower shall:
(i) fail to pay any amount of principal or interest when due
(whether by scheduled maturity, required prepayment,
acceleration or otherwise) under any Indebtedness (other than
the Notes) and such failure shall continue after the applicable
grace period, if any, specified in any agreement or instrument
relating to such Indebtedness, or
(ii) fail to perform or observe any term, covenant or condition on
its part to be performed or observed under any agreement or
instrument relating to any such Indebtedness when required to be
performed or observed, and such failure shall not be waived and
shall continue
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after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such failure to
perform or observe is to accelerate, or to permit acceleration
of, with the giving of notice if required, the maturity of such
Indebtedness; or
(i) Terrance D. Paul and/or Judith A. Paul shall sell, assign, pledge,
transfer, convey or otherwise divest himself, herself, or theirself,
voluntarily or involuntarily, of their shares of voting capital stock
in the Borrower resulting Terrance D. Paul and Judith A. Paul owning
a combined interest in the Borrower which is less than the majority
of Borrower's voting capital stock; or
(j) Terrance D. Paul and/or Judith A. Paul shall cease to be involved in
the full time, active, day-to day management and operation of the
Borrower for any reason other than death or disability; or
(k) Terrance D. Paul and/or Judith A. Paul shall die or become disabled,
unless, within 45 days after the date of death or disability, the
Borrower presents a comprehensive written plan to M&I for the
continuing operation of the Borrower without the deceased or disabled
party and M&I considers said plan in good faith and approves it
within 90 days after the date of death or disability.
1.44 Obligations. "Obligations" shall mean:
(a) the outstanding principal of, and all interest on, the Notes, and any
renewal, extension or refinancing thereof;
(b) all debts, liabilities, obligations, covenants and agreements of the
Borrower contained in this Loan Agreement and any other documents or
materials to be delivered by the Borrower to M&I pursuant to this
Loan Agreement; and
(c) any and all other debts, liabilities, and obligations of the Borrower
to M&I.
1.45 PBGC "PBGC" shall mean Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
1.46 Permanent Loan. "Permanent Loan" shall mean the amount of the advances
from M&I to Borrower in an aggregate principal amount up to and including
$7,000,000 for Borrower's construction of the Project which is converted to a
Permanent Loan per the terms of Article IV of this Loan Agreement.
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1.47 Permitted Investments. "Permitted Investments" shall mean:
(a) Investments in insured savings accounts and certificates of deposit;
(b) Investments in prime commercial paper, rated either P-1 by Moody's
Investors Service or A-1 by Standard & Poor's Corporation, maturing
within one year of the date of acquisition;
(c) investments in obligations of a governmental body rated "A" or
better, maturing within one year of the date of acquisition;
(d) purchases of insurance on the lives of officers or employees of the
Borrower made prior to the date of this Loan Agreement;
(e) purchases of insurance made subsequent to the date of this Loan
Agreement on the lives of officers or employees of the Borrower,
provided that the Borrower is named the beneficiary on any such
policy;
(f) Investments in money market instruments;
(g) Investments in registered investment companies which invest in any of
the foregoing; and
1.48 Permitted Liens. "Permitted Liens" shall mean:
(a) Liens in favor of M&I; and
(b) Liens for taxes, assessments, or governmental charges, or levies that
are not yet due and payable or that are being contested in good faith
by appropriate proceedings and for which adequate reserves have been
established if being contested in good faith; and
(c) easements, restrictions, minor title irregularities and similar
matters which have no material adverse effect as a practical matter
upon the ownership and use of the affected property; and
(d) Liens or deposits in connection with worker's compensation,
unemployment insurance, social security, ERISA or similar legislation
or to secure customs' duties, public or statutory obligations in lieu
of surery, stay or appeal bonds, or to secure performance of
contracts or bids (other than contracts for the payment of borrowed
money) or deposits required by law
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as a condition to the transaction of business or other liens or
deposits of a like nature made in the ordinary course of business;
and
(e) Liens (including financing leases) existing on the date hereof and
the extension, renewal, or replacement of any such Lien, but only if
the principal amount of the Indebtedness secured by such Lien
immediately prior thereto is not increased and the Lien is not
extended to other property; and
(f) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary
course of business which secure payment of obligations not more than
sixty (60) days past due or are being diligently contested in good
faith and by appropriate proceeds; and
(g) any Lien created by or relating to any judicial proceeding, provided
that such proceeding is being diligently contested in good faith and
the execution of such Lien is effectively stayed.
1.49 Person. "Person" shall mean and include an individual, partnership,
corporation, trust, limited liability company, unincorporated association and
any unit, department or agency of government.
1.50 Plan. "Plan" shall mean each pension, profit sharing, stock bonus,
thrift, savings and employee stock ownership plan established or maintained, or
to which contributions have been made, by a Borrower or any trade or business
which together with a Borrower would be treated as a single employer under
Section 4001 of ERISA.
1.51 Project. "Project" shall mean the Borrower's construction project as
described in the Drawings and Specifications, to be constructed on the Mortgaged
Premises.
1.52 Security Agreement. "Security Agreement" shall mean the security
agreement from the Borrower to M&I in substantially the form of Exhibit D to
this Loan Agreement.
1.53 Soft Costs. "Soft Costs" shall mean the costs of constructing the Project
which are set forth as Soft Costs on the Total Project Cost Statement.
1.54 Tangible Net Worth. "Tangible Net Worth" shall mean the excess, if any,
of the assets of the Borrower (excluding goodwill, patents, trademarks, trade
names, copyrights and other assets properly classified as intangible assets)
over consolidated liabilities of the Borrower, determined in accordance with
generally accepted accounting principles in
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effect on the date hereof; provided, however, that in determining such Tangible
Net Worth there shall be included in liabilities any and all evidences of
indebtedness of the Borrower, including notes and debentures of the Borrower
which are subordinated indebtedness, and there shall be excluded from assets any
and all assets of the Borrower which are investments in any other Person, except
for Permitted Investments.
1.55 Total Project Costs. "Total Project Costs" shall mean being the total
amount estimated by the Borrower as necessary to complete the Project, as set
forth in and certified by the Borrower in the Total Project Cost Statement.
1.56 Total Project Cost Statement. "Total Project Cost Statement" shall mean
the certificate of the Borrower in which the Borrower certifies to M&I the
Borrower's reasonable estimate of the total of all Hard Costs and Soft Costs
necessary to complete the Project in accordance with the Drawings and
Specifications.
ARTICLE II
COSTRUCTION LOAN ADVANCES, DISBURSEMENT
PROCEDURES AND DEPOSIT OF FUNDS
2.1 The Advances. M&I agrees, on the terms and subject to the conditions
hereinafter set forth, to make Advances to the Borrower from time to time during
the period from the date hereof to the Commitment Termination Date in an amount
of its Commitment to pay costs actually incurred in connection with the
construction of the Project, which shall include but not be limited to costs of
permits, licenses, labor, supplies, materials, services, equipment, insurance
premiums, real estate taxes and interest on Advances, but shall not include any
profit to the Borrower acting in its capacity as developer or general
contractor. The unpaid amount of the Advances shall bear interest at the 30-day
LIBOR Rate plus 1.25 percent, which shall be a floating rate with each change in
the interest rate to occur on the first business day of each month based upon
the 30-day LIBOR Rate on such date. The obligation of the Borrower to repay the
Advances shall be evidenced by the Note dated the date of this Agreement, and
containing the terms set forth in this Loan Agreement and in Exhibit B.
Notwithstanding any provision of the Note, interest shall be payable at the rate
provided therein only on such portions of the loan proceeds as actually have
been disbursed pursuant to this Agreement.
2.2 Disbursement Procedures.
(a) Whenever the Borrower desires to borrow hereunder, the Borrower shall
submit to M&I a Draw Request, duly executed on behalf of the
Borrower, setting forth the information requested therein. Each Draw
Request, other than with respect to the initial draw, shall be
submitted at least three (3)
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business days before the date the Advance is desired. With respect to
Hard Costs, each Draw Request shall be limited to amounts equal to
(i) the total of such costs actually incurred and paid or owing by
the Borrower to the date of such Draw Request for work performed on
the Project that M&I has committed to finance pursuant to Section 2.1
hereof, plus (ii) the cost of materials and equipment not
incorporated in the Project, but delivered to and suitably stored at
the Project site; less, (iii) the holdback, if any, set forth in the
Construction Contract, or such lesser holdback as authorized by M&I.
Notwithstanding anything herein to the contrary, no Advances for
materials stored at the Projects site will be made by M&I unless the
Borrower shall advise M&I of its intention to so store materials
prior to their delivery, and provides suitable security for such
storage. With respect to all Soft Costs each Draw Request shall be
limited to the total of such costs actually incurred by the Borrower
to the date of such Draw Request. Each Draw Request shall constitute
a representation and warranty by the Borrower that all representation
and warranties set forth in Article V are true and correct as of the
date such Draw Request, except to the extent Borrower has notified
M&I otherwise pursuant to Section 7.10 hereof.
(b) At the time of submission of each Draw Request, the Borrower shall
submit the following:
(i) To the Disbursing Agent, a written lien waiver with respect to
all Hard Costs from each Contractor for work done and materials
supplied by it in excess of $10,000.00 which were paid for
pursuant to the next preceding Draw Request.
(ii) To the Disbursing Agent, reasonable documentation (receipts,
cancelled checks and the like) evidencing payment of all Soft
Costs in excess of $10,000.00 which were paid in connection with
the immediately preceding Draw Request, excluding amounts drawn
for payment of interest on Advances or fees due to M&I.
(iii)Such other supporting evidence as may be requested by M&I or the
Disbursing Agent to substantiate all payments which are to be
made out of the relevant Draw Request and/or to substantiate all
payments then made with respect to the Project.
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(c) If on the date an Advance is desired, the Borrower has performed all
of its agreements and complied with all requirements therefor to be
performed or complied with hereunder including satisfaction of all
applicable conditions precedent contained in Article III hereof, M&I
shall pay to the Disbursing Agent the amount of the requested
Advance, less amounts owing to M&I (which will be applied directly by
M&I) and the Disbursing Agent will disburse such funds pursuant to
and in accordance with the terms of the Disbursing Agreement. Each
Advance disbursed to the Disbursing Agent shall bear interest at the
rate provided in the Note from the date such Advance is so disbursed
to the Disbursing Agent.
2.3 Deposit of Funds by the Borrower. If M&I shall at any time in good faith
determine that the undisbursed amount of the Commitment is less than the amount
required to pay all costs and expenses of any kind which reasonably may be
anticipated in connection with the completion of the Project, and shall
thereupon send written notice thereof to the Borrower specifying the amount
required to be deposited by the Borrower with the Disbursing Agent to provide
sufficient funds to complete the Project, the Borrower agrees that it will,
within ten (10) calendar days of receipt of any such notice, deposit with the
Disbursing Agent the amount of funds specified in M&I's notice. The Borrower
agrees that any such funds deposited with the Disbursing Agent may be disbursed
by the Disbursing Agent, before any further disbursement of loan proceeds from
M&I, to pay any and all costs and expenses of any kind in connection with
completion of the Project.
2.4 Advances Without Receipt of Draw Request. Notwithstanding anything herein
to the contrary, M&I shall have the irrevocable right at any time and from time
to time to apply funds which it agrees to advance hereunder to pay interest on
the Note as and when it becomes due, and to pay any and all of the expenses and
fees referred to in Section 9.1 hereof, all without receipt of a Draw Request
for funds from the Borrower.
ARTICLE III
CONDITIONS OF ADVANCES
3.1 Conditions Precedent to Initial Advance. The obligation of M&I to make
the initial Advance shall be subject to the condition precedent that the
Borrower shall be in compliance with the conditions contained in Section 3.2 and
the further condition precedent that M&I shall have received on or before the
date of the initial Advance hereunder the following:
(a) The Note duly executed by the Borrower;
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(b) The Mortgage duly executed, constituting a valid and perfected first
lien on a good and marketable fee simple title to the Mortgaged
Premises and the fixtures described in to the Mortgage and a security
interest in the personal property described in the Mortgage;
(c) A financing statement, in form and substance satisfactory to M&I,
duly executed and describing the collateral as the personal property
and fixtures covered by the Mortgage and the Borrower's rights under
the Construction Contract and the Architect's Contract;
(d) A copy of the Drawings and Specifications, certified by the
Architect, that are acceptable to M&I;
(e) The Assignment of Construction Contract duly executed by the Borrower
and consented to by the General Contractor;
(f) The Assignment of Architect's Contract duly executed by the Borrower
and consented to by the Architect;
(g) Copies of the Construction Contract and the Architect's Contract
acceptable to M&I;
(h) Copies of the electrical, heating, masonry, plumbing, mechanical,
excavation and elevator contracts in excess of $5,000 relating to
construction of the Project as M&I may reasonably request, with each
such contract being acceptable to M&I, together with letters from
each such contractor permitting M&I, upon its election to complete
the Project and to acquire the interest of the Borrower under such
contracts;
(i) A sworn construction statement duly executed by the General
Contractor showing all Contractors having contracts or subcontracts
for specific portions of the work on the Project and the amounts due
or to become due each such Contractor, including all Hard Costs and
expenses of any kind incurred and to be incurred in constructing
the Project;
(j) A Total Project Cost Statement, incorporating the construction cost
as shown on the sworn construction statement described in
subparagraph (i) above and setting forth all the Hard Costs and Soft
Costs of any kind
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incurred or to be incurred in completion of the Project sworn to by
the Borrower to be a true, complete and accurate account of all costs
actually incurred and a reasonably accurate estimate of all costs to
be incurred in the future;
(k) Evidence satisfactory to M&I that the Borrower has expended not less
than the amount of the required Equity based upon the Total Project
Cost which would otherwise be properly payable from an Advance, such
amount to exceed twenty-five percent (25%) of the Total Project Cost,
together with satisfactory lien waivers for Hard Costs paid with such
funds;
(l) Two copies of a recent perimeter land survey of the Mortgaged
Premises, in form and substance satisfactory to M&I, prepared at the
Borrower's expense, currently certified by a licensed, registered
surveyor and incorporating the legal description of the Mortgaged
Premises, showing the location of all points and lines referred to in
the legal description, the location of any existing improvements, the
proposed location of the Project (including parking) as being within
the exterior boundaries of the Mortgaged Premises and in compliance
with all applicable building set-back requirements, and the location
of all utilities and the location of all easements and encroachments
onto or from the Mortgaged Premises that are visible on the Mortgaged
Premises, known to the surveyor preparing the survey or of record,
identifying easements of recording by recording data, and currently
certified by the surveyor that there are no such easements or
encroachments upon the Mortgaged Premises except as shown on the
survey;
(m) A title binder, in form and substance satisfactory to M&I, issued by
the Disbursing Agent, at the Borrower's expense, with such title
binder constituting a commitment by such title company to issue a
mortgagee's title policy in favor of M&I as mortgagee under the
Mortgage, that will be free from all standard exceptions, including
mechanics' liens and all other exceptions not previously approved by
M&I and that will insure the Mortgage to be a valid first lien on the
Mortgaged Premises, subject only to such prior liens and encumbrances
as are approved by M&I, in an amount not less than the amount of the
Commitment;
(n) Copies of all building permits and such other licenses and permits as
may be required to construct and operate the Project; a letter from
the appropriate city or county authority having jurisdiction over the
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Mortgaged Premises stating that the Project when constructed in
accordance with the Drawings and Specifications will comply in all
respects with all applicable ordinances, zoning, planned unit
development, subdivision, platting, environmental and land use
requirements, without special variance or exception, and such other
evidence as M&I shall request to establish that the Project and the
contemplated use thereof are permitted by and comply with all
applicable use or other restrictions and requirements in prior
conveyances, zoning ordinances, environmental laws and regulations,
water shed district regulations and all other applicable laws or
regulations, and have been duly approved by the municipal and other
governmental authorities having jurisdiction over the Project and
that all required permits for construction have been obtained;
(o) Letters from utility companies, in form satisfactory to M&I,
establishing that all utilities necessary for the construction
and operation of the Project are available at the boundaries of the
Mortgaged Premises, including without limitation, water, sewer,
electricity, gas and telephone, and that the Borrower has the right
to connect to and use such utilities to the extent required by the
Project;
(p) Copies of the policy builder's risk insurance and comprehensive
general liability insurance and a certificate of the worker's
compensation insurance required under Section 7.15 hereof, with all
such insurance in full force and effect and approved by M&I;
(q) A signed copy of a favorable opinion of counsel to the Borrower in
form and content acceptable to M&I;
(r) A Certificate of Good Standing issued by the State of Wisconsin; a
true and correct copy of the Borrower's Articles of Incorporation and
By-laws; a certified copy of the directors' resolutions authorizing
the transactions contemplated by this Agreement; and a certificate of
the secretary of the Borrower setting forth the true and correct
signatures of the officers of the Borrower and their respective
offices within the Borrower;
(s) The Disbursing Agreement, duly executed by the Disbursing Agent and
M&I; and
3.2 Further Conditions Precedent to All Advances. The obligation of M&I to
make each subsequent Advance shall be in compliance with all conditions set
forth in Section 3.1, and the further conditions precedent that on the date of
such Advance:
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(a) No Event of Default hereunder or event which would constitute such an
Event or Default but for the requirement that notice be given or that
a period of grace or time elapse, shall have occurred and be
continuing and all representations and warranties made by the
Borrower in Article V shall continue to be true and correct as of the
date of such Advance.
(b) No determination shall have been made by M&I that the undisbursed
amount of the Commitment is less than the amount required to pay all
costs and expenses of any kind which reasonably may be anticipated in
connection with the completion of the Project; or if such a
determination has been made and notice thereof sent to the Borrower,
the Borrower has deposited the necessary funds with the Disbursing
Agent in accordance with Section 2.3 hereof.
(c) The disbursement requirements of Section 2.2 hereof and of the
Disbursing Agent set forth in the Disbursing Agreement have been
satisfied.
(d) If required by M&I, M&I shall be furnished with a statement of the
Borrower and of any Contractor, in form and substance required by
M&I, setting forth the names, addresses and amounts due or to become
due as well as the amounts previously paid to every Contractor,
subcontractor, person, firm or corporation furnishing materials or
performing labor entering into the construction of any part of the
Project.
(e) The Borrower shall have provided to M&I such evidence of compliance
with all of the provisions of this Agreement as M&I may reasonably
request.
(f) No license or permit necessary for the construction of the Project
shall have been revoked or the issuance thereof subjected to
challenge before any court or other governmental authority having or
asserting jurisdiction thereover.
3.3 Conditions Precedent to the Final Advance. The obligation of M&I to make
the final Advance shall be subject to the condition precedent that the Borrower
shall be in compliance with all conditions set forth in Sections 3.1 and 3.2
and, further, that the following conditions shall have been satisfied prior to
the Completion Date:
(a) The Project, including all parking requirements, has been completed
in accordance with the Drawings and Specifications and M&I shall
have
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received a Certificate of Completion acceptable to M&I from the
General Contractor and the Architect certifying that (i) work on the
Project has been completed in accordance with the Drawings and
Specifications and all labor, services, materials and supplies used
in such work have been paid for and (ii) the completed Project
conforms with all applicable zoning, land use planning, building and
environmental laws and regulations of the governmental authorities
having jurisdiction over the Project.
(b) M&I has received satisfactory evidence that all work requiring
inspection by municipal or other governmental authorities having
jurisdiction has been duly inspected and approved by such authorities
and by the rating or inspection organization, bureau, corporation or
office having jurisdiction, and that all requisite certificates of
occupancy and other approvals have been issued.
(c) The Disbursing Agent shall have received a lien waiver from each
Contractor for all work done and for all materials furnished by it
for the Project.
(d) M&I shall have received an "as-built" survey of the Real Estate
meeting all of the requirements set forth in Section 3.1(1) and
showing the location and exterior lines and egress and other
improvements completed on the Real Estate and the observation of all
required setbacks, that the Project as completed is entirely within
the exterior boundaries of the Real Estate and any building
restriction lines and does not encroach upon any easements or right-
of-way, and showing such other information as M&I may be reasonably
request.
3.4 No Waiver. The making of any Advance prior to fulfillment of any
condition thereof shall not be construed as a waiver of such condition, and M&I
reserves the right to require fulfillment of any and all such conditions prior
to making any subsequent Advances.
ARTICLE IV
PERMANENT LOAN
4.1 Permanent Loan. At the Commitment Termination Date, M&I agrees to convert
the construction loan Advances to a Permanent Loan based upon the principal
amount owing M&I at the Commitment Termination Date (up to the sum of
$7,000,000). The obligation of the Borrower to repay the Permanent Loan shall
be evidenced by the Note
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dated the date of this Agreement, and containing the terms as set forth in this
Loan Agreement and in Exhibit B. The unpaid principal balance shall bear
interest, at the 30-day LIBOR Rate plus 1.25 percent, which shall be a floating
rate with each change in the interest rate to occur on the first business day of
each month based upon the 30-day LIBOR Rate on said date. At any time prior to
the due date of this Note, Borrower has the option to fix the interest rate at
the five-year LIBOR Rate plus 1.25 percent. Borrower shall provide M&I with
thirty (30) days advance written notice if Borrower elects to fix the rate.
Subject to the following, the interest rate shall not exceed 8.5 percent during
the term of this Loan. In the event that any amount of the principal of, or
interest on, the Note is not paid on the date when due (whether at stated
maturity, by accelerated) and the expiration of any applicable grace period, the
entire principal amount of the Note outstanding shall bear interest, in addition
to the interest otherwise payable under such note and to the extent permitted by
law, at an annual rate of two percent (2%) from the date following the due date
until such overdue amounts have been paid in full. All interest and other
amounts due under this Loan Agreement and the Note shall be computed for the
actual number of days lapsed on the basis of a 360-day year.
4.2 Payments.
(a) Prior to March 1, 1997, interest accrued on the loan through the last
day of each month shall be payable on the first day of the next
month, and continuing thereafter until the principal of the loan is
repaid in full. Commencing March 1, 1998, and continuing on an annual
basis thereafter, principal payments shall be made on the Note in the
sum of Seven Hundred Thousand Dollars ($700,000). However, the Note
shall be repaid in full (principal balance and any accrued interest)
on March 1, 2002.
(b) All payments of principal and interest on account of the Notes and
all other payments made pursuant to this Loan Agreement shall be
delivered to M&I, 1245 Main Street, Stevens Point, Wisconsin 54481,
Attention: Commercial Loan Department, or at such other place as M&I
or any holder of the Notes shall designate in writing, in immediately
available funds by 3:00 p.m., Stevens Point time, on the date when
due, and if received after such time on any day shall be deemed to
have been made on the next Business Day.
4.3 Prepayment. The Borrower may prepay the Loan in whole or in part at any
time without premium or penalty by delivering such prepayment to M&I.
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4.4 Recordkeeping. M&I shall record in its records the date and amount of the
Loan and each payment of principal of, and interest on, the Loans. The aggregate
amounts so recorded shall be rebuttable presumptive evidence of the principal
and interest owing and unpaid on the Notes. The failure to so record any such
amount or any error in so recording any such amount shall not, however, limit or
otherwise affect the obligations of the Borrower under this Loan Agreement or
under the Note to repay the principal amount of the Loans together with all
interest accruing thereon.
4.5 Collateral. The Obligations are secured by the terms and provisions of
this Loan Agreement, the Collateral Documents, the liens, security interests,
rights and privileges granted thereunder.
4.6 Extension. Prior to March 1, 2002, the Borrower, in its sole discretion,
may ask M&I to consider renewing or extending the Note for an additional period
of five years. The consideration of any such request by M&I shall be in its sole
and absolute discretion in the exercise of its business and credit judgement,
and the credit terms for any such extension shall be subject to the mutual
agreement of M&I and the Borrower at that time. M&I has no present commitment or
obligation to extend the term of the Note beyond the due date, and the Borrower
understands that, in the absence of a future agreement on the part of M&I for an
extension, the Note will be due and payable in full on March 1, 2002, subject to
earlier termination upon the occurrence of an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Organization and Qualification. The Borrower is a corporation duly and
validly organized and existing under the Laws of the State of Wisconsin and has
the corporate power and all necessary licenses, permits and franchises to own
its assets and properties and to carry on its business as now conducted or
presently contemplated. The Borrower is duly licensed or qualified to do
business and is in good standing in all jurisdictions in which the failure to do
so would have a material adverse effect on its business or financial condition.
The Borrower has no subsidiaries.
5.2 Financial Statements. All of the financial statements of the Borrower
heretofore furnished to M&I by the Borrower are accurate and complete in all
material respects and present fairly the financial condition and the results of
operations of the Borrower for the periods covered thereby and as of the
relevant dates thereof, all in accordance with generally accepted accounting
principles applied on a consistent basis, subject in the cause of interim
financial statements to audit and year-end adjustments. There has been
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no material adverse change in the business, properties or condition (financial
or otherwise) of the Borrower since the date of the latest of such financial
statements. The Borrower has no knowledge of any material liabilities of any
nature not disclosed in writing to M&I.
5.3 Authorization; Enforceability. The making, execution, delivery and
performance of this Loan Agreement, the Notes and any other documents or
materials to be delivered by the Borrower to M&I pursuant to this Loan
Agreement, and compliance with their respective terms, have been duly authorized
by all necessary corporate action of the Borrower. This Loan Agreement, the
Notes and any other documents, instruments or agreements to be delivered by the
Borrower to M&I pursuant to this Loan Agreement are the valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium of similar Laws
affecting the rights of creditors generally and subject to general principle's
of equity.
5.4 Absence of Conflicting Obligations. The making, execution, delivery and
performance of this Loan Agreement, the Notes, and any other documents or
materials to be delivered by the Borrower to M&I pursuant to this Loan
Agreement, and compliance with their respective terms, do not violate any
presently existing provision of Law, the articles of incorporation or bylaws of
the Borrower, or any agreement material to the business of the Borrower to which
the Borrower is a party or by which the Borrower or any of its assets is bound.
5.5 Taxes. The Borrower has filed all federal, state, foreign and local tax
returns which were required to be filed (subject to any valid extensions of the
time for filing), and has paid, or made provisions for payment of, all taxes
owed by it, and no tax deficiencies have been assessed or, to the Borrower's
knowledge, proposed against the Borrower.
5.6 Absence of Litigation. The Borrower is not a party to, and so far as is
known to the Borrower there is no threat of, any litigation or administrative
proceeding which would, if adversely determined, impair the ability of the
Borrower to perform its obligations under this Loan Agreement, the Notes or any
other documents or materials to be delivered by the Borrower to M&I pursuant to
this Loan Agreement, cause any material adverse change in the assets and
properties of the Borrower, cause any material impairment of the right to carry
on the business of the Borrower, or cause any material adverse effect on the
financial condition of the Borrower.
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5.7 Accuracy of Information. All information, certificates or statements by
the Borrower given in, or pursuant to, this Loan Agreement (whether in writing,
by electronic messaging or otherwise) shall be accurate, true and complete when
given.
5.8 Title to Property. The Borrower has good title to, or a valid leasehold
interest in, all assets and properties necessary to conduct its business as now
conducted or proposed to be conducted, and there are no liens or any of the
assets or properties of the Borrower other than Permitted Liens. The Borrower
has all licenses, permits, franchises, patents, copyrights, trademarks and
trade names, or rights thereto, reasonably necessary to conduct its business
as now conducted or proposed to be conducted, and the Borrower does not know of
any conflict with or violation of any valid rights of others with respect
thereto.
5.9 ERISA. All Plans are in compliance in all material respects with the
applicable provisions of ERISA and the Internal Revenue Code. There is no
pending or threatened litigation or governmental proceeding or investigation
against or relating to any Plan, nor is there any reasonable basis for any
material proceedings, claims or actions against or relating to any Plan. There
is no "accumulated funding deficiency" within the meaning of Section 302(a)(2)
of ERISA in connection with any Plan. There has been no Reportable event or
Prohibited Transaction (as such terms are defined in ERISA) with respect to any
Plan, the occurrence of which would have a material adverse effect on the
business or condition (financial or otherwise) of the Borrower nor has the
Borrower incurred any liability to the PBGC under Section 4062 of ERISA in
connection with any Plan.
5.10 Fiscal Year. The Borrower's fiscal year ends on December 31.
5.11 Compliance with Laws. The Borrower and its assets, businesses and
operations are in compliance with all Laws to which they are subject, except
where any noncompliance would not have a material adverse effect on the
Borrower.
5.12 Dump Sites. With respect to any periods during which the Borrower has
occupied the Facilities and, to the Borrower's knowledge after reasonable
investigation, with respect to the time prior to the Borrower's occupancy of the
Mortgaged Premises, no Person has caused or permitted petroleum or petroleum
products, hazardous substances or other materials to be stored, deposited,
treated, recycled or disposed of on, under or at the Mortgaged Premises, which
materials, if known to be present, might require investigation, clean-up,
removal or some other remedial action under any Environmental Laws.
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5.13 Tanks. To Borrower's knowledge after reasonable investigation, there are
not now nor, to the Borrower's knowledge after reasonable investigation, have
there ever been, tanks, containers or other vessels on, under or at the
Mortgaged Premises that contained petroleum or petroleum products, hazardous
substances or other materials which, if known to be present in soils or ground
water, might require investigation, clean-up, soils or some other remedial
action under any Environmental Laws.
5.14 Other Environmental Conditions. To the Borrower's knowledge after
reasonable investigation, there are no conditions existing currently or likely
to exist during the term of this Loan Agreement that would be subject the
Borrower to damages, penalties, injunctive relief or clean-up costs under any
Environmental Laws, or that might require investigation, clean-up, removal or
some other remedial action by the Borrower under any Environmental Laws.
5.15 Environmental Judgments, Decrees and Orders. No judgment, decree, order
or citation related to or arising out of any Environmental Laws is applicable to
or binds the Borrower or the Mortgaged Premises.
5.16 Environmental Permits and Licenses. All permits, licenses and approvals
required under any Environmental Laws necessary for the Borrower to operate the
Facilities and to conduct its business as now conducted or proposed to be
conducted, which are currently obtainable, have been obtained and are in full
force and effect.
5.17 Offering of Notes. Neither the Borrower nor any agent acting for it has
offered the Notes or any similar obligation of the Borrower for sale to, or
solicited any offers to buy the Notes or any similar obligation of the Borrower
from, any Person other than M&I, and neither the Borrower nor any agent acting
for them will take any action that would subject the sale of the Notes to the
registration provisions of the Securities Act of 1933, as amended.
5.18 Stock Ownership. The issued and outstanding shares of the Borrower's
capital stock consist of 20,000 shares of Class A Common Stock par value $.01
per share and 80,000 shares of Class B Common Stock par value $.01 per share.
The Class A Common Stock is voting stock, and the Class B Common Stock is non
voting stock. The issued and outstanding shares of the Borrower's capital stock
will consist of 10,000 shares of Class A Common Stock and 36,385 shares of Class
B Common Stock owned by Terrance D. Paul; 10,000 shares of Class A Common Stock
and 36,385 shares of Class B Common Stock owned by Judith A. Paul; and 7,230
shares of Class B Common Stock held by the Terrance D. Paul and Judith A. Paul
Descendants Trust. The above-referenced stock shall be free and clear of all
liens and encumbrances except Permitted Liens.
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5.19 Regulation U. No part of the proceeds of the Loans will be used, directly
or indirectly, for the purpose of purchasing or carrying any margin stock within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System or to extend credit to others for the purpose of purchasing or carrying
any such margin stock.
ARTICLE VI
NEGATIVE COVENANTS
From and after the date of this Loan Agreement and until all of the
Obligations are paid in full, the Borrower shall not, without the prior written
consent of M&I:
6.1 Liens. Incur, create, assume or permit to be created or allow to exist any
Lien upon or in any of its assets or properties, except Permitted Liens.
6.2 Consolidation or Merger.
(a) Consolidate with or merge into any other Person; or
(b) permit another Person to merge or consolidate with or into it; or
(c) acquire substantially all of the assets of any other Person, whether
in one or a series of transactions.
6.3 Disposition of Assets. Sell, lease, assign, transfer or otherwise dispose
of all or substantially all of its now owned or hereafter acquired assets or
properties or sell, lease, assign, transfer or dispose of any of its now owned
or hereafter acquired assets or properties except the disposition of assets no
longer used or useful in the conduct of Borrower's business and in the ordinary
course of business.
6.4 Sale and Leaseback. Enter into any agreement, directly or indirectly, to
sell or transfer any real or personal property used in its business and
thereafter to lease back the same or similar property.
6.5 Investments. Make any Investment in or to other Persons, except Permitted
Investments.
6.6 Transactions with Affiliates. Engage in any transaction with an Affiliate
on terms materially less favorable to the Borrower than would be available at
the time from a Person who is not an Affiliate.
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6.7 Loans and Advances. Make any loan or advance to any Person, except (a)
extensions of credit in the ordinary course of business by the Borrower; and (b)
advances to officers and employees of the Borrower for travel and other expenses
in the ordinary course of business.
6.8 Guarantees. Guarantee the Indebtedness of any Person.
6.9 S Election. Revoke or terminate, or permit the voluntary or involuntary
revocation or termination of, the Borrower's S corporation election for state
and federal income tax purposes.
6.10 Indebtedness. Incur, create, assume, permit to exist, guarantee, endorse
or otherwise become directly or indirectly or contingently responsible or liable
for any Indebtedness, except the Loans, the Notes and other indebtedness in a
maximum amount of $500,000.00.
6.11 Issuance of Shares. Sell, issue or transfer any shares of treasury stock
or issue any additional shares of capital stock in the Borrower.
6.12 Fixed Asset Acquisitions. Other than the expenditures in the Project, make
any expenditures for fixed or capital assets, including capitalized leases,
which would cause the aggregate of all such expenditures to exceed (a) $500,000
for the fiscal year ending December 31, 1997; (b) for the fiscal year ending
December 31, 1998, the amount of the Borrower's depreciation for the fiscal year
ended October 31, 1997 plus any unused amount of this restriction for the fiscal
year ended December 31, 1997; or (c) for each fiscal year commencing on or
after January 1, 1998, the amount of the Borrower's depreciation for the
immediately preceding fiscal year plus any unused amount of this restriction for
the two (2) immediately preceding fiscal years. This restriction does not
include leases which are properly classified as operating leases in accordance
with generally accepted accounting principles consistently applied.
ARTICLE VII
AFFIRMATIVE COVENANTS
From and after the date of this Loan Agreement and until all of the
Obligations are paid in full:
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7.1 Payment. The Borrower shall timely pay or cause to be paid the principal
of and interest on the Note per the terms of the Note; and all other amounts due
under this Loan Agreement and any other documents or materials to be delivered
by the Borrower to M&I pursuant to this Loan Agreement, provided such failure to
pay has continued for a period of thirty (30) days.
7.2 Corporate Existence; Properties. The Borrower shall (a) maintain its
corporate existence; (b) conduct its business in the ordinary and usual course
and in good faith; (c) do or cause to be done all things necessary to preserve
and keep in full force and effect any licenses, franchises and contracts which
are material to the Borrower's business; (d) maintain the Facilities and all
assets (other than assets no longer used or useful in the conduct of its
business) in good repair, working order and condition, ordinary wear and tear
excepted; (e) maintain insurance of such nature and in such amounts as is
customarily maintained by companies engaged in the same or similar business; and
(f) maintain accurate records and books of account in accordance with generally
accepted principles of accounting consistently applied throughout all accounting
periods.
7.3 Licenses. The Borrower shall maintain in good standing and in full force
and effect each license, permit and franchise granted or issued by any federal,
state or local governmental agency or regulatory authority that is reasonably
necessary to the Borrower's business.
7.4 Reporting Requirements. The Borrower shall furnish to M&I such information
respecting the business; assets and financial condition of the Borrower as M&I
may reasonably request and, without request:
(a) within forty-five (45) days after the end of each month in each
fiscal year, a balance sheet of the Borrower as of the end of each
such month and a statement of income and surplus of the Borrower for
each such month and for that part of the fiscal year ending with each
month and for the corresponding periods of the preceding fiscal year,
all in reasonable detail and certified as true and correct, subject
to audit and normal year-end adjustments, by the chief financial
officer or treasurer of the Borrower; and
(b) as soon as available, and in any event within one hundred twenty
(120) days after the close of each fiscal year, a copy of the
detailed annual audit report for such year end accompanying financial
statements of the Borrower prepared in reasonable detail and in
accordance with generally accepted accounting principles by
independent certified public accountants of recognized standing
selected by the borrower, and reasonably
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satisfactory to M&I, which audit report shall be accompanied by an
opinion of such accountants, in form and substance reasonably
satisfactory to M&I, to the effect that the same presents fairly the
financial condition and the results of operations of the Borrower for
the periods and as of the relevant dates thereof; and
(c) together with each delivery required by this Section 7.4, an executed
Officer's Certificate, in the form reasonably acceptable to M&I and
Borrower containing information as to the financial statements so
delivered.
7.5 Taxes. The Borrower shall pay all taxes and assessments prior to the date
on which penalties attach thereto, except for any tax or assessment which is
either not delinquent or which is being contested in good faith and by proper
proceedings and against which adequate reserves have been provided.
7.6 Inspection of Properties and Records. The Borrower shall permit M&I or its
agents or representatives to visit any of its properties and examine any of its
books and records at any reasonable time and as often as may be reasonably
desired, and the Borrower shall facilitate each such inspection, audit and
examination.
7.7 Reference in Financial Statements. The Borrower shall include, or cause to
be included, a reference to this Loan Agreement in all financial statements of
the Borrower which are furnished to stockholders, financial reporting services,
creditors and prospective creditors.
7.8 Compliance with Laws. The Borrower shall (a) comply with all applicable
Environmental Laws, and orders of regulatory and administrative authorities with
respect thereto, and, without limiting the generality of the foregoing, promptly
undertake and diligently pursue to completion appropriate and legally authorized
containment, investigation and clean-up action in the event of any release of
petroleum, petroleum products, or hazardous materials or substances on, upon or
into any real property owned, operated or within the control of any of the
Borrower; and (b) comply in all material respects with all other applicable
Laws.
7.9 Compliance with Agreements. The Borrower shall perform and comply in all
respects with the provisions of any agreement (including without limitation any
collective bargaining agreement) binding upon the Borrower or its assets or
properties, if the failure to so perform or comply would have a material adverse
effect on the condition (financial or otherwise) of the business, assets or
properties of the Borrower.
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7.10 Notices. The Borrower shall:
(a) as soon as possible and in any event within ten (10) days after the
occurrence of any Default or Event of Default, notify M&I in writing
of such Default or Event of Default and set forth the details thereof
and the action which is being taken or proposed to be taken by the
Borrower with respect thereto;
(b) promptly notify M&I of the commencement of any litigation or
administrative proceeding that would cause the representation and
warranty of the Borrower contained in Section 3.6 of this Loan
Agreement to be untrue;
(c) promptly notify M&I of (i) the occurrence of any Reportable Event or
Prohibited Transaction (as such terms are defined in ERISA) that has
occurred with respect to any Plan, and (ii) the institution by the
PBGC or the Borrower of proceedings under Title IV of ERISA to
terminate any Plan;
(d) unless prohibited by applicable Law, notify M&I, and provide copies,
promptly upon receipt, of any notice, pleading, citation, indictment,
complaint, order or decree from any federal, state or local
government agency or regulatory body, or any other source, asserting
or alleging a circumstance or condition that requires or may require
a financial contribution by the Borrower or an investigation, clean-
up, removal, remedial action or other response by or on the part of
the Borrower under Environmental Laws or which seeks damages or
civil, criminal or punitive penalties from or against the Borrower
for an alleged violation of Environmental Laws;
(e) notify M&I at least thirty (30) days prior to the change of the
Borrower's name;
(f) promptly notify M&I of any damage to, or loss of, any of the assets
or properties of the Borrower if the net book value of the damaged or
lost asset or property at the time of such damage or loss exceeds
five percent (5%) of the total net book value of the fixed assets of
the Borrower; and
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(g) promptly notify M&I of the commencement of any investigation,
litigation, or administrative or regulatory proceeding by, or the
receipt of any notice, citation, pleading, order, decree or similar
document issued by, any federal, state or local governmental agency
or regulatory authority that results in, or may result in, the
termination or suspension of any license, permit or franchise
necessary for the Borrower's business, or that imposes, or may result
in the imposition of, a material fine or penalty on the Borrower.
7.11 Environmental Assessment. Promptly after the Borrower learns of the
occurrence of any event or condition describe in Section 7.8 of this Loan
Agreement, if requested in writing by M&I, the Borrower shall undertake and,
within a reasonably time thereafter, obtain an Environmental Assessment, at the
Borrower's expense, and provide promptly to M&I a written report of the results
of such Environmental Assessment, which report shall recite that M&I is
entitled to rely thereon. Except as otherwise required by applicable Law or as
may be reasonable necessary, in the opinion of M&I, for evaluation and analysis
by M&I, any participating financial institution, or their attorneys, agents and
consultants, any Environmental Assessment provided to M&I pursuant to this
Section 7.8 shall be treated as confidential and shall not be disclosed without
the prior written consent of the Borrower.
7.12 Tangible Net Worth. The Borrower shall maintain at all times Tangible Net
Worth equal to at least the following:
(a) $3,500,000 from the date hereof through December 31, 1996;
(b) $4,500,000 at January 1, 1997 through December 31, 1997;
(c) $5,500,000 at January 1, 1998 through December 31, 1998;
(d) $6,500,000 at January 1, 1999 through December 31, 1999;
(e) $7,500,000 at January 1, 2000 and thereafter.
Tangible Net Worth shall be tested at the end of each month.
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7.13 Leverage Ratio. The Borrower shall maintain at all times a Leverage Ratio
less than or equal to the following:
(a) 1.75 from the date hereof through December 31, 1996;
(b) 1.5 at January 1, 1997 through December 31, 1997;
(c) 1.35 at January 1, 1998 through December 31, 1998;
(d) 1.30 at January 1, 1999 through December 31, 1999;
(e) 1.25 at January 1, 2000 and thereafter.
The Leverage Ratio shall be tested at the end of each month.
7.14 Debt Service Ratio. The Borrower shall maintain a Debt Service Ratio not
less than 1.15 to 1 commencing December 31, 1997 and continuing thereafter.
7.15 Project Insurance. The Borrower will provide and maintain at all times
during the process of building the Project (and, from time to time at the
request of M&I, furnish M&I with proof of payment of premiums on):
(a) Builder's risk insurance, written on the so-called "Builder's Risk-
Completed Value Basis", in an amount equal to one hundred percent
(100%) of the insurable value of the Project at the date of
completion without a coinsurance clause, and with coverage available
on the so-called "all risk", non-reporting form of policy. M&I's
interest shall be protected in accordance with a standard mortgagee's
clause in form and content satisfactory to M&I;
(b) Comprehensive general liability insurance (including operations,
contingent liability, operations of subcontractors, complete
operations and contractual liability insurance) with limits
acceptable to M&I; and
(c) Worker's compensation insurance, with statutory coverage.
The policies of insurance required pursuant to subsection (a) above
shall be in form and content satisfactory to M&I and shall be placed
with financially sound and reputable insurers licensed to transact
business in the State of Wisconsin. The policy of insurance referred
to in subsection (a) above shall contain an agreement of the insurer
to give not less than thirty
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(30) days' advance written notice to M&I in the event of
cancellation of such policy or change affecting the coverage
thereunder. Acceptance of insurance policies referred to in
subsections (a) and (b) above shall not bar M&I from requiring
additional insurance which it reasonably deems necessary.
ARTICLE VIII
REMEDIES
8.1 Acceleration.
(a) Upon the occurrence of an Automatic Event of Default, then, without
notice, demand or action of any kind by M&I; (i) the obligation of
M&I to make the Loans under this Loan Agreement shall automatically
and immediately terminate; and (ii) the entire unpaid principal of,
and accrued interest on, the Note, and any other amount due under
this Loan Agreement, shall be automatically and immediately due and
payable.
(b) Upon the occurrence of a Notice of Event of Default, M&I may, upon
written notice and demand to the Borrower: (i) terminate its
obligation to make the Loans under this Loan Agreement; and (ii)
declare the entire unpaid principal of, and all accrued interest on,
the Note, and any other amount due under this Loan Agreement,
immediately due and payable.
8.2 Possession of Project. M&I may enter upon the Real Estate and take
possession thereof, together with the Project then in the course of
construction, and proceed either in its own name or in the name of the Borrower,
as the attorney-in-fact of the Borrower (which authority is coupled with an
interest and is irrevocable by the Borrower) to complete or cause to be
completed the Project, at the cost and expense of the Borrower. If M&I elects to
complete or cause to be completed the Project, it may do so according to the
Drawings and Specifications or according to such changes, alterations or
modifications in and to the Drawings and Specifications as M&I may deem
reasonable and appropriate; and M&I may enforce or cancel all contracts let by
the Borrower relating to construction of the Project, and/or let other contracts
which in M&I's sole judgment may seem advisable; and the Borrower shall
forthwith turn over and duly assign to M&I, as M&I may from time to time
require, contracts not already assigned to M&I relating to construction of the
Project, blueprints, shop drawings, bonds, building permits, bills and
statements of accounts pertaining to the Project, whether paid or not, and any
other instruments or records in the possession of the Borrower pertaining to the
project. The Borrower shall be liable under this Agreement to pay to M&I, on
demand, any amount or amounts expended by M&I in so completing the Project,
together with any
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costs, charges, or expenses incident thereto or resulting therefrom, all of
which shall be secured by the Collateral Documents. In the event that a
proceeding is instituted against the Borrower for recovery and reimbursement of
any moneys expended by M&I in connection with the completion of the project, a
statement of such expenditures, verified by the affidavit of an officer of M&I,
shall be prima facie evidence of the amounts so expended and of the propriety of
and necessity for such expenditures; and the burden of proving to the contrary
shall be upon the Borrower. M&I shall have the right to apply any funds which it
agrees to advance hereunder and any funds which the Borrower has then on deposit
with the Disbursing Agent to bring about the completion of the Project and to
pay the costs thereof; and if such moneys so agreed to be advanced and funds of
the Borrower then on deposit with the Disbursing Agent are insufficient, in the
sole judgment of M&I, to complete the Project, the Borrower agrees to promptly
deliver and pay to M&I may from time to time demand for the purpose of
completing the Project or of paying any liability, charge or expense which may
have been incurred or assumed by M&I under or in performance of this Agreement,
or for the purpose of completing the Project. It is expressly understood and
agreed that in no event shall M&I be obligated or liable in any way to complete
the Project or to pay for the costs of construction thereof beyond the amount of
the Commitment.
8.3 Remedies Not Exclusive. No remedy herein conferred upon M&I is intended
to be exclusive of any other remedy and each such remedy shall be cumulative and
shall be in addition to every other remedy given under this Loan Agreement, the
Notes or any other documents or materials to be delivered by the Borrower to M&I
pursuant to this Loan Agreement or now or hereafter existing at law or in
equity. No failure or delay on the part of M&I in exercising any right or
remedy shall operate as a waiver thereof nor shall any single or partial
exercise of any right preclude other or further exercise thereof or the exercise
of any other right or remedy.
8.4 Setoff. The Borrower agrees that M&I shall have all rights of setoff and
bankers' Lien provided by applicable Law, and in addition thereto, the Borrower
agrees that if at any time any payment or other amount owing by the borrower
under the Notes or this Loan Agreement is then due to M&I, M&I may apply to the
payment of such payment or other amount any or all balances, credits, deposits,
accounts or moneys of the Borrower then or thereafter with M&I.
ARTICLE IX
MISCELLANEOUS
9.1 Expenses and Attorneys' Fees. The Borrower shall pay M&I a fee of
$35,000 which shall be paid at or prior to the First Draw Request. The Borrower
shall pay all reasonable fees and expenses incurred by M&I, including the
reasonable fees and
34
<PAGE>
expenses of counsel in the amount of $7,500.00, in connection with the
preparation, issuance, maintenance and amendment of this Loan Agreement, the
Notes and any other documents or materials to be delivered by the Borrower to
M&I pursuant to this Loan Agreement and the consummation of the transactions
contemplated by this Loan Agreement, and the administration, protection and
enforcement of M&I's rights under this Loan Agreement, the Notes and any other
documents or materials to be delivered by the Borrower to M&I pursuant to this
Loan Agreement, including without limitation the protection and enforcement of
such rights in any bankruptcy, reorganization or insolvency proceeding involving
the Borrower.
9.2 Assignability; Successors. The Borrower's rights and liabilities under
this Loan Agreement are not assignable or delegable, in whole or in part,
without the prior written consent of M&I. The provisions of this Loan Agreement
shall inure to the benefit of and be binding upon the permitted successors and
assigns of the parties.
9.3 Survival. All agreements, representations and warranties made in this
Loan Agreement or in any document delivered pursuant to this Loan Agreement
shall survive the execution and delivery of this Loan Agreement, the issuance of
the Notes and the delivery of such document.
9.4 Governing Law. This Loan Agreement, the Notes and the other instruments,
agreements and documents issued pursuant to this Loan Agreement shall be
governed by, and construed and interpreted in accordance with, the Laws of the
State of Wisconsin applicable to agreements made and wholly performed within
such state.
9.5 Counterparts; Headings. This Loan Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same agreement. The article and
section headings in this Loan Agreement are inserted for convenience of
reference only and shall not constitute a part of this Loan Agreement.
9.6 Entire Agreement. This Loan Agreement, the Notes and the other documents
referred to herein and therein contain the entire understanding of the parties
with respect to the subject matter hereof. There are no restrictions, promises,
warranties, covenants or undertakings other than those expressly set forth in
this Loan Agreement. This Loan Agreement supersedes all prior negotiations,
agreements and undertakings between the parties with respect to such subject
matter.
9.7 Notices. All communications or notices required or permitted by this
Loan Agreement shall be in writing and shall be deemed to have been given (a)
upon delivery if hand delivered, or (b) upon deposit in the United States mail,
postage prepaid, or with
35
<PAGE>
a nationally recognized overnight commercial carrier, airbill prepaid, or (c)
upon transmission if by facsimile,provided that such transmission is promptly
confirmed by hand delivery, mail or courier as provided above, and each such
communication or notice shall be addressed as follows, unless and until any
party notifies the other in accordance with this Section 9.7 of a change of
address:
If to M&I: M&I Mid-State Bank
Attn: Commercial Loan Department
1245 Main Street
Stevens Point, WI 54481
with a copy to: Anderson, Shannon, O'Brien, Rice & Bertz
Attn: Torren K. Pies
1257 Main Street
Stevens Point, WI 54481
If to the Borrower: Advantage Learning Systems, Inc.
Attn: E. T. Birkholz
P.O. Box 8036
Wisconsin Rapids, WI 54495
with a copy to: Godfrey & Kahn, S.C.
Attn: Kristin A. Roeper
780 North Water Street
Milwaukee, WI 53203
9.8 Amendment: No amendment of this Loan Agreement shall be effective unless
in writing and signed by the Borrower and M&I.
9.9 Taxes: If any transfer or documentary taxes, assessments or charges
levied by any governmental authority shall be payable by reason of the
execution, delivery or recording of this Loan Agreement, the Notes or any other
documents or instrument issued or delivered pursuant to this Loan Agreement, the
Borrower shall pay all such taxes, assessments and charges, including interest
and penalties, and hereby indemnifies M&I against any liability therefor.
9.10 Accounting Terms. All accounting terms used in this Loan Agreement shall
be construed in accordance with generally accepted accounting principles
consistent with those used in the preparation of the financial statements
referred to in Section 5.4 of this Loan Agreement.
36
<PAGE>
9.11 Inspections. The Borrower and the Architect shall be responsible for
making inspections of the Project during the course of construction and shall
determine to their own satisfaction that the work done or materials supplied by
the Contractors to whom payment is to be made out of each Advance has been
properly done or supplied in accordance with the Construction Contract and the
other applicable contracts with the Contractors. If any work done or materials
supplied by a Contractor is not satisfactory to the Borrower and/or its
Architect and the same is not remedied within fifteen days of the discovery
thereof, the Borrower will immediately notify M&I in writing of such fact. It is
expressly understood and agreed that M&I may conduct such inspections of the
Project as it may deem necessary for the protection of M&I's interest, and that
any inspections which may be made of the Project by M&I will be made, solely for
the benefit and protection of M&I, and that the Borrower will not rely thereon.
9.12 Severability. Any provision of this Loan Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Loan Agreement in such jurisdiction or affecting
the validity or enforceability of any provision in any other jurisdiction.
9.13 Indemnification. The Borrower hereby indemnifies, agrees to defend and
hold M&I harmless from and against all loss, liability, damage and expense,
including costs associated with administrative and judicial proceedings and
attorneys' fees, suffered or incurred or M&I on account of: (i) the Borrower's
failure to comply with any Environmental Law, or any order of any regulatory or
administrative authority with respect thereto; (ii) any release of petroleum
products or hazardous materials or substances on, upon or into real property
owned, operated or controlled by the Borrower unless caused by M&I or its
agents; and (iii) any and all damage to natural resources or property or harm or
injury to Persons resulting or alleged to have resulted from any failure to
comply or any release of petroleum products or hazardous materials or substances
as described in clauses (i) and (ii) above unless caused by M&I or its agents.
All indemnities set forth in this Loan Agreement shall survive the execution and
delivery of this Loan Agreement and the Notes and the making and repayment of
the Loans.
The Borrower hereby grants and licenses to M&I full and complete access,
for itself, its employees and representatives (including without limitation
independent engineering consultants retained by M&I), to the Facilities, and to
the books and records of the Borrower relating to the Facilities, in order to
conduct an Environmental Assessment from time to time as M&I may deem necessary
in its sole discretion. The license granted by this paragraph is coupled with an
interest and irrevocable. The Borrower shall reimburse M&I for the costs and
expenses associated with any Environmental Assessment obtained by M&I under this
paragraph if the Borrower was
37
<PAGE>
obligated to obtain and provide to M&I an Environmental Assessment pursuant to
Section 5.11 of this Loan Agreement and failed to do so or if any Default shall
have occurred and be continuing at the time such Environmental Assessment is
undertaken by M&I. The Borrower and M&I agrees that there is no adequate remedy
at law for the damage that M&I might sustain for failure of the Borrower to
permit M&I to exercise and enjoy the license granted by this paragraph and,
accordingly, M&I might sustain for failure of the Borrower to permit M&I to
exercise and enjoy the license granted by this paragraph and, accordingly, M&I
shall be entitled at its option to the remedy of specific performance to enforce
such license.
9.14 CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL COURT SITTING IN
WISCONSIN OR WISCONSIN STATE COURT SITTING IN STEVENS POINT IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, THE NOTES, OR THE
COLLATERAL DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS
IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF M&I
TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER
JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST M&I INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS LOAN AGREEMENT, THE NOTES OR THE COLLATERAL DOCUMENTS SHALL
BE BROUGHT ONLY IN A COURT IN MILWAUKEE, WISCONSIN.
9.15 WAIVER OF JURY TRIAL. THE BORROWER AND M&I HEREBY WAIVE TRIAL BY JURY IN
ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER
SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO,
OR CONNECTED WITH THIS LOAN AGREEMENT, THE NOTES, THE COLLATERAL DOCUMENTS OR
THE RELATIONSHIP ESTABLISHED THEREUNDER.
9.16 Participation. M&I may, at any time and from time to time, grant to any
of its Affiliates a participation in any part of the Loans. All of the
representations, warranties and covenants of the Borrower in this Loan Agreement
are also made to any participant with the same force and effect as if expressly
so made.
38
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan agreement
as of the day and year first above written.
ADVANTAGE LEARNING SYSTEMS, INC.
/s/ Judith A. Paul
By: --------------------------
Judith A. Paul
Chairman of the Board
ATTEST
/s/ Terrance D. Paul
By: --------------------------
Terrance D. Paul
Chief Executive Officer
M&I MID-STATE BANK, NA
/s/ William K. Fields
By:--------------------------
William K. Fields
Vice President
39
<PAGE>
INDEX TO EXHIBITS
Exhibit A Draw Request
Exhibit B Promissory Note
Exhibit C Real Estate Mortgage
Exhibit D General Business Security Agreement
Exhibit E Financing Statement
Exhibit F Mortgaged Premises
Exhibit G Corporate Borrowing Resolution and Corporation Certificate
Exhibit H Opinion of Borrower's Counsel (to be attached)
<PAGE>
Exhibit 21.1
------------
Subsidiaries of Advantage Learning Systems, Inc.
------------------------------------------------
(As of February 28, 1997)
Name State of Incorporation
- ---- ----------------------
Institute for Academic Excellence, Inc. Wisconsin
IPS Publishing, Inc. Washington
<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
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
February 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,755,866
<SECURITIES> 0
<RECEIVABLES> 2,684,388
<ALLOWANCES> 161,000
<INVENTORY> 543,902
<CURRENT-ASSETS> 5,088,182
<PP&E> 11,324,688
<DEPRECIATION> (746,979)
<TOTAL-ASSETS> 19,854,745
<CURRENT-LIABILITIES> (4,522,236)
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (3,772,990)
<TOTAL-LIABILITY-AND-EQUITY> (19,854,745)
<SALES> (18,930,334)
<TOTAL-REVENUES> (22,381,092)
<CGS> 2,329,171
<TOTAL-COSTS> 4,227,346
<OTHER-EXPENSES> 15,140,377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,755
<INCOME-PRETAX> (2,858,264)
<INCOME-TAX> (1,601,708)
<INCOME-CONTINUING> (4,459,972)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,459,972)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
