<PAGE>
As filed with the Securities and Exchange Commission on May 13, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
eCOLLEGE.COM
(Exact name of registrant as specified in its charter)
Delaware 7379 84-1351729
(State or Other
Jurisdiction of
Incorporation or
Organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification Number)
---------------
10200 A East Girard Avenue
Denver, Colorado 80231
(303) 873-7400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Mr. Robert N. Helmick
President and Chief Executive Officer
eCollege.com
10200 A East Girard Avenue
Denver, Colorado 80231
(303) 873-7400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
with copies to:
Richard R. Plumridge, Esq. James C.T. Linfield, Esq.
John E. Hayes, III, Esq. Michael L. Platt, Esq.
Brobeck, Phleger & Harrison LLP Cooley Godward LLP
1125 Seventeenth Street, Suite 2525 2595 Canyon Boulevard, Suite 250
Denver, Colorado 80202 Boulder, Colorado 80302
(303) 293-0760 (303) 546-4000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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(d)
under the Securities Act, 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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per
share........................... $57,500,000 $15,985
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
---------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. The underwriters may not confirm sales of these securities until the +
+registration statement filed with the Securities and Exchange Commission +
+becomes effective. This prospectus is not an offer to sell these securities, +
+and it is not soliciting an offer to buy these securities in any state where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 13, 1999
Shares
Common Stock
eCollege.com is offering shares of its common stock. This is our initial
public offering. We intend to apply to have our common stock listed on the
Nasdaq National Market under the symbol "ECLG." We estimate that the initial
public offering price will be between $ and $ .
-----------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $ $
Discounts and Commissions to Underwriters $ $
Proceeds to eCollege.com $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
-----------
NationsBanc Montgomery Thomas Weisel
Securities LLC Partners LLC
The date of this prospectus is , 1999.
<PAGE>
[PICTURE OF WOMAN WORKING ON A LAPTOP COMPUTER IN A TRAIN STATION]
2
<PAGE>
[PICTURE OF REPRESENTATIVE COURSE HOME PAGE FROM STUDENT PERSPECTIVE DEPICTING
INTERACTIVE SYLLABUS. TEXT APPEARING ABOVE PICTURE READS: "ECOLLEGE.COM IS
ABOUT POSSIBILITIES. NOT MERELY THE POSSIBILITIES THAT ARISE IN THE WAKE OF
CLASSROOMS WITHOUT WALLS, BUT THOSE WHICH OCCUR WHEN EDUCATORS COMMUNICATE WITH
STUDENTS THROUGH A WHOLE NEW MEDIUM. AT ECOLLEGE.COM, OUR SOLE PURPOSE IS TO
PROVIDE EDUCATORS AND STUDENTS WITH UNPARALLELED OPTIONS FOR LEARNING TO NOT
ONLY EXTEND THE CLASSROOM, BUT TO ELEVATE ITS POTENTIAL." GRAPHIC ALSO INCLUDES
CAPTION "TEACHING IN A WHOLE NEW WAY. BEYOND THE CHALK AND THE BOARD --
STUDENTS," TOGETHER WITH THE COMPANY'S LOGO.]
<PAGE>
[PICTURE OF COURSE HOME PAGE FROM THE FACULTY PERSPECTIVE DEPICTING INTERACTIVE
SYLLABUS FROM COURSE ENTITLED "TEACHING WITH ECOLLEGE.COM." TEXT BELOW THE
PICTURE READS: "THINK OF THE INTERACTIVE SYLLABUS, LOCATED ON THE COURSE
HOMEPAGE ABOVE, AS YOUR GUIDE TO THE UNLIMITED TECHNOLOGICAL POTENTIAL OF
ECOLLEGE SYSTEM 3.0. PROVIDING IMMEDIATE ACCESS TO THE WIDE ARRAY OF MULTIMEDIA
AND COMMUNICATION TOOLS THAT MAKE UP OUR COURSE DELIVERY SYSTEM, THE
INTERACTIVE SYLLABUS ENSURES THAT EVERY COMPONENT OF YOUR ONLINE CLASSROOM IS
JUST A "CLICK" AWAY." GRAPHIC ALSO INCLUDES CAPTION "TEACHING IN A WHOLE NEW
WAY. BEYOND THE CHALK AND THE BOARD -- FACULTY," TOGETHER WITH THE COMPANY'S
LOGO.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 39
Certain Transactions..................................................... 46
Principal Stockholders................................................... 48
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 54
Legal Matters............................................................ 55
Experts.................................................................. 56
Additional Information................................................... 56
Index to Financial Statements............................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. Unless otherwise indicated,
all information contained in this prospectus assumes that the underwriters will
not exercise their over-allotment option. This prospectus contains forward-
looking statements, which involve risks and uncertainties. eCollege.com's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this prospectus. Unless otherwise
indicated, all information contained in this prospectus reflects the conversion
of our outstanding preferred stock into common stock, a seven-for-one split of
our common stock and our reincorporation in Delaware on or before completion of
this offering.
eCollege.com
eCollege.com, formerly Real Education, Inc., is a leading provider of a
complete solution that enables colleges and universities to deliver an online
campus and courses over the Internet. Our integrated software and services
allow colleges and universities to outsource the creation, launch, management
and support of a comprehensive online campus and courses. We typically create
and deliver a complete online campus, including faculty and administration
training, in 60 business days. We charge our customers an initial online campus
and course development fee, an additional development fee for each incremental
online course, and a per student fee for each enrollment in an online course.
Our comprehensive solution allows colleges and universities to reach a large
number of additional students and enables students to participate in courses at
convenient times and from a variety of geographic locations. As of May 12,
1999, we had 80 contracts covering over 100 individual campuses. Student
enrollments per year at these campuses are approximately 8.8 million. Since
inception, our customers have purchased more than 1,500 online courses from us.
During the Spring 1999 term, our customers had approximately 5,000 student
enrollments in online courses provided by us.
The Internet's open architecture, universal accessibility and real-time
interactive nature make it a natural platform for distance education.
Accordingly, online learning has become one of the fastest growing segments of
the education marketplace. International Data Corporation estimated that the
number of Web users worldwide would exceed 95 million by the end of 1998 and
will grow to over 320 million by the end of 2002. International Data
Corporation also estimates that approximately 85% of higher education
institutions will offer distance learning courses by 2002 and that the number
of students taking such courses will increase by more than 30% per year through
2002. Despite this projected growth, colleges and universities face several
challenges in delivering high quality online courses. Effective online
education requires that students receive a learning experience of comparable
quality, content and student/faculty interaction to an on-campus education. We
believe that many colleges and universities have found internally developed
solutions to be time-consuming, expensive and difficult to implement. As a
result, a growing number of colleges and universities are outsourcing the
development and maintenance of their online campus and courses.
Our solution is designed to meet the online learning needs of colleges and
universities and their students. The eCollege.com solution has the following
key elements:
Comprehensive Services. We provide a comprehensive suite of services,
including design, development, management and hosting of online campuses and
courses, as well as ongoing customer support. Our online campus model
replicates key services of a physical campus, including admissions,
registration, bookstore, library, academic advising, career counseling, student
union, bursar's office and financial aid services.
Rapid, Cost-Effective Development of Online Campuses. We can build an online
campus for a college or university, typically within 60 business days. Our
initial development fee of $30,000 includes the online campus and ten courses.
Easy Online Course Development. We work with faculty members to convert
courses into effective Web presentations using an array of course design tools
and support services. Our automated, user-friendly authoring tools enable
faculty, with little or no programming experience, to easily develop and update
their courses through a standard Web browser.
4
<PAGE>
Easy to Use, Online Learning Environment. Our customized online campuses and
courses are easy for students and faculty to use. Using a standard Web brower,
students and faculty access the online campus and courses, which include easily
navigable screens and rich multimedia content.
Standard, Scalable Technology. We integrate industry standard, open
technology to provide a scalable and reliable delivery system.
We target more than 3,000 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 50 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. Our current customers include: University of Colorado, Seton
Hall University, Eastern Michigan University, University of Pennsylvania,
Connecticut State University System, Keller Graduate School of Management,
Rutgers University, The University of North Carolina at Greensboro, California
State University--Hayward, University of Montana and The University of Wyoming.
In addition, we have contracts with several providers of continuing education
and corporate training, including DeVry/Becker Educational Development Corp.,
Earth Tech, Inc., National Association of Realtors and Palmer Chiropractic
University Foundation d/b/a Palmer Institute for Professional Advancement.
Our objective is to become the leading provider of outsourced online
learning solutions for colleges and universities and for providers of
continuing education and corporate training worldwide. The key elements of our
growth strategy are:
Add Additional Colleges and Universities. Using a focused regional approach,
our recently expanded sales force is now actively targeting more than 3,000
colleges and universities. We are also increasing our marketing efforts,
including increased print and online media advertising and greater
participation in trade shows and executive speaking engagements.
Increase Course Offerings and Enrollments with Existing Customers. Once we
build an online campus, our customers can easily develop additional courses
with minimal assistance and investment. In addition, we recently announced a
$12 million grant and scholarship program designed to increase the number of
degree courses offered online and the number of online students.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We believe this will be a key factor in our ability to serve
additional departments within the college or university.
Enter New Markets. We intend to further expand into the continuing education
and corporate training markets and to pursue opportunities with international
colleges and universities.
----------------
Our company was incorporated in Colorado on July 26, 1996. On or before
completion of this offering, we will be reincorporated in Delaware as
eCollege.com. Our principal executive offices are located at 10200 A East
Girard Avenue, Denver, Colorado 80231. Our telephone number is (303) 873-7400.
Our website is located at www.ecollege.com. Information contained on our
website is not incorporated by reference into this prospectus and you should
not consider such information a part of this prospectus.
eCollege and our logo are trademarks, and eCollege System, eCollege Campus
and eCollege Course are service marks, of eCollege.com. Each trademark, trade
name or service mark of any other company appearing in this prospectus belongs
to its holder.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered.............. shares
Common stock to be outstanding shares
after this offering..............
Use of proceeds................... To fund anticipated operating losses, to
substantially increase promotional and
marketing activities and for other general
corporate purposes, including adding
personnel to expand development and
marketing capacities. A portion of the net
proceeds may also be used for the
acquisition of businesses, products,
services or technologies that are
complementary to those of eCollege.com. See
"Use of Proceeds."
Proposed Nasdaq National Market ECLG
symbol...........................
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of April 30, 1999 and excludes 2,559,627 shares of common stock
issuable upon the exercise of outstanding stock options and warrants at a
weighted average exercise price of $1.41 per share. See "Capitalization" and
Note 4 in the notes to financial statements.
Summary Financial Data
The following table sets forth our summary financial data. You should read
this information together with the financial statements and the notes to those
statements beginning on page F-1 of this prospectus and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Please see Note 2 in the notes
to financial statements for the method of computing pro forma basic and diluted
net loss from continuing operations per share.
<TABLE>
<CAPTION>
Period from Year Ended December Three Months Ended
July 26, 1996 31, March 31,
(inception) through --------------------- ---------------------
December 31, 1996 1997 1998 1998 1999
------------------- --------- ---------- --------- ----------
(Unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course de-
velopment fees........ $ -- $ 628 $ 1,086 $ 155 $ 325
Student fees........... 22 400 579 93 286
----- --------- ---------- --------- ----------
Total revenue.......... 22 1,028 1,665 248 611
Cost of revenue......... 110 528 2,065 236 1,188
----- --------- ---------- --------- ----------
Gross margin........... (88) 500 (400) 12 (577)
Operating expenses:
Selling and marketing.. 25 106 3,394 237 1,321
General and administra-
tive.................. 249 768 2,509 450 717
Development............ 60 212 1,099 108 633
----- --------- ---------- --------- ----------
Total operating ex-
penses................ 334 1,086 7,002 795 2,671
----- --------- ---------- --------- ----------
Net loss from opera-
tions.................. (422) (586) (7,402) (783) (3,248)
Other income (expense),
net.................... 18 (29) 112 30 120
----- --------- ---------- --------- ----------
Net loss from continuing
operations............. $(404) $ (615) $ (7,290) $ (753) $ (3,128)
===== ========= ========== ========= ==========
Net loss from continuing
operations applicable
to common stockhold-
ers.................... $(404) $ (674) $ (7,993) $ (881) $ (3,743)
===== ========= ========== ========= ==========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.11) $ (1.05) $ (0.12) $ (0.49)
===== ========= ========== ========= ==========
Weighted average common
shares outstanding--ba-
sic and diluted........ -- 6,161,946 7,612,045 7,444,549 7,674,345
===== ========= ========== ========= ==========
Pro forma net loss from
continuing operations
per common share--basic
and diluted (unau-
dited)................. $ (0.68) $ (0.08) $ (0.23)
========== ========= ==========
Pro forma weighted aver-
age common shares out-
standing--pro forma ba-
sic and diluted (unau-
dited)................. 10,680,033 9,792,090 13,899,956
========== ========= ==========
</TABLE>
6
<PAGE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of our preferred stock into common
stock upon the completion of this offering, and the pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the
shares of common stock we are selling in this offering at an assumed initial
public offering price of per share, after deducting estimated underwriting
discounts and expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 9,927 $ 9,927 $
Working capital ......................... 8,679 8,679
Total assets............................. 12,818 12,818
Long-term notes payable.................. -- --
Total liabilities........................ 2,469 2,469
Mandatorily redeemable, convertible pre-
ferred stock............................ 22,515 --
Total stockholders' equity (deficit)..... (12,166) 10,349
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties that we do not
presently know about or that we currently believe are immaterial may also
adversely impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are usually accompanied by
words such as "believes," "anticipates," "plans," "expects" and similar
expressions. Our actual results may differ materially from the results
discussed in the forward-looking statements because of factors such as the Risk
Factors discussed below.
WE HAVE A LIMITED OPERATING HISTORY
We began offering our services in August 1996. Accordingly, we have a
limited operating history from which you may evaluate our business and
prospects. Our revenue growth to date may not be indicative of our future
operating results. As an early stage company in the new and rapidly changing
market for online education services, we face numerous risks and uncertainties.
Some of these risks relate to our ability to:
. maintain and increase our college and university customer base;
. increase courses and enrollments at our customers' online campuses;
. implement an evolving and unproven business model;
. compete favorably in a highly competitive market;
. expand our service offerings;
. attract, motivate and retain qualified employees;
. access sufficient capital to support our growth;
. build an infrastructure to effectively handle our growth; and
. upgrade and enhance our technologies.
We may not be successful in addressing these risks, and the failure to do so
would have a material adverse effect on our business and financial results.
WE HAVE A HISTORY OF NET OPERATING LOSSES AND EXPECT NET OPERATING LOSSES AND
NEGATIVE CASH FLOW FOR THE FORESEEABLE FUTURE
We have experienced net losses from continuing operations each year since
our inception in July 1996, including losses of $404,260 for the period from
inception to December 31, 1996, and $614,797 and $7,289,847 for the years ended
December 31, 1997 and 1998, respectively, and $3,127,583 for the quarter ended
March 31, 1999. We may not achieve profitability and if achieved, profitability
may not be sustained. At March 31, 1999, we had an accumulated deficit of
$12,779,696. We have invested heavily to develop our services and establish our
development, sales and marketing capabilities. We believe that our success
depends, among other things, on our ability to develop new relationships with
colleges and universities and maintain existing customer relationships.
Accordingly, we intend to continue to incur significant expenses for
development and sales and marketing. As such, we expect to continue
experiencing net operating losses and negative cash flow for the foreseeable
future. To the extent our sales and marketing efforts do not significantly
increase our revenues, our business and financial results will be materially
and adversely affected.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
Because of our limited operating history and the emerging nature of the
online learning market, we may be unable to accurately forecast our revenues.
The sales cycle for our solution varies widely and it is difficult
8
<PAGE>
for us to predict the timing of particular sales, the rate at which online
courses will be implemented or the number of students who will enroll in the
online courses. The cancellation or delay of even a small number of
implementations could cause our revenues to fall short of projections. Since
most of our costs are fixed and are based on anticipated revenue levels, small
variations in the timing of revenue recognition could cause significant
variations in operating results from quarter to quarter. Sales and operating
results may fluctuate from quarter to quarter depending on:
. our ability to attract and retain colleges and universities;
. our ability to successfully implement online campuses;
. the number of online courses that our customers offer each term;
. the number of students who enroll in our customers' online courses each
term;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business;
. our introduction of new or enhanced services and products, and similar
introductions by our competitors;
. the budgetary cycles of colleges and universities;
. the seasonality inherent in the academic calendar;
. our ability to upgrade and develop our systems and infrastructure;
. our ability to attract, motivate and retain personnel in a timely and
effective manner;
. technical difficulties in delivering our services;
. governmental regulation; and
. general economic conditions.
As a result, we believe that quarter-to-quarter comparisons of our sales and
operating results are not necessarily meaningful, and that such comparisons may
not be accurate indicators of future performance. Since we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, any significant decrease in revenue would likely have an immediate
material adverse effect on our business and financial results. In addition, if
our future operating results are below the expectations of securities analysts
or investors, our stock price may decline.
OUR BUSINESS AND PRICING MODELS ARE UNPROVEN
Our success depends on our ability to generate revenues by providing online
learning solutions to colleges and universities. The viability and
profitability of this model are unproven. To be successful, we must develop and
market solutions that achieve broad market acceptance with both colleges and
universities and their students. Online learning, in general, and our
solutions, in particular, may not achieve broad market acceptance. In addition,
our pricing model includes an initial campus and course development fee from
colleges and universities, additional development fees for each incremental
course we develop and a per student fee for each enrollment in an online
course. Our contracts do not require customers to guarantee any minimum number
of student enrollments or to commit to developing any courses beyond the
initial courses covered by the contract. This pricing model may not be
successful and it may not achieve or maintain revenue growth in the future. The
failure of either our business model or our pricing model would have a material
adverse affect on our business and financial results.
OUR SALES CYCLE IS LENGTHY AND CAN VARY WIDELY
The sales cycle between initial customer contact and signing of a contract
varies widely, reflecting differences in our customers' decision-making
processes and budget cycles. Our customers typically conduct
9
<PAGE>
extensive and lengthy evaluations before committing to our system. Delays in
the sales cycle can result from, among other things, changes in a college or
university's budget, the need for approval from both the customer's
administration and faculty, and the need to educate a college or university as
to the potential applications of and cost savings associated with our services.
We generally have little or no control over these factors, which may cause a
potential customer to favor a competitor's solution, or to delay or forgo
purchases altogether. As a result, we may not be able to forecast the timing
and amount of specific sales and resulting revenue. The delay in or failure to
complete planned transactions could have a material adverse effect on our
business and financial results and could cause our financial results to vary
significantly from period to period.
We provide a single service offering
We currently derive most of our revenues from developing and delivering
online campuses and courses for colleges and universities. We expect that
revenues from these services will continue to account for a substantial portion
of our revenues in future periods. Our dependence upon a single service makes
us particularly vulnerable to successful introductions of competing services.
Our inability to generate sufficient sales and achieve market penetration of
our service due to competitive factors, implementation difficulties or other
reasons, would have a material adverse effect on our business and financial
results.
We may have difficulty identifying and meeting the needs of colleges and
universities
We must accurately determine the features and functionality required by
colleges and universities and design and implement services that meet those
requirements in a timely and efficient manner. We may not be able to accurately
determine customer requirements or deliver features and functions that will
satisfy customer demands. Furthermore, even if we correctly identify our
customers' requirements, we may not be able to design and implement services
incorporating these features in a timely and efficient manner. Our failure to
determine and address customer requirements in a timely and efficient manner
would have a material adverse effect on our business and financial results.
Online learning may not be broadly accepted by academics and educators
Some academics and educators are opposed to online learning in principle.
They also have expressed concerns regarding the perceived loss of control over
the education process that can result from the outsourcing of online campuses
and courses. Some of these critics, particularly college and university
professors, have the capacity to influence the market for our services, and
their opposition could have a material adverse impact on our business and
financial results. Further, the growth and development of the market for online
learning may prompt calls from some within the academic community for more
stringent protection of intellectual property associated with course content,
which may impose additional burdens on companies offering online learning. The
adoption of any additional laws or regulations may impair the growth of online
learning, which could have a material adverse effect on our business and
financial results.
The market for online learning in higher education is in an early stage of
development
The market for online learning is a new and emerging market. Although online
learning solutions have been available for several years, they currently
represent only a small portion of the overall higher education market.
Accordingly, our success depends upon colleges and universities adopting online
learning solutions. Although we have established relationships with some
colleges and universities, these colleges and universities may not continue to
use the online learning solutions we provide. Further, given their relatively
early entry into the market for online learning, the colleges and universities
with which we have established relationships are likely to be less risk-averse
than most colleges and universities. Accordingly, the rate at which we have
been able to establish relationships with colleges and universities in the past
may not be indicative of the rate at which we will be able to establish
relationships in the future. The use of online learning solutions may not
become widespread and our services may not achieve commercial success. In
addition, colleges and universities that have already invested substantial
resources in other nontraditional methods of instruction may be reluctant to
adopt new methods that compete with their existing offerings. Any failure of
online learning to gain
10
<PAGE>
continuing market acceptance would have a material adverse effect on our
business and financial results. Further, even if colleges and universities
implement online learning solutions, they may still choose to design, develop
or manage all or a part of their system internally. The failure of colleges and
universities to outsource the design, development or management of their online
learning solutions to third parties would have a material adverse effect on our
business and financial results.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET
Our most intense competition is with the information technology departments
of the colleges and universities themselves, which may seek to develop online
learning capabilities internally rather than using an outsourced provider. We
also face significant competition from a variety of companies including: (1)
other companies which seek to offer a complete solution including software and
services, (2) software companies with specific products for the college and
university market, (3) systems integrators and (4) hardware vendors. Finally,
our business is dependent on students taking courses over the Internet, so we
compete indirectly with the traditional classroom-based courses of our
customers and their competitor schools. We may not be able to compete
successfully against current and future competitors, and the competitive
pressures we face could have a material adverse effect on our business and
financial results. See "Business--Competition."
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE
The market for our software and services is characterized by rapid
technological change, changes in customer demands and evolving industry
standards. The introduction of services embodying new technologies and the
emergence of new industry standards can render existing services obsolete and
unmarketable. To succeed, we must address the increasingly sophisticated needs
of higher education by improving our software and services to keep pace with
technological developments, emerging industry standards and customer
requirements. We may not be able to do so successfully.
GOVERNMENT REGULATIONS, INCLUDING THOSE RELATING TO THE INTERNET IN GENERAL AND
TO OUR INDUSTRY IN PARTICULAR, COULD ADVERSELY AFFECT OUR BUSINESS
We may be subject to certain government laws and regulations, such as the
Family Educational Rights and Privacy Act. Our violation of these statutes, or
of any other law or regulation, could have a material adverse effect on our
business and financial results. In addition, there are an increasing number of
laws and regulations pertaining to the Internet. These laws and regulations
relate to liability for information received from or transmitted over the
Internet, online content regulation, user privacy, taxation and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing intellectual property ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing. We cannot predict the impact, if any,
that future regulation or regulatory changes may have on our business. In
addition to laws and regulations of general application to the Internet, we may
be subject to laws and regulations governing online providers of educational
services. IMS, a coalition of corporate, academic and government organizations,
was recently formed to develop technical standards for the online education
industry. While we believe we are currently in compliance with the standards
and regulations pronounced by the IMS coalition, we may not continue to be in
compliance with such standards in the future, and we may not be able to meet
any certification standards the IMS coalition may establish. Many colleges and
universities are accredited by regional accreditation organizations whose
approval may be required for the college or university to offer courses over
the Internet. Any delay in, or failure to receive, such approval could limit or
prevent a college or university from using our solution, which would adversely
affect our financial results.
WE ARE HIGHLY DEPENDENT ON GOVERNMENT FUNDING OF HIGHER EDUCATION
Most of the colleges and universities we serve and intend to serve in the
future depend substantially on government funding. Thus, a decrease or delay in
government funding of higher education may have a material adverse effect on
our business and financial results.
11
<PAGE>
MANAGING OUR GROWTH EFFECTIVELY MAY BE DIFFICULT
We are currently experiencing a period of significant expansion. Our growth
has placed, and any further growth is likely to continue to place, a
significant strain on our managerial, operational, financial and other
resources. We have grown from 17 employees as of July 31, 1996 to 197 employees
as of March 31, 1999. Our success will depend, in part, upon our ability to
effectively manage any future growth. This will require us to implement
additional management information systems, to further develop our operating,
administrative, financial and accounting systems and controls and to maintain
close coordination among our technology development, accounting, finance,
marketing, sales, and customer service and support departments. Our failure to
successfully manage growth and to develop financial controls and accounting and
reporting systems or to add and retain personnel that adequately support our
growth would have a material adverse effect on our business and financial
results.
WE MUST EXPAND OUR CUSTOMER SERVICE AND SUPPORT DEPARTMENT
As we increase the number of colleges and universities we serve, we will
require greater numbers of highly trained development personnel and account
service representatives to ensure rapid and successful implementation of our
solution. As of March 31, 1999, we had 79 individuals in this department
servicing our customers. We may not be able to increase the size of our
customer service and support department on a timely basis, or at all, and we
may not be able to provide the high level of support required by our customers,
especially during the initial implementation and development of our services.
Our failure to do so would have a material adverse effect on our business and
financial results.
OUR NETWORK INFRASTRUCTURE AND COMPUTER SYSTEMS MAY FAIL
The continuing and uninterrupted performance of our network infrastructure
and computer systems is critical to our success. Any system failure that causes
interruptions in our ability to provide service to our customers or their
students could reduce customer satisfaction and, if sustained or repeated,
would reduce the attractiveness of our solution to higher education providers
or their students. An increase in the number of online campuses delivered
through our servers could strain the capacity of our software or hardware,
which could lead to slower response times or system failures. To the extent we
do not successfully address any capacity constraints, such constraints would
have a material adverse effect on our business and financial results.
Our operations are dependent upon our ability to protect our computer
systems against damage from fire, power loss, telecommunications failures,
vandalism and other malicious acts, and similar unexpected adverse events. In
addition, the failure of our telecommunications and network backbone provider
to provide the data communications capacity and network infrastructure in the
time frame we require could cause service interruptions or slower response
times. Despite precautions we have taken, unanticipated problems affecting our
systems have from time to time in the past caused, and in the future could
cause, interruptions or delays in the delivery of our solutions. Any damage or
failure that interrupts or delays our operations could have a material adverse
effect on our business and financial results.
OUR NETWORK MAY BE VULNERABLE TO SECURITY RISKS
Our success depends on our ability to provide superior network security
protection and the confidence of our customers in that ability. We have located
our servers in commercial server farms that are designed to prevent
unauthorized access from the Internet. Still, we may not be able to prevent
unauthorized disruptions, whether caused unintentionally or by computer
"hackers," of our network operations. These disruptions may result in liability
to us and harm to our customers, and our failure to prevent such disruptions
would have a material adverse effect on our business and financial results.
OUR SUCCESS DEPENDS ON MAINTENANCE AND CONTINUED DEVELOPMENT OF THE WEB
INFRASTRUCTURE
Our success depends, in large part, upon the maintenance of the Web
infrastructure as a reliable network backbone with the necessary speed, data
capacity and security, and timely development of enabling products
12
<PAGE>
such as high speed modems, for providing reliable Web access and services as
well as improved content. We depend on a single company to maintain the
operational integrity of our network backbone. Increases in the number of
users, frequency of use or bandwidth requirements may strain the Web
infrastructure and degrade the performance and reliability of the Web.
Furthermore, the Web has experienced a variety of outages and delays as a
result of damage to portions of its infrastructure, and any future outages or
delays could adversely affect our online campuses. In addition, delays in the
development or adoption of new standards and protocols (such as the next-
generation Internet protocol) that are designed to handle increased levels of
activity, could reduce the viability of the Web. The infrastructure or
complementary products or services necessary to maintain and enhance the Web as
a commercial medium may never be developed. If the necessary infrastructure,
standards or protocols or complementary products, services, or facilities are
not developed, or if the Web does not continue to develop as a viable
commercial medium, our business and financial results would be materially and
adversely affected. Even if such infrastructure, standards or protocols or
complementary products, services or facilities are developed, we may be
required to incur substantial expenditures in order to adapt our services to
changing or emerging technologies, which could have a material adverse effect
on our business and financial results. Moreover, critical issues concerning the
commercial use and government regulation of the Internet (including security,
cost, ease of use and access, intellectual property ownership and other legal
liability issues) remain unresolved and could materially and adversely impact
the growth of the Internet and our business and financial results.
We depend on our key personnel and we may have difficulty attracting and
retaining skilled employees
Our success depends on the continued service of our key management
personnel, particularly our Chief Executive Officer. We do not carry life
insurance policies on most of our key management personnel. The loss of
services from one or more of these persons would have a material adverse effect
on our business and financial results. Our success also depends on our ability
to attract, motivate and retain highly-skilled managerial, sales and marketing,
customer service and support and technology development personnel. Competition
for such personnel in our industry is intense. We may not be able to retain our
key employees or attract, motivate and retain additional key employees in the
future. Our failure to retain these key employees would have a material adverse
effect on our business and financial results.
We may expand internationally and become subject to risks of international
operations
We may expand our business internationally. In doing so, we would become
subject to the risks of conducting business internationally, including:
. unexpected changes in regulatory requirements (including the regulation
of Internet access);
. uncertainty regarding liability for information retrieved and replicated
in foreign countries;
. foreign currency fluctuations, which could result in reduced revenues and
increased operating expenses;
. tariffs and trade barriers;
. potentially longer payment cycles;
. difficulty in collecting accounts receivable;
. foreign taxes; and
. the burdens of complying with a variety of foreign laws and trade
standards.
We would also be subject to general geopolitical risks, such as political
and economic instability and changes in diplomatic and trade relationships, in
connection with our proposed international operations. The risks associated
with our proposed international operations could materially and adversely
effect our business and financial results.
13
<PAGE>
WE MUST PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success depends, in part, on our ability to protect our proprietary
rights and technology. We rely on a combination of copyrights, trademarks,
trade secret laws, employee and third-party nondisclosure agreements and other
methods to protect our proprietary rights. Despite our efforts to protect these
rights, unauthorized parties may attempt to duplicate or copy aspects of our
services or software or to obtain and use information that we regard as
proprietary. Policing unauthorized use of the software underlying our services
is difficult, and while we are unable to determine the extent to which piracy
of our software exists, software piracy in general will likely be a persistent
problem. In addition, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. As a
consequence, effective trademark, service mark, copyright, and trade secret
protection may not be available in every country in which our products and
services are made available online. Our proprietary rights and technology may
not be adequate, and our competitors could independently develop similar rights
and technology. Our failure to meaningfully protect our intellectual property
could have a material adverse effect on our business and financial results.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. Although we believe that our intellectual
property rights are sufficient to allow us to market our existing services
without incurring liability to third parties, and we are not aware of any
disputes with third parties relating to competing intellectual property rights,
we might not prevail in such disputes. Failure to prevail in one or more such
disputes could impair our right to market our services, which, in turn, could
have a material adverse effect on our business and financial results.
To date, we have not been notified that our services infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim that our current or future services are infringing their
proprietary rights.
WE MUST MONITOR AND PROTECT OUR INTERNET DOMAIN
We currently hold various Internet domain names. Third parties may acquire
substantially similar or conceptually similar domain names that decrease the
value of our domain name and trademarks and other proprietary rights which may
hurt our business. Domain names generally are regulated by Internet regulatory
bodies. The regulation of domain names in the United States and in foreign
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. The relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. As a result, we may not acquire or maintain exclusive rights
to our domain name in the United States or in other countries in which we
conduct business.
WE FACE RISK FROM POTENTIAL YEAR 2000 PROBLEMS
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. In addition to our
internally developed software, we use software and hardware developed by third
parties for both our network and internal information systems. An incorrect
date could result in failures of our systems or miscalculations causing
disruptions to our operations, including, among other things, an inability to
connect to the Internet, process transactions, send invoices or otherwise
engage in normal business activities. We are also subject to the risk of
failure of third-party providers to be Year 2000 compliant, in particular those
third-party providers that provide local access and long distance service. We
rely on third party network infrastructure providers to gain access to the
Internet. If such providers experience business interruptions as a result of
their failure to achieve Year 2000 compliance, our ability to provide Internet
connectivity could be impaired. In
14
<PAGE>
addition, we provide a warranty to our customers regarding the Year 2000
compliance of our system, including our software and the interfaces necessary
to deliver courses over the Internet. If we were to breach this
representation, our customers would have the right to terminate their contracts
with us upon 30 days notice. Our inability to timely correct, or to correct at
all, a Year 2000 problem, would result in a material adverse effect on our
business and financial results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Issues."
WE MAY MAKE ACQUISITIONS OR INVESTMENTS
From time to time we have had discussions with companies regarding our
acquiring, or investing in, their businesses. If we buy a company, we could
have difficulty in assimilating its operations, or assimilating and retaining
its key personnel. These difficulties could disrupt our ongoing business and
distract our management and employees. Also, acquisitions may result in a
variety of accounting charges which would increase our reported expenses,
including amortization of goodwill and the write off of acquired in-process
research and development. Furthermore, we may incur debt or issue dilutive
equity securities to pay for any future acquisitions or investments. As a
result, any future business acquisitions or investments could have a material
adverse effect on our business and financial results.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
We may need to raise additional funds in the future to fund our operations,
to finance the substantial investments in equipment and corporate
infrastructure we will need for our planned expansion, to enhance and/or expand
the range of services we offer or to respond to competitive pressures and/or
perceived opportunities, such as investment, acquisition and international
expansion activities. Additional financing may not be available on terms
favorable to us, or at all. If adequate funds are not available when required
or on acceptable terms, our business and financial results could suffer.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT
Purchasers of common stock in this offering will incur immediate and
substantial dilution of $ in the pro forma net tangible book value per share
of common stock from the initial public offering price of $ per share. To the
extent outstanding options and warrants to purchase common stock are exercised,
there will be further dilution to investors.
WE DO NOT PLAN TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE
We intend to retain our future earnings, if any, to finance the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER
STOCKHOLDERS WILL STILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE
Currently, our existing officers, directors and 5% or greater stockholders
(and their affiliates), in the aggregate, beneficially own approximately 78% of
our outstanding capital stock. Upon consummation of this offering, this group
will continue to own a majority of our outstanding capital stock. As a result,
such persons, acting together, will have the ability to control the vote on all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control.
FUTURE SALES BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK
9,010,764 shares of our common stock are eligible for resale after this
offering immediately upon the expiration of 180-day lock-up agreements, subject
in many cases to the volume limitations and other restrictions of Rule 144
under the Securities Act. Sales of our common stock in the public market
following this offering could adversely affect the market price of the common
stock. See "Shares Eligible for Future Sale."
15
<PAGE>
THERE HAS BEEN NO PRIOR MARKET FOR OUR STOCK, AND OUR STOCK PRICE IS LIKELY TO
BE HIGHLY VOLATILE
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our stock or how liquid that
market might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in any
future trading market. The stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs and a diversion
of our management's attention and resources.
OUR ANTI-TAKEOVER PROVISIONS COULD PREVENT A THIRD PARTY FROM ACQUIRING YOUR
SHARES AT A PREMIUM TO THE MARKET PRICE
Various provisions of our certificate of incorporation, bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to you and our other stockholders.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common
stock offered hereby are estimated to be $ ($ if the underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discount and offering expenses and assuming an initial public
offering price of $ per share.
We intend to use the net proceeds from this offering to fund anticipated
operating losses, to substantially increase our promotional and marketing
activities, and for other general corporate purposes, including adding
personnel to expand our development and marketing capacities. A portion of the
net proceeds may also be used for the acquisition of businesses, products,
services or technologies that are complementary to those of eCollege.com. We
have not yet determined the amount of net proceeds to be used specifically for
each of the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of this offering. Pending these uses,
we intend to invest the net proceeds from this offering in short term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception and we do not expect to pay any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. On an actual basis;
. On a pro forma basis to reflect the automatic conversion of all
outstanding shares of Series A, B and C mandatorily redeemable,
convertible preferred stock into 6,225,611 shares of common stock upon
the completion of this offering and the effectiveness of our
reincorporation in Delaware; and
. On a pro forma as adjusted basis to reflect to the sale of shares
common stock offered hereby, at an assumed initial public offering price
of $ per share (after deducting the estimated underwriting discounts
and commissions and offering expenses) and the application of the net
proceeds therefrom.
This table should be read together with the financial statements and notes
to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(Unaudited)
(in thousands, except share
data)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock:
Series A, mandatorily redeemable, convertible
preferred stock, no par value; 132,000 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ $ 1,164
Series B, mandatorily redeemable, convertible
preferred stock, no par value, 326,833 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ 6,686
Series C, mandatorily redeemable, convertible
preferred stock, no par value, 430,540 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ 14,665
Stockholders' equity:
Preferred stock, no shares authorized, issued or
outstanding, actual; $0.01 par value, 5,000,000
shares authorized, no shares issued and
outstanding, pro forma and pro forma as
adjusted.......................................
Common stock, no par value, 50,000,000 shares
authorized; 7,686,000 shares issued and
outstanding, actual; $.01 par value 13,911,611
shares issued and outstanding, pro forma; and
$.01 par value, shares issued and
outstanding, pro forma as adjusted............. 469 $22,984
Additional paid-in capital....................... -- --
Notes receivable................................. (341) (341)
Warrants and stock options....................... 2,336 2,336
Deferred compensation............................ (1,850) (1,850)
Accumulated deficit.............................. (12,780) (12,780)
------- ------- --------
Total stockholders' equity..................... (12,166) 10,349
------- ------- --------
Total capitalization......................... $10,349 $10,349
======= ======= ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999. We are
permitted, and in some cases obligated, to issue shares of
18
<PAGE>
common stock in addition to the common stock to be outstanding after this
offering. The following is a summary of these additional shares of common
stock:
. 1,492,750 shares that could be issued upon the exercise of options
outstanding as of March 31, 1999 at a weighted average exercise price of
$1.38 per share;
. 1,029,777 shares that could be issued upon exercise of outstanding
warrants as of March 31, 1999 at a weighted average exercise price of
$1.34 per share; and
. shares that can be issued to our employees who elect to buy stock in
the future under our employee stock purchase plan.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $10,348,719,
or approximately $0.74 per share. Pro forma net tangible book value represents
the amount of tangible assets less total liabilities, divided by the number of
shares of common stock outstanding, assuming conversion of all outstanding
shares of preferred stock into common stock. Without taking into account any
other changes in the net tangible book value after March 31, 1999, other than
the sale of the shares offered hereby at an assumed offering price of $ per
share, our pro forma net tangible book value as of March 31, 1999 would have
been $ , or $ per share. The pro forma net tangible book value assumes
that the proceeds to us, net of offering expenses and underwriting discount,
will be approximately $ . This represents an immediate increase in net
tangible book value to existing stockholders attributable to new investors of
$ per share and the immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma book value per share before this offering................ $0.74
Increase per share attributable to new investors...................
-----
Pro forma net tangible book value per share after this offering.....
----
Dilution per share to new investors................................. $
====
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with
respect to (1) the number of shares of common stock purchased from us, (2) the
total consideration paid to us and (3) the average price paid per share by
existing stockholders and by the new investors purchasing shares of common
stock in this offering, at an assumed initial public offering price of $ per
share. Underwriting discounts, commissions and other estimated offering
expenses have not been deducted.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 13,911,611 % $22,498,750 % $1.62
New investors..............
---------- --- ----------- --- -----
Total.................... 100% 100% $
========== === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
March 31, 1999.
As of March 31, 1999, there were options outstanding to purchase 1,492,750
shares of common stock at a weighted average exercise price of $1.38 per share,
warrants outstanding to purchase 1,029,777 shares of common stock at a weighted
average exercise price of $1.34 per share, and 1,183,850 additional shares
reserved for future grants under our stock option plans. To the extent that any
of these options are exercised, there will be further dilution to new
investors.
20
<PAGE>
SELECTED FINANCIAL DATA
The data should be read in conjunction with the financial statements and the
notes to such statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The selected financial data as of December 31, 1997 and 1998, for
the period from July 26, 1996 (inception) through December 31, 1996 and for the
years ended December 31, 1997 and 1998, are derived from our audited financial
statements included elsewhere in this prospectus. The balance sheet data as of
December 31, 1996 is derived from audited financial statements not included
elsewhere in this prospectus. The selected financial data at March 31, 1999 and
for the three months ended March 31, 1998 and 1999 are derived from unaudited
financial statements included elsewhere in this prospectus. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments which we consider necessary for the fair presentation of
our financial position and results of operations for these periods. Operating
results for the three months ended March 31, 1999 are not necessarily
indicative of the results that we will experience for the entire year.
Historical results are not necessarily indications of the results to be
expected in the future. Please see Note 2 in the notes to financial statements
for the method of computing pro forma basic and diluted net loss from
continuing operations per share.
<TABLE>
<CAPTION>
Period from
July 26, 1996
(inception) Year Ended December Three Months Ended
through 31, March 31,
December 31, --------------------- ---------------------
1996 1997 1998 1998 1999
------------- --------- ---------- --------- ----------
(Unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course
development fees...... $ -- $ 628 $ 1,086 $ 155 $ 325
Student fees........... 22 400 579 93 286
----- --------- ---------- --------- ----------
Total revenue.......... 22 1,028 1,665 248 611
Cost of revenue......... 110 528 2,065 236 1,188
----- --------- ---------- --------- ----------
Gross margin............ (88) 500 (400) 12 (577)
Operating expenses:
Selling and marketing.. 25 106 3,394 237 1,321
General and
administrative........ 249 768 2,509 450 717
Development............ 60 212 1,099 108 633
----- --------- ---------- --------- ----------
Total operating
expenses.............. 334 1,086 7,002 795 2,671
----- --------- ---------- --------- ----------
Net loss from
operations............. (422) (586) (7,402) (783) (3,248)
Other income (expense),
net.................... 18 (29) 112 30 120
----- --------- ---------- --------- ----------
Net loss from continuing
operations............. $(404) $ (615) $ (7,290) $ (753) $ (3,128)
===== ========= ========== ========= ==========
Net loss from continuing
operations applicable
to common
stockholders........... $(404) $ (674) $ (7,993) $ (881) $ (3,743)
===== ========= ========== ========= ==========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.11) $ (1.05) $ (0.12) $ (0.49)
===== ========= ========== ========= ==========
Weighted average common
shares outstanding--
basic and diluted...... -- 6,161,946 7,612,045 7,444,549 7,674,345
===== ========= ========== ========= ==========
Pro forma net loss from
continuing operations
per common share--basic
and diluted
(unaudited)............ $ (0.68) $ (0.08) $ (0.23)
========== ========= ==========
Pro forma weighted
average common shares
outstanding--pro forma
basic and diluted
(unaudited)............ 10,680,033 9,792,090 13,899,956
========== ========= ==========
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of our preferred stock into common
stock, upon completion of this offering, and the pro forma as adjusted column
also reflects our receipt of the estimated net proceeds of the shares of
common stock we are selling in this offering at an assumed initial public
offering price of $ per share, after deducting estimated underwriting
discounts and expenses.
21
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
-------------------- ------------------------------
PRO FORMA
1996 1997 1998 ACTUAL PRO FORMA AS ADJUSTED
---- ----- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equiva-
lents................... $ 20 $ 208 $11,661 $ 9,927 $9,927 $
Working capital.......... (657) 58 9,577 8,679 8,679
Total assets............. 269 748 13,660 12,818 12,818
Long-term notes payable
to related parties...... -- 231 -- -- --
Total liabilities........ 703 621 2,549 2,469 2,469
Mandatorily redeemable,
convertible preferred
stock................... -- 1,029 19,650 22,515 --
Total stockholders' eq-
uity (deficit).......... (434) (902) (8,539) (12,166) 10,349
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and notes attached to
those statements included elsewhere in this prospectus. This discussion
contains certain forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors" elsewhere in this prospectus.
Overview
We are a leading provider of a complete solution that enables colleges and
universities to deliver an online campus and courses over the Internet. Our
integrated software and services allow colleges and universities to outsource
the creation, launch, management and support of a comprehensive online campus
and courses. We typically create and deliver a complete online campus,
including faculty and administration training, in 60 business days. We charge
our customers an initial online campus and course development fee, an
additional development fee for each incremental online course, and a per
student fee for each enrollment in an online course. Our comprehensive solution
allows colleges and universities to reach a large number of additional students
and enables students to participate in courses at convenient times and from a
variety of geographic locations. As of May 12, 1999, we had 80 contracts
covering over 100 individual campuses. Student enrollments per year at these
campuses are approximately 8.8 million. Since inception, our customers have
purchased more than 1,500 online courses from us. During the Spring 1999 term,
our customers had approximately 5,000 student enrollments in online courses
provided by us.
In 1996, we acquired Brecknet Internet Services, an Internet service
provider doing business as ColoradoNet, for cash of $80,000 and a note payable
of $129,000. In May 1997, we sold ColoradoNet to a third party due to our
determination that the Internet service provider business did not complement
our primary business focus of Internet education. The business of ColoradoNet
has been treated as a discontinued operation. Please see the notes to our
financial statements.
Revenue
We currently generate revenue from two sources:
. An initial development fee to build an online campus and a specified
number of courses, as well as incremental fees to build additional
courses; and
. Per student fees for each enrollment in an online course.
We typically enter into multi-year contracts with colleges and universities
to provide online learning solutions. These contracts specify the initial
number of courses purchased as well as the price for additional courses. Our
contracts do not require customers to guarantee any minimum number of student
enrollments or to commit to developing any courses beyond the initial courses
covered by the contract. The initial fee is fixed, covering development of the
online campus as well as the initial number of courses. We recognize our
initial fee as the online campus design services and course design services are
performed. Subsequent incremental fees for additional courses are recognized as
the design services are performed. Student fees are recognized ratably over the
duration of the course.
Our business model is based upon a number of factors, including increasing
acceptance of online learning among colleges and universities, adding new
customers, developing additional courses for our existing customers and
increasing student enrollment in online courses. Through March 31, 1999, the
majority of our revenue has been generated by fees for building campuses and
courses, and, to a lesser extent, per student fees. We expect that both revenue
streams will continue to grow, but that the per student fees will become larger
than the development fees as the number of courses offered by our customers and
the numbers of students in those courses continue to increase.
23
<PAGE>
Cost of Revenue
Our cost of revenue consists primarily of employee compensation and benefits
for development, course design, account management and technical personnel. We
also allocate a portion of our occupancy and infrastructure costs to cost of
revenue. To continue to execute our business plan, we intend to expand our
operations, including our marketing, technical, operational and customer
support resources.
Selling and Marketing
The principal components of our selling and marketing expenses are employee
compensation and benefits, advertising and travel. Other significant components
include marketing collateral expenses, consulting fees and depreciation.
General and Administrative
The principal component of our general and administrative expenses is
employee compensation and benefits. Other components include facilities,
depreciation, communications, professional and consulting fees and deferred
compensation.
Development
Development expenses consist primarily of employee compensation and related
benefits for development personnel and related depreciation, occupancy costs
and consulting fees.
Results of Continuing Operations
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $9,036,572 as of December 31, 1998, and $12,779,696 as
of March 31, 1999. We intend to continue to make investments in technology,
which may involve the development, acquisition or licensing of technologies
that complement or augment our existing services and technologies. We also
intend to continue to invest heavily in marketing activities. Accordingly, we
expect to incur significant operating losses for the foreseeable future.
We experience fluctuations in our quarterly results due to the seasonality
inherent in the academic calendar and due to the relatively fixed nature of our
operating expenses.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that our revenue and other operating results
should not be relied upon as indications of future performance.
Three Months Ended March 31, 1999 and 1998
Revenue. Revenue increased to $610,957 for the three months ended March 31,
1999 from $248,514 for the three months ended March 31, 1998. Increases in
revenue are due to an increased number of online campuses and courses
developed, as well as increased student enrollment in online courses. Campus
and course development fees represented 53% and 62% of total revenue for the
three months ended March 31, 1999 and 1998, respectively. Student fees
represented 47% and 38% of total revenue, respectively, for these same periods.
Cost of Revenue. Cost of revenue increased to $1,187,599 for the three
months ended March 31, 1999 from $236,236 for the three months ended March 31,
1998. Our cost of revenue increased primarily due to increased personnel costs,
depreciation expense and sales commissions. These costs were approximately 194%
and 95% of total revenue for the three months ended March 31, 1999 and 1998,
respectively. Our operations and account management personnel increased to 79
as of March 31, 1999 from 29 as of March 31, 1998.
Selling and Marketing. Selling and marketing expenses increased to
$1,320,551 for the three months ended March 31, 1999 from $237,299 for the
three months ended March 31, 1998. The increase was primarily due to increases
in the number of selling and marketing personnel and increases in compensation
and travel expense. Our selling and marketing personnel increased to 53 as of
March 31, 1999 from 12 as of March 31, 1998. The increase in selling and
marketing expenses also reflects an increase in advertising to $281,114 for the
three months ended March 31, 1999 from $41,207 for the three months ended March
31, 1998.
24
<PAGE>
General and Administrative. General and administrative expenses increased to
$716,784 for the three months ended March 31, 1999 from $450,240 for the three
months ended March 31, 1998. The increase was primarily due to an increase in
the number of general and administrative personnel to 28 as of March 31, 1999
from 13 as of March 31, 1998. In addition, outside consulting, professional
fees, recruiting fees and travel expenses increased, reflecting our expanded
business activities.
Through March 31, 1999, we recorded aggregate deferred compensation totaling
approximately $2.4 million in connection with the grant of certain options to
employees. During the first quarter of 1999, we recorded aggregate deferred
compensation in the amount of approximately $946,000 and in April 1999, we
recorded an additional $400,000 of such deferred compensation. The deferred
charge is being amortized over the vesting period of such options, which ranges
from 2 to 5 years. Of the total deferred compensation, approximately $17,000,
$18,000, $27,000 and $137,000 were amortized in the quarters ended March 31,
June 30, September 30 and December 31, 1998, respectively, and approximately
$103,000 was amortized in the first quarter of 1999. We expect approximate per
quarter amortization in future years related to deferred compensation to be as
follows:
<TABLE>
<CAPTION>
QUARTERS
IN THE
YEAR
ENDED
DECEMBER
31, AMOUNT
-------- --------------------
<S> <C>
1999 $105,000 -- $160,000
2000 $130,000 -- $140,000
2001 $130,000
2002 $120,000
2003 $ 90,000 -- $120,000
2004 $ 0 -- $ 50,000
</TABLE>
Development. Development expenses increased to $633,502 for the three months
ended March 31, 1999 from $107,404 for the three months ended March 31, 1998.
The increase was primarily due to an increase in the number of development
personnel to 37 as of March 31, 1999 from 9 as of March 31, 1998.
Other Income (Expense). Other income (expense), which consists primarily of
interest earnings on our cash and cash equivalents, increased to $119,896 for
the three months ended March 31, 1999 from $29,920 for the three months ended
March 31, 1998, primarily due to the completion of a private placement of
equity securities in December 1998, which provided net proceeds of $11,938,955.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenue .Revenue increased to $1,665,069 for 1998 from $1,028,180 for 1997
and $22,464 for 1996. Increases in revenue are due to an increased number of
online campuses and courses developed, as well as increased student enrollment
in online courses. Campus and course development fees represented 65%, 61% and
0% of 1998, 1997 and 1996 total revenue, respectively. Per student fees
represented 35%, 39% and 100%, respectively, of total revenue. We expect that
per student fees will account for a greater percentage of total revenue in the
future.
Cost of Revenue. Since 1996, the growth in the number of online campuses
and courses has resulted in increased cost of revenue. Cost of revenue
increased to $2,064,909 for 1998 from $528,090 for 1997 and $109,974 for 1996.
Our cost of revenue increased in 1998 and 1997 primarily due to increased
personnel costs, depreciation expense and sales commissions. Our operations and
account management personnel increased to 65 from 21 and from 5 at December 31,
1998, 1997 and 1996, respectively. During 1998, cost of revenue was
approximately 124% of total revenue. We have made investments in people and
technology that will support higher revenue than our historical levels, which
has resulted in a cost of revenue that exceeds current revenue. Since most of
our costs are fixed and based on anticipated revenue levels, we believe our
revenue will exceed our cost of revenue in the future.
Selling and Marketing. Selling and marketing expenses increased to
$3,394,000 for 1998 from $106,026 for 1997 and $25,474 for 1996. The increases
in 1998 and 1997 were primarily due to increases in the number
25
<PAGE>
of sales and marketing personnel, which numbered 42, 5 and 0 at December 31,
1998, 1997 and 1996, respectively. In addition, we increased advertising
expenditures to $1,096,843 for 1998 from $18,000 for 1997.
General and Administrative. General and administrative expenses increased to
$2,509,496 for 1998 from $767,812 for 1997 and $248,884 for 1996. The increases
in 1998 and 1997 were primarily due to increases in the number of general and
administrative personnel, which numbered 19, 7 and 6 at December 31, 1998, 1997
and 1996, respectively. In addition, outside consulting and professional fees,
recruiting fees and travel expenses increased, reflecting our expanded business
activities.
During 1998, we recorded aggregate deferred compensation in the amount of
approximately $1.4 million in connection with the grant of certain stock
options during this period. Amortization of deferred compensation totaled
approximately $200,000 during this period. No such deferred compensation was
recorded prior to January 1, 1998.
Development. Development expenses increased to $1,099,000 for 1998 from
$212,052 for 1997 and $60,207 for 1996. The increases in 1998 and 1997 were
primarily due to ongoing development and improvement of our current online
learning solutions, as well as increases in the number of development
personnel, which numbered 28, 8 and 2 at December 31, 1998, 1997 and 1996,
respectively.
Other Income (Expense). Other income, which is comprised primarily of
interest earnings on our cash and cash equivalents, was $149,308 for 1998,
$8,993 for 1997 and $27,001 for 1996. We completed private placements of equity
securities in June 1997, February 1998 and December 1998, which provided net
proceeds of $970,150, $5,978,000 and $11,938,955, respectively. Interest
expense from notes payable and a bridge loan was $36,819 in 1998, $37,990 in
1997 and $9,186 in 1996. The notes payable and the bridge loan were repaid in
1998.
INCOME TAXES
Income taxes will consist of federal, state and local taxes, when
applicable. We expect significant net losses for the forseeable future that
should generate net operating loss carryforwards. However, utilization of such
prospective net operating loss carryforwards may be subject to certain
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. If we achieve operating profits
and the net operating loss carryforwards have been exhausted or have expired,
we may experience significant tax expense. We have recorded no provision or
benefit for federal and state income taxes because we incurred net operating
losses from inception through December 31, 1998. As of December 31, 1998 we had
approximately $7,800,000 of federal and state operating net operating loss
carryforwards available to offset future taxable income which expire in varying
amounts beginning in 2011. We have established a valuation allowance against
the entire amount of our deferred tax asset because our management has not been
able to conclude that it is more likely than not that we will be able to
realize the deferred tax asset, due primarily to our history of operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased from $208,346 at December 31, 1997
to $11,661,186 at December 31, 1998. This net change occurred primarily because
we raised $18,750,020 in proceeds from the sale of equity securities and
incurred a net loss of $7,289,847 during 1998.
Our investment in property and equipment during 1998 was $1,663,128.
Installation of network infrastructure equipment, equipment for new employees
and leasehold improvements related to expansions accounted for most of our
capital expenditures in 1998. We intend to continue to make investments in
property and equipment, although we have no formal commitments to do so.
We have financed the majority of our operations through the issuance of
equity securities. We have sold common stock and preferred stock generating
aggregate proceeds of $19,764,686 from inception through December 31, 1998.
26
<PAGE>
We believe that the net proceeds from the sale of common stock offered
hereby, together with our current cash, cash equivalents and short-term
investment balances and cash generated from operations, will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. Our operating and investing activities may require us to obtain
additional equity or debt financing. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products and technologies to consummate potential
acquisitions, we may need additional equity or debt financing in the future.
Without regard to this offering, management believes that cash on hand and
other sources of liquidity at March 31, 1999 are sufficient to fund the
Company's operations through at least March 31, 2000, albeit at significantly
lower levels of activities.
Year 2000 Issues
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. This could result in system
failures or miscalculations causing disruptions of operations for any company
using such computer programs or hardware, including, among other things, an
inability to connect to the Internet, process transactions, send invoices or
engage in normal business activities. As a result, many companies and
individuals must upgrade or replace their computer systems to avoid "Year 2000"
issues.
The software and hardware we use to manage our business has substantially
all been purchased or developed by us within the last 30 months. While this
does not uniformly protect us against Year 2000 exposure, we believe that our
information technology is not based upon "legacy" hardware and software
systems. "Legacy system" is a term often used to describe hardware and software
systems that were developed in previous decades when there was less awareness
of Year 2000 issues. Generally, hardware and software design within the current
decade, and the past several years in particular, has given greater
consideration to Year 2000 issues. All of the software code we have internally
developed to manage our network and to develop courses, for example, is written
with four digits to define the applicable year.
We are in the process of testing our internal information technology and
non-information technology systems. We have a dedicated Year 2000 project
manager and our own personnel have performed all of the testing we have
completed. To date, we have completed our initial testing of our internally
developed information technology and non-information technology software. Our
initial testing produced no results that would lead us to believe such software
is not Year 2000 compliant. Nevertheless, we may experience material unexpected
costs caused by undetected errors or defects in the technology used in our
systems. To confirm our results, we plan to retain an outside firm specializing
in Year 2000 issues.
In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. We have not performed any testing of such third-party
software or hardware to determine Year 2000 compliance. We are, however, in the
process of obtaining certifications from our key vendors to ensure that their
hardware and software is Year 2000 compliant. Based on our initial evaluation
of our list of material software and hardware providers, we believe that these
providers are presently compliant or are reviewing and implementing their own
Year 2000 compliance programs. We
intend to work with these providers to address the Year 2000 issue and continue
to seek assurances from them that their products are Year 2000 compliant.
We rely on third party network infrastructure providers to gain access to
the Internet. We also rely on other third party providers such as utilities who
provide electricity to our physical facilities. If such providers experience
business interruptions as a result of their failure to achieve Year 2000
compliance, our ability to provide Internet connectivity, for example, could be
impaired, which could have a material adverse effect on our business, results
of operations and financial condition.
27
<PAGE>
Moreover, our users' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenue and execute our business plan.
Interruptions in our users' services and on-line activities caused by Year 2000
problems could have a material adverse effect on our revenue.
We expect to substantially complete our Year 2000 compliance program,
including any necessary remediation measures, by June 30, 1999. Other than the
cost of the outside consulting firm, which we do not expect to exceed $75,000,
we have not incurred any significant expenses to date and we are not aware of
any material costs associated with our anticipated Year 2000 efforts. Costs or
other amounts incurred in connection with Year 2000 issues have been expensed
or will be expensed as they occur. However, if we, a significant number of our
users, our providers of hardware and software or our third-party network or
utility providers fail to remedy any Year 2000 issues, we would experience a
material loss of revenue that could materially adversely affect our business,
results of operations and financial condition. We would consider an
interruption in our ability to provide our services to be the most likely
result of any failure by us, or failure by the third parties upon whom we rely,
to achieve Year 2000 compliance. Presently, we are unable to reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenue. In addition, we provide a warranty to
our customers regarding the Year 2000 compliance of our system, including our
software and the interfaces necessary to deliver courses over the Internet. If
we were to breach this representation, our customers would have the right to
terminate their contracts with us upon 30 days notice. We are currently
developing a contingency plan to ensure the continuity of our core business
processes in the event of a Year 2000-related failure of our systems. We expect
that the plan will include a determination of the critical core processes that
would be at risk during a system failure. The plan will also prioritize the
areas where resources should be applied. To date, the costs of developing the
plan have not been material. Although future costs are difficult to estimate,
we do not currently expect that such costs will be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are, or may become, exposed to market risk in the
areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States Dollar. These
exposures are directly related to our normal operating and funding activities.
Historically and as of December 31, 1998, we have not used derivative
instruments or engaged in hedging activities.
INTEREST RATE RISK
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes
in interest rates will result in a material effect on our future earnings, fair
values or cash flows.
FOREIGN CURRENCY RISK
We may enter into contracts where we pay or a third party pays us in a
foreign currency. This would expose us to changes in exchange rates. Changes in
the foreign exchange rates may positively or negatively affect our financial
position, results of operations or cash flows. We do not believe that near-term
changes in exchange rates will result in a material effect on future earnings,
fair values or cash flows, and therefore, have chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the foreign exchange rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the cost of such software. SOP No. 98-1 is effective for
28
<PAGE>
financial statements for fiscal years beginning after December 15, 1998. We do
not expect that the adoption of SOP No. 98-1 will have a material impact on our
1999 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). We are required to adopt
SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, we have not entered into any derivative financial instruments or hedging
activities.
29
<PAGE>
BUSINESS
Overview
eCollege.com, formerly Real Education, Inc., is a leading provider of a
complete solution that enables colleges and universities to deliver an online
campus and courses over the Internet. Our integrated software and services
allow colleges and universities to outsource the creation, launch, management
and support of a comprehensive online campus and courses. We typically create
and deliver a complete online campus, including faculty and administration
training, in 60 business days. We charge our customers an initial online campus
and course development fee, an additional development fee for each incremental
online course, and a per student fee for each enrollment in an online course.
Our comprehensive solution allows colleges and universities to reach a large
number of additional students and enables students to participate in courses at
convenient times and from a variety of geographic locations. As of May 12,
1999, we had 80 contracts covering over 100 individual campuses. Student
enrollments per year at these campuses are approximately 8.8 million. Since
inception, our customers have purchased more than 1,500 online courses from us.
During the Spring 1999 term, our customers had approximately 5,000 student
enrollments in online courses provided by us.
Market Opportunity
The market for higher education is large and growing. The U.S. Department of
Education estimates that more than $200 billion is spent annually in the higher
education market and that more than 14.5 million students were enrolled in
colleges and universities in 1998. We believe that a growing demand for skilled
labor, a larger population of potential students and the economic value of
post-secondary education to students will continue to drive demand for higher
education over the next decade. Moreover, a change in demographics has resulted
in a greater percentage of older students. International Data Corporation
estimated that for 1996, adults over 24 years of age comprised approximately
6.2 million, or 43.5%, of the students enrolled in higher education programs.
The U.S. Bureau of Census estimates that approximately 75% of students over the
age of 24 work while attending school. This growing population of older
students has caused colleges and universities to alter their approach to
traditional education to meet the different needs of this population.
The Internet's open architecture, universal accessibility and real-time
interactive nature make it a natural platform for distance education.
Accordingly, online learning has become one of the fastest growing segments of
the education marketplace. International Data Corporation estimated that the
number of Web users worldwide would exceed 95 million by the end of 1998 and
will grow to over 320 million by the end of 2002. Online learning allows
students to participate in courses at times that are convenient for them and
from a variety of geographic locations, including satellite campuses or their
own homes. Colleges and universities are experiencing increased demand for
online learning and are increasingly recognizing that online learning allows
them to reach more students, presenting additional revenue opportunities.
International Data Corporation also estimates that approximately 85% of higher
education institutions will offer distance learning courses by 2002 and that
the number of students taking such courses will increase by more than 30% per
year through 2002.
Despite this projected growth, colleges and universities face several
challenges in delivering high quality online courses. Effective online learning
requires that students receive a learning experience of comparable quality,
content and student/faculty interaction to an on-campus education. A college or
university may attempt to develop an online education solution internally,
creating its own software or purchasing software components from a vendor.
However, we believe that many colleges and universities have found internally
developed solutions to be time-consuming, expensive and difficult to implement.
As a result, a growing number of colleges and universities are outsourcing the
development and maintenance of their online campus and courses.
The eCollege.com Solution
Our solution is designed to meet the online learning needs of colleges and
universities and their students. The eCollege.com solution has the following
key elements:
30
<PAGE>
Comprehensive Services. We provide a comprehensive suite of services,
including design, development, management and hosting of online campuses and
courses, as well as ongoing customer support. Our account service
representatives work with college and university administrators to design a
unique online campus which replicates key services of a physical campus,
including admissions, registration, bookstore, library, academic advising,
career counseling, student union, bursar's office and financial aid services.
We also provide ongoing service and training to our customers through a
technical support staff and an online help desk. We host the online campus on
our reliable infrastructure, achieving nearly 100% uptime. We believe our
integrated software and services offer the most comprehensive solution to
colleges and universities seeking to outsource the development, delivery and
maintenance of their online campus and courses.
Rapid, Cost-Effective Development of Online Campuses. We can build an online
campus for a college or university, typically within 60 business days. ,Our
initial development fee of $30,000 includes the online campus and ten courses.
We believe most colleges and universities would incur substantially greater
costs to develop a comparable solution internally.
Easy Online Course Development. We work with faculty members to convert
courses into effective Web presentations using an array of course design tools
and support services. Our automated, user-friendly authoring tools enable
faculty, with little or no programming experience, to easily develop and update
their courses through a standard Web browser. We believe that ease of use by
the faculty and the availability of our technical support services are critical
to achieving faculty acceptance of our solution.
Easy to Use, Online Learning Environment. The customized online campuses and
courses are easy for students and faculty to use. A student can access our
system with a Pentium 75 megahertz computer with a 28.8 kilobits-per-second
modem and a standard Web browser. The online campus includes easily navigable
screens, as well as highly customizable courses and student services. Our
system allows the use of rich multimedia content, including video and audio
clips, and a variety of interactive learning tools. Our high capacity, fully-
redundant infrastructure helps to ensure availability of the online campus and
convenient "anytime/anywhere" delivery of courses. Our customer support
personnel are available 24 hours a day, seven days a week.
Standard, Scalable Technology. We integrate industry standard, open
technology to provide a scalable and reliable delivery system. We have made
significant investments in our infrastructure and technical support to ensure
the reliability and scalability of our solution. We utilize redundant high
bandwidth network connections and clustered servers, fault-tolerant storage
technology and load distribution capabilities to increase the reliability and
availability of our systems and services.
GROWTH STRATEGY
Our objective is to become the leading provider of outsourced online
learning solutions for colleges and universities and for providers of
continuing education and corporate training worldwide. The key elements of our
growth strategy are:
Add Additional Colleges and Universities. In order to capitalize on the
significant interest from colleges and universities, we increased our sales
force from 4 to 40 in mid-1998 and have entered into more than 50 new contracts
since then. Using a focused regional approach, we are now actively targeting
more than 3,000 colleges and universities. In addition, we intend to further
develop the eCollege.com brand and reputation by increasing our marketing
efforts, including increased use of print and online media advertising and
greater participation at trade shows and executive speaking engagements. We
believe our larger sales force and an increased marketing effort will enable us
to further penetrate the higher education market.
Increase Course Offerings and Enrollments with Existing Customers. Once we
build an online campus, our customers can easily develop additional courses
with minimal assistance and investment. To facilitate the development of
additional courses, we work with faculty on an ongoing basis, providing
instructional design coordinators for one-on-one training and dedicated course
developers for website design and development assistance. To further increase
enrollments, we assist our customers with the marketing and promotion of their
31
<PAGE>
online learning programs. In particular, we recently announced a $12 million
grant and scholarship program designed to increase the number of degree courses
offered online and the number of online students.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We invest heavily in course development personnel and technology
and work closely with faculty to ensure easy-to-implement, high quality
courses. Our account service representatives are available to assist faculty
and administrators on an ongoing basis. To further develop the relationships
with our customers' faculty, we recently developed faculty.com, a website
focused on faculty issues relating to online learning. We believe that
development of long-term relationships with our customers will help us to
penetrate additional departments within the college or university, and will
create a strong barrier to exit.
Enter New Markets. We currently focus on North American colleges and
universities, but also intend to offer our integrated software and services to
the continuing education and corporate training markets. Accordingly, we are
actively marketing to selected continuing education providers, corporate
training companies and trade and professional associations. We also intend to
expand into selected international markets.
ECOLLEGE.COM CUSTOMERS
We target more than 3,000 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 50 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. Our current customers include: University of Colorado, Seton
Hall University, Eastern Michigan University, University of Pennsylvania,
Connecticut State University System, Keller Graduate School of Management,
Rutgers University, The University of North Carolina at Greensboro, California
State University--Hayward, University of Montana and The University of Wyoming.
The University of Colorado accounted for 11% of our revenue in the first
quarter of 1999, 21% of our revenue in 1998, 62% of our revenue in 1997 and 93%
of our revenue in 1996. In addition, we have contracts with several providers
of continuing education and corporate training, including DeVry/Becker
Educational Development Corp., Earth Tech, Inc., National Association of
Realtors and Palmer Chiropractic University Foundation d/b/a Palmer Institute
for Professional Advancement.
32
<PAGE>
eCollege System
The eCollege System is made up of four components that are integrated and
scalable: eCollege Campus, eCollege Course, Course Manager and Administrative
Reports. The eCollege Campus serves as the entry point for students, faculty
and administrators to enter the eCollege System. With a valid password,
students, faculty and administrators can also access the eCollege Course.
Faculty can access the Course Manager to create and update online course
material, while administrators can access the Administrative Reports to review
and sort student information.
Graphic depicting components of eCollege System:
eCollege System (SM)
Students/Faculty/Administrators
Web Browser
eCollege Campus (SM)
-----------------------------------------------------
* Welcome Page * Tuition & Fees
* Course Catalog * Technical Requirements
* Admissions * Academic Information
* Registration * Financial information
-----------------------------------------------------
------------------
Restricted Access:
Password Required
------------------
--------------------
eCollege Course (SM)
* Personal Homepage
* Message Center
* Multimedia Support
* Add/Drop Courses
* Class Email
* Testing Functions
* Learning Tools
--------------------
- -------------------------------------- ------------------------------------
Course Manager Administrative Reports
* Administer communications tools * Student records: payment history
* Administer assessment tools payment status and grades
* Upload text, graphics and multimedia * Database of college and
- -------------------------------------- university specific inquiries
Faculty * Bulk email notification
------------------------------------
Administrators
eCollege Campus. The eCollege Campus is the initial entry point for all
student, faculty and administrative services, including online admissions and
registration, as well as the entry point to access the password protected
eCollege Course, which contains the online courses and course material. We
design each eCollege Campus to be easy to use and to reflect a college's
distinctive character and unique preferences. We also design each eCollege
Campus to replicate the key services available on-campus.
33
<PAGE>
Below are examples of eCollege Campuses for the University of Colorado and
Seton Hall University.
[Picture of web page from "cuonline.edu,"
the online campus of University of Colorado.]
[Picture of web page from "setonworldwide.net,"
the online campus of Seton Hall University.]
34
<PAGE>
eCollege Course. After entering the password protected eCollege Course, an
individual views a customized personal homepage. This page is unique for each
student, faculty member or administrator and offers access to several features
and services, including add/drop functions, account balance information, the
online bookstore and personal emails. The personal homepage also lists each
course in which a student is currently enrolled and provides an online
tutorial. The eCollege Course presents course material online with features
that enable faculty to track and manage student progression through a course.
The eCollege Course also emphasizes student-to-faculty and student-to-student
communication. Faculty members may use a variety of online teaching tools to
conduct courses. Each online course begins with an introduction to the course
and incorporates an audio or video presentation (using streaming technology)
introducing the faculty member. Within the eCollege Course, faculty members can
create, administer and score a variety of types of exams. Faculty members are
also able to incorporate multimedia capabilities to enhance presentations.
Course Manager. Our course developers use the Course Manager to build online
courses and materials. The Course Manager also provides faculty with an
organized format to display content while offering design flexibility in the
use of communications and assessment tools in their courses. After minimal
training, faculty can use the Course Manager to create and update their own
course material in real time. This functionality encourages faculty to
continually improve and update their courses, leading to better quality courses
and materials for students.
Administrative Reports. The Administrative Reports capture and display
student information for college and university officials and administrators.
Our customers can sort information by class code, student name, city or state
or the registrant's Internet provider. Further, the Administrative Reports
maintain faculty and student evaluations and offer the ability to broadcast
email messages to any group, based on enrollment classifications, demographics
or other characteristics.
ADDITIONAL ECOLLEGE.COM SUPPORT AND SERVICES
We support the development of the online campus and courses with account
service representatives, course developers, instructional design consultants
and a help desk. We believe that providing attentive service is a key
competitive advantage and will be an important factor in achieving market
acceptance and maintaining long-term relationships with colleges and
universities.
Account service representatives. Account service representatives facilitate
the efficient development and growth of the online campus, frequently consult
with college and university administrators and serve as a point of contact for
all services. The account service representatives gather information regarding
the distinctive character and preferences of each college or university and
serve as a liaison to our design and technology teams. After the online campus
is built, the account service representatives assist the customer with ongoing
maintenance issues and manage all aspects of our relationship with the college
or university.
Course developers. Our course developers help faculty build online courses
using content provided by faculty. Course developers input the content into the
Course Manager to build an online course to the faculty member's
specifications. We offer a studio for faculty to record lectures and our course
developers work with our audio and video group to create multimedia content for
online courses.
Instructional design consultants. Our instructional design consultants
train faculty, provide written and multimedia resources and work individually
with faculty to help them present their material in an attractive online
format. In addition, they consult with faculty and our research and technology
teams to generate ideas for improving our course delivery system.
Help desk. Our help desk provides technical support to students and faculty
using the eCollege System. The help desk is available through email and
telephone 24 hours a day, seven days a week.
SALES AND MARKETING
Sales. We target more than 3,000 colleges and universities in the United
States and Canada. We have a sales force of 40 individuals, most with a
background in education and/or technology. Our sales force covers 27
35
<PAGE>
regions throughout the entire continental United States and Canada, and a
National Accounts Manager covers 50 strategic colleges and universities. We
divide the United States and Canada into three geographic areas, each managed
by a regional vice president who is responsible for approximately 10 smaller
regions. These regions are covered by regional managers who are located within
the territories they serve. Their assignments and objectives include:
. working with our marketing department team to develop awareness of our
services in each manager's region;
. developing the initial business relationship with the roughly 100
colleges and universities in their region; and
. broadening the business relationship by working with additional
departments in a given college or university.
The sales process is based on leads generated by the regional managers,
inquiries to the website and through attendance at conferences or trade shows.
After a lead is generated, the regional manager qualifies each prospect. We
typically give each prospect access to a demonstration course and make an
appointment for a presentation. Each presentation includes an online or CD-ROM
demonstration of our system. Subsequent presentations may be scheduled with
faculty and other interested parties. Once a contract is signed, we begin
implementation of the online campus.
We are also pursuing opportunities in the continuing education and corporate
training markets. We recently transferred two individuals to focus on
continuing education, corporate training and trade association customers and
prospects. These corporate sales managers respond to inquiries from customers
and prospects, work with our marketing department to increase awareness of our
services and proactively develop relationships with additional providers of
continuing education and corporate training.
Marketing. We market our solution through a combination of print and online
media advertising, trade shows and direct marketing to promote our services to
colleges and universities. Our website has been designed as our primary
marketing communications tool, incorporating a demonstration of the eCollege
System, information on industry trends, market research, webcasts from industry
experts, and other important events in online learning. We also advertise in
industry periodicals such as The Chronicle of Higher Education to address key
decision-makers in our target market, generally senior administrators, faculty
and IT administrators. We continue to strengthen our brand identity by
participating in trade shows, conferences and executive speaking engagements.
Finally, we hold online learning symposiums to build market awareness and
identify qualified prospects.
We market to students through our website, which highlights the benefits of
online learning and provides students with information on online higher
education alternatives. We intend to continue to develop our website for
students as an important source for their online learning needs. We also intend
to market to faculty through faculty.com, a website focused on faculty issues
relating to online learning.
We provide our customers with additional marketing support to drive
enrollment of online students, including:
. an instructional enrollment marketing kit for our customers including
media plans, sample advertisements and public relations and Web marketing
strategies;
. pamphlets distributed on campus;
. marketing consulting services;
. international promotion and recruitment; and
36
<PAGE>
. awareness of advanced degree, continuing education and corporate training
alternatives.
We recently announced a twelve million dollar grant and scholarship program
dedicated to increasing the number of degree courses currently offered online
and increasing the number of students pursuing an online education. Grants will
be awarded, at our discretion, to institutions based on demonstrated commitment
to a quality online degree program, the number of current and potential
students, the institution's unique approach to online learning and other
factors. Scholarships will be awarded based on a variety of student
characteristics, including financial need and scholastic aptitude.
TECHNOLOGY
Our technology strategy is to employ the best available software on stable
and scalable platforms. The eCollege System consists of widely known off-the-
shelf components combined to create a proprietary architechture. We use
Microsoft NT 4.0 as our operating system for both our development and
production environments. Our course content storage architecture is based on
Microsoft SQL Server, version 6.0. Our webserver component, as well as our
authentication systems, are provided by the Microsoft Commercial Internet
System. The proprietary elements of the eCollege System are based on a
combination of Microsoft programming languages, including Visual Basic, Active
Server Pages and Web Classes. The eCollege System is load balanced using
Microsoft's Windows Load Balancing Services, resulting in a scalable delivery
system.
The eCollege System is delivered from a centralized webserver to our
customers. We have made a substantial investment in fault-detection, fault-
handling and general system uptime enhancements, resulting in a highly reliable
Web hosting infrastructure. Our server hardware consists of Hewlett Packard
servers, using Intel microprocessors, typically configured with twin processors
and one gigabyte of memory. All primary servers contain redundant network cards
and power supplies, as well as fault-tolerant disk storage solutions for added
redundancy. Our service contracts with Hewlett Packard include a four-hour
hardware response time. Our database servers contain the latest clustering
technology that leverages both Hewlett Packard hardware and Microsoft software
technologies for scalability and speed. Finally, we maintain sophisticated
firewall technology to protect against security breaches and "hackers."
Our network engineering infrastructure generally follows a traditional co-
location model. Currently, all of our primary servers are co-located at an
independent facility in Sunnyvale, California. This facility ensures us a
minimum of ten megabyte connection to the Internet. In addition, we maintain a
backup data center in Denver, utilizing a redundant fiber optic connection to
another tier one service provider, Cerfnet/AT&T. Additionally, our bandwidth is
scalable to accommodate unforeseen spikes in user activity. Our current
Internet backbone employs both DS-3 ATM and OC-3c to OC-12c packet over SONET
links. For increased reliability, we outsource fully-redundant components using
state-of-the-art technology from leading industry vendors. Our outsourced
digital distribution architecture is comprised of more than 60 high-speed
private peering network connections to major Internet carriers such as MCI
Worldcom, Sprint and AT&T. In addition, it provides high-speed links to eight
Internet exchanges with over 100 public peering arrangements, geographically
dispersed Media Distribution Centers and intelligent end-user routing software.
COMPETITION
The online learning market is quickly evolving and is subject to rapid
technological change with no single competitor accounting for a dominant market
share. We believe that the principal competitive factors in our market include:
. the ability to provide an online solution meeting the needs of colleges,
universities and students;
. quality and performance of online learning solutions;
37
<PAGE>
. service features such as adaptability, scalability and ability to
integrate other technology-based products;
. quality of implementation and service teams;
. company reputation; and
. pricing.
Our competitors vary in size and in the scope and breadth of the products and
services they offer. Competition is most intense from colleges' and
universities' internal information technology departments. Many colleges and
universities construct online learning systems utilizing in-house personnel and
creating their own software or purchasing software components from a vendor. We
also face significant competition from a variety of companies including: (1)
other companies which seek to offer a complete solution including software and
services, (2) software companies with specific products for the college and
university market, (3) systems integrators and (4) hardware vendors.
Other competitors in this market include a wide range of education and
training providers. These companies use video, cable, correspondence, CD-ROM,
computer-based training, and online training.
We believe that the level of competition will continue to increase as
current competitors increase the sophistication of their offerings and as new
participants enter the market. Many of our current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do and may enter into strategic or commercial relationships with
larger, more established and well-financed companies. Certain competitors may
be able to secure alliances with customers and affiliates on more favorable
terms, devote greater resources to marketing and promotional campaigns and
devote substantially more resources to systems development than we can. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures we face. Increased competition may result in
reduced operating margins, as well as loss of market share and brand
recognition. We may not be able to compete successfully against current and
future competitors, and competitive pressures we face could have a material
adverse effect on our business and financial results.
PROPRIETARY RIGHTS AND TECHNOLOGY
Although our business model and the services we provide define our business,
our software and our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property are also very
important to our success. We rely on a combination of trademark and copyright
laws, trade secret protection and confidentiality and/or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. We have applied for the registration of certain of our trademarks and
service marks in the United States. In addition to our Internet domain name, we
also license and may license in the future, certain of our proprietary rights,
such as trademarks, technology or copyrighted material, to third parties. See
"Risk Factors--We must protect or intellectual property and proprietary
rights."
EMPLOYEES
As of March 31, 1999, we employed 197 people. None of our employees is
subject to any collective bargaining agreements, and we consider our relations
with our employees to be good.
FACILITIES
Our corporate headquarters are located in Denver, Colorado. The headquarters
facility encompasses approximately 44,000 square feet and is leased for three
years. We believe our existing facilities are adequate for current requirements
and that additional space can be obtained on commercially reasonable terms to
meet future requirements.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
38
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of eCollege.com as of
April 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Robert N. Helmick............ 41 Chairman, President and Chief Executive
Officer
Jonathan M. Dobrin........... 27 Vice President, Chief Technology Officer and
Director
Steven M. Singer............. 44 Vice President, Finance and Administration
and Chief Financial Officer
John V. Helmick.............. 40 Vice President, Corporate Services
Mark J. Fine................. 43 Vice President, Sales
Ray Henderson................ 35 Vice President, Product Systems & Technology
Kevin L. Johnson............. 38 Vice President, Business Development
Daniel H. Meitus............. 43 Vice President, Marketing
James N. Sigman.............. 37 Vice President, Accounts and Services
Jack W. Blumenstein (1) (2).. 55 Director
Christopher E. Girgenti (1) 35 Director
(2).........................
Jeri Korshak (1) (2)......... 44 Director
Oakleigh Thorne.............. 41 Director
Key Employees
Bradley V. Felix............. 25 Vice President, Systems Development
Denise LaBier Pilkington..... 36 General Counsel
James R. Nollsch............. 26 Vice President, Web Development
Ginger Smith................. 39 Controller
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Robert N. Helmick founded eCollege.com in July 1996 and has served as our
Chairman of the Board, President and Chief Executive Officer since our
inception. Mr. Helmick founded and served as Chief Executive Officer of
Helmick and Associates, International, a consulting firm for higher education
from 1990 through 1996. During that time, he served on the Board of Trustees
of several universities. Previously, he practiced law with Bradshaw, Fowler,
Proctor and Fairgrave, a law firm in Des Moines, Iowa, from 1982 through 1990.
Mr. Helmick received a JD from the University of Southern California Law
School and a BA from Drake University. Mr. Helmick is the brother of John V.
Helmick, our Vice President, Corporate Services.
Jonathan M. Dobrin has served as our Vice President and Chief Technology
Officer since August 1998. Mr. Dobrin also served as our Vice President and
Chief Operating Officer from July 1996 through July 1998. Mr. Dobrin has
served as a director since 1997. He founded and served as Vice President of
Real Information Systems LLC, a company that specialized in the development
and deployment of premium Web sites, from October 1994 through July 1996. Mr.
Dobrin received a BA from the University of Vermont.
Steven M. Singer has served as our Vice President, Finance and
Administration and Chief Financial Officer since December 1997. Mr. Singer has
served as our Treasurer since January 1998 and served as a director from June
1997 to January 1999. Mr. Singer was an investment banker with McDonald & Co.
from
39
<PAGE>
July 1997 through December 1997, with The Chicago Corporation (now ABN AMRO,
Inc.) from October 1994 through July 1997 and with Dain Bosworth from April
1991 through October 1994. He received a BBA and an MBA from the University of
Wisconsin. Mr. Singer is a Certified Public Accountant.
John V. Helmick has served as our Vice President, Corporate Services since
March 1999. Mr. Helmick has served as our Secretary since our inception. He
also served as a director from our inception through January 1999, as our
General Counsel from August 1996 through March 1999 and as our Treasurer from
our inception through January 1998. Mr. Helmick was an attorney specializing in
corporate finance and securities regulation with Hershner, Hunter, Moulton,
Andrews & Neill in Eugene, Oregon from 1993 until joining the Company in 1996.
Mr. Helmick received a JD from Yale Law School and a BBA from the University of
Texas at Austin. Mr. Helmick is the brother of Robert N. Helmick, our Chairman,
President and Chief Executive Officer.
Mark J. Fine has served as our Vice President, Sales since October 1997.
From August 1980 through April 1996, he held various positions at Columbine
JDS, a leading provider of software and services to the broadcasting and cable
industries, including Vice President, Corporate Development, Vice President,
Director of Automation Business Unit and most recently, Vice President, Sales
and Marketing. Mr. Fine holds a BS in Quantitative Business Analysis from
Arizona State University.
Ray Henderson has served as our Vice President, Product Systems and
Technology since January 1, 1999. From 1987 to 1998, he was employed by Simon &
Schuster's Higher Education Division, where he was Vice President, Product
Systems & Technology. In this role he pioneered many of the higher education
industry's first Web-based products, and created a highly scalable technology
infrastructure for producing Internet-based educational products. Mr. Henderson
received a BS from Trinity University.
Kevin L. Johnson has served as our Vice President, Business Development
since October 1998. From December 1984 through October 1998, he held various
positions, most recently as the Director of Strategic Relationships for the
Simon & Schuster Higher Education Distributed Learning Group responsible for
business development and partnership work as well as sales management of
several regional sales managers. Mr. Johnson has over fifteen years of higher
education sales, editorial and business development experience. Mr. Johnson
received a BA from Middlebury College.
Daniel H. Meitus has served as our Vice President, Marketing since May 1998.
From December 1996 through April 1998, he was a senior consultant with Meitus &
Associates, performing services for Integro, Inc., where he led the sales force
automation practice. From 1995 to 1996, he was Director of Analog Services for
Nextel Communications, Inc. where he managed the nationwide operations of its
wireless communications product line. From 1992 through 1995, Mr. Meitus was
the Director of Marketing of OneComm, Inc. Mr. Meitus received an MBA from the
Wharton School, University of Pennsylvania, and a BS from Washington University
in St. Louis.
James N. Sigman has served as our Vice President, Accounts and Services
since our inception. From 1992 through May 1996, he was an attorney with
Laurence J. Rich & Associates, specializing in corporate law, employment law
and litigation. Mr. Sigman received a JD from the University of Denver Law
School and a BA from Tulane University.
Jack W. Blumenstein has served as a member of our board of directors since
February 1998. Mr. Blumenstein has been the President of TBG Information
Investors, LLC, and the co-president of Blumenstein/Thorne Information
Partners, L.L.C. since October 1996, and is a co-founder of these private
equity investment firms. From October 1992 to September 1996, Mr. Blumenstein
held various positions with The Chicago Corporation (now ABN AMRO, Inc.),
serving most recently as Vice President, Debt Capital Markets Group and a
member of the board of directors. Mr. Blumenstein was President and CEO of
Ardis, a joint venture of Motorola and IBM, and has held various senior
management positions in product development and sales and marketing for Rolm
Corporation and IBM. Mr. Blumenstein is a member of various business and civic
boards of directors, including AirCell, Inc., HotOffice Technologies, Inc., the
Chicago Zoological Society, and Kids Voting USA.
40
<PAGE>
Christopher E. Girgenti has served as a member of our board of directors
since June 1997. Mr. Girgenti has been Senior Managing Director of New World
Equities, Inc. since November 1996 and Managing Director of New World Venture
Advisors, LLC since January 1998. He serves on the boards of several technology
and telecommunications companies. From April 1994 through October 1996, Mr.
Girgenti served as Vice President and was co-head of the technology investment
banking group of The Chicago Corporation (now ABN AMRO, Inc.). He has held
various corporate finance positions with Kemper Securities, Inc. and KPMG Peat
Marwick. Mr. Girgenti is a Chartered Financial Analyst.
Jeri Korshak has served as a member of our board of directors since February
1999. Ms. Korshak has over twenty years of experience in marketing and business
development. Ms. Korshak has been the Vice President of Strategy for MediaOne
Group since June 1998. Ms. Korshak was Vice President and General Manager of US
WEST Dex--Mountain Region from September 1995 to May 1998, and Vice President
and General Manager of Interactive Television of US WEST Multimedia from
November 1994 to September 1995. In these and other positions, Ms. Korshak has
been involved in developing and introducing interactive services.
Oakleigh Thorne has served as a member of our board of directors since
February 1998. Mr. Thorne has been Chairman and Chief Executive Officer of TBG
Information Investors, LLC and the co-president of Blumenstein/Thorne
Information Partners, L.L.C. since October 1996, and is a co-founder of these
private equity investment firms. TBG, a partnership with GS Capital Partners
II, is a private equity fund that focuses on capital transactions in the
information industry. Prior to that time, from January 1991 to August 1996, Mr.
Thorne served in various management positions, including most recently
President and Chief Executive Officer, of CCH Incorporated, a leading provider
of tax and business law information, software, and services.
Bradley V. Felix has served as our Vice President, Systems Development since
August 1996. He founded and served as President of Timberline Internet
Services, Inc., a consulting firm specializing in programming for Internet
commerce from March 1996 through March 1997. In June 1997, Mr. Felix also co-
authored Building an Extranet: Connect Your Intranet with Vendors and
Customers. Mr. Felix also co-founded and developed ColoradoNet, an Internet
service provider in 1995 and served in various technical and management
capacities from December 1995 through August 1996. ColoradoNet was purchased by
eCollege.com in August 1996. From September 1995 to June 1996, Mr. Felix served
as a transportation specialist for Ralston Resorts. Mr. Felix served as a
systems developer with Futures Tech on the Net from May 1995 to September 1995.
Mr. Felix received a BS from Tufts University in 1995.
Denise LaBier Pilkington has served as our General Counsel since March 1999.
From August 1998 to March 1999, she was our Associate General Counsel. From
1992 to 1998, she was an attorney with Woodrow & Gruskin, PC, specializing in
corporate and business law. Ms. LaBier Pilkington received a BA from the
University of Colorado and a JD from the University of Denver Law School.
James R. Nollsch has served as our Vice President, Web Development since
July 1996. From November 1995 to July 1996, Mr. Nollsch served as Director of
Product Development for Real Information Systems, LLC. Mr. Nollsch attended the
University of Colorado, where he received a BA in 1994.
Ginger C. Smith has served as our Controller since March 1998. Ms. Smith has
over fourteen years of experience in finance and accounting. She has held
financial management positions at NovaLogic, Inc., a software start-up, and
Paramount Pictures. From 1985 to 1990, she was an auditor at Coopers & Lybrand.
She received an MBA from California State University, and a BS in Finance and a
BA in Accounting from George Mason University.
Directors' Terms
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified.
41
<PAGE>
Board Committees
The Compensation Committee consists of Messrs. Girgenti and Blumenstein, and
Ms. Korshak. There is currently one vacancy on the Compensation Committee. The
Compensation Committee reviews and evaluates the salaries, supplemental
compensation and benefits of our officers, reviews general policy matters
relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also administers our stock option and stock purchase
plans. See "--1997 Stock Option Plan" and "--1999 Employee Stock Purchase
Plan."
The Audit Committee consists of Messrs. Girgenti and Blumenstein, and Ms.
Korshak. The Audit Committee reviews with our independent auditor the scope and
timing of its audit services, the auditor's report on our financial statements
following completion of its audit and our policies and procedures with respect
to internal accounting and financial controls. In addition, the Audit Committee
will make annual recommendations to the board of directors for the appointment
of independent auditors for the ensuing year.
Director Compensation
We do not currently compensate directors for attending meetings of the board
of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was at any time an employee of
eCollege.com. None of our executive officers serves as a member of the board of
directors or Compensation Committee of any other entity which has one or more
executive officers serving as a member of our board of directors or
Compensation Committee.
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted in 1997, and amended on April 13,
1999. The 1997 plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, and for
the granting of nonqualified stock options to employees and/or consultants.
Unless terminated sooner, the 1997 plan will terminate automatically in 2007. A
total of 2,800,000 shares of common stock have been reserved for issuance under
the 1997 plan. As of April 30, 1999, options to purchase 1,452,850 shares of
common stock were outstanding under the 1997 plan, and 1,176,700 shares of
common stock remained available.
The 1997 plan may be administered by the board or a committee appointed by
the board to administer the plan. The board or committee has full power and
authority to administer and interpret the plan. Such powers include, but are
not limited to, authority to determine the employees and consultants to be
granted stock options under the plan, to determine the size, type, and
applicable terms and conditions of grants to be made to such employees and
consultants, to determine a time when stock options will be granted, and to
authorize grants to eligible employees and consultants. The exercise price of
incentive stock options must be at least equal to the fair market value of the
common stock on the date of the grant. During all times we are subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), each member of the board who participates in
administration must be a "disinterested person" as that term is defined in Rule
16b-3 of the Exchange Act.
The option or purchase price of all nonqualified and incentive stock options
granted under the 1997 plan will be determined by the board. Payment of such
purchase price must be made in cash, or in accordance with procedures for a
"cashless exercise" as we may establish from time to time with a brokerage firm
to facilitate exercises of options and sales of shares under the 1997 plan.
Also, payment for shares upon the exercise of options may be made with shares
of our common stock valued at the fair market value of those shares. Upon
exercise of a nonqualified stock option, in addition to the exercise price, the
optionee must pay the amount of
42
<PAGE>
federal, state, and local income tax and FICA taxes we are required to
withhold. An optionee can elect to pay these taxes by having us withhold shares
of common stock with a value equal to the amount of taxes required to be
withheld.
The 1997 plan provides that in the event of a merger, a tender or takeover
offer (other than one by us) or a sale of all or substantially all of our
assets (collectively, a "Change of Control Event"), or stockholder approval of
our dissolution, the board has the authority to provide for the full automatic
vesting and exercisability within a specified period of time of each
nonqualified stock option, including shares as to which the option would not
otherwise be exercisable. An option exercise may be made contingent upon
completion of a Change of Control Event. After a Change of Control Event occurs
or articles of dissolution are filed, all unexercised options will terminate.
1999 Employee Stock Purchase Plan
eCollege.com's 1999 Employee Stock Purchase Plan (the "purchase plan") will
be effective prior to completion of this offering. The purchase plan authorizes
the issuance and sale of up to a total of 1,000,000 shares of common stock to
participating employees. The purchase plan will consist of ten separate
consecutive six-month offerings. The first offering will commence on completion
of our initial public offering, and subsequent offerings will commence on each
subsequent January 1. Unless amended, the purchase plan will terminate upon the
earliest of the following: (a) June 30, 2005, (b) the date we file a statement
of intent to dissolve or the effective date of a merger or consolidation
wherein are not the surviving corporation, unless the merger or consolidation
is between or among corporations related to us, (c) the date the board acts to
terminate the purchase plan, or (d) the date when all of the shares reserved
for issuance under the purchase plan have been purchased.
The purchase plan will be administered by the board, which may engage a
designated stock brokerage or financial services firm to assist in its
administration. The board is vested with full authority to make, administer,
and interpret rules and regulations necessary to administer the purchase plan.
The board may delegate any or all of its administrative duties to a committee
composed of two or more members of the board.
Regular employees of eCollege.com, including part-time employees who work at
least 20 hours per week, or any of our subsidiaries who are employed by us or
our subsidiaries on the commencement date of an offering period and have been
so employed for at least three months, are eligible to participate in the
purchase plan. However, employees who would immediately after the grant own 5%
or more of the total combined voting power or value of our stock or that of any
subsidiary are not eligible to participate.
The board will set the purchase price per share at an amount not less than
the lower of (a) 85% of the fair market value of the shares on the commencement
date, or the nearest subsequent business day, (b) 85% of the fair market value
of the shares on the ending date, or the nearest prior business day, or (c) 85%
of the fair market value of the shares on the purchase date. In the absence of
any other determination by the board, the purchase price will be 85% of the
fair market value of the shares on the purchase date.
An eligible employee may participate by completing an enrollment agreement
and filing it with us prior to the commencement date of the offering to which
it relates. For as long as the participant participates in the purchase plan,
he or she authorizes us to make payroll deductions. A participant's payroll
deductions will be credited to his or her account during the period of the
offering. In the absence of any other determination by the board, no
participant may have withheld payroll deductions in excess of the lesser of 10%
of his or her salary or $20,000 during any calendar year.
On each of one or more purchase dates during an offering, a participant will
be deemed to have purchased at the purchase price, the number of full shares
that may be purchased with the participant's account.
An employee's rights under the purchase plan terminate upon voluntary
withdrawal from the purchase plan, or when the employee ceases employment for
any reason. No participant will be permitted to sell, or otherwise transfer, or
to encumber his or her account or any rights to purchase shares under the
purchase plan other than by will or the laws of descent and distribution. The
board will have the right to amend, modify, or terminate the purchase plan at
any time without notice, provided that (a) no participant's existing rights
under
43
<PAGE>
any offering that is in progress may be adversely affected, and (b) in the
event that the board desires to retain the favorable tax treatment under
Sections 421 and 423 of the Internal Revenue Code, no such amendment of the
purchase plan will increase the number of shares reserved for issuance unless
our stockholders approve such an increase.
Executive Compensation
The following table sets forth all compensation received during the year
ended December 31, 1998 by Mr. Robert Helmick, our Chief Executive Officer. No
other executive officer had salary and bonus exceeding $100,000 for services
rendered in all capacities during 1998.
Summary Compensation Table
In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted from the following
table because the aggregate amount of these perquisites and other personal
benefits constituted less than the lesser of $50,000 or 10% of the total of
annual salary and bonus in 1998.
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name and Principal Position Year Salary Bonus
- --------------------------- ---- -------- -----
<S> <C> <C> <C>
Robert N. Helmick
President and Chief Executive Officer...................... 1998 $120,000 -0-
</TABLE>
- --------
Aggregate Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by Mr. Robert Helmick at December 31, 1998.
Mr. Helmick did not exercise options to purchase common stock during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert N. Helmick........... 35,000 -0- -0-
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $ per share, less the applicable
exercise price per share, multiplied by the number of shares underlying
such options.
Employment Agreement
We have entered into an employment agreement with Mr. Robert Helmick. The
agreement sets a base salary for Mr. Helmick which salary may be adjusted by
the Compensation Committee. In addition to a base salary, Mr. Helmick is
eligible for a bonus in cash, eCollege.com stock, or other consideration as
determined by our board of directors, although we are not required to pay any
bonus. Mr. Helmick is also entitled to standard benefits including:
. vacation days;
. participation in a flexible reimbursement plan; and
. medical/dental insurance.
44
<PAGE>
The initial term of employment under Mr. Helmick's employment agreement is
from May 1, 1997 through December 31, 2000.
The term of employment is automatically extended for successive one-year
renewal periods if not terminated by Mr. Helmick or by us upon written notice.
The agreement generally provides for termination:
. upon employee's willful and continuous failure or refusal to comply with
our policies, standards and regulations;
. if employee engages in fraud, dishonesty or any other act of material
misconduct; and
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
The agreement contains non-competition provisions during the term of
employment and for the period twelve months after termination of employment.
Under these provisions, Mr. Helmick may not:
. engage in, own an interest in, or perform services for any competitive
business or activity;
. for the 6 months subsequent to termination, solicit any of our employees
to terminate their employment; and
. for the 12 months subsequent to termination, sell or attempt to sell any
competitive services or goods to any of our customers.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Helmick during the term of the employment agreement.
45
<PAGE>
CERTAIN TRANSACTIONS
In February 1997, Robert N. Helmick, Chairman, President and Chief Executive
Officer, Jonathan M. Dobrin, Vice President, Chief Technology Officer and
Director, and John V. Helmick, Vice President, Corporate Services, made the
following purchases of our common stock:
<TABLE>
<CAPTION>
Shares Price Per Aggregate
Purchased Share Proceeds
--------- --------- ---------
<S> <C> <C> <C>
Mr. R. Helmick................................. 6,790,000 $0.02 $130,500
Mr. Dobrin..................................... 210,000 0.02 4,050
Mr. J. Helmick................................. 350,000 0.02 6,750
</TABLE>
Mr. R. Helmick's contribution of $130,500 was in the form of services. Mr.
Dobrin contribution of $4,050 was in the form of assets, including computer
equipment, office furniture and computer software.
From August 2, 1996 through January 31, 1997, we borrowed a total of
$443,277 from a limited liability company of which Mr. R. Helmick is a manager
and a member. Each loan was made under a promissory note that had an interest
rate of 8% per annum. We repaid these loans in a series of installments from
July 1997 through April 1998, together with a total of $42,269 in accrued
interest.
On March 10, 1997 we borrowed $87,000 from Mr. R. Helmick pursuant to a
promissory note. The note was payable in 60 monthly installments of $1,868, and
had an interest rate of 10.25% per annum. We made monthly payments through
March 1998 and repaid the remainder of the note in full in April 1998.
On June 11, 1997 we entered into a Unit Purchase Agreement with New World
Equities, Inc., Steven M. Singer, who is our Vice President, Finance and
Administration and Chief Financial Officer, and four other investors. New World
Equities, Inc. is the beneficial owner of 12.8% of our common stock before the
offering, and director Christopher E. Girgenti is a senior managing director of
New World Equities, Inc. Under the agreement we sold a total of 132,000 units
for an aggregate purchase price of $1,000,000. Each unit consisted of one share
of Series A Convertible Preferred Stock and a warrant to purchase seven shares
of our common stock at an exercise price of $1.08 per share. The shares of
Series A Preferred Stock will convert into a total of 924,000 shares of common
stock upon the completion of this offering. In connection with these sales, we
entered into a shareholders agreement which provided for the composition of our
board and provided each purchaser with certain participation rights in any
resale of the Series A Preferred Stock by the other purchasers. We also entered
into a registration agreement which provided the purchasers with certain demand
and piggyback registration rights. The shareholders agreement and the
registration agreement were superseded in connection with the sale of our
Series B Preferred Stock. Also on June 11, 1997 we also entered into a
consulting agreement with New World Equities, Inc. Under the agreement New
World Equities provided financial consulting services to us. In exchange we
paid New World Equities a consulting fee of $3,000 per month. Under the
contract we paid New World Equities $21,000 in 1998 and $15,000 in 1997.
On February 2, 1998 we entered into a Series B Preferred Share Purchase
Agreement with Blumenstein/Thorne Information Partners I, L.P., and fifteen
other investors. Blumenstein/Thorne Information Partners I, L.P. beneficially
owns 15.6% of our common stock before the offering, and directors Jack W.
Blumenstein and Oakleigh Thorne are co-presidents of Blumenstein/Thorne
Information Partners L.L.C., which is the general partner of Blumenstein/Thorne
Information Partners I, L.P. Under the agreement we sold a total of 326,833
shares of Series B Convertible Preferred Stock for an aggregate purchase price
of $6,000,000. The shares of Series B Preferred Stock will convert into a total
of 2,287,831 shares of common stock upon the completion of this offering. In
connection with these sales, we entered into an amended and restated
shareholders agreement with the Series B Preferred purchasers, our Series A
Preferred and our common stockholders. The shareholders agreement provided for
the composition of our board and provided each purchaser with certain
participation rights in any resale of the Series A or Series B Preferred Stock
by the other Series A or Series B stockholders. We also entered into an amended
and restated registration agreement which provided the Series A and Series B
stockholders with certain demand and piggyback registration rights. The
46
<PAGE>
amended and restated shareholders agreement and the amended and restated
registration agreement were superseded in connection with the sale of our
Series C Preferred Stock. Please see "Description of Capital Stock--
Registration Rights."
On March 4, 1998, Mr. Sigman, our Vice President, Accounts and Services,
purchased 104,930 shares of our common stock for $113,624 pursuant to the
exercise of warrants. As payment for the shares Mr. Sigman issued us a
promissory note. The note has an interest rate of 8% per annum, and is
repayable in twenty-four monthly payments of $5,500 beginning March 31, 2000.
On December 21, 1998 we entered into a Series C Preferred Share Purchase
Agreement with MediaOne Interactive Services, Inc., Blumenstein/Thorne
Information Partners I, L.P., New World Equities, Inc., and six other
investors. MediaOne Interactive Services, Inc. is the beneficial owner of 10.1%
of our common stock before the offering. Under the agreement we sold a total of
430,540 shares of Series C Convertible Preferred Stock for an aggregate
purchase price of $15,000,020 in a series of closings from December 21, 1998
through March 1, 1999. The shares of Series C Preferred Stock will convert into
a total of 3,013,780 shares of common stock upon the completion of this
offering. In connection with these sales, we entered into an amended and
restated shareholders agreement with the Series C Preferred purchasers and our
Series A Preferred, Series B Preferred and common stockholders. The agreement
designates the composition of our board of directors. Under this agreement, if
any stockholder desires to sell all or any portion of his stock, he must first
offer to all other stockholders the right to participate in the sale, based on
each stockholders' pro-rata stock holdings on a fully-diluted basis. This right
of participation terminates upon a sale of shares to the public pursuant to a
registration statement or in a transaction pursuant to Rule 144 adopted under
the Securities Act. In addition, the entire agreement will terminate upon the
consummation of this offering. We also entered into an amended and restated
registration agreement which provided the Series A, Series B and Series C
stockholders with certain demand and piggyback registration rights. Please see
"Description of Capital Stock--Registration Rights."
During 1998 we paid $35,245 in legal fees to Dorsey & Whitney LLP and we
have paid $57,426 in legal fees to that firm thus far in 1999. Robert H.
Helmick, Esq., the father of Mr. R. Helmick and Mr. J. Helmick, is a partner of
that firm.
We have entered into indemnification agreements with our non-employee
directors, Mr. Blumenstein, Mr. Girgenti and Jeri Korshak.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of shares offered hereby, by (1) each of our directors, (2) our Chief
Executive Officer, (3) each person (or group of affiliated persons) known by us
to beneficially own more than 5% of our common stock and (4) all directors and
executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power or shares such power with his or her spouse with
respect to all shares of capital stock listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes any shares
the individual has the right to acquire within 60 days.
<TABLE>
<CAPTION>
Percent of
Number of Ownership
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Robert N. Helmick........................... 6,825,000(1) 48.9%
Jonathan M. Dobrin.......................... 280,000(2) 2.0%
Blumenstein/Thorne Information Partners I,
L.P. ...................................... 2,164,463(3) 15.6%
MediaOne Interactive Services, Inc. ........ 1,406,433(4) 10.1%
New World Equities, Inc. ................... 1,376,067(5) 9.6%
VSI Holding, Inc............................ 703,213(6) 5.0%
Jack W. Blumenstein......................... 2,164,463(7) 15.6%
Christopher E. Girgenti..................... 1,376,067(8) 9.6%
Oakleigh Thorne............................. 2,164,463(9) 15.6%
Jeri Korshak................................ -- --
All directors and executive officers as a
group...................................... 11,675,230(10) 78.0%
</TABLE>
- --------
(1) Consists of 6,790,000 shares held by the Robert N. Helmick Trust and
options to purchase 35,000 shares of common stock. The address for Mr.
Helmick is 10200 A East Girard Avenue, Denver, Colorado 80231.
(2) Includes options to purchase 70,000 shares of common stock. The address for
Mr. Dobrin is 10200 A East Girard Avenue, Denver, Colorado 80231.
(3) The address for Blumenstein/Thorne Information Partners I, L.P. is P.O. Box
871, Lake Forest, Illinois 60045.
(4) The address for MediaOne Interactive Services, Inc. is 5613 DTC Parkway,
Suite 700, Englewood, Colorado 80111.
(5) Includes warrants to purchase 462,000 shares of common stock. The address
for New World Equities, Inc. is 1603 Orrington Avenue, Suite 1070,
Evanston, Illinois 60201.
(6) The address for VSI Holding, Inc. is 2100 N. Woodward Ave., Suite 201 West,
Bloomfield Hills, Michigan 48304-2263.
(7) Consists of shares beneficially owned by Blumenstein/Thorne Information
Partners I, L.P. Mr. Blumenstein is a co-President of Blumenstein/Thorne
Information Partners L.L.C., the general partner of Blumenstein/Thorne
Information Partners I, L.P. Mr. Blumenstein disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest, if any. The
address for Mr. Blumenstein is P.O. Box 871, Lake Forest, Illinois 60045.
(8) Consists of shares beneficially owned by New World Equities, Inc., of which
Mr. Girgenti is a Senior Managing Director. Mr. Girgenti disclaims
beneficial ownership of such shares, except to the extent of his pecuniary
interest, if any. The address for Mr. Girgenti is 1603 Orrington Avenue,
Suite 1070, Evanston, Illinois 60201.
(9) Consists of shares beneficially owned by Blumenstein/Thorne Information
Partners I, L.P. Mr. Thorne is a co-President of Blumenstein/Thorne
Information Partners L.L.C., the general partner of Blumenstein/Thorne
Information Partners I, L.P. Mr. Thorne disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest, if any. The
address for Mr. Thorne is P.O. Box 871, Lake Forest, Illinois 60045.
(10) Includes 402,500 shares issuable upon the exercise of options and 600,600
shares issuable upon the exercise of warrants. See notes 1, 2 and 5 above.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share.
Prior to completion of this offering, we will reincorporate in Delaware and
amend and restate our Certificate of Incorporation. The following summary of
certain provisions of the common stock and preferred stock does not purport to
be complete and is subject to, and qualified in its entirety by, the provisions
of the forms of amended and restated Certificate of Incorporation and Amended
and Restated Bylaws to be effective upon the completion of this offering.
Common Stock
As of the date of this prospectus, assuming conversion of our outstanding
preferred stock there are shares of common stock outstanding and held of
record by 38 stockholders. There will be shares of common stock outstanding
upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding preferred stock. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all of our assets remaining after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
sold in this offering will be, when issued in consideration for payment
thereof, fully paid and nonassessable. The rights, preferences and privileges
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future. Upon completion of this offering, there
will be no shares of preferred stock outstanding.
Preferred Stock
Upon completion of this offering, the board of directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. We have no present plans to issue
any shares of preferred stock.
Warrants
We are a party to certain warrant agreements that entitle the warrant
holders to purchase 959,000 shares of common stock at a purchase price of $1.08
per share. All shares of common stock issuable upon exercise of these warrants
are entitled to certain registration rights. See "Description of Capital
Stock--Registration Rights." The warrants expire if not exercised on or prior
to June 11, 2000. The warrants provide the holders with anti-dilution
protection under certain circumstances. We are also a party to a warrant
agreement that entitles the warrant holder to purchase 60,277 shares of common
stock at a purchase price of $4.98 per share. This warrant expires if not
exercised on or prior to February 26, 2002. The terms of this warrant are the
same as those of the warrants described above.
We are also a party to a warrant agreement that entitles the warrant holder
to purchase 10,500 shares of common stock. The exercise price of the warrant is
$2.62 per share for fifty percent of the shares of common
49
<PAGE>
stock, and $4.98 per share for the remaining fifty percent. In the event that
we are acquired by another entity, the warrant holder, at its option, may elect
to receive either (i) the consideration to be received by the holders of common
stock, or (ii) cash in an amount equal to the difference between the fair
market value of the consideration that the warrant holder would otherwise have
received and the exercise price of the warrant. The warrant shares are subject
to an anti-dilution agreement. In addition, all shares of common stock issuable
upon exercise of this warrant are entitled to certain registration rights. See
"Description of Capital Stock--Registration Rights."
Options
As of April 30, 1999, options to purchase a total of 1,529,850 shares of
common stock were outstanding, all of which are subject to lock-up agreements.
Options to purchase a total of 2,800,000 shares of common stock may be granted
under the Stock Option Plan. See "Management--Stock Option Plan" and "Shares
Eligible for Future Sale."
Registration Rights
We entered into registration rights agreements with certain of our
stockholders. After the completion of this offering, the holders of 6,225,611
shares of common stock issuable upon the conversion of all of the outstanding
preferred stock, and warrants to purchase an additional 934,500 shares of
common stock, will be entitled to certain demand registration rights with
respect to the registration of their registrable securities under the
Securities Act. The holders of 30% or more of the registrable securities are
entitled to demand that we register their registrable securities under the
Securities Act on Form S-1 or any similar long form registration statement. We
are not required to effect more than two registrations pursuant to these demand
registrations rights. The holders of the of the registrable securities are
entitled to demand that we register their registrable securities under the
Securities Act on Form S-3 or any similar short form registration statement
then available to the Company, provided that the anticipated aggregate offering
price of the securities to be registered exceeds $500,000. In addition, the
holders of registrable securities are entitled to require us to include their
registrable securities in future registration statements that we may file.
These registration rights are subject to various conditions and limitations,
including the right of the underwriters of an offering to limit the number of
registrable securities that may be included in the offering. In addition,
holders of all of these shares will be restricted from exercising their demand
rights until 180 days after the date of this prospectus. We are generally
required to bear all of the expenses of these registrations, except
underwriting discounts and selling commissions. Registration of any of the
registrable securities held by security holders with registration rights will
result in shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration.
Anti-Takeover Effects of Certain Provisions of Delaware Law and the Certificate
of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (as amended from time to time, the "DGCL"). Subject to certain
exceptions, Section 203 of the DGCL prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the board of directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to certain
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
(15%) or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire us.
In addition, certain provisions of the Certificate and Bylaws, which
provisions will be in effect upon the closing of this offering and are
summarized in the following paragraphs, may be deemed to have an anti-
50
<PAGE>
takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the shares
held by stockholders.
Board of Directors Vacancies
The Certificate authorizes the board of directors to fill vacant
directorships or increase the size of the board of directors. This may deter a
stockholder from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by such
removal with its own nominees.
Stockholder Action; Special Meeting of Stockholders
The Certificate provides that stockholders may not take action by written
consent, but only at duly called annual or special meetings of stockholders.
The Certificate further provides that special meetings of stockholders of
eCollege.com may be called only by the Chairman of the board of directors or a
majority of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120
days nor more than 150 days prior to the first anniversary of the date of our
notice of annual meeting provided with respect to the previous year's annual
meeting of stockholders; provided, that if no annual meeting of stockholders
was held in the previous year or the date of the annual meeting of stockholders
has been changed to be more than 30 calendar day earlier than or 60 calendar
days after such anniversary, notice by the stockholder, to be timely, must be
so received not more than 90 days nor later than the later of (i) 60 days prior
to the annual meeting of stockholders or (ii) the close of business on the 10th
day following the date on which notice of the date of the meeting is given to
stockholders or made public, whichever first occurs. The Bylaws also specify
certain requirements as to the form and content of a stockholder's notice.
These provisions may preclude stockholders from bringing matters before an
annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval, subject to certain
limitations imposed by the Nasdaq National Market. These additional shares may
be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an attempt
to obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Securities
Transfer and Trust, Inc., Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares of
51
<PAGE>
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, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the closing of this offering, we will have an aggregate of shares
of common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Upon the
closing of this offering, shares of common stock will be issuable upon
exercise of outstanding options and shares of common stock will be issuable
upon exercise of outstanding warrants. Of the outstanding shares, the
shares sold in this offering will be freely tradable, except that any shares
held by our "affiliates" (as that term is defined in Rule 144 promulgated under
the Securities Act) may only be sold in compliance with the limitations
described below. The remaining 13,685,861 shares of common stock will be deemed
"restricted securities" as defined under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. After taking into account
the 180-day lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
9,010,764...................... 180 days after the date of this prospectus
4,955,097...................... At various times after 180 days
from the date of this prospectus
</TABLE>
In addition, approximately 12,113,493 of the shares that will become
eligible for resale after the expiration of the 180-day lock-up agreements are
held by affiliates and therefore will remain subject to the volume limitations
and other restrictions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of common stock (approximately shares immediately after
this offering) or (ii) the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate of us at any time during the 90 days preceding
a sale and who has beneficially owned the shares proposed to be sold for at
least two years would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. To the extent that shares were
acquired from an affiliate of us such person's holding period for the purpose
of effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
Rule 701 promulgated under the Securities Act provides that shares of common
stock acquired pursuant to written plans such as the 1997 Stock Option Plan may
be resold by persons other than affiliates, beginning 90 days after the date of
this prospectus, subject only to the manner of sale provisions of Rule 144, and
by affiliates, beginning 90 days after the date of this prospectus, subject to
all provisions of Rule 144 except its one-year minimum holding period.
All of our directors, officers and stockholders, and our optionholders and
warrantholders have agreed that they will not, without the prior written
consent of the representatives of the underwriters, sell or otherwise dispose
of any shares of common stock or options to acquire shares of common stock
during the 180-day period following the date of this prospectus. See
"Underwriting."
We intend to file a Form S-8 registration statement under the Securities Act
on or immediately after the date of this prospectus to register all shares of
common stock issuable under the 1997 Stock Option Plan and our 1999 Employee
Stock Purchase Plan. Such registration statement will automatically become
effective upon filing.
52
<PAGE>
Accordingly, shares covered by that registration statement will thereupon be
eligible for sale in the public markets, unless such options are subject to
vesting restrictions or the contractual restrictions described above. See
"Management-- 1997 Stock Option Plan" and "--1997 Employee Stock Purchase
Plan."
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under the
Stock Option Plan and we may offer and sell shares of common stock under our
Employee Stock Purchase Plan. In addition, we may issue shares of common stock
in connection with any acquisition of another company if the terms of such
issuance provide that such common stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. See
"Risk Factors--Future sales by our existing stockholders could adversely affect
the market price of our common stock."
Following this offering, under certain circumstances and subject to certain
conditions, holders of shares of our outstanding common stock will have
certain demand registration rights (subject to the 180-day lock-up arrangement
described above) to require us to register their shares of common stock under
the Securities Act, and they will have certain rights to participate in any
future registration of securities by us. These holders are subject to lock-up
periods of not more than 180 days following the date of this prospectus or 90
days after any subsequent prospectus. See "Description of Capital Stock--
Registration Rights."
53
<PAGE>
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of underwriters. NationsBanc Montgomery Securities LLC and
Thomas Weisel Partners LLC are the representatives of the underwriters. We have
entered into an underwriting agreement with the representatives. Subject to the
terms and conditions of the underwriting agreement, we have agreed to sell to
the underwriters, and each of the underwriters has agreed to purchase, the
number of shares of common stock listed next to its name in the following
table:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.................................
Thomas Weisel Partners LLC............................................
---------
Total...............................................................
=========
</TABLE>
The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to
some dealers a concession of not more than $ per share. The underwriters
also may allow, and any other dealers may reallow, a concession of not more
than $ per share to some other dealers. If all the shares are not sold at
the initial public offering price, the underwriters may change the offering
price and the other selling terms. The common stock is offered subject to a
number of conditions, including:
. receipt and acceptance of our common stock by the underwriters; and
. the right to reject orders in whole or in part.
We have granted an option to the underwriters to buy up to additional
shares of common stock. These additional shares would cover sales of shares by
the underwriters which exceed the number of shares specified in the table
above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.
We and all holders of our stock prior to this offering, as well as most
holders of stock options, have entered into lock-up agreements with the
underwriters. Under those agreements, we and those holders of stock and options
may not dispose of or hedge any common stock or securities convertible into or
exchangeable for shares of common stock. These restrictions will be in effect
for a period of 180 days after the date of this prospectus. At any time and
without notice, NationsBanc Montgomery Securities LLC may, in its sole
discretion, release all or some of the securities from these lock-up
agreements.
We will indemnify the underwriters against certain liabilities, including
some liabilities under the Securities Act. If we are unable to provide this
indemnification, we will contribute to payments the underwriters may be
required to make in respect of those liabilities.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:
. short sales;
. stabilizing transactions; and
. purchases to cover positions created by short sales.
Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while this offering
is in progress.
54
<PAGE>
The underwriters also may impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions
or to cover short sales, the representatives can require the underwriters that
sold those shares as part of this offering to repay the underwriting discount
received by them.
The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:
. over-allotment;
. stabilization;
. syndicate covering transactions; and
. imposition of penalty bids.
As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and the
underwriters. Among the factors to be considered in such negotiations are:
. our history and prospects, and the history and prospects of the industry
in which we compete;
. our past and present financial performance;
. an assessment of our management;
. the present state of our development;
. our prospects for future earnings;
. the prevailing market conditions of the applicable U.S. securities market
at the time of this offer;
. market valuations of publicly traded companies that we and the
representatives believe to be comparable to us; and
. other factors deemed relevant.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 27 filed public offerings of equity securities, of which eleven have
been completed, and has acted as a syndicate member in an additional ten public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
The underwriters have reserved up to 5% of the common stock offered hereby
for sale to certain of our employees, directors and friends at the initial
public offering price set forth on the cover page of this prospectus. Such
persons must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase these
reserved shares.
55
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for eCollege.com by Brobeck, Phleger & Harrison LLP, Denver, Colorado.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Cooley Godward LLP, Boulder, Colorado.
EXPERTS
The financial statements included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein upon the authority of said
firm as experts in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common 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, certain parts of which are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. For
further information about us and the common stock offered hereby, reference is
made to the registration statement. Statements contained in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. The registration statement (and all amendments, exhibits and
schedules thereto) may be inspected without charge at the principal office of
the Securities and Exchange Commission in Washington, D.C. and copies of all or
any part thereof may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Securities and
Exchange Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained at prescribed rates by mail from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, the Securities and Exchange Commission maintains a
Website (http//www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
We intend to distribute to our stockholders annual reports containing
audited consolidated financial statements.
56
<PAGE>
ECOLLEGE.COM
(FORMERLY REAL EDUCATION, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
After the re-incorporation and stock split discussed in Note 11 to the
Company's financial statements is effected, we expect to be in a position to
render the following audit report.
Arthur Andersen LLP
Denver, Colorado,
April 23, 1999.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eCollege.com:
We have audited the accompanying balance sheets of eCollege.com (a Delaware
corporation, formerly Real Education, Inc.) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' deficit and cash flows
for the period from inception (July 26, 1996) to December 31, 1996, and for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eCollege.com as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from inception (July 26, 1996) to December 31, 1996, and for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Denver, Colorado,
April 23, 1999 (except with
respect to the matters discussed
in Note 11, as to which the date
is May , 1999).
F-2
<PAGE>
ECOLLEGE.COM
(FORMERLY REAL EDUCATION, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------ MARCH 31, MARCH 31, 1999
1997 1998 1999 (SEE NOTE 2)
----------- ----------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equiva-
lents................. $ 208,346 $11,661,186 $ 9,927,383
Accounts receivable,
net................... 214,660 258,980 910,733
Accrued revenue re-
ceivable.............. 10,000 57,885 86,600
Other current assets... 15,550 112,357 173,005
----------- ----------- ------------
Total current as-
sets................ 448,556 12,090,408 11,097,721
PROPERTY AND EQUIPMENT,
net.................... 299,842 1,569,129 1,720,278
----------- ----------- ------------
TOTAL ASSETS............ $ 748,398 $13,659,537 $ 12,817,999
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable....... $ 229,337 $ 658,643 $ 656,913
Accounts payable re-
lated party........... 6,500 -- --
Accrued liabilities.... 79,725 1,284,967 573,305
Deferred revenue....... 35,750 569,599 1,188,498
Current portion of
notes payable to re-
lated parties......... 39,441 -- --
----------- ----------- ------------
Total current liabil-
ities............... 390,753 2,513,209 2,418,716
OTHER LIABILITIES....... -- 35,900 50,564
NOTES PAYABLE TO RELATED
PARTIES................ 230,534 -- --
COMMITMENTS AND CONTIN-
GENCIES (Notes 1 and 8)
CONVERTIBLE PREFERRED
STOCK SUBJECT TO MANDA-
TORY REDEMPTION, no par
value;
Series A; 132,000,
132,000, 132,000 and
0 (unaudited, pro
forma) shares autho-
rized, issued and
outstanding, respec-
tively; entitled to
preference in liqui-
dation (includes cu-
mulative preferred
return of $55,030,
$155,086, $180,098
and $0, respective-
ly)................... 1,029,284 1,136,803 1,163,680 $ --
Series B; 0, 326,833,
326,833 and 0 (unau-
dited, pro forma)
shares authorized,
issued and outstand-
ing, respectively;
entitled to prefer-
ence in liquidation
(includes cumulative
preferred return of
$0, $550,060,
$700,076 and $0, re-
spectively)........... -- 6,534,046 6,685,713 --
Series C; 0, 430,540,
430,540 and 0 (unau-
dited, pro forma)
shares authorized,
respectively; 0,
365,959, 430,540 and
0 shares issued and
outstanding, respec-
tively; entitled to
preference in liqui-
dation (includes cu-
mulative preferred
return of $0,
$31,438, $386,680 and
$0, respectively)..... -- 11,978,566 14,665,563 --
STOCKHOLDERS' EQUITY
(DEFICIT)
Common stock, no par
value; 50,000,000
shares authorized;
7,350,070, 7,668,500,
7,686,000 and
13,911,611 (unau-
dited, pro forma)
shares, respectively,
issued and outstand-
ing................... 141,376 456,190 468,730 22,983,686
Warrants and options
for common stock...... -- 1,626,426 2,572,826 2,572,826
Notes receivable....... -- (341,024) (341,024) (341,024)
Deferred compensa-
tion.................. -- (1,244,007) (2,087,073) (2,087,073)
Accumulated deficit.... (1,043,549) (9,036,572) (12,779,696) (12,779,696)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit).... (902,173) (8,538,987) (12,166,237) $ 10,348,719
----------- ----------- ------------ ============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT).............. $ 748,398 $13,659,537 $ 12,817,999
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Years For the Three
(July 26, 1996) Ended Months Ended
through December 31, March 31,
December 31, ---------------------- ----------------------
1996 1997 1998 1998 1999
--------------- --------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Campus and course
development fees...... $ -- $ 628,250 $ 1,086,022 $ 155,050 $ 325,010
Student fees........... 22,464 399,930 579,047 93,464 285,947
--------- --------- ----------- --------- -----------
Total revenue........ 22,464 1,028,180 1,665,069 248,514 610,957
COST OF REVENUE......... 109,974 528,090 2,064,909 236,236 1,187,599
--------- --------- ----------- --------- -----------
Gross profit (loss).. (87,510) 500,090 (399,840) 12,278 (576,642)
--------- --------- ----------- --------- -----------
OPERATING EXPENSES:
Selling and
marketing............. 25,474 106,026 3,394,000 237,299 1,320,551
General and
administrative........ 248,884 767,812 2,509,496 450,240 716,784
Development............ 60,207 212,052 1,099,000 107,404 633,502
--------- --------- ----------- --------- -----------
Total operating
expenses............ 334,565 1,085,890 7,002,496 794,943 2,670,837
--------- --------- ----------- --------- -----------
LOSS FROM OPERATIONS.... (422,075) (585,800) (7,402,336) (782,665) (3,247,479)
OTHER INCOME (EXPENSE):
Interest and other
income................ 27,001 8,993 149,308 30,952 119,896
Interest expense....... (9,186) (37,990) (36,819) (1,032) --
--------- --------- ----------- --------- -----------
NET LOSS FROM CONTINUING
OPERATIONS............. (404,260) (614,797) (7,289,847) (752,745) (3,127,583)
--------- --------- ----------- --------- -----------
DISCONTINUED OPERATIONS
(Note 5):
Income (loss) from
operations............ (29,239) 29,249 -- -- --
Gain on disposal of
discontinued
operations............ -- 34,632 -- -- --
--------- --------- ----------- --------- -----------
NET LOSS................ $(433,499) $(550,916) $(7,289,847) $(752,745) $(3,127,583)
========= ========= =========== ========= ===========
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss............... $(433,499) $(550,916) $(7,289,847) $(752,745) $(3,127,583)
Dividends on
mandatorily
redeemable,
convertible preferred
stock................. -- (55,030) (681,554) (125,025) (530,270)
Accretion of
mandatorily
redeemable,
convertible preferred
stock................. -- (4,104) (21,622) (2,954) (85,271)
--------- --------- ----------- --------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(433,499) $(610,050) $(7,993,023) $(880,724) $(3,743,124)
========= ========= =========== ========= ===========
BASIC AND DILUTED NET
LOSS FROM CONTINUING
OPERATIONS PER SHARE .. $ -- $ (0.11) $ (1.05) $ (0.12) $ (.49)
========= ========= =========== ========= ===========
BASIC AND DILUTED NET
LOSS PER SHARE ........ $ -- $ (0.10) $ (1.05) $ (0.12) $ (.49)
========= ========= =========== ========= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND
DILUTED................ -- 6,161,946 7,612,045 7,444,549 7,674,345
========= ========= =========== ========= ===========
PRO FORMA NET LOSS FROM
CONTINUING
OPERATIONS PER SHARE
(UNAUDITED--Note 2):
Basic and diluted net
loss per share........ $ (0.68) $ (0.08) $ (0.23)
=========== ========= ===========
Weighted average
common shares
outstanding--basic
and diluted........... 10,680,033 9,792,090 13,899,956
=========== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
ECOLLEGE.COM
(FORMERLY REAL EDUCATION, INC.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------------ AND NOTES DEFERRED ACCUMULATED
SHARES AMOUNT OPTIONS RECEIVABLE COMPENSATION DEFICIT TOTAL
--------- -------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 26, 1996
(Inception)............ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- -- -- (433,499) (433,499)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1996................... -- -- -- -- -- (433,499) (433,499)
Issuance of common
stock at approximately
$0.02 per share....... 560,000 10,800 -- -- -- -- 10,800
Issuance of common
stock in February 1997
for services
provided.............. 6,790,000 130,500 -- -- -- -- 130,500
Common stock issued
upon exercise of
warrants.............. 70 76 -- -- -- -- 76
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- (55,030) (55,030)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- (4,104) (4,104)
Net loss............... -- -- -- -- -- (550,916) (550,916)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1997................... 7,350,070 141,376 -- -- -- (1,043,549) (902,173)
Issuance of common
stock upon exercise of
warrants and options
...................... 318,430 344,814 -- (341,024) -- -- 3,790
Repurchase of warrants
for common stock...... -- (30,000) -- -- -- -- (30,000)
Deferred compensation.. -- -- 1,443,542 -- (1,443,542) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 199,535 -- 199,535
Warrants for common
stock issued in
connection with bridge
loan.................. -- -- 27,819 -- -- -- 27,819
Warrants for common
stock issued in
connection with Series
C preferred stock..... -- -- 155,065 -- -- -- 155,065
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- (681,554) (681,554)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- (21,622) (21,622)
Net loss............... -- -- -- -- -- (7,289,847) (7,289,847)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1998................... 7,668,500 456,190 1,626,426 (341,024) (1,244,007) (9,036,572) (8,538,987)
Issuance of common
stock upon exercise of
options (Unaudited)... 17,500 12,540 -- -- -- -- 12,540
Deferred compensation
(Unaudited)........... -- -- 946,400 -- (946,400) -- --
Amortization of
deferred compensation
(Unaudited)........... -- -- -- -- 103,334 -- 103,334
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock (Unaudited)..... -- -- -- -- -- (530,270) (530,270)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value (Unaudited)..... -- -- -- -- -- (85,271) (85,271)
Net loss (Unaudited)... -- -- -- -- -- (3,127,583) (3,127,583)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, MARCH 31, 1999
(UNAUDITED)............ 7,686,000 $468,730 $2,572,826 $(341,024) $(2,087,073) $(12,779,696) $(12,166,237)
========= ======== ========== ========= =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
ECOLLEGE.COM
(FORMERLY REAL EDUCATION, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION FOR THE THREE
(JULY 26, 1996) FOR THE YEARS ENDED MONTHS ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
Net loss....................................... $(433,499) $ (550,916) $ (7,289,847) $ (752,745) $ (3,127,583)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................. 18,376 126,199 393,841 66,908 176,602
Provision for doubtful accounts............... -- -- 9,800 -- --
Gain on disposal of discontinued operations... -- (34,632) -- -- --
Common stock issued for services.............. -- 65,250 -- -- --
Deferred compensation......................... -- -- 199,535 -- 103,334
Noncash interest expense...................... -- -- 27,819 -- --
Change in-
Accounts receivable and accrued
revenue receivables......................... (14,433) (190,607) (102,005) 24,630 (680,468)
Other current assets......................... (1,399) (14,151) (96,807) (31,868) (60,648)
Accounts payable and accrued liabilities..... 112,379 268,433 972,048 9,245 (57,392)
Deferred revenue............................. 35,000 750 533,849 88,206 618,899
Other liabilities............................ -- -- 35,900 8,104 14,664
--------- ---------- ------------ ---------- ------------
Net cash used in operating activities...... (283,576) (329,674) (5,315,867) (587,520) (3,012,592)
--------- ---------- ------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (53,090) (369,653) (1,663,128) (420,619) (327,751)
Proceeds from sale of ColoradoNet.............. -- 200,000 -- -- --
Purchase of ColoradoNet, net of cash
acquired...................................... (77,662) -- -- -- --
--------- ---------- ------------ ---------- ------------
Net cash used in investing activities...... (130,752) (169,653) (1,663,128) (420,619) (327,751)
--------- ---------- ------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock...... -- 1,000,000 18,750,020 6,000,000 2,250,000
Proceeds from bridge loan...................... -- -- 500,000 -- --
Payments on bridge loan........................ -- -- (500,000) -- --
Payments on notes payable...................... -- (129,000) -- -- --
Proceeds from notes payable to related
parties....................................... 434,465 120,812 -- -- --
Payments on notes payable to related parties... -- (285,302) (269,975) (3,421) --
Payment of stock issuance costs................ -- (29,850) (22,000) (22,000) (656,000)
Repurchase of warrants......................... -- -- (30,000) (30,000) --
Proceeds from issuance of common stock......... -- 10,876 3,790 -- 12,540
--------- ---------- ------------ ---------- ------------
Net cash provided by financing activities.. 434,465 687,536 18,431,835 5,944,579 1,606,540
--------- ---------- ------------ ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 20,137 188,209 11,452,840 4,936,440 (1,733,803)
CASH AND CASH EQUIVALENTS, beginning of year.... -- 20,137 208,346 208,346 11,661,186
--------- ---------- ------------ ---------- ------------
CASH AND CASH EQUIVALENTS, end of year.......... $ 20,137 $ 208,346 $ 11,661,186 $5,144,786 $ 9,927,383
========= ========== ============ ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................ $ -- $ 47,176 $ 9,000 $ 1,032 $ --
========= ========== ============ ========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends accrued on Series A, B and C
mandatorily redeemable, convertible
preferred stock.............................. $ -- $ 55,030 $ 681,554 $ 125,025 $ 530,270
========= ========== ============ ========== ============
Accretion on Series A, B and C mandatorily
redeemable, convertible preferred stock...... $ -- $ 4,104 $ 21,622 $ 2,954 $ 85,271
========= ========== ============ ========== ============
Common stock issued for accrued services
payable...................................... $ -- $ 65,250 $ -- $ -- $ --
========= ========== ============ ========== ============
Issuance of note payable in connection with
acquisition.................................. $ 129,000 $ -- $ -- $ -- $ --
========= ========== ============ ========== ============
Warrants issued for offering costs............ $ -- $ -- $ 155,065 $ -- $ --
========= ========== ============ ========== ============
Accrued offering costs........................ $ -- $ -- $ 656,000 $ -- $ --
========= ========== ============ ========== ============
Common stock issued in exchange for notes
receivable................................... $ -- $ -- $ 341,024 $ -- $ --
========= ========== ============ ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information as of and for the Three Months
Ended March 31, 1998 and 1999 is Unaudited)
(1) Organization and Nature of Business
eCollege.com (the "Company," formerly Real Education, Inc. and Real
Information Systems, Inc.) was organized and incorporated in the state of
Colorado on July 26, 1996. As discussed in Note 11, the Company expects to file
for reincorporation in the State of Delaware. The Company is a leading provider
of a complete solution that enables colleges and universities to deliver an
online campus and courses over the Internet. The Company's integrated software
and services allow colleges and universities to outsource the creation, launch,
management and support of comprehensive online campuses and courses. The
Company's services include campus and course design, development, hosting,
maintenance and customer support services.
The Company is subject to various risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving market for Internet-based products
and services. Such risks and uncertainties include, but are not limited to, its
limited operating history, evolving and unpredictable technology and market
demands and the management of rapid growth. To address these risks, the Company
must, among other things, maintain and increase its customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology, provide superior customer service and
attract, retain and motivate qualified personnel. There can be no guarantee
that the Company will be successful in addressing such risks.
The Company's current business plan contemplates significant growth. Such
growth will likely result in a period in which the Company reports losses and
cash used in operations, which could result in the Company seeking external
financing. Management believes that cash on hand and other sources of liquidity
at March 31, 1999 are sufficient to fund the Company's operations through at
least March 31, 2000, albeit at significantly lower levels of activities.
(2) Summary of Significant Accounting Policies
Interim Financial Statements (Unaudited)
The interim financial statements for the three months ended March 31, 1998
and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire year. In addition, our
results of operations in interim periods will fluctuate due to the seasonality
inherent in the academic calendar.
Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may 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.
F-7
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. Such
investments are held in money market accounts whose costs approximate their
fair market values.
Revenue Recognition
The Company generates revenue primarily from two sources--campus and course
development revenue and per-course student fees.
Online campus and course design and development services are generally
conducted under fixed price contracts, and revenue is recognized using the
percentage of completion method. Frequently, customers will elect to add
courses in addition to those under the initial contract, and the Company
recognizes revenue related to these courses as the courses are completed.
Revenues from online campus and course design and development contracts are
recognized on the percentage of completion method for individual contracts,
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that hours incurred bear to total estimated hours at completion. The
Company's use of the percentage of completion method of revenue recognition
requires estimates of percentage of project completion. Changes in job
performance, estimated profitability and final contract settlements may result
in revisions to the estimated degree of completion and corresponding revenue in
the period in which the revisions are determined. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable. Contract costs include all labor costs directly related to
contract performance.
Revenue that is recognized is reflected as accrued revenue receivable to the
extent that the customer has not yet been billed for such services. The Company
records deferred revenue for amounts received from customers in excess of the
revenue that has been earned.
The Company also generates student fee revenue when students sign up for
online courses developed by the Company for its customers at an agreed upon
price with the customer. This student fee revenue is recognized ratably over
the period the course is delivered.
Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 152,750 $ 607,750
Estimated earnings................................. 16,500 5,136
--------- -----------
169,250 612,886
Less: Billings to date............................. (195,000) (1,104,000)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
Included in accompanying balance sheets under the
following captions:
Accrued revenue receivable....................... $ 10,000 $ 57,885
Deferred revenue--development.................... (35,750) (548,999)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
</TABLE>
In addition to the amounts disclosed above, at December 31, 1998 the Company
had $20,600 of deferred revenue related to student fees.
F-8
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounts Receivable
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. At December 31, 1997 and 1998,
the allowance for doubtful accounts was approximately $0 and $10,000,
respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company has no significant off-balance sheet
concentrations of credit risk, such as foreign exchange contracts, option
contracts or other foreign currency hedging arrangements. The Company maintains
its cash balances in the form of bank demand deposits and money market accounts
with financial institutions that management believes are creditworthy. Accounts
receivable are typically unsecured and are derived from transactions with and
from educational institutions primarily located in the United States.
Accordingly, the Company may be exposed to credit risk generally associated
with educational institutions. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential credit losses.
As discussed in Note 9, the Company had one customer in 1996, two customers
in 1997 and one customer in 1998 that accounted for more than 10% of revenue.
In addition, as of December 31, 1997 and 1998, the Company had five and four
customers, respectively, that individually accounted for more than 10% of
accounts receivable. These customers in the aggregate accounted for 99% and 53%
of accounts receivable balances at December 31, 1997 and 1998, respectively.
The loss of such customers could result in a significant reduction of revenues.
Property and Equipment
Property and equipment are stated at cost and depreciation is provided using
the straight-line method, generally over estimated useful lives of three to
five years. Maintenance and repairs are expensed as incurred and major
additions, replacements and improvements are capitalized.
Leasehold improvements are amortized using the straight-line method over the
shorter of the useful life or the life of the lease.
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment................................ $ 308,795 $1,609,401
Office furniture and equipment.................... 19,805 349,305
Leasehold improvements............................ 90,649 123,671
--------- ----------
419,249 2,082,377
Less: Accumulated depreciation and amortization... (119,407) (513,248)
--------- ----------
$ 299,842 $1,569,129
========= ==========
</TABLE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates the recoverability of its long-lived
assets based on estimated undiscounted future cash flows and provides for
impairment if such undiscounted cash flows are insufficient to recover the
carrying amount of the long-lived asset.
F-9
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-term
trade receivables and payables, and notes payable. The carrying values of the
cash equivalents and short-term trade receivables and payables approximate
their fair values. Based on borrowing rates currently used by the Company for
financing, the carrying value of the notes payable approximates estimated fair
value. Financial instruments also consist of convertible preferred stock
subject to mandatory redemption, whose fair value at December 31, 1997 and
1998, was approximately $1.2 million and $28.7 million, respectively. Such
values were estimated based upon the estimated value of the common stock into
which such preferred stock could be converted.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable on tax return filings each year. Deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and amounts
reported in the accompanying balance sheets, and for operating loss and tax
credit carryforwards. The change in deferred tax assets and liabilities for the
period measures the deferred tax provision or benefit for the period. Effects
of changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax asset is sufficiently assured at each balance sheet date (Note
10).
Development
Costs incurred in the development of new software and enhancements to
existing software and services are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying statements of operations. Advertising
expense for each of the periods presented in the accompanying statement of
operations related to continuing operations is as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Three Months
December 31, Ended March 31,
------------------------------ -------------------------------------------
1997 1998 1998 1999
--------- ----------- ------- --------
(Unaudited)
<S> <C> <C> <C>
$ 18,000 $ 1,097,000 $41,000 $281,000
======== =========== ======= ========
</TABLE>
For the period from inception to December 31, 1996, approximately $9,000 of
advertising expense was incurred in connection with discontinued operations.
Stock-Based Compensation
The Company accounts for its employee stock option plans and other stock-
based compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25"), and related interpretations. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma disclosures for employee
stock grants made in 1997 and future years as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123.
F-10
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Split
Upon the reincorporation of the Company discussed in Note 11, the Company
will effect a seven-for-one split of its common stock, and change its
authorized common stock to 50,000,000 shares and preferred stock to 5,000,000
shares. In connection with the common stock split, the Company will change its
conversion ratios on the preferred stock to reflect the split. All references
in the accompanying financial statements to the number of common shares have
been retroactively restated to reflect the common stock split, the increase in
the authorized common and preferred stock and the change in the preferred stock
conversion ratios.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to
common shareholders for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. The Company has excluded the weighted
average effect (using the treasury stock method) of common stock issuable upon
conversion of all convertible preferred stock, warrants and stock options from
the computation of diluted earnings per share as the effect of all such
securities is anti-dilutive for all periods presented. The shares excluded are
as follows:
<TABLE>
<S> <C> <C>
For the years ended December 31,
1997...................................................... 581,875
========= ===
1998...................................................... 4,341,694
========= ===
For the three months ended March 31,
1998 (unaudited).......................................... 3,298,155
========= ===
1999 (unaudited).......................................... 8,368,710
========= ===
</TABLE>
At December 31, 1998, the Company had issued rights to 8,647,338 shares of
common stock under such agreements.
Net loss from continuing operations per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------- -----------------------
1997 1998 1998 1999
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Numerator: (Unaudited)
Net loss from continuing
operations.............. $ (614,797) $ (7,289,847) $(752,745) $ (3,127,583)
Dividends on mandatorily
redeemable, convertible
preferred stock......... (55,030) (681,554) (125,025) (530,270)
Accretion of mandatorily
redeemable, convertible
preferred stock......... (4,104) (21,622) (2,954) (85,271)
----------- ------------ --------- ------------
Net loss from continuing
operations applicable to
common shareholders..... $ (673,931) $ (7,993,023) $(880,724) $ (3,743,124)
=========== ============ ========= ============
Denominator:
Weighted average shares
outstanding............. 6,161,946 7,612,045 7,444,549 7,674,345
=========== ============ ========= ============
</TABLE>
The Company was incorporated in 1996 without capital contributions. As of
December 31, 1996, no shares of common stock were outstanding. Therefore, no
earnings per share amounts have been reflected for the period from inception to
December 31, 1996.
F-11
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of the Company's planned initial public offering,
the outstanding shares of Series Preferred (as defined below) will
automatically convert into 6,225,611 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma balance sheet at March 31, 1999.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1998 is
computed using the net loss and weighted average number of common shares
outstanding, including the pro forma effects of the assumed conversion of the
Company's Series A, B and C convertible preferred stock into shares of the
Company's common stock as if such conversion occurred on January 1, 1998, or at
date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute basic and
diluted net loss per share of approximately 3,067,988, 2,347,541 and 6,225,611
shares for the year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999, respectively, and pro forma entries to eliminate
preferred stock dividend accruals and accretion charges for each period. The
pro forma effects of these transactions are unaudited.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. Since inception, comprehensive loss has
been the same as net loss.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it has one reportable operating segment at December
31, 1998.
Start-Up Activities
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." In general, SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Initial application of SOP 98-5 is reported as the cumulative effect
of a change in accounting principle. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of its
operations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which provides guidance on accounting for the cost of such
software. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 did not have a
material impact on the Company's financial statements.
F-12
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. To date, the Company
has not entered into any derivative financial instruments or hedging
activities.
Reclassifications
Certain prior years balances were reclassified to conform to current year
presentation.
(3) Convertible Preferred Stock Subject to Mandatory Redemption
A summary of the Company's mandatorily redeemable, convertible preferred
stock is presented in the table below:
<TABLE>
<CAPTION>
Series A Series B Series C
------------------ ------------------ -------------------
Shares Amount Shares Amount Shares Amount
------- ---------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996 -- $ -- -- $ -- -- $ --
Issuance of Series A
mandatorily
redeemable,
convertible preferred
stock in May 1997 for
cash of approximately
$7.58 per share, net
of stock issuance
costs of $29,850..... 132,000 970,150 -- -- -- --
Dividends accrued..... -- 55,030 -- -- -- --
Accretion to
redemption value..... -- 4,104 -- -- -- --
------- ---------- ------- ---------- ------- -----------
Balances, December 31,
1997.................... 132,000 1,029,284 -- -- -- --
Issuance of Series B
mandatorily
redeemable,
convertible preferred
stock in February
1998 for cash of
approximately $18.36
per share, net of
stock issuance costs
of $22,000........... -- -- 326,833 5,978,000 -- --
Issuance of Series C
mandatorily
redeemable,
convertible preferred
stock in December
1998 for cash of
approximately $34.84
per share, net of
stock issuance costs
of $811,065.......... -- -- -- -- 365,959 11,938,955
Dividends accrued..... -- 100,056 -- 550,060 -- 31,438
Accretion to
redemption value..... -- 7,463 -- 5,986 -- 8,173
------- ---------- ------- ---------- ------- -----------
Balances, December 31,
1998.................... 132,000 1,136,803 326,833 6,534,046 365,959 11,978,566
Issuances of Series C
mandatorily
redeemable,
convertible preferred
stock in January,
February and March
1999 for cash of
approximately $34.84
per share
(unaudited).......... -- -- -- -- 64,581 2,250,000
Dividends accrued
(unaudited).......... -- 25,012 -- 150,016 -- 355,242
Accretion to
redemption value
(unaudited).......... -- 1,865 -- 1,651 -- 81,755
------- ---------- ------- ---------- ------- -----------
Balances, March 31, 1999
(unaudited)............. 132,000 $1,163,680 326,833 $6,685,713 430,540 $14,665,563
======= ========== ======= ========== ======= ===========
</TABLE>
Under the Company's articles of incorporation, the Company is authorized to
issue 889,373 shares of preferred stock. Shares of preferred stock may be
issued from time to time in one or more series, with designations, rights,
preferences and limitations established by the Company's Board of Directors. As
of December 31, 1998, the Company has the following shares of preferred stock
authorized for issuance:
F-13
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Liquidation,
Redemption Annual
Shares Value per Dividend
Outstanding Share Rate
----------- ------------ --------
<S> <C> <C> <C>
Series A mandatorily redeemable,
convertible preferred stock (Series
A) 132,000 $ 7.58 $0.758
======= ====== ======
Series B mandatorily redeemable,
convertible preferred stock (Series
B) 326,833 $18.36 $1.836
======= ====== ======
Series C mandatorily redeemable,
convertible preferred stock (Series
C) 365,959 $34.84 $3.484
======= ====== ======
</TABLE>
Dividends
Dividends accrue at an annual rate of ten-percent of the face value of the
preferred stock. Dividends accrue whether or not they have been declared, are
cumulative, and in addition, to the extent there are unpaid dividends,
dividends are payable on such unpaid dividends. If at any time the Company
pays less than the total amount of dividends then accrued with respect to the
Series A, Series B and Series C (collectively, the "Preferred Stock"), such
payment will be distributed first to the holders of the Series C on a pro rata
basis, second to the holders of the Series B and then to holders of Series A.
No dividends may be paid to junior classes of the Company's capital stock if
there are unpaid Preferred Stock dividends. Further, if dividends or other
distributions are declared for the holders of the Company's common stock,
holders of Preferred Stock are entitled to participate on an as-if-converted
to common stock basis. As of December 31, 1998, $155,086, $550,060 and $31,438
has been accumulated for dividends on Series A, Series B and Series C,
respectively.
Liquidation Preference
Holders of Series C are entitled to a preference of $34.84 per share (an
aggregate of approximately $15 million), plus accrued and unpaid dividends,
upon any liquidation, dissolution or winding up of the Company before
distribution or payment is made upon Series A, Series B or the Company's
common stock. Holders of Series B are entitled to a preference of $18.36 per
share (an aggregate of approximately $6 million), plus accrued and unpaid
dividends, upon any liquidation, dissolution or winding up of the Company
before distribution or payment is made upon Series A or the Company's common
stock. Holders of Series A are entitled to a preference of $7.58 per share (an
aggregate of approximately $1 million), plus accrued and unpaid dividends upon
the occurrence of such events. Remaining proceeds, if any, from such events
are allocable to the holders of the Company's common stock. Holders of
Preferred Stock have the option to have the proceeds from such events
allocated to them as common stockholders on an as-if-converted to common stock
basis.
Mandatory Redemption
The Preferred Stock outstanding as of December 31, 1998 is subject to
redemption at the following dates:
<TABLE>
<CAPTION>
Series A Series B Series C Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
June 15 -
2001....................... $ 385,215 $2,183,571 $ 4,260,486 $ 6,829,272
2002....................... 385,215 2,183,571 4,260,486 6,829,272
2003....................... 385,216 2,183,572 4,260,486 6,829,274
---------- ---------- ----------- -----------
Total.................... 1,155,646 6,550,714 12,781,458 20,487,818
Less: Unaccreted issuance
costs................... (18,843) (16,668) (802,892) (838,403)
---------- ---------- ----------- -----------
$1,136,803 $6,534,046 $11,978,566 $19,649,415
========== ========== =========== ===========
</TABLE>
F-14
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
If the Preferred Stock is still outstanding at June 1, 2001, holders of the
Preferred Stock may require redemption of all or a portion of their stock on or
before June 15, 2001. The redemption amount per share is $7.58, $18.36 and
$34.84 for the Series A, Series B and Series C, respectively, plus accrued and
unpaid dividends. The redemption will be made in three equal annual
redemptions. If the Preferred Stock is outstanding at June 1, 2002, then on or
before June 15, 2002, holders of Preferred Stock may require redemption of all
or a portion of their preferred shares. The redemption price upon such election
is the greater of $7.58, $18.36 and $34.84 for the Series A, Series B and
Series C per share, respectively, plus accrued and unpaid dividends or the
market value of the Preferred Stock.
Accretion
The difference between the redemption price and the recorded value, which is
net of the offering costs of $29,850, $22,000 and $811,065 for Series A, Series
B and Series C, respectively, is being accreted to the earliest possible
redemption date.
Voting Rights
The Preferred Stock is entitled to vote on an as-if-converted to common
stock basis.
Conversion Rights
At any time, any holder may convert all or any portion of such shares into
common stock at a rate of seven shares of common stock per one share of
preferred stock. The conversion price is subject to adjustment to prevent
dilution based on criteria defined in the articles of incorporation. Upon
conversion, accrued and unpaid dividends are not paid or converted and are
extinguished. Each share of Preferred Stock is subject to a mandatory
conversion to common stock at the conversion price in effect at that time
immediately upon the closing of a public offering which meets certain
conditions.
Warrants
In connection with the sale of Series C, the Company issued 60,277 warrants
to purchase one share of the Company's common stock for approximately $4.98.
Upon issuance, the warrants had a value totaling $155,065, which has been
reflected as a cost of the offering. The warrants vest immediately and are
exercisable for a period of three years. As of December 31, 1998, none of the
warrants have been exercised. In addition, the Company incurred $656,000 of
direct costs in connection with the issuance of Series C.
In connection with the sale of Series A, the Company issued 924,000 warrants
to purchase one share of the Company's common stock for approximately $1.08.
The warrants vest immediately and are exercisable for a period of three years.
Based upon the fair market value of the common stock at the date of issuance,
the fair value of the warrants was determined to be immaterial. As of December
31, 1998, none of the warrants have been exercised.
(4) Stockholders' Equity
Common Stock
In February 1997, the Company issued 560,000 shares of common stock for cash
of approximately $0.02 per share. In 1998, an individual exercised options for
3,500 shares of common stock for cash of approximately $1.08 per share.
F-15
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Noncash Common Stock Issuance
In February 1997, the Company issued 6,790,000 shares of common stock for
services provided during formation of the Company, a portion of which was
accrued at December 31, 1996. The Company recorded the stock at its fair market
value of approximately $0.02 per share, which approximated the value of the
services rendered with the corresponding expense being recorded in the
Company's statement of operations over the period that the services were
provided.
Warrants
In June 1997, the Company issued warrants for 420,000 shares of common stock
with an exercise price of approximately $1.08. The warrants vested immediately
and are exercisable for a period of three years. In 1997, the Company issued 70
shares of common stock upon the exercise of warrants in return for cash
consideration totaling $76. During 1998, the Company issued 314,930 shares of
common stock upon the exercise of such warrants. The employees issued notes for
the purchase price of the common stock received upon exercise of the warrants.
These notes receivable, totaling $341,024 at December 31, 1998, are reflected
as a reduction of stockholders' equity. Interest on the loans is at a rate of
8% per annum, and the principal and the accrued and unpaid interest is due in
twenty-four monthly payments, beginning on March 31, 2000. The loans are due in
full on February 28, 2002. The loans are full recourse loans and are secured by
the underlying shares of common stock. The Company also issued security buy-
sell agreements in connection with these loans which place restrictions on the
transfer of ownership interests, as defined in the agreement. These agreements
will be removed upon completion of the offering discussed in Note 11.
During 1998, the Company repurchased 70,000 warrants issued to an employee
of the Company for $30,000, their intrinsic value on the date of purchase. As
of December 31, 1998, 35,000 of the original 420,000 warrants remained
outstanding.
In November 1998, the Company obtained a $500,000 bridge loan from a bank.
In connection with the bridge loan, the Company issued 10,500 warrants to the
bank. Fifty-percent of the warrants have a strike price of $2.62 and fifty-
percent have a strike price of $4.98. The value of the warrants at the date of
issuance was approximately $28,000, which is included in interest expense in
the accompanying statement of operations for the year ended December 31, 1998.
The warrants were valued using the Black-Scholes pricing model, assuming
volatility of 70%, risk free interest rate of 5.0%, no expected dividends and a
life of five years.
Employee Stock Option Grants
During 1997, the Company adopted the 1997 Stock Option Plan ("the Plan")
under which the Company is authorized to grant incentive and non-qualified
stock options to acquire up to 1,645,000 shares of the Company's common stock
to employees and directors of the Company. Options granted vest over various
terms, with a maximum vesting period of five years, and expire after a maximum
of 6 years. The Company accounts for the Plan under APB Opinion No. 25, under
which the Company has recorded deferred compensation of $1,443,542 during 1998
and an additional $946,400 during the three months ended March 31, 1999
(unaudited) which, will be amortized over the period that services are provided
to the Company. During 1998, the Company recognized $199,535 of such
compensation. During the three months ended March 31, 1998 and 1999, the
Company recognized $17,188 and $103,334 of such compensation, respectively
(unaudited).
F-16
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Plan at December 31, 1997 and 1998, and
activity during the years then ended:
<TABLE>
<CAPTION>
1997 1998
---------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year........... -- $ -- 770,700 $ 1.01
Granted.................................. 770,700 1.01 684,250 1.41
Forfeited or canceled.................... -- -- (143,500) (1.16)
Exercised................................ -- -- (3,500) (1.08)
------- ----- --------- ------
Outstanding, end of year................. 770,700 $1.01 1,307,950 $ 1.20
======= ===== ========= ======
Exercisable, end of year................. 105,000 $1.19 399,350 $ 1.04
======= ===== ========= ======
Weighted average fair value of options
granted during the year................. $0.21 $ 2.20
===== ======
</TABLE>
The status of stock options outstanding and exercisable under the Plan as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------ ---------------------------
Weighted
Average Weighted
Range of Remaining Weighted Average
Exercise Number of Contractual Average Number of Exercise
Prices Shares Life Exercise Price Shares Price
- ----------- --------- ----------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.36-$0.39 133,000 3.34 $ .36 66,500 $ .36
$1.08-$1.19 550,200 4.90 1.15 318,850 1.17
$1.43 624,750 5.88 1.43 14,000 1.43
--------- ---- ----- ------------- -----------
1,307,950 5.21 $1.20 399,350 $1.04
========= ==== ===== ============= ===========
</TABLE>
In addition, during March 1997 the Company issued options for 84,000 shares
of common stock outside of the Plan with an exercise price of $0.39. All such
options are fully vested at March 31, 1999.
Pro Forma Fair Value Disclosures
The fair value of each option grant is calculated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Risk-free interest rate........................... 5.8% 5.0%
Expected dividend yield........................... 0% 0%
Expected lives outstanding........................ 2.0 years 2.9 years
Expected volatility............................... 0.001% 0.001%
</TABLE>
Cumulative compensation costs recognized in pro forma net income or loss
with respect to options that are forfeited prior to vesting are adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
F-17
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the following pro
forma amounts for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported.................................... $(610,050) $(7,993,023)
========= ===========
Pro forma...................................... $(617,580) $(8,028,721)
========= ===========
Basic and diluted net loss per share:
As reported.................................... $ (0.10) $ (1.05)
========= ===========
Pro forma...................................... $ (0.10) $ (1.05)
========= ===========
</TABLE>
(5) Discontinued Operations
Pursuant to a Stock Purchase Agreement dated August 5, 1996, the Company
acquired Brecknet Internet Services, Inc. ("ColoradoNet"), an Internet access
provider for cash of $80,000 and a note payable of $129,000. The acquisition
was accounted for in accordance with the purchase method of accounting, and
accordingly, a new basis of accounting for the assets acquired was established
as of August 5, 1996, based on the fair market value of the assets acquired.
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
Fair Value of
Net Assets Acquired
--------------------
<S> <C>
Cash................................................. $ 2,338
Accounts receivable.................................. 19,620
Furniture, fixtures and equipment.................... 37,196
Leasehold improvements............................... 7,295
Cost in excess of identifiable assets acquired....... 142,551
--------
Total cost of purchased assets................... $209,000
========
</TABLE>
On March 24, 1997, the Board of Directors approved the disposition of
ColoradoNet, as the Company determined that such business did not compliment
its primary business focus of Internet education. Pursuant to an Asset Purchase
Agreement dated May 30, 1997, the Company sold substantially all of the net
assets of ColoradoNet for cash of $200,000 to a third party. The gain on the
sale of this discontinued operation was $34,632.
Total revenue for ColoradoNet during the Company's operation of the business
was $90,512 and $137,055 in 1996 and 1997, respectively.
F-18
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Notes Payable To Related Parties
As of December 31, 1997, notes payable to related parties consisted of the
following:
<TABLE>
<S> <C>
Unsecured note payable to related party, interest
payable on a quarterly basis at 8% per
annum, principal payments equal to one-sixteenth
of the outstanding principal amount at December 31, 1997,
payable in 16 quarterly installments
beginning June 30, 1998 and ending March 31, 2002............ $193,277
Unsecured note payable to officer of the
Company, interest and principal due in
monthly installments of $1,868, at 10.25%
per annum, matures March 10, 2002............................ 76,698
--------
269,975
Less: Current portion........................................... (39,441)
--------
Long-term portion of notes payable to related parties........... $230,534
========
</TABLE>
On April 7, 1998, the Company repaid the $193,277 note payable to a related
party. On April 17, 1998, the Company repaid the $76,698 note payable to a
related party.
Interest expense for the period from inception to December 31, 1996 and for
the years ended December 31, 1997 and 1998 was $9,186, $37,990 and $36,819,
respectively. Interest expense for the year ended December 31, 1998 includes
$27,819 related to warrants for common stock issued in connection with the
bridge loan (Note 4).
(7) Other Related Party Transactions
The Company engaged the brother of the chief executive officer to provide
legal services to the Company. For the years ended December 31, 1997 and 1998,
the Company incurred approximately $39,000 and $16,400 in legal expenses to
this related party. As of December 31, 1997, the Company owed approximately
$6,500 to this related party for legal services performed.
On February 14, 1997, an officer of the Company extended a loan to the
Company in the amount of $25,000 to fund operations. The note was repaid on May
29, 1997.
(8) Commitments And Contingencies
Operating Lease Obligations
The Company leases its office space under a noncancellable operating lease
agreement which expires in July 2002. Future minimum lease obligations as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1999......................................................... $ 564,467
2000......................................................... 671,811
2001......................................................... 462,858
2002......................................................... 26,925
----------
$1,726,061
==========
</TABLE>
F-19
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense for the period from inception to December 31, 1996 and for the
years ended December 31, 1997 and 1998 was $14,002, $57,426 and $331,219,
respectively.
Legal Matters
The Company is exposed to asserted and unasserted legal claims encountered
in the normal course of business. Management believes that the ultimate
resolution of such matters will not have a material adverse effect on the
operating results or the financial position of the Company.
(9) Major Customers
Below is a listing of major customers, each of which comprised more than 10%
of revenue for the period from inception to December 31, 1996 and for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
Amount % Amount % Amount %
------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Customer 1.......................... $20,944 93% $637,690 62% $346,382 21%
Customer 2.......................... $ -- -- $157,240 15% $121,560 7%
</TABLE>
As of December 31, 1998, Customer 1 owed the Company $9,000 related
primarily to course development fees.
(10) Income Taxes
Components of the income tax provision applicable to federal and state
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Current benefit:
Federal....................................... $ -- $ -- $ --
State......................................... -- -- --
-------- -------- ----------
Total....................................... -- -- --
-------- -------- ----------
Deferred benefit:...............................
Federal....................................... (146,818) (184,891) (2,401,048)
State......................................... (14,250) (17,945) (233,043)
-------- -------- ----------
Total....................................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Total tax benefit........................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Valuation allowance............................. 161,068 202,836 2,634,091
-------- -------- ----------
Net tax benefit............................. $ -- $ -- $ --
======== ======== ==========
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate................................. 34.0% 34.0% 34.0%
Increase (decrease) as a result of-
State income tax net of federal benefit................ 3.3% 3.3% 3.3%
Permanent differences.................................. (0.1%) (0.5%) (1.2%)
Valuation allowance.................................... (37.2%) (36.8%) (36.1%)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
F-20
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities result from the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Deferred tax assets-
Non-current:
Net operating loss carryforward....................... $354,363 $2,919,417
Depreciation differences.............................. 9,541 32,255
Deferred rent......................................... -- 13,391
Current:
Vacation accrual...................................... -- 29,277
Allowance for doubtful accounts....................... -- 3,655
-------- ----------
Total deferred tax assets............................. 363,904 2,997,995
-------- ----------
Less: Valuation allowance................................. (363,904) (2,997,995)
-------- ----------
Net deferred tax assets................................... $ -- $ --
======== ==========
</TABLE>
From its inception, the Company has generated losses for both financial
reporting and tax purposes. Accordingly, for income tax return reporting
purposes, the Company may utilize approximately $7.8 million of net operating
loss carryforwards, which begin to expire in 2011. The Tax Reform Act of 1986
contains provisions which may limit the net operating loss carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership interests.
The Company has determined that approximately $364,000 and $2,998,000 of
deferred tax assets as of December 31, 1997 and 1998, respectively, did not
satisfy the realization criteria set forth in SFAS No. 109, primarily due to
the Company's operating loss since inception and the start up nature of the
Company. Accordingly, a valuation allowance was recorded against the entire
deferred tax asset.
(11) Subsequent Events
Employee Benefit Plan
Effective January 1, 1999, the Company adopted a defined contribution plan
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute up to 15% of their annual compensation. In addition,
the Company may make discretionary and/or matching contributions on behalf of
participating employees.
Stock Option Grants
From January 1999 through April 1999, the Company granted stock options to
employees to purchase 168,350 shares of common stock at an exercise price of $4
per share. In connection with such option grants, the Company recognized
unearned compensation totaling approximately $1.3 million which is being
amortized over the vesting period of the related options.
Reincorporation
On or before the completion of the Initial Public Offering discussed below,
the Company expects to file for reincorporation in the State of Delaware.
Initial Public Offering
On May 13, 1999, the Company filed a registration statement with the SEC on
Form S-1.
F-21
<PAGE>
[INSIDE BACK COVER - LOGOS OF REPRESENTATIVE CUSTOMERS WITH CAPTION
"PARTNERSHIPS DEDICATED TO ONLINE LEARNING" AT BOTTOM OF PAGE.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[eCollege.com logo]
Common Stock
----------------
Prospectus
, 1999
----------------
NationsBanc Montgomery Securities LLC
Thomas Weisel Partners LLC
Until (25 days after the date of this Prospectus), all dealers
effecting transactions in the common stock, whether or not participating 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount to
be Paid
---------
<S> <C>
SEC registration fee............................................ $15,985
NASD filing fee................................................. 30,500
Nasdaq National Market listing fee.............................. *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Printing and engraving.......................................... *
Blue sky fees and expenses (including legal fees)............... *
Transfer agent fees............................................. *
Miscellaneous................................................... *
-------
Total......................................................... $ *
* To be supplied by amendment.
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof, and the Registrant's Second Amended and Restated
Certificate of Incorporation to be in effect upon the closing of this offering
(collectively, the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"),
the Registrant's directors shall not be personally liable to the Registrant or
its stockholders for monetary damages for any breach of fiduciary duty as
directors of the Registrant. Under the DGCL, the directors have a fiduciary
duty to the Registrant which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the Registrant as a director
or officer of another
II-1
<PAGE>
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since July 26,
1996 (inception):
Common Stock and Preferred Stock. In February 1997, the Registrant issued
(i) 6,790,000 shares of its common stock, no par value per share, to its
founder Robert N. Helmick in exchange for $130,500 in services, (ii) 350,000
shares of its common stock to John V. Helmick in exchange for $6,750 in cash,
and (iii) 210,000 shares of its common stock, no par value per share, to
Jonathan M. Dobrin, in exchange for $4,050 in property.
On June 11, 1997, the Registrant issued an aggregate of 132,000 investment
units; each unit consisting of one share of Series A Convertible Preferred
Stock (the "Series A Preferred") and one warrant to purchase seven shares of
Registrant's common stock (exercisable at a price of $1.08 per share), at a
purchase price of $7.58 per unit, to certain investors in consideration for the
payment of $1,000,000. Upon the closing of this offering, all of the
outstanding shares of Series A Preferred will convert into an aggregate of
924,000 shares of Common Stock.
On February 2, 1998, the Registrant issued an aggregate of 326,833 shares of
Series B Convertible Preferred Stock (the "Series B Preferred"), at a purchase
price of $18.36 per share, to certain investors in consideration for the
payment of approximately $6,000,000. Upon the closing of this offering, all of
the outstanding shares of Series B Preferred will convert into an aggregate of
2,287,831 shares of Common Stock.
In a series of closings from December 21, 1998 through March 1, 1999, the
Registrant issued an aggregate of 430,540 shares of Series C Convertible
Preferred Stock (the "Series C Preferred"), at a purchase price of $34.84 per
share, to certain investors in consideration for the payment of $15,000,020.
Upon the closing of this offering, all of the outstanding shares of Series C
Preferred will convert into an aggregate of 3,013,780 shares of Common Stock.
Warrants. The Registrant from time to time has granted warrants to
investors, consultants and other third parties in connection with business
transactions in reliance upon exemption from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.
<TABLE>
<CAPTION>
Weighted-
average
Number of Exercise
Shares Prices
--------- ---------
<S> <C> <C>
July 26, 1996 (inception) to December 31, 1996....... -- --
January 1, 1997 to December 31, 1997................. 959,000 $1.08
January 1, 1998 to December 31, 1998................. 10,500 $3.80
January 1 to April 30, 1999.......................... 60,277 $4.98
</TABLE>
II-2
<PAGE>
Options. The Registrant from time to time has granted stock options to
employees and consultants in reliance upon exemption from registration pursuant
to either (i) Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) Rule 701 promulgated under the Securities Act.
NUMBER OF EXERCISE
SHARES PRICES
--------- -----------
July 26, 1996 (inception) to December 31, 1996.... -- --
January 1, 1997 to January 6, 1998................ 882,700 $0.36-$1.19
January 7, 1998 to December 31, 1998.............. 656,250 $1.43
January 1, 1999 to April 1, 1999.................. 168,350 $4.00
Of the options granted during the period from January 1, 1997 through
January 6, 1998, to purchase 798,700 shares of common stock, 744,450 remain
outstanding as of April 30, 1999. Of the options granted during the period from
January 7, 1998 through December 31, 1998, to purchase 656,250 shares of common
stock, 617,050 remain outstanding. All options granted in 1999 remained
outstanding as of April 30, 1999.
The above securities were offered and sold by the Registrant in reliance
upon exemptions from registration pursuant to either (i) Section 4(2) of the
Securities Act, as amended, as transactions not involving any public offering,
(ii) Regulation D promulgated under the Securities Act, as amended, as limited
offers and sales of securities, or (iii) Rule 701 promulgated under the
Securities Act, as amended. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect a 7-for-1 stock split to be
effected on or before completion of this offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
NUMBER DESCRIPTION
------ -----------
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.3* Form of Second Amended and Restated Certificate of Incorporation to be
in effect upon the closing of this offering.
3.4* Bylaws.
3.5* Form of Amended and Restated Bylaws to be in effect upon the closing of
this offering.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Unit Purchase Agreement dated June 11, 1997, between the Registrant and
the Persons listed on the Schedule of Purchasers attached thereto.
10.2 Series B Preferred Share Purchase Agreement dated February 2, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3 Series C Preferred Share Purchase Agreement dated December 21, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4 Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors,
each of the Series B Investors and each of the Series C Purchasers.
10.5 Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on
the Schedules attached thereto.
10.6 Form of Indemnification Agreement by and between the Registrant and its
outside directors.
10.7 Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.8 Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9 Common Stock Purchase Warrant issued to New World Equities, Inc.
expiring June 11, 2000.
10.10 Agreement between the Registrant and the University of Colorado dated
May 22, 1998.
10.11 Promissory Note dated June 1, 1997 by Registrant in the favor of
Advanced Worldwide Education, LC.
10.12 1997 Stock Option Plan, as amended.
10.13* Amended Lease Agreement and Termination of Initial Lease for a Portion
of the Leased Premises dated July 30, 1998 between Kennedy Center
Partnership and the Registrant.
10.14* Lease Agreement dated April 16, 1999 between Kennedy Center Partnership
and the Registrant.
10.15* 1999 Employee Stock Purchase Plan.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (See Signature Page on Page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b)(1)
or (4), or 497(h) under the Securities Act, shall be deemed to be part
of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Denver, Colorado, on
this 13th day of May, 1999.
eCollege.com
By: ___/s/ Robert N. Helmic____k
NAME:ROBERT N. HELMICK
TITLE:PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
We, the undersigned directors and/or officers of eCollege.com (the
"Company"), hereby severally constitute and appoint Robert N. Helmick,
President and Chief Executive Officer, and Steven M. Singer, Vice President,
Finance and Administration and Chief Financial Officer, and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, in connection with the registration
under the Securities Act of 1933, as amended, of equity securities of the
Company, and to file or cause to be filed the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as each of them might or could do in person, and hereby ratifying and
confirming all that said attorneys, and each of them, or their substitute or
substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 13, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<S> <C>
/s/ Robert N. Helmick President, Chief Executive Officer and
___________________________________________ Chairman of the Board of Directors
ROBERT N. HELMICK (principal executive officer)
/s/ Steven M. Singer Vice President, Finance and Administration
___________________________________________ and Chief Financial Officer (principal
STEVEN M. SINGER financial and accounting officer)
j/s/ Jonathan M. Dobrin Vice President, Chief Technology Officer
___________________________________________ and Director
JONATHAN M. DOBRIN
/s/ Jack W. Blumenstein Director
___________________________________________
JACK W. BLUMENSTEIN
/s/ Christopher E. Girgenti Director
___________________________________________
CHRISTOPHER E. GIRGENTI
/s/ Oakleigh Thorne Director
___________________________________________
OAKLEIGH THORNE
/s/ Jeri Korshak Director
___________________________________________
JERI KORSHAK
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation.
3.2* Form of Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.3* Form of Second Amended and Restated Certificate of Incorporation to be
in effect upon the closing of this offering.
3.4* Bylaws.
3.5* Form of Amended and Restated Bylaws to be in effect upon the closing of
this offering.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Unit Purchase Agreement as of June 11, 1997, between the Registrant and
the Persons listed on the Schedule of Purchasers attached thereto.
10.2 Series B Preferred Share Purchase Agreement dated February 2, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3 Series C Preferred Share Purchase Agreement dated December 21, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4 Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors, each
of the Series B Investors and each of the Series C Purchasers.
10.5 Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on the
Schedules attached thereto.
10.6 Form of Indemnification Agreement by and between the Registrant and its
outside directors.
10.7 Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
10.8 Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9 Common Stock Purchase Warrant issued to New World Equities, Inc.,
expiring June 11, 2000.
10.10 Agreement between the Registrant and the University of Colorado dated
May 22, 1998.
10.11 Promissory Note dated June 1, 1997 by Registrant in the favor of
Advanced Worldwide Education, LC.
10.12 1997 Stock Option Plan, as amended.
10.13* Amended Lease Agreement and Termination of Initial Lease for a Portion
of the Leased Premises dated July 30, 1998 between Kennedy Center
Partnership and the Registrant.
10.14* Lease Agreement dated April 16, 1999 between Kennedy Center Partnership
and the Registrant.
10.15* 1999 Employee Stock Purchase Plan.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (See Signature Page on Page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
<PAGE>
EXHIBIT 10.1
UNIT PURCHASE AGREEMENT
DATED JUNE 11, 1997
BETWEEN
REAL EDUCATION, INC.
AND
THE PERSONS LISTED ON THE ATTACHED SCHEDULE OF PURCHASERS
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS............................................................................................. 1
2 AUTHORIZATION AND CLOSING............................................................................... 4
A. AUTHORIZATION OF THE UNITS......................................................................... 4
B. PURCHASE AND SALE OF THE UNITS..................................................................... 4
C. THE CLOSING........................................................................................ 4
3. CONDITIONS OF EACH PURCHASER'S OBLIGATION AT THE CLOSING................................................ 5
A. REPRESENTATIONS AND WARRANTIES: COVENANTS.......................................................... 5
B. NO MATERIAL ADVERSE CHANGE......................................................................... 5
C. CHARTER AMENDMENT.................................................................................. 5
D. COMPANY'S BYLAWS................................................................................... 5
E. REGISTRATION AGREEMENT............................................................................. 5
F. STOCKHOLDERS AGREEMENT............................................................................. 5
G. CONSULTING AGREEMENT............................................................................... 6
H. EMPLOYMENT AGREEMENTS.............................................................................. 6
I. BOARD OF DIRECTORS................................................................................. 6
J. BLUE SKY CLEARANCE................................................................................. 6
K. OPINION OF THE COMPANY'S COUNSEL................................................................... 6
L. PROCEEDINGS........................................................................................ 6
M. WAIVER............................................................................................. 7
N. CLOSING DOCUMENTS.................................................................................. 7
4. COVENANTS............................................................................................... 7
A. FINANCIAL STATEMENTS AND OTHER INFORMATION......................................................... 8
B. INSPECTION OF PROPERTY............................................................................. 9
C. DIRECTORS' MEETINGS; EXPENSES AND INDEMNIFICATION.................................................. 9
D. ATTENDANCE AT BOARD MEETINGS....................................................................... 9
E. BOARD APPROVALS.................................................................................... 10
F. RESTRICTIONS....................................................................................... 10
G. AFFIRMATIVE COVENANTS.............................................................................. 13
H. COMPLIANCE WITH AGREEMENTS......................................................................... 14
I. CURRENT PUBLIC INFORMATION......................................................................... 14
J. RESERVATION OF COMMON STOCK........................................................................ 15
K. PROPRIETARY RIGHTS................................................................................. 15
L. FIRST REFUSAL RIGHTS............................................................................... 15
M. MANAGEMENT STOCK POOL.............................................................................. 16
N. USE OF PROCEEDS.................................................................................... 16
5. TRANSFER OF RESTRICTED SECURITIES....................................................................... 17
6. REPRESENTATIONS AND WARRANTIES OF COMPANY............................................................... 18
A. ORGANIZATION AND CORPORATE POWER................................................................... 18
B. CAPITAL STOCK AND RELATED MATTER................................................................... 18
C. SUBSIDIARIES; INVESTMENTS.......................................................................... 19
D. AUTHORIZATION; NO BREACH........................................................................... 19
E. FINANCIAL STATEMENTS............................................................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
F. ABSENCE OF UNDISCLOSED LIABILITIES................................................................. 20
G. NO MATERIAL ADVERSE CHANGE......................................................................... 20
H. ABSENCE OF CERTAIN DEVELOPMENTS.................................................................... 20
I. ASSETS............................................................................................. 22
J. TAX MATTERS........................................................................................ 22
K. CONTRACTS AND COMMITMENTS.......................................................................... 22
L. PROPRIETARY RIGHTS................................................................................. 24
M. LITIGATION, ETC.................................................................................... 24
N. BROKERAGE.......................................................................................... 25
O. GOVERNMENTAL CONSENT. ETC.......................................................................... 25
P. INSURANCE.......................................................................................... 25
Q. EMPLOYEES.......................................................................................... 25
R. ERISA.............................................................................................. 25
S. COMPLIANCE WITH LAWS............................................................................... 26
T. AFFILIATED TRANSACTION............................................................................. 26
U. DISCLOSURE......................................................................................... 26
V. CLOSING DATE....................................................................................... 27
7. MISCELLANEOUS........................................................................................... 27
A. EXPENSES........................................................................................... 27
B. PURCHASER'S INVESTMENT REPRESENTATIONS............................................................. 28
C. CONSENT TO AMENDMENTS.............................................................................. 29
D. SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................................................... 29
E. SUCCESSORS AND ASSIGNS............................................................................. 29
F. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES........................................................... 30
G. SEVERABILITY....................................................................................... 30
H. COUNTERPARTS....................................................................................... 30
I. DESCRIPTIVE HEADINGS; INTERPRETATION............................................................... 30
J. NOTICES............................................................................................ 30
</TABLE>
<PAGE>
UNIT PURCHASE AGREEMENT
-----------------------
THIS AGREEMENT is made as of June 11, 1997, between REAL EDUCATION, INC.,
a Colorado corporation (the "COMPANY"), and the Persons listed on the Schedule
of Purchasers attached hereto (collectively referred to herein as the
"PURCHASERS" and individually as a "PURCHASER"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 1 hereof.
The parties hereto agree as follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
terms have the meanings set forth below:
"AFFILIATE" of any particular person or entity means any other person
or entity controlling, controlled by or under common control with such
particular person or entity.
"AWE" and "AWE NOTE" shall have the meanings set in Section 3.N.
"CHARTER AMENDMENT" shall have the meaning set in Section 2.A.
"CLOSING" and "CLOSING DATE" shall have the respective meanings set
in Section 2.C.
"COMMON STOCK" shall mean the Company's Common Stock, no par value per
share.
"COMPENSATORY STOCK" means Common Stock (or options to purchase Common
Stock) issued for compensatory or incentive purposes to directors, officers,
employees and consultants of the Company, issuances of which are from time to
time approved by the Company's Board of Directors.
"EBITDA" for a particular accounting period shall mean the sum of the
Company's net income (or loss) plus net interest expense, tax expense and
amortization and depreciation expense, as all such amounts are reported in the
Company's financial statements for such period.
"EMPLOYMENT AGREEMENT" shall have the meaning set in Section 3.H.
"INDEBTEDNESS" shall mean at a particular time, without duplication,
(i) indebtedness for borrowed money or for the deferred purchase price of
property or services in respect of which any Person is liable, contingently or
otherwise, as obligor or otherwise (other than trade payables and other current
liabilities incurred in the ordinary course of business) or any commitment by
which any Person assures a creditor against loss, including contingent
reimbursement obligations with respect to letters of credit, (ii) indebtedness
guaranteed in any manner by any Person, including guarantees in the form of an
agreement to repurchase or reimburse and (iii) obligations under capitalized
leases in respect of which obligations any
<PAGE>
Person is liable, contingently or otherwise, as obligor, guarantor or otherwise,
or in respect of which obligations any Person assures a creditor against loss.
"INVESTMENT" as applied to any Person means (i) any direct or indirect
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
"KEY EMPLOYEES" shall mean those senior management and other employees
whose service is deemed significant to the continued growth and prosperity of
the Company, as specified in a schedule to be jointly developed by Company
management and representatives of the Purchasers.
"LATEST BALANCE SHEET DATE" shall mean May 31, 1997.
"NWE" shall mean New World Equities, Inc., one of the Purchasers.
"OFFICER'S CERTIFICATE" means a certificate signed by the Company's
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
necessary in order to permit him to verify the accuracy of the information set
forth in such certificate and (ii) to the best of such officer's knowledge, such
certificate does not misstate any material fact and does not omit to state any
fact necessary to make the certificate not misleading.
"OPTION PLAN" shall have the meaning set in Section 4.M.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization and a governmental entity or
any department, agency or political subdivision thereof.
"PROPRIETARY RIGHTS" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secret and other confidential information (including ideas, formulas, patentable
or unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, financial and marketing
plans and customer and supplier lists and information), (vii) other
2
<PAGE>
intellectual property rights and (viii) copies and tangible embodiments thereof
(in whatever form or medium).
"REPRESENTATIVES" shall have the meaning set in Section 4.B.
"RESTRICTED SECURITIES" means (i) the Series A Preferred issued
hereunder, (ii) the Common Stock issued upon either conversion of Series A
Preferred or upon exercise of the Warrants and (iii) any securities issued with
respect to the securities referred to in clauses (i) or (ii) above by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted
Securities when they have (a) been effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them,
(b) become eligible for sale pursuant to Rule 144(k) (or any similar provision
then in force) under the Securities Act or (c) been otherwise transferred and
new certificates for them not bearing the Securities Act legend of the character
set forth in Section 7.D have been delivered by the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental body or
agency succeeding to the functions thereof.
"SERIES A PREFERRED" shall mean the Company's Series A Convertible
Preferred Stock, no par value per share.
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof or (ii) if a partnership, limited liability
company, association or other business entity, a majority of the partnership,
membership or other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more Subsidiaries of
that Person or a combination thereof. For purposes hereof, a Person or Persons
shall be deemed to have a majority ownership interest in a partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of partnership, association or other business entity gains
or losses or shall be or control the managing director or general partner of
such partnership, association or other business entity.
"TREASURY REGULATIONS" means the United States Treasury Regulations
promulgated under the IRC and any reference to any particular Treasury
Regulation section shall
3
<PAGE>
be interpreted to include any final or temporary revision of or successor to
that section regardless of how numbered or classified.
"UNDERLYING COMMON STOCK" means (i) the Common Stock issued or
issuable upon either conversion of the Series A Preferred or exercise of the
Warrants and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement, any
Person who holds Series A Preferred shall be deemed to be the holder of the
Underlying Common Stock obtainable upon conversion of the Series A Preferred in
connection with the transfer thereof or otherwise regardless of any restriction
or limitation on the conversion of the Series A Preferred. As to any particular
shares of Underlying Common Stock, such shares shall cease to be Underlying
Common Stock when they have been (a) effectively registered under the Securities
Act and disposed of in accordance with the registration statement covering them
or (b) distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 under the Securities Act (or any similar provision then in
force).
"UNITS" shall mean the investment units of the Company's securities,
each Unit consisting of one share of Series A Preferred and one Warrant.
"WARRANT" shall mean a warrant to purchase one share of the Company's
Common Stock, exerciseable at a price of $7.58 per share, for a period of three
years from the Closing.
2. Authorization and Closing .
-------------------------
A. Authorization of the Units. The Company shall authorize the issuance
--------------------------
and sale to the Purchasers of 132,000 investment units ("UNITS"), each Unit
consisting of one share of its Series A Preferred, having the rights and
preferences set forth in Article II of the Company's Restated Articles of
Incorporation, the form of which is attached hereto as Exhibit A (the "CHARTER
---------
AMENDMENT"), and one Warrant. The Series A Preferred is convertible into shares
of the Company's Common Stock.
B. Purchase and Sale of the Units. At the Closing, the Company shall
------------------------------
sell to each Purchaser and, subject to the terms and conditions set forth
herein, each Purchaser shall severally purchase from the Company, the number of
Units set forth opposite such Purchaser's name on the Schedule of Purchasers
attached hereto, at a price of $7.58 per Unit. The aggregate purchase price to
be paid by each Purchaser is set forth on the Schedule of Purchasers. The sale
of Units to each Purchaser shall constitute a separate sale hereunder.
C. The Closing. The closing of the separate purchases and sales of the
-----------
Units (the "CLOSING") shall take place at the offices of Sachnoff & Weaver, Ltd.
at 10:00 a.m. on June 11, 1997 (the "CLOSING DATE"), or at such other place or
on such other date as may be mutually agreeable to the Company and each
Purchaser. At the Closing, the Company shall deliver to each Purchaser stock
certificates evidencing the Series A Preferred to be purchased by such
4
<PAGE>
Purchaser and Warrant Certificates, in the form attached hereto as Exhibit B,
---------
evidencing the Warrants to be purchased by such Purchaser, both registered in
such Purchaser's or its nominee's name, upon payment of the purchase price
thereof by certified or cashier's check, or wire transfer of immediately
available funds to a Company bank account designated by the Company in the
amount set forth opposite such Purchaser's name on the Schedule of Purchasers.
3. Conditions of Each Purchaser's Obligation at the Closing.
--------------------------------------------------------
The obligation of each Purchaser to purchase and pay for the Series A
Preferred at the Closing is subject to the satisfaction as of the Closing of the
following conditions:
A. Representations and Warranties: Covenants. The representations and
-----------------------------------------
warranties contained in Section 6 hereof shall be true and correct at and as of
the Closing as though then made, except to the extent of changes caused by the
transactions expressly contemplated herein, and the Company shall have performed
in all material respects all of the covenants required to be performed by it
hereunder prior to the Closing.
B. No Material Adverse Change. Since the Latest Balance Sheet Date,
--------------------------
there shall have been no material adverse change in the business, financial
condition, operating results, assets, employee relations, customer or supplier
relations, product development efforts, research and development efforts or
business prospects of the Company and there shall have been no material casualty
loss or damage to the Company's assets (whether or not covered by insurance).
C. Charter Amendment. The Charter Amendment shall have been duly filed
-----------------
with the Colorado Secretary of State and shall be in full force and effect, and
the Company's Articles of Incorporation shall not have been further amended in
any way.
D. Company's Bylaws. The Company's bylaws shall be in the form
----------------
attached hereto as Exhibit C.
---------
E. Registration Agreement. The Company and the Purchasers shall have
----------------------
entered into a registration agreement in form and substance as set forth in
Exhibit D attached hereto (the "REGISTRATION AGREEMENT") and the Registration
- ---------
Agreement shall be in full force and effect as of the Closing. All other
agreements providing for registration rights shall have been canceled (and
consolidated into the Registration Agreement) without cost or liability to the
Company.
F. Shareholders Agreement. The Company, the Purchasers and all of the
----------------------
Company's current Shareholders shall have entered into a voting agreement in
form and substance as set forth in Exhibit E attached hereto (the "SHAREHOLDERS
---------
AGREEMENT") and the Shareholders Agreement shall be in full force and effect at
the Closing. All other agreements relating to the voting of the Company's
capital stock shall have been canceled (and consolidated into the Shareholders
Agreement) without cost or liability to the Company.
5
<PAGE>
G. Consulting Agreement. The Company and NWE shall have entered into a
--------------------
consulting agreement in form and substance as set forth in Exhibit F attached
---------
hereto (the "CONSULTING AGREEMENT") and the Consulting Agreement shall be in
full force and effect as of the Closing.
H. Employment Agreements. The Company shall have entered into an
---------------------
Employment Agreement containing confidentiality and intellectual property rights
assignment provisions, in the form reviewed by the Purchasers' counsel and
satisfactory to the Purchasers (each, an "EMPLOYMENT AGREEMENT"), with each Key
Employee of, and significant consultant to, the Company, including Robert
Helmick, its President ("R. HELMICK"), and each such Employment Agreement shall
not have been amended or modified and shall be in full force and effect as of
the Closing. R. Helmick shall have executed the Company's standard form of
"Securities: Buy-Sell" agreement, and such agreement shall remain in full force
and effect.
I. Board of Directors. The size of the Board of Directors shall be set
------------------
at seven, Messrs. Christopher Girgenti and Steven Singer shall have been
appointed as directors and Audit and Compensation Committees of the Board of
Directors shall have been appointed pursuant to the terms of the Shareholders
Agreement.
J. Blue Sky Clearance. The Company shall have made all filings under
------------------
applicable state securities laws necessary to consummate the issuance of the
Series A Preferred pursuant to this Agreement in compliance with such laws.
K. Opinion of the Company's Counsel. Each Purchaser shall have received
--------------------------------
from Helmick & Associates, L.L.C., counsel for the Company, an opinion with
respect to the matters set forth in Exhibit G attached hereto, which shall be
---------
addressed to each Purchaser, dated the Closing Date and in form and substance
reasonably satisfactory to each Purchaser.
L. Proceedings. All corporate and other proceedings taken or required
-----------
to be taken by the Company in connection with the transactions contemplated
hereby to be consummated at or prior to the Closing and all documents incident
thereto shall be reasonably satisfactory in form and substance to Purchasers'
counsel.
M. AWE Note. The Company shall not owe principal, interest, fees,
--------
deferred compensation or other amounts to any Shareholders or Affiliates of the
Company, other than Advanced Worldwide Education, L.C., an Iowa limited
liability company ("AWE"). All amounts owed to AWE shall be reflected in a
single promissory note payable by the Company to AWE in the principal amount of
$443,276.96 (the "AWE NOTE"). The AWE Note shall provide that it accrues
interest at 8% per year, shall be payable as to interest only for the first year
following the Closing Date, and shall thereafter be payable in 16 equal,
quarterly payments of principal and interest. The Affiliated Transactions
Schedule shall include a brief description of the circumstances giving rise to
the original obligations to AWE.
6
<PAGE>
N. Driscoll Release Undertaking. R. Helmick shall have executed an
----------------------------
undertaking to obtain a release of the Company by Robert Driscoll and AWE, and
to indemnify and defend the Company and certain other persons until such release
is obtained.
O. Waiver. Any condition specified in this Section 3 may be waived if
------
consented to by each Purchaser, provided that no such waiver shall be effective
against any Purchaser unless it is set forth in a writing executed by such
Purchaser.
P. Closing Documents. The Company shall have delivered to each
-----------------
Purchaser all of the following documents:
(1) an Officer's Certificate, dated the Closing Date, stating that the
conditions specified in Section 2 and Sections 3.A through 3.N, inclusive,
have been fully satisfied;
(2) certified copies of (a) the resolutions duly adopted by the
Company's Board of Directors authorizing the execution, delivery and
performance of this Agreement, the Warrants, the Registration Agreement,
the Shareholders Agreement, the Consulting Agreement and each of the other
agreements contemplated hereby, the filing of the Charter Amendment
referred to in Section 2.A, the adoption of the Company's bylaws referred
to in Section 3.D, the issuance and sale of the Series A Preferred, the
reservation of an aggregate of 132,000 shares of Common Stock for issuance
upon conversion of any of the authorized shares of Series A Preferred, the
reservation for issuance of an aggregate of 132,000 shares of Common Stock
for issuance upon exercise of the Warrants and the consummation of all
other transactions contemplated by this Agreement, (b) the resolutions duly
adopted by the Company's Shareholders approving the Charter Amendment and
(c) the AWE Note;
(3) certified copies of the Restated Articles of Incorporation and the
Company's bylaws, each as in effect at the Closing;
(4) copies of all third party and governmental consents, approvals and
filings required in connection with the consummation of the transactions
hereunder (including, all blue sky law filings and waivers of all
preemptive rights and rights of first refusal); and
(5) such other documents relating to the transactions contemplated by
this Agreement as Purchasers' counsel may reasonably request.
4. Covenants.
----------
So long as at least 83,000 shares of Series A Preferred remain outstanding
(as appropriately adjusted for any stock dividends payable in shares of Series A
Preferred and any combinations, subdivisions and split-ups of the shares of
Series A Preferred), the Company covenants and agrees to observe the covenants
stated in Sections 4.A, 4.B and 4.F. The
7
<PAGE>
Company shall comply with the remaining provisions of this Article 4 so long as
any shares of Series A Preferred remain outstanding.
A. Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to each Purchaser:
(1) as soon as available but in any event within 30 days after the
end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such monthly period and for the period from the beginning
of the fiscal year to the end of such month and consolidated balance sheets
of the Company and its Subsidiaries as of the end of such monthly period,
setting forth in each case comparisons to the corresponding period in the
preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently
applied;
(2) accompanying the monthly financial statements delivered pursuant
to Section 4.A(1) above, an executive summary which discusses the Company's
results of operations and material developments in the Company's business;
(3) within 90 days after the end of each fiscal year, consolidated
statements of income and cash flows of the Company and its Subsidiaries for
such fiscal year, and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year, setting forth in each case
comparisons to the preceding fiscal year, all prepared in accordance with
generally accepted accounting principles, consistently applied, and
accompanied by (a) with respect to the consolidated portions of such
statements, an opinion containing no exceptions or qualifications (except
for qualifications regarding specified contingent liabilities) of an
accounting firm of national recognition and (b) a copy of such firm's
annual management letter to the Company's Board of Directors;
(4) promptly upon receipt thereof, any additional reports, management
letters or other detailed information concerning significant aspects of the
Company's operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);
(5) at least 30 days but not more than 90 days prior to the beginning
of each fiscal year, an annual budget prepared on a monthly basis for the
Company and its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows and balance sheets) and promptly upon
preparation thereof, any other significant budgets prepared by the Company
and any revisions of such annual or other budgets;
(6) promptly (but in any event within ten business days) after the
discovery or receipt of notice of any default under any material agreement
to which it or any of its Subsidiaries is a party or any other material
adverse event or circumstance affecting the Company or any Subsidiary
(including the filing of any material litigation against the
8
<PAGE>
Company or any Subsidiary or the existence of any dispute with any Person
which involves a reasonable likelihood of such litigation being commenced),
an Officer's Certificate specifying the nature and period of existence
thereof and what actions the Company and its Subsidiaries have taken and
propose to take with respect thereto; and
(7) with reasonable promptness, such other information and financial
data concerning the Company and its Subsidiaries as any Purchaser may
reasonably request.
Each of the financial statements referred to in subparagraphs (1) and (3) above
shall be true and correct in all material respects as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole).
B. Inspection of Property. The Company shall permit any
----------------------
representatives ("REPRESENTATIVES"), designated by any Purchaser or group of
purchasers holding at least 1% of the outstanding Common Stock equivalents, upon
reasonable notice and during normal business hours and such other times as any
such Representative may reasonably request, to (i) visit and inspect any of the
properties of the Company and its Subsidiaries, (ii) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and (iii) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, employees and independent
accountants of the Company and its Subsidiaries. The presentation of an executed
copy of this Agreement by any Purchaser to the Company's independent accountants
shall constitute the Company's permission to its independent accountants to
participate in discussions with such Persons. The inspection rights provided
under this Section 4.B may be exercised, if at all, not more than once per
calendar quarter by all Purchasers as a group.
C. Directors' Meetings; Expenses and Indemnification. There will be
-------------------------------------------------
at least six meetings of the Company's Board of Directors during each fiscal
year until the first anniversary of the Closing Date; after such date, there
will be at least four meetings during each fiscal year. Upon request of any
director, all reasonable travel and other out-of-pocket expenses of such board
member incurred in connection with attending regular and special Board of
Directors' meetings, attending any meeting of any committee thereof or
conducting any other business on behalf of the Company, will be paid by the
Company. The Company shall give each director written notice of each meeting of
its Board of Directors and each committee thereof, at least ten days prior to
the date of each such meeting. Promptly after the Closing, the Company shall
enter into an indemnification agreement with each of its outside directors
providing for indemnification to the fullest extent permitted by law.
D. Attendance at Board Meetings. The Company shall give each
----------------------------
Purchaser notice of each meeting of its Board of Directors and each committee
thereof at the same time and in the same manner as notice is given to the
directors (which notice shall be confirmed in writing to each such Purchaser),
and the Company shall permit each such Purchaser or a Representative
9
<PAGE>
of such Purchaser to attend as an observer all meetings of its Board of
Directors and all committees thereof. Each Representative shall be entitled to
receive all written materials and other information (including copies of meeting
minutes) given to directors in connection with such meetings at the same time
such materials and information are given to the directors. If the Company
proposes to take any action by written consent in lieu of a meeting of its Board
of Directors or of any committee thereof, the Company shall give written notice
thereof to each such Purchaser or Representative at least five days prior to the
effective date of such consent describing in reasonable detail the nature and
substance of such action. Each Purchaser or Representative shall pay his or her
out-of-pocket expenses incurred in connection with attending such board and
committee meetings.
E. Board Approvals. The affirmative vote of a majority of the
---------------
members of the Board of Directors attending a meeting held following due notice
shall be required to approve the following acts by the Company listed below in
this Section 4.E. The Company covenants and agrees not to enter into any such
action without the required Board of Directors consent:
(1) the authorization, execution or delivery of significant
distribution, licensing or other arrangements entered into outside the
ordinary course of business;
(2) the authorization or incurrence of any new Indebtedness (other than
Indebtedness subject to Section 4.F(14), as to which the Shareholder
approval specified by such Section shall be necessary and sufficient);
(3) all executive compensation arrangements (as to which, the Board of
Directors shall act only following an affirmative recommendation of
the Compensation Committee);
(4) approval of the Company's annual operating plan and capital budget;
(5) undertaking capital expenditures in excess of the agreed-upon
capital budget; and
(6) commencing any executive searches.
F. Restrictions. The Company shall not, without the prior written
------------
consent of the holders of at least 66 2/3% of the shares of Underlying Common
Stock, voting together as a single class:
(1) directly or indirectly redeem, purchase or otherwise acquire, or
permit any Subsidiary to redeem, purchase or otherwise acquire, any of the
Company's equity securities (including warrants, options and other rights
to acquire equity securities) other than (a) the Series A Preferred
pursuant to the terms of the Articles of Incorporation as amended by the
Charter Amendment or (b) the redemption of shares of Common Stock from
employees or consultants at a price equal to the original purchase price
paid by such consultants or employees, pursuant to "Securities Buy-Sell
Agreements" approved by the
10
<PAGE>
Board of Directors and entered into at or prior to the time such Common
Stock was originally issued to such employees or consultants;
(2) authorize, issue or enter into any agreement providing for the
issuance (contingent or otherwise) of, or the appointment of any
underwriter in connection with the sale of (a) any notes or debt securities
containing equity features (including any notes or debt securities
convertible into or exchangeable for equity securities, issued in
connection with the issuance of equity securities or containing profit
participation features) (b) any equity securities (or any securities
convertible into or exchangeable for any equity securities) which equity
features or equity securities are in either case senior to or on a parity
with the Series A Preferred with respect to voting, the payment of
dividends, redemptions or distributions upon liquidation or otherwise or
(c) any equity securities or securities containing equity features at a
price per equivalent share of Common Stock less than $7.58, other than
securities issued upon exercise of stock options under the Option Plan;
(3) make, or permit any Subsidiary to make, any loans or advances to,
guarantees for the benefit of, or, except as otherwise permitted by Section
4.F(8) below, Investments in, any Person (other than a wholly-owned
Subsidiary), except for (a) reasonable advances to employees in the
ordinary course of business, (b) acquisitions permitted pursuant to Section
4.F(8) below, (c) advances against anticipated future license fees or
royalties in connection with acquisitions of software products or licensing
rights with respect to software products and (d) Investments having a
stated maturity no greater than one year from the date the Company makes
such Investment in (i) obligations of the United States government or any
agency thereof or obligations guaranteed by the United States government,
(ii) certificates of deposit of commercial banks having combined capital
and surplus of at least $50 million, (iii) commercial paper with a rating
of at least "Prime-l" by Moody's Investors Service, Inc. or (iv) public
mutual funds which invest primarily in the instruments described in items
(i) and (iii) above;
(4) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including any reorganization
into partnership form);
(5) merge or consolidate with any Person or, except as permitted by
Section 4.F(8) below, permit any Subsidiary to merge or consolidate with
any Person (other than a wholly-owned Subsidiary);
(6) sell, lease or otherwise dispose of, or permit any Subsidiary to
sell, lease or otherwise dispose of, more than 25% of the consolidated
assets of the Company and its Subsidiaries (computed on the basis of book
value, determined in accordance with generally accepted accounting
principles, consistently applied, or fair market value, determined by the
Company's Board of Directors in its reasonable good faith judgment) in any
transaction or series of related transactions (other than sales in the
ordinary course
11
<PAGE>
of business) or sell or permanently dispose of any of its or any
Subsidiary's Proprietary Rights;
(7) engage an underwriter or file with the Securities and Exchange
Commission any registration statement in either case relating to a proposed
public offering of the Company's securities, other than a Qualified IPO (as
defined in the Charter Amendment);
(8) acquire, or permit any Subsidiary to acquire, any interest in any
business (whether by a purchase of assets, purchase of stock, merger or
otherwise), or enter into any joint venture, involving an aggregate
consideration (including the assumption of liabilities whether direct or
indirect) exceeding $100,000 in any one transaction or exceeding $100,000
in the aggregate in any twelve-month period;
(9) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than those
owned, managed or operated as of the Closing;
(10) become subject to, or permit any of its Subsidiaries to become
subject to, any agreement or instrument which by its terms would (under any
circumstances) restrict the Company's right to perform the provisions of
this Agreement, the Registration Agreement, the Articles of Incorporation
or the Company's bylaws (including provisions relating to payment of
dividends on and making redemptions and conversions of the Series A
Preferred);
(11) except as expressly contemplated by this Agreement, make any
amendment to the Articles of Incorporation, or the Company's bylaws, or
file any resolution of the Board of Directors with the Colorado Secretary
of State containing any provisions, which would increase or decrease (other
than by redemption or conversion) the number of authorized shares of the
Series A Preferred or adversely affect the rights or relative priority of
the holders of the Series A Preferred or the Underlying Common Stock under
this Agreement, the Articles of Incorporation, the Company's bylaws or the
Registration Agreement;
(12) (a) enter into, or permit any Subsidiary to enter into, any
transaction with any of its or any Subsidiary's officers, directors,
employees or Affiliates (or any individual related by blood or marriage to
any such Person or any entity in which any such Person or individual owns a
beneficial interest), except (i) for normal employment arrangements and
benefit programs on reasonable terms and except as otherwise expressly
contemplated by this Agreement and (ii) in the ordinary course of and
pursuant to the reasonable requirements of its business and upon fair and
reasonable terms no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person who is not an officer,
director, employee or Affiliate or (b) hire or employ any individual, other
than John Helmick, the Company's outside general counsel, related to an
officer of the Company or any Subsidiary by blood or marriage;
12
<PAGE>
(13) establish or acquire any Subsidiaries;
(14) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness to any
banks or other financial institutions exceeding in the aggregate the
greater of (a) $1,000,000 or (b) four (4) times total EBITDA over the four
most recent fiscal quarters; outstanding at any time on a consolidated
basis;
(15) make any capital expenditures (including payments with respect to
capitalized leases, as determined in accordance with generally accepted
accounting principles, consistently applied but excluding any amounts of
product development expenditures which are capitalized in conformity with
generally accepted accounting principles, consistently applied) more than
35% greater than the amount authorized for such expenditures in the
applicable line item of the Company's latest annual budget, as approved
pursuant to (S)4.E(4) of this Agreement;
(16) amend the Articles of Incorporation or bylaws to set the size of
the Company's Board of Directors at any number greater than seven;
(17) issue any Common Stock, unless the purchaser or subscriber is or
becomes a party to the Shareholders Agreement; or
(18) grant any options under the Option Plan if, after giving affect
to such grant, the sum of (i) all shares of Common Stock subject to then-
outstanding options issued under the Option Plan plus (ii) all shares of
Common Stock previously issued upon the exercise of options under the
Option Plan, would exceed 90,000 shares.
G. Affirmative Covenants. The Company shall, and shall cause each
---------------------
Subsidiary to:
(1) at all times cause to be done all things necessary to maintain,
preserve and renew its corporate existence and all material licenses,
authorizations and permits necessary to the conduct of its businesses;
(2) maintain and keep its properties in good repair, working order
and condition, and from time to time make all necessary or desirable
repairs, renewals and replacements, so that its businesses may be properly
and advantageously conducted at all times;
(3) pay and discharge when payable all taxes, assessments and
governmental charges imposed upon its properties or upon the income or
profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all claims for labor, materials or
supplies which if unpaid would reasonably be expected to have a material
adverse effect upon the financial condition, operating results, assets,
operations or business prospects of the Company and its Subsidiaries taken
as a whole, unless and to
13
<PAGE>
the extent that the same are being contested in good faith and by
appropriate proceedings and adequate reserves (as determined in accordance
with generally accepted accounting principles, consistently applied) have
been established on its books with respect thereto;
(4) comply with all other obligations which it incurs pursuant to any
contract or agreement, whether oral or written, express or implied, as such
obligations become due, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
(5) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company
and its Subsidiaries;
(6) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of such types and in
such amounts as are customary for well-insured corporations of similar size
engaged in similar lines of business;
(7) maintain proper books of record and account which fairly present
its financial condition and results of operations and make provisions on
its financial statements for all such proper reserves as in each case are
required in accordance with generally accepted accounting principles,
consistently applied; and
(8) enter into and maintain Employment Agreements containing
confidentiality covenants and intellectual property rights assignments
provisions with all Key Employees of the Company and each consultant to the
Company.
H. Compliance with Agreements. The Company shall perform and observe
--------------------------
(i) all of its obligations to each holder of the Series A Preferred and all of
its obligations to each holder of the Underlying Common Stock set forth in the
Articles of Incorporation and the Company's bylaws and (ii) all of its
obligations to each holder of Registrable Securities set forth in the
Registration Agreement.
I. Current Public Information. At all times after the Company has
--------------------------
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted
14
<PAGE>
by the Securities and Exchange Commission or (ii) a registration statement on
Form S-2 or S-3 or any similar registration form hereafter adopted by the
Securities and Exchange Commission. Upon request, the Company shall deliver to
any holder of Restricted Securities a written statement as to whether it has
complied with such requirements.
J. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the conversion of the Series A
Preferred or the exercise of the Warrants, such number of shares of Common Stock
as are issuable upon the conversion of all outstanding Series A Preferred and
upon the exercise of all Warrants. The Company represents and covenants that all
shares of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Company shall take all such actions as may be necessary to assure
that all such shares of Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be immediately transmitted by the
Company upon issuance).
K. Proprietary Rights. The Company shall, and shall cause each
------------------
Subsidiary to, possess and maintain all material Proprietary Rights necessary to
the conduct of their respective businesses and shall own all right, title and
interest in and to, or have a valid license for, all material Proprietary Rights
used by the Company and each Subsidiary in the conduct of their respective
businesses. Neither the Company nor any Subsidiary shall take any action, or
fail to take any action, which would result in the invalidity, abuse, misuse or
unenforceability of such Proprietary Rights or which would infringe upon any
rights of other Persons, provided that the foregoing shall not obligate the
Company to undertake litigation or other enforcement actions which the Company's
Board of Directors in its discretion determines to be not economically
justified.
L. First Refusal Rights.
--------------------
(1) Except for the issuance of (a) Compensatory Stock, (b) Common
Stock upon the conversion of the Series A Preferred, (c) Common Stock upon
exercise of the Warrants, (d) Common Stock or other equity securities in
connection with the acquisition of another business as contemplated by
Section 4.F(8) or in a transaction approved by the holders of 66 2/3% of
the Underlying Common Stock and (e) Common Stock pursuant to a public
offering registered under the Securities Act, if the Company authorizes the
issuance or sale of any shares of Common Stock or any securities containing
options or rights to acquire any shares of Common Stock (other than as a
dividend on the outstanding Common Stock), the Company shall first offer to
sell to each holder of Underlying Common Stock a portion of such stock or
securities equal to the quotient determined by dividing (1) the number of
shares of Underlying Common Stock held by such holder by (2) the sum of the
total number of shares of Underlying Common Stock and the number of shares
of Common Stock outstanding which are not shares of Underlying Common
Stock. Each holder of Underlying Common Stock shall be entitled
15
<PAGE>
to purchase such stock or securities at the most favorable price and on the
most favorable terms as such stock or securities are to be offered to any
other Persons.
(2) In order to exercise its purchase rights hereunder, a holder of
Underlying Common Stock must, within 21 days after receipt of written
notice from the Company describing in reasonable detail the stock or
securities being offered, the purchase price thereof, the payment terms and
such holder's percentage allotment, deliver a written notice to the Company
describing its election hereunder. If not all of the stock and securities
offered to the holders of Underlying Common Stock are fully subscribed by
such holders, the remaining stock and securities shall be reoffered by the
Company to the holders purchasing their full allotment upon the terms set
forth in this Section 4.L, except that such holders must exercise their
purchase rights within five days after receipt of such reoffer.
(3) Upon the expiration of the offering periods described above, the
Company shall be entitled to sell such stock or securities which the
holders of Underlying Common Stock have not elected to purchase during the
90 days following such expiration on terms and conditions no more favorable
to the purchasers thereof than those offered to such holders. Any stock or
securities offered or sold by the Company after such 90-day period must be
reoffered to the holders of Underlying Common Stock pursuant to the terms
of this Section 4.L.
(4) The rights under this Section 4.L shall terminate upon the
closing of a Qualified IPO, as such term is defined in the Charter
Amendment.
M. Management Stock Pool. The Company shall maintain its incentive
---------------------
stock option plan (the "OPTION PLAN") in the form adopted on March 24, 1997, for
which 150,000 shares of the Common Stock have been reserved, and for which no
additional shares will be reserved. The Option Plan provides for the grant of
options to the Company's employees, which options shall vest over a two year
period from the date of issuance, with 50% of the options vesting on the first
anniversary of the date of issuance and 50% on the second anniversary of the
date of issuance. The Option Plan provides, and it shall continue to be the
case, that the Compensation Committee of the Company's Board of Directors shall
determine the recipients and size of all option grants.
N. Use of Proceeds. The Company shall use no more than 25% of its
---------------
net proceeds from the sale of Units hereunder to repay principal owed by the
Company under the AWE Note. The Company covenants and agrees that, except as
provided in the prior sentence and except as required by any agreements
governing any existing debt obligations of the Company, as such agreements
existed immediately prior to the Closing Date, it shall not apply any of the
proceeds from the sale of the Units to pay, repay, discharge, or secure any
amounts of principal, interest or other amounts owing under any secured or
unsecured debt of the Company existing immediately prior to or as of the Closing
Date. The remaining proceeds shall be added to the Company's working capital and
used for general corporate purposes. Pending their
16
<PAGE>
disposition as provided in the prior sentence, the Company covenants and agrees
to invest such proceeds in short-term, investment grade, interest-bearing
securities.
O. Insurance. Within 90 days after the Closing Date, the Company
---------
shall undertake an investigation of the availability and affordability of a
directors' and officers' liability insurance policy and report to the Board of
Directors on the results of such investigation. Further, within such time, the
Company shall obtain "key man" insurance on the life of R. Helmick in a minimum
amount of $1,000,000. The Company further covenants and agrees that any proceeds
received under such policy shall immediately be placed in a segregated account
and thereafter disbursed solely to fund the Company's obligations to redeem the
Series A Preferred, on the terms, and subject to the conditions, of the Charter
Amendment.
5. Transfer of Restricted Securities.
----------------------------------
Each Purchaser acknowledges that Restricted Securities are
transferable only pursuant to (i) public offerings registered under the
Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange
Commission (or any similar rule or rules then in force) if such rule is
available or (iii) subject to the conditions specified in subsection (A) below,
any other legally available means of transfer.
(A) In connection with the transfer of any Restricted Securities,
the holder thereof shall deliver written notice to the Company describing
in reasonable detail the transfer or proposed transfer, together with an
opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such
Restricted Securities under the Securities Act. In addition, if the holder
of the Restricted Securities delivers to the Company an opinion of such
counsel that no subsequent transfer of such Restricted Securities shall
require registration under the Securities Act, the Company shall promptly
upon such contemplated transfer deliver new certificates for such
Restricted Securities which do not bear the Securities Act legend set forth
in Section 7.D. If the Company is not required to deliver new certificates
for such Restricted Securities not bearing such legend, the holder thereof
shall not transfer the same until the prospective transferee has confirmed
to the Company in writing its agreement to be bound by the conditions
contained in this Section 5.A and Section 7.D.
(B) Upon the request of any Purchaser, the Company shall promptly
supply to such Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a
transfer pursuant to Rule 144A of the Securities and Exchange Commission.
(C) Upon the request of any holder of Restricted Securities, the
Company shall remove the foregoing legend from the certificates for such
holder's Restricted Securities; provided that such Restricted Securities
are eligible for sale pursuant to Rule 144(k). Whenever any particular
securities cease to be Restricted Securities, the holder thereof shall be
entitled to receive from the Company, without expense, new certificates
17
<PAGE>
representing such securities but of not bearing a Securities Act legend of
the character set forth in Section 7.D.
6. Representations and Warranties of Company. As a material inducement
-----------------------------------------
to the Purchasers to enter into this Agreement and purchase the Units, the
Company hereby represents and warrants that:
A. Organization and Corporate Power. The Company is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of Colorado and
is qualified to do business in Colorado and in every other jurisdiction in which
its ownership of property or conduct of business requires it to qualify. The
Company has all requisite corporate power and authority and all material
licenses, permits and authorizations necessary to own and operate its
properties, to carry on its businesses as now conducted and presently proposed
to be conducted and to carry out the transactions contemplated by this
Agreement. The copies of the Company's charter documents and bylaws which have
been furnished to the Purchasers' counsel reflect all amendments made thereto at
any time prior to the date of this Agreement and are correct and complete.
B. Capital Stock and Related Matters.
---------------------------------
(1) As of the Closing and immediately thereafter, the authorized capital
stock of the Company shall consist of (a) 132,000 shares of Series A
Preferred, of which 132,000 shares shall be issued and outstanding, (b)
10,000,000 shares of Common Stock, of which 1,050,000 shares shall be
issued and outstanding, 132,000 shares shall be reserved for issuance upon
conversion of the Series A Preferred sold at the Closing, 132,000 shall be
reserved for issuance upon exercise of the Warrants, 13,000 shall be
reserved for issuance upon exercise of options granted to members of the
Board of Directors and 150,000 shall be reserved for issuance pursuant to
the terms of the Option Plan. As of the Closing, the Company shall not have
outstanding any stock or securities convertible or exchangeable for any
shares of its capital stock or containing any profit participation
features, nor shall it have outstanding any rights or options to subscribe
for or to purchase its capital stock or any stock or securities convertible
into or exchangeable for its capital stock or any stock appreciation rights
or phantom stock plans, except for the Series A Preferred and the Warrants
and except as set forth on the attached "CAPITALIZATION SCHEDULE." The
Capitalization Schedule accurately sets forth the following with respect to
all outstanding options and rights to acquire the Company's capital stock:
the holder, the number of shares covered, the exercise price, the grant
date and the expiration date. As of the Closing, the Company shall not be
subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any
warrants, options or other rights to acquire its capital stock, except as
set forth on the Capitalization Schedule and except pursuant to the
Articles of Incorporation. As of the Closing, all of the outstanding shares
of the Company's capital stock shall be validly issued, fully paid and
nonassessable.
18
<PAGE>
(2) There are no statutory or, to the best of the Company's knowledge,
contractual Shareholders' preemptive rights or rights of refusal with
respect to the issuance of the Series A Preferred hereunder or the issuance
of the Common Stock upon conversion of the Series A Preferred or the
exercise of the Warrants. The Company has not violated any applicable
federal or state securities laws in connection with the offer, sale or
issuance of any of its capital stock, and, assuming the truth of the
Purchasers' representations in Section 7.D hereof, the offer, sale and
issuance of the Units hereunder does not require registration under the
Securities Act or any applicable state securities laws. Except as described
on the Affiliate Transactions Schedule (as defined in Section 6.T), there
are no agreements between the Company and any of its Shareholders or, to
the Company's knowledge between the Company's Shareholders with respect to
the voting or transfer of the Company's capital stock or with respect to
any other aspect of the Company's affairs, except for the Registration
Agreement, the Shareholders Agreement and this Agreement.
C. Subsidiaries; Investments. The Company does not own or hold any
-------------------------
rights to acquire any shares of stock or any other security or interest in any
other Person and the Company does not have any Subsidiary. The Company formerly
owned all of the stock of Brecknet Internet Service, Inc., a Colorado
corporation ("BREKNET"). The Company sold the assets of Breknet to Vailnet, Inc.
pursuant to an Asset Purchase Agreement dated May 30, 1997. The Company
subsequently sold the stock of Breknet for a nominal consideration
D. Authorization; No Breach. The execution, delivery and performance of
------------------------
this Agreement, the Registration Agreement, the Shareholders Agreement, the
Warrants and all other agreements contemplated hereby to which the Company is a
party have been duly authorized by the Company. This Agreement, the Registration
Agreement, the Shareholders Agreement, the Warrants and all other agreements
contemplated hereby each constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms. The execution and delivery by
the Company of this Agreement, the Registration Agreement, the Shareholders
Agreement, the Warrants and all other agreements contemplated hereby to which
the Company is a party, the offering, sale and issuance of the Units hereunder,
the issuance of the Common Stock upon conversion of the Series A Preferred or
upon exercise of the Warrants and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a material breach of the terms, conditions or
provisions of, (ii) constitute a material default under, (iii) result in the
creation of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation under, (v) result in a
material violation of, or (vi) require any authorization, consent, approval,
exemption or other action by or notice to any court or administrative or
governmental body pursuant to, the Articles of Incorporation or bylaws of the
Company, or any law, statute, rule or regulation to which the Company is
subject, or any agreement, instrument, order, Judgment or decree to which the
Company is subject.
19
<PAGE>
E. Financial Statements. Attached hereto as the "FINANCIAL STATEMENTS
--------------------
SCHEDULE" are the unaudited balance sheets of the Company as of May 31, 1997
(the "LATEST BALANCE SHEET"), and December 31, 1996, and the related statements
of income and cash flows (or the equivalent) for the periods then ended. Each of
such financial statements (including in all cases the notes thereto, if any) is
accurate and complete in all material respects, is consistent with the books and
records of the Company (which, in turn, are accurate and complete in all
material respects) and has been prepared in accordance with generally accepted
accounting principles, consistently applied, subject to the lack of footnote
disclosure (none of which disclosures would, alone or in the aggregate, be
materially adverse to the financial condition, operating results, assets,
operations or business prospects of the Company and its Subsidiaries taken as a
whole).
F. Absence of Undisclosed Liabilities. Except as set forth on the
----------------------------------
attached "LIABILITIES SCHEDULE," the Company does not have any material
obligation or liability (whether accrued, absolute, contingent, unliquidated or
otherwise, whether or not known to the Company, whether due or to become due and
regardless of when asserted) arising out of transactions entered into at or
prior to the Closing, any action or inaction at or prior to the Closing or any
state of facts existing at or prior to the Closing, other than: (i) liabilities
set forth on the Latest Balance Sheet (including any notes thereto), (ii)
liabilities and obligations which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a liability
resulting from breach of contract, breach of warranty, tort, infringement, claim
or lawsuit and all of which in the aggregate are not material to the Company)
and (iii) other liabilities and obligations expressly disclosed in the other
Schedules to this Agreement.
G. No Material Adverse Change. Since the date of the Latest Balance
--------------------------
Sheet, there has been no material adverse change in the financial condition,
operating results, assets, operations, business prospects, employee relations or
customer or supplier relations of the Company.
H. Absence of Certain Developments.
-------------------------------
(1) Except as expressly contemplated by this Agreement or as set forth on
the attached "DEVELOPMENTS SCHEDULE," since the date of the Latest Balance
Sheet, the Company has not:
a) issued any notes, bonds or other debt securities (other than
the AWE Note) or any equity securities or any securities
convertible, exchangeable or exercisable into any equity
securities;
b) borrowed any amount or incurred or become subject to any
liabilities, except current liabilities incurred in the ordinary
course of business and liabilities under contracts entered into
in the ordinary course of business;
20
<PAGE>
c) discharged or satisfied any lien or encumbrance or paid any
obligation or liability, other than current liabilities paid in
the ordinary course of business;
d) declared or made any payment or distribution of cash or other
property to its Shareholders with respect to its stock or
purchased or redeemed any shares of its stock or any warrants,
options or other rights to acquire its stock;
e) mortgaged or pledged any of its properties or assets or
subjected them to any lien, security interest, charge or other
encumbrance, except liens for current property taxes not yet due
and payable;
f) sold, assigned or transferred any of its tangible assets,
except in the ordinary course of business, or canceled any debts
or claims;
g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate
names, copyrights or copyright registrations, trade secrets or
other intangible assets, or disclosed any proprietary
confidential information to any Person;
h) suffered any extraordinary losses or waived any rights of
material value, whether or not in the ordinary course of business
or consistent with past practice;
i) made capital expenditures or commitments therefor that
aggregate in excess of $25,000 (excluding any amounts of product
development expenditures which are capitalized in conformity with
generally accepted accounting principles, consistently applied);
j) entered into any other transaction other than in the ordinary
course of business or entered into any other material
transaction, whether or not in the ordinary course of business;
k) made any loans or advances to, guarantees for the benefit of,
or any Investments in, any Persons;
l) suffered any damage, destruction or casualty loss exceeding
in the aggregate $25,000, whether or not covered by insurance; or
m) made any Investment in or taken steps to incorporate any
Subsidiary.
(2) The Company has not at any time made any payments for political
contributions or made any bribes, kickback payments or other illegal
payments.
21
<PAGE>
I. Assets. Except as set forth on the attached "ASSETS SCHEDULE," the
------
Company has good and marketable title to, or a valid leasehold interest in, the
properties and assets used by it, located on its premises or shown on the Latest
Balance Sheet or acquired thereafter, free and clear of all liens, security
interests, charges and encumbrances, except for properties and assets disposed
of in the ordinary course of business since the date of the Latest Balance Sheet
and except for liens disclosed on the Latest Balance Sheet (including any notes
thereto) and liens for current property taxes not yet due and payable. The
Company's buildings, equipment and other tangible assets are in good operating
condition in all material respects and are fit for use in the ordinary course of
business. The Company owns, or has a valid leasehold interest in, all assets
necessary for the conduct of its business as presently conducted.
J. Tax Matters. The Company has filed all tax returns which it is
-----------
required to file (taking into account all extensions of due dates) under
applicable laws and regulations; all such returns are true and correct in all
material respects; the Company has paid, or has made sufficient provision for,
all taxes due and owing by it and has withheld and paid over all taxes which it
is obligated to withhold from amounts paid or owing to any employee,
Shareholder, creditor or other third party; the Company has not waived any
statute of limitations with respect to taxes or agreed to any extension of time
with respect to a tax assessment or deficiency; the assessment of any additional
taxes for periods for which returns have been filed is not expected; no foreign,
federal, state or local tax audits are pending or being conducted with respect
to the Company, no information related to tax matters has been requested by any
foreign, federal, state or local taxing authority and no notice indicating an
intent to open an audit or other review has been received by the Company from
any foreign, federal, state or local taxing authority; and there are no material
unresolved questions or claims concerning the Company's tax liability. The
Company has not made an election under Section 341(f) of the IRC.
K. Contracts and Commitments.
-------------------------
(1) Except as expressly contemplated by this Agreement or as set forth on
the attached "CONTRACTS SCHEDULE," as of the Closing, the Company is not a
party to any written or oral:
a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or
other compensation to employees or any other employee benefit
plan or arrangement, or any contract with any labor union, or any
severance agreements;
b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or
other basis, other than the Employment Agreements, or contract
relating to loans to officers, directors or affiliates;
c) contract under which the Company has advanced or loaned any
other Person any amounts;
22
<PAGE>
d) agreement or indenture relating to the borrowing of money or
the mortgaging, pledging or otherwise placing a lien on any
material asset or material group of assets of the Company;
e) guarantee of any obligation;
f) lease or agreement under which the Company is lessee of or
holds or operates any property, real or personal, owned by any
other party, except for any lease of real or personal property
under which the aggregate annual rental payments do not exceed
$20,000;
g) lease or agreement under which the Company is lessor of or
permits any third party to hold or operate any property, real or
personal, owned or controlled by the Company;
h) contract or group of related contracts with the same party or
group of affiliated parties the performance of which involves a
consideration in excess of $20,000;
i) assignment, license, indemnification or agreement with
respect to any intangible property (including any patent,
trademark, trade name, copyright, know-how, trade secret or
confidential information);
j) warranty agreement with respect to its services rendered or
its products sold or leased;
k) agreement under which it has granted any Person any
registration rights (including piggyback rights);
l) contract or agreement prohibiting it from freely engaging in
any business or competing anywhere in the world; or
m) any other contractor agreement which is material to its
operations and business prospects.
(2) All of the contracts, agreements and instruments set forth on the
Contracts Schedule are valid, binding and enforceable in accordance with
their respective terms. The Company has performed all material obligations
required to be performed by it and is not in default under or in breach of
nor in receipt of any claim of default or breach under any contract,
agreement or instrument to which it is subject; no event has occurred which
with the passage of time or the giving of notice or both would result in a
default, breach or event of noncompliance under any contract, agreement or
instrument to which it is subject; and the Company has no knowledge of any
breach or anticipated breach by the other parties to any contract or
commitment to which it is a party.
23
<PAGE>
(3) The Purchasers' counsel has been supplied with a true and correct
copy of each of the written contracts and an accurate description of the
oral contracts which are referred to on the Contracts Schedule, together
with all amendments, waivers or other changes thereto.
L. Proprietary Rights. The attached "PROPRIETARY RIGHTS SCHEDULE"
------------------
contains a complete and accurate list of (i) all patented and registered
Proprietary Rights owned by the Company, specifically identified, (ii) all
pending patent applications and applications for registrations of other
Proprietary Rights filed by the Company, specifically identified, (iii) all
unregistered trade names and corporate names owned or used by the Company,
specifically identified and (iv) all unregistered trademarks, service marks and
copyrights and computer software which are material to the financial condition,
operating results, assets, operations or business prospects of the Company,
either specifically identified or described by category. The Proprietary Rights
Schedule also contains a complete and accurate list of all licenses and other
rights granted by the Company to any third party with respect to any Proprietary
Rights and all licenses and other rights granted by any third party to the
Company with respect to any Proprietary Rights. The Company owns or has the
right to use pursuant to a valid license all Proprietary Rights necessary for
the operation of the businesses of the Company as presently conducted and as
presently proposed to be conducted. Except as set forth on the Proprietary
Rights Schedule, the loss or expiration of any Proprietary Right or related
group of Proprietary Rights would not have a material adverse effect on the
conduct of the Company's business, and no such loss or expiration is threatened,
pending or reasonably foreseeable. The Company has taken all necessary and
desirable actions to maintain and protect the Proprietary Rights which it owns
and uses. To the best of the Company's knowledge, the owners of any Proprietary
Rights licensed to the Company have taken all necessary and desirable actions to
maintain and protect the Proprietary Rights which are subject to such licenses.
Except as indicated on the Proprietary Rights Schedule, (i) the Company owns all
right, title and interest in and to all of the Proprietary Rights listed on such
schedule and all other Proprietary Rights material to the operation of the
business of the Company, (ii) there have been no claims made against the Company
asserting the invalidity, misuse or unenforceability of any of such rights and
there are no grounds for the same, (iii) the Company has not received a notice
of conflict with the asserted rights of others within the last five years and
(iv) the conduct of the Company's business has not infringed or misappropriated
and does not infringe or misappropriate any Proprietary Rights of other Persons,
nor would any future conduct as presently contemplated infringe any Proprietary
Rights of other Persons and, to the best of the Company's knowledge, the
Proprietary Rights owned by the Company have not been infringed or
misappropriated by other Persons.
M. Litigation, etc.. Except as set forth on the attached "LITIGATION
----------------
SCHEDULE," there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (or to the best of the Company's knowledge, pending or
threatened against or affecting any of the officers, directors or employees of
the Company with respect to their businesses or proposed business activities) at
law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality (including any actions, suit,
proceedings or investigations with respect
24
<PAGE>
to the transactions contemplated by this Agreement), the Company is not subject
to any arbitration proceedings or, to the best of the Company's knowledge, any
governmental investigations or inquiries (including inquiries as to the
qualification to hold or receive any license or permit) and, to the best of the
Company's knowledge, there is no basis for any of the foregoing. The Company is
not subject to any judgment, order or decree of any court or other governmental
agency.
N. Brokerage. There are no claims for brokerage commissions, finders'
---------
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement binding upon the Company.
The Company shall pay, and hold each Purchaser harmless against, any liability,
loss or expense (including reasonable attorneys' fees and out-of-pocket
expenses) arising in connection with any such claim.
O. Governmental Consent. etc.. No permit, consent, approval or
--------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby.
P. Insurance. The attached "INSURANCE SCHEDULE" contains a description
---------
of each insurance policy maintained by the Company with respect to its
properties, assets and businesses, and each such policy is in full force and
effect as of the Closing. The Company is not in default with respect to its
obligations under any insurance policy maintained by it.
Q. Employees. The Company is not aware that any executive or key
---------
employee of the Company or any group of employees of the Company has any current
or immediate plans to terminate employment with the Company. The Company has
complied in all material respects with all laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes, and
the Company is not aware that it has any material labor relations problems
(including any union organization activities, threatened or actual strikes or
work stoppages or material grievances). Neither the Company nor, to the best of
the Company's knowledge after due inquiry, any of its employees is subject to
any noncompete, nondisclosure, confidentiality, employment, consulting or
similar agreements relating to, affecting or in conflict with the present or
proposed business activities of the Company, except for agreements between the
Company and its present and former employees.
R. ERISA.
-----
(1) Multiemployer Plans. The Company does not have any obligation to
-------------------
contribute to (or any other liability, including current or potential
withdrawal liability, with respect to) any "MULTIEMPLOYER PLAN" (as defined
in Section 3(37) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")).
25
<PAGE>
(2) Retiree Welfare Plans. The Company does not maintain or have any
---------------------
obligation to contribute to (or any other liability with respect to) any
plan or arrangement whether or not terminated, which provides medical,
health, life insurance or other welfare-type benefits for current or future
retired or terminated employees (except for limited continued medical
benefit coverage required to be provided under Section 4980B of the IRC or
as required under applicable state law).
(3) Defined Benefit Plans. The Company does not maintain, contribute
---------------------
to or have any liability under (or with respect to) any employee plan which
is a tax-qualified "DEFINED BENEFIT PLAN" (as defined in Section 3(35) of
ERISA), whether or not terminated.
(4) Defined Contribution Plans. The Company does not maintain,
--------------------------
contribute to or have any liability under (or with respect to) any employee
plan which is a tax-qualified "DEFINED CONTRIBUTION PLAN" (as defined in
Section 3(34) of ERISA), whether or not terminated.
(5) Other Plans. Except as explicitly set forth in the Contracts
-----------
Schedule, the Company does not maintain, contribute to or have any
liability under (or with respect to) any plan or arrangement providing
benefits to current or former employees, including any bonus plan, plan for
deferred compensation, employee health or other welfare benefit plan or
other arrangement, whether or not terminated.
S. Compliance with Laws. To the best of the Company's knowledge, the
--------------------
Company is not in material violation of any law, regulation or requirement and
has not received notice of any such violation. The Company is not subject to
any clean up liability, or has any reason to believe it may become subject to
any clean up under any federal, state or local environmental law, rule or
regulation.
T. Affiliated Transaction. Except as set forth on the attached
----------------------
"AFFILIATED TRANSACTIONS SCHEDULE," no officer, director, Shareholder or
Affiliate of the Company or any individual related by blood or marriage to any
such Person or any entity in which any such Person or individual owns any
beneficial interest, is a party to any agreement, contract, commitment or
transaction with the Company or has any interest in any property, real, personal
or mixed, tangible or intangible, used in or pertaining to the business of the
Company. The Affiliated Transactions Schedule contains all information required
to be stated by Section 3.N, above.
U. Disclosure. Neither this Agreement, nor any of the schedules,
----------
attachments, written statements, documents, certificates or other items prepared
or supplied to any Purchaser by or on behalf of the Company with respect to the
transactions contemplated hereby contain any untrue statement of a material fact
or omit a material fact necessary to make each statement contained herein or
therein not misleading. There is no fact which the Company has not disclosed to
the Purchasers in writing and of which any of its officers, directors or
executive employees is aware and which has had or would reasonably be
anticipated to have a material
26
<PAGE>
adverse effect upon the existing or expected financial condition, operating
results, assets, customer or supplier relations, employee relations or business
prospects of the Company and its Subsidiaries taken as a whole.
V. Closing Date. The representations and warranties of the Company
------------
contained in this Section 6 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any writing
delivered by, or on behalf of, the Company to any Purchaser shall be true and
correct in all material respects on the Closing Date as though then made, except
as affected by the transactions expressly contemplated by this Agreement .
7. Miscellaneous.
-------------
A. Expenses. The Company agrees to pay, and hold each Purchaser and
--------
all holders of Series A Preferred and Underlying Common Stock harmless against
liability for the payment of, (i) the Purchasers' fees and expenses (not to
exceed $35,000) arising in connection with their legal review of the Company,
the negotiation and execution of this Agreement and the consummation of the
transactions contemplated by this Agreement, including fees and disbursements of
their legal counsel, (ii) the fees and expenses incurred with respect to any
amendments or waivers (whether or not the same become effective) under or in
respect of this Agreement, the agreements contemplated hereby or the Articles of
Incorporation and (iii) stamp and other transfer taxes which may be payable in
respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of any shares of Series A Preferred, the Warrants or any
shares of Common Stock issuable upon conversion of the Series A Preferred or
upon exercise of the Warrants.
(1) Remedies, Enforcement, Governing Law, Venue. (1) Each holder of
-------------------------------------------
Units and Underlying Common Stock shall have all rights and remedies set
forth in this Agreement, the Articles of Incorporation and all rights and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under
any law. Any Person having rights under any provision of this Agreement
will be entitled to enforce such rights specifically to recover damages
caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that any party may in its sole
discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or other security) for specific performance and
for other injunctive relief in order to enforce or prevent violation of the
provisions of this Agreement.
27
<PAGE>
(2) (2) All questions concerning the relative rights of the Company and
its shareholders and the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the domestic laws of the State of Colorado, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Colorado or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Colorado.
(3) (3) Any controversy or claim arising out of or relating to this
Agreement, including, without limitation, the making, performance, or
interpretation of this Agreement, may be heard and resolved by any state or
federal court located in Denver or Arapahoe Counties, Colorado.
(4) (4) The parties agree that they will not seek from the court hearing
any claim under this Agreement any award or judgment for punitive damages (or
any other amount awarded for the purpose of imposing a penalty), and that if any
such award or judgment is granted, the parties agree not to seek to satisfy such
award or judgment.
(5) (5) The court hearing any claim under this Agreement shall award all
costs of the proceeding, including court costs, filing fees, travel costs of
witnesses, costs of depositions and reasonable attorney fees, to the
substantially prevailing party.
B. Purchasers' Investment Representations.
--------------------------------------
(1) Each Purchaser hereby represents that it is acquiring the Restricted
Securities purchased hereunder or acquired pursuant hereto for its own account
with the present intention of holding such securities for purposes of investment
and that it has no intention of selling such securities in a public distribution
in violation of the federal securities laws or any applicable state securities
laws; provided that nothing contained herein shall prevent any Purchaser and
subsequent holders of Restricted Securities from transferring such securities in
compliance with the provisions of Section 5 hereof.
(2) Each Purchaser acknowledges that the Units are being issued and sold
under exemptions from registration provided in the Securities Act and under
applicable state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act or applicable state securities
laws or an exemption from such registrations is available. Accordingly, each
Purchaser represents and warrants that it is able to bear the economic risk of
any investment in the Series A Preferred for an indefinite period of time.
28
<PAGE>
(3) Each certificate for Restricted Securities shall be imprinted
with a legend in substantially the following form:
"The securities represented by this certificate were originally issued
on June 11, 1997, and have not been registered under the Securities
Act of 1933, as amended. The transfer of the securities represented by
this certificate is subject to the conditions specified in the Unit
Purchase Agreement and the Shareholders Agreement, both dated as of
June 11, 1997, between the issuer (the "Company") and certain
investors, and the Company reserves the right to refuse the transfer
of such securities until such conditions have been fulfilled with
respect to such transfer. A copy of such conditions shall be furnished
by the Company to the holder hereof upon written request and without
charge."
(4) Each Purchaser represents that it has had the opportunity to ask
questions and receive answers concerning the Units and to obtain whatever
information concerning the Company as has been requested by the Purchaser
in order to make its investment decision.
(5) Each Purchaser represents that (a) it is an accredited investor
for purposes of the Securities Act and (b) it is sophisticated in financial
matters and is able to evaluate the risks and benefits of any investment in
the Units.
C. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of 66 2/3 % of the Underlying Common Stock. No other course of dealing
between the Company and the holder of any Series A Preferred, Warrant or
Underlying Common Stock or any delay in exercising any rights hereunder or under
the Articles of Incorporation shall operate as a waiver of any rights of any
such holders. For purposes of this Agreement, shares of Series A Preferred or
Underlying Common Stock held by the Company or any Subsidiaries shall not be
deemed to be outstanding.
D. Survival of Representations and Warranties. All representations and
-------------------------------------------
warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and continue until the
Company has delivered to the Purchasers, in the manner specified in Section 4.A,
its audited financial statements as of and for the year ended December 31, 1998,
regardless of any investigation made by any Purchaser or on its behalf.
E. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, and whether or not any
29
<PAGE>
express assignment has been made, the provisions of this Agreement which are for
any Purchaser's benefit as a purchaser or holder of Series A Preferred, Warrant
or Underlying Common Stock are also for the benefit of, and enforceable by, any
subsequent holder of such Series A Preferred, Warrant or such Underlying Common
Stock.
F. Generally Accepted Accounting Principles. Where any accounting
----------------------------------------
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied.
G. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
H. Counterparts. This Agreement may be executed in separate
------------
counterparts, anyone of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same agreement.
I. Descriptive Headings; Interpretation. The descriptive headings of
------------------------------------
this Agreement are inserted for convenience only and do not constitute a part of
this Agreement. The use of the word "INCLUDING" in this Agreement shall be by
way of example rather than by limitation. Disclosure of a fact or document on
one disclosure schedule shall be deemed to be disclosure on all schedules to
which such fact or document manifestly applies.
J. Notices. All notices, demands or other commutations to be given or
-------
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable national express courier service
guaranteeing overnight delivery (charges prepaid) or mailed to the recipient by
certified or registered mail, return receipt requested and postage prepaid. Such
notices, demands and other communications shall be sent to each Purchaser at the
address indicated on the Schedule of Purchasers and to the Company at the
address indicated below:
If to the Company, to:
Robert N. Helmick
CEO & President
Real Education, Inc.
9000 E. Chenango Ave
Greenwood Village, Colorado 80111
with a copy to :
30
<PAGE>
John V. Helmick
General Counsel
10271 Mica Way
Parker, Colorado 80134
If to the Purchasers, to:
Christopher Girgenti
Sr. Managing Partner
New World Equities, Inc.
1603 Orrington Ave.
Suite 1070
Evanston, Illinois 60201
with a copy to:
Douglas R. Newkirk, Esq.
Sachnoff & Weaver, Ltd.
30 S. Wacker Drive,
Chicago, Illinois 60601
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
[Remainder of page intentionally left blank]
31
<PAGE>
[Signature Page to Real Education, Inc. Unit Purchase Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
By /s/ Robert N. Helmick
---------------------------
Its President
----------------------------
NEW WORLD EQUITIES, INC.
By. /s/ Christpoher E. Girgenti
----------------------------
Its Senior Managing Partner
----------------------------
/s/ Steven M. Singer
- --------------------------------
Steven M. Singer
/s/ Robert C. Douglas
- --------------------------------
Robert C. Douglas
/s/ William E. Waldeck
- --------------------------------
William E. Waldeck
/s/ Patrick T. DeLacey
- --------------------------------
Patrick T. DeLacey
/s/ David P. Shielddrop
- --------------------------------
David P. Schieldrop
32
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF PURCHASERS
Amount
Name #of Units Purchased ($) Address
- ---- --------- ------------- -------
<S> <C> <C> <C>
NWE 66,000 $ 500,000 1603 Orrington Avenue,
Suite 1070
Evanston, Illinois 60201
Steven M. Singer 19,800 150,000 433 W. Briar Place, #5A
Chicago, Illinois 60657
Robert C. Douglas 19,800 150,000 1231 Inverlieth Road
Lake Forest, Illinois 60045
William E. Waldeck 13,200 100,000 415 Thorne Lane
Lake Forest, Illinois 60045
Patrick T. DeLacey 6,600 50,000 400 Blackstone
La Grange, Illinois 60525
David P. Schieldrop 6,600 50,000 205 E. 68th Street, #5F
------- ---------- New York, New York 10021
TOTALS 132,000 $1,000,000
</TABLE>
33
<PAGE>
LIST OF EXHIBITS
Ex. A Form of Restated Articles of Incorporation ("Charter Amendment")
Ex. B Form of Warrant Certificate
Ex. C Bylaws
Ex. D Registration Agreement
Ex. E Shareholders Agreement
Ex. F Form of Consulting Agreement
Ex. G Form of Opinion of Counsel
<PAGE>
EXHIBIT 10.2
SERIES B PREFERRED
SHARE PURCHASE AGREEMENT
DATED FEBRUARY 2, 1998
BETWEEN
REAL EDUCATION, INC.
AND
THE PERSONS LISTED ON THE ATTACHED SCHEDULE OF PURCHASERS
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS.............................................................................. 1
2. AUTHORIZATION AND CLOSING................................................................ 4
A. Authorization of the Units...................................................... 4
B. Purchase and Sale of the Units.................................................. 4
C. The Closing..................................................................... 4
3. CONDITIONS OF EACH PURCHASER'S OBLIGATION AT THE CLOSING................................. 5
A. Representations and Warranties: Covenants....................................... 5
B. No Material Adverse Change...................................................... 5
C. Charter Amendment............................................................... 5
D. Company's Bylaws................................................................ 5
E. Registration Agreement.......................................................... 5
F. Stockholders Agreement.......................................................... 5
G. Board of Directors.............................................................. 6
H. Blue Sky Clearance.............................................................. 6
I. Opinion of the Company's Counsel................................................ 6
J. Proceedings..................................................................... 6
K. Waiver.......................................................................... 6
L. Closing Documents............................................................... 6
4. COVENANTS................................................................................ 7
A Financial Statements and Other Information...................................... 7
B. Inspection of Property.......................................................... 8
C. Directors' Meetings; Expenses and Indemnification............................... 9
D. Attendance at Board Meetings.................................................... 9
E. Board Approvals................................................................. 9
F. Restrictions.................................................................... 10
G. Affirmative Covenants........................................................... 13
H. Compliance with Agreements...................................................... 14
I. Current Public Information...................................................... 14
J. Reservation of Common Stock..................................................... 14
K. Proprietary Rights.............................................................. 14
L. First Refusal Rights............................................................ 15
M. Management Stock Pool........................................................... 15
N. Use of Proceeds................................................................. 16
5. TRANSFER OF RESTRICTED SECURITIES........................................................ 16
6. REPRESENTATIONS AND WARRANTIES OF COMPANY................................................ 17
A Organization and Corporate Power................................................ 17
B. Capital Stock and Related Matter................................................ 17
C. Subsidiaries; Investments....................................................... 18
D. Authorization; No Breach........................................................ 18
E. Financial Statements............................................................ 19
F. Absence of Undisclosed Liabilities.............................................. 19
G. No Material Adverse Change...................................................... 19
H. Absence of Certain Developments................................................. 19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
I. Assets.......................................................................... 21
J. Tax Matters..................................................................... 21
K. Contracts and Commitments....................................................... 21
L. Proprietary Rights.............................................................. 23
M. Litigation, etc................................................................. 24
N. Brokerage....................................................................... 24
O. Governmental Consent. etc....................................................... 24
P. Insurance....................................................................... 24
Q. Employees....................................................................... 24
R. ERISA........................................................................... 25
S. Compliance with Laws............................................................ 25
T. Affiliated Transaction.......................................................... 26
U. Disclosure...................................................................... 26
V. Closing Date.................................................................... 26
7. MISCELLANEOUS............................................................................ 26
A Expenses........................................................................ 26
B. Purchaser's Investment Representations.......................................... 27
C. Consent to Amendments........................................................... 28
D. Survival of Representations and Warranties...................................... 28
E. Successors and Assigns.......................................................... 28
F. Generally Accepted Accounting Principles........................................ 29
G. Severability.................................................................... 29
H. Counterparts.................................................................... 29
I. Descriptive Headings; Interpretation............................................ 29
J. Notices......................................................................... 29
</TABLE>
ii
<PAGE>
SHARE PURCHASE AGREEMENT
------------------------
THIS AGREEMENT is made as of February 2, 1998, between REAL EDUCATION,
INC., a Colorado corporation (the "COMPANY"), and the Persons listed on the
Schedule of Purchasers attached hereto (collectively referred to herein as the
"PURCHASERS" and individually as a "PURCHASER"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 1 hereof.
The parties hereto agree as follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
terms have the meanings set forth below:
"AFFILIATE" of any particular person or entity means any other
person or entity controlling, controlled by or under common control with such
particular person or entity.
"CHARTER AMENDMENT" shall have the meaning set in Section 2.A.
"CLOSING" and "CLOSING DATE" shall have the respective meanings
set in Section 2.C.
"COMMON STOCK" shall mean the Company's Common Stock, no par
value per share.
"COMPENSATORY STOCK" means Common Stock (or options to purchase
Common Stock) issued for compensatory or incentive purposes to directors,
officers, employees and consultants of the Company, issuances of which are from
time to time approved by the Company's Board of Directors.
"EBITDA" for a particular accounting period shall mean the sum of
the Company's net income (or loss) plus net interest expense, tax expense and
amortization and depreciation expense, as all such amounts are reported in the
Company's financial statements for such period.
"INDEBTEDNESS" shall mean at a particular time, without
duplication, (i) indebtedness for borrowed money or for the deferred purchase
price of property or services in respect of which any Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business) or
any commitment by which any Person assures a creditor against loss, including
contingent reimbursement obligations with respect to letters of credit, (ii)
indebtedness guaranteed in any manner by any Person, including guarantees in the
form of an agreement to repurchase or reimburse and (iii) obligations under
capitalized leases in respect of which obligations any Person is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in respect of
which obligations any Person assures a creditor against loss.
<PAGE>
"INVESTMENT" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
"KEY EMPLOYEES" shall mean those senior management and other
employees whose service is deemed significant to the continued growth and
prosperity of the Company, as specified in a schedule to be jointly developed by
Company management and representatives of the Purchasers.
"LATEST BALANCE SHEET DATE" shall mean December 31, 1997.
"OFFICER'S CERTIFICATE" means a certificate signed by the
Company's president or its chief financial officer, stating that (i) the officer
signing such certificate has made or has caused to be made such investigations
as are necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"OPTION PLAN" shall have the meaning set in Section 4.M.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization and a governmental entity or
any department, agency or political subdivision thereof.
"PREFERRED STOCK" shall mean the Series A Preferred and the
Series B Preferred, considered together.
"PROPRIETARY RIGHTS" means all (i) patents, patent applications,
patent disclosures and inventions, (ii) trademarks, service marks, trade dress,
trade names and corporate names and registrations and applications for
registration thereof, (iii) copyrights and registrations and applications for
registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secret and other confidential information (including ideas, formulas, patentable
or unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, financial and marketing
plans and customer and supplier lists and information), (vii) other intellectual
property rights and (viii) copies and tangible embodiments thereof (in whatever
form or medium).
2
<PAGE>
"REPRESENTATIVES" shall have the meaning set in Section 4.B.
"RESTRICTED SECURITIES" means (i) the Series B Preferred issued
hereunder, (ii) the Common Stock issued upon conversion of Series B Preferred
and (iii) any securities issued with respect to the securities referred to in
clauses (i) or (ii) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have (a) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) become eligible for sale
pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend of the character set forth in Section 7.C
have been delivered by the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental
body or agency succeeding to the functions thereof.
"SERIES A HOLDERS" shall mean the holders of Series A Preferred,
from time to time.
"SERIES A PURCHASE AGREEMENT" shall mean that certain Unit
Purchase Agreement, dated June 11, 1997, between the Company and the Purchasers
named therein.
"SERIES A PREFERRED" shall mean the Company's Series A
Convertible Preferred Stock, no par value per share.
"SERIES B PREFERRED" shall mean the Company's Series B
Convertible Preferred Stock, no par value per share.
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof or (ii) if a partnership, limited liability
company, association or other business entity, a majority of the partnership,
membership or other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more Subsidiaries of
that Person or a combination thereof. For purposes hereof, a Person or Persons
shall be deemed to have a majority ownership interest in a partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of partnership, association
3
<PAGE>
or other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
"TREASURY REGULATIONS" means the United States Treasury
Regulations promulgated under the IRC and any reference to any particular
Treasury Regulation section shall be interpreted to include any final or
temporary revision of or successor to that section regardless of how numbered or
classified.
"UNDERLYING COMMON STOCK" means (i) the Common Stock issued or
issuable upon either conversion of the Series A Preferred or the Series B
Preferred and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement, any
Person who holds Series A Preferred or Series B Preferred shall be deemed to be
the holder of the Underlying Common Stock obtainable upon conversion of the
Series A Preferred or the Series B Preferred in connection with the transfer
thereof or otherwise regardless of any restriction or limitation on the
conversion of the Series A Preferred or the Series B Preferred. As to any
particular shares of Underlying Common Stock, such shares shall cease to be
Underlying Common Stock when they have been (a) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them or (b) distributed to the public through a broker, dealer or
market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force).
"WARRANTS" shall mean the Company's outstanding warrants to
purchase one share of the Company's Common Stock, exerciseable at a price of
$7.58 per share, for a period of three years from the Closing.
1. Authorization and Closing .
-------------------------
A. Authorization of the Shares. The Company shall authorize the
---------------------------
issuance and sale to the Purchasers of 326,833 shares of its Series B Preferred,
having the rights and preferences set forth in Article II of the Company's
Amended and Restated Articles of Incorporation, the form of which is attached
hereto as Exhibit A (the "CHARTER AMENDMENT"). The Series B Preferred is
---------
convertible into shares of the Company's Common Stock.
B. Purchase and Sale of the Shares. At the Closing, the Company
-------------------------------
shall sell to each Purchaser and, subject to the terms and conditions set forth
herein, each Purchaser shall severally purchase from the Company, the number of
shares of Series B Preferred (the "SHARES") set forth opposite such Purchaser's
name on the Schedule of Purchasers attached hereto, at a price of $18.36 per
Share. The aggregate purchase price to be paid by each Purchaser is set forth on
the Schedule of Purchasers. The sale of Shares to each Purchaser shall
constitute a separate sale hereunder.
C. The Closing. The closing of the separate purchases and sales
-----------
of the Shares (the "CLOSING") shall take place at the offices of Sachnoff &
Weaver, Ltd. at 10:00 a.m. on February 2, 1998 (the "CLOSING DATE"), or at such
other place or on such other date as may be
4
<PAGE>
mutually agreeable to the Company and each Purchaser. At the Closing, the
Company shall deliver to each Purchaser a stock certificate evidencing the
Series B Preferred to be purchased by such Purchaser, registered in such
Purchaser's or its nominee's name, upon payment of the purchase price thereof by
certified or cashier's check, or wire transfer of immediately available funds to
a Company bank account designated by the Company in the amount set forth
opposite such Purchaser's name on the Schedule of Purchasers.
2. Conditions of Each Purchaser's Obligation at the Closing.
--------------------------------------------------------
The obligation of each Purchaser to purchase and pay for the
Series B Preferred at the Closing is subject to the satisfaction as of the
Closing of the following conditions:
A. Representations and Warranties: Covenants. The
------------------------------------------
representations and warranties contained in Section 6 hereof shall be true and
correct at and as of the Closing as though then made, except to the extent of
changes caused by the transactions expressly contemplated herein, and the
Company shall have performed in all material respects all of the covenants
required to be performed by it hereunder prior to the Closing.
B. No Material Adverse Change. Since the Latest Balance Sheet
--------------------------
Date, there shall have been no material adverse change in the business,
financial condition, operating results, assets, employee relations, customer or
supplier relations, product development efforts, research and development
efforts or business prospects of the Company and there shall have been no
material casualty loss or damage to the Company's assets (whether or not covered
by insurance).
C. Charter Amendment. The Charter Amendment shall have been
-----------------
duly filed with the Colorado Secretary of State and shall be in full force and
effect, and the Company's Articles of Incorporation shall not have been further
amended in any way.
D. Company's Bylaws. The Company's bylaws shall be unchanged
----------------
from June 1, 1997.
E. Registration Agreement. The Purchasers shall have been added
----------------------
as parties to the Company's Registration Agreement dated June 11, 1997, which
agreement shall have been further amended as provided in Exhibit B attached
---------
hereto (as so amended, the "REGISTRATION AGREEMENT") and the Registration
Agreement, as so amended, shall be in full force and effect as of the Closing.
The Company shall not be party to any other agreements providing rights relating
to the registration of the Company's securities.
F. Shareholders Agreement. The Company, the Purchasers and all
----------------------
of the Company's current holders of Common Stock or Series A Preferred shall
have entered into an Amended and Restated Shareholders Agreement in form and
substance as set forth in Exhibit C attached hereto (the "SHAREHOLDERS
---------
AGREEMENT") and the Shareholders Agreement, as so amended, shall be in full
force and effect at the Closing. Neither the Company nor any of its shareholders
shall be parties to any other agreement relating to the voting of the Company's
capital stock.
5
<PAGE>
G. Board of Directors. The size of the Board of Directors shall
------------------
be set at nine, Messrs. Jack W. Blumenstein and Oakliegh Thorne shall have been
appointed as directors and Audit and Compensation Committees of the Board of
Directors shall have been appointed pursuant to the terms of the Shareholders
Agreement.
H. Blue Sky Clearance. The Company shall have made all filings
------------------
under applicable state securities laws necessary to consummate the issuance of
the Series B Preferred pursuant to this Agreement in compliance with such laws.
I. Opinions of the Company's Counsel. Each Purchaser shall have
---------------------------------
received from Sachnoff & Weaver, Ltd, and John Helmick, counsel for the Company,
opinions with respect to the matters set forth in Exhibit D attached hereto,
---------
which shall be addressed to each Purchaser, dated the Closing Date and in form
and substance reasonably satisfactory to each Purchaser.
J. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchasers' counsel.
K. Driscoll Release Undertaking. The undertaking of Rob Helmick
----------------------------
to obtain a release of the Company by Robert Driscoll and AWE, and to indemnify
and defend the Company and certain other persons until such release is obtained,
shall have been amended to include the Purchasers as beneficiaries and shall in
all other respects remain in full force and effect and shall not have been
otherwise amended since it was issued.
L. Waiver. Any condition specified in this Section 3 may be
------
waived if consented to by each Purchaser, provided that no such waiver shall be
effective against any Purchaser unless it is set forth in a writing executed by
such Purchaser.
M. Closing Documents. The Company shall have delivered to each
-----------------
Purchaser all of the following documents:
(1) an Officer's Certificate, dated the Closing Date, stating
that the conditions specified in Section 2 and Sections 3.A through 3.L,
inclusive, have been fully satisfied;
(2) certified copies of (a) the resolutions duly adopted by the
Company's Board of Directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement, the Shareholders
Agreement and each of the other agreements contemplated hereby, the filing
of the Charter Amendment referred to in Section 2.A, the issuance and sale
of the Series B Preferred, the reservation of an aggregate of 326, 833
shares of Common Stock for issuance upon conversion of any of the
authorized shares of Series B Preferred and the consummation of all other
transactions contemplated by this Agreement; (b) the resolutions duly
adopted by the Company's Shareholders approving the Charter Amendment; and
(c) waivers obtained from the Series A Holders with respect to (i) granting
other registration rights pursuant to Section 2.E of the Registration
6
<PAGE>
Agreement, as previously in effect, (ii) First Refusal Rights pursuant to
Section 4.L of the Series A Purchase Agreement, and (iii) all other rights
held by the Series A Holders under the Series A Purchase Agreement, By-Laws
or otherwise which maybe in conflict with the terms of this Agreement and
the transactions contemplated hereby;
(3) certified copies of the Amended and Restated Articles of
Incorporation and the Company's bylaws, each as in effect at the Closing;
(4) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, all blue sky law filings and waivers of
all preemptive rights and rights of first refusal); and
(5) such other documents relating to the transactions
contemplated by this Agreement as Purchasers' counsel may reasonably
request.
3. Covenants.
---------
So long as at least 195,000] Shares of Series B Preferred remain
outstanding (as appropriately adjusted for any stock dividends payable in shares
of Series B Preferred and any combinations, subdivisions and split-ups of the
shares of Series B Preferred), the Company covenants and agrees to observe the
covenants stated in Sections 4.A, 4.B and 4.F. The Company shall comply with the
remaining provisions of this Article 4 so long as any shares of Series B
Preferred remain outstanding.
A. Financial Statements and Other Information. The Company
-------------------------------------------
shall deliver to each Purchaser:
(1) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such monthly period and for the period from the beginning
of the fiscal year to the end of such month and consolidated balance sheets
of the Company and its Subsidiaries as of the end of such monthly period,
setting forth in each case comparisons to the corresponding period in the
preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently
applied;
(2) accompanying the monthly financial statements delivered
pursuant to Section 4.A(1) above, an executive summary which discusses the
Company's results of operations and material developments in the Company's
business;
(3) within 90 days after the end of each fiscal year,
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year, setting
forth in each case comparisons to the preceding fiscal year, all prepared
in accordance with generally accepted accounting principles, consistently
7
<PAGE>
applied, and accompanied by (a) with respect to the consolidated
portions of such statements, an opinion containing no exceptions or
qualifications (except for qualifications regarding specified
contingent liabilities) of an accounting firm of national recognition
and (b) a copy of such firm's annual management letter to the Company's
Board of Directors;
(4) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(5) at least 30 days but not more than 90 days prior to the
beginning of each fiscal year, an annual budget prepared on a monthly
basis for the Company and its Subsidiaries for such fiscal year
(displaying anticipated statements of income and cash flows and balance
sheets) and promptly upon preparation thereof, any other significant
budgets prepared by the Company and any revisions of such annual or
other budgets;
(6) promptly (but in any event within ten business days) after
the discovery or receipt of notice of any default under any material
agreement to which it or any of its Subsidiaries is a party or any
other material adverse event or circumstance affecting the Company or
any Subsidiary (including the filing of any material litigation against
the Company or any Subsidiary or the existence of any dispute with any
Person which involves a reasonable likelihood of such litigation being
commenced), an Officer's Certificate specifying the nature and period
of existence thereof and what actions the Company and its Subsidiaries
have taken and propose to take with respect thereto; and
(7) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any
Purchaser may reasonably request.
Each of the financial statements referred to in subparagraphs (1) and (3) above
shall be true and correct in all material respects as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole).
B. Inspection of Property. The Company shall permit any
----------------------
representatives ("REPRESENTATIVES"), designated by any Purchaser or group of
purchasers holding at least 1% of the outstanding Common Stock equivalents, upon
reasonable notice and during normal business hours and such other times as any
such Representative may reasonably request, to (i) visit and inspect any of the
properties of the Company and its Subsidiaries, (ii) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and (iii) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, employees and independent
accountants of the Company and its Subsidiaries. The presentation of an executed
copy of this Agreement by any Purchaser to the Company's independent accountants
shall constitute the Company's permission to its independent
8
<PAGE>
accountants to participate in discussions with such Persons. The inspection
rights provided under this Section 4.B may be exercised, if at all, not more
than once per calendar quarter by all Purchasers as a group.
C. Directors' Meetings; Expenses and Indemnification. There
-------------------------------------------------
will be at least six meetings of the Company's Board of Directors during each
fiscal year until the first anniversary of the Closing Date; after such date,
there will be at least four meetings during each fiscal year. Upon request of
any director, all reasonable travel and other out-of-pocket expenses of such
board member incurred in connection with attending regular and special Board of
Directors' meetings, attending any meeting of any committee thereof or
conducting any other business on behalf of the Company, will be paid by the
Company. The Company shall give each director written notice of each meeting of
its Board of Directors and each committee thereof, at least ten days prior to
the date of each such meeting. Promptly after the Closing, the Company shall
enter into an indemnification agreement with each of its outside directors
providing for indemnification to the fullest extent permitted by law.
D. Attendance at Board Meetings. The Company shall give each
----------------------------
Purchaser of more than 35,000] Shares of Series B Preferred notice of each
meeting of its Board of Directors and each committee thereof at the same time
and in the same manner as notice is given to the directors (which notice shall
be confirmed in writing to each such Purchaser), and the Company shall permit
each such Purchaser or a Representative of such Purchaser to attend as an
observer all meetings of its Board of Directors and all committees thereof. Each
Representative shall be entitled to receive all written materials and other
information (including copies of meeting minutes) given to directors in
connection with such meetings at the same time such materials and information
are given to the directors. If the Company proposes to take any action by
written consent in lieu of a meeting of its Board of Directors or of any
committee thereof, the Company shall give written notice thereof to each such
Purchaser or Representative at least five days prior to the effective date of
such consent describing in reasonable detail the nature and substance of such
action. Each Purchaser or Representative shall pay his or her out-of-pocket
expenses incurred in connection with attending such board and committee
meetings.
E. Board Approvals. The affirmative vote of a majority of the
---------------
members of the Board of Directors attending a meeting held following due notice
shall be required to approve the following acts by the Company listed below in
this Section 4.E. The Company covenants and agrees not to enter into any such
action without the required Board of Directors consent:
(1) the authorization, execution or delivery of significant
distribution, licensing or other arrangements entered into outside the
ordinary course of business;
(2) the authorization or incurrence of any new Indebtedness
(other than Indebtedness subject to Section 4.F(14), as to which the
Shareholder approval specified by such Section shall be necessary and
sufficient);
(3) all executive compensation arrangements (as to which, the
Board of Directors shall act only following an affirmative
recommendation of the Compensation Committee);
9
<PAGE>
(4) approval of the Company's annual operating plan and capital
budget;
(5) undertaking capital expenditures in excess of the agreed-
upon capital budget; and
(6) commencing any executive searches.
F. Restrictions. The Company shall not, without the prior
------------
written consent of the holders of at least 66 2/3% of the shares of Underlying
Common Stock, voting together as a single class (provided that, in the case of
subparagraphs 2 and 11 below, the approval of the holders of at least 66 2/3% of
the Underlying Common Stock related to or derived from only the Series B
Preferred shall be required, rather than 66 2/3% of the Underlying Common Stock
as a whole):
(1) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise
acquire, any of the Company's equity securities (including warrants,
options and other rights to acquire equity securities) other than (a)
the Preferred Stock pursuant to the terms of the Articles of
Incorporation as amended by the Charter Amendment or (b) the redemption
of shares of Common Stock from employees or consultants at a price
equal to the original purchase price paid by such consultants or
employees, pursuant to "Securities Buy-Sell Agreements" approved by the
Board of Directors and entered into at or prior to the time such Common
Stock was originally issued to such employees or consultants;
(2) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, or the appointment of any
underwriter in connection with the sale of (a) any notes or debt
securities containing equity features (including any notes or debt
securities convertible into or exchangeable for equity securities,
issued in connection with the issuance of equity securities or
containing profit participation features) (b) any equity securities (or
any securities convertible into or exchangeable for any equity
securities), which equity features (in the case of notes or debt
securities) or equity securities are in either case senior to or on a
parity with the Series B Preferred with respect to voting, the payment
of dividends, redemptions or distributions upon liquidation or
otherwise or (c) any equity securities or securities containing equity
features at a price per equivalent share of Common Stock less than
$18.36, other than securities issued upon exercise of stock options
under the Option Plan;
(3) make, or permit any Subsidiary to make, any loans or
advances to, guarantees for the benefit of, or, except as otherwise
permitted by Section 4.F(8) below, Investments in, any Person (other
than a wholly-owned Subsidiary), except for (a) reasonable advances to
employees in the ordinary course of business, (b) acquisitions
permitted pursuant to Section 4.F(8) below, (c) advances against
anticipated future license fees or royalties in connection with
acquisitions of software products or licensing rights with respect to
software products and (d) Investments having a stated maturity no
greater than one year from the date the Company makes such Investment
in (i)
10
<PAGE>
obligations of the United States government or any agency thereof or
obligations guaranteed by the United States government, (ii)
certificates of deposit of commercial banks having combined capital and
surplus of at least $50 million, (iii) commercial paper with a rating
of at least "Prime-l" by Moody's Investors Service, Inc. or (iv) public
mutual funds which invest primarily in the instruments described in
items (i) and (iii) above;
(4) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including any reorganization
into partnership form);
(5) merge or consolidate with any Person or, except as permitted
by Section 4.F(8) below, permit any Subsidiary to merge or consolidate
with any Person (other than a wholly-owned Subsidiary);
(6) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 25% of the
consolidated assets of the Company and its Subsidiaries (computed on
the basis of book value, determined in accordance with generally
accepted accounting principles, consistently applied, or fair market
value, determined by the Company's Board of Directors in its reasonable
good faith judgment) in any transaction or series of related
transactions (other than sales in the ordinary course of business) or
sell or permanently dispose of any of its or any Subsidiary's
Proprietary Rights;
(7) engage an underwriter or file with the Securities and
Exchange Commission any registration statement in either case relating
to a proposed public offering of the Company's securities, other than a
Qualified IPO (as defined in the Charter Amendment);
(8) acquire, or permit any Subsidiary to acquire, any interest
in any business (whether by a purchase of assets, purchase of stock,
merger or otherwise), or enter into any joint venture, involving an
aggregate consideration (including the assumption of liabilities
whether direct or indirect) exceeding $100,000 in any one transaction
or exceeding $100,000 in the aggregate in any twelve-month period;
(9) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than
those owned, managed or operated as of the Closing;
(10) become subject to, or permit any of its Subsidiaries to
become subject to, any agreement or instrument which by its terms would
(under any circumstances) restrict the Company's right to perform the
provisions of this Agreement, the Registration Agreement, the Articles
of Incorporation or the Company's bylaws (including provisions relating
to payment of dividends on and making redemptions and conversions of
the Series A Preferred);
(11) except as expressly contemplated by this Agreement, make any
amendment to the Amended and Restated Articles of Incorporation, or the
Company's bylaws, or file any resolution of the Board of Directors with
the Colorado Secretary of State containing
11
<PAGE>
any provisions which would increase or decrease (other than by
redemption or conversion) the number of authorized shares of the Series
B Preferred or adversely affect the rights or relative priority of the
holders of the Series B Preferred or the Underlying Common Stock under
this Agreement, the Amended and Restated Articles of Incorporation, the
Company's bylaws or the Registration Agreement;
(12) (a) enter into, or permit any Subsidiary to enter into, any
transaction with any of its or any Subsidiary's officers, directors,
employees or Affiliates (or any individual related by blood or marriage
to any such Person or any entity in which any such Person or individual
owns a beneficial interest), except (i) for normal employment
arrangements and benefit programs on reasonable terms and except as
otherwise expressly contemplated by this Agreement and (ii) in the
ordinary course of and pursuant to the reasonable requirements of its
business and upon fair and reasonable terms no less favorable to it
than it would obtain in a comparable arm's length transaction with a
Person who is not an officer, director, employee or Affiliate or (b)
hire or employ any individual, other than John Helmick, the Company's
outside general counsel, related to an officer of the Company or any
Subsidiary by blood or marriage;
(13) establish or acquire any Subsidiaries;
(14) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness to
any banks or other financial institutions exceeding in the aggregate
the greater of (a) $1,000,000 or (b) four (4) times total EBITDA over
the four most recent fiscal quarters; outstanding at any time on a
consolidated basis;
(15) make any capital expenditures (including payments with
respect to capitalized leases, as determined in accordance with
generally accepted accounting principles, consistently applied but
excluding any amounts of product development expenditures which are
capitalized in conformity with generally accepted accounting
principles, consistently applied) more than 35% greater than the amount
authorized for such expenditures in the applicable line item of the
Company's latest annual budget, as approved pursuant to Section 4.E(4)
of this Agreement;
(16) amend the Articles of Incorporation or bylaws to set the
size of the Company's Board of Directors at any number greater than
seven ;
(17) issue any Common Stock, unless the purchaser or subscriber
is or becomes a party to the Shareholders Agreement; or
(18) grant any options under the Option Plan if, after giving
affect to such grant, the sum of (i) all shares of Common Stock subject
to then-outstanding options issued under the Option Plan plus (ii) all
shares of Common Stock previously issued upon the exercise of options
under the Option Plan, would exceed 182,000 shares.
12
<PAGE>
G. Affirmative Covenants. The Company shall, and shall cause
---------------------
each Subsidiary to:
(1) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(2) maintain and keep its properties in good repair, working
order and condition, and from time to time make all necessary or
desirable repairs, renewals and replacements, so that its businesses
may be properly and advantageously conducted at all times;
(3) pay and discharge when payable all taxes, assessments and
governmental charges imposed upon its properties or upon the income or
profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all claims for labor, materials or
supplies which if unpaid would reasonably be expected to have a
material adverse effect upon the financial condition, operating
results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole, unless and to the extent that the
same are being contested in good faith and by appropriate proceedings
and adequate reserves (as determined in accordance with generally
accepted accounting principles, consistently applied) have been
established on its books with respect thereto;
(4) comply with all other obligations which it incurs pursuant
to any contract or agreement, whether oral or written, express or
implied, as such obligations become due, unless and to the extent that
the same are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have
been established on its books with respect thereto;
(5) comply with all applicable laws, rules and regulations of
all governmental authorities, the violation of which would reasonably
be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries;
(6) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of such types and
in such amounts as are customary for well-insured corporations of
similar size engaged in similar lines of business;
(7) maintain proper books of record and account which fairly
present its financial condition and results of operations and make
provisions on its financial statements for all such proper reserves as
in each case are required in accordance with generally accepted
accounting principles, consistently applied; and
13
<PAGE>
(8) enter into and maintain Employment Agreements containing
confidentiality covenants and intellectual property rights assignments
provisions with all Key Employees of the Company and each consultant to
the Company.
H. Compliance with Agreements. The Company shall perform and
--------------------------
observe (i) all of its obligations to each holder of the Series B Preferred and
all of its obligations to each holder of the Underlying Common Stock set forth
in the Amended and Restated Articles of Incorporation, as amended, and the
Company's bylaws and (ii) all of its obligations to each holder of Registrable
Securities set forth in the Registration Agreement.
I. Current Public Information. At all times after the Company
--------------------------
has filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
J. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the conversion of the Series B
Preferred, such number of shares of Common Stock as are issuable upon the
conversion of all outstanding Series B Preferred. The Company represents and
covenants that all shares of Common Stock which are so issuable shall, when
issued, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges. The Company shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Company upon issuance).
K. Proprietary Rights. The Company shall, and shall cause each
------------------
Subsidiary to, possess and maintain all material Proprietary Rights necessary to
the conduct of their respective businesses and shall own all right, title and
interest in and to, or have a valid license for, all material Proprietary Rights
used by the Company and each Subsidiary in the conduct of their respective
businesses. Neither the Company nor any Subsidiary shall take any action, or
fail to take any action, which would result in the invalidity, abuse, misuse or
unenforceability of such Proprietary Rights or which would infringe upon any
rights of other Persons, provided that the foregoing shall not obligate the
Company to undertake litigation or other enforcement actions
14
<PAGE>
which the Company's Board of Directors in its discretion determines to be not
economically justified.
L. First Refusal Rights.
--------------------
(1) Except for the issuance of (a) Compensatory Stock, (b)
Common Stock upon the conversion of the Preferred Stock, (c) Common
Stock or other equity securities in connection with the acquisition of
another business as contemplated by Section 4.F(8) or in a transaction
approved by the holders of 66 2/3% of the Underlying Common Stock, (d)
Common Stock upon exercise of the Warrants and (e) Common Stock
pursuant to a public offering registered under the Securities Act, if
the Company authorizes the issuance or sale of any shares of Common
Stock or any securities containing options or rights to acquire any
shares of Common Stock (other than as a dividend on the outstanding
Common Stock), the Company shall first offer to sell to each holder of
Underlying Common Stock a portion of such stock or securities equal to
the quotient determined by dividing (1) the number of shares of
Underlying Common Stock held by such holder by (2) the sum of the total
number of shares of Underlying Common Stock and the number of shares of
Common Stock outstanding which are not shares of Underlying Common
Stock. Each holder of Underlying Common Stock shall be entitled to
purchase such stock or securities at the most favorable price and on
the most favorable terms as such stock or securities are to be offered
to any other Persons.
(2) In order to exercise its purchase rights hereunder, a holder
of Underlying Common Stock must, within 21 days after receipt of
written notice from the Company describing in reasonable detail the
stock or securities being offered, the purchase price thereof, the
payment terms and such holder's percentage allotment, deliver a written
notice to the Company describing its election hereunder. If not all of
the stock and securities offered to the holders of Underlying Common
Stock are fully subscribed by such holders, the remaining stock and
securities shall be reoffered by the Company to the holders purchasing
their full allotment upon the terms set forth in this Section 4.L,
except that such holders must exercise their purchase rights within
five days after receipt of such reoffer.
(3) Upon the expiration of the offering periods described above,
the Company shall be entitled to sell such stock or securities which
the holders of Underlying Common Stock have not elected to purchase
during the 90 days following such expiration on terms and conditions no
more favorable to the purchasers thereof than those offered to such
holders. Any stock or securities offered or sold by the Company after
such 90-day period must be reoffered to the holders of Underlying
Common Stock pursuant to the terms of this Section 4.L.
(4) The rights under this Section 4.L shall terminate upon the
closing of a Qualified IPO, as such term is defined in the Charter
Amendment.
M. Management Stock Pool. The Company shall maintain its
---------------------
incentive stock option plan (the "OPTION PLAN") in the form adopted on March 24,
1997, for which 150,000
15
<PAGE>
shares of the Common Stock have been reserved, and for which no more than 32,000
additional shares will be reserved. The Option Plan provides for the grant of
options to the Company's employees, which options shall vest over a two year
period from the date of issuance, with 50% of the options vesting on the first
anniversary of the date of issuance and 50% on the second anniversary of the
date of issuance. The Option Plan provides, and it shall continue to be the
case, that the Compensation Committee of the Company's Board of Directors shall
determine the recipients and size of all option grants.
N. Use of Proceeds. The Company covenants and agrees that
---------------
except as required by any agreements governing any existing debt obligations of
the Company, which are listed on the "Liabilities Schedule," as such agreements
existed immediately prior to the Closing Date, it shall not apply any of the
proceeds from the sale of the Shares of Series B Preferred to pay, repay,
discharge, or secure any amounts of principal, interest or other amounts owing
under any secured or unsecured debt of the Company existing immediately prior to
or as of the Closing Date. The remaining proceeds shall be added to the
Company's working capital and used for general corporate purposes. Pending their
disposition as provided in the prior sentence, the Company covenants and agrees
to invest such proceeds in short-term, investment grade, interest-bearing
securities.
4. Transfer of Restricted Securities.
---------------------------------
Each Purchaser acknowledges that Restricted Securities are
transferable only pursuant to (i) public offerings registered under the
Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange
Commission (or any similar rule or rules then in force) if such rule is
available or (iii) subject to the conditions specified in subsection (A) below,
any other legally available means of transfer.
A. In connection with the transfer of any Restricted
Securities, the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of counsel which (to the Company's reasonable satisfaction) is
knowledgeable in securities law matters to the effect that such transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. In addition, if the holder of the
Restricted Securities delivers to the Company an opinion of such counsel that no
subsequent transfer of such Restricted Securities shall require registration
under the Securities Act, the Company shall promptly upon such contemplated
transfer deliver new certificates for such Restricted Securities which do not
bear the Securities Act legend set forth in Section 7.C. If the Company is not
required to deliver new certificates for such Restricted Securities not bearing
such legend, the holder thereof shall not transfer the same until the
prospective transferee has confirmed to the Company in writing its agreement to
be bound by the conditions contained in this Section 5.A and Section 7.C.
B. Upon the request of any Purchaser, the Company shall
promptly supply to such Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
16
<PAGE>
C. Upon the request of any holder of Restricted Securities, the
Company shall remove the foregoing legend from the certificates for such
holder's Restricted Securities; provided that such Restricted Securities are
eligible for sale pursuant to Rule 144(k). Whenever any particular securities
cease to be Restricted Securities, the holder thereof shall be entitled to
receive from the Company, without expense, new certificates representing such
securities but of not bearing a Securities Act legend of the character set forth
in Section 7.C.
5. Representations and Warranties of Company. As a material
-----------------------------------------
inducement to the Purchasers to enter into this Agreement and purchase the
Shares, the Company hereby represents and warrants that:
A. Organization and Corporate Power. The Company is a
--------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Colorado and is qualified to do business in Colorado and in every other
jurisdiction in which its ownership of property or conduct of business requires
it to qualify. The Company has all requisite corporate power and authority and
all material licenses, permits and authorizations necessary to own and operate
its properties, to carry on its businesses as now conducted and presently
proposed to be conducted and to carry out the transactions contemplated by this
Agreement. The copies of the Company's charter documents and bylaws which have
been furnished to the Purchasers' counsel reflect all amendments made thereto at
any time prior to the date of this Agreement and are correct and complete.
B. Capital Stock and Related Matters.
---------------------------------
(1) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 132,000 shares of
Series A Preferred, of which 132,000 Shares shall be issued and
outstanding, (b) 326,833 Shares of Series B Preferred, of which
[272,221] shall be issued and outstanding, (c) 10,000,000 shares of
Common Stock, of which 1,050,000 shares shall be issued and
outstanding, 132,000 shares shall be reserved for issuance upon
conversion of the outstanding Series A Preferred, 326,833 shall be
reserved for issuance upon conversion of the Series B Preferred to be
issued upon closing, 192,000 shall be reserved for issuance upon
exercise of the Warrants, 13,000 shall be reserved for issuance upon
exercise of options granted to members of the Board of Directors and
[150,000 or 182,000] shall be reserved for issuance pursuant to the
terms of the Option Plan. None of the previous issuances of the Series
A Preferred, Common Stock, Warrants or any other outstanding security
of the Company have been in violation of any preemptive right or
similar right of first refusal.
(2) As of the Closing, the Company shall not have outstanding
any stock or securities convertible or exchangeable for any shares of
its capital stock or containing any profit participation features, nor
shall it have outstanding any rights or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into
or exchangeable for its capital stock or any stock appreciation rights
or phantom stock plans, except for the Series A Preferred, the Series B
Preferred and the Warrants and except as set forth on the attached
"CAPITALIZATION SCHEDULE." The Capitalization Schedule
17
<PAGE>
accurately sets forth the following with respect to all outstanding
shares of the Company's capital stock: name of the holder and number of
shares of each class of capital stock held. The fact that the
Purchasers are aware of the Company's agreement with Bradley Cohen, a
copy of which is attached as Exhibit E, shall in no way affect the
Purchaser's entitlement to rely on the representations in this
Paragraph 6(B)(1). The Capitalization Schedule accurately sets forth
the following with respect to all outstanding options and rights to
acquire the Company's capital stock: the holder, the number of shares
covered, the exercise price, the grant date and the expiration date.
(3) As of the Closing, the Company shall not be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of its capital stock or any warrants, options or
other rights to acquire its capital stock, except as set forth on the
Capitalization Schedule and except pursuant to the Amended and Restated
Articles of Incorporation. As of the Closing, all of the outstanding
shares of the Company's capital stock shall be validly issued, fully
paid and nonassessable.
(4) There are no statutory or contractual Shareholders'
preemptive rights or rights of refusal with respect to the issuance of
the Series B Preferred hereunder or the issuance of the Common Stock
upon conversion of the Series B Preferred, except for First Refusal
Rights held by Series A Holders under the Series A Purchase Agreement,
which rights have all been duly and validly waived. The Company has not
violated any applicable federal or state securities laws in connection
with the offer, sale or issuance of any of its capital stock, and,
assuming the truth of the Purchasers' representations in Section 7.C
hereof, the offer, sale and issuance of the Shares hereunder does not
require registration under the Securities Act or any applicable state
securities laws. Except as described on the Affiliate Transactions
Schedule (as defined in Section 6.T), there are no agreements between
the Company and any of its Shareholders or, to the Company's knowledge
between the Company's Shareholders with respect to the voting or
transfer of the Company's capital stock or with respect to any other
aspect of the Company's affairs, except for the Registration Agreement,
the Shareholders Agreement and this Agreement.
C. Subsidiaries; Investments. The Company does not own or hold
-------------------------
any rights to acquire any shares of stock or any other security or interest in
any other Person and the Company does not have any Subsidiary. The Company
formerly owned all of the stock of Brecknet Internet Service, Inc., a Colorado
corporation ("BRECKNET"). The Company sold the assets of Breknet to Vailnet,
Inc. pursuant to an Asset Purchase Agreement dated May 30, 1997. The Company
subsequently sold the stock of Breknet for a nominal consideration
D. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement, the Registration Agreement, the Shareholders
Agreement and all other agreements contemplated hereby to which the Company is a
party have been duly authorized by the Company. This Agreement, the Registration
Agreement, the Shareholders Agreement and all other agreements contemplated
hereby each constitutes a valid and binding obligation of the Company,
enforceable in accordance with its terms. The execution and delivery by the
Company of this Agreement, the Registration Agreement, the Shareholders
Agreement and all other
18
<PAGE>
agreements contemplated hereby to which the Company is a party, the offering,
sale and issuance of the Shares hereunder, the issuance of the Common Stock upon
conversion of the Series B Preferred and the fulfillment of and compliance with
the respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a material breach of the terms, conditions or
provisions of, (ii) constitute a material default under, (iii) result in the
creation of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation under, (v) result in a
material violation of, or (vi) require any authorization, consent, approval,
exemption or other action by or notice to any court or administrative or
governmental body pursuant to, the Amended and Restated Articles of
Incorporation or bylaws of the Company, or any law, statute, rule or regulation
to which the Company is subject, or any agreement, instrument, order, Judgment
or decree to which the Company is subject.
E. Financial Statements. Attached hereto as the "FINANCIAL
--------------------
STATEMENTS SCHEDULE" are the unaudited balance sheets of the Company as of
December 31, 1997 (the "LATEST BALANCE SHEET"), and December 31, 1997, and the
related statements of income and cash flows (or the equivalent) for the periods
then ended. Each of such financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject to the lack of footnote disclosure (none of which disclosures would,
alone or in the aggregate, be materially adverse to the financial condition,
operating results, assets, operations or business prospects of the Company and
its Subsidiaries taken as a whole).
F. Absence of Undisclosed Liabilities. Except as set forth on
----------------------------------
the attached "LIABILITIES SCHEDULE," the Company does not have any material
obligation or liability (whether accrued, absolute, contingent, unliquidated or
otherwise, whether or not known to the Company, whether due or to become due and
regardless of when asserted) arising out of transactions entered into at or
prior to the Closing, any action or inaction at or prior to the Closing or any
state of facts existing at or prior to the Closing, other than: (i) liabilities
set forth on the Latest Balance Sheet (including any notes thereto), (ii)
liabilities and obligations which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a liability
resulting from breach of contract, breach of warranty, tort, infringement, claim
or lawsuit and all of which in the aggregate are not material to the Company)
and (iii) other liabilities and obligations expressly disclosed in the other
Schedules to this Agreement.
G. No Material Adverse Change. Since the date of the Latest
--------------------------
Balance Sheet, there has been no material adverse change in the financial
condition, operating results, assets, operations, business prospects, employee
relations or customer or supplier relations of the Company.
H. Absence of Certain Developments.
-------------------------------
19
<PAGE>
(1) Except as expressly contemplated by this Agreement or as set
forth on the attached "DEVELOPMENTS SCHEDULE," since the date of the
Latest Balance Sheet, the Company has not:
a) issued any notes, bonds or other debt securities or any
equity securities or any securities convertible,
exchangeable or exercisable into any equity securities;
b) borrowed any amount or incurred or become subject to
any liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts
entered into in the ordinary course of business;
c) discharged or satisfied any lien or encumbrance or paid
any obligation or liability, other than current liabilities
paid in the ordinary course of business;
d) declared or made any payment or distribution of cash or
other property to its Shareholders with respect to its stock
or purchased or redeemed any shares of its stock or any
warrants, options or other rights to acquire its stock;
e) mortgaged or pledged any of its properties or assets or
subjected them to any lien, security interest, charge or
other encumbrance, except liens for current property taxes
not yet due and payable;
f) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business, or
canceled any debts or claims;
g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names,
corporate names, copyrights or copyright registrations,
trade secrets or other intangible assets, or disclosed any
proprietary confidential information to any Person;
h) suffered any extraordinary losses or waived any rights
of material value, whether or not in the ordinary course of
business or consistent with past practice;
i) made capital expenditures or commitments therefor that
aggregate in excess of $25,000 (excluding any amounts of
product development expenditures which are capitalized in
conformity with generally accepted accounting principles,
consistently applied);
j) entered into any other transaction other than in the
ordinary course of business or entered into any other
material transaction, whether or not in the ordinary course
of business;
20
<PAGE>
k) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons;
l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $25,000, whether or not covered
by insurance; or
m) made any Investment in or taken steps to incorporate
any Subsidiary.
(2) The Company has not at any time made any payments for
political contributions or made any bribes, kickback payments or other
illegal payments.
I. Assets. Except as set forth on the attached "ASSETS
------
SCHEDULE," the Company has good and marketable title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises or
shown on the Latest Balance Sheet or acquired thereafter, free and clear of all
liens, security interests, charges and encumbrances, except for properties and
assets disposed of in the ordinary course of business since the date of the
Latest Balance Sheet and except for liens disclosed on the Latest Balance Sheet
(including any notes thereto) and liens for current property taxes not yet due
and payable. The Company's buildings, equipment and other tangible assets are in
good operating condition in all material respects and are fit for use in the
ordinary course of business. The Company owns, or has a valid leasehold interest
in, all assets necessary for the conduct of its business as presently conducted.
J. Tax Matters. The Company has filed all tax returns which it
-----------
is required to file (taking into account all extensions of due dates) under
applicable laws and regulations; all such returns are true and correct in all
material respects; the Company has paid, or has made sufficient provision for,
all taxes due and owing by it and has withheld and paid over all taxes which it
is obligated to withhold from amounts paid or owing to any employee,
Shareholder, creditor or other third party; the Company has not waived any
statute of limitations with respect to taxes or agreed to any extension of time
with respect to a tax assessment or deficiency; the assessment of any additional
taxes for periods for which returns have been filed is not expected; no foreign,
federal, state or local tax audits are pending or being conducted with respect
to the Company, no information related to tax matters has been requested by any
foreign, federal, state or local taxing authority and no notice indicating an
intent to open an audit or other review has been received by the Company from
any foreign, federal, state or local taxing authority; and there are no material
unresolved questions or claims concerning the Company's tax liability. The
Company has not made an election under Section 341(f) of the IRC.
K. Contracts and Commitments.
-------------------------
(1) Except as expressly contemplated by this Agreement or as set
forth on the attached "CONTRACTS SCHEDULE," as of the Closing, the
Company is not a party to any written or oral:
a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred
or other compensation to
21
<PAGE>
employees or any other employee benefit plan or arrangement,
or any contract with any labor union, or any severance
agreements;
b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time,
consulting or other basis, other than the Employment
Agreements, or contract relating to loans to officers,
directors or affiliates;
c) contract under which the Company has advanced or loaned
any other Person any amounts;
d) agreement or indenture relating to the borrowing of
money or the mortgaging, pledging or otherwise placing a
lien on any material asset or material group of assets of
the Company;
e) guarantee of any obligation;
f) lease or agreement under which the Company is lessee of
or holds or operates any property, real or personal, owned
by any other party, except for any lease of real or personal
property under which the aggregate annual rental payments do
not exceed $20,000;
g) lease or agreement under which the Company is lessor of
or permits any third party to hold or operate any property,
real or personal, owned or controlled by the Company;
h) contract or group of related contracts with the same
party or group of affiliated parties the performance of
which involves a consideration in excess of $20,000;
i) assignment, license, indemnification or agreement with
respect to any intangible property (including any patent,
trademark, trade name, copyright, know-how, trade secret or
confidential information);
j) warranty agreement with respect to its services
rendered or its products sold or leased;
k) agreement under which it has granted any Person any
registration rights (including piggyback rights);
l) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world;
or
m) any other contractor agreement which is material to its
operations and business prospects.
22
<PAGE>
(2) All of the contracts, agreements and instruments set forth
on the Contracts Schedule are valid, binding and enforceable in
accordance with their respective terms. The Company has performed all
material obligations required to be performed by it and is not in
default under or in breach of nor in receipt of any claim of default or
breach under any contract, agreement or instrument to which it is
subject; no event has occurred which with the passage of time or the
giving of notice or both would result in a default, breach or event of
noncompliance under any contract, agreement or instrument to which it
is subject; and the Company has no knowledge of any breach or
anticipated breach by the other parties to any contract or commitment
to which it is a party.
(3) The Purchasers' counsel has been supplied with a true and
correct copy of each of the written contracts and an accurate
description of the oral contracts which are referred to on the
Contracts Schedule, together with all amendments, waivers or other
changes thereto.
(4) The Employment Agreements and R. Helmick's Buy-Sell
Agreement entered into in connection with the sale of the Series A
Preferred and Warrants on June 11, 1997, have not been amended or
modified and remain in full force and effect.
L. Proprietary Rights. The attached "PROPRIETARY RIGHTS
------------------
SCHEDULE" contains a complete and accurate list of (i) all patented and
registered Proprietary Rights owned by the Company, specifically identified,
(ii) all pending patent applications and applications for registrations of other
Proprietary Rights filed by the Company, specifically identified, (iii) all
unregistered trade names and corporate names owned or used by the Company,
specifically identified and (iv) all unregistered trademarks, service marks and
copyrights and computer software which are material to the financial condition,
operating results, assets, operations or business prospects of the Company,
either specifically identified or described by category. The Proprietary Rights
Schedule also contains a complete and accurate list of all licenses and other
rights granted by the Company to any third party with respect to any Proprietary
Rights and all licenses and other rights granted by any third party to the
Company with respect to any Proprietary Rights. The Company owns or has the
right to use pursuant to a valid license all Proprietary Rights necessary for
the operation of the businesses of the Company as presently conducted and as
presently proposed to be conducted. Except as set forth on the Proprietary
Rights Schedule, the loss or expiration of any Proprietary Right or related
group of Proprietary Rights would not have a material adverse effect on the
conduct of the Company's business, and no such loss or expiration is threatened,
pending or reasonably foreseeable. The Company has taken all necessary and
desirable actions to maintain and protect the Proprietary Rights which it owns
and uses. To the best of the Company's knowledge, the owners of any Proprietary
Rights licensed to the Company have taken all necessary and desirable actions to
maintain and protect the Proprietary Rights which are subject to such licenses.
Except as indicated on the Proprietary Rights Schedule, (i) the Company owns all
right, title and interest in and to all of the Proprietary Rights listed on such
schedule and all other Proprietary Rights material to the operation of the
business of the Company, (ii) there have been no claims made against the Company
asserting the invalidity, misuse or unenforceability of any of such rights and
there are no grounds for the same, (iii) the Company has not received a notice
of conflict with the asserted rights of others within
23
<PAGE>
the last five years and (iv) the conduct of the Company's business has not
infringed or misappropriated and does not infringe or misappropriate any
Proprietary Rights of other Persons, nor would any future conduct as presently
contemplated infringe any Proprietary Rights of other Persons and, to the best
of the Company's knowledge, the Proprietary Rights owned by the Company have not
been infringed or misappropriated by other Persons.
M. Litigation, etc.. Except as set forth on the attached
---------------
"LITIGATION SCHEDULE," there are no actions, suits, proceedings, orders,
investigations or claims pending or, to the best of the Company's knowledge,
threatened against or affecting the Company (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company with respect to their businesses or
proposed business activities) at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality
(including any actions, suit, proceedings or investigations with respect to the
transactions contemplated by this Agreement), the Company is not subject to any
arbitration proceedings or, to the best of the Company's knowledge, any
governmental investigations or inquiries (including inquiries as to the
qualification to hold or receive any license or permit) and, to the best of the
Company's knowledge, there is no basis for any of the foregoing. The Company is
not subject to any judgment, order or decree of any court or other governmental
agency.
N. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company. The Company shall pay, and hold each Purchaser harmless
against, any liability, loss or expense (including reasonable attorneys' fees
and out-of-pocket expenses) arising in connection with any such claim.
O. Governmental Consent. etc.. No permit, consent, approval or
--------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby.
P. Insurance. The attached "INSURANCE SCHEDULE" contains a
---------
description of each insurance policy maintained by the Company with respect to
its properties, assets and businesses, and each such policy is in full force and
effect as of the Closing. The Company is not in default with respect to its
obligations under any insurance policy maintained by it. The Company maintains
"key man" insurance on the life of R. Helmick in a minimum amount of
[$1,000,000]. The Company further covenants and agrees that any proceeds
received under such policy shall immediately be placed in a segregated account
and thereafter disbursed solely to fund the Company's obligations to redeem the
Preferred Stock, on the terms, and subject to the conditions, of the Charter
Amendment
Q. Employees. The Company is not aware that any executive or
key employee of the Company or any group of employees of the Company has any
current or immediate plans to terminate employment with the Company. The Company
has complied in all material respects
24
<PAGE>
with all laws relating to the employment of labor, including provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other taxes, and the Company is not aware that it
has any material labor relations problems (including any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). Neither the Company nor, to the best of the Company's knowledge
after due inquiry, any of its employees is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or similar agreements
relating to, affecting or in conflict with the present or proposed business
activities of the Company, except for agreements between the Company and its
present and former employees.
R. ERISA.
-----
(1) Multiemployer Plans. The Company does not have any
-------------------
obligation to contribute to (or any other liability, including current
or potential withdrawal liability, with respect to) any "MULTIEMPLOYER
PLAN" (as defined in Section 3(37) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")).
(2) Retiree Welfare Plans. The Company does not maintain or have
---------------------
any obligation to contribute to (or any other liability with respect
to) any plan or arrangement whether or not terminated, which provides
medical, health, life insurance or other welfare-type benefits for
current or future retired or terminated employees (except for limited
continued medical benefit coverage required to be provided under
Section 4980B of the IRC or as required under applicable state law).
(3) Defined Benefit Plans. The Company does not maintain,
---------------------
contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "DEFINED BENEFIT PLAN" (as
defined in Section 3(35) of ERISA), whether or not terminated.
(4) Defined Contribution Plans. The Company does not maintain,
--------------------------
contribute to or have any liability under (or with respect to) any
employee plan which is a tax-qualified "DEFINED CONTRIBUTION PLAN" (as
defined in Section 3(34) of ERISA), whether or not terminated.
(5) Other Plans. Except as explicitly set forth in the Contracts
-----------
Schedule, the Company does not maintain, contribute to or have any
liability under (or with respect to) any plan or arrangement providing
benefits to current or former employees, including any bonus plan, plan
for deferred compensation, employee health or other welfare benefit
plan or other arrangement, whether or not terminated.
S. Compliance with Laws. To the best of the Company's
--------------------
knowledge, the Company is not in material violation of any law, regulation or
requirement and has not received notice of any such violation. The Company is
not subject to any clean up liability, or has any reason to believe it may
become subject to any clean up under any federal, state or local environmental
law, rule or regulation.
25
<PAGE>
T. Affiliated Transaction. Except as set forth on the attached
----------------------
"AFFILIATED TRANSACTIONS SCHEDULE," no officer, director, Shareholder or
Affiliate of the Company or any individual related by blood or marriage to any
such Person or any entity in which any such Person or individual owns any
beneficial interest, is a party to any agreement, contract, commitment or
transaction with the Company or has any interest in any property, real, personal
or mixed, tangible or intangible, used in or pertaining to the business of the
Company.
U. Disclosure. Neither this Agreement, nor any of the
----------
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to any Purchaser by or on behalf of the Company with
respect to the transactions contemplated hereby contain any untrue statement of
a material fact or omit a material fact necessary to make each statement
contained herein or therein not misleading. There is no fact which the Company
has not disclosed to the Purchasers in writing and of which any of its officers,
directors or executive employees is aware and which has had or would reasonably
be anticipated to have a material adverse effect upon the existing or expected
financial condition, operating results, assets, customer or supplier relations,
employee relations or business prospects of the Company and its Subsidiaries
taken as a whole.
V. Closing Date. The representations and warranties of the
------------
Company contained in this Section 6 and elsewhere in this Agreement and all
information contained in any exhibit, schedule or attachment hereto or in any
writing delivered by, or on behalf of, the Company to any Purchaser shall be
true and correct in all material respects on the Closing Date as though then
made, except as affected by the transactions expressly contemplated by this
Agreement.
6. Miscellaneous.
-------------
A. Expenses. The Company agrees to pay, and hold each Purchaser
and all holders of Series B Preferred harmless against liability for the payment
of, (i) the Purchasers' fees and expenses (not to exceed $35,000) arising in
connection with their legal review of the Company, the negotiation and execution
of this Agreement and the consummation of the transactions contemplated by this
Agreement, including fees and disbursements of their legal counsel, (ii) the
fees and expenses incurred with respect to any amendments or waivers (whether or
not the same become effective) under or in respect of this Agreement, the
agreements contemplated hereby or the Amended and Restated Articles of
Incorporation and (iii) stamp and other transfer taxes which may be payable in
respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of any Shares of Series B Preferred or any shares of
Common Stock issuable upon conversion of the Series B Preferred.
B. Remedies, Enforcement, Governing Law, Venue.
-------------------------------------------
(1) Each holder of Shares and Underlying Common Stock shall have
all rights and remedies set forth in this Agreement, the Amended and
Restated Articles of Incorporation and all rights and remedies which
such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law.
Any Person having rights under any provision of this Agreement will be
entitled to enforce such rights specifically to recover damages caused
by reason of any
26
<PAGE>
breach of any provision of this Agreement and to exercise all other
rights granted by law. The parties hereto agree and acknowledge that
money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole
discretion apply to any court of law or equity of competent
jurisdiction (without posting any bond or other security) for specific
performance and for other injunctive relief in order to enforce or
prevent violation of the provisions of this Agreement.
(2) All questions concerning the relative rights of the Company
and its shareholders and the construction, validity and interpretation
of this Agreement and the exhibits and schedules hereto shall be
governed by and construed in accordance with the domestic laws of the
State of Colorado, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Colorado or
any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Colorado.
(3) Any controversy or claim arising out of or relating to this
Agreement, including, without limitation, the making, performance, or
interpretation of this Agreement, may be heard and resolved by any
state or federal court located in Denver or Arapahoe Counties,
Colorado.
(4) The parties agree that they will not seek from the court
hearing any claim under this Agreement any award or judgment for
punitive damages (or any other amount awarded for the purpose of
imposing a penalty), and that if any such award or judgment is granted,
the parties agree not to seek to satisfy such award or judgment.
(5) The court hearing any claim under this Agreement shall award
all costs of the proceeding, including court costs, filing fees, travel
costs of witnesses, costs of depositions and reasonable attorney fees,
to the substantially prevailing party.
C. Purchasers' Investment Representations.
--------------------------------------
(1) Each Purchaser hereby represents that it is acquiring the
Restricted Securities purchased hereunder or acquired pursuant hereto
for its own account with the present intention of holding such
securities for purposes of investment and that it has no intention of
selling such securities in a public distribution in violation of the
federal securities laws or any applicable state securities laws;
provided that nothing contained herein shall prevent any Purchaser and
subsequent holders of Restricted Securities from transferring such
securities in compliance with the provisions of Section 5 hereof.
(2) Each Purchaser acknowledges that the Shares are being issued
and sold to such Purchaser under exemptions from registration provided
in the Securities Act and under applicable state securities laws and,
therefore, cannot be resold by such Purchaser unless subsequently
registered under the Securities Act or applicable state securities laws
or an exemption from such registrations is available. Accordingly, each
Purchaser represents and warrants that it is able to bear the economic
risk of any investment in the Series B Preferred for an indefinite
period of time.
27
<PAGE>
(3) Each certificate for Restricted Securities shall be
imprinted with a legend in substantially the following form:
"The securities represented by this certificate were
originally issued on February 2, 1998, and have not
been registered under the Securities Act of 1933, as
amended. The transfer of the securities represented
by this certificate is subject to the conditions
specified in the Share Purchase Agreement and the
Amended and Restated Shareholders Agreement, both
dated as of February 2, 1998, between the issuer
(the "Company") and certain investors, and the
Company reserves the right to refuse the transfer of
such securities until such conditions have been
fulfilled with respect to such transfer. A copy of
such conditions shall be furnished by the Company to
the holder hereof upon written request and without
charge."
(4) Each Purchaser represents that it has had the opportunity to
ask questions and receive answers concerning the Shares and to obtain
whatever information concerning the Company as has been requested by
the Purchaser in order to make its investment decision.
(5) Each Purchaser represents that (a) it is an "Accredited
Investor" as such term is defined under applicable regulations
promulgated under the Securities Act and (b) it is sophisticated in
financial matters and is able to evaluate the risks and benefits of any
investment in the Shares.
D. Consent to Amendments. Except as otherwise expressly
---------------------
provided herein, the provisions of this Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company has obtained the written
consent of the holders of 66 2/3 % of the Underlying Common Stock derived from
or related to the Series B Preferred . No other course of dealing between the
Company and the holder of any Series B Preferred or Underlying Common Stock
derived from or related to the Series B Preferred or any delay in exercising any
rights hereunder or under the Articles of Incorporation shall operate as a
waiver of any rights of any such holders. For purposes of this Agreement, shares
of Series B Preferred or Underlying Common Stock held by the Company or any
Subsidiaries shall not be deemed to be outstanding.
E. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
continue until the Company has delivered to the Purchasers, in the manner
specified in Section 4.A, its audited financial statements as of and for the
year ended December 31, 1998, regardless of any investigation made by any
Purchaser or on its behalf.
F. Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties
28
<PAGE>
hereto shall bind and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for any Purchaser's benefit as a
purchaser or holder of Series B Preferred or Underlying Common Stock are also
for the benefit of, and enforceable by, any subsequent holder of such Series B
Preferred or such Underlying Common Stock.
G. Generally Accepted Accounting Principles. Where any
----------------------------------------
accounting determination or calculation is required to be made under this
Agreement or the exhibits hereto, such determination or calculation (unless
otherwise provided) shall be made in accordance with generally accepted
accounting principles, consistently applied.
H. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
I. Counterparts. This Agreement may be executed in separate
------------
counterparts, anyone of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same agreement.
J. Descriptive Headings; Interpretation. The descriptive
------------------------------------
headings of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement. The use of the word "INCLUDING" in this
Agreement shall be by way of example rather than by limitation. Disclosure of a
fact or document on one disclosure schedule shall be deemed to be disclosure on
all schedules to which such fact or document manifestly applies.
K. Notices. All notices, demands or other commutations to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable national express courier
service guaranteeing overnight delivery (charges prepaid) or mailed to the
recipient by certified or registered mail, return receipt requested and postage
prepaid. Such notices, demands and other communications shall be sent to each
Purchaser at the address indicated on the Schedule of Purchasers and to the
Company at the address indicated below:
If to the Company, to:
Robert N. Helmick
CEO & President
Real Education, Inc.
10200A E. Girard Avenue
Denver, CO 80231
with a copy to:
29
<PAGE>
John V. Helmick
General Counsel
10271 Mica Way
Parker, Colorado 80134
If to the Purchasers, to the respective addresses indicated on
the Schedule of Purchasers,
with a copy to:
John A. Ballis, Esq.
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * * *
[Remainder of page intentionally left blank]
30
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
REAL EDUCATION, INC.
By /s/ Robert N. Helmick
----------------------------
Its ____________________________
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
By: /s/ Oakleigh Thorne
--------------------
Oakleigh Thorne
Its Co-President
--------------------
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
By _____________________________
Its ____________________________
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
By: /s/ Jack W. Blumenstein
-----------------------------
Jack W. Blumenstein
Co-President
OTHER PURCHASERS:
Signature: /s/ Robert Douglas
----------------------------
Print Name: /s/ Robert Douglas
---------------------------
Dollar Value of Shares Purchased: $ 150,000
---------
31
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
By _____________________________
Its ____________________________
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
By: /s/ Jack W. Blumenstein
---------------------------
Jack W. Blumenstein
Co-President
OTHER PURCHASERS:
Signature: /s/ Steven M Singer
--------------------------
Print Name: /s/ Steven M Singer
-------------------------
Dollar Value of Shares Purchased: $
---------
31
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
By _____________________________
Its ____________________________
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
By: /s/ Jack W. Blumenstein
------------------------------
Jack W. Blumenstein
Co-President
OTHER PURCHASERS:
Signature: /s/ William E. Waldeck
----------------------------
Print Name: /s/ William E. Waldeck
----------------------------
Dollar Value of Shares Purchased: $ 49,994.28
-----------
31
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
REAL EDUCATION, INC.
By _______________________________
Its ______________________________
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
By: _______________________
Jack W. Blumenstein
Co-President
<TABLE>
<CAPTION>
OTHER PURCHASERS:
<S> <C>
/s/ Robert A. Conway/Darlene A. Conway /s/ Stanley R. Dorbrin
- -------------------------------------- ------------------------------------------------
Robert Conway and Darlene A. Conway Stanley R. Dobrin
By: /s/ William O. Kasten /s/ James F. Hemmer
------------------------------ ------------------------------------------------
Its:William O. Kasten James F. Hemmer
------------------------------
McDONALD & CO. SECURITES, INC. McD VENTURE CAPITAL FUND, L.P.
By: /s/ Ralph M. Della Ratta, Jr. By: /s/ McDonald & Company Securities, Inc
----------------------------- --------------------------------------------
Its: Senior Managing Director Its: General Partner - Ralph M. Della Ratta, Jr.
----------------------------- -------------------------------------------
Chair, Board of Advisors
/s/ Lee S. Mendel
------------------------------------------------
Lee S. Mendel
SILVER FAMILY TRUST, U/D/T
12/19/97
/s/ Jay S. Perlmutter By: /s/ Martin J. Silver
- ---------------------------------- ------------------------------------------------
Jay S. Perlmutter Martin J. Silver, Trustee
By: /s/ Victoria H. Silver
------------------------------------------------
Victoria H. Silver, Trustee
</TABLE>
<PAGE>
[Signature Page to Real Education, Inc. Series B Preferred Share Purchase
Agreement]
/s/ Alan L. Sigman /s/ Mark A. Timmerman
- -------------------------------- --------------------------------
Alan L. Sigman Mark A. Timmerman
/s/ Michael J. Walker /s/ Davis B. Weidner
- -------------------------------- --------------------------------
Michael J. Walker Davis B. Weidner
32
<PAGE>
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Amount Purchased
Name # of Shares ($) Address
- ---- ----------- --- -------
<S> <C> <C> <C>
Blumenstein/Thorne 272,331 4,999,997.16 Blumenstein/ Thorne Information
Partners I, L. P. Information Partners I, L.P.
P.O. Box 871
Lake Forest, IL 60045
Alan L. Sigman 1,362 25,006.32 3878 S. Jasmine Street
Denver, CO 80237
303/758-0256
Lee S. Mendel 1,362 25,006.32 400 S. Steele, Unit 56
Denver, CO 80209
(h) 303/777-4292
(w) 303/778-1165
Davis B. Weidner 4,085 75,000.60 23521 Golden Gate Canyon
Golden, CO 80403
303/278-3670
James F. Hemmer 1,362 25,006.32 534 Melrose Avenue
Kenilworth, IL 60043
(h) 847/251-2210
(w) 312/360-3888
Michael J. Walker 1,362 25,006.32 1438 Weiland Street
Chicago,IL 60610
(h) 312/255-1845
(w) 312/360-3883
Stanley R. Dobrin 2,723 49,994.28 7001 Sally Lane
Edina, MN 55435
(h) 612/941-7787
(w) 612/829-5919
Robert A. Conway & Darlene A. Conway, 1,362 25,006.32 4819 Millersville Road
JTWROS Indianapolis, IN 46226
(h) 317/546-5558
(w) 317/562-9251
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C>
Mark A. Timmerman 2,723 49,994.28 1450 N. Astor St., #14B
Chicago, IL 60610
(h) 312/951-8934
(w) 312/364-8432
Silver Family Trust U/D/T 1,362 25,006.32 601 Almond Avenue
December 19, 1997 Los Altos, CA 94022-2314
Martin J. Silver and (h) 650/947-9623
Victoria H. Silver, (f) 650/493-1426
as Trustees
Jay S. Perlmutter 1,362 25,006.32 c/o Jordan Permutter & Co.
1601 Blake Street
Denver, CO 80202
303/877-8200
William O. Kasten 2,723 49,994.28 c/o William O. Kasten
William Blair and Company, L.L.C.
222 West Adams Street
Chicago, IL 60606
312/364-8448
McDonald & Co. Securities, Inc. 10,911 200,325.96 c/o Ralph Della Ratta
Senior Managing Director
McDonald & Co. Securities, Inc.
McDonald Investment Centre
800 Superior St.
Cleveland, OH 44114
McD Venture Capital Fund, L.P. 10,910 200,307.60 c/o Ralph Della Ratta
Senior Managing Director
McDonald & Co. Securities, Inc.
McDonald Investment Centre
800 Superior St.
Cleveland, OH 44114
Robert C. Douglas 8,170 150,001.20 c/o McDonald & Co.
311 S. Wacker Drive
Suite 2020
Chicago, IL 60606
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
McDonald & Company 2,723 49,994.28 c/o McDonald & Co.
----- ---------
Securities, Inc., as Custodian 311 S. Wacker Drive
for William E. Waldeck, IRA Suite 2020
Chicago, IL 60606
TOTALS 326,833 $6,000,653.88
======= =============
</TABLE>
35
<PAGE>
EXHIBIT 10.3
SERIES C PREFERRED
SHARE PURCHASE AGREEMENT
DATED DECEMBER 21,1998
BETWEEN
REAL EDUCATION, INC.
AND
THE PERSONS LISTED ON THE ATTACHED SCHEDULE OF PURCHASERS
Page 1 Share Purchase Agreement
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS................................................................................................. 1
2. AUTHORIZATION AND CLOSING................................................................................... 5
A. AUTHORIZATION OF THE UNITS.............................................................................. 5
B. PURCHASE AND SALE OF THE UNITS.......................................................................... 5
C. THE CLOSING............................................................................................. 5
3. CONDITIONS OF EACH PURCHASER'S OBLIGATION AT THE CLOSING.................................................... 5
A. REPRESENTATIONS AND WARRANTIES: COVENANTS.............................................................. 5
B. NO MATERIAL ADVERSE CHANGE............................................................................. 6
C. CHARTER AMENDMENT...................................................................................... 6
D. COMPANY'S BYLAWS....................................................................................... 6
E. REGISTRATION AGREEMENT................................................................................. 6
F. STOCKHOLDERS AGREEMENT................................................................................. 6
G. BOARD OF DIRECTORS..................................................................................... 6
H. BLUE SKY CLEARANCE..................................................................................... 6
I. OPINION OF THE COMPANY'S COUNSEL....................................................................... 6
J. PROCEEDINGS............................................................................................ 7
K. WAIVER................................................................................................. 7
L. CLOSING DOCUMENTS...................................................................................... 7
4. COVENANTS................................................................................................... 7
A. FINANCIAL STATEMENTS AND OTHER INFORMATION............................................................. 8
B. INSPECTION OF PROPERTY................................................................................. 9
C. DIRECTORS' MEETINGS; EXPENSES AND INDEMNIFICATION...................................................... 9
D. BOARD APPROVALS........................................................................................ 9
E. RESTRICTIONS........................................................................................... 10
F. AFFIRMATIVE COVENANTS.................................................................................. 13
G. COMPLIANCE WITH AGREEMENTS............................................................................. 14
H. CURRENT PUBLIC INFORMATION............................................................................. 14
I. RESERVATION OF COMMON STOCK............................................................................ 14
J. PROPRIETARY RIGHTS..................................................................................... 14
K. FIRST REFUSAL RIGHTS................................................................................... 15
L. MANAGEMENT STOCK POOL.................................................................................. 16
M. USE OF PROCEEDS........................................................................................ 16
N. COVENANT BY PURCHASERS RE. SECTION 4.E................................................................. 17
O. WEBCT.................................................................................................. 17
5. TRANSFER OF RESTRICTED SECURITIES........................................................................... 18
6. REPRESENTATIONS AND WARRANTIES OF COMPANY................................................................... 19
A. ORGANIZATION AND CORPORATE POWER....................................................................... 19
B. CAPITAL STOCK AND RELATED MATTER....................................................................... 19
C. SUBSIDIARIES; INVESTMENTS.............................................................................. 20
</TABLE>
Share Purchase Agreement i
<PAGE>
<TABLE>
<S> <C>
D. AUTHORIZATION; NO BREACH............................................................................... 20
E. FINANCIAL STATEMENTS................................................................................... 21
F. ABSENCE OF UNDISCLOSED LIABILITIES..................................................................... 21
G. NO MATERIAL ADVERSE CHANGE............................................................................. 21
H. ABSENCE OF CERTAIN DEVELOPMENTS........................................................................ 21
I. ASSETS................................................................................................. 23
J. TAX MATTERS............................................................................................ 23
K. CONTRACTS AND COMMITMENTS.............................................................................. 23
L. PROPRIETARY RIGHTS..................................................................................... 25
M. LITIGATION, ETC........................................................................................ 26
N. BROKERAGE.............................................................................................. 26
O. GOVERNMENTAL CONSENT, ETC.............................................................................. 26
P. INSURANCE.............................................................................................. 26
Q. EMPLOYEES.............................................................................................. 26
R. ERISA.................................................................................................. 27
S. COMPLIANCE WITH LAWS................................................................................... 27
T. AFFILIATED TRANSACTION................................................................................. 27
U. DISCLOSURE............................................................................................. 27
V. CLOSING DATE........................................................................................... 28
W. ENVIRONMENTAL LAW...................................................................................... 28
X. LEASES................................................................................................. 28
Y. NO SIDE LETTER AGREEMENTS.............................................................................. 28
Z. DISASTER RECOVERY PLANS................................................................................ 28
7. MISCELLANEOUS............................................................................................... 29
A. EXPENSES............................................................................................... 29
B. REMEDIES, ENFORCEMENT, GOVERNMENT LAW, VENUE........................................................... 29
C. PURCHASER'S INVESTMENT REPRESENTATIONS................................................................. 31
D. CONSENT TO AMENDMENTS.................................................................................. 32
E. SURVIVAL OF REPRESENTATIONS AND WARRANTIES............................................................. 32
F. SUCCESSORS AND ASSIGNS................................................................................. 32
G. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES............................................................... 32
H. SEVERABILITY........................................................................................... 32
I. COUNTERPARTS........................................................................................... 33
J. DESCRIPTIVE HEADINGS; INTERPRETATION................................................................... 33
K. NOTICES................................................................................................ 33
</TABLE>
Share Purchase Agreement ii
<PAGE>
SHARE PURCHASE AGREEMENT
------------------------
THIS AGREEMENT is made as of DECEMBER 21, 1998, between REAL EDUCATION,
INC., a Colorado corporation (the "COMPANY"), and the Persons listed on the
Schedule of Purchasers attached hereto (collectively referred to herein as the
"PURCHASERS" and individually as a "PURCHASER"). Except as otherwise indicated
herein, capitalized terms used herein are defined in Section 1 hereof.
The parties hereto agree as follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
terms have the meanings set forth below:
"AFFILIATE" of any particular person or entity means any other
person or entity controlling, controlled by or under common control with such
particular person or entity.
"CHARTER AMENDMENT" shall have the meaning set in Section 2.A.
"CLAIMS" means (i) all demands, claims, actions or causes of
action, assessments, losses, damages, charges, complaints, injunctions,
judgments, orders, decrees, rulings, awards, obligations, costs of environmental
investigations and/or cleanups, (ii) all costs of defending against and
complying with all actions, suits, proceeds, hearings, investigations, charges,
complains, claims, demands, injunctions, judgments, orders, decrees, rulings,
and (iii) all amounts paid in settlement, damages, dues, penalties, fines,
costs, liabilities, obligations, taxes, liens, losses, expenses, and fees,
including court costs, mediation, arbitration, or alternative dispute resolution
provisions, interest, penalties, disbursements, and reasonable attorneys' fees
and expenses.
"CLOSING" and "CLOSING DATE" shall have the respective meanings
set in Section 2.C.
"COMMON STOCK" shall mean the Company's Common Stock, no par
value per share.
"COMPENSATORY STOCK" means Common Stock (or options to purchase
Common Stock) issued for compensatory or incentive purposes to directors,
officers, employees and consultants of the Company, issuances of which are from
time to time approved by the Company's Board of Directors.
"EBITDA" for a particular accounting period shall mean the sum of
the Company's net income (or loss) plus net interest expense, tax expense and
amortization and depreciation expense, as all such amounts are reported in the
Company's financial statements for such period.
"EMPLOYMENT AGREEMENT" means the agreements entered into between
Company and Company's employees setting forth the terms and conditions of the
employees' employment at the Company.
"INDEBTEDNESS" shall mean at a particular time, without
duplication, (i) indebtedness for borrowed money or for the deferred purchase
price of property or services
Page 1 Share Purchase Agreement
<PAGE>
in respect of which any Person is liable, contingently or otherwise, as obligor
or otherwise (other than trade payables and other current liabilities incurred
in the ordinary course of business) or any commitment by which any Person
assures a creditor against loss, including contingent reimbursement obligations
with respect to letters of credit, (ii) indebtedness guaranteed in any manner by
any Person, including guarantees in the form of an agreement to repurchase or
reimburse and (iii) obligations under capitalized leases in respect of which
obligations any Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations any Person assures a
creditor against loss.
"INVESTMENT" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests, membership interests and joint venture interests) of any other Person
and (ii) any capital contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
"KEY EMPLOYEES" shall mean those senior management and other
employees whose service is deemed significant to the continued growth and
prosperity of the Company, as specified in a schedule to be jointly developed by
Company management and representatives of the Purchasers.
"KNOWLEDGE" (whether or not capitalized) means knowledge after
reasonable investigation and due inquiry on the part of the Company.
"LATEST BALANCE SHEET DATE" shall mean November 30, 1998.
"MATERIAL," "MATERIALITY," and all other iterations of the
term "MATERIAL" (whether or not capitalized) shall (i) be aggregated, and (ii)
shall be deemed to be triggered if the effect of such event, together with all
other events qualified by materiality (or other iterations thereof) exceeds 2%
of the aggregate purchase price paid by the Purchasers under this Agreement.
"MEDIAONE" means MediaOne Interactive Services, Inc.
"OFFICER'S CERTIFICATE" means a certificate signed by the
Company's president or its chief financial officer, stating that (i) the officer
signing such certificate has made or has caused to be made such investigations
as are necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"OPTION PLAN" shall have the meaning set in Section 4.L.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated
Page 2 Share Purchase Agreement
<PAGE>
organization and a governmental entity or any department, agency or political
subdivision thereof.
"PREFERRED STOCK" shall mean the Series A Preferred, the
Series B Preferred, and the Series C Preferred, considered together.
"PROPRIETARY RIGHTS" means under the laws of all countries all
(i) patents, patent applications, patent disclosures and inventions, (ii)
trademarks, service marks, trade dress, trade names, domain names and corporate
names and registrations and applications for registration thereof, (iii)
copyrights and registrations and applications for registration thereof and all
other literary property and author rights (including "moral rights"), (iv) mask
works and registrations and applications for registration thereof, (v) computer
software (including all code and all audio and/or visual displays), data,
database and documentation, (vi) trade secret and other confidential information
(including ideas, formulas, and processes whether patentable or unpatentable and
whether or not reduced to practice, know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, financial and marketing information
and plans, technical data, computer source code customer and supplier and
potential customer and supplier lists and information), (vii) other intellectual
property and intellectual property rights (including an individual's right of
publicity)and (viii) all tangible embodiments and copies thereof (in whatever
form or medium).
"REPRESENTATIVES" shall have the meaning set in Section 4.B.
"RESTRICTED SECURITIES" means (i) the Series C Preferred
issued hereunder, (ii) the Common Stock issued upon conversion of Series C
Preferred and (iii) any securities issued with respect to the securities
referred to in clauses (i) or (ii) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities when they
have (a) been effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) become eligible
for sale pursuant to Rule 144(k) (or any similar provision then in force) under
the Securities Act or (c) been otherwise transferred and new certificates for
them not bearing the Securities Act legend of the character set forth in Section
7.C have been delivered by the Company.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"SECURITIES AND EXCHANGE COMMISSION" includes any governmental
body or agency succeeding to the functions thereof.
"SERIES A HOLDERS" shall mean the holders of Series A
Preferred, from time to time.
Page 3 Share Purchase Agreement
<PAGE>
"SERIES A PURCHASE AGREEMENT" shall mean that certain Share
Purchase Agreement, dated June 11, 1997, between the Company and the Purchasers
named therein.
"SERIES A PREFERRED" shall mean the Company's Series A
Convertible Preferred Stock, no par value per share.
"SERIES B HOLDERS" shall mean the holders of Series B
Preferred, from time to time.
"SERIES B PURCHASE AGREEMENT" shall mean that certain Unit
Purchase Agreement, dated February 2, 1998, between the Company and the
Purchasers named therein.
"SERIES B PREFERRED" shall mean the Company's Series B
Convertible Preferred Stock, no par value per share.
"SERIES C PREFERRED" shall mean the Company's Series C
Convertible Preferred Stock, no par value per share.
"SUBSIDIARY" means, with respect to the Company, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by the Company or one or more of the other Subsidiaries
of the Company or a combination thereof or (ii) if a partnership, limited
liability company, association or other business entity, a majority of the
partnership, membership or other similar ownership interest thereof is at the
time owned or controlled, directly or indirectly, by the Company or one or more
Subsidiaries of the Company or a combination thereof. For purposes hereof, the
Company shall be deemed to have a majority ownership interest in a partnership,
association or other business entity if the Company shall be allocated a
majority of partnership, association or other business entity gains or losses or
shall be or control the managing director or general partner of such
partnership, association or other business entity.
"TREASURY REGULATIONS" means the United States Treasury
Regulations promulgated under the IRC and any reference to any particular
Treasury Regulation section shall be interpreted to include any final or
temporary revision of or successor to that section regardless of how numbered or
classified.
"UNDERLYING COMMON STOCK" means (i) the Common Stock issued or
issuable upon either conversion of the Series A Preferred, the Series B
Preferred, or the Series C Preferred and (ii) any Common Stock issued or
issuable with respect to the securities referred to in clause (i) above by way
of stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes of
this Agreement, any Person who holds Series A Preferred, Series B Preferred, or
Series C Preferred shall be deemed to be the holder of the Underlying Common
Stock obtainable upon conversion of the Series A Preferred, the Series B
Preferred, or the Series C Preferred in connection with the transfer of any such
Preferred Stock or otherwise regardless of any restriction or limitation on the
conversion of the Series A Preferred, the Series B Preferred, or the Series C
Preferred. As to any particular shares of Underlying Common Stock, such shares
Page 4 Share Purchase Agreement
<PAGE>
shall cease to be Underlying Common Stock when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them or (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or
any similar provision then in force).
"WARRANTS" shall mean the Company's outstanding warrants to
purchase one share of the Company's Common Stock, exercisable at a price of
$7.58 per share, for a period ending June 11, 2000.
"YEAR 2000 COMPLIANT" as applied to any hardware, software,
firmware or other technology, means that at all times and under all
circumstances the technology in question operates correctly and consistently
with dates and times, and date and time ranges in and beyond the year 2000, and
date and time ranges spanning periods before and after 0:00 hours on January 1,
2000, in a manner identical to that in which it operates with dates, times, and
date and time ranges prior to the year 2000, and, in particular, treats the year
2000 as a leap year and as the year immediately following 1999 for all purposes.
2. Authorization and Closing.
-------------------------
A. Authorization of the Shares. The Company shall authorize the
---------------------------
issuance and sale to the Purchasers of 430,540 shares of its Series C Preferred,
having the rights and preferences set forth in Article II of the Company's
Amended and Restated Articles of Incorporation, the form of which is attached
hereto as Exhibit A (the "CHARTER AMENDMENT"). The Series C Preferred is
---------
convertible into shares of the Company's Common Stock.
B. Purchase and Sale of the Shares. At the Closing, the Company
-------------------------------
shall sell to each Purchaser and, subject to the terms and conditions set forth
herein, each Purchaser shall severally purchase from the Company, the number of
shares of Series C Preferred (the "SHARES") set forth opposite such Purchaser's
name on the Schedule of Purchasers attached hereto, at a price of $34.84 per
Share. The aggregate purchase price to be paid by each Purchaser is set forth on
the Schedule of Purchasers. .
C. The Closing. The closing of the separate purchases and sales
-----------
of the Shares (the "CLOSING") shall take place at the offices of the Company at
10:00 a.m. December 21, 1998 (the "CLOSING DATE"), or at such other place or on
such other date as may be mutually agreeable to the Company and each Purchaser.
At the Closing, the Company shall deliver to each Purchaser a stock certificate
evidencing the Series C Preferred to be purchased by such Purchaser, registered
in such Purchaser's or its nominee's name, upon payment of the purchase price
thereof by certified or cashier's check, or wire transfer of immediately
available funds to a Company bank account designated by the Company in the
amount set forth opposite such Purchaser's name on the Schedule of Purchasers.
3. Conditions of Each Purchaser's Obligation at the Closing.
--------------------------------------------------------
The obligation of each Purchaser to purchase and pay for the
Series C Preferred at the Closing is subject to the satisfaction as of the
Closing of the following conditions:
A. Representations and Warranties: Covenants. The
------------------------------------------
representations and warranties contained in Section 6 hereof shall be true and
correct at and as of the Closing as
Page 5 Share Purchase Agreement
<PAGE>
though then made, except to the extent of changes caused by the transactions
expressly contemplated herein, and the Company shall have performed in all
material respects all of the covenants required to be performed by it hereunder
prior to the Closing.
B. No Material Adverse Claims. Since the Latest Balance Sheet
--------------------------
Date, there shall have been no material adverse change in the business,
financial condition, operating results, assets, employee relations, customer or
supplier relations, product development efforts, research and development
efforts or business prospects of the Company and there shall have been no
material claims or casualty loss or damage to the Company's assets (whether or
not covered by insurance)
C. Charter Amendment. The Charter Amendment shall have been
-----------------
duly filed with the Colorado Secretary of State and shall be in full force and
effect, and the Company's Articles of Incorporation shall not have been further
amended in any way.
D. Company's Bylaws. The Company's bylaws shall be unchanged
----------------
from June 11, 1997 except for the amendment to Section 3-1 of the By-laws,
adopted by unanimous consent of the Board of Directors on January 30, 1998 and
the amendment to Section 3-1 of the By-laws, adopted by unanimous consent of the
Board of Directors on December 18, 1998.
E. Registration Agreement. The Purchasers shall have been added
----------------------
as parties to the Company's Amended and Restated Registration Agreement dated
February 2, 1998, which agreement shall have been further amended as provided in
Exhibit B attached hereto (as so amended, the "REGISTRATION AGREEMENT") and the
Registration Agreement, as so amended, shall be in full force and effect as of
the Closing. The Company shall not be party to any other agreements providing
rights relating to the registration of the Company's securities.
F. Shareholders Agreement. The Company, the Purchasers and all
----------------------
of the Company's current holders of Common Stock, Series A Preferred or Series B
Preferred shall have entered into an Amended and Restated Shareholders Agreement
in form and substance as set forth in Exhibit C attached hereto (the
"SHAREHOLDERS AGREEMENT") and the Shareholders Agreement, as so amended, shall
be in full force and effect at the Closing. Neither the Company nor any of its
shareholders shall be parties to any other agreement relating to the voting of
the Company's capital stock.
G. Board of Directors. The size of the Board of Directors shall
------------------
be set at ten (10), and a Media One designee to the Board of Directors shall
have been appointed pursuant to the terms of the Shareholders Agreement.
H. Blue Sky Clearance. The Company shall have made all filings
------------------
under applicable state securities laws necessary to consummate the issuance of
the Series C Preferred pursuant to this Agreement in compliance with such laws.
I. Opinion of the Company's Counsel. Each Purchaser shall have
--------------------------------
received from Dorsey & Whitney LLP, special counsel for the Company, an opinion
with respect to the matters set forth in Exhibit D attached hereto, which shall
be addressed to each Purchaser, dated the Closing Date and in form and substance
reasonably satisfactory to each Purchaser.
Page 6 Share Purchase Agreement
<PAGE>
J. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Purchasers' counsel.
K. Waiver. Any condition specified in this Section 3 may be
------
waived if consented to by each Purchaser, provided that no such waiver shall be
effective against any Purchaser unless it is set forth in writing executed by
such Purchaser.
L. Closing Documents. The Company shall have delivered to each
-----------------
Purchaser all of the following documents:
(1) an Officer's Certificate, dated the Closing Date, stating
that the conditions specified in Section 2 and Sections 3.A through 3.M,
inclusive, have been fully satisfied;
(2) certified copies of (a) the resolutions duly adopted by the
Company's Board of Directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement, the
Shareholders Agreement and each of the other agreements contemplated
hereby, the filing of the Charter Amendment referred to in Section 2.A,
the issuance and sale of the Series C Preferred, the reservation of an
aggregate of 430,540 shares of Common Stock for issuance upon conversion
of any of the authorized shares of Series C Preferred and the
consummation of all other transactions contemplated by this Agreement;
(b) the resolutions duly adopted by the Company's Shareholders approving
the Charter Amendment; and (c) waivers obtained from the Series A Holders
and the Series B Holders with respect to (i) granting other registration
rights pursuant to Section 2.E of the Registration Agreement, as
previously in effect, (ii) First Refusal Rights pursuant to Section 4.L
of the Series A Purchase Agreement, (iii) First Refusal Rights pursuant
to Section 3.L of the Series B Purchase Agreement, and (iv) all other
rights held by the Series A Holders under the Series A Purchase
Agreement, Series B Holders under the Series B Purchase Agreement, By-
Laws or otherwise which maybe in conflict with the terms of this
Agreement and the transactions contemplated hereby;
(3) certified copies of the Amended and Restated Articles of
Incorporation and the Company's bylaws, each as in effect at the
Closing;
(4) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, all blue sky law filings and waivers
of all preemptive rights and rights of first refusal); and
(5) such other documents relating to the transactions
contemplated by this Agreement as Purchasers' counsel may reasonably
request.
M. The Company shall, concurrently with MediaOne's investment,
sell a total of not less than $15 million of Series C Preferred Stock.
4. Covenants.
---------
Page 7 Share Purchase Agreement
<PAGE>
So long as at least 143,370 Shares of Series C Preferred remain
outstanding (as appropriately adjusted for any stock dividends payable in shares
of Series C Preferred and any combinations, subdivisions and split-ups of the
shares of Series C Preferred), the Company covenants and agrees to observe the
covenants stated in Sections 4.A, 4.B and 4.D. The Company shall comply with
the remaining provisions of this Article 4 so long as any shares of Series C
Preferred remain outstanding.
A. Financial Statements and Other Information. The Company shall
------------------------------------------
deliver to each Purchaser, and with respect to subsections 4.A.(1) through
4.A.(3) until such time as the Company (i) shall have closed a Qualified IPO (as
defined in the Charter Amendment) or (ii) becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended:
(1) as soon as available but in any event within 30 days after the end
of each monthly accounting period in each fiscal year, unaudited
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such monthly period and for the period from the beginning
of the fiscal year to the end of such month and consolidated balance sheets
of the Company and its Subsidiaries as of the end of such monthly period,
setting forth in each case comparisons to the corresponding period in the
preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently
applied;
(2) as soon as available but in any event within 30 days after the end
of each quarter, an executive summary which discusses the Company's results
of operations and material developments in the Company's business;
(3) within 90 days after the end of each fiscal year, audited
consolidated statements of income and cash flows of the Company and its
Subsidiaries for such fiscal year, and consolidated balance sheets of the
Company and its Subsidiaries as of the end of such fiscal year, setting
forth in each case comparisons to the preceding fiscal year, all prepared
in accordance with generally accepted accounting principles, consistently
applied, and accompanied by (a) with respect to the consolidated portions
of such statements, an opinion containing no exceptions or qualifications
(except for qualifications regarding specified contingent liabilities) of
an accounting firm of national recognition and (b) a copy of such firm's
annual management letter to the Company's Board of Directors;
(4) promptly upon receipt thereof, any additional reports, management
letters or other detailed information concerning significant aspects of the
Company's operations or financial affairs given to the Company by its
independent accountants (and not otherwise contained in other materials
provided hereunder);
(5) at least 30 days but not more than 90 days prior to the beginning
of each fiscal year, an annual budget prepared on a monthly basis for the
Company and its Subsidiaries for such fiscal year (displaying anticipated
statements of income and cash flows and balance sheets) and promptly upon
preparation thereof, any other significant budgets prepared by the Company
and any revisions of such annual or other budgets;
Page 8 Share Purchase Agreement
<PAGE>
(6) promptly (but in any event within ten business days) after the
discovery or receipt of notice of any default under any material agreement
to which it or any of its Subsidiaries is a party or any other material
adverse event or circumstance affecting the Company or any Subsidiary
(including the filing of any material litigation or other claim against the
Company or any Subsidiary or the existence of any dispute with any Person
which involves a reasonable likelihood of such litigation being commenced),
an Officer's Certificate specifying the nature and period of existence
thereof and what actions the Company and its Subsidiaries have taken and
propose to take with respect thereto;
(7) copies of all materials provided to the Board of Directors as part
of any package of information provided to the Board of Directors prior to
or at any regular or special meeting of the Board of Directors;
(8) copies of any other materials provided to the Board of Directors;
and
(9) with reasonable promptness, such other information and financial
data concerning the Company and its Subsidiaries as any Purchaser may
reasonably request.
Each of the financial statements referred to in subparagraphs (1) and (3) above
shall be true and correct in all material respects as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end audit adjustments (none of
which would, alone or in the aggregate, be materially adverse to the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole).
B. Inspection of Property. The Company shall permit any
----------------------
representatives ("REPRESENTATIVES"), designated by any Purchaser or group of
purchasers holding at least 1% of the outstanding Common Stock equivalents, upon
reasonable notice and during normal business hours and such other times as any
such Representative may reasonably request, to (i) visit and inspect any of the
properties of the Company and its Subsidiaries, (ii) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or
extracts therefrom and (iii) discuss the affairs, finances and accounts of any
such corporations with the directors, officers, employees and independent
accountants of the Company and its Subsidiaries. The presentation of an
executed copy of this Agreement by any Purchaser to the Company's independent
accountants shall constitute the Company's permission to its independent
accountants to participate in discussions with such Persons.
C. Directors' Meetings; Expenses and Indemnification. There shall be
-------------------------------------------------
at least four meetings of the Board of Directors during each fiscal year. Upon
request of any director, all reasonable travel and other out-of-pocket expenses
of such board member incurred in connection with attending regular and special
Board of Directors' meetings, attending any meeting of any committee thereof or
conducting any other business on behalf of the Company, will be paid by the
Company. The Company shall give each director written notice of each meeting of
its Board of Directors and each committee thereof, at least ten days prior to
the date of each such meeting. Promptly after the Closing, the Company shall
enter into an indemnification agreement with each of its outside directors
providing for indemnification to the fullest extent permitted by law.
Page 9 Share Purchase Agreement
<PAGE>
D. Board Approvals. The affirmative vote of a majority of the members
---------------
of the Board of Directors attending a meeting held following due notice shall be
required to approve the following acts by the Company listed below in this
Section 4.D. The Company covenants and agrees not to enter into any such action
without the required Board of Directors consent:
(1) the authorization, execution or delivery of significant
distribution, licensing or other arrangements entered into outside the
ordinary course of business;
(2) the authorization or incurrence of any new Indebtedness (other than
Indebtedness subject to Section 4.E(14), as to which the Shareholder
approval specified by such Section shall be necessary and sufficient);
(3) all executive compensation arrangements (as to which, the Board of
Directors shall act only following an affirmative recommendation of the
Compensation Committee);
(4) approval of the Company's annual operating plan and capital budget;
(5) undertaking capital expenditures in excess of the agreed-upon
capital budget; and
(6) commencing any executive searches.
E. Restrictions. The Company shall not, without the prior written
------------
consent of the holders of at least 66 2/3% of the Underlying Common Stock
related to or derived from only the Series C Preferred, (as this Section 4.E may
be modified by Section 4.N):
(1) directly or indirectly redeem, purchase or otherwise acquire, or
permit any Subsidiary to redeem, purchase or otherwise acquire, any of the
Company's equity securities (including warrants, options and other rights
to acquire equity securities) other than (a) the Preferred Stock pursuant
to the terms of the Articles of Incorporation as amended by the Charter
Amendment or (b) the redemption of shares of Common Stock from employees or
consultants at a price equal to the original purchase price paid by such
consultants or employees, pursuant to "Securities Buy-Sell Agreements"
approved by the Board of Directors and entered into at or prior to the time
such Common Stock was originally issued to such employees or consultants;
(2) authorize, issue or enter into any agreement providing for the
issuance (contingent or otherwise) of, or the appointment of any
underwriter in connection with the sale of (a) any notes or debt securities
containing equity features (including any notes or debt securities
convertible into or exchangeable for equity securities, issued in
connection with the issuance of equity securities or containing profit
participation features) (b) any equity securities (or any securities
convertible into or exchangeable for any equity securities), which equity
features (in the case of notes or debt securities) or equity securities are
in either case senior to or on a parity with the Series C Preferred with
respect to voting, the payment of dividends, redemptions or distributions
upon liquidation or otherwise or (c) any equity securities or securities
containing equity features at a price per equivalent share of Common Stock
less than $34.84, other than securities issued upon exercise of stock
options under the Option Plan;
Page 10 Share Purchase Agreement
<PAGE>
(3) make, or permit any Subsidiary to make, any loans or advances to,
guarantees for the benefit of, or, except as otherwise permitted by Section
4.E(8) below, Investments in, any Person (other than a wholly-owned
Subsidiary), except for (a) reasonable advances to employees in the
ordinary course of business, (b) acquisitions permitted pursuant to Section
4.E(8) below, (c) advances against anticipated future license fees or
royalties in connection with acquisitions of software products or licensing
rights with respect to software products and (d) Investments having a
stated maturity no greater than one year from the date the Company makes
such Investment in (i) obligations of the United States government or any
agency thereof or obligations guaranteed by the United States government,
(ii) certificates of deposit of commercial banks having combined capital
and surplus of at least $500 million, (iii) commercial paper with a rating
of at least "Prime-l" by Moody's Investors Service, Inc. or (iv) public
mutual funds which invest primarily in the instruments described in items
(i) and (iii) above;
(4) liquidate, dissolve or effect a recapitalization or sale of all or
substantially all of the assets of the Company or reorganization in any
form of transaction (including any reorganization into partnership form);
(5) merge or consolidate with any Person or, except as permitted by
Section 4.E(8) below, permit any Subsidiary to merge or consolidate with
any Person (other than a wholly-owned Subsidiary);
(6) sell, lease or otherwise dispose of, or permit any Subsidiary to
sell, lease or otherwise dispose of, more than 25% of the consolidated
assets of the Company and its Subsidiaries (computed on the basis of book
value, determined in accordance with generally accepted accounting
principles, consistently applied, or fair market value, determined by the
Company's Board of Directors in its reasonable good faith judgment) in any
transaction or series of related transactions (other than sales in the
ordinary course of business) or sell, grant exclusive rights in or
permanently dispose of any of its or any Subsidiary's Proprietary Rights;
(7) file with the Securities and Exchange Commission any registration
statement relating to a proposed public offering of the Company's
securities, other than a Qualified IPO (as defined in the Charter
Amendment);
(8) acquire, or permit any Subsidiary to acquire, any interest in any
business (whether by a purchase of assets, purchase of stock, merger or
otherwise), or enter into any joint venture, involving an aggregate
consideration (including the assumption of liabilities whether direct or
indirect) exceeding $1,000,000 in any one transaction or exceeding
$1,000,000 in the aggregate in any twelve-month period;
(9) enter into, or permit any Subsidiary to enter into, the ownership,
active management or operation of any business other than those owned,
managed or operated as of the Closing;
(10) become subject to, or permit any of its Subsidiaries to become
subject to, any agreement or instrument which by its terms would (under any
circumstances) restrict the Company's right to perform the provisions of
this Agreement, the
Page 11 Share Purchase Agreement
<PAGE>
Registration Agreement, the Articles of Incorporation
or the Company's bylaws (including provisions relating to payment of
dividends on and making redemptions and conversions of the Series A
Preferred);
(11) except as expressly contemplated by this Agreement, make any
amendment to the Amended and Restated Articles of Incorporation, or the
Company's bylaws, or file any resolution of the Board of Directors with the
Colorado Secretary of State containing any provisions which would increase
or decrease (other than by redemption or conversion) the number of
authorized shares of the Series C Preferred or adversely affect the rights
or relative priority of the holders of the Series C Preferred or the
Underlying Common Stock under this Agreement, the Amended and Restated
Articles of Incorporation, the Company's bylaws or the Registration
Agreement;
(12) (a) enter into, or permit any Subsidiary to enter into, any
transaction with any of its or any Subsidiary's officers, directors,
employees or Affiliates (or any individual related by blood or marriage to
any such Person or any entity in which any such Person or individual owns a
beneficial interest), except (i) for normal employment arrangements and
benefit programs on reasonable terms and except as otherwise expressly
contemplated by this Agreement and (ii) in the ordinary course of and
pursuant to the reasonable requirements of its business and upon fair and
reasonable terms no less favorable to it than it would obtain in a
comparable arm's length transaction with a Person who is not an officer,
director, employee or Affiliate or (b) hire or employ any individual, other
than John Helmick, the Company's General Counsel and Vice President of
Legal Affairs, related to an officer of the Company or any Subsidiary by
blood or marriage;
(13) establish or acquire any Subsidiaries;
(14) create, incur, assume or suffer to exist, or permit any Subsidiary
to create, incur, assume or suffer to exist, Indebtedness to any banks or
other financial institutions exceeding (a) $500,000; except any addition to
the credit facility with Silicon Valley Bank, or its successors, up to a
maximum credit facility of $5,000,000.
(15) make any capital expenditures (including payments with respect to
capitalized leases, as determined in accordance with generally accepted
accounting principles, consistently applied but excluding any amounts of
product development expenditures which are capitalized in conformity with
generally accepted accounting principles, consistently applied) more than
35% greater than the amount authorized for such expenditures in the
applicable line item of the Company's latest annual budget, as approved
pursuant to Section 4.D(4) of this Agreement;
(16) amend the Articles of Incorporation or bylaws to set the size of
the Company's Board of Directors at any number greater than ten;
(17) issue any Common Stock, unless the purchaser or subscriber is or
becomes a party to the Shareholders Agreement; or
(18) grant any options under the Option Plan if, after giving affect to
such grant, the sum of (i) all shares of Common Stock subject to then-
outstanding options
Page 12 Share Purchase Agreement
<PAGE>
issued under the Option Plan plus (ii) all shares of Common Stock
previously issued upon the exercise of options under the Option Plan, would
exceed 235,000 shares.
F. Affirmative Covenants. The Company shall, and shall cause each
---------------------
Subsidiary to:
(1) at all times cause to be done all things necessary to (a) maintain,
preserve and renew its corporate existence, good standing and all material
leases, licenses, registrations, authorizations and permits necessary or
desirable for the conduct of its businesses; and (b) maintain, preserve,
prosecute and renew its Proprietary Rights (as applicable) and all material
registrations, pending applications for registrations and licenses with
respect to such Proprietary Rights.
(2) maintain and keep its properties in good repair, working order and
condition, and from time to time make all necessary or desirable repairs,
renewals and replacements, so that its businesses may be properly and
advantageously conducted at all times;
(3) pay and discharge when payable all taxes, assessments and other
governmental fees or charges imposed upon its properties, receipts, income
or profits, including taxes or charges that it may or is required to
collect from its customers or employees, and prepare and file all forms,
reports, extension of time to file requests, and returns to report and pay
such taxes, fees or charges (in all cases before the payment or report
becomes delinquent and before penalties accrue thereon), unless and to the
extent that the same are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have been
established on its books with respect thereto;
(4) comply with all other obligations which it incurs pursuant to any
contract or agreement, whether oral or written, express or implied, as such
obligations become due, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its books with
respect thereto;
(5) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company
and its Subsidiaries;
(6) apply for and continue in force with good and responsible insurance
companies adequate insurance covering risks of such types and in such
amounts as are customary for well-insured corporations of similar size
engaged in similar lines of business;
(7) maintain proper books of record and account which fairly present
its financial condition and results of operations and make provisions on
its financial
Page 13 Share Purchase Agreement
<PAGE>
statements for all such proper reserves as in each case are required in
accordance with generally accepted accounting principles, consistently
applied; and
(8) enter into and maintain Employment Agreements containing
confidentiality covenants and intellectual property rights assignments
provisions with all Key Employees of the Company and enter into and
maintain confidentiality agreements and agreements providing for the
assignment of intellectual property rights with each employee of the
Company and each consultant to the Company.
(9) Use the proceeds from the sale of Series C Preferred Stock only in
accordance with the provisions of Section 4.M hereof.
G. Compliance with Agreements. The Company shall perform and observe
--------------------------
(i) all of its obligations to each holder of the Series C Preferred and all of
its obligations to each holder of the Underlying Common Stock set forth in the
Amended and Restated Articles of Incorporation, as amended, and the Company's
bylaws and (ii) all of its obligations to each holder of Registrable Securities
set forth in the Registration Agreement.
H. Current Public Information. At all times after the Company has
--------------------------
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
I. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of issuance upon the conversion of the Series C
Preferred, such number of shares of Common Stock as are issuable upon the
conversion of all outstanding Series C Preferred. The Company represents and
covenants that all shares of Common Stock which are so issuable shall, when
issued, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges. The Company shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Company upon issuance).
J. Proprietary Rights. The Company shall, and shall cause each
------------------
Subsidiary to, possess and maintain all Proprietary Rights necessary to the
conduct of their respective businesses and shall own all right, title and
interest in and to, or have a valid license sufficient as to scope, territory
and duration for, all such Proprietary Rights used by the Company and
Page 14 Share Purchase Agreement
<PAGE>
each Subsidiary in the conduct of their respective businesses. Neither the
Company nor any Subsidiary shall take any action, or fail to take any action,
which would result in the invalidity, abuse, misuse, unavailability or
unenforceability of such Proprietary Rights or which would infringe upon or
constitute a misappropriation or dilution of any rights of other Persons,
provided that the foregoing shall not obligate the Company to undertake
litigation or other enforcement actions which the Company's Board of Directors
in its commercially reasonable discretion determines to be not economically
justified. The Company knows of no facts or circumstances which could result in
the invalidity, abuse, misuse, unavailability or unenforceability of such
Proprietary Rights or which would infringe upon or constitute a misappropriation
or dilution of any rights of other Persons.
K. First Refusal Rights.
--------------------
(1) Except for the issuance of (a) Compensatory Stock, (b) Common Stock
upon the conversion of the Preferred Stock, (c) Common Stock or other
equity securities in connection with the acquisition of another business as
contemplated by Section 4.E(8) or in a transaction approved by the holders
of 66 2/3% of the Underlying Common Stock, (d) Common Stock upon exercise
of the Warrants and (e) Common Stock pursuant to a public offering
registered under the Securities Act, if the Company authorizes the issuance
or sale of any shares of Common Stock or any securities containing options
or rights to acquire any shares of Common Stock (other than as a dividend
on the outstanding Common Stock), the Company shall first offer to sell to
each holder of Underlying Common Stock a portion of such stock or
securities equal to the quotient determined by dividing (1) the number of
shares of Underlying Common Stock held by such holder by (2) the sum of the
total number of shares of Underlying Common Stock and the number of shares
of Common Stock outstanding which are not shares of Underlying Common
Stock. Each holder of Underlying Common Stock shall be entitled to
purchase such stock or securities at the most favorable price and on the
most favorable terms as such stock or securities are to be offered to any
other Persons.
(2) In order to exercise its purchase rights hereunder, a holder of
Underlying Common Stock must, within 21 days after receipt of written
notice from the Company describing in reasonable detail the stock or
securities being offered, the purchase price thereof, the payment terms and
such holder's percentage allotment, deliver a written notice to the Company
describing its election hereunder. If not all of the stock and securities
offered to the holders of Underlying Common Stock are fully subscribed by
such holders, the remaining stock and securities shall be reoffered by the
Company to the holders purchasing their full allotment upon the terms set
forth in this Section 4.K, except that such holders must exercise their
purchase rights within five days after receipt of such reoffer.
(3) Upon the expiration of the offering periods described above, the
Company shall be entitled to sell such stock or securities which the
holders of Underlying Common Stock have not elected to purchase during the
90 days following such expiration on terms and conditions no more favorable
to the purchasers thereof than those offered to such holders. Any stock or
securities offered or sold by the Company after such 90-day period must be
reoffered to the holders of Underlying Common Stock pursuant to the terms
of this Section 4.K.
Page 15 Share Purchase Agreement
<PAGE>
(4) The rights under this Section 4.K shall terminate upon the closing
of a Qualified IPO, as such term is defined in the Charter Amendment.
L. Management Stock Pool. The Company shall maintain its incentive
---------------------
stock option plan (the "OPTION PLAN") in the form adopted on March 24, 1997, as
amended on October 12, 1998, for which 182,000 shares of the Common Stock have
been reserved, and for which no more than 43,000 additional shares will be
reserved. The Option Plan provides for the grant of options to the Company's
employees, which options shall vest over a period of two (2) to five (5) years
from the date of issuance. The Option Plan provides, and it shall continue to be
the case, that the Compensation Committee of the Company's Board of Directors
shall determine the recipients and size of all option grants.
M. Use of Proceeds. The Company covenants and agrees that except as
---------------
required by any agreements governing any existing debt obligations of the
Company, which are listed on the "Liabilities Schedule," as such agreements
existed immediately prior to the Closing Date, it shall not apply any of the
proceeds from the sale of the Shares of Series C Preferred to pay, repay,
discharge, or secure any amounts of principal, interest or other amounts owing
under any secured or unsecured debt of the Company existing immediately prior to
or as of the Closing Date. The remaining proceeds shall be used for the
expansion of the Company's direct sales organization, advertising and promotion
activities, continued product development, working capital, and other general
corporate purposes. The Company further agrees as follows:
(1) The Company agrees to allocate and apply $1,000,000 of the proceeds
from the sale of Series C Preferred (the "Allocated Funds") to efforts in
support of one or more broadband projects relating to broadband content and
delivery suitable for distribution through the MediaOne Express high-speed
internet access services, which shall include, without limitation, projects
related to mutually agreeable content and technology. The Company shall
also develop an online course/school finder where consumers can search for
courses or schools that may interest them and then enroll online. As soon
as reasonably practicable following the effective date of this Agreement
(the "Effective Date") and quarterly thereafter, the Company will prepare
and submit to the Company's Board of Directors (with a copy to MediaOne
Interactive Services Group ("ISG")) a status report regarding the Allocated
Funds Uses (as defined below), to include information regarding project
staffing, objectives, milestones and funding; provided, however, that the
Company shall have no further obligations to prepare and submit status
reports after the Allocated Funds have been expended on Allocated Fund
Uses. Unless ISG otherwise consents in writing, the Company will use all
of the Allocated Funds for purposes of the Allocated Funds Uses within
twenty-four (24) months following the Effective Date ("Completion Date").
(2) ISG shall have the unlimited right to delay, suspend, discontinue,
or terminate its requirement that the Company utilize all or any portion of
the Allocated Funds for the Allocated Funds Uses at any time upon written
notice to the Company. If the use of the Allocated Funds for the Allocated
Funds Uses is discontinued or terminated by ISG, the Company may retain the
unused portion of the Allocated Funds for general corporate purposes and
may, in its discretion, continue its efforts on the Allocated Funds Uses.
"Allocated Funds Uses" shall mean (i) development of one or more broadband
projects relating to broadband content and delivery suitable for
Page 16 Share Purchase Agreement
<PAGE>
distribution through the MediaOne Express high-speed internet access
services, and (ii) an online course/school finder where consumers can
search for courses or schools that may interest them and then enroll
online.
(3) Prior to the Completion Date and for a period of two years
thereafter, the Company shall keep and maintain accurate books and records
relating to the Allocated funds and the Allocated Funds Uses. Upon
request, ISG or its agents may inspect, audit and analyze copies of all of
the Company's records relating to the Allocated Funds and Allocated Funds
Uses. Any such audit by ISG shall be conducted at ISG's cost and expense
during normal business hours at the regular place of business of the
Company upon at least five (5) days prior written notice, ISG may exercise
this audit right three (3) times per calendar year, but no more than once
per quarter.
(4) The Company agrees to allocate a portion of the proceeds to adopt
Company's system for delivery of corporate training and continuing
education courses.
N. Covenant by Purchasers re. Section 4.E. The Purchasers agree to
--------------------------------------
modify the introductory language to Section E, to read as follows, IF AND ONLY
IF the Company secures the consent of all of the holders of Series A Preferred
and all of the holders of Series B Preferred to the same language with respect
to their respective Purchase Agreements:
"The Company shall not, without the prior written consent of the holders of
at least 66 2/3% of the Underlying Common Stock related to or derived from
only the Series C Preferred (provided, that, in the case of subparagraphs 4
and 5, the approval of 66 2/3% of Series A Preferred, 66 2/3% of Series B
Preferred, and 66 2/3% of Series C Preferred shall be required if the per-
share proceeds to the Series C Preferred is less than 150% of the
Redemption Price (as defined in the Charter Amendment, with respect to the
Series C Preferred), and provided further, that, in the case of
subparagraphs 4 and 5, the approval of 50% of Series A Preferred, 50% of
Series B Preferred, and 50% of Series C Preferred shall be required if the
per-share proceeds to the Series C Preferred is greater than or equal to
150% of the Redemption Price (as defined in the Charter Amendment, with
respect to the Series C Preferred)):"
O. WebCT Within thirty (30) days after the Closing Date, the Company
-----
shall use its reasonable efforts to obtain a nonexclusive, fully paid-up,
worldwide, irrevocable right and license to use the source code and all
supporting documentation necessary to maintain and support the WebCT online
course building tool (including all upgrades and modified versions of such tool)
(the "WebCT Material"), during the term of the Company's license for the WebCT
tool, in the event WebCT fails to provide maintenance and support services for
the product, as required by the terms and conditions of the license agreement.
Within this thirty (30) day period the Company shall use its reasonable efforts
to either: (a) obtain complete copies of all of the WebCT Material (and the
written commitment of WebCT Educational Technologies Company ("WebCT") to
provide all necessary updates/modifications to such WebCT Material during the
term of the Company's license), or (b) enter into an escrow agreement for the
WebCT Material with WebCT and a nationally-recognized, independent escrow agent
in the United States (e.g., Data Securities International, Inc.) that obligates
the escrow agent to provide the Company with timely access to the WebCT Material
under the circumstances outlined above during the term of the Company's license.
The Company shall
Page 17 Share Purchase Agreement
<PAGE>
be solely responsible for all costs and expenses associated with establishing
and maintaining such escrow arrangement. In the event the Company is unable to
secure the license rights and access to the WebCT Materials, as specified above,
the Company shall use its reasonable efforts to develop an alternative solution
to continued use of the WebCT product.
P. Independent Contractor Agreements. Within 30 days after the
---------------------------------
Closing Date, the Company will analyze the "assignment of rights" provisions in
the Company's employment agreements and independent contractor agreements, and
will make appropriate modifications in order to strengthen such provisions. The
Company will consult with MediaOne (or an expert of MediaOne's choosing) in
connection with making these modifications.
Q. Subsequent Series C Closings. The Company covenants that the
----------------------------
terms of the investment by any Purchaser (e.g., Blumenstein/Thorne Information
Partners I, L.P.) which closes their investment subsequent to the closing of
MediaOne's investment will be on terms that are no better, in any respect, than
the terms received by MediaOne pursuant to this Agreement, the Charter
Amendment, the Shareholders Agreement, the Registration Agreement, and any other
related documents.
5. Transfer of Restricted Securities.
----------------------------------
Each Purchaser acknowledges that Restricted Securities are transferable
only pursuant to (i) public offerings registered under the Securities Act, (ii)
Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar
rule or rules then in force) if such rule is available or (iii) subject to the
conditions specified in subsection (A) below, any other legally available means
of transfer.
A. In connection with the transfer of any Restricted Securities, the
holder thereof shall deliver written notice to the Company describing in
reasonable detail the transfer or proposed transfer, together with an opinion of
counsel which (to the Company's reasonable satisfaction) is knowledgeable in
securities law matters to the effect that such transfer of Restricted Securities
may be effected without registration of such Restricted Securities under the
Securities Act. In addition, if the holder of the Restricted Securities
delivers to the Company an opinion of such counsel that no subsequent transfer
of such Restricted Securities shall require registration under the Securities
Act, the Company shall promptly upon such contemplated transfer deliver new
certificates for such Restricted Securities which do not bear the Securities Act
legend set forth in Section 7.C. If the Company is not required to deliver new
certificates for such Restricted Securities not bearing such legend, the holder
thereof shall not transfer the same until the prospective transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this Section 5.A and Section 7.C.
B. Upon the request of any Purchaser, the Company shall promptly
supply to such Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
C. Upon the request of any holder of Restricted Securities, the
Company shall remove the foregoing legend from the certificates for such
holder's Restricted Securities; provided that such Restricted Securities are
eligible for sale pursuant to Rule 144(k). Whenever any particular securities
cease to be Restricted Securities, the holder thereof shall be entitled to
Page 18 Share Purchase Agreement
<PAGE>
receive from the Company, without expense, new certificates representing such
securities but of not bearing a Securities Act legend of the character set forth
in Section 7.C.
6. Representations and Warranties of Company. As a material
-----------------------------------------
inducement to the Purchasers to enter into this Agreement and purchase the
Shares, the Company hereby represents and warrants that:
A. Organization and Corporate Power. The Company is a
--------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Colorado and is qualified to do business in Colorado and in every other
jurisdiction in which its ownership of property or conduct of business requires
it to qualify. The Company has all requisite corporate power and authority and
all material licenses, permits and authorizations necessary to own and operate
its properties, to carry on its businesses as now conducted and presently
proposed to be conducted and to carry out the transactions contemplated by this
Agreement. The copies of the Company's charter documents and bylaws which have
been furnished to the Purchasers' counsel reflect all amendments made thereto at
any time prior to the date of this Agreement and are correct and complete.
B. Capital Stock and Related Matters
---------------------------------
(1) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 132,000 shares of Series
A Preferred, of which 132,000 Shares shall be issued and outstanding, (b)
326,833 Shares of Series B Preferred, of which 326,833 shall be issued and
outstanding, (c) 430,540 Shares of Series C Preferred, of which 430,540
shall be issued and outstanding (d) 10,000,000 shares of Common Stock, of
which 1,095,500 shares shall be issued and outstanding, 132,000 shares
shall be reserved for issuance upon conversion of the outstanding Series A
Preferred, 326,833 shares shall be reserved for issuance upon conversion of
the outstanding Series B Preferred, 430,540 shall be reserved for issuance
upon conversion of the outstanding Series C Preferred to be issued upon
closing, 137,000 shall be reserved for issuance upon exercise of the
Warrants, 12,000 shall be reserved for issuance upon exercise of options
granted to members of the Board of Directors, 4,500 shall be reserved for
warrants granted to Silicon Valley Bank and 182,000 shall be reserved for
issuance pursuant to the terms of the Option Plan. None of the previous
issuances of the Series A Preferred, Series B Preferred, Common Stock,
Warrants or any other outstanding security of the Company have been in
violation of any preemptive right or similar right of first refusal.
(2) As of the Closing, the Company shall not have outstanding any
stock or securities convertible or exchangeable for any shares of its
capital stock or containing any profit participation features, nor shall it
have outstanding any rights or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable
for its capital stock or any stock appreciation rights or phantom stock
plans, except for the Series A Preferred, the Series B Preferred, the
Series C Preferred and the Warrants and except as set forth on the attached
"CAPITALIZATION SCHEDULE." The Capitalization Schedule accurately sets
forth the following with respect to all outstanding shares of the Company's
capital stock: name of the holder and number of shares of each class of
capital stock held. The Capitalization Schedule accurately sets forth the
following with respect to all outstanding options and rights to acquire the
Page 19 Share Purchase Agreement
<PAGE>
Company's capital stock: the holder, the number of shares covered, the
exercise price, the grant date and the expiration date.
(3) As of the Closing, the Company shall not be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other
rights to acquire its capital stock, except as set forth on the
Capitalization Schedule and except pursuant to the Amended and Restated
Articles of Incorporation. As of the Closing, all of the outstanding
shares of the Company's capital stock shall be validly issued, fully paid
and nonassessable.
(4) There are no statutory or contractual Shareholders' preemptive
rights or rights of refusal with respect to the issuance of the Series C
Preferred hereunder or the issuance of the Common Stock upon conversion of
the Series C Preferred, except for First Refusal Rights held by Series A
Holders under the Series A Purchase Agreement and the First Refusal Rights
held by Series B Holders under the Series B Purchase Agreement which rights
have all been duly and validly waived. The Company has not violated any
applicable federal or state securities laws in connection with the offer,
sale or issuance of any of its capital stock, and, assuming the truth of
the Purchasers' representations in Section 7.C hereof, the offer, sale and
issuance of the Shares hereunder does not require registration under the
Securities Act or any applicable state securities laws. Except as
described on the Affiliate Transactions Schedule (as defined in Section
6.T), there are no agreements between the Company and any of its
Shareholders or, to the Company's knowledge between the Company's
Shareholders with respect to the voting or transfer of the Company's
capital stock or with respect to any other aspect of the Company's affairs,
except for the Registration Agreement, the Shareholders Agreement and this
Agreement.
C. Subsidiaries; Investments. The Company does not own or hold any
-------------------------
rights to acquire any shares of stock or any other security or interest in any
other Person and the Company does not have any Subsidiary.
D. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement, the Registration Agreement, the Shareholders
Agreement and all other agreements contemplated hereby to which the Company is a
party have been duly authorized by the Company. This Agreement, the Registration
Agreement, the Shareholders Agreement and all other agreements contemplated
hereby each constitutes a valid and binding obligation of the Company,
enforceable in accordance with its terms. The execution and delivery by the
Company of this Agreement, the Registration Agreement, the Shareholders
Agreement and all other agreements contemplated hereby to which the Company is a
party, the offering, sale and issuance of the Shares hereunder, the issuance of
the Common Stock upon conversion of the Series C Preferred and the fulfillment
of and compliance with the respective terms hereof and thereof by the Company,
do not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result in
the creation of any lien, security interest, charge or encumbrance upon the
Company's capital stock or assets pursuant to, (iv) give any third party the
right to modify, terminate or accelerate any obligation under, (v) result in a l
violation of, or (vi) require any authorization, consent, approval, exemption or
other action by or notice to any court or administrative or governmental body
pursuant to, the Amended and Restated Articles of Incorporation or bylaws of the
Company, or any law, statute,
Page 20 Share Purchase Agreement
<PAGE>
rule or regulation to which the Company is subject, or any agreement,
instrument, order, Judgment or decree to which the Company is subject.
E. Financial Statements. Attached hereto as the "Financial
--------------------
Statements Schedule" are the audited balance sheets of the Company as of June
30, 1998 (the "Audited Balance Sheet"), the related audited statements of income
and cash flows for the fiscal year then ended, the unaudited balance sheets of
the Company for the quarter ended September 30, 1998 and the related unaudited
statements of income and cash flows for the quarter then ended, and the
unaudited balance sheets of the Company as of October 31, 1998 (the "Latest
Balance Sheet"), and the related statements of income and cash flows (or the
equivalent) for the periods then ended. Each of such financial statements
(including in all cases the notes thereto, if any) is accurate and complete in
all material respects, is consistent with the books and records of the Company
(which, in turn, are accurate and complete in all material respects) and has
been prepared in accordance with generally accepted accounting principles,
consistently applied, subject to the lack of footnote disclosure (none of which
disclosures would, alone or in the aggregate, be materially adverse to the
financial condition, operating results, assets, operations or business prospects
of the Company and its Subsidiaries taken as a whole).
F. Absence of Undisclosed Liabilities. Except as set forth on the
----------------------------------
attached "LIABILITIES SCHEDULE," the Company does not have any obligation or
liability (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to the Company, whether due or to become due and regardless
of when asserted) arising out of transactions entered into at or prior to the
Closing, any action or inaction at or prior to the Closing or any state of facts
existing at or prior to the Closing, other than: (i) liabilities set forth on
the Latest Balance Sheet (including any notes thereto), (ii) liabilities and
obligations which have arisen after the date of the Latest Balance Sheet in the
ordinary course of business (none of which is a liability resulting from breach
of contract, breach of warranty, tort, infringement, claim or lawsuit and all of
which in the aggregate are not material to the Company) and (iii) other
liabilities and obligations expressly disclosed in the other Schedules to this
Agreement. For purposes of this Agreement "ordinary course of business" also
requires consistency with past practice with respect to frequency and amount.
G. No Material Adverse Change. Since the date of the Latest Balance
--------------------------
Sheet, there has been no adverse change in the financial condition, operating
results, assets, operations, business prospects, employee relations or customer
or supplier relations of the Company.
H. Absence of Certain Developments.
-------------------------------
(1) Except as expressly contemplated by this Agreement or as set
forth on the attached "DEVELOPMENTS SCHEDULE," since the date of the Latest
Balance Sheet, the Company has not:
(a) issued any notes, bonds or other debt securities or any
equity securities or any securities convertible, exchangeable or
exercisable into any equity securities;
Page 21 Share Purchase Agreement
<PAGE>
(b) borrowed any amount or incurred or become subject to
any liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts
entered into in the ordinary course of business;
(c) discharged or satisfied any lien or encumbrance or paid
any obligation or liability, other than current liabilities paid
in the ordinary course of business;
(d) declared or made any payment or distribution of cash or
other property to its Shareholders with respect to its stock or
purchased or redeemed any shares of its stock or any warrants,
options or other rights to acquire its stock;
(e) mortgaged or pledged any of its properties or assets or
subjected them to any lien, security interest, charge or other
encumbrance, except liens for current property taxes not yet due
and payable;
(f) sold, assigned or transferred any of its tangible
assets, except in the ordinary course of business, or canceled
any debts or claims;
(g) sold, assigned or transferred, or granted any license
rights in (except in the ordinary course of business) any
patents or patent applications, trademarks, service marks, trade
names, domain names, or corporate names, or registrations or
applications for registration of same, copyrights or copyright
registration or applications, trade secrets or other intangible
assets, or allowed any pending application by the Company for
registration of any Proprietary Rights, or Company registration
of any Proprietary Rights to be abandoned, or otherwise allowed
any Proprietary Rights necessary for the Company's business to
fall into the public domain, or disclosed any proprietary
confidential information, or confidential information of any
third party to any Person;;
(h) suffered any extraordinary losses or waived any rights
of material value, whether or not in the ordinary course of
business or consistent with past practice;
(i) made capital expenditures or commitments therefor that
aggregate in excess of $100,000 (excluding any amounts of
product development expenditures which are capitalized in
conformity with generally accepted accounting principles,
consistently applied);
(j) entered into any other transaction other than in the
ordinary course of business or entered into any other material
transaction, whether or not in the ordinary course of business;
(k) made any loans or advances to, guarantees for the
benefit of, or any Investments in, any Persons;
Page 22 Share Purchase Agreement
<PAGE>
(l) suffered any damage, destruction or casualty loss
exceeding in the aggregate $25,000, whether or not covered by
insurance; or
(m) made any Investment in or taken steps to incorporate
any Subsidiary.
(2) The Company has not at any time made any payments for political
contributions or made any bribes, kickback payments or other illegal
payments.
I. Assets. Except as set forth on the attached "ASSETS SCHEDULE,"
------
the Company has good and marketable title to, or a valid leasehold interest in,
or a valid license for the properties and assets used by it, located on its
premises or shown on the Latest Balance Sheet or acquired thereafter, free and
clear of all liens, security interests, charges and encumbrances, except for
properties and assets disposed of in the ordinary course of business since the
date of the Latest Balance Sheet and except for liens disclosed on the Latest
Balance Sheet (including any notes thereto) and liens for current property taxes
not yet due and payable. The Company's buildings, equipment and other tangible
assets are in good operating condition in all material respects and are fit for
use in the ordinary course of business and, as applicable, are Year 2000
Compliant. The Company's intangible assets (e.g., computer software) function,
in all material respects, in accordance with their published specifications and
user documentation and are Year 2000 compliant. The Company owns, or has a
valid leasehold interest in, or a valid license for all assets necessary for the
conduct of its business as presently conducted and as presently proposed to be
conducted.
J. Tax Matters. The Company has filed all tax returns which it is
-----------
required to file (taking into account all properly extended due dates) under
applicable laws and regulations; all such returns were correct and complete when
filed; the Company has paid all taxes due and owing by it, or claimed to be due
and owing by it, to all federal, foreign, state or local taxing authorities; the
Company has withheld or collected and has paid over all taxes which it is
obligated to withhold or collect from amounts paid or owing to or received from
any employee, Shareholder, creditor or other third party; the Company has not
waived any statute of limitations with respect to taxes or agreed to any
extension of time with respect to a tax assessment or deficiency; the assessment
of any additional taxes for periods for which returns have been filed is not
expected; there are no pending or threatened examinations relating to, or claims
asserted for, any taxes against the Company; no information related to tax
matters has been requested by any foreign, federal, state or local taxing
authority; no notice indicating an intent to open an audit or other review has
been received by the Company from any foreign, federal, state or local taxing
authority; no issues have been raised on audit or otherwise by any foreign,
federal, state or local tax authority that have not been finally resolved
through payment, final agency or judicial order, or compromise and settlement;
and the Company is not a party to any tax sharing agreement or any other
agreement pertaining to taxes owed by it or pertaining to taxes for which it may
be liable. The Company has not made an election under Section 341(f) of the
IRC.
K. Contracts and Commitments.
-------------------------
(1) Except as expressly contemplated by this Agreement or as set
forth on the attached "CONTRACTS SCHEDULE," as of the Closing, the Company
is not a party to any written or oral:
Page 23 Share Purchase Agreement
<PAGE>
(a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or
other compensation to employees or any other employee benefit
plan or arrangement, or any contract with any labor union, or any
severance agreements;
(b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or
other basis, other than the Employment Agreements, or contract
relating to loans to officers, directors or affiliates;
(c) contract under which the Company has advanced or loaned
any other Person any amounts;
(d) agreement or indenture relating to the borrowing of money
or the mortgaging, pledging or otherwise placing a lien on any
material asset or material group of assets of the Company;
(e) guarantee of any obligation;
(f) lease or agreement under which the Company is lessee of or
holds or operates any property, real or personal, owned by any
other party, except for any lease of real or personal property
under which the aggregate annual rental payments do not exceed
$20,000;
(g) lease or agreement under which the Company is lessor of or
permits any third party to hold or operate any property, real or
personal, owned or controlled by the Company;
(h) contract or group of related contracts with the same party
or group of affiliated parties the performance of which involves
a consideration in excess of $20,000;
(i) assignment, license, indemnification or agreement with
respect to any intangible property (including any patent,
trademark, trade name, copyright, know-how, trade secret or
confidential information);
(j) warranty agreement with respect to its services rendered
or its products sold, licensed or leased;
(k) agreement under which it has granted any Person any
registration rights (including piggyback rights);
(l) contract or agreement prohibiting it from freely engaging
in any business or competing anywhere in the world; or
(m) any other contractor agreement which is material to its
operations and business prospects.
(2) All of the contracts, agreements and instruments set forth on the
Contracts Schedule are valid, binding and enforceable in accordance with
their
Page 24 Share Purchase Agreement
<PAGE>
respective terms. The Company has performed all material obligations
required to be performed by it and is not in default under or in breach of
nor in receipt of any claim of default or breach under any contract,
agreement or instrument to which it is subject; no event has occurred which
with the passage of time or the giving of notice or both would result in a
default, breach or event of noncompliance under any contract, agreement or
instrument to which it is subject; and the Company has no knowledge of any
breach or anticipated breach by the other parties to any contract or
commitment to which it is a party.
(3) The Purchasers' counsel has been supplied with a true and correct
copy of each of the written contracts and an accurate description of the
oral contracts which are referred to on the Contracts Schedule, together
with all amendments, waivers or other changes thereto.
L. Proprietary Rights. The attached "PROPRIETARY RIGHTS SCHEDULE"
------------------
contains a complete and accurate list of (i) all patented and registered
Proprietary Rights owned by the Company, specifically identified, (ii) all
pending patent applications and applications for registrations of other
Proprietary Rights filed by the Company, specifically identified, (iii) all
unregistered trade names and corporate names owned or used by the Company,
specifically identified, (iv) database, specifically identified and (v) all
unregistered trademarks, service marks and works eligible for copyright
----------------------
protection (including all computer software, specifically identified,
- ---------------------------------------------------------------------
audio/visual works and publications) which are material to the financial
- ------------------------------------
condition, operating results, assets, operations or business prospects of the
Company, either specifically identified or described by category. The
Proprietary Rights Schedule also contains a complete and accurate list of all
licenses and other rights granted by the Company to any third party with respect
to any Proprietary Rights and all licenses and other rights granted by any third
party to the Company with respect to any Proprietary Rights. The Company owns
exclusively or has the right to use pursuant to a valid license all Proprietary
Rights necessary for the operation of the businesses of the Company as presently
conducted and as presently proposed to be conducted. Except as set forth on the
Proprietary Rights Schedule, the loss or expiration of any Proprietary Right or
related group of Proprietary Rights would not have a material adverse effect on
the conduct of the Company's business, and no such loss or expiration is
threatened, pending or reasonably foreseeable. The Company has taken all
necessary and desirable actions to maintain and protect the Proprietary Rights
which it owns and/or uses. To the best of the Company's knowledge, the owners of
any Proprietary Rights licensed to the Company have taken all necessary and
desirable actions to maintain and protect the Proprietary Rights which are
subject to such licenses. Except as indicated on the Proprietary Rights
Schedule, (i) the Company owns exclusively all right, title and interest in and
to all of the Proprietary Rights listed on such schedule and all other
Proprietary Rights material to the operation of the business of the Company as
presently conducted and as presently proposed to be conducted, (ii) there have
been no claims made against the Company asserting the invalidity, misuse or
unenforceability of any of such rights and there are no grounds for the same,
(iii) the Company has not received a notice of conflict with the asserted rights
of others within the last five years and (iv) the conduct of the Company's
business has not infringed, misappropriated, or constitute a dilution of, and
does not infringe, misappropriate or constitute a dilution of any Proprietary
Rights of other Persons, nor would any future conduct as presently contemplated
infringe any Proprietary Rights of other Persons and, to the best of the
Company's knowledge, the Proprietary Rights owned by the Company have not been
infringed, misappropriated or diluted by other Persons. The Company represents
and warrants that any termination of the
Page 25 Share Purchase Agreement
<PAGE>
Company's arrangement with WebCT will not have a material adverse effect on the
Company's business, whether presently conducted or as envisioned to be
conducted.
M. Litigation, etc. Except as set forth on the attached "LITIGATION
----------------
SCHEDULE," there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (or to the best of the Company's knowledge, pending or
threatened against or affecting any of the officers, directors or employees of
the Company with respect to their businesses or proposed business activities) at
law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality (including any actions, suit,
proceedings or investigations with respect to the transactions contemplated by
this Agreement), the Company is not subject to any arbitration or mediation
proceedings or, to the best of the Company's knowledge, any governmental
investigations or inquiries (including inquiries as to the qualification to hold
or receive any license or permit) and, to the best of the Company's knowledge,
there is no basis for any of the foregoing. The Company is not subject to any
judgment, order or decree of any court or other governmental agency.
N. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company (other than fees due to Hambrecht & Quist, which are the sole
obligation of the Company). The Company shall pay, and hold each Purchaser
harmless against, any liability, loss or expense (including reasonable
attorneys' fees and out-of-pocket expenses) arising in connection with any such
claim.
O. Governmental Consent, etc.. No permit, consent, approval or
--------------------------
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby.
P. Insurance. The attached "INSURANCE SCHEDULE" contains a
---------
description of each insurance policy maintained by the Company with respect to
its properties, assets and businesses, and each such policy is in full force and
effect as of the Closing. The Company is not in default with respect to its
obligations under any insurance policy maintained by it. The Company maintains
"key man" insurance on the life of R. Helmick in a minimum amount of $1,000,000.
The Company further covenants and agrees that any proceeds received under such
policy shall immediately be placed in a segregated account and thereafter
disbursed solely to fund the Company's obligations to redeem the Preferred
Stock, on the terms, and subject to the conditions, of the Charter Amendment
Q. Employees. No executive or Key Employee of the Company or group
---------
of employees of the Company has any proposed or current or immediate plans to
terminate employment with the Company. The Company has complied in all material
respects with all laws relating to the employment of labor, including provisions
thereof relating to wages, hours, equal opportunity, collective bargaining and
the payment of social security and other taxes, and the Company is not aware
that it has any material labor relations problems (including any union
organization activities, threatened or actual strikes or work stoppages or
material grievances). Neither the Company nor, to the best of the Company's
knowledge after due inquiry, any of its employees is subject to any noncompete,
nondisclosure, confidentiality, employment,
Page 26 Share Purchase Agreement
<PAGE>
consulting or similar agreements relating to, assignment of rights in inventions
or assignment of intellectual property rights affecting or in conflict with the
present or proposed business activities of the Company, except for agreements
between the Company and its present and former employees.
R. ERISA.
-----
(1) Multiemployer Plans. The Company does not have any obligation to
-------------------
contribute to (or any other liability, including current or potential
withdrawal liability, with respect to) any "MULTIEMPLOYER PLAN" (as defined
in Section 3(37) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")).
(2) Retiree Welfare Plans. The Company does not maintain or have any
---------------------
obligation to contribute to (or any other liability with respect to) any
plan or arrangement whether or not terminated, which provides medical,
health, life insurance or other welfare-type benefits for current or future
retired or terminated employees (except for limited continued medical
benefit coverage required to be provided under Section 4980B of the IRC or
as required under applicable state law).
(3) Defined Benefit Plans. The Company does not maintain, contribute
---------------------
to or have any liability under (or with respect to) any employee plan which
is a tax-qualified "DEFINED BENEFIT PLAN" (as defined in Section 3(35) of
ERISA), whether or not terminated.
(4) Defined Contribution Plans. The Company does not maintain,
--------------------------
contribute to or have any liability under (or with respect to) any employee
plan which is a tax-qualified "DEFINED CONTRIBUTION PLAN" (as defined in
Section 3(34) of ERISA), whether or not terminated.
(5) Other Plans. Except as explicitly set forth in the Contracts
-----------
Schedule, the Company does not maintain, contribute to or have any
liability under (or with respect to) any plan or arrangement providing
benefits to current or former employees, including any bonus plan, plan for
deferred compensation, employee health or other welfare benefit plan or
other arrangement, whether or not terminated.
S. Compliance with Laws. The Company is not in material violation of
--------------------
any law, regulation or requirement and has not received notice of any such
violation. The Company is not subject to any clean up liability, or has any
reason to believe it may become subject to any clean up under any federal, state
or local environmental law, rule or regulation.
T. Affiliated Transaction. Except as set forth on the attached
----------------------
"AFFILIATED TRANSACTIONS SCHEDULE," no officer, director, Shareholder or
Affiliate of the Company or any individual related by blood or marriage to any
such Person or any entity in which any such Person or individual owns any
beneficial interest, is a party to any agreement, contract, commitment or
transaction with the Company or has any interest in any property, real, personal
or mixed, tangible or intangible, used in or pertaining to the business of the
Company.
U. Disclosure. Neither this Agreement, nor any of the schedules,
----------
attachments, written statements, documents, certificates or other items prepared
or supplied to
Page 27 Share Purchase Agreement
<PAGE>
any Purchaser by or on behalf of the Company with respect to the transactions
contemplated hereby contain any untrue statement of a material fact or omit a
material fact necessary to make each statement contained herein or therein not
misleading. There is no fact which the Company has not disclosed to the
Purchasers in writing and of which any of its officers, directors or executive
employees is aware and which has had or would reasonably be anticipated to have
a material adverse effect upon the existing or expected financial condition,
operating results, assets, customer or supplier relations, employee relations or
business prospects of the Company and its Subsidiaries taken as a whole.
V. Closing Date. The representations and warranties of the Company
------------
contained in this Section 6 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any writing
delivered by, or on behalf of, the Company to any Purchaser shall be true and
correct in all material respects on the Closing Date as though then made, except
as affected by the transactions expressly contemplated by this Agreement.
W. Environmental Law. The Company is in compliance with, has complied
-----------------
with, and has no liability under any Environmental Law. The Company has not
received any notice of any such violation or liability nor does the Company have
any reason to believe that it is or may be found in violation of or determined
to be liable under any Environmental Law. "Environmental Law" means any
federal, state, foreign, or local statute, regulation, order, rule, ordinance,
resolutions, determination, writ, injunction, common law ruling, award,
judgment, or decree related to protection of human health or safety, clean up or
investigation of materials regulated by any governmental entity, natural
resources, or the environment.
X. Leases. The Company does not own and has never owned or leased
------
Real Property other than 9000 East Chenango, Greenwood Village, Colorado, 80111
and 10200 A East Girard Avenue, Denver, Colorado 80231.
Y. No Side Letter Agreements. The Company has heretofore delivered to
-------------------------
the Purchasers (and will deliver to Purchasers) copies of all letters,
agreements, undertakings, and other documents, if any which the Company have
heretofore entered (or contemporaneously herewith are entering or hereafter
enter) into with any holders of Common Stock, Series A Holders or Series B
Holders or any other Person which amend, supplement, interpret or otherwise
relate to this Agreement, the Amended and Restated Shareholders Agreement of
even date herewith, or the Amended and Restated Registration Agreement of even
date herewith (collectively "Side Letters"). There is no oral agreement or
undertaking of the type described in the previous sentence. So long as 143,370
shares of Series C Preferred Stock is outstanding, the Purchasers shall be
entitled to receive the same rights granted in any Side Letter, provided that
the Purchasers notify the Company in writing to that effect within 30 days after
it receives a copy of such Side Letter pursuant to the first sentence of this
paragraph. To the Company's knowledge, there are no such agreements among the
Company's shareholders, except as set forth in the Shareholders' Agreements.
Z. Disaster Recovery Plans. The Company has taken reasonable measures
-----------------------
for a company of its size, and considering the type of business in which the
Company operates, to plan for and mitigate the effects of natural disasters and
acts of God, including maintaining redundant systems and system backups.
Page 28 Share Purchase Agreement
<PAGE>
7. Miscellaneous.
-------------
A. Expenses. The Company agrees to pay, and hold each Purchaser and
--------
all holders of Series C Preferred harmless against liability for the payment of,
(i) the Purchasers' fees and expenses (not to exceed $10,000) arising in
connection with their legal review of the Company, the negotiation and execution
of this Agreement and the consummation of the transactions contemplated by this
Agreement, including fees and disbursements of their legal counsel, (ii) the
fees and expenses incurred with respect to any amendments or waivers (whether or
not the same become effective) under or in respect of this Agreement, the
agreements contemplated hereby or the Amended and Restated Articles of
Incorporation and (iii) stamp and other transfer taxes which may be payable in
respect of the execution and delivery of this Agreement or the issuance,
delivery or acquisition of any Shares of Series C Preferred or any shares of
Common Stock issuable upon conversion of the Series C Preferred.
B. Remedies, Enforcement, Governing Law, Venue.
-------------------------------------------
(1) Each holder of Shares and Underlying Common Stock shall have all
rights and remedies set forth in this Agreement, the Amended and Restated
Articles of Incorporation and all rights and remedies which such holders
have been granted at any time under any other agreement or contract and all
of the rights which such holders have under any law. Any Person having
rights under any provision of this Agreement will be entitled to enforce
such rights specifically to recover damages caused by reason of any breach
of any provision of this Agreement and to exercise all other rights granted
by law. The parties hereto agree and acknowledge that money damages may
not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court
of law or equity of competent jurisdiction (without posting any bond or
other security) for specific performance and for other injunctive relief in
order to enforce or prevent violation of the provisions of this Agreement.
(2) All questions concerning the relative rights of the Company and its
shareholders and the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto shall be governed by and
construed in accordance with the domestic laws of the State of Colorado,
without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of Colorado or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
State of Colorado.
(4) In the event of any claim, dispute and controversy of any nature
between the Purchasers and the Company arising out of or in connection with
this Agreement, or the negotiation, execution, delivery, performance,
nonperformance or breach thereof (collectively, a "Dispute"), the
Purchasers and the Company shall consult and negotiate with each other in
good faith and otherwise use their respective commercially reasonable
efforts to settle such Dispute within a 45-day period after the Dispute
first arises. If the Dispute is not resolved or settled within such 45-day
period then, upon written notice by either party to the other, the Dispute
shall be resolved by binding arbitration in Denver, Colorado in accordance
with Title 9 of the U.S. Code (United States Arbitration Act) and the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"), as they may be amended from time to time and as modified by this
Page 29 Share Purchase Agreement
<PAGE>
Agreement or decision of a majority of the arbitrators. The arbitration
shall be held in Denver, Colorado. The Purchasers and the Company intend
that arbitration be the sole remedy available as to matters arbitrable
hereunder. An arbitration award rendered by the arbitrators shall be final
and binding on Purchasers and the Company and may be filed with any court
having jurisdiction over the Purchasers or the Company or their property as
a basis of declaratory or other judgment and of the issuance of execution.
(5) Unless otherwise agreed, any party requesting arbitration hereunder
shall do so within 15 days after the expiration of 45-day negotiation
period, and failure by either party to request arbitration within such
period shall thereafter bar such Dispute in any forum whatsoever. When a
party timely requests arbitration hereunder, the Dispute shall be resolved
by a panel of three neutral arbitrators to be selected as follows: the
party requesting the arbitration shall, incident to giving the notice of
arbitration, also notify the other party of the name of an arbitrator
selected from a list of qualified persons supplied by the AAA, and the
other party shall, within 20 days after receipt of such notice, notify the
party requesting arbitration of the name of an arbitrator it has selected
from such list. The two arbitrators shall, within 20 days after
notification of the identity of the second arbitrator, choose a third
arbitrator.
(6) The Commercial Arbitration Rules of the AAA and decisions by a
majority of the arbitration panel shall determine the rules governing
admissibility of evidence and the rules of procedure and discovery. The
action of a majority of the arbitration panel shall govern all actions by
the panel, and the arbitrators shall render their decision promptly but in
no event more than 60 days after the conclusion of submission of evidence.
The arbitration award shall be in writing and shall specify factual and
legal basis for the award. Either party may make application to the
arbitration panel seeking injunctive relief to maintain the status quo
until such time as the arbitration award is rendered or the Dispute is
otherwise resolved. The arbitration panel shall have the authority to
award any remedy or relief that a court of the State of Colorado could
order or grant, including specific performance of any obligation created
under the Agreement, issuance of an injunction or money damages, but
excluding punitive, incidental or consequential damages.
(7) Each party shall pay the fees and expenses of the arbitrator
selected by it and one-half of the reasonable fees and expenses of the
third arbitrator. All other fees and expenses of each party incurred in
connection with the arbitration shall be paid as determined by the
arbitrators.
(8) The parties agree that they will not seek from the arbitration any
claim under this Agreement any award or judgment for punitive damages (or
any other amount awarded for the purpose of imposing a penalty), and that
if any such award or judgment is granted, the parties agree not to seek to
satisfy such award or judgment.
(9) Indemnification. The Company hereby agrees to indemnify, defend
---------------
and hold harmless the Purchasers from and against and in any respect of all
Claims asserted against, resulting to, imposed upon or incurred by any of
the Purchasers individually or the Purchasers collectively (whether such
Claims are by, against or relate to the Company or any other party,
including a governmental entity), directly or indirectly, by reason of or
resulting from any breach of any representation or warranty or
Page 30 Share Purchase Agreement
<PAGE>
noncompliance with any covenants or other written Agreements given or made
by the Company in this Agreement or in the Schedule or Exhibits attached
hereto, or from any liability of the company. The Purchasers' knowledge
prior to the Closing of any inaccuracy or breach of any representation,
warranty or covenant made or to be performed by the Company under this
Agreement or the agreements contemplated hereby shall not limit or affect
the Purchasers' right to indemnification under this Section.
C. Purchasers' Investment Representations.
--------------------------------------
(1) Each Purchaser hereby represents that it is acquiring the
Restricted Securities purchased hereunder or acquired pursuant hereto for
its own account with the present intention of holding such securities for
purposes of investment and that it has no present intention of selling such
securities in a public distribution in violation of the federal securities
laws or any applicable state securities laws; provided that nothing
contained herein shall prevent any Purchaser and subsequent holders of
Restricted Securities from transferring such securities in compliance with
the provisions of Section 5 hereof.
(2) Each Purchaser acknowledges that the Shares are being issued and
sold to such Purchaser under exemptions from registration provided in the
Securities Act and under applicable state securities laws and, therefore,
cannot be resold by such Purchaser unless subsequently registered under the
Securities Act or applicable state securities laws or an exemption from
such registrations is available. Accordingly, each Purchaser represents and
warrants that it is able to bear the economic risk of any investment in the
Series C Preferred for an indefinite period of time.
(3) Each certificate for Restricted Securities shall be imprinted with
a legend in substantially the following form:
"The securities represented by this certificate were originally issued
on December 21, 1998, and have not been registered under the
Securities Act of 1933, as amended. The transfer of the securities
represented by this certificate is subject to the conditions specified
in the Share Purchase Agreement dated December 21, 1998 and the
Amended and Restated Shareholders Agreement, dated as of December 21,
1998, between the issuer (the "Company") and certain investors, as
such agreement may be amended from time to time and the Company
reserves the right to refuse the transfer of such securities until
such conditions have been fulfilled with respect to such transfer. A
copy of such conditions shall be furnished by the Company to the
holder hereof upon written request and without charge."
(4) Each Purchaser represents that it has had the opportunity to ask
questions and receive answers concerning the Shares and to obtain whatever
information concerning the Company as has been requested by the Purchaser
in order to make its investment decision.
Page 31 Share Purchase Agreement
<PAGE>
(5) Each Purchaser represents that (a) it is an "Accredited Investor"
as such term is defined under applicable regulations promulgated under the
Securities Act and (b) it is sophisticated in financial matters and is able
to evaluate the risks and benefits of any investment in the Shares.
D. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of 66 2/3 % of the Underlying Common Stock derived from or related to
the Series C Preferred. No other course of dealing between the Company and the
holder of any Series C Preferred or Underlying Common Stock derived from or
related to the Series C Preferred or any delay in exercising any rights
hereunder or under the Articles of Incorporation shall operate as a waiver of
any rights of any such holders. For purposes of this Agreement, shares of
Series C Preferred or Underlying Common Stock held by the Company or any
Subsidiaries shall not be deemed to be outstanding.
E. Survival of Representations and Warranties. All representations,
------------------------------------------
warranties, covenants, indemnities and other Agreements made by any part to this
Agreement herein or pursuant hereto shall also be deemed made and as of the
Closing Date as though such representations, warranties, covenants, indemnities
and other Agreements were made on and as of such date, and all such
representations, warranties, covenants, indemnities and other Agreements shall
survive the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and continue for a period of 18 months
following the delivery by the Company to the Purchasers, in the manner specified
in Section 4.A., its audited financial statements as of and for the year ended
December 31, 1998; provided, however, that the representations, warranties,
covenants, indemnities and other Agreements contained in Sections 6.A. and 6.D.
hereof shall survive the Closing and remain in full force and effect, and
provided, further, that the representations, warranties, covenants, indemnities
and other Agreements contained in Sections 6.J, 6.R, and 6.W hereof shall
survive the Closing and remain in full force and effect until the expiration of
all applicable statutes of limitation.
F. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, and whether or not any express
assignment has been made, the provisions of this Agreement which are for any
Purchaser's benefit as a purchaser or holder of Series C Preferred or Underlying
Common Stock are also for the benefit of, and enforceable by, any subsequent
holder of such Series C Preferred or such Underlying Common Stock.
G. Generally Accepted Accounting Principles. Where any accounting
----------------------------------------
determination or calculation is required to be made under this Agreement or the
exhibits hereto, such determination or calculation (unless otherwise provided)
shall be made in accordance with generally accepted accounting principles,
consistently applied.
H. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such
Page 32 Share Purchase Agreement
<PAGE>
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
I. Counterparts. This Agreement may be executed in separate
------------
counterparts, anyone of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same agreement.
J. Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a part
of this Agreement. The use of the word "INCLUDING" in this Agreement shall be
by way of example rather than by limitation.
K. Notices. All notices, demands or other commutations to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable national express courier
service guaranteeing overnight delivery (charges prepaid) or mailed to the
recipient by certified or registered mail, return receipt requested and postage
prepaid. Such notices, demands and other communications shall be sent to each
Purchaser at the address indicated on the Schedule of Purchasers and to the
Company at the address indicated below:
If to the Company, to:
Robert N. Helmick
CEO & President
Real Education, Inc.
10200 E. Girard Avenue
Building A
Denver, CO 80231
with a copy to :
Annita M. Menogan, Esq.
Dorsey & Whitney LLP
Republic Plaza Building, Suite 4400
370 17th Street
Denver, CO 80202-5644
If to the Purchasers, to:
THE RESPECTIVE ADDRESSES INDICATED ON THE SCHEDULE OF PURCHASERS,
-----------------------------------------------------------------
If to MediaOne:
MediaOne Interactive Services
9000 East Nichols, Suite 100
Englewood, CO 80112
ATTN: VP Business Development
Page 33 Share Purchase Agreement
<PAGE>
and
MediaOne Interactive Services
5613 DTC Parkway, Suite 700
Englewood, CO 80111
ATTN: Gary Burghart
with a copy to:
John Fitzgerald, Esq.
Hogan & Hartson, L.L.P.
One Tabor Center Suite 1500
1200 Seventeenth Street
Denver, Colorado 80202
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
[Remainder of page intentionally left blank]
Page 34 Share Purchase Agreement
<PAGE>
[Signature Page to Real Education, Inc. Series C Preferred Share Purchase
Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
/s/ Robert N. Helmick
- ----------------------------------
Robert N. Helmick, President and CEO
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
/s/ Oakleigh Thorne
- ----------------------------------
Oakleigh Thorne, Co-President
MEDIAONE INTERACTIVE SERVICES, INC.
/s/ Thomas Cullen
- ----------------------------------
Thomas Cullen, President
VSI HOLDINGS, INC.
/s/ Terry L. Davis,
- ----------------------------------
Terry L. Davis, Executive Vice President.
NEW WORLD EQUITIES, INC.
/s/ Chris Girgenti
- ----------------------------------
Chris Girgenti, Senior Managing Director
- -----------------------------------------
Signature Page - Share Purchase Agreement
<PAGE>
[Signature Page 2 to Real Education, Inc. Series C Preferred Share Purchase
Agreement]
H & K PARTNERS V
By: /s/ William Kasten
-------------------------------
William Kasten
Its: General Partner
-------------------------------
<PAGE>
[Signature Pages to Real Education, Inc. Series C Preferred share Purchase
Agreement]
/s/ Stanley R. Dobrin
- ---------------------------------------
/s/ Carol L. Dobrin
- ---------------------------------------
Stanley Dobrin & Carol Dobrin, JTWROS
/s/ Davis B. Weidner
- ---------------------------------------
Davis B. Weidner
/s/ Sue Thompson
- ---------------------------------------
Sue Thompson
H & K PARTNERS V
/s/ William Kasten
- ---------------------------------------
William Kasten
Its: General Partner
- ---------------------------------------
N.T. RUDDOCK CO. - Profit Sharing Trust
/s/ Neil T. Ruddock, Jr. - Trust Administrator
- --------------------------
Samuel James Ruddock, Vice President
SIGNATURE PAGE TO SHARE PURCHASE AGREEMENT
<PAGE>
SCHEDULE
SERIES C PURCHASERS
<TABLE>
<CAPTION>
Amount Invested Number of Shares
<S> <C> <C>
MediaOne Interactive Services $ 7,000,017.96 200,919
9000 E. Nichols Ave., Ste. 100
Englewood, CO 80112
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P. $ 1,249,989.52 35,878
P.O. Box 871
Lake Forest, Illinois 60045
VSI HOLDINGS, INC. $ 3,499,991.56 100,459
2100 N. Woodward Avenue
West 201
Bloomfield Hills, MI 48304-2263
NEW WORLD EQUITIES, INC. $ 2,250,002.04 64,581
1603 Orrington Avenue
Suite 1070
Evanston, Illinois 60201
H & K PARTNERS V $ 399,963.20 11,480
c/o William Blair & Co., L.L.C.
222 West Adams Street
Chicago, IL 60606
STANLEY R. AND CAROL L. DOBRIN $ 49,995.40 1,435
7001 Sally Lane
Ednia, MN 55435
DAVIS WEIDNER AND SUE THOMPSON $ 499,988.84 14,351
17553 W. 53rd Drive
Golden, CO 80403-1138
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P. $ 34,840.00 1,000
P.O. Box 871
Lake Forest, Illinois 60045
N.T. RUDDOCK COMPANY $ 15,225.08 437
26123 Broadway Ave.
Cleveland, OH 44146
-------------- -------------
$15,000,013.60 430,540
</TABLE>
<PAGE>
LIST OF EXHIBITS
Ex. A Form of Amended and Restated Articles of Incorporation ("Charter
Amendment")
Ex. B Registration Agreement
Ex. C Shareholders Agreement
Ex. D Form of Opinion of Counsel
Ex. E Key Employee Schedule
<PAGE>
EXHIBIT E
KEY EMPLOYEE SCHEDULE
1) Robert Helmick - President/CEO
2) Jonathan Dobrin - Chief Technology Officer
3) John Helmick - General Counsel
4) Steve Singer - Chief Financial Officer
5) James Sigman - Vice President of Accounts
6) Mark Fine - Vice President of Sales
7) Daniel H. Meitus - Vice President of Marketing
8) Brad Felix - Vice President of Information Technology
9) James Nollsh - Vice President of Production
10) Kevin Johnson - Vice President, Business Development
11) Ray Henderson - Vice President, Product Systems
2
<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED
REGISTRATION AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION AGREEMENT (this "AGREEMENT") is made
as of December 21, 1998, by and among Real Education, Inc., a Colorado
corporation (the "COMPANY"), each of the Series A Investors (the "SERIES A
INVESTORS") set forth in the Series A Agreement (as defined below), each of the
Series B Investors (the "SERIES B INVESTORS") set forth in the Series B
Agreement (as defined below) and each of the Series C Purchasers (the "SERIES C
PURCHASERS") set forth in the Series C Agreement (as defined below). In the
event less than all of the Series C Purchasers execute this Agreement as of the
date hereof, this Agreement shall be valid as to the parties who do execute this
Agreement as of the date hereof. The Series A Investors, the Series B
Investors, and the Series C Purchasers shall be collectively known as
"INVESTORS" hereinafter. This Agreement amends, restates and supersedes that
certain Registration Agreement by and between the Company and the Series A
Investors and Series B Investors dated as of February 2, 1998.
BACKGROUND
----------
A. Pursuant to a Unit Purchase Agreement by and among the Company and the
Series A Investors, dated as of June 11, 1997 (the "SERIES A AGREEMENT"), the
Series A Investors purchased an aggregate of 132,000 investment units ("UNITS"),
each Unit consisting of one share of Series A Convertible Preferred Stock, no
par value per share, of the Company (the "SERIES A PREFERRED"), and one Common
Stock Purchase Warrant ("WARRANT"). In addition, the Series B Investors
purchased 326,833 shares of Series B Convertible Preferred Stock, no par value
per share, of the Company (the "SERIES B PREFERRED"), pursuant to the Share
Purchase Agreement by and between the Company and the Series B Investors dated
as of February 2, 1998 (the " SERIES B AGREEMENT"). In addition, the Series C
Purchasers will purchase 430,540 shares of Series C Convertible Preferred Stock,
no par value per share, of the Company (the "SERIES C PREFERRED"), pursuant to
the Share Purchase Agreement by and between the Company and the Series C
Purchasers of even date herewith (the "SERIES C AGREEMENT"). The Series C
Purchasers' purchase of the Series C Preferred was on the condition that the
Company, the Series A investors and the Series B Investors agree to certain
terms and conditions related to the registration of securities of the Company,
as set forth in this Agreement.
B. All parties hereto are willing to enter into this Agreement so that
all registration rights covering Registrable Securities held by the Investors
will be identical.
C. The Series A Investors and Series B Investors have agreed to release
whatever registration rights they now have in exchange for the rights afforded
by this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing Background, which is by
this reference expressly incorporated herein, the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
Page 1 - Registration Agreement
<PAGE>
1. Definitions.
-----------
"COMMON STOCK" has the meaning assigned to it in the Amended and Restated
Shareholders Agreement among the Company and its Shareholders of even date
herewith
"PERSON" means an individual, a partnership, a corporation, an association, a
joint stock company, a trust, a joint venture, a limited liability company, an
unincorporated organization or a governmental entity or any department, agency
or political subdivision thereof.
"REGISTRABLE SECURITIES" means (i) any Series A Preferred or Common Stock issued
upon the conversion of any Series A Preferred issued pursuant to the Series A
Agreement; (ii) any Common Stock issued upon exercise of any Warrant issued
pursuant to the Series A Agreement; (iii) any Series B Preferred or Common Stock
issued upon the conversion of any Series B Preferred issued pursuant to the
Series B Agreement; (iv) any Series C Preferred or Common Stock issued upon the
conversion of any Series C Preferred issued pursuant to the Series C Agreement;
and (v) any Common Stock issued or issuable with respect to the securities
referred to in clauses (i), (ii) (iii) (iv) and (v) by way of a stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular Registrable
Securities, such securities will cease to be Registrable Securities when they
have been distributed to the public pursuant to an offering registered under the
Securities Act of 1933, as amended (the "Securities Act") or sold to the public
through a broker, dealer or market maker in compliance with Rule 144 under the
Securities Act (or any similar rule then in force). For purposes of this
Agreement, a Person will be deemed to be a holder of Registrable Securities
whenever such Person has the right to acquire directly or indirectly such
Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
2. Demand Registration Rights of the Investors.
-------------------------------------------
A. Requests for Registration. At any time following the closing date of
-------------------------
the Company's initial public offering of its Common Stock (the "IPO CLOSING")
the holders of at least thirty percent (30%) of the Registrable Securities may
request up to two registrations under the Securities Act of 1933, as amended
from time to time (the "SECURITIES ACT"), of all or part of their Registrable
Securities on Form S-1 or any similar long-form registration ("LONG-FORM
REGISTRATIONS"). Each request for an Investor Demand Registration, including
Short Form Registrations, (both as defined below) shall specify the approximate
number of Registrable Securities requested to be registered and the anticipated
per share price range for such offering. Within ten days after receipt of any
such request, the Company will give written notice of such requested
registration to all other holders of Registrable Securities and will include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 20 days after the
receipt of the Company's notice. The holders of the Registrable Securities may
also request Short-Form Registrations, as defined in Section 2.B below. All
registrations requested pursuant to Sections 2.A and 2.B are referred to herein
as "INVESTOR DEMAND REGISTRATIONS".
B. Short-Form Registrations. At any time after the IPO Closing, the
------------------------
holders of the Registrable Securities may request registration of all or part of
their Registrable Securities on Form S-3, or any similar short-form registration
then available to the Company, provided that
Page 2 - Registration Agreement
<PAGE>
the anticipated aggregate offering price of the Registrable Securities to the
public for any such registration exceeds $500,000 ("SHORT-FORM REGISTRATIONS").
Investor Demand Registrations will be Short-Form Registrations whenever the
Company is permitted to use any applicable short form. Once the Company has
become subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, (the "EXCHANGE ACT"), the Company will use its best efforts to
make Short-Form Registrations available for the sale of Registrable Securities.
C. Restrictions on Investor Demand Registrations. The Company will not be
---------------------------------------------
obligated to effect any Investor Demand Registration under this Section 2 within
60 days prior to or 180 days following the effective date of any registration
under the Securities Act pertaining to securities of the Company.
D. Selection of Underwriters. The holders of sixty-six and two-thirds
-------------------------
percent (66-2/3%) ("TWO-THIRDS") of the Registrable Securities included in any
Investor Demand Registration under this Section 2 will have the right to select
the investment banker(s) and manager(s) to administer the offering, if such
offering is underwritten, subject to the approval of the Company, which approval
will not be unreasonably withheld.
E. Demand Registration Expenses. The Registration Expenses (as defined
----------------------------
herein) of the holders of Registrable Securities in all Investor Demand
Registrations will be paid by the Company in accordance with Section 6 hereof.
F. Registration Delay. Anything in this Section 2 to the contrary
------------------
notwithstanding, the Company may not defer or delay Investor Demand
Registrations under this Section 2 for more than two 60-day periods in any 12-
month period. The Company may engage in such delays only where its Board of
Directors has determined, in its good faith judgment, that such Investor Demand
Registration would be seriously detrimental to the Company and its shareholders.
If the Company makes such a determination of detriment warranting a delay in
Investor Demand Registration, prior written notice thereof shall be duly
provided to the holders of the Registrable Securities.
3. Piggyback Registrations.
-----------------------
A. Right to Piggyback. Whenever the Company proposes to register any of
------------------
its Common Stock under the Securities Act (other than pursuant to a Investor
Demand Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "PIGGYBACK REGISTRATION"), the Company
will give prompt written notice to all holders of Registrable Securities of its
intention to effect such a registration and will include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within 20 days after the receipt of the
Company's notice. These rights to Piggyback Registration expire on the fifth
anniversary of the IPO Closing.
B. Piggyback Expenses. The Registration Expenses of the holders of
------------------
Registrable Securities in all Piggyback Registrations will be paid by the
Company in accordance with Section 6 hereof.
C. Priority on Primary Registrations. If a Piggyback Registration is an
---------------------------------
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the
Page 3 - Registration Agreement
<PAGE>
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration (i) first, the securities the Company
proposes to sell on its own behalf, and, if additional shares can be sold in the
opinion of the managing underwriters, (ii) second, the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of shares of Registrable
Securities owned by each such holder, calculated as if such shares had been
converted at such time to Common Stock, and (iii) third, other securities
requested to be included in such registration.
D. Priority on Secondary Registrations. If a Piggyback Registration is an
-----------------------------------
underwritten secondary registration on behalf of holders of the Company's
securities (other than an Investor Demand Registration), and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without adversely affecting the marketability
of the offering, the Company will include in such registration (i) first, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such securities on the basis of the number of shares owned
by each such holder, calculated as if such shares had been converted at such
time to Common Stock, and (ii) second, other securities requested or permitted
to be included in such registration.
E. Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to
Sections 2 or 3, and if such previous registration has not been withdrawn or
abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or any successor form), whether on its own behalf or at
the request of any holder or holders of such securities, until a period of at
least 90 days has elapsed from the effective date of such previous registration.
4. Holdback Agreements.
-------------------
A. Each holder of Registrable Securities agrees not to effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Investor
Demand Registration or any underwritten Piggyback Registration in which any
Registrable Securities are included (except as part of such underwritten
registration), unless the underwriters managing the registered public offering
otherwise agree. Notwithstanding the provisions of the prior sentence, if the
underwritten registration is the Company's initial public offering, then the
applicable periods under this Section 4.A shall be 180 rather than 90 days.
B. The Company agrees (i) not to effect any public sale or distribution
of its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Investor
Demand Registration or any underwritten Piggyback Registration (except as part
of such underwritten registration or pursuant to registrations on Form S-8 or
any successor form), unless the underwriters managing the registered public
offering otherwise agree, and (ii) to cause each holder of its equity securities
(or any securities convertible into or exchangeable or exercisable for such
equity securities) purchased from the
Page 4 - Registration Agreement
<PAGE>
Company at any time after the date of this Agreement (other than in a registered
public offering) to agree not to effect any public sale or distribution
(including sales pursuant to Rule 144) of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the underwriters managing the registered public offering otherwise agree.
Notwithstanding the provisions of the prior sentence, if the underwritten
registration is the Company's initial public offering, then the applicable
periods under this Section 4.B shall be 180 rather than 90 days.
5. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
A. prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
best efforts to cause such registration statement to become effective (provided
that before filing a registration statement or prospectus or any amendments or
supplements thereto, the Company will furnish to the counsel selected by the
holders of Two-Thirds of the Registrable Securities covered by such registration
statement copies of all such documents proposed to be filed, which documents
will be subject to the review and comments of such counsel);
B. prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of not less than 180 days and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
C. furnish to each seller of Registrable Securities such number of copies
of such registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents as such seller may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
seller;
D. use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this Section, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
E. notify each seller of such Registrable Securities, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Company will prepare a supplement
Page 5 - Registration Agreement
<PAGE>
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus will not contain an
untrue statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading;
F. cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Company are then listed and,
if not so listed, to be listed on The Nasdaq Stock Market ("NASDAQ") and, if
listed on Nasdaq, use its best efforts to secure designation of all such
Registrable Securities covered by such registration statement as a Nasdaq
National Market security within the meaning of Rule 11Aa2-l promulgated pursuant
to the Exchange Act or, failing that, to secure Nasdaq authorization for such
Registrable Securities and, without limiting the generality of the foregoing, to
arrange for at least two market makers to register as such with Nasdaq with
respect to such Registrable Securities;
G. provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
H. enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
Two-Thirds of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
I. make available for inspection by any seller of Registrable Securities,
any underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by any such
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors, employees and independent accountants to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement; provided that upon the
reasonable request of the Company, any Person to whom any proprietary
information is made available shall agree to maintain the confidentiality of
such proprietary information, except if disclosure is required by judicial
decree or applicable law or such proprietary information otherwise becomes
publicly available;
J. otherwise use its best efforts to comply with all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
K. permit any holder of Registrable Securities, which holder might be
deemed to be an underwriter or a controlling Person of the Company, (i) to
review and comment on the registration or comparable statement to be filed with
the Securities and Exchange Commission, and all preliminary versions thereof,
(ii) to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included therein in order to reduce the risk that such holder may be deemed
to be an underwriter or a controlling Person of the Company, or to reduce the
risk and potential liability associated therewith in the event that such holder
is deemed to be an underwriter or
Page 6 - Registration Agreement
<PAGE>
controlling Person of the Company (including, without limitation, that the
holding by such holder of such securities is not to be construed as a
recommendation by such holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such holder
will assist in meeting any future financial requirements of the Company),
provided that such material does not contain a material misstatement or omission
and (iii) in the event that reference to such holder by name or otherwise is not
required by the Securities Act or any similar Federal statute then in force, the
deletion of any reference to such holder (provided that such holder shall
furnish to the Company an opinion of counsel to such effect, which opinion shall
be reasonably satisfactory to the Company);
L. use its best efforts to cause such Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities;
M. in any underwritten offering obtain a "cold comfort" letter and
updates thereof from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by cold comfort
letters as the holders of a majority of the Registrable Securities being sold
reasonably request (provided that such Registrable Securities constitute at
least 10% of the securities covered by such registration statement); and
N. in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its best efforts promptly to obtain the
withdrawal of such order.
O. make such representations and warranties to the holders of Registrable
Securities and the underwriters, if any, in form, substance, and scope as are
customarily made by issuers to underwriters in underwritten offerings in
customary form and consistent with then-current market practice;
P. obtain opinions of counsel to the Company which counsel and opinions
(in form, scope, and substance) shall be reasonably satisfactory to the managing
underwriters, if any, addressed to the underwriters, if any, in customary form
covering the matters customarily covered in opinions requested in primary
underwritten offerings and such other matters as may be reasonably requested by
such underwriters;
Q. of an underwriting agreement is entered into, cause the same to set
forth in full the indemnification provisions and procedures substantially to the
effect set forth in Section 7 hereof with respect to all parties to be
indemnified pursuant to said Section; and
R. deliver such documents and certificates as may be reasonably requested
by the holders of at least 50% of Registrable Securities being sold or the
managing underwriters, if any, to evidence compliance with Section E above and
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
Page 7 - Registration Agreement
<PAGE>
6. Registration Expense.
--------------------
A. All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other Persons retained by the Company
(all such expenses being herein called "REGISTRATION EXPENSES"), will be borne
by the Company. Registration Expenses shall also include the Company's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Company are then
listed or on Nasdaq.
B. In connection with each Investor Demand Registration and each
Piggyback Registration, the Company will reimburse the holders of the
Registrable Securities covered by such registration for the reasonable fees and
disbursements of one counsel chosen by the holders of Two-Thirds of the
Registrable Securities covered by such registration.
C. Each holder of securities included in any registration hereunder will
pay any underwriting discounts and commissions incurred upon the sale of such
securities.
7. Indemnification.
---------------
A. The Company agrees to indemnify and hold harmless, to the extent
permitted by law, each holder of Registrable Securities, its officers,
directors, employees and agents and each Person who controls such holder (within
the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses arising out of or based upon any untrue or alleged
untrue statement of material fact contained in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such holder expressly for use therein or
by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Registrable
Securities.
B. In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify and hold harmless
the Company, its directors, officers, employees and agents and each Person who
controls the Company (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses arising out of or based upon
any untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or
Page 8 - Registration Agreement
<PAGE>
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder and is not cured in a timely manner;
provided that the obligation to indemnify will be individual to each holder and
will be limited to the amount of proceeds received by such holder from the sale
of Registrable Securities pursuant to such registration statement.
C. Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in the reasonable judgment of such
indemnified party a conflict of interest between such indemnified and
indemnifying parties exists with respect to such claim, permit such indemnifying
party to assume the defense of such claim with counsel reasonably satisfactory
to the indemnified party. If such defense is assumed, the indemnifying party
will not be subject to any liability for any settlement made by the indemnified
party without its consent (but such consent will not be unreasonably withheld).
An indemnifying party who is not entitled to, or elects not to, assume the
defense of a claim will not be obligated to pay the fees and expenses of more
than one counsel for all parties indemnified by such indemnifying party with
respect to such claim, unless in the reasonable judgment of legal counsel to any
indemnified party a conflict of interest exists between such indemnified party
and any other of such indemnified parties with respect to such claim.
D. The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
8. Participation in Underwritten Registrations. No Person may participate
-------------------------------------------
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that no
holder of Registrable Securities included in any underwritten registration shall
be required to make any representations or warranties to the Company or the
underwriters other than representations and warranties regarding such holder and
such holder's intended method of distribution.
9. Miscellaneous.
-------------
A. No Inconsistent Agreements. From and after the date hereof the Company
--------------------------
shall not enter into any agreement granting any holder or prospective holder of
any securities of the Company registration rights with respect to such
securities unless such new registration rights are subordinate to, or otherwise
do not adversely affect the rights of the holders granted hereunder. The Company
represents and warrants that the rights granted to the holders hereunder do not
in any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's securities under any agreement in effect on the date
hereof.
Page 9 - Registration Agreement
<PAGE>
B. Adjustments Affecting Registrable Securities. The Company will not
--------------------------------------------
take any action, or permit any change to occur, with respect to its securities
which would adversely affect the ability of the holders of Registrable
Securities to include such Registrable Securities in a registration undertaken
pursuant to this Agreement or which would adversely affect the marketability of
such Registrable Securities in any such registration (including, without
limitation, effecting a stock split or a combination of shares).
C. Remedies, Enforcement, Governing Law, Venue.
-------------------------------------------
(1) Any Person having rights under any provision of this Agreement will be
entitled to enforce such rights specifically to recover damages caused by reason
of any breach of any provision of this Agreement and to exercise all other
rights granted by law. The parties hereto agree and acknowledge that (i) money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement; and (ii) any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction (without posting any bond or other
security) for specific performance and for other injunctive relief in order to
enforce or prevent violation of the provisions of this Agreement; and (iii) each
party hereby waives the defense in any action for specific performance that a
remedy at law would be adequate.
(2) All questions concerning the relative rights of the Company and its
shareholders and the construction, validity and interpretation of this Agreement
and the exhibits and schedules hereto shall be governed by and construed in
accordance with the domestic laws of the State of Colorado, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Colorado or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Colorado.
(3) In the event of any claim, dispute and controversy of any nature
between or among the Investors and the Company arising out of or in connection
with this Agreement, or the negotiation, execution, delivery, performance,
nonperformance or breach thereof (collectively, a "Dispute"), the Investors and
the Company shall consult and negotiate with each other in good faith and
otherwise use their respective commercially reasonable efforts to settle such
Dispute within a 45-day period after the Dispute first arises. If the Dispute
is not resolved or settled within such 45-day period then, upon written notice
by either party to the other, the Dispute shall be resolved by binding
arbitration in Denver, Colorado in accordance with Title 9 of the U.S. Code
(United States Arbitration Act) and the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), as they may be amended from time to
time and as modified by this Agreement or decision of a majority of the
arbitrators. The arbitration shall be conducted in Denver, Colorado. The
Investors and the Company intend that arbitration be the sole remedy available
as to matters arbitrable hereunder. An arbitration award rendered by the
arbitrators shall be final and binding on the Investors and the Company and may
be filed with any court having jurisdiction over the Investors or the Company,
as the case may be, or their property as a basis of declaratory or other
judgment and of the issuance of execution.
(4) Unless otherwise agreed, any party requesting arbitration hereunder
shall do so within 15 days after the expiration of 45-day negotiation period
referenced in Section 9.C.3, and failure by either party to request arbitration
within such period shall thereafter bar such Dispute in any forum whatsoever.
When a party timely requests arbitration hereunder, the Dispute shall be
resolved by a panel of three neutral arbitrators to be selected as follows: the
party requesting the arbitration shall, incident to giving the notice of
arbitration, also notify the
Page 10 - Registration Agreement
<PAGE>
other party of the name of an arbitrator selected from a list of qualified
persons supplied by the AAA, and the other party shall, within 20 days after
receipt of such notice, notify the party requesting arbitration of the name of
an arbitrator it has selected from such list. The two arbitrators shall, within
20 days after notification of the identity of the second arbitrator, choose a
third arbitrator.
(5) The Commercial Arbitration Rules of the AAA and decisions by a
majority of the arbitration panel shall determine the rules governing
admissibility of evidence and the rules of procedure and discovery. The action
of a majority of the arbitration panel shall govern all actions by the panel,
and the arbitrators shall render their decision promptly but in no event more
than 60 days after the conclusion of submission of evidence. The arbitration
award shall be in writing and shall specify factual and legal basis for the
award. Either party may make application to the arbitration panel seeking
injunctive relief to maintain the status quo until such time as the arbitration
award is rendered or the Dispute is otherwise resolved. The arbitration panel
shall have the authority to award any remedy or relief that a court of the State
of Colorado could order or grant, including specific performance of any
obligation created under the Agreement, issuance of an injunction or money
damages, but excluding punitive, incidental or consequential damages.
(6) Each party shall pay the fees and expenses of the arbitrator selected
by it and one-half of the reasonable fees and expenses of the third arbitrator.
All other fees and expenses of each party incurred in connection with the
arbitration shall be paid as determined by the arbitrators.
(7) The parties agree that they will not seek from the arbitrator any
claim under this Agreement any award or judgment for punitive damages (or any
other amount awarded for the purpose of imposing a penalty), and that if any
such award or judgment is granted, the parties agree not to seek to satisfy such
award or judgment.
D. Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of Two-Thirds of the Registrable
Securities then outstanding. The Series A Investors and Series B Investors, by
executing this Amended and Restated Agreement, shall consent to the amendment of
the Amended and Restated Registration Agreement as originally executed on
February 2, 1998 to add the Series C Purchasers as parties to this Agreement,
with the rights set forth herein. This Amended and Restated Agreement shall
become effective as to the Company and the Investors when executed by the
Company and by holders of Two-Thirds of the Registrable Securities.
E. Successors and Assigns. All covenants and agreements in this Agreement
----------------------
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not. In addition, whether or not any express assignment has been
made, the provisions of this Agreement which are for the benefit of purchasers
or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
F. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such
Page 11 - Registration Agreement
<PAGE>
provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
G. Counterparts. This Agreement may be executed in separate counterparts,
------------
any one of which need not contain the signatures of more than one party, but all
such counterparts taken together will constitute one and the same agreement.
H. Descriptive Headings; Interpretation. The descriptive headings of this
-------------------------------------
Agreement are inserted for convenience only and do not constitute a part of this
Agreement. The use of the word "including" in this Agreement shall be by way of
example rather than by limitation.
I. Notices. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Unless otherwise indicated below, such
notices, demands and other communications will be sent to each Investor at the
address listed on the signature page(s) to this Agreement and to the Company at
the addresses indicated below:
Robert N. Helmick
CEO & President
Real Education, Inc.
10200A E. Girard Avenue
Denver, CO 80231
With a copy to:
Annita M. Menogan
Dorsey & Whitney LLP
Republic Plaza Building, Suite 4400
370 17/th/ Street
Denver, CO 80202-5644
and to:
MediaOne Interactive Services
9000 East Nichols, Suite 100
Englewood, CO 80112
ATTN: VP Business Development
and
MediaOne Interactive Services
5613 DTC Parkway, Suite 700
Englewood, CO 80111
ATTN: Gary Burghart
Page 12 - Registration Agreement
<PAGE>
with a copy to:
John P. Fitzgerald
Hogan & Hartson L.L.P.
One Tabor Center
1200 Seventeenth Street.
Denver, Colorado 80202
or to such other address or to the attention of such other Person as the
recipient party has specified by prior written notice to the sending party.
[the remainder of this page is intentionally blank]
Page 13-Registration Agreement
<PAGE>
[Signature Page to Amended and Restated Registration Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
/s/ Robert N. Helmick
- -----------------------------------------
Robert N. Helmick, President and CEO
BLUMENSTEIN/THORNE INFORMATION PARTNERS I, L.P
By: Blumenstein/Thorne Information Partners L.L.C., as General Partner
/s/ Oakleigh Thorne
------------------------------------
Oakleigh Thorne, Co-President
MEDIAONE INTERACTIVE SERVICES, INC.
/s/ Thomas Cullen
- -----------------------------------------
Thomas Cullen, President
VSI HOLDINGS, INC.
/s/ Terry L. Davis
- -----------------------------------------
Terry L. Davis, Executive Vice President
/s/ Robert N. Helmick /s/ John V. Helmick
- ----------------------------------------- ----------------------------
Robert N. Helmick John V. Helmick
/s/ Jonathan M. Dobrin /s/ James N. Sigman
- ----------------------------------------- ----------------------------
Jonathan M. Dobrin James N. Sigman
Signature Page-Amended and Restated Registration Agreement
<PAGE>
/s/ James R. Nollsch /s/ Bradley Felix
- --------------------------------- ----------------------------
James R. Nollsch Bradley Felix
/s/ Nikki Pike
- --------------------------------- ----------------------------
Nikki Pike Adel Hazan
/s/ Steven Singer /s/ Robert C. Douglas
- --------------------------------- ____________________________
Steven Singer Robert C. Douglas
By: John V. Helmick, Attorney-in-Fact
/s/ William E. Waldeck /s/ David P. Schieldrop
- --------------------------------- ----------------------------
William E. Waldeck David P. Schieldrop
NEW WORLD EQUITIES, INC. /s/ Patrick C. DeLacey
----------------------------
Patrick C. DeLacey
By: /s/ Christopher E. Girgenti /s/ Robert A. Conway
------------------------------ ----------------------------
Its: Senior Mnagement Director Robert A. Conway and
---------------------------- Darlene A. Conway, JTWROS
/s/ Alan L. Sigman /s/ Lee S. Mendel
- --------------------------------- ----------------------------
Alan L. Sigman Lee S. Mendel
/s/ James F. Hemmer /s/ Stanley R. Dobrin
- --------------------------------- ----------------------------
James F. Hemmer Stanley R. Dobrin
/s/ Michael J. Walker /s/ Mark A. Timmerman
- --------------------------------- ----------------------------
Michael J. Walker Mark A. Timmerman
Signature Page-Amended and Restated Registration Agreement
<PAGE>
McD VENTURE CAPITAL FUND, L.P.
By: /s/ Patricia Jamison
----------------------------------
Its: Assistant Treasurer
---------------------------------
/s/ William O. Kasten
--------------------------------
William O. Kasten
McDonald & Company Securities, Inc. /s/ Davis B. Weidner
--------------------------------
AS CUSTODIAN FOR WILLIAM E. WALDECK IRA Davis B. Weidner
By: Mark Fine, Attorney-in-Fact
By: W.E Waldeck
----------------------------------
Its: Managing Director /s/ Jay S. Perlmetter
--------------------------------- --------------------------------
Jay S. Perlmutter
MCDONALD & CO. SECURITIES, INC.
By: /s/ Patricia Jamison
----------------------------------
Its: Chief Financial Officer
---------------------------------
SILVER FAMILY TRUST U/D/T
/s/ Martin J. Silver
- -------------------------------------
Martin J. Silver, Trustee
/s/ Victoria H. Silver
- -------------------------------------
Victoria H. Silver, Trustee
Signature Page-Amended and Restated Registration Agreement
<PAGE>
[Signature Pages to Real Education, Inc. Series C Preferred Resignation
Agreement]
/s/ Stanley Dobrin
- ------------------------------------------
/s/ Carol Dobrin
- ------------------------------------------
Stanley Dobrin & Carol Dobrin, JTWROS
/s/ Davis B. Weidner
- ------------------------------------------
Davis B. Weidner
/s/ Sue Thompson
- ------------------------------------------
Sue Thompson
H & K PARTNERS V
/s/ William Kasten
- ------------------------------------------
William Kasten
N.T. RUDDOCK CO. -- Profit Sharing Trust
/s/ Neil T. Ruddock, Jr. Trust Administrator
- ------------------------------------------
Samuel James Ruddock, Vice President
Signature Page to Registration Agreement
<PAGE>
EXHIBIT 10.5
AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
THIS AMENDED AND RESTATED SHAREHOLDERS AGREEMENT (this "AGREEMENT") is made as
of December 21, 1998 (the "EFFECTIVE DATE"), by and among Real Education, Inc.,
a Colorado corporation (the "COMPANY"), each of the shareholders listed on
Schedule I attached hereto (the "COMMON SHAREHOLDERS"), each of the purchasers
of the Units listed on Schedule II-A attached hereto (the "SERIES A INVESTORS"),
each of the purchasers of the Units listed on Schedule II-B attached hereto (the
"SERIES B INVESTORS"), and each of the purchasers of the Series C Preferred
Stock, no par value, of the Company listed on Schedule III attached hereto (the
"SERIES C PURCHASERS"). The Series A Investors and Series B Investors, are
collectively referred to as the "INVESTORS." In the event less than all of the
Series C Purchasers execute this Agreement as of the Effective Date, this
Agreement shall be valid as to the parties who do execute this Agreement as of
the Effective Date. The Common Shareholders, the Series A Investors, Series B
Investors, and the Series C Purchasers are collectively referred to as the
"SHAREHOLDERS" and individually as a "SHAREHOLDER". Except as otherwise
indicated herein, capitalized terms used herein are defined in Section 1 hereof.
This Agreement amends and restates that certain Amended and Restated
Shareholders Agreement by and among the Company, the Common Shareholders, the
Series A Investors and the Series B Investors, dated as of February 2, 1998, for
the purpose of adding the Series C Purchasers as parties to such agreement, and
revising its terms to reflect their addition as shareholders of the Company and
parties to such Agreement.
BACKGROUND
----------
A. The Series A Investors purchased investment units ("UNITS"), each Unit
consisting of one share of Series A Convertible Preferred Stock, no par value
per share, of the Company (the "SERIES A PREFERRED"), and one Common Stock
Purchase Warrant pursuant to a Unit Purchase Agreement between the Company and
the Series A Investors dated June 11, 1997 (the "SERIES A AGREEMENT"). As
Shareholders of the Company, the Series A Investors have obtained and will
obtain substantial benefit from the Series C Purchasers' investment in the
Company.
B. The Series B Investors purchased 326,833 shares of Series B Convertible
Preferred Stock, no par value per share, of the Company (the "SERIES B
PREFERRED"), pursuant to the Share Purchase Agreement by and among the Company
and the Series B Investors dated February 2, 1998 (the "SERIES B AGREEMENT"). As
Shareholders of the Company, the Series B Investors have obtained and will
obtain substantial benefit from the Series C Purchasers' investment in the
Company.
C. The Series C Purchasers will purchase 430,540 shares of Series C
Convertible Preferred Stock, no par value per share, of the Company (the "SERIES
C PREFERRED"), pursuant to the Share Purchase Agreement by and among the Company
and the Series C Purchasers of even date herewith (the "SERIES C AGREEMENT").
The execution and delivery of this Agreement is a condition to the purchase by
the Series C Purchasers of the Series C Preferred under the Series C Agreement.
Page 1 of 16 -- Shareholders Agreement
<PAGE>
D. Each of the Common Shareholders owns certain shares of the Company's Common
Stock, no par value per share (the "COMMON STOCK"), and as such, has obtained
and will obtain substantial benefit from the Series C Purchasers' and Investors'
investment in the Company.
E. The Company and the Shareholders desire to enter into this Agreement for
the purposes, among others, of (i) agreeing on certain representatives to be
elected to the board of directors of the Company (the "BOARD") and (ii) inducing
the Series C Purchasers to enter into the Series C Agreement and to purchase the
Series C Preferred to be issued and sold thereunder.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing Background, which is by this
reference expressly incorporated herein, the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Agreement hereby agree as follows:
1) DEFINITIONS.
"AFFILIATE" of a Shareholder means any other person, entity or investment
fund controlling, controlled by or under common control with such Shareholder
and any partner of a Shareholder that is a partnership.
"COMMON EQUIVALENT SHARES" means at any time as to any Shareholder the sum
of the number of shares of Common Stock held by such Shareholder at such time
and the number of shares of Common Stock issuable at such time upon conversion
of any Shareholder Shares then held by such Shareholder.
"FAMILY GROUP" means an individual's spouse and descendants (whether
natural or adopted) and any trust solely for the benefit of such individual
and/or his or her spouse and/or descendants.
"FAMILY MEMBER" means any relative by blood, adoption or marriage.
"INDEPENDENT DIRECTORS" shall mean any individual who is neither an officer
nor employee of the Company nor an Affiliate or Family Member of any such
officer or employee of the Company.
"MEDIAONE" means MediaOne Interactive Services, Inc.
"PERMITTED TRANSFEREE" shall have the meaning set forth in Section 3(b)
hereof.
"PREFERRED STOCK APPROVAL" means an affirmative vote at a meeting or by
written consent of the holders of sixty-six and two-thirds percent (66 2/3%) of
the Series A Preferred, Series B Preferred and Series C Preferred, collectively.
"PUBLIC SALE" means any sale of Shareholder Shares to the public pursuant
to an offering registered under the Securities Act or to the public through a
broker, dealer or market maker pursuant to the provisions of Rule 144 adopted
under the Securities Act.
Page 2 of 16 -- Shareholders Agreement
<PAGE>
"PUBLIC OFFERING" means any offering by the Company of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act, or any comparable statement under any similar federal
statute then in force; provided that a Public Offering will not include an
offering made in connection with a business acquisition or pursuant to
registration on Form S-8 or any similar Form of Registration Statement.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time to
time.
"SHAREHOLDER SHARES" means (i) any Common Stock purchased or otherwise
acquired by any Shareholder, (ii) any Series A Preferred purchased or otherwise
acquired by any Shareholder, (iii) any Series B Preferred purchased or otherwise
acquired by any Shareholder, (iv) any Series C Preferred purchased or otherwise
acquired by any Shareholder, (v) any equity securities issued or issuable
directly or indirectly with respect to the Common Stock, Series A Preferred,
Series B Preferred or Series C Preferred referred to in clauses (i), (ii), (iii)
and (iv) above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and (vi) any other shares of any class or series of capital
stock of the Company held by a Shareholder.
2) BOARD OF DIRECTORS. The following provisions shall apply during the
pendency of this Agreement:
a) The Shareholders agree that the size of the Board shall equal ten (10)
members.
b) The Shareholders further agree that the Common Shareholders shall have
the right to designate five representatives to serve on the Board (the
"COMMON SHAREHOLDERS' DESIGNEES"), that the Series A Investors shall have
the right to designate two representatives to serve on the Board (the
"SERIES A DESIGNEES"), one of whom New World Equities, Inc. will designate,
and one that the other Series A Investors shall designate, and that one of
the Series B Investors, Blumenstein/Thorne Information Partners I, L.P.,
shall have the right to designate two representatives to serve on the Board
(the "SERIES B DESIGNEES"), and that one of the Series C Purchasers,
MediaOne or its assignee, shall have the right to designate one
representative to serve on the Board (the "SERIES C DESIGNEE"). The Common
Shareholders agree that two of the five Common Shareholders' Designees
shall be Independent Directors who are subject to Preferred Stock Approval.
c) Until the later of (a) three years from the Effective Date, or (b) the
first date when less than 83,000 shares of Series A Preferred are
outstanding (with respect to Series A designees only), or (c) the first
date when less than 195,000 shares of Series B Preferred are outstanding
(with respect to Series B designees only), or (d) the first date when less
than 133,812 shares of Series C Preferred are outstanding and held by
MediaOne or its assignee (with respect to the Series C Designee only), each
Shareholder agrees to vote all of his Shareholder Shares and any other
voting securities of the Company over which such Shareholder has voting
control and to take all other necessary or desirable actions within his
control (whether in his, her or its capacity as a shareholder, director,
member of a Board committee or officer of the Company or otherwise, and
including, without limitation, attendance at meetings in person or by proxy
for purposes of obtaining a quorum and execution of written consents in
lieu of meetings), so that the Common Shareholders' Designees, the Series A
Designees, the Series B Designees, and the Series C Designee shall be
elected to, and continue to serve on, the Board. Without limiting the
generality of the prior sentence, the
Page 3 of 16 -- Shareholders Agreement
<PAGE>
Common Shareholders agree not to vote to remove the Series A Designees, the
Series B Designees or the Series C Designee from the Board; the Series A
Investors agree not to vote to remove the Common Shareholders' Designees,
the Series B Designees, or the Series C Designee from the Board; the Series
B Investors agree not to vote to remove the Common Shareholders' Designees,
the Series A Designees, or the Series C Designees from the Board; and the
Series C Purchasers agree not to vote to remove the Common Shareholders'
Designees, the Series A Designees, or the Series B Designees from the
Board.
d) The Board shall maintain a compensation committee (the "COMPENSATION
COMMITTEE") which will recommend the following for approval by the full
Board: management compensation; Company benefit plans; and adoption of, and
grants under, stock option plans. The Board shall also maintain an audit
committee (the "AUDIT COMMITTEE") which will be responsible for reviewing
with management of the Company and with the Company's independent auditors,
both jointly and separately, the financial controls, accounting and audit
and reporting activities of the Company, the performance of the Company's
auditors, and the capability and performance of the Company's finance
staff. As of the Effective Date, the members of the Compensation Committee
shall be, (1) Christopher Girgenti, a Series A Designee, and (2) Jack
Blumenstein , a Series B Designee, and (3) the Series C Designee (who shall
be identified from time to time by MediaOne). As of the Effective Date, the
members of the Audit Committee shall be (1) Oakleigh Thorne, a Series B
Designee, (2) Christopher Girgenti, a Series A Designee and (3) the Series
C Designee (who shall be identified from time to time by MediaOne.
3) TAKE-ALONG RIGHTS.
a) At least forty (40) days prior to any proposed sale, transfer,
assignment, pledge or other disposal (each, a "TRANSFER") of Shareholder
Shares (other than a Public Sale) by any Shareholder (the "SELLER"), such
Seller shall deliver a written notice (the "SALE NOTICE") to each other
Shareholder, specifying in reasonable detail the identity of the
prospective transferee(s) and the terms and conditions of the Transfer. The
other Shareholders may elect to participate in the contemplated Transfer by
delivering written notice to the Seller within twenty (20) days after
delivery of the Sale Notice. If any of the Shareholders have elected to
participate in such Transfer (the "PARTICIPATING SHAREHOLDERS"), the Seller
and such Participating Shareholders shall be entitled to sell in the
contemplated Transfer, at the same price and on the same terms, a number of
Shareholder Shares equal to the product of (i) the quotient determined by
dividing the number of Common Equivalent Shares owned by the Participating
Shareholder by the aggregate number of Common Equivalent Shares owned by
the Seller and all Participating Shareholders participating in such sale
multiplied by (ii) the number of Shareholder Shares to be sold in the
contemplated Transfer.
For example, if the Sale Notice contemplated a sale of 100
Shareholder Shares by the Seller, and if the Seller at such
time owns 200 of the Shareholder Shares and if one
Participating Shareholder elects to participate and owns 300
of the Shareholder Shares, the Seller would be entitled to
sell 40 shares (200/500 x 100 shares) and the Participating
Shareholder would be entitled to sell 60 shares (300/500 x 100
(shares)
Page 4 of 16 -- Shareholders Agreement
<PAGE>
The Seller covenants and agrees to use its best efforts to obtain the agreement
of the prospective transferee(s) to the participation of the Shareholders in any
contemplated Transfer, and the Seller covenants and agrees not to transfer any
of his, her or its Shareholder Shares to the prospective transferee(s) if the
prospective transferee(s) declines to allow the participation of any of the
Shareholders.
b) The restrictions contained in this Section 3 shall not apply
with respect to any Transfer of Shareholder Shares by a Common
Shareholder (i) pursuant to applicable laws of descent and
distribution or among his Family Group or (ii) among his Affiliates
(collectively referred to herein as "PERMITTED TRANSFEREES");
provided that the restrictions contained in this Section 3 shall
continue to be applicable to the Shareholder Shares after any such
Transfer and provided further that, prior to the effectiveness of
such Transfer, the transferees of such Shareholder Shares shall
have agreed in writing to be bound by the provisions of this
Agreement affecting the Shareholder Shares so transferred.
c) Subject to Section 7(i), the restrictions on the Transfer of
Shareholder Shares by the Shareholders set forth in this Section 3
shall continue until the date on which such Shareholder Shares have
been transferred in a Public Sale.
4) Legend. Each certificate evidencing Shareholder Shares and each certificate
------
issued in exchange for or upon the Transfer of any Shareholder Shares (if such
shares remain Shareholder Shares as defined herein after such transfer) shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY
ISSUED ON DECEMBER 21, 1998, AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS
SPECIFIED IN THE SHARE PURCHASE AGREEMENT DATED AS OF ________, AND
THE AMENDED AND RESTATED SHAREHOLDERS AGREEMENT, DATED AS OF DECEMBER
21, 1998, BETWEEN THE ISSUER (THE "COMPANY") AND CERTAIN INVESTORS,
AS SUCH AGREEMENT MAY BE AMENDED FROM TIME TO TIME AND THE COMPANY
RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL
SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A
COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE."
The Company shall imprint such legend on certificates evidencing Shareholder
Shares outstanding prior to the date hereof. The legend set forth above shall
be removed from the certificates evidencing any shares that cease to be
Shareholder Shares in accordance with the definition thereof.
Page 5 of 16 -- Shareholders Agreement
<PAGE>
5) TRANSFER. Prior to transferring any Shareholder Shares (other than in a
Public Sale) to any person or entity, the transferring Shareholder shall cause
the prospective transferee to execute and deliver to the Company and the other
Shareholders a counterpart of this Agreement.
6) TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted Transfer
of any Shareholder Shares in violation of any provision of this Agreement shall
be void, and the Company shall not record such Transfer on its books or treat
any purported transferee of such Shareholder Shares as the owner of such shares
for any purpose.
7) MISCELLANEOUS.
a) Amendment and Waiver. Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by (i) the Company, (ii) Preferred
Stock Approval, (iii) 67% of the Series C Preferred, and (iv) the holders of a
majority of the outstanding shares of Common Stock. The Investors and Common
Shareholders, by executing this Amended and Restated Shareholders Agreement,
shall consent to the amendment, restatement, and supercession of the Amended
and Restated Shareholders Agreement, dated February 2, 1998 as originally
executed to add the Series C Purchasers as parties to this Agreement, and to
adjust all parties' rights as set forth herein. This Amended and Restated
Shareholders Agreement shall become effective as to the Company and the
Purchasers when executed by the Series C Purchasers, the Company, holders of a
majority of the outstanding shares of Common Stock and by Preferred Stock
Approval of the Series A Preferred, and the Series B Preferred, voting
collectively. The failure of any party to enforce any of the provisions of
this Agreement shall in no way be construed as a waiver of such provisions and
shall not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
b) Severability. Whenever possible, each provision of this Agreement shall
------------
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
c) Entire Agreement. Except as otherwise expressly set forth herein, this
----------------
document embodies the complete agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersedes and preempts
any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof
in any way.
d) Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
this Agreement shall bind and inure to the benefit of and be enforceable by
the respective successors and assigns of the parties hereto whether so
expressed or not.
e) Counterparts. This Agreement may be executed in separate counterparts,
------------
any one of which need not contain the signatures of more than one party, but
all such counterparts taken together shall constitute one and the same
agreement.
Page 6 of 16 -- Shareholders Agreement
<PAGE>
f) Remedies, Enforcement, Governing Law, Venue. Any Person having rights
-------------------------------------------
under any provision of this Agreement will be entitled to enforce such rights
specifically to recover damages caused by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that
any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or other security) for
specific performance and for other injunctive relief in order to enforce or
prevent violation of the provisions of this Agreement.
i) All questions concerning the relative rights of the Company and
its shareholders and the construction, validity and
interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by and construed in accordance with
the domestic laws of the State of Colorado, without giving
effect to any choice of law or conflict of law provision or
rule (whether of the State of Colorado or any other
jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Colorado.
ii) In the event of any claim, dispute and controversy of any
nature between or among the Shareholders, and the Company
arising out of or in connection with this Agreement or the
Company's Articles of Incorporation, as they may be amended or
restated from time to time (the "Articles"), or the
negotiation, execution, delivery, performance, nonperformance
or breach thereof (collectively, a "Dispute"), the Shareholders
and the Company shall consult and negotiate with each other in
good faith and otherwise use their respective commercially
reasonable efforts to settle such Dispute within a 45-day
period after the Dispute first arises. If the Dispute is not
resolved or settled within such 45-day period then, upon
written notice by either party to the other, the Dispute shall
be resolved by binding arbitration in Denver, Colorado in
accordance with Title 9 of the U.S. Code (United States
Arbitration Act) and the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), as they may be
amended from time to time and as modified by this Agreement or
decision of a majority of the arbitrators. The arbitration
shall be conducted in Denver, Colorado. The Shareholders and
the Company intend that arbitration be the sole remedy
available as to matters arbitrable hereunder. An arbitration
award rendered by the arbitrators shall be final and binding on
the Shareholders and the Company and may be filed with any
court having jurisdiction over the Shareholders, the Series C
Purchasers or the Company or their property as a basis of
declaratory or other judgment and of the issuance of execution.
iii) Unless otherwise agreed, any party requesting arbitration
hereunder shall do so within 15 days after the expiration of
the 45-day negotiation period referred to in Section 7(f)(ii),
and failure by either party to request arbitration within such
period shall thereafter bar such Dispute in any forum
whatsoever. When a party timely requests arbitration hereunder,
the Dispute shall be resolved by a panel of three neutral
arbitrators to be selected as follows: the party requesting the
arbitration shall, incident to giving the notice of
arbitration, also notify the other party of the name of an
arbitrator selected from a list of qualified persons supplied
by the AAA, and the other party shall, within 20 days after
receipt of such notice, notify the party requesting arbitration
of the name of an arbitrator it has selected from such list.
The
Page 7 of 16 -- Shareholders Agreement
<PAGE>
two arbitrators shall, within 20 days after notification of the
identity of the second arbitrator, choose a third arbitrator.
iv) The Commercial Arbitration Rules of the AAA and decisions by a
majority of the arbitration panel shall determine the rules
governing admissibility of evidence and the rules of procedure
and discovery. The action of a majority of the arbitration
panel shall govern all actions by the panel, and the
arbitrators shall render their decision promptly but in no
event more than 60 days after the conclusion of submission of
evidence. The arbitration award shall be in writing and shall
specify factual and legal basis for the award. Either party may
make application to the arbitration panel seeking injunctive
relief to maintain the status quo until such time as the
arbitration award is rendered or the Dispute is otherwise
resolved. The arbitration panel shall have the authority to
award any remedy or relief that a court of the State of
Colorado could order or grant, including specific performance
of any obligation created under the Agreement or the Articles,
issuance of an injunction or money damages, but excluding
punitive, incidental or consequential damages.
v) Each party shall pay the fees and expenses of the arbitrator
selected by it and one-half of the reasonable fees and expenses
of the third arbitrator. All other fees and expenses of each
party incurred in connection with the arbitration shall be paid
as determined by the arbitrators.
vi) The parties agree that they will not seek, in any claim under
this Agreement or the Articles, any award or judgment for
punitive damages (or any other amount awarded for the purpose
of imposing a penalty), and that if any such award or judgment
is granted, the parties agree not to seek to satisfy such award
or judgment.
vii) The arbitration panel hearing any claim under this Agreement or
the Articles shall award all costs of the proceeding, including
court costs, filing fees, travel costs of witnesses, costs of
depositions and reasonable attorney fees, to the substantially
prevailing party.
g) Notices. All notices, demands or other communication to be given or
-------
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to
the recipient, sent to the recipient by reputable express courier service
(charges prepaid) or mailed to the recipient by certified or registered mail,
return receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the Company and MediaOne at the address
indicated below and to any other recipient at the address indicated on
Schedule I and Schedule II attached hereto and to any subsequent holder of
Shareholder Shares subject to this Agreement at such address as indicated by
the Company's records, or at such address or to the attention of such other
person as the recipient party has specified by prior written notice to the
sending party. The Company's address is:
Page 8 of 16 -- Shareholders Agreement
<PAGE>
Robert N. Helmick
CEO & President
Real Education, Inc.
Building A
10200 E. Girard Avenue
Denver, CO 80231
With a copy to:
Annita Menogan
Dorsey & Whitney LLP
Republic Plaza Building, Suite 4400
370 17th Street
Denver, CO 80202-5644
MediaOne's address is:
MediaOne Interactive Services
9000 East Nichols, Suite 100
Englewood, CO 80112
ATTN: VP Business Development
and
MediaOne Interactive Services
5613 DTC Parkway, Suite 700
Englewood, CO 80111
ATTN: Gary Burghart
with a copy to:
John P. Fitzgerald
Hogan & Hartson L.L.P.
One Tabor Center
1200 Seventeenth Street, Suite 1500
Denver, Colorado 80202
h) Descriptive Headings. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this Agreement.
Use of the word "including" in this Agreement shall be by way of example
rather than limitation.
i) Termination. This Agreement shall terminate upon the consummation of a
-----------
Public Offering.
* * * * *
Page 9 of 16 -- Shareholders Agreement
<PAGE>
/s/ James R. Nollsch /s/ Bradley Felix
- -------------------------------- ----------------------------
James R. Nollsch Bradley Felix
/s/ Nikki Pike /s/ Adel Hazan
- -------------------------------- ----------------------------
Nikki Pike Adel Hazan
/s/ Steven Singer /s/ Robert C. Douglas
- -------------------------------- ----------------------------
Steven Singer Robert C. Douglas
By: John V. Hulmick
Attorney-In-Fact
/s/ W E. Waldeck /s/ David P. Schieldrop
- -------------------------------- ----------------------------
William E. Waldeck David P. Schieldrop
NEW WORLD EQUITIES, INC. /s/ Patrick C. DeLacey
----------------------------
Patrick C. DeLacey
/s/ Christopher E. Girgenti /s/ Robert A. Conway
By: --------------------------- ----------------------------
Its: Senior Managing Director Robert A. Conway and
--------------------------- Darlene A. Conway, JTWROS
/s/ Alan L Sigman /s/ Lee S. Mandel
- -------------------------------- ----------------------------
Alan L. Sigman Lee S. Mendel
/s/ James F. Hemmer /s/ Stanley R. Dobrin
- -------------------------------- ----------------------------
James F. Hemmer Stanley R. Dobrin
/s/ Michael J. Walker /s/ Mark Timmerman
- -------------------------------- ----------------------------
Michael J. Walker Mark A. Timmerman
Signature Page - Amended and Restated Shareholders Agreement
<PAGE>
MCD VENTURE CAPITAL FUND, L.P.
/s/ Patricia Jamison /s/ William O. Kasten
By:---------------------------- ----------------------------------
Its: Assistant Treasurer William O. Kasten
- -------------------------------
MCDONALD & COMPANY SECURITIES, INC. /s/ M.E. Fine for Davis B. Weidner
As Custodian for William E. Waldeck IRA ----------------------------------
Davis B. Weidner
Mark Fine
Attorney-in-fact
By: /s/ William E. Waldeck
---------------------------
Its: Managing Director /s/ Jay S. Perlmutter
--------------------------- ----------------------------------
Jay S. Perlmutter
MCDONALD & CO. SECURITIES, INC.
By: /s/ Patricia Jamison
---------------------------
Its: Chief Financial Officer
---------------------------
SILVER FAMILY TRUST U/D/T
/s/ Martin J. Silver
- -------------------------------
Martin J. Silver, Trustee
/s/ Victoria H. Silver
- -------------------------------
Victoria H. Silver, Trustee
Signature Page - Amended and Restated Shareholders Agreement
<PAGE>
[Signature Page to Amended and Restated Shareholders Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REAL EDUCATION, INC.
/s/ Robert N. Helmick
- ----------------------------------------
Robert N. Helmick, President and CEO
BLUMENSTEIN/THORNE INFORMATION PARTNERS I,L.P.
By: Blumenstein Thorne Information Partners, L.L.C., as General Partner
/s/ Oakleigh Thorne
-----------------------------------
Oakleigh Thorne, Co-President
MEDIAONE INTERACTIVE SERVICES, INC.
/s/ Thomas Cullen
- ----------------------------------------
Thomas Cullen, President
VSI HOLDING, INC.
/s/ Terry L. Davis
- ----------------------------------------
Terry L. Davis, Executive Vice President
/s/ Robert N. Helmick /s/ John V. Helmick
- ---------------------------------------- ---------------------------
Robert N. Helmick John V. Helmick
/s/ Jonathan M. Dobrin /s/ James N. Sigman
- ---------------------------------------- ---------------------------
Jonathan M. Dobrin James N. Sigman
Signature Page - Amended and Restated Shareholders Agreement
<PAGE>
Signature Pages to Real Education, Inc. Series C Preferred Shareholders
Agreement
/s/ Stanley R Dobrin
- -------------------------------------
/s/ Carol L Dobrin
- -------------------------------------
Stanley Dobrin & Carol Dobrin, JTWROS
/s/ Davis B Weidner
- -------------------------------------
Davis B. Weidner
/s/ Sue Thompson
- -------------------------------------
Sue Thompson
H & K PARTNERS V
/s/ William Kasten
- -------------------------------------
William Kasten
N. T. RUDDOCK CO. - Profit Sharing Trust
/s/ Neil T. Ruddock - Trust Administrator
- -----------------------------------------
Samuel James Ruddock, Vice President
Signature Page to Shareholders Agreement
<PAGE>
SCHEDULE I
----------
COMMON SHAREHOLDERS
-------------------
Robert N. Helmick
Real Education, Inc.
10200A E. Girard Avenue
Denver, CO 80231
John V. Helmick
10271 Mica Way
Parker, Colorado 80134
Jonathan M. Dobrin
1173 S. Vine Street
Denver, Colorado 80210
James Sigman
Real Education, Inc.
10200A E. Girard Avenue
Denver, CO 80231
James Nollsch
1173 S. Vine Street
Denver, Colorado 80210
Bradley Felix
11910 E. Bates Circle
Aurora, CO 80014
Nikki Pike
133 Ellis Hall
Fort Collins, CO 80521
Schedules to Shareholders Agreement
<PAGE>
SCHEDULE II-A
SERIES A INVESTORS
New World Equities, Inc.
1603 Orrington Avenue
Suite 1070
Evanston, Illinois 60201
Steven M. Singer
Real Education, Inc.
10200A E. Girard Avenue
Denver, CO 80231
Robert C. Douglas
1231 Inverlieth Road
Lake Forest, Illinois 60045
William E. Waldeck
415 Thorne Lane
Lake Forest, Illinois 60045
David P. Schieldrop
205 E. 68th Street, #5F
New York, New York 10021
Patrick T. DeLacey
400 Blackstone
La Grange, Illinois 60525
Schedules to Shareholders Agreement
<PAGE>
SCHEDULE II-B
SERIES B INVESTORS
Blumenstein/Thorne Information Partners I, L.P.
P.O. Box 871
Lake Forest, Illinois 60045
Robert A Conway & Darlene A Conway
4819 Millersville Road
Indianapolis, IN 46226
Stanley R. Dobrin
7001 Sally Lane
Ednia, Minnesota 55435
William O. Kasten
222 West Adams Street
Chicago, Illinois 60606
James F. Hemmer
534 Melrose Avenue
Kenilworth, Illinois 60043
McD VENTURE CAPITAL FUND, L.P.
c/o Ralph Della Ratta, Senior Managing Director
McDonald & Co. Securities, Inc.
McDonald Investment Centre
800 Superior Street
Cleveland, Ohio 44114
McDONALD & COMPANY SECURITIES, INC., Custodian
for William E. Waldeck IRA
311 S. Wacker Drive, Suite 2020
Chicago, Illinois 60606
McDONALD & COMPANY SECURITIES, INC.
311 S. Wacker Drive, Suite 2020
Chicago, Illinois 60606
Lee S. Mendel
400 S. Steele, Unit 56
Denver, Colorado 80209
Jay S. Perlmutter
1601 Blake Street
Denver, Colorado 80202
Schedules to Shareholders Agreement
<PAGE>
SILVER FAMILY TRUST, U/D/T
Martin J. Silver, Trustee
Victoria H. Silver, Trustee
601 Almond Avenue
Los Altos, California 94022-2314
Alan L. Sigman
3878 S. Jasmine Street
Denver, Colorado 80237
Mark A. Timmerman
1450 N. Astor Street, #14B
Chicago, Illinois 60606
Michael J. Walker
1438 Weilland Street
Chicago, Illinois 60610
Davis B. Weidner
23521 Golden Gate Canyon
Golden, Colorado 80403
Schedules to Shareholders Agreement
<PAGE>
SCHEDULE III
SERIES C PURCHASERS
MediaOne Interactive Services
9000 E. Nichols Ave., Ste. 100
Englewood, CO 80112
Blumenstein/Thorne Information Partners I, L.P.
P.O. Box 871
Lake Forest, Illinois 60045
VSI Holdings, Inc.
2100 N. Woodward Avenue
West 201
Bloomfield Hills, MI 48304-2263
New World Equities, Inc.
1603 Orrington Avenue
Suite 1070
Evanston, Illinois 60201
H & K Partners V
c/o William Blair & Co., L.L.C.
222 West Adams Street
Chicago, IL 60606
Stanley R. and Carol L. Dobrin
7001 Sally Lane
Ednia, MN 55435
Davis Weidner and Sue Thompson
17553 W. 53rd Drive
Golden, CO 80403-1138
N.T. Ruddock Company
26123 Broadway Ave.
Cleveland, OH 44146
Schedules to Shareholders Agreement
<PAGE>
EXHIBIT 10.6
================================================================================
INDEMNIFICATION AGREEMENT
================================================================================
The terms of Indemnification by and between Real Education, Inc., a
Colorado corporation (the "COMPANY"), and (the "DIRECTOR" or
"INDEMNITEE") are as set forth in this Agreement (which shall be made an Exhibit
to the Company's Bylaws (the "AGREEMENT")).
RECITALS
--------
A. The Company and Indemnitee recognize the substantial increase in
corporate litigation in general, subjecting directors, officers, employees,
controlling persons, shareholders, agents and fiduciaries to expensive
litigation risks while at the same time the availability and coverage of
liability insurance has been significantly limited.
B. Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee may not be willing to
serve as a director or fiduciary without additional protection.
C. The Company (i) desires to attract and retain the involvement of
highly qualified individuals, such as Indemnitee, to serve as directors,
officers and employees of the Company and (ii) wishes to provide for the
indemnification and advancing of expenses to Indemnitee to the maximum extent
permitted by law and as set forth hereunder.
D. In view of the considerations set forth above, the Company desires
that Indemnitee be indemnified by the Company as set forth herein.
* * * * *
THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
A. INDEMNIFICATION OF ALL EXPENSES. The Company shall
-------------------------------
indemnify and hold harmless Indemnitee to the fullest extent permitted by law
and/or as set forth hereunder, if Indemnitee was or is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any threatened, pending or completed action,
suit proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee believes might (in Indemnitee's view)
lead to the institution of any such action, suit proceeding or alternative
dispute resolution mechanism, whether civil, criminal
1
================================================================================
<PAGE>
================================================================================
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was or may be deemed a director, officer, shareholder,
employee, controlling person, agent or fiduciary of the Company, or any
subsidiary of the Company or any partnership in which the Company or an
affiliate is a partner, or any limited liability company in which the Company is
a member, or is or was or may be deemed to be serving at the request of the
Company as a director, officer, shareholder, employee, controlling person, agent
or fiduciary of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity -- including, without limitation, any and all
losses, claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit, proceeding or any claim
asserted) under the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other
federal or state statutory law or regulation, at common law or otherwise, which
relate directly or indirectly to the ownership of any securities of the Company
or to any fiduciary obligation owed to such entities (hereinafter an
"Indemnification Event") against any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending a witness in or participating in (including on appeal),
or preparing to defend, be a witness in or participate in, any such action,
suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or
investigation), judgments, fines, penalties and amounts paid in settlement of
such Claim and any federal, state local or foreign taxes imposed on Indemnitee
as a result of the actual or deemed receipt of any payments under this Agreement
(collectively, hereinafter "Expenses"), including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses.
Such payment of Expenses shall be made by the Company as soon as practicable but
in any event no later than three days after written demand by Indemnitee
therefor is presented to the Company. The Company shall be entitled to a refund
of Expenses from the Indemnitee if a court of competent jurisdiction makes a
final, nonappealable determination that the payment of Expenses arose out of the
willful misconduct of the Indemnitee.
B. CONTRIBUTION. If the indemnification provided for in
------------
Section 1(a) above for any reason is held by a court of competent jurisdiction
to be unavailable to Indemnitee in respect of any Claim or Expense, then the
Company, in lieu of indemnifying Indemnitee thereunder, shall contribute to the
amount paid or payable by Indemnitee as a result of such losses, claims,
damages, expenses or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and Indemnitee, or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
Indemnitee in connection with the action or inaction which resulted in such
Claims or Expenses, as well as any other relevant equitable considerations.
2
================================================================================
<PAGE>
================================================================================
C. SURVIVAL REGARDLESS OF INVESTIGATION. The indemnification
------------------------------------
and contribution provided for in this Section 1 will remain in full force and
effect regardless of any investigation made by or on behalf of Indemnitee.
D. CHANGE IN CONTROL. The Company agrees that if there is a
-----------------
Change in Control (as defined below) of the Company then, with respect to all
matters thereafter arising concerning the rights of Indemnitee to payments of
Expenses under this Agreement or any other agreement or under the Company's
Articles of Incorporation or Bylaws as now or hereafter in effect, Independent
Legal Counsel (as defined below) shall be selected by Indemnitee. Such counsel,
among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent Indemnitee should be indemnified
hereunder -- or pursuant to applicable law. The Company agrees to abide by such
opinion and to pay the fees of the Independent Legal Counsel referred to above
and to fully indemnify such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or its engagement pursuant hereto.
2. EXPENSES: INDEMNIFICATION PROCEDURE.
------------------------------------
A. ADVANCEMENT OF EXPENSES. The Company shall advance all
-----------------------
Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid
by the Company to Indemnitee as soon as practicable but in any event no later
than three days after written demand by Indemnitee therefor to the Company.
B. NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall give the
--------------------------------
Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement.
C. NO PRESUMPTION. For purposes of this Agreement, the
--------------
termination of any Claim by judgment, order, award, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court had
determined that indemnification is not permitted by applicable law. In
addition, neither the failure of the Company to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief nor an actual determination by the Company that Indemnitee has
not met such standard of conduct or did not have such belief prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law, shall
be a defense to Indemnitee's claim or create a presumption that Indemnitee has
not met any particular standard of conduct or did not have any particular
belief.
3
================================================================================
<PAGE>
================================================================================
D. NOTICE TO INSURERS. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt written notice of the commencement of such Claim to the insurers in
accordance with the procedures set forth in each of the policies. The Company
thereafter shall take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies. Notwithstanding, the Company's obligation to indemnify Indemnitee and
pay Expenses is not contingent upon the Company receiving any funds from its
insurance carrier.
E. SELECTION OF COUNSEL. In the event the Company shall be
--------------------
obligated hereunder to pay all of the Expenses of any Claim, the Company shall
be entitled to assume the defense of such Claim, with counsel reasonably
approved by Indemnitee, upon the delivery to Indemnitee of written notice of its
election to do so. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Claim; provided
that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, (B) Indemnitee shall
have reasonably concluded that there is a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not continue to retain such counsel to defend such Claim, then the fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS: NONEXCLUSIVITY.
--------------------------------------------------
A. SCOPE. The Company hereby agrees to indemnify Indemnitee as
-----
specifically set forth hereunder, in addition to the fullest extent permitted by
law, even if such indemnification is not specifically authorized by the other
provisions of this Agreement or any other Agreement, the Company's Articles of
Incorporation or Bylaws or by statute. In the event of any change after the
date of this Agreement in any applicable law, statute or rule which expands the
right of a corporation to indemnify a member of its Board of Directors or an
officer, shareholder, employee, controlling person, agent or fiduciary, it is
the intent of the parties hereto that Indemnitee shall enjoy by this Agreement
the greater benefits afforded by such change. In the event of any change in any
applicable law, statute or rule which narrows the right of the Company to
indemnify a member of its Board of Directors or an officer, employee,
controlling person, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
4
================================================================================
<PAGE>
================================================================================
B. NONEXCLUSIVITY. The indemnification provided by this
--------------
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation and Bylaws, any other
agreement, the laws of the State of Colorado, or otherwise. The indemnification
provided under this Agreement shall continue as to Indemnitee for any action
Indemnitee took or did not take while serving in an indemnified capacity even
though Indemnitee may have ceased to serve in such capacity.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for any portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
5. LIABILITY INSURANCE. To the extent the Company maintains
-------------------
liability insurance applicable to directors, officers, employees, controlling
persons, agents or fiduciaries, Indemnitee shall be covered by such policies in
such a manner as to provide Indemnitee the same rights and benefits as are
accorded to the most favorably insured of the Company's directors or other
personnel.
6. NO COMPANY ACTION. No legal action shall be brought and no cause
-----------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives.
7. DEFINITIONS/CONSTRUCTION.
------------------------
a. For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify its directors, officers,
employees, shareholders, agents or fiduciaries, so that if Indemnitee is or was
or may be deemed a director, officer, employee, agent, control person, or
fiduciary of such constituent corporation, or is or was or may be deemed to be
serving at the request of such constituent corporation as a director, officer,
employee, control person, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have had with respect to such constituent corporation if its separate
existence had continued.
b. For purposes of this Agreement a "Change in Control" shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an
5
================================================================================
<PAGE>
================================================================================
employee benefit plan of the Company or an entity owned directly or indirectly
by the shareholders of the Company in substantially the same proportions as
their ownership of stock of the Company, (A) who is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing 10% or
more of the combined voting power of the Company's then outstanding Voting
Securities, increases his beneficial ownership of such securities by 5% or more
over the percentage so owned by such person, or (B) becomes the "beneficial
owner" (as defined in Rule 13d-3 under said Exchange Act),directly or
indirectly, of securities of the Company representing more than 30% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least two-
thirds of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the shareholders of the Company approve a merger or consolidation of
the Company with any other corporation other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of transactions)
all or substantially all of the Company's assets.
c. For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected by Indemnitee, who shall
not have otherwise performed services for the Company within the last three
years (other than with respect to matters concerning the right of Indemnitee
under this Agreement, or of other indemnitees under similar indemnity
agreements).
8. BINDING EFFECT: SUCCESSORS AND ASSIGNS. This Agreement shall be
---------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform the terms
and conditions set forth in this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place. The terms and conditions set forth in this Agreement shall
continue in effect with respect
6
================================================================================
<PAGE>
================================================================================
to all Claims or Expenses regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent, controlling person, or fiduciary of the
Company or of any other enterprise, including subsidiaries of the Company, at
the Company's request.
9. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action. In the event of an action instituted
by or in the name of the Company under this Agreement to enforce or interpret
any of the terms of this Agreement, Indemnitee shall be entitled to be paid all
Expenses incurred by Indemnitee in defense of such action (including costs and
Expenses incurred with respect to Indemnitee counterclaims and cross-claims made
in such action), and shall be entitled to the advancement of Expenses with
respect to such action, unless, as a part of such action.
10. NOTICE. All notices and other communications required or
------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given (a) five (5) days after deposit with
the U.S. Postal Service or other applicable postal service, if delivered by
first class mail, postage prepaid, (b) upon delivery, if delivered by hand, or
(c) two business days after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid, and shall be addressed to
Indemnitee, at Indemnitee's address as set forth on the books and records of the
Company and if to the Company at the address of its principal business offices
(attention: Secretary) or at such other address as such party may designate by
ten days' advance written notice to the other party hereto.
11. SEVERABILITY. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
12. CHOICE OF LAW. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the laws of the State of
Colorado as applied to contracts between Colorado residents, entered into and to
be performed entirely within the State of Colorado, without regard to the
conflict of laws principles thereof.
7
================================================================================
<PAGE>
================================================================================
13. AMENDMENT AND TERMINATION. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by all parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
14. INTEGRATION AND ENTIRE AGREEMENT. Save as set out herein with
--------------------------------
respect to other indemnity mechanisms, this Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings, and agreements
relating to the subject matter hereof between the parties hereto.
15. CORPORATE AUTHORITY. The Board of Directors of the Company have
-------------------
approved the terms of this Agreement.
16. ENFORCEMENT.
-----------
A. ASSUMPTION OF OBLIGATIONS. The Company expressly confirms
-------------------------
and agrees that it has entered into this Agreement and assumed the obligations
imposed on the Company hereby in order to induce Indemnitee to serve as an
officer and/or employee of the Company, and acknowledges that Indemnitee is
relying on this Agreement in agreeing to serve in such capacity.
B. ACTION TO ENFORCE RIGHTS. In the event that Indemnitee is
------------------------
required to bring any action to enforce rights or to collect moneys due under
this Agreement and is successful in such action, the Company shall reimburse
Indemnitee for all Indemnitee's reasonable fees and expenses, including
attorneys' fees, in bringing and pursuing such action.
DIRECTOR REAL EDUCATION, INC.
- --------------------------- ---------------------------------------
Robert N. Helmick, CEO & President
8
================================================================================
<PAGE>
EXHIBIT 10.7
CONSULTING AGREEMENT
--------------------
This CONSULTING AGREEMENT (this "Agreement"), dated as of June 11, 1997,
between Real Education, Inc., a Colorado corporation (the "Company"), and New
World Equities, Inc., a Delaware corporation ("Consultant").
BACKGROUND
----------
A. The Company operates a business which provides multi-media communication
and publishing services.
B. The Company has informed Consultant that it intends, from time to time,
to seek additional financing.
C. The Company desires to engage Consultant to provide financial services
to the Company, and Consultant desires to accept such engagement, upon the terms
and conditions hereinafter set forth.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing Background, which is
by this reference expressly incorporated herein, of the mutual covenants and
agreements herein contained and for other good and valuable consideration, the
receipt, adequacy and sufficiency of which are hereby acknowledged, the parties,
intending legally to be bound, hereby agree as follows:
1. Engagement. The Company hereby engages Consultant to provide financial
----------
services to the Company, and Consultant hereby accepts such engagement, upon the
terms and conditions hereinafter set forth.
2. Duties of Consultant. Consultant shall provide financial consulting
--------------------
services to the Company in such manner as may reasonably be acceptable to both
parties, including, without limitation, (i) assisting the efforts of the Company
in preparing a business plan, (ii) assisting the efforts of the Company to
secure debt or equity financing, (iii) assisting the efforts of the Company to
establish contacts in the investment banking community, (iv) assisting the
efforts of the Company in effecting an initial public offering of its common
stock and (v) assisting the Company's sales efforts where possible through
contacts which Consultant has developed. Consultant shall devote so much of its
employees' time to Consultant's responsibilities hereunder as shall be
reasonably necessary to discharge Consultant's duties (it being understood that
Consultant shall not be required to cause its employees, consisting of its
professional staff, to devote more than 60 hours per calendar month to
Consultant's duties hereunder).
<PAGE>
3. Term.
----
(a) The term of this Agreement shall be effective as of the date hereof
(the "Commencement Date").
(b) The term of this Agreement shall terminate upon the earliest to
occur of the following events (the "Termination Date");
(i) the decision of either party to terminate this Agreement;
provided, however, that the party desiring to terminate this Agreement
-------- -------
shall provide at least 30 days' prior written notice thereof to the
other party; and provided, further, that neither party may terminate
-------- -------
this Agreement pursuant to this Section 3(b)(i) prior to the 12 month
anniversary of the date hereof; or
(ii) the dissolution or liquidation of Consultant.
Termination of this Agreement shall not affect either party's
obligations which have accrued as of the Termination Date.
4. Compensation. For each one month period commencing on the Commencement
------------
Date and terminating on the day prior to the next succeeding monthly anniversary
thereof (each a "Consulting Month"), as cash compensation for the services to be
provided by Consultant hereunder, the Company shall pay Consultant a consulting
fee of $3,000 (the "Consulting Fee"), which amount shall be subject to
adjustment on each anniversary hereof upon the mutual agreement of the parties.
5. Expenses. Within 30 days after Consultant's presentation of copies of
--------
receipts in accordance with appropriate practices, the Company shall reimburse
Consultant for all reasonable ordinary and necessary out-of-pocket expenses
which are incurred by it in the performance of its duties hereunder.
Notwithstanding the foregoing, Consultant shall obtain the prior approval of the
Company for any single expense in excess of $500.
6. Records and Confidential Data.
-----------------------------
(a) Consultant acknowledges that during the term of this Agreement the
Company will make available to Consultant certain information which is
either confidential, proprietary or otherwise not generally available to
the public to assist Consultant in the satisfaction of its obligations
hereunder (such information is hereinafter referred to as the
"Information").
(b) The Information will be kept strictly confidential by Consultant,
will not be used in any manner which is detrimental to the Company, will
not be used other than in connection with Consultant's discharge of its
duties hereunder, and will be safeguarded by Consultant from unauthorized
disclosure. For purposes of this Agreement, the Information shall not
include and Consultant's obligation's shall not extend to (i) information
which is generally available to the public, (ii) information obtained by
2
<PAGE>
Consultant from third persons not under agreement to maintain the
confidentiality of the same and (iii) information obtained by Consultant
other than from the Company.
7. Indemnification. From and after the date hereof, the Company shall
---------------
indemnify and hold harmless Consultant and its stockholders, directors,
officers, employees, agents and affiliates (the "Indemnified Persons") from and
against any loss, damage, claim or expense, including without limitation,
reasonable attorneys' and consultants' fees, suffered by any Indemnified Person
arising or resulting from the performance by Consultant or and Indemnified
Person of the services contemplated by this Agreement, except to the extent that
such loss, damage, claim or expense was caused primarily as a result of
Consultant's gross negligence or willful misconduct.
8. Miscellaneous Provisions.
------------------------
(a) Independent Contractor. The parties agree that Consultant is an
----------------------
independent contractor, and nothing continued in this Agreement shall be
interpreted to create an employment relationship or partnership or joint
venture between the Company and Consultant.
(b) Alienation. Neither the Company nor Consultant shall sell, assign,
----------
transfer or pledge any of its rights or obligations under this Agreement,
by operation of law or otherwise, without the prior written consent of the
other party.
(c) Notices. Any notice, waiver, consent or other communication
-------
required or permitted hereunder shall be in writing and shall be delivered
personally (including delivery by a internationally recognized courier
service), by facsimile transmission, by pre-paid telegram or by pre-paid
certified or registered mail, return receipt requested, addressed as
follows:
If to the Company: Real Education, Inc.
9000 E. Chenango Avenue
Greenwood Village, Colorado 80111
Attention: Robert N. Helmick
Facsimile: (303) 779-9232
If to the Consultant: New World Equities, Inc.
1603 Orrington Avenue
Suite 1070
Evanston, Illinois 60201
Attention: Christopher Girgenti
Facsimile (847) 328-8297
Notice hereunder shall be deemed to have been received and be effective
for all purposes hereunder (a) if given by facsimile transmission, when
transmitted to the facsimile number specified in this Section and
confirmation of such transmittal is received, (b) if given by prepaid
certified or registered mail, return receipt requested, on
3
<PAGE>
the third business day after mailing or (c) if given by any other means,
when delivered at the address specified in this Section. The address and
facsimile number of any party hereto may be changed by notice given in
accordance with the provisions hereof.
(d) Severability. If any provision of this Agreement is held by a
------------
court of competent jurisdiction to be invalid, illegal or unenforceable,
such provision shall be severed and enforced to the extent possible or
modified in such a way as to make it enforceable, and the invalidity,
illegality or unenforceability thereof shall not affect the validity,
legality or enforceability of the remaining provisions of this Agreement.
(e) Successors. This Agreement and all the terms and provision hereof
----------
shall be binding upon and shall inure to the benefit of all of the parties
hereto, and their legal representatives, heirs, successors and permitted
assigns, except as expressly herein otherwise provided.
(f) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Illinois.
(g) Service of Process. Each of the Company and Consultant expressly
------------------
submits and consent in advance to the exclusive jurisdiction of the United
States District Court for the Northern District of Illinois or the Circuit
Court of Cook County, Illinois for the purposes of any and all suits,
actions or other proceedings arising out of or based upon this applicable
law, each of the parties hereto hereby waives, and agrees not to assert, by
way of motion, as a defense, or otherwise, in any such suit, action or
proceeding brought in such courts, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that its property
is exempt or immune from attachment or execution, that the suit, action or
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Agreement or the subject
matter hereof may not be enforced in or by such court.
(h) Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be an original, but all of which shall constitute one and
the same instrument.
(i) Pronouns and Headings. As used herein, all pronouns shall include
---------------------
the masculine, feminine, neuter, singular and plural thereof whenever the
context and facts require such construction. The headings, titles and
subtitles herein are inserted for convenience of reference only and are to
be ignored in any construction of the provisions hereof.
(j) Amendment and Waiver. Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement shall
be effective unless such modification, amendment or waiver is approved in
writing by the parties. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of
such provisions and shall not affect the right of such party thereafter to
enforce each and every provision of this Agreement in accordance with its
terms.
4
<PAGE>
(k) Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto with respect to the subject matter hereof and
supersede all prior agreements, both written and oral, between the parties
with respect to the subject matter hereof.
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first above written.
THE COMPANY:
-----------
REAL EDUCATION, INC.,
a Colorado corporation
By: /s/ Robert N. Helmick
---------------------------------------
Name: Robert N. Helmick
Title: President and Chief Executive
Officer
CONSULTANT:
----------
NEW WORLD EQUITIES, INC.,
a Delaware corporation
By: /s/ Christopher Girgenti
---------------------------------------
Name: Christopher Girgenti
Title: Senior Managing Partner
5
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
DATE: May 1, 1997
PARTIES: Real Information Systems, Inc., a Colorado corporation (the "Company")
Robert N. Helmick, a resident of Colorado ("Employee")
RECITAL:
The Company is engaged in the business of online web production, online
education and online training business. The Company desires to employ and retain
the unique experience, abilities, and services of Employee as President and
Chief Executive Officer, of the Company's office in Denver, Colorado.
AGREEMENT:
The parties agree as follows:
SECTION 1. EMPLOYMENT
1.1 TERM. The Company agrees to employ Employee as its "President and
Chief Executive Officer" for a term commencing on May 1, 1997, and terminating
on December 31, 2000 (the "INITIAL TERM"), or until termination in accordance
with Section 5. The term of employment shall be renewed automatically for
successive periods of one (1) year each (a "RENEWAL TERM") after the expiration
of the Initial Term and any subsequent Renewal Term, unless the Company provides
the Employee, or the Employee provides the Company, with written notice to the
contrary at least thirty (30) days prior to the end of the Initial Term or any
Renewal Term.
1.2 DUTIES. Employee accepts employment with the Company on the terms and
conditions set forth in this Agreement, and agrees to devote his full time and
attention (reasonable periods of illness excepted) to the performance of his
duties under this Agreement. In general, such duties shall consist of
administration of the day to day operations of the Company's online web
production, online education and online training business, and act as liaison
between the Company and the Company's vendors. Employee shall perform such
specific duties and shall exercise such specific authority as may be assigned to
Employee from time to time by the President of the Company. In performing such
duties, Employee shall be subject to the direction and control of the President
of the Company. Employee further agrees that in all aspects of such employment,
Employee shall comply with the policies, standards, and regulations of the
Company established from time to time, and shall perform his duties faithfully,
intelligently, to the best of his ability, and in the best interest of the
Company. The devotion of reasonable periods of time by Employee for personal
purposes or charitable activities shall not be deemed a breach of this
Agreement, provided that such purposes or activities do not materially interfere
with the services required to be rendered to or on behalf of the Company;
however, any outside business activities that are not first submitted in writing
to the President of the Company, and approved by the President shall be deemed a
breach of this Agreement.
<PAGE>
SECTION 2. COVENANT NOT TO COMPETE; CONFIDENTIALITY
2.1 NONCOMPETITION. During the term of this Agreement and for a period of
12 months after the termination of employment with the Company for any reason,
Employee shall not, within the United States, directly or indirectly, (1) own
(as a proprietor, partner, stockholder, or otherwise) an interest in, or (2)
participate (as an officer, director, or in any other capacity) in the
management, operation, or control of, or (3) perform services as or act in the
capacity of an employee, independent contractor, consultant, or agent of any
enterprise engaged, directly or indirectly, in the online web production, online
education and online training business or in competition with any other business
conducted by the Company except with the prior written consent of the Company;
provided, however, that, for online web production business that is unrelated to
online education, including distance learning, the prohibition shall be the term
of this Agreement and for a period of 6 months after the termination of
employment with the Company for any reason, or, (4) directly or indirectly,
contact, solicit or direct any person, firm, or corporation to contact or
solicit, any of the Company's customers, prospective customers, or business
brokers for the purpose of selling or attempting to sell, any products and/or
services that are the same as or similar to the products and services provided
by the Company to its customers during the term hereof. In addition, the
Employee will not disclose the identity of any such business brokers, customers,
or prospective customers, or any part thereof, to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever; and solicit
or accept if offered to him, with or without solicitation, on his own behalf or
on behalf of any other person, the services of any person who is an employee of
the Company, nor solicit any of the Company's employees to terminate employment
with the Company, nor agree to hire any employee of the Company into employment
with himself or any company, individual or other entity.
2.2 CONFIDENTIALITY. Employee acknowledges and agrees that all product
specifications, product planning information, lists of the Company's customers
and suppliers, financial information, and other Company data related to its
business ("Confidential Information") are valuable assets of the Company.
Except for information that is a matter of public record, Employee shall not,
during the term of this Agreement or after the termination of employment with
the Company, disclose any Confidential Information to any person or use any
Confidential Information for the benefit of Employee or any other person, except
with the prior written consent of the Company.
2.3 IDEAS, INVENTIONS. The Employee recognizes and agrees that all ideas,
inventions, enhancements, plans, writings, and other developments or
improvements (the "INVENTIONS") conceived by the Employee, alone or with others,
during the term of his or her employment, whether or not during working hours,
that are within the scope of the Company's business operations or that relate to
any of the Company's work or projects, are the sole and exclusive property of
the Company. The Employee further agrees that (1) he will promptly disclose all
Inventions to the Company and hereby assigns to the Company all present and
future rights he has or may have in those Inventions, including without
limitation those relating to patent, copyright, trademark or trade secrets; and
(2) all of the Inventions eligible under the copyright laws are "work made for
hire." At the request of and without charge to the Company, the Employee will
do all things deemed by the Company to be reasonably necessary to perfect title
to the Inventions in the Company and to assist in obtaining for the Company such
patents, copyrights or other protection as may be provided under law and desired
by the Company, including but not limited to executing and signing any and all
relevant applications, assignments
<PAGE>
or other instruments. Notwithstanding the foregoing, the Company hereby notifies
the Employee that the provisions of this Section 2.3 shall not apply to any
Inventions for which no equipment, supplies, facility or trade secret
information of the Company was used and which were developed entirely on the
Employee's own time, unless (1) the Invention relates (i) to the business of the
Company, or (ii) to actual or demonstrably anticipated research or development
of the Company, or (2) the Invention results from any work performed by the
Employee for the Company.
2.4 RETURN OF DOCUMENTS. Employee acknowledges and agrees that all
originals and copies of records, reports, documents, lists, plans, drawings,
memoranda, notes, and other documentation related to the business of the Company
or containing any Confidential Information shall be the sole and exclusive
property of the Company, and shall be returned to the Company upon the
termination of employment with the Company or upon the written request of the
Company.
2.5 INJUNCTION. Employee agrees that it would be difficult to measure
damage to the Company from any breach by Employee of Section 2.1, 2.2, or 2.3
and that monetary damages would be an inadequate remedy for any such breach.
Accordingly, Employee agrees that if Employee shall breach or take steps
preliminary to breaching Section 2.1, 2.2, or 2.3, the Company shall be
entitled, in addition to all other remedies it may have at law or in equity, to
an injunction or other appropriate orders to restrain any such breach, without
showing or proving any actual damage sustained by the Company.
2.6 NO RELEASE. Employee agrees that the termination of employment with
the Company or the expiration of the term of this Agreement shall not release
Employee from any obligations under Section 2.1, 2.2, 2.3, 2.4 or 2.5.
SECTION 3. COMPENSATION
3.1 BASE COMPENSATION; BONUS COMPENSATION. In consideration of all
services to be rendered by Employee to the Company, the Company shall pay to
Employee compensation as described on Schedule A of this Agreement.
3.2 OTHER BENEFITS. The Company shall provide to Employee the
substantially similar benefits that the Company provides to all other employees
of the Company.
SECTION 4. EXPENSES
Employee shall be entitled to reimbursement from the Company for reasonable
expenses necessarily incurred by Employee in the performance of Employee's
duties under this Agreement, upon presentation of vouchers indicating in detail
the amount and business purpose of each such expense and upon compliance with
the Company's reimbursement policies established from time to time.
SECTION 5. TERMINATION
5.1 TERMINATION BY PRIOR NOTICE. At any time after December 31, 2000, the
employment of Employee by the Company may be terminated by either the Company or
Employee upon the giving of 20 days' prior written notice to the other party.
This Agreement
<PAGE>
may be terminated at any time upon the mutual written agreement of the Company
and Employee.
5.2 IMMEDIATE TERMINATION. The employment of Employee by the Company may
be terminated immediately in the sole discretion of the Board of Directors of
the Company upon the occurrence of any one of the following events:
5.2.1 After receiving written notice of conduct which is in violation
of policies, standards, and regulations of the Company as established from time
to time and reasonable period of time to correct the conduct, the Employee
willfully and continuously fails or refuses to comply, in a material manner,
with the policies, standards, and regulations of the Company;
5.2.2 Employee engages in fraud, dishonesty, or any other act of
material misconduct in the performance of Employee's duties on behalf of the
Company;
5.2.3 Employee fails to perform any material provision of this
Agreement to be performed by Employee, provided however, that if such breach can
be cured, the Employee will receive reasonable, written notice of breach and
opportunity to cure such breach;
SECTION 6. VACATION; ILLNESS
Subject to the prior approval by the Vice President of the Company,
Employee shall be entitled to one or more vacations, personal leave, and sick
days totaling 14 working days in each calendar year. Up to 5 days of unused
vacation, personal leave, and sick days time remaining at the end of any
calendar year may be carried over to the next calendar year. Additional days
shall reduce the compensation of Employee, and, unless such additional days are
approved by the President or the Vice President of Operations, they shall be
deemed a violation of policies, standards and regulations as described in
Section 5.2.1.
SECTION 7. FACILITIES AND PERSONNEL
Employee shall be provided a private office at the Company's executive
headquarters. The Company shall provide all other facilities, supplies, and
services as shall be required for the performance of Employee's duties under
this Agreement.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
Employee represents and warrants to the Company that there is no employment
contract or any other contractual obligation to which Employee is subject which
prevents Employee from entering into this Agreement or from performing fully
Employee's duties under this Agreement.
<PAGE>
SECTION 9. MISCELLANEOUS PROVISIONS
a. BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of the parties and their heirs, personal representatives,
successors, and assigns.
b. NOTICES. Any notice, election, waiver, consent, acceptance or
other communication required or permitted to be given under this Agreement shall
be in writing and shall be hand delivered, transmitted via fax, or sent via
nationally recognized third party delivery (such as Federal Express or UPS) for
next day delivery, addressed to the parties as follows:
If to Company:
--------------
Real Information Systems, Inc.
9000 E. Chenango Ave.
Greenwood Village, Colorado 80111
Fax: 1-303-779-9233
With a copy to:
--------------
John V. Helmick
General Counsel
10271 Mica Way
Parker, CO 80134
Fax 1-303-841-8043
If to Employee:
---------------
Robert N. Helmick
9000 E. Chenango Ave.
Greenwood Village, CO 80111
Any notice or other communication shall be deemed to be given at the date the
notice is hand delivered to the individual, the date the notice is sent via fax,
or the date following the date of deposit with any nationally recognized third
party delivery (such as Federal Express or UPS) for next day delivery to the
addressee. The addresses to which notices or other communications shall be sent
may be changed from time to time by giving written notice to the other party as
provided in this Paragraph.
c. AMENDMENTS. This Agreement may be amended only by an instrument
in writing executed by all the parties.
d. ENTIRE AGREEMENT. This Agreement (including the schedules) sets
forth the entire understanding of the parties with respect to the subject matter
of this Agreement and supersedes any and all prior understandings and
agreements, whether written or oral, between the parties with respect to such
subject matter.
e. COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when executed and delivered shall be an
original, but all of which together shall constitute one and the same
instrument. Fax signatures shall have the same effect as an original signature.
<PAGE>
f. SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any respect for any reason, the validity and
enforceability of any such provision in any other respect and of the remaining
provisions of this Agreement shall not be in any way impaired; provided,
however, that the parties will attempt to agree upon a valid and enforceable
provision which shall be a reasonable substitute for each invalid provision or
unenforceable provision in light of the tenor of this Agreement and, upon so
agreeing, shall incorporate such substitute provision into this Agreement.
g. WAIVER. A provision of this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
Failure to enforce any provision of this Agreement shall not operate as a waiver
of such provision or any other provision.
h. FURTHER ASSURANCES. From time to time, each of the parties shall
execute, acknowledge, and deliver any instruments or documents necessary to
carry out the purposes of this Agreement.
i. NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express
or implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
j. EXPENSES. Except as otherwise provided herein, each party shall
bear its own expenses in connection with this Agreement and the transactions
contemplated by this Agreement.
k. EXHIBITS. The exhibits and schedules referenced in this
Agreement are a part of this Agreement as if fully set forth in this Agreement.
l. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the United States of America and the State of
Colorado.
m. ARBITRATION.
(1) Any controversy or claim arising out of or relating to this
Agreement, including, without limitation, the making, performance, or
interpretation of this Agreement, shall be settled by arbitration.
(2) The parties may chose an arbitrator and rules of arbitration
by mutual agreement. Unless the parties agree otherwise, the arbitration shall
be conducted in Denver, Colorado in accordance with the then-current Commercial
Arbitration Rules of the American Arbitration Association. The arbitration shall
be held before a single arbitrator (unless otherwise agreed by the parties). The
arbitrator shall be chosen from a panel of attorneys knowledgeable in the field
of business law in accordance with the then-current Commercial Arbitration Rules
of the American Arbitration Association and judgment upon the award of the
arbitrator may be entered in any court having jurisdiction thereof and any party
to the arbitration may, if it so elects, institute proceedings in any court
having jurisdiction for the specific performance of any such award. The powers
of the arbitrator shall include the granting of injunctive relief. If the
arbitration is commenced, the parties agree to permit reasonable discovery
proceedings as
<PAGE>
determined by the arbitrator, including production of material documents,
accounting of sources and uses of funds, interrogatories and the deposition of
each party and any witness proposed by either party.
(3) The parties agree that the arbitrator shall have no
jurisdiction to consider evidence with respect to or render an award or judgment
for punitive damages (or any other amount awarded for the purpose of imposing a
penalty), incidental or consequential damages.
(4) The arbitrator shall award all costs of the arbitration,
including arbitrator's fees, arbitration filing fees, travel costs of witnesses,
costs of depositions and reasonable attorney fees to the substantially
prevailing party.
(5) The arbitrator shall determine a schedule for the
arbitration proceedings such that a final determination of the matter submitted
to the arbitrator can be rendered and delivered to the parties within 150 days
following the date that a demand for arbitration is filed.
(6) The parties agree that all facts and other information
relating to any arbitration arising under this Agreement shall be kept
confidential to the fullest extent permitted by law.
REAL INFORMATION SYSTEMS, INC.
By: /s/ Jonathan Dorbin
---------------------------------------
Jonathan Dobrin, Vice President
/s/ Robert N. Helmick
------------------------------------------
Robert N. Helmick, Individually
ATTACHMENTS: -- SCHEDULE A: COMPENSATION
<PAGE>
SCHEDULE A
COMPENSATION
1. Employee has not received any compensation since the founding of the
Company; therefore compensation for all services provided to the Company
through May 31, 1997 shall be by discharge of the indebtedness of $130,050
incurred by Employee to purchase common stock of the Company on or about
February 28, 1997.
2. For the period June 1, 1997 through July 31, 1998 compensation to the
Employee shall be at the rate of $120,000 per year, payable on the
Company's normal payroll dates.
3. Employee base compensation for the all periods after July 31, 1998, shall
be at the rate as set by the Compensation Committee of the Company, payable
on the Company's normal payroll dates.
4. Employee bonus compensation, in cash, Company stock, or other consideration
may be provided to Employee as determined from time to time by the Board of
Directors or the President of the Company; the Company has no requirement
to provide Employee with bonus compensation of any type.
<PAGE>
EXHIBIT 10.9
Neither this Warrant nor the shares of Common Stock issuable upon exercise of
this Warrant have been registered under the Securities Act of 1933, and this
Warrant cannot be sold or transferred, and the shares of Common Stock issuable
upon exercise of this Warrant cannot be sold or transferred, unless and until
they are so registered or upon receipt of an opinion of Warrantholder's counsel,
satisfactory to the Corporation, that such registration is not then required
under the circumstances of such sale or transfer.
REAL EDUCATION, INC.
COMMON STOCK PURCHASE WARRANT
EXPIRING JUNE 11, 2000
No. 001
WARRANTHOLDER: NEW WORLD EQUITIES, INC.
NAME: New World Equities, Inc.
ADDRESS: 1603 Orrington Avenue, Suite 1070 Evanston, Illinois 60201
No. of Shares of Common Stock to be issued upon exercise in full: 66,000
Purchase price per share: $7.58
For Value Received, Real Education, Inc., a Colorado corporation (the
"Corporation"), promises to issue to the holder of this Warrant
("Warrantholder"), its nominees, successors or assigns the nonassessable shares
(the "Shares") of the Common Stock, no par value (as more fully defined in
Section 2.8 below), of the Corporation at any time on or prior to June 11, 2000
(the "Expiration Date") upon the payment by the Warrantholder to the Corporation
of the purchase price per share set forth above (the "Purchase Price") and to
deliver to the Warrantholder a certificate or certificates representing the
Shares purchased. The Warrantholder shall have the right to exercise this
Warrant in whole or in part at any time or times on or prior to the Expiration
Date. Subject to the conditions hereinafter set forth, the Warrantholder may
sell, assign and transfer this Warrant, in whole or in part, and, in the event
of any such sale, assignment and transfer, the Corporation agrees to reissue a
Warrant or Warrants of like tenor for the unexercised portion hereof. The number
of Shares purchasable upon exercise of this Warrant and the Purchase Price per
Share shall be subject to adjustment from time to time as set forth herein.
1. Covenants of the Corporation. The Corporation will at all times reserve
----------------------------
and keep available out of its authorized shares of Common Stock or its treasury
shares, solely for the purpose of issue upon the exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Corporation
<PAGE>
covenants that all shares of Common Stock which shall be so issued shall be duly
and validly issued and fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issuance thereof. The Corporation will
take all such action as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable requirements
of any federal or state securities laws or of any national stock exchange upon
which the shares of Common Stock of the Corporation may be listed. The
Corporation will not take any action which results in any adjustment of the
Purchase Price if the total number of shares of Common Stock issuable after such
action upon exercise of this Warrant would exceed the total number of shares of
Common Stock then authorized by the Corporation's Articles of Incorporation.
2. Terms of Warrant.
----------------
2.1. Dividends. No payment or adjustment shall be made upon any exercise of
---------
this Warrant on account of any previous cash dividends.
2.2. Purchase Price. The Purchase Price shall be $7.58 per share or, in
--------------
case an adjustment of such price has taken place pursuant to the provisions of
this Section 2, then the Purchase Price shall be the price as last adjusted and
in effect at the date this Warrant (or any part hereof) is surrendered for
exercise.
2.3. Adjustment of Purchase Price. Upon each adjustment of the Purchase
----------------------------
Price, the Warrantholder shall thereafter be entitled to purchase at the
adjusted Purchase Price, the number of shares of Common Stock obtained by
multiplying the Purchase Price in effect immediately prior to such adjustment by
the number of shares of Common Stock purchasable immediately prior to such
adjustment and dividing the product by the Purchase Price as adjusted. No
adjustment of the Purchase Price shall be made in an amount less than $.01 per
share, but any such lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which together with
any adjustments so carried forward shall amount to $.01 per share or more.
2.4. Subdivision or Combination of Stock.
-----------------------------------
(a) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares or declare a dividend or
make any other distribution upon the Common Stock of the Corporation payable in
Common Stock, the Purchase Price in effect immediately prior to such
subdivision, dividend or distribution shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Corporation
shall be combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
(b) Record Date. In case the Corporation shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution payable in Common Stock, then such record date
shall be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution, as the case may be.
2.5. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
2
<PAGE>
(a) If any capital reorganization or reclassification of the capital stock
of the Corporation, or any consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then the Corporation agrees that, as a condition of
such reorganization, reclassification, consolidation, merger or sale, it shall
require that lawful and adequate provisions be made whereby the holder of this
Warrant shall thereafter have the right to receive upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
of the Corporation immediately theretofore receivable upon the exercise of this
Warrant, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such stock immediately receivable upon
the exercise of this Warrant had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of such holder
to the end that the provisions hereof (including without limitation provisions
for adjustments of the Purchase Price) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
(b) In the event of a merger or consolidation of the Corporation with or
into another corporation as a result of which a greater or lesser number of
shares of common stock of the surviving corporation are issuable to holders of
Common Stock of the Corporation outstanding immediately prior to such merger or
consolidation, then the Purchase Price in effect immediately prior to such
merger or consolidation shall be adjusted in the same manner as though there
were a subdivision or combination of the outstanding shares of Common Stock of
the Corporation. The Corporation will not effect any such consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed or delivered to the registered holder hereof at the last address of
such holder appearing on the books of the Corporation, the obligation to deliver
to such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive.
(c) If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock of the
Corporation, the Corporation shall not effect any consolidation, merger or sale
with the person having made such offer or with any affiliate of such person,
unless prior to the consummation of such consolidation, merger or sale the
holder hereof shall have been given a reasonable opportunity to then elect to
receive, upon exercise of this Warrant, either the stock, securities or assets
then issuable with respect to the Common Stock of the Corporation or the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer.
2.6. Notice of Adjustment. Upon any adjustment of the Purchase Price, then
--------------------
and in each such case the Corporation shall give written notice thereof, which
notice shall state the Purchase Price resulting from such adjustment, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
3
<PAGE>
2.7. Other Notices. In case at any time:
-----------------------------------
(a) the Corporation shall declare any dividend upon its Common Stock
payable in stock;
(b) the Corporation shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other rights;
(c) there shall be any capital reorganization, or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with, or sale of all or substantially all of its assets to, another corporation;
or
(d) there shall be a voluntary dissolution, liquidation or winding up of
the Corporation; then, in any one or more of said cases, the Corporation shall
give, (i) at least 20 days prior written notice of the date on which the books
of the Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (ii)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
2.8. Definition of Common Stock. As used in this Section 2, the term
--------------------------
"Common Stock" shall mean and include all of Corporation's authorized Common
Stock, no par value, of any class as constituted on the effective date hereof,
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or percentage of
par value in respect of the rights of the holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
2.9. Issue Tax. The issuance of certificates for shares of Common Stock
---------
upon exercise of this Warrant shall be made without charge to the holder hereof
for any issuance tax in respect thereof, provided that the Corporation shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the holder of this Warrant.
2.10. Closing of Books. The Corporation will not close its books against
----------------
the transfer of any shares of Common Stock issued or issuable upon the exercise
of this Warrant.
3. Transferability and Registration Under Securities Act.
-----------------------------------------------------
4
<PAGE>
3.1. (1) The Warrants have not been registered under the Securities Act of
1933, as amended (the "Act"), or the securities laws of any state, based upon an
exemption from such registration requirements for non-public offerings pursuant
to Regulation D under the Act; (2) the Warrants are and will be "restricted
securities", as said term is defined in Rule 144 of the Rules and Regulations
promulgated under the Act; (3) the Warrants may not be sold or otherwise
transferred unless they have been first registered under the Act and all
applicable state securities laws, or unless exemptions from such registration
provisions are available with respect to said resale or transfer; (4) the
Corporation is under no obligation to register the Warrants under the Act or any
state securities laws, or to take any action to make any exemption from any such
registration provisions available; and (5) stop transfer instructions will be
placed with the transfer agent for the Warrants;
3.2. The Warrants or any interest therein may not be sold or transferred
unless and until: (1) said Warrants shall have first been registered under the
Act and all applicable state securities laws; or (2) the Warrantholder shall
have first delivered to the Corporation a written opinion of counsel (which
counsel and opinion (in form and substance) shall be reasonably satisfactory to
the Corporation), to the effect that the proposed sale or transfer is exempt
from the registration provisions of the Act and all applicable state securities
laws. The restrictions of this Section 3.2 shall also apply to the
transferability and registration of any shares of Common Stock or other
securities acquired upon exercise hereof.
3.3. The Shares issuable upon exercise of this Warrant are subject to the
provisions of a certain Registration Agreement, dated June 11, 1997 between the
Corporation and certain investors.
4. Notice. Any notice or other document required or permitted to be
------
given or delivered to the Warrantholder(s) and holder(s) of shares issued upon
exercise of this Warrant shall be sent by certified or registered mail, return
receipt requested, to the Warrantholder at the address now shown on this Warrant
or at such other address as the holder(s) shall furnish to the Corporation in
writing. Any notice or other document required or permitted to be given or
delivered to the Corporation at 9000 E. Chenango Avenue, Greenwood Village,
Colorado 80111 or such other address as shall have been furnished to the
Warrantholder(s) and holder(s) of Shares by the Corporation.
5. Manner of Exercise of Warrant. In order to exercise this Warrant, the
-----------------------------
Warrantholder shall deliver to the Corporation (i) a written notice of such
holder's election to exercise this Warrant, specifying the number of shares of
Common Stock to be purchased, and (ii) payment in cash or by a certified or
cashier's check of the required Purchaser Price. The Corporation may require the
Warrantholder to furnish a written statement that the Shares are being purchased
for its own account and not with a view to the distribution thereof. Upon
receipt of written notice, the Corporation shall as promptly as practicable
execute or cause to be executed and delivered to such holder a certificate or
certificates representing the aggregate number of Shares purchased. If this
Warrant shall have been exercised only in part, the Corporation shall also
deliver a new Warrant of like tenor evidencing the rights of such holder to
purchase the remaining Shares called for by this Warrant.
6. Limitation of Liability. No provisions hereof, in the absence of
-----------------------
affirmative action by the Warrantholder to purchase Shares hereunder, and no
mere enumeration herein of the
5
<PAGE>
rights or privileges of the Warrantholder shall give rise to any liability of
such holder for the Purchase Price or as a shareholder of the Corporation
(whether such liability is asserted by the Corporation or creditors of the
Corporation).
7. Mutilated Or Missing Warrant. In case the certificate or certificates
----------------------------
evidencing the Warrant shall be mutilated, lost, stolen or destroyed, the
Corporation shall, at the request of the Warrantholder, issue and deliver in
exchange and substitution for the certificate or certificates lost, stolen or
destroyed a new Warrant certificate or certificates of like tenor and
representing an equivalent right or interest. The Warrantholder shall indemnify
the Corporation for the reasonable cost of issuing and delivering any
certificate under the terms of this Section 7 and for any direct and foreseeable
damages incurred by the Corporation with respect to such lost, stolen or
destroyed certificates that do not arise from the Corporation's gross negligence
or willful misconduct.
8. Miscellaneous.
-------------
8.1. Amendment and Waiver. No modification, amendment or waiver of any
--------------------
provision of this Warrant shall be effective against the Corporation or the
Warrantholder unless such modification, amendment or waiver is approved in
writing by the Corporation and the Warrantholder. The failure of any party to
enforce any of the provisions of this Warrant shall in no way be construed as a
waiver of such provisions and shall not affect the right of such party
thereafter to enforce each and every provision of this Warrant in accordance
with its terms.
8.2. Applicable Law. This Warrant shall be deemed to be a contract made
--------------
under the laws of the State of Colorado and for all purposes shall be construed
in accordance with the laws of said State.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its President or a Vice President, thereunto duly authorized, the execution
hereof to be attested by its Secretary or an Assistant Secretary; and the
affixing of its corporate seal on this 11th day of June, 1997.
ATTEST
Real Education, Inc.
/s/ John V. Helmick /s/ Jonathan Dobrin
- ------------------------------- -------------------------------
John V. Helmick, Secretary Jonathan Dobrin, Vice President
6
<PAGE>
EXHIBIT 10.10
AGREEMENT BETWEEN
THE REGENTS OF THE UNIVERSITY OF COLORADO
AND
REAL EDUCATION, INC.
This Agreement is made this 22nd day of May, 1998 by and between The Regents of
the University of Colorado, a body corporate, contracting on behalf of the
University of Colorado ("University"), and Real Education, Inc. ("Real Ed").
RECITALS
WHEREAS, authority exists in the Law and Funds will be made available; and
WHEREAS, required approval, clearance and coordination has been accomplished
from and with appropriate agencies; and
WHEREAS, Real Ed owns an integrated software system designated as the Real
Education Active Learning System (REAL System); and
WHEREAS, Real Ed creates Internet-based websites and designs and supports
development of online courses to be delivered over the REAL System; and
WHEREAS, Real Ed manages the delivery of courses; and
WHEREAS, Real Ed houses websites and web-based courses on computer servers for
delivery over the Internet, and maintains and monitors those websites and
courses; and
WHEREAS, University offers courses to undergraduate, graduate and professional
students and desires to convert and offer those courses online over the Internet
on Real Ed's REAL System.
NOW THEREFORE, in consideration of the promises, and the mutual covenants and
agreements herein contained, the parties hereto agree as follows:
May 21, 1998
<PAGE>
ARTICLE I
DEFINITIONS
1.1 The term "REAL System" shall mean the software and the interfaces necessary
to deliver online courses over the Internet and all modifications, enhancements
and improvements thereof.
1.2 The term "university developed material" shall mean all courseware
developed and owned by University.
1.3 The term "courseware" shall mean anything set forth as part of the course
structure, including but not limited to intellectual content, graphics, and all
by-products generated through the interactions between students and between
students and faculty.
1.4 The term "manage the delivery system" includes, but is not limited to,
performing actions which will cause the REAL System to function in accordance
with the features and services which are described in Exhibit A to this
---------
Agreement.
1.5 The term "customer databases" shall mean any information provided through
interaction by and between past, current and potential students.
ARTICLE II
WARRANTIES AND REPRESENTATIONS
2.1 Real Ed represents and warrants to the University that:
(i) Real Ed will use its best efforts to make the REAL System function in
a manner satisfactory to the University, as outlined in this Agreement, and
according to published documentation; however both parties acknowledge that the
technology employed has limitations beyond the control of Real Ed.
(ii) Real Ed, at its own expense, will defend any suit which may be brought
against the University or the State of Colorado for the infringement of
patent(s), copyright(s), or trade secret(s) based upon software and/or materials
furnished hereunder and in such suit will satisfy any final award for any
infringement. This is upon the condition that the University or the State of
Colorado shall give Real Ed prompt written notice of such suit and full right
and opportunity to conduct the defense thereof, together with full information
and all reasonable cooperation. No costs or expense shall be incurred for the
account of Real Ed without its written consent.
May 21, 1998
2
<PAGE>
(iii) Real Ed represents that it is qualified to render the services
described herein, and that any individual associated with Real Ed for the
purpose of performing this Agreement is likewise qualified.
(iv) Real Ed represents that it has no conflict of interest involving the
representation of the University as described herein.
(v) Real Ed represents that no benefit, payment, or consideration
received by it for the performance of services associated with and pertinent to
this Agreement shall accrue, directly or indirectly, to any employee, or
employees, elected or appointed officers or representatives, or to any other
person or persons identified as agents of, or who are, by definition, public
servants of the State of Colorado.
(vi) Real Ed warrants that it will use its best efforts to comply with
the Americans with Disabilities Act and the regulations enacted pursuant thereto
(C.F.R. (S)104), with respect to the REAL System and its management of the
delivery system. The parties acknowledge that, with respect to the University's
students, and depending on the scope, this may require additional compensation.
(vii) Real Ed warrants to the University that it will treat all student
information in accordance with the Family and Educational Rights to Privacy Act
("the Buckley Amendment" or "FERPA"). Any costs, including attorneys fees
incurred by the University in responding to a Department of Education's finding
of violation of FERPA, or any finding by any court of law caused by the agents
or employees of Real Ed, shall be borne by Real Ed; however, this is upon the
condition that the University or the State of Colorado shall give Real Ed prompt
written notice of such suit and full right and opportunity to conduct the
defense thereof, together with full information and all reasonable cooperation.
No costs or expense shall be incurred for the account of Real Ed without its
written consent.
(viii) During the course of work pursuant to this Agreement, Real Ed may
come in contact with University information of a sensitive nature, including but
not limited to, information concerning the University's operations or strategic
or tactical plans. Real Ed represents that it shall not disclose such
information, or any information that could directly or indirectly affect the
University, to any third party.
(ix) Real Ed represents that without permission neither it nor its agents
and employees will represent themselves as agents or employees of the
University, unless granted specific permission.
(x) Real Ed represents that, to the extent possible, it will use its
best efforts to ensure that the REAL System can be used with courses developed
on software other than Real Ed's.
May 21, 1998
3
<PAGE>
2.2 The University warrants that it will use its best efforts to ensure that
its course content will be free of copyright infringement and that it will be
responsible for the acts of its employees.
2.3 Notwithstanding any other provision of this Agreement, in the event Real Ed
ceases to maintain or notifies the University of its intent to cease maintaining
the REAL System, due to bankruptcy or close of its business, Real Ed grants to
University a non-transferable, non-exclusive license to use the REAL System. The
University will be provided with program codes, descriptions, supporting
documentation and information associated with the REAL System for its use or for
the use of third parties for the purpose of maintaining the ability to offer the
courses described in this Agreement within fifteen (15) days of the notice of
intent to cease maintaining the REAL System due to bankruptcy or close of
business. In the event of Real Ed ceasing to maintain the REAL System due to any
other reason, except cancellation or termination of this Agreement, the
University shall have a right to specific performance for delivery of its
performance for delivery of its courseware.
2.4 Regardless of cause, Real Ed will return to the University, in electronic
format, all course content maintained in its data base submitted to them by
instructors, faculty, or staff associated with CU Online, and all equipment
owned by the University within thirty (30) days of the termination of the
contract.
ARTICLE III
GRANT OF LICENSE
3.1 Real Ed hereby grants to University a non-transferable, non-exclusive
license to use the REAL System subject to the terms of this Agreement. As owner
of the REAL System, Real Ed has the right to license the REAL System to others
during and after the expiration of this Agreement.
3.2 Real Ed shall retain ownership of the REAL System, and all reproductions,
corrections, modifications, enhancements and improvements thereof, and all such
items are the exclusive and proprietary property of Real Ed. Title and full
ownership rights in all REAL System licensed products and all reproductions,
corrections, modifications, enhancements and improvements, and all related
patent rights, copyrights, trade secrets, trademarks, service marks, related
goodwill and Real Ed's intellectual property are reserved to and shall remain
proprietary to Real Ed; including but not limited to, source code, programming
code, software license, and joint software development agreements, corporate
identifying graphics, DNS matters and marketing strategies. University shall not
remove or destroy any copyright, trade secret, proprietary or confidential
legends or markings placed upon or contained or embedded within any licensed
products and related material.
May 21, 1998
4
<PAGE>
3.3 University acknowledges that the REAL System is proprietary information.
Accordingly, University agrees to keep confidential all material and
documentation relating to the REAL System and any modification thereto.
University will not knowingly make available or distribute any information,
program code or description associated with the REAL System to third parties
without the prior written approval of Real Ed unless required by law.
3.4 University shall have no right to sub-license or assign its rights with
respect to the REAL System without the written permission of Real Ed.
3.5 University shall have the right to unlimited use of the REAL System within
University system, at any location it deems necessary; subject to the terms of
this Agreement.
ARTICLE IV
SCOPE OF WORK
4.1 University, on behalf of its four campuses, wishes to further develop its
online capability utilizing Real Ed's REAL System Version 2.7 (or the latest
version thereof) to create University credit and non-credit courses for delivery
in the United States and abroad.
4.2 The services and functions provided by Real Ed will include, but not be
limited to the following:
(i) Real Ed will use its best efforts to provide all of the
technological resources to create quality online Internet-based courses. Real Ed
will house and maintain the courses for delivery over the World Wide Web. Real
Ed will provide all requested services, functions, and features described in,
but not limited to, the REAL System, Version 2.7, attached hereto as Exhibit A.
---------
(ii) Real Ed will work with the University to establish a complete
student services capacity so that online students will have access to student
services equivalent to those available to on-campus students. This includes all
those services described in Exhibit A. In order to accommodate the needs of each
---------
individual campus and school of the University, Real Ed acknowledges that each
unit may choose to use only some of these student services at its option.
(iii) Real Ed will assist in the adaptation of existing distance-
learning courses and collaborate with University's faculty and staff in the
development of new courses. It is understood and agreed that the relationship of
University and Real Ed, with respect to all courseware supplied from University
course developers, is that of author and editor, unless otherwise designated.
Final approval and ownership rights over University-
May 21, 1998
5
<PAGE>
developed material will vest with University, except as otherwise provided
herein. Real Ed will obtain the permission of the University prior to using any
developed courses for demonstrations of the system to non University parties.
University will assist Real Ed in obtaining appropriate releases.
(iv) At the University's request, Real Ed will provide reasonable
materials, online guides courses and technical training to the University's key
employees, including faculty, academic advisors, and librarians to orient them
to all features of the REAL System.
(v) Real Ed will provide an online instructor best practices course
and access for interested faculty to practice using the online software.
(vi) Real Ed will provide telephone and online technical support to
University faculty, students and staff who need course use and administrative
technical support associated with the use of the REAL System.
(vii) Real Ed will provide instructional design support and work in
collaboration with the University's instructional designers to assist in the
transfer of courses to the online format. It is understood and agreed that the
relationship of University and Real Ed, with respect to all course development,
is that of author and editor. Final approval and ownership rights of University-
developed material will vest in the University, subject to the terms of this
Agreement.
(viii) Real Ed will train University-designated individuals on the use
of the course development features and instructional design strategies
appropriate to the REAL System.
(ix) Real Ed will provide reasonable audio and video recording and
editing services to University faculty in the production of online courses.
(x) Real Ed may advertise and promote CU Online subject to prior
written approval of the University.
(xi) Real Ed agrees that it will support the University's efforts in
marketing the CU Online program to increase enrollment; including, but not
limited to, assigning marketing employees of Real Ed to promote the CU Online
account, and providing advertising and other marketing tools to promote CU
Online.
May 21, 1998
6
<PAGE>
ARTICLE V
PERFORMANCE STANDARDS
5.1 Real Ed will provide adequate instructional design support and coordination
to facilitate the development of online courses by faculty.
5.2 Real Ed will provide a reasonable amount of faculty training to ensure
adequate understanding of the REAL System and their ability to develop courses.
5.3 Upon receipt of faculty text files or other electronically formatted
material for conversion into the online format, Real Ed will make the conversion
to the appropriate electronic format and will make them available for review by
the faculty member and department within ten (10) working days, provided that
course is being offered in the next regularly scheduled cohort. Conversion of
audio and video material for online delivery will normally be made available for
review by faculty member and department with twenty (20) working days. If the
course is not scheduled in the next cohort, Real Ed will make the course
available to review within twenty (20) days or less.
5.4 Reported site fixes, i.e., typos, incorrect information, and changes to the
site will be made within two (2) business days of receipt of a written E-Mail
report. This provision applies to courses currently being offered at the time of
the request and to information related to a semester, such as course offerings,
registration instruction, tuition schedules and faculty biographies, one month
before the start of course registration. Timing for requested changes in the
appearance of the online campus shall be agreed upon between University and Real
Ed.
5.5 Reported errors in student registration will be corrected within two (2)
business days of receipt of a written E-Mail report.
5.6 If other specific standards, or changes in those specified above, are
required for specific projects, this Agreement will be amended as necessary.
ARTICLE VI
ROLES AND RESPONSIBILITIES OF THE UNIVERSITY
6.1 University will select, supervise, and compensate all faculty.
6.2 University will approve all course schedules before they are released, and
will do so in a timely manner.
6.3 University will ensure that students receive high-quality curriculum
materials and instruction.
May 21, 1998
7
<PAGE>
6.4 University will assume all responsibility for student recruitment.
6.5 University will designate one or more coordinator(s) (Course Content
Coordinator [CCC]) to work with Real Ed to secure content from the course
developers designated by the University to develop courses. The coordinator(s)
shall deliver the necessary content as requested by Real Ed in order to meet any
deadlines set forth in this Agreement. For the purpose of this Agreement,
"content" shall include, but not be limited to, course text, test and answer
keys, graphics, etc., in an Internet-ready format, work problems and answers, an
instructor biography and photograph and audio and video lectures.
6.6 Real Ed will remain the administrative, billing, technical and zone
contacts for the cuonline.edu domain name. If it is not possible to secure a top
level domain name for any University online campus created by Real Ed, Real Ed
shall be permitted to use a secondary domain name based on University's primary
"EDU" or other domain name; and University shall permit Real Ed to host a second
and third DNS entry on distinctly separate servers to help assure the online
campus remains accessible to student end-users. Real Ed must notify University
in advance and obtain permission prior to using a secondary domain name or
hosting a second and third DNS entry. Real Ed acknowledges that the CU Online
domain name shall be assigned in full to University if this Agreement expires or
is terminated for any reason. All fees to purchase and maintain a domain name
shall be paid by University.
ARTICLE VII
INTELLECTUAL PROPERTY
7.1 Real Ed agrees that the faculty member who develops the course retains
intellectual rights to publish scholarly and pedagogical materials such as CD-
ROM specific to the online course developed by said faculty member; further, the
University may utilize the services of others to create a similar online course,
and publish or cause to have published pedagogical materials, such as CD-ROMs
specific to the University's online courses.
7.2 Real Ed recognizes and agrees that the University owns the copyright to
the courseware and to the customer databases created under this Agreement. Such
notice of copyright will be placed on all courses.
May 21, 1998
8
<PAGE>
ARTICLE VIII
PAYMENT
8.1 In consideration of the grant of license and participation by Real Ed in
managing services, and designing and formatting University's courses for
delivery over the Internet, University will pay a fee as follows:
(i) University shall pay Real Ed Translation License Fees (for converting
courses for delivery over the REAL System) and per student Technology Service
Fees (for providing the ongoing services to students and University).
Translation License Fees encompass the conversion of courses from their current
delivery methodology to Real Ed's REAL System, with the inclusion of some or all
of the features set forth in Exhibit A; and the ongoing right to modify or
operate multiple sections of a course in which a Translation License Fee was
paid during the term of this Agreement, without additional compensation to Real
Ed, except as provided herein.
(ii) Any courses developed during the term of this Agreement shall be
billed for a Translation License Fee as identified in Exhibit B. The Translation
License Fee shall be due and payable upon University ordering an online course
and Real Ed creating a slot in its REAL System for such course to be developed,
and upon billing by Real Ed, net thirty (30) days. University will not have to
pay Real Ed an additional Translation License Fee to modify a course or add an
additional section, except that if a course is substantially rewritten, a new
Translation License Fee will be charge. For the purpose of this Agreement,
"substantially rewritten" shall be defined as University courses wherein 75% of
the course has been altered. Real Ed will notify University that a University
professor has submitted course material that would trigger the new Translation
License fee described herein, and as a warning when a particular course has
reached the 50% rewritten level. Individual courses may be from any of the
University's four campuses, as designated by CU Online Administration.
(iii) University shall pay Real Ed a Technology Service Fee per student,
per academic period, per course, based on the number of credit hours, as
identified in Exhibit B. The Technology Service Fee shall be due and payable for
all students enrolled in the University's SIS system on the day following census
date. The University will provide a printed report to Real Ed with this
information. Written notification in the form of emails and Schedule Adjustment
Forms dated through census date will be considered proof of enrollment and
disenrollment as well as the file transfer information provided to Real Ed. Real
Ed will submit an invoice to University, net thirty (30) days, for all
Technology Service Fees. If the University enrolls students after the census
date, the appropriate Technology Service Fee will be provided to Real Ed upon
receipt of an invoice.
May 21, 1998
9
<PAGE>
(iv) University shall pay Real Ed a Translation License Fee and Technology
Service Fee to create and deliver Online Course supplement material. (These are
courses taught on campus supplemented by any degree of usage of the REAL System
an instructor would like to utilize to supplement his or her on-campus course).
The Translation License Fee for Online course Supplement material shall be as
identified in Exhibit B. The Technology Service Fee per student, per academic
period, per course, per each credit hour, for Online Course Supplement material
shall be equal to one-half (1/2) of the Technology Service Fees identified in
Exhibit B, but not less than $50.00 per student. Further, University shall
enroll (or deliver Real Ed enrollment files in an acceptable format) and pay for
each and every student enrolled in the on campus, course utilizing the Online
Course supplement material in a given academic period.
(v) University shall receive special pricing on its Technology License
Fees when the number of students enrolled in a particular Section of a course in
a particular semester exceeds fifty students. For the purpose of this paragraph
only, a "Section" shall be defined as the same course with the same electronic
record, in the same semester, whether or not the course is being taught by the
same professor. See Exhibit B - Course Sections that Exceed Fifty Students.
(Note that if there were 25 students each in three different sections of a given
course in a particular semester, for a total of 75 students, this pricing would
only apply if the three sections used the exact same electronic record for each
section. Further, the discount shall only apply to the Technology Service Fee
for the 51st student onward, and shall not apply to the first 50 students). Real
Ed will work with University to design these Course Sections that Exceed fifty
Students to accommodate the pedagogical needs of University.
(vi) For its Continuing and Professional Education Courses, University
shall pay Real Ed a Translation License Fee and Technology Service Fee. The
Translation License Fee for Continuing and Professional Education courses shall
be as identified in Exhibit B. The Technology Service Fee per student, per
academic period, per course, per each contact hour, for Continuing and
Professional Education courses shall be a $40.00 minimum (for up to five contact
hours), and as identified in Exhibit B. The Technology Service Fee shall be due
and payable for all students enrolled in the University's SIS system or other
registration system on the day following the start date of the course. Written
notification in the form of emails and Schedule Adjustment Forms dated through
the day after the start of the course will be considered proof of enrollment and
disenrollment as well as the file transfer information provided to Real Ed.
(vii) Real Education agrees to refund any new Translation License Fee
incurred during the term of this Agreement if the following conditions are met:
(a) University designates the course as a Translation License Fee
Refund Course, in writing, when it orders a slot to create the course;
May 21, 1998
10
<PAGE>
(b) If the enrollment and the number of Technology License Fees in
the Translation License Fee refund course meets or exceeds 90 students (i.e., 90
x $100.00) in the first calender year that the course is offered, the entire
Translation License Fee shall be refunded;
(c) If enrollment and the number of Technology License Fees in the
Translation License Fee Refund Course does not meet or exceed 90 students (i.e.,
90 x $100.00) in the first calendar year that the course is offered, then
University may pay the difference between 90 and the actual number of students
thereby triggering the Translation License Fee Refund. Real Ed and University
will reconcile these numbers following the time period designated herein. (For
example, if a course had total enrollment of 70 in a calendar year, the
University could pay Real Ed $2,000 (90 - 70 Technology License Fees) for that
particular course thereby triggering the Translation License Fee Refund).
8.2 Any collection fees such as credit card and online check fees shall be paid
by University.
8.3 The Parties will negotiate in good faith for special pricing arrangements
for atypical courses, courses that have unusual technical requirements that
require more than those described herein or other unforeseen requirements of
University. If atypical pricing is required, then an addendum to this Agreement
will be attached and set forth as such.
ARTICLE IX
TERM AND TERMINATION
9.1 The term of this Agreement shall commence upon the date of signature and
shall continue for one (1) year thereafter. However, either party may elect to
terminate the Agreement provided that sixty (60) days written notice is
provided. The University may, at its election renew this Agreement by providing
written notice to Real Ed no less than thirty (30) days prior to the end of this
Agreement.
9.2 After termination, the parties shall continue to operate the online program
until the students enrolled at the time of termination complete the course work
begun when they registered for online courses under this Agreement.
9.3 Real Ed must disclose the existence of this Agreement to any potential
University of Colorado customers.
May 21, 1998
11
<PAGE>
ARTICLE X
INSURANCE
10.1 Real Ed shall obtain, and maintain at all times during the term of this
Agreement, insurance in the following kinds and amounts:
(i) Standard Workers' Compensation and Employer Liability as required by
state statute, including occupational disease, covering all employees at work
site.
(ii) General Liability - Personal Liability and Property Damage (minimum
coverage)
(a) Combined single limit of $600,000 written on an occurrence
basis.
(b) Any aggregate limit will not be less than $1 million.
(c) Real Ed must purchase additional insurance if claims reduce
the annual aggregate below $600,000.
(iii) Automobile Liability (minimum coverage) in the amount of $600,000
combined single limit.
10.2 The Regents of the University of Colorado, a body corporate shall be named
as an additional insured on each comprehensive general liability policy.
10.3 The insurance shall include provisions preventing cancellation without
sixty (60) calendar days prior written notice to the University by certified
mail.
10.4 Real Ed shall submit a certificate of insurance at the signing of this
Agreement and also any notices of renewal of said policy as they occur.
ARTICLE XI
MISCELLANEOUS
11.1 Both Real Ed and the University will appoint an individual to be its
principal liaison with the other party.
11.2 University and Real Ed understand and agree that this Agreement is to be
administered in the context of the constraints within which they respectively
operate. Specifically Real Ed understands and agrees that University must
operate within the
May 21, 1998
12
<PAGE>
guidelines established by governing bodies and external agencies, and according
to the processes of decision-making and academic governance in effect at the
University; and Real Ed recognizes that the authority and responsibilities of
the University in all academic matters must be unimpaired. All courses offered
through the online program of University will be University courses subject to
the curriculum governance and faculty approval processes of University in
compliance with the accreditation standards of the North Central Association
(NCA) and the Colorado Commission of Higher Education (CCHE). Offerings may be
in or out of phase with the traditional academic terms. All instructors shall be
approved and selected by the University.
11.3 All notices, requests, demands, and other communications under this
Agreement shall be in writing and shall be effective upon receipt. Unless
hereinafter changed by written notice to Real Ed, any notice to the State of
Colorado and/or the University shall be delivered, mailed or faxed to:
University of Colorado
Office of Vice President for Academic Affairs
Assoc. VP for Technology
Campus Box 51
Boulder, CO 80309-0051
Tel: (303) 492-8911
Fax: (303) 492-0330
Unless hereinafter changed by written notice to the University, any notice
to Real Ed shall be delivered or mailed to:
Real Education, Inc.
Attn: President
10200 A East Girard Ave.
Denver, CO 80231
Tel: (303) 873-7400
Fax: (303) 873-7449
All notices delivered by hand shall be effective upon delivery and all
notices mailed by certified mail, return receipt requested, shall be effective
when received, as indicated on the return receipt.
11.4 Real Ed shall not contract with others for the provision of any material
part of the services to be provided hereunder unless agreed to in writing by the
University.
11.5 Neither party shall be considered to be in default as a result of its delay
or failure to perform its obligations herein when such delay or failure arises
out of causes beyond the
May 21, 1998
13
<PAGE>
reasonable control of the party. Such causes may include, but are not restricted
to, acts of God or the public enemy, acts of the state or the United States in
either its sovereign or contractual capacity, fires, floods, epidemics, strikes,
and unusually severe weather; but, in every case, delay or failure to perform
must be beyond the reasonable control of and without the fault or negligence of
the party.
11.6 THE CONTRACTOR SHALL PERFORM ITS DUTIES HEREUNDER AS AN INDEPENDENT
CONTRACTOR AND NOT AS AN EMPLOYEE. NEITHER THE CONTRACTOR NOR ANY AGENT OR
EMPLOYEE OF THE CONTRACTOR SHALL BE OR SHALL BE DEEMED TO BE AN AGENT OR
EMPLOYEE OF THE STATE. CONTRACTOR SHALL PAY WHEN DUE ALL REQUIRED EMPLOYMENT
TAXES AND INCOME TAX WITHHOLDING, INCLUDING ALL FEDERAL AND STATE INCOME TAX AND
LOCAL HEAD TAX AND ANY MONIES PAID PURSUANT TO THIS CONTRACT. CONTRACTOR
ACKNOWLEDGES THAT THE CONTRACTOR AND ITS EMPLOYEES ARE NOT ENTITLED TO
UNEMPLOYMENT INSURANCE BENEFITS UNLESS THE CONTRACTOR OR A THIRD PARTY PROVIDES
SUCH COVERAGE AND THAT THE STATE DOES NOT PAY FOR OR OTHERWISE PROVIDE SUCH
COVERAGE. CONTRACTOR SHALL HAVE NO AUTHORIZATION, EXPRESS OR IMPLIED, TO BIND
THE STATE TO ANY AGREEMENTS, LIABILITY, OR UNDERSTANDING EXCEPT AS EXPRESSLY SET
FORTH HEREIN. CONTRACTOR SHALL PROVIDE AND KEEP IN FORCE WORKER'S COMPENSATION
(AND SHOW PROOF OF SUCH INSURANCE) AND UNEMPLOYMENT COMPENSATION INSURANCE IN
THE AMOUNTS REQUIRED BY LAW, AND SHALL BE SOLELY RESPONSIBLE FOR THE ACTS OF THE
CONTRACTOR, ITS EMPLOYEES AND AGENTS.
11.7 Relationship of Parties. This Agreement shall not be deemed to create
the relationship of joint venturers, principal and agent, employer and employee,
or master and servant between the parties hereto. Real Ed is an independent
contractor in complete control of its services to be rendered hereunder.
Neither party shall be liable to any third party in any way for any engagement,
obligation, contract, representation or transaction of the other party hereto,
or for any negligent act or omission of the other party hereto, except as
expressly provided herein.
11.8 The laws of the State of Colorado and rules and regulations issued pursuant
thereto shall be applied in the interpretation, execution, and enforcement of
this Agreement, and any legal action brought by either party arising out of or
relating to this Agreement shall be filed in Boulder County, Colorado.
May 21, 1998
14
<PAGE>
11.9 Except as otherwise provided in the Agreement, neither party may assign
the Agreement and/or any of its right and obligations hereunder without the
written consent of the other party.
11.10 No term or provision hereof shall be deemed waived and no breach excused
unless such waiver or consent to breach is in writing.
11.11 This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors.
11.12 This Agreement shall not be exclusive, and the University may use other
online providers and other online course delivery systems.
May 21, 1998
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives.
THE REGENTS OF THE UNIVERSITY REAL EDUCATION, INC.
OF COLORADO, A BODY CORPORATE
By /s/ David A. Groth By /s/ Rob Helmick
---------------------------------- --------------------------------
David A. Groth ROB HELMICK
- ------------------------------------ ----------------------------------
Printed Name Printed Name
Vice Pres For ACA, AFF CEO
- ------------------------------------ ----------------------------------
Title Title
5/26/98 5/22/98
- ------------------------------------ ----------------------------------
Date Date
STATE CONTROLLER: CLIFFORD W. HALL
By /s/ John A. Bernhard
---------------------------------
John A. Bernhard
- ------------------------------------
Printed Name
Vice Chancellor For Administration and Finance
- ----------------------------------------------
Title
5-22-98
- ------------------------------------
Date
----------------------------------
Approved as to Legal Sufficiency
Office of University Counsel
By /s/ R Augustine
------------------------------
Date May 21, 1998
----------------------------
----------------------------------
May 21, 1998
16
<PAGE>
EXHIBIT A
REAL EDUCATION'S REAL SYSTEM FEATURES
Course Options
1. Online Syllabus
2. Customized homepage for each course
3. Course policies and procedures
4. Course Learning Objective and Requirements
5. Course requirements and learning objectives
6. Opportunities to incorporate self-directed learning exercises and
independent study
7. Email to professor, whole class, small groups, or individual students
8. Capability for small and large group collaboration
9. Audio and/or video introduction from professor
10. Audio and video lectures for each week
11. Threaded discussion and web conferencing for each week
12. Text-based lecture and lecture notes for each week
13. Customized webliography for each course - providing direct links to other
sites on the internet
14. Live online classrooms for group projects, individual counseling or testing
15. Online multiple choice, matching and true/false testing, with automatic
scoring and email to professors and students with results, essay, fill in
the blank, short answer and oral exams.
16. Students have an electronic notebook that they can create online without
any programming or html knowledge
17. Customized message center for easy communications
18. Audio with streaming web pages
Campus Features
1. Course catalog
2. Academic Advising, Bursar and Career Counseling Communication System
3. Registration and Admissions Forms
4. Financial Aid Forms
5. Payment by credit card and online check
6. Bursar and Communication System
7. Attendance Reports and Student Tracking System
8. Faculty photos, audio, video, and vitae
9. Online Bookstore
10. Online Library
May 21, 1998
17
<PAGE>
11. Online Course development for professors, providing the instructor access
to update his/her courses 24 hours a day over the web on the fly, with
little or no programming knowledge
12. Attendance reports, tracking pages viewed by student and time spent
13. Access to online payment data for each student
14. Customized course description and needed instructions for the course
15. Online student license, rules of conduct, and ethics agreements
16. Technical support via email and telephone (during normal business hours-
Mountain Time)
17. Online delivery of video over 28.8 modems
18. Upgrades to system to incorporate the newest technologies of REAL System
19. Faculty, course and system assessment/evaluations
20. Customized Administrative Page
May 21, 1998
18
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Semester Translation License Fee Technology Service Fee
- ------------------------------------------------------------------------
<S> <C> <C>
5 Credit Course $3,000 $140
- ------------------------------------------------------------------------
4 Credit Course 3,000 120
- ------------------------------------------------------------------------
3 Credit Course 3,000 100
- ------------------------------------------------------------------------
2 Credit Course 3,000 67
- ------------------------------------------------------------------------
1 Credit Course 3,000 67
- ------------------------------------------------------------------------
Course Sections that Technology Service Fee Technology Service Fee
Exceed Fifty - First Fifty Students - Each Additional
Students Student After Fifty
- ------------------------------------------------------------------------
5 Credit Course $ 140 $ 50
- ------------------------------------------------------------------------
4 Credit Course 120 50
- ------------------------------------------------------------------------
3 Credit Course 100 50
- ------------------------------------------------------------------------
2 Credit Course 67 33.50
- ------------------------------------------------------------------------
1 Credit Course 67 33.50
- ------------------------------------------------------------------------
Continuing &
Professional
Education
- ------------------------------------------------------------------------
Up to 45 Contact $3,000 $40 for 5 contact
Hours hours, $3 per
additional contact hour
- ------------------------------------------------------------------------
</TABLE>
May 21, 1998
19
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$443,276.96 Denver , Colorado
June 1, 1997
1. OBLIGATION. FOR VALUE RECEIVED, the Real Information Systems, Inc., a
Colorado corporation ("Real") does hereby promise to pay to Advance Worldwide
Education, L.C. FOUR HUNDRED FOURTY THREE THOUSAND TWO HUNRED SEVENTY SIX
DOLLARS AND NINETY SIX CENTS ($443,276.96) together with interest on unpaid
principal portions of the Note calculated at a rate equal to eight percent (8%)
per annum from June 1, 1997 until paid.
2. PAYMENT. This Note shall be paid as follows:
(a) Payment of all accrued interest shall be made on June 30,
September 30, December 31, and March 31 of each year beginning
with the first payment on June 30, 1997.
(b) In addition to the payments described in Section 2.(a) above,
payment of equal to one-sixteenth (1/16) of the principal amount
due and payable as of June 30, 1997, shall be paid in 15
payments on June 30, September 30, December 31, and March 31 of
each year, beginning with the first payment on June 30, 1998.
(c) A final payment of all unpaid interest and principal on March
31, 2002
3. PREPAYMENT. Privilege is reserved to prepay all or any portion of
this Note at any time or from time to time without penalty.
4. DEFAULT. If any payment required by this Note is not made when due,
time being of the essence, the entire sum of principal and interest, shall
become due and payable at once, at the election of the holder. From and after
that date, the entire unpaid amount of this Note shall accrue interest at
thereafter at the rate of fourteen percent (14%) per annum.
5. WAIVER. The undersigned and any endorsers each waive valuation,
appraisement, presentment, protest and demand, and notice of protest, demand,
dishonor and non-payment of this Note, and expressly agree that the maturity of
this Note, or any payment hereunder, may be extended from time to time without
in any way affecting the liability of the undersigned or said endorsers.
6. COSTS AND FEES. If this Note is placed in the hands of an attorney
for collection or suit is filed hereon, or proceedings are had in bankruptcy,
probate, receivership, reorganization, or other judicial proceedings for the
establishment or collection of any amount called for hereunder, or if any amount
payable or to be payable hereunder is collected through any such proceedings,
the undersigned agrees to pay the holder of this Note all costs and expenses of
collection, including attorneys fees, irrespective of whether suit is instituted
and whether at trial or on appeal.
<PAGE>
7. APPLICATION OF PAYMENTS. Any and all payments on this Note, when made,
shall be applied first to costs and expenses described in the preceding Section
6, then to accrued interest and then to principal. Prepayments of principal
shall be treated as installments applied in inverse order of when due, and shall
not affect the amount of any future installments which may become due on any
amount remaining owing on this Note.
8. GOVERNING LAW. This Note is governed by the laws of the State of Colorado.
REAL INFORMATION SYSTEMS, INC.
/s/ Robert N. Helmick
- -------------------------------
Robert N. Helmick, President
/s/ Jonathan Dobrin
- -------------------------------
Jonathan Dobrin, Vice President
<PAGE>
EXHIBIT 10.12
REAL EDUCATION, INC.
1997 STOCK OPTION PLAN
(Adopted March 24, 1997; Amended April 13, 1999)
1. INTRODUCTIONS AND DEFINITIONS
1.1 THE PLAN
This 1997 Stock Option Plan (hereinafter, this "Plan") establishes the
right of and procedures for Real Education, Inc. (the "Company") to grant stock
options to its employees and/or consultants. This Plan provides for the
granting of two types of options, namely (1) Incentive Stock Options, as defined
and governed by Section 422 of the Internal Revenue Code of 1986, as amended,
and (2) Nonqualified Stock Options. This Plan sets forth provisions applicable
to both types of options, to Incentive Stock Options only, to Nonqualified Stock
Options only, and to the procedures allowed for the conversion of Nonqualified
Stock Options into Incentive Stock Options.
1.2 DEFINITIONS
Capitalized terms used in this Plan shall have the following meanings:
"ACT" means the Securities Act of 1933.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL EVENT" means a merger, consolidation, tender offer,
takeover bid, or sale of assets, as the case may be and as described in
Subsections (1) through (3) of Section 3.4(a).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means a committee appointed by the Board, pursuant to Section
2.3 hereof, to administer the provisions of this Plan, and in the absence of any
such committee, references to the Committee shall mean the Board.
"COMPANY" means Real Education, Inc.
"CONSULTANT" means any person engaged by the Company or any current or
future subsidiary of the Company to perform services as a non-employee service
provider, advisor or consultant pursuant to the terms of a written plan or
contract. "Consultants" is the plural of Consultant.
"EMPLOYEE" means, for purposes of this Plan, persons continuously employed
by the Company or by any current or future foreign or domestic subsidiary of the
Company on a
<PAGE>
regular basis, whether full-time or part-time, at any time during the duration
hereof. "Employees" is the plural of Employee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as from time to
time amended, or any replacement act or legislation.
"FAIR MARKET VALUE" of the Company's equity Securities shall be determined
by the Board or, in the event the Company's Securities are listed on any
national exchange, over-the-counter, or other stock trading market, then as of
any time based upon the prevailing bid price of the Company's common stock as of
such time.
"INCENTIVE STOCK OPTION" means an option issued by the Company to purchase
shares of stock of the Company that meets the definition of "incentive stock
option" contained in Section 422 of the Internal Revenue Code of 1986, as
amended, and that is issued by the Company to be an Incentive Stock Option.
"Incentive Stock Options" is the plural of Incentive Stock Option.
"NONQUALIFIED STOCK OPTION" means an option issued by the Company to
purchase shares of stock of the Company that is not an Incentive Stock Option.
"Nonqualified Stock Options" is the plural of Nonqualified Stock Option.
"OPTIONED SHARES" means Shares subject to a Stock Option.
"OPTIONEE" means the recipient of a Stock Option pursuant to a Stock Option
Agreement. "Optionees" is the plural of Optionee.
"PLAN" means this Real Education, Inc. 1997 Stock Option Plan, as amended,
which also may be referred to as the "Real Education Stock Option Plan."
"PLAN GUIDELINES" shall mean the guidelines, rules, policies, regulations,
forms of notice, and forms of agreements and instruments, if any, adopted and
amended by the Board from time to time with respect to this Plan pursuant to
Section 2.3.
"SHARES" shall mean the Shares of the Company reserved for issuance under
this Plan as further defined in Section 2.2.
"STOCK OPTION" means an agreement entered into by the Company granting the
recipient the right to purchase shares of stock of the Company, at certain
times, and under certain conditions, subject to certain obligations and
responsibilities as defined in this Plan and in the written Stock Option
Agreement, whether an Incentive Stock Option or a Nonqualified Stock Option.
"Stock Options" is the plural of Stock Option.
"STOCK OPTION AGREEMENT" means the written contract by which a Stock Option
is granted by the Company to an Optionee. "Stock Option Agreements" is the
plural of Stock Option Agreement.
Page 2 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
2. GENERAL PROVISIONS APPLICABLE TO BOTH NONQUALIFIED STOCK OPTIONS AND
INCENTIVE STOCK OPTIONS GRANTED BY THE COMPANY.
2.1 OBJECTIVES OF THIS PLAN
The purpose of this Plan is to encourage ownership of common stock of the
Company by Employees and to provide a means of granting Stock Options to
Consultants. This Plan is intended to provide an incentive to Employees for
maximum effort in the successful operation of the Company and is expected to
benefit the shareholders by enabling the Company to attract and retain personnel
of the best available talent through the opportunity to share in the increased
value of the Company's shares to which such personnel have contributed. The
benefits of this Plan are not a substitute for compensation otherwise payable to
Employees pursuant to the terms of their employment. This Plan may be referred
to as the Real Education, Inc. Stock Option Plan.
2.2 STOCK RESERVED FOR THIS PLAN
The stock initially reserved by the Board for issue upon the exercise of
Stock Options granted under this Plan shall be four hundred thousand 400,000
shares of the no par value common stock of the Company (the "Shares") which
Shares shall be reserved from the Company's authorized and unissued shares.
Shares subject to any Stock Option under this Plan which are not exercised in
full or Shares as to which the right to purchase is forfeited through default or
otherwise, shall remain available for other Stock Options under this Plan. The
aggregate number of Shares subject to Stock Options under this Plan or reserved
for issuance by the Board shall not exceed the number approved by the
shareholders at the time of adoption hereof unless such increase is approved by
the Company's shareholders. Such approval shall be by the affirmative vote of
shareholders holding a majority of the issued and outstanding shares of common
stock of the Company entitled to vote at a meeting called to approve said
increase.
2.3 ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board, provided that at all times
during which the Company is subject to the periodic reporting requirements of
the Exchange Act each member of the Board who participates in administration
must be a "disinterested person" as that term is defined in Rule 16b(3) of the
Exchange Act. The Board may appoint a Board committee ( the "Committee") to
administer this Plan in the name of the Board. The Board or the Committee so
appointed shall have full power and authority to administer and interpret this
Plan and to adopt, from time to time, such guidelines, rules, policies,
regulations, forms of notice, and forms of agreements and instruments for the
administration of this Plan (collectively, "Plan Guidelines") as the Board or
such Committee, as the case may be, deems necessary or advisable. Such powers
include, but are not limited to (subject to the specific limitations described
herein), authority to determine the Employees and Consultants to be granted
Stock Options under this Plan, to determine the size, type, and applicable terms
and conditions of grants to be made to such Employees and Consultants, to
determine a time when Stock Options will be granted, and to authorize grants to
eligible Employees and Consultants.
Page 3 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
The Board's interpretations of this Plan and all Stock Option Agreements,
including the definitions of terms used herein and in Stock Option Agreements,
and all actions taken and determinations made by the Board concerning any matter
arising under or with respect to this Plan or any Stock Options granted pursuant
to this Plan, shall be final, binding, and conclusive on all interested parties,
including the Company, its shareholders, and all former, present, and future
Employees and Consultants of the Company. So long as the Company is not subject
to the reporting requirements of the Exchange Act, the Board may delegate some
or all of its power and authority hereunder to the duly elected officers of the
Company, such delegation to be subject to such terms and conditions as the Board
in its discretion shall determine. Such delegation of authority may be
contained in the Plan Guidelines. The Board may, as to questions of accounting,
rely conclusively upon any determinations made by independent public accountants
of the Company.
2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING STOCK OPTIONS
The Board shall have the authority to determine the persons eligible to
receive a Stock Option, the time or times at which the Optioned Shares may be
purchased and whether all of the Stock Options may be exercised at one time or
in increments.
2.5 STOCK OPTION AGREEMENTS; TERMS AND EXPIRATION OF STOCK OPTIONS
Each Stock Option granted under this Plan shall be pursuant to a written
Stock Option Agreement, shall be subject to such amendment or modification from
time to time as the Board shall deem necessary or appropriate to comply with or
take advantage of applicable laws or regulations and shall contain provisions as
to the following effect, together with such other provisions as the Board shall
from time to time approve:
(a) that, subject to the provisions of Section 2.5(b) below, the Stock
Option, as to the whole or any part thereof, may be exercised only by the
Optionee or Optionee's personal representative;
(b) that neither the whole nor any part of the Stock Option shall be
transferable by the Optionee or by operation of law other than by will of, or by
the laws of descent and distribution applicable to, a deceased Optionee and that
the Stock Option and any and all rights granted to the Optionee thereunder and
not theretofore effectively and completely exercised shall automatically
terminate and expire upon any sale, transfer, or hypothecation or any attempted
sale, transfer, or hypothecation of such rights or upon the bankruptcy or
insolvency of the Optionee or Optionee's estate;
(c) that subject to the foregoing provisions, a Stock Option may be
exercised at different times for portions of the total number of Shares for
which the right to purchase shall have vested provided that such portions are in
multiples of ten (10) shares if the Optionee holds vested Stock Options for
ninety-nine (99) or fewer shares and otherwise in multiples of one hundred (100)
shares;
(d) that no Optionee shall have the right to receive any dividend on or to
vote or exercise any right in respect to any Shares unless and until the
certificates for such Shares have been issued to such Optionee;
Page 4 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
(e) that, unless otherwise provided in the Stock Option Agreement, the
Stock Option shall expire at the earliest of the following:
(1) The date specified in the Stock Option Agreement;
(2) With respect to Employees, ninety (90) days after voluntary or
involuntary termination of Optionee's employment other than termination as
described in Paragraphs (3) or (4) below;
(3) With respect to Employees, upon the discharge of Optionee for
misconduct, willfully or wantonly harmful to the Company;
(4) With respect to Employees, twelve (12) months after Optionee's
death or disability; or
(5) In the event of a Change of Control Event, or the filing of
Articles of Dissolution, as the case may be and as described in subsections (1)
through (4) of Section 3.4(a), on the date specified in Section 3.4(c).
However, if the Change of Control Event does not occur or if Articles of
Dissolution are not filed, as the case may be and as described in Subsections
(1) through (4) of Section 3.4(a), all Stock Options which are terminated
pursuant to this Subsection (e)(5) shall be reinstated as if no action with
respect to any of said events had been contemplated or taken by any party
thereto and all Optionees shall be returned to their respective positions on the
date of termination;
(f) that, to the extent a Stock Option Agreement provides for the vesting
of the right to purchase in increments, such vesting shall cease as of the date
of the Optionee's death, disability, or voluntary or involuntary termination of
Optionee's employment with the Company;
(g) that the terms of the Stock Option Agreement shall be a contract
between the Company and the Optionee; and the specific terms of any Stock Option
Agreement shall govern over the more general terms hereof; and
(f) With respect to Employees, subject to the Plan Guidelines, the Stock
Option Agreement shall not be affected by any changes of duties or position so
long as the Optionee shall continue to be an Employee, and, subject to the terms
hereof.
2.6 NOTICE OF INTENT TO EXERCISE STOCK OPTION
The Optionee (or other person or persons, if any, entitled hereunder)
desiring to exercise a Stock Option as to all or part of the Shares covered
thereby shall in writing notify the Company at its principal office in the state
of Colorado, specifying the number of Stock Option Shares to be purchased and,
if required by the Company, representing in form satisfactory to the Company
that the Shares are being purchased for investment and not with a view to resale
or distribution. The Company from time to time may issue or specify to
Optionees a written form for use in connection with any such exercise. With
respect to any Shares conditionally purchased pursuant to Section 3.4(a) below
and for which such purchase has not been voluntarily or otherwise rescinded
pursuant to Section 3.4(b), the Optionee shall be deemed to have given to the
Company the notice of exercise required by this Section 2.6 as of ten (10) days
prior to the closing or effective date of the Change of Control Event or the
filing of Articles
Page 5 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
of Dissolution, as the case may be and as described in Subsections (1) through
(4) of Section 2.5(a).
2.7 METHOD OF EXERCISE OF STOCK OPTION
Within ten (10) days after receipt by the Company of the notice provided in
Section 2.6, but not later than the expiration date specified in Section 3.4(e),
the Stock Option shall be exercised as to the number of Shares specified in the
notice by payment by the Optionee to the Company of the amount specified below
in Section 3.2. Payment of such purchase price shall be made in cash, or in
accordance with procedures for a "cashless exercise" as the same reasonably will
be established from time to time by the Company and the brokerage firm, if any,
designated by the Company to facilitate exercises of Stock Options and sales of
shares under this Plan. Payment in shares of the Company's common stock shall
be deemed to be the equivalent of payment in cash at the Fair Market Value of
those shares. For purposes of the preceding sentence, "fair market value" shall
be determined by the Board in the same manner as utilized in determining the
fair market value at the time other Stock Options are granted.
2.8 RECAPITALIZATION
The aggregate number of Shares for which Stock Options may be granted
hereunder, the number of Shares covered by each outstanding Stock Option, and
the price per Share thereof in each such Stock Option Agreement shall be
proportionately adjusted for an increase or decrease in the number of
outstanding shares of common stock of the Company resulting from a stock split
or reverse split of shares or any other capital adjustment or the payment of a
stock dividend or other increase or decrease in such shares effected without
receipt of consideration by the Company excluding any decrease resulting from a
redemption of shares by the Company. If the adjustment would result in a
fractional Share the Optionee shall be entitled to one (1) additional Share,
provided that the total number of Shares to be granted under this Plan shall not
be increased above the equivalent number of Shares initially allocated or later
increased by approved amendment to this Plan.
2.9 SUBSTITUTIONS AND ASSUMPTIONS
The Board shall have the right to substitute, replace, or assume options in
connection with mergers, reorganizations, separations, or other "corporate
transactions" as that term is defined in and said substitutions and assumptions
are permitted by Section 425 of the Code and the regulations promulgated
thereunder. The number of Shares reserved pursuant to Section 2.2 may be
increased by the corresponding number of options assumed and, in the case of a
substitution, by the net increase in the number of Shares subject to options
before and after the substitution.
2.10 TERMINAL DATE OF PLAN
This Plan shall not extend beyond a date ten (10) years from the original
date of adoption by the Board, provided that any Stock Option to purchase shares
duly granted hereunder prior to such date shall be exercisable pursuant to its
terms and the terms hereof until expiration or earlier termination of such Stock
Option.
Page 6 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
2.11 GRANTING OF STOCK OPTIONS
The granting of any Stock Option pursuant to this Plan shall be entirely in
the discretion of the Board and nothing herein contained shall be construed to
give any Employee any right to participate under this Plan or to receive any
Stock Option under it.
The granting of a Stock Option pursuant to this Plan shall not constitute
any agreement or an understanding, express or implied on the part of the Company
or a Subsidiary to employ the Optionee for any specified period.
2.12 WITHDRAWAL
An Optionee may at any time elect in writing to abandon a Stock Option with
respect to the number of Shares as to which the Stock Option shall not have been
exercised.
2.13 GOVERNMENT REGULATIONS
This Plan and the granting and exercise of any Stock Option hereunder and
the obligations of the Company to sell and deliver Shares under any such Stock
Option shall be subject to all applicable laws, rules, and regulations and to
such approvals by any governmental agencies as may be required.
2.14 PROCEEDS FROM SALE OF STOCK
Proceeds of the purchase of Optioned Shares by an Optionee shall be used
for the general business purposes of the Company.
2.15 SHAREHOLDER APPROVAL
This Plan shall be submitted to the shareholders for their approval within
twelve (12) months from the date hereof. The Company may grant Stock Options
prior to such approval which shall be conditioned upon subsequent shareholder
approval.
2.16 COMPLIANCE WITH SECURITIES LAWS
The Board shall have the right to:
(a) require an Optionee to execute, as a condition of exercise of a Stock
Option, a letter evidencing Optionee's intent to acquire the Shares for
investment and not with a view to the resale or distribution thereof;
(b) place appropriate legends upon the certificate or certificates for the
Shares; and
(c) take such other acts as it deems necessary in order to cause the
issuance of Optioned Shares to comply with applicable provisions of state and
federal securities laws.
In furtherance of the foregoing, and not by way of limitation thereof, no
Stock Option shall be exercisable unless such Stock Option and the Shares to be
issued pursuant thereto shall be registered under appropriate federal and state
securities laws, or shall be exempt
Page 7 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
therefrom, in the opinion of the Board upon advice of counsel to the Company.
Each Stock Option Agreement shall contain adequate provisions to assure that
there will be no violation of such laws. This provision shall in no way obligate
the Company to undertake registration of Stock Options or Shares hereunder.
Issue, transfer or delivery of certificates for Shares pursuant to the exercise
of Stock Options may be delayed, at the discretion of the Board until the Board
is satisfied that the applicable requirements of the federal and state
securities laws have been met.
3. PROVISIONS APPLICABLE SOLELY TO NONQUALIFIED STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any Stock Options granted under this Plan which are not Incentive
Stock Options.
3.1 OPTION PRICE
The option, or purchase, price of each Share optioned as a Nonqualified
Stock Option under this Plan shall be determined by the Board and set forth in
the Stock Option Agreement.
3.2 METHOD OF EXERCISE OF STOCK OPTION
The amount to be paid by the Optionee upon exercise of a Nonqualified
Option shall be the exercise price provided for in the Stock Option Agreement,
together with the amount of federal, state, and local income and FICA taxes
required to be withheld by the Company. An Optionee may elect to pay Optionee's
federal, state, or local income and FICA withholding tax by having the Company
withhold shares of Company common stock having a value equal to the amount
required to be withheld. The value of the shares to be withheld is deemed to
equal the fair market value of the shares on the day the option is exercised.
An election by an Optionee to have shares withheld for this purpose will be
subject to the following restrictions:
(a) If an Optionee has received multiple Stock Option grants, a separate
election must be made for each grant;
(b) The election must be made prior to the day the Stock Option is
exercised;
(c) The election will be irrevocable;
(d) The election will be subject to the disapproval of the Board;
(e) If the Optionee is an "officer" of the Company within the meaning of
Section 16 of the Exchange Act ("Section 16") as defined in Rule 16a-1
promulgated by the Securities Exchange Commission, the election may not be made
within six (6) months following the grant of the Stock Option; and
(f) If the Optionee is an "officer" of the Company within the meaning of
Section 16 as so defined, the election must be made either six (6) months prior
to the day the Stock Option is exercised or during the period beginning on the
third business day following the date of release of the Company's quarterly or
annual summary statement of sales and earnings and ending on the twelfth
business day following such date.
Page 8 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
3.3 ASSIGNMENT
The Company may allow limited assignment rights for the gifting by Optionee
of rights hereunder to vested Nonqualified Stock Options, on terms to be
determined by the Board from time to time.
3.4 RIGHTS OF OPTIONEE IN CHANGE OF CONTROL EVENTS--MERGER, CONSOLIDATION,
TENDER OFFER, TAKEOVER BID, SALE OF ASSETS--OR ON DISSOLUTION
(a) As a condition of the grant of any Nonqualified Stock Option, the
Board of Directors may provide, notwithstanding anything in this Plan to the
contrary, the Optionee may purchase the full amount of Optioned Shares for which
Nonqualified Stock Options have been granted to the Optionee and for which the
Nonqualified Stock Options have not been exercised under the following
conditions:
(1) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing twenty-seven (27) days and ending seven (7)
days prior to the scheduled effective date of a merger or consolidation (as such
effective date may be delayed from time to time) wherein the Company's
shareholders prior to the merger will not continue to hold, in exchange for or
as a result of their shares in the Company, a majority of the voting shares of
the surviving corporation;
(2) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing on the initial date of a tender offer or
takeover bid for the Shares (other than a tender offer by the Company) subject
to the Securities Exchange Act of 1934 and the rules promulgated thereunder and
ending on the day preceding the scheduled termination date of acceptance of
tenders of Shares by the offeror under any such tender offer or takeover bid (as
such termination date may be extended by such offeror);
(3) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing the date the shareholders of the Company
approve a sale of substantially all the assets of the Company and ending seven
(7) days prior to the scheduled closing date of such sale (as such closing date
may be delayed from time to time), or when and if the Company or its
shareholders, in a transaction or series of related transactions, transfer
sufficient shares to a third party or third parties acting in concert such that
the third party or third parties acquire a majority of the outstanding voting
shares of the Company and ending seven (7) days prior to the scheduled closing
date of such sale (as such closing date may be delayed from time to time.
(4) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing the date the shareholders of the Company
approve the dissolution of the Company and ending seven (7) days prior to the
date of filing its Articles of Dissolution.
(b) If the merger, consolidation, tender offer, takeover bid, sale of
assets (collectively, a "Change of Control Event"), or dissolution, as the case
may be and as described in subsections (1) through (4) of Section 3.4(a), once
commenced, is canceled or revoked, the conditional purchase of Shares for which
the option to purchase would not have otherwise been exercisable at the time of
said cancellation or revocation, but for the operation of this Section
Page 9 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
3.4, shall be rescinded. With respect to all other Shares conditionally
purchased, the Optionee may rescind such purchase at Optionee's option.
(c) If the Change of Control Event does occur or Articles of Dissolution
are filed, as the case may be and as described in subsections (1) through (4) of
Section 3.4(a), and the Optionee has not conditionally purchased all Optioned
Shares, all unexercised options shall terminate on the effective, termination,
closing, or filing date, as the case may be.
(d) If the Company shall be the surviving corporation in any merger or is
a party to a merger or consolidation which is between or among the Company and
other corporations related to or affiliated with the Company, any Nonqualified
Stock Option granted hereunder shall pertain and apply to the securities to
which a holder of the number of Shares of common stock subject to the
Nonqualified Stock Option would have been entitled.
(e) Nothing herein shall allow the Optionee to purchase Optioned Shares,
the options for which have expired.
4. PROVISIONS APPLICABLE SOLELY TO INCENTIVE STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any Stock Options granted under this Plan which are Incentive
Stock Options.
4.1 CONFORMANCE WITH INTERNAL REVENUE CODE
Stock Options granted under this Plan which are "Incentive Stock Options"
shall conform to, be governed by, and be interpreted in accordance with Section
422 of the Code and any regulations promulgated thereunder and amendments to the
Code and Regulations. Only Employees may be granted Incentive Stock Options
hereunder--Consultants may not receive Incentive Stock Options hereunder.
---
4.2 OPTION PRICE
The option, or purchase, price of each Share optioned as an Incentive Stock
Option under this Plan shall be determined by the Board at the time of the
action for the granting of the Stock Option and set forth in the Stock Option
Agreement, but shall not, in any event, be less than the fair market value of
the Company's common stock on the date of grant.
4.3 LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTION
The aggregate fair market value of the Optioned Shares, as determined on
the date of grant, vesting in any one calendar year with respect to which an
Employee has the right to purchase (under this Plan or any other plan of the
Company which authorizes Incentive Stock Options) shall not exceed $100,000; and
to the extent any Stock Option purporting to be an Incentive Stock Option grants
an Employee the right to purchase Optioned Shares with an aggregate fair market
value vesting in any one calendar year in excess of $100,000, as so determined
(under this Plan or any other plan of the Company which authorizes Incentive
Stock Options), shall be deemed a Nonqualified Stock Option for such excess
amount.
Page 10 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
4.4 LIMITATION ON GRANTS TO SUBSTANTIAL SHAREHOLDERS
It is the Company's intent that in the case of any Employee who,
immediately prior to the grant of a Stock Option hereunder, owns stock in the
Company representing more than ten percent (10%) of the voting power of all
classes of stock of the Company, will not be granted Incentive Stock Options
unless the per share option price specified by the Board for the Incentive Stock
Options granted such an Employee is at least one hundred ten percent (110%) of
the fair market value of the Company's stock on the date of grant and such Stock
Option, by its terms, is not exercisable after the expiration of five (5) years
from the date such Stock Option is granted. Any Stock Option that by its terms
purports to be an Incentive Stock Option that is issued to an Employee who owns
stock in the Company representing more than ten percent (10%) of the voting
power of all classes of stock of the Company that does not have an exercise
price of at least one hundred ten percent (110%) of the fair market value of the
Company's stock on the date of grant or that is, by its terms, exercisable after
the expiration of five (5) years from the date such Stock Option is granted,
shall be deemed a Nonqualified Stock Option.
4.5 METHOD OF EXERCISE OF STOCK OPTION
The amount to be paid by the Optionee upon exercise of an Incentive Stock
Option shall be the purchase price per share provided for in the Stock Option
Agreement.
5. EXCHANGE OF NONQUALIFIED STOCK OPTIONS FOR INCENTIVE STOCK
OPTIONS
At the Optionee's election and in accordance with the procedures described
below, an Employee may exchange a Nonqualified Stock Option granted pursuant to
this Plan for an Incentive Stock Option for the identical number of Shares.
5.1 NOTICE OF INTENT TO EXCHANGE
Not less than seven (7) days prior to the desired date of exchange, the
Optionee shall notify the Company in writing specifying the number of Shares
subject to grants as Nonqualified Stock Options under this Plan which are to be
exchanged for Shares subject to grants as Incentive Stock Options under this
Plan and the desired date of exchange.
5.2 LIMITATIONS ON AMOUNT OF STOCK OPTIONS EXCHANGED
Notwithstanding the number of Optioned Shares specified by the Optionee as
desired to be exchanged pursuant to this Section 5, the Company will allow
exchanges for only so many Stock Options as will not violate the aggregate
dollar limitations specified in Section 4.3 above with that limit being based on
a calculation of the fair market value on the date of exchange. If an Optionee
requests to exchange more Optioned Shares than would be allowed by the preceding
sentence, the Company shall deem the request to apply only to the maximum number
of Optioned Shares which would be allowed and shall disregard the request as to
the excess. Exchanges may not occur after the terminal date of this Plan.
Page 11 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
5.3 EFFECT OF EXCHANGE
If an exchange does occur, the Optionee shall surrender the Nonqualified
Stock Option Agreement for cancellation and shall execute a new Incentive Stock
Option Agreement for the number of Optioned Shares exchanged and, if all of the
Nonqualified Stock Options have not been exchanged, shall execute a new
Nonqualified Stock Option (or an amendment to the existing Nonqualified Stock
Option Agreement) to specify the remainder of Shares under the Nonqualified
Stock Option. The new Incentive Stock Option shall be deemed a new option
granted on the new Stock Option Agreement is executed with the exercise price
established as of such date.
6. SHAREHOLDER'S AGREEMENT
Upon any exercise of any Stock Option hereunder, an Optionee shall be bound
to the terms of the Company's ISO Shareholders Agreement dated as of April 13,
1999, and as amended from time to time, by the terms of which, Optionee is
restricted as to resale, is subject to repurchase and certain rights of first
offer and first refusal, and is restricted from selling shares acquired upon
exercise of Stock Options within 180 days following the Company's initial public
offering of Common Stock.
7. AMENDMENT
This Plan, the Plan Guidelines, and all rules and regulations adopted in
respect hereof may be terminated, suspended, or amended at any time by a
majority vote of the Board, provided that no such action shall adversely affect
any material rights of Optionees granted under this Plan prior to such action.
The Board may amend the terms and conditions of outstanding Stock Options,
provided, however, that (i) no such amendment would be adverse to the holders of
such Stock Options, (ii) no such amendment shall extend the period for exercise
of a Stock Option, and (iii) the amended terms of a Stock Option would be
permitted under this Plan.
8. FOREIGN EMPLOYEES
Without amending this Plan, the Board may grant Stock Options to eligible
Employees who are foreign nationals on such terms and conditions different from
those specified in this Plan as may in the judgment of the Board be necessary or
desirable to foster and promote achievement of the purposes of this Plan, and,
in furtherance of such purposes the Board may make such modifications,
amendments, procedures, subplans, and the like as may be necessary or advisable
to comply with the provisions of the laws in other countries in which the
Company operates or has Employees.
9. REGISTRATION, LISTING, AND QUALIFICATION OF SHARES
Each Stock Option shall be subject to the requirement that if at any time
the Board shall determine that the registration, listing, or qualification of
the shares covered thereby upon any securities exchange or under any foreign,
federal, state, or local law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Stock Option or the purchase of shares thereunder, no
Page 12 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
such Stock Option may be exercised unless and until such registration, listing,
qualification, consent, or approval shall have been effected or obtained free of
any condition not acceptable to the Board. Any person exercising a Stock Option
shall make such representations and agreements and furnish such information as
the Board may request to assure compliance with the foregoing or any other
applicable legal requirements.
10. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS; NO DAMAGES
No Employee or other person shall have any claim or right to be granted a
Stock Option under this Plan. Having received a Stock Option under this Plan
shall not give an Employee any right to receive any other grant or Stock Option
under this Plan. Optionee agrees that continuation of the engagement of each
Employee or Consultant of the Company is, in the absence of any written and
signed contract to the contrary, terminable at the will of the Company. An
Optionee shall have no rights to or interest in any Stock Option except as set
forth herein. Neither this Plan nor any action taken hereunder shall be
construed as giving any Employee any right to be retained in the employ of the
Company. Neither this Plan nor any action taken hereunder shall be construed as
giving any Consultant any right to be retained or engaged by the Company.
Nothing in this Plan shall restrict the Company's rights to adopt other option
plans pertaining to any or all of the Employees or Consultants covered under
this Plan or other Employees or Consultants not covered under this Plan. Each
Optionee shall be required to specifically acknowledge and agree that their
engagement by the Company as Employee or Consultant is at will, is not for any
fixed or minimum time period, is subject to the mutual consent of the Company
and the Optionee, and may be terminated at any time, with or without cause or
notice, for any reason or no reason, and without any kind of pre- or post-
termination warning, discipline or procedure.
Each Stock Option granted hereunder may be affected, with regard to both
vesting schedule and termination, by leaves of absence, a reduction in the
number of hours worked, partial disability, and other changes in Optionee's
Employee or Consultant status, as the case may be. The Company's policies in
such matters shall be contained in the Plan Guidelines adopted by the Board.
The Plan Guidelines and the guidelines, rules, policies and regulations
contained therein may be amended at any time and from time to time by the Board
or the Committee, in its sole discretion and with or without notice. Optionee's
rights hereunder or under any Stock Option granted hereunder at any time shall
be governed by the Plan Guidelines in effect at the time of any change in
Optionee's employment status as contemplated above.
Each Optionee must acknowledge and agree that, regardless of whether
Optionee's engagement as an employment or Consultant is terminated with or
without cause or notice, or with or without any kind of pre- or post-termination
warning, discipline or procedure, that Optionee has no right to, will not bring,
and specifically waives any legal claim or action against the Company or any
officer, Employee, or director thereof for any damages or losses arising from
having to exercise any vested portion of any Stock Option during any defined
period after termination or any cancellation of any unvested portion of any
Stock Option, or of any vested by unexercised portion of any Stock Option.
Page 13 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
11. COSTS AND EXPENSES
Except as provided herein with respect to the payment of taxes, all costs
and expenses of administering this Plan shall be borne by the Company and shall
not be charged to any grant or any Employee receiving a grant.
12. PLAN UNFUNDED
This Plan shall be unfunded. Except for the Board's reservation of a
sufficient number of authorized shares to the extent required by law to meet the
requirements of this Plan, the Company shall not be required to establish any
special or separate fund or to make any other segregation of assets to assure
payment of any grant under this Plan.
13. GOVERNING LAW
This Plan shall be governed by and construed in accordance with the laws of
the state of Colorado.
Page 14 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
[Form of]
REAL EDUCATION, INC.
(THE "COMPANY")
STOCK OPTION AGREEMENT FOR PURCHASE OF STOCK
We are pleased to inform you that the Company has granted to you, as the
individual named below (the "Optionee"), this Stock Option. This Stock Option
Agreement is a contract between you and the Company. It grants to you certain
defined rights, at certain times, and under certain conditions, to purchase
shares of the Company's common stock, and in exchange you accept certain
obligations and responsibilities, as described below and in the Company's 1997
STOCK OPTION PLAN (the "Plan") and the attached Terms and Conditions.
FOR VALUABLE CONSIDERATION, the Company does hereby grant to the Optionee,
as of the Date of Option Grant specified below, the right and option to purchase
the Number of Option Shares of common stock of the Company specified below (the
"Option Shares") for the Exercise Price Per Share specified below, and the right
to purchase the Option Shares under this Stock Option Agreement shall accrue and
vest according to the Vesting Schedule specified below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
NAME OF OPTIONEE:
-----------------------------------------------------------------------------------------
<S> <C>
Type of Option: [_] Employee Incentive Stock
Option
[_] Employee Nonqualified Stock
Option
[_] Consultant Nonqualified Stock
Option
-----------------------------------------------------------------------------------------
NUMBER OF OPTION SHARES:
-----------------------------------------------------------------------------------------
Exercise Price Per Share:
-----------------------------------------------------------------------------------------
Date of Option Grant:
-----------------------------------------------------------------------------------------
Expiration of Option
-----------------------------------------------------------------------------------------
Term of Option: __ Years from Date of Option Grant
-----------------------------------------------------------------------------------------
VESTING SCHEDULE: 33% of the Option Shares (rounding up
any fraction of a share up to the next
whole number) on the one year
anniversary of the Date of Option
Grant, then a number of shares equal
to 1/24th of the remaining Option
Shares (rounding up any fraction of a
share to the next whole number) on the
first of each month thereafter
-----------------------------------------------------------------------------------------
</TABLE>
Page 15 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
EXECUTED as of the Date of Option Grant.
REAL EDUCATION, INC.
___________________________________________
Robert N. Helmick, CEO and President
BY SIGNING BELOW AND ENTERING INTO THIS STOCK OPTION AGREEMENT,
OPTIONEE AGREES TO THE TERMS HEREOF, AND ALL OBLIGATIONS AND
RESPONSIBILITIES AS DESCRIBED IN PLAN AND THE ATTACHED TERMS AND
CONDITIONS.
OPTIONEE
By_________________________________________
, as Optionee
Page 16 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
TERMS AND CONDITIONS OF STOCK OPTION AGREEMENT
STOCK OPTIONS ARE SUBJECT TO THE TERMS HEREOF AND OF THE COMPANY'S 1997 STOCK
OPTION PLAN ("PLAN").
CAPITALIZED TERMS USED IN THIS STOCK OPTION AGREEMENT (THIS "AGREEMENT"),
IF NOT OTHERWISE DEFINED, HAVE THE MEANINGS GIVEN THEM IN THE PLAN.
1. a. Any Option Shares which become purchasable ("vest") but are not
purchased on a vesting date or anniversary date, as the case may be, may be
purchased on any subsequent date, provided all options for the purchase of
Option Shares must be exercised within the time periods specified in Section 2
below.
b. Optionees may have conditional purchase rights in the event of
any Change of Control Event as described in the Plan.
2. If Optionee is or becomes an Employee, all UNVESTED options shall
expire upon any termination of Optionee's employment with the Company, whether
voluntary or involuntary, or upon the death or disability of Optionee.
Subject to the terms hereof, all VESTED options (i.e., options for which
the right to purchase has accrued) shall expire at the earliest of the
following:
a. The earlier of the end of the Term of Option specified on the
first page of this Agreement or Ten (10) years from the Date of Option Grant
specified on the first page of this Agreement;
b. If Optionee is or becomes an Employee, ninety (90) days after
voluntary or involuntary termination of Optionee's employment other than
termination as described in Paragraphs (c) or (d) below;
c. If Optionee is or becomes an Employee, upon discharge of Optionee
for misconduct, willfully or wantonly harmful to the Company;
d. If Optionee is or becomes an Employee, Twelve (12) months after
Optionee's death or disability; or
3. This Stock Option may be exercised at different times for portions of
the total number of Option Shares for which the right to purchase shall have
accrued and vested hereunder, provided that such portions are in multiples of
ten (10) shares if the Optionee holds vested portions for ninety-nine (99) or
fewer shares and otherwise in multiples of one hundred (100) shares.
4. This Stock Option shall be adjusted for recapitalizations, stock
splits, stock dividends, and the like as described in the Plan.
5. This is not an employment contract and while the benefits, if any, of
this Stock Option may be an incident of the Optionee's employment with the
Company, the terms and conditions of such employment are otherwise wholly
independent hereof.
6. Neither this Stock Option nor any right under this Agreement is
assignable, and rights under this Agreement may be exercised only by the
Optionee or a person to whom the rights under this Agreement shall pass by will
or the laws of descent and distribution.
7. The Optionee shall indicate Optionee's intention to exercise this
Stock Option with respect to vested Option Shares by notifying the Company in
writing of such intention, indicating the number of Option Shares Optionee
intends to purchase, and, within ten (10) days thereafter, paying to the Company
an amount sufficient to cover the total option price of such Option Shares.
Payment of the Exercise Price Per Share specified on the first page of this
Agreement shall be made in cash or in accordance with such procedures for a
"cashless exercise" as reasonable will be established from time to time by the
Company and the brokerage firm, if any, designated by the Company to facilitate
exercises of Stock Options and sales of Optioned Shares under the Plan.
8. If the Optionee, immediately prior to the grant of an Incentive Stock
Option hereunder, owns stock in the Company representing more than ten percent
(10%) of the voting power of all classes of stock of the Company, the Exercise
Price Per Share specified on the first page of this Agreement for Incentive
Stock Options granted hereunder shall be not less than one hundred ten percent
(110%) of the fair market value of the Company's common stock on the Date of
Option Grant specified on the first page of this Agreement, and such Incentive
Stock Option shall not be exercisable after the expiration of five (5) years
from said Date of Option Grant, and notwithstanding any pricing or vesting terms
hereof which appear at variance with the foregoing, all pricing and vesting
terms hereof shall be deemed hereby to conform with the foregoing limitations.
In lieu of the foregoing, the Optionee may elect to have a Stock Option that
purports to be an Incentive Stock Option treated as a Non-Qualified Stock Option
pursuant to the original terms of this Agreement.
9. Notwithstanding the foregoing, no Stock Option shall be exercisable,
and rights under this Agreement are not enforceable, unless and until all
requirements imposed by or pursuant to Section 2.16 of the Plan are satisfied.
SECTION 2.16 OF PLAN DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO
FEDERAL AND STATE SECURITIES LAWS THAT MUST BE SATISFIED BEFORE THIS OPTION CAN
BE EXERCISED AND BEFORE THE COMPANY CAN ISSUE ANY OPTION SHARES TO THE OPTIONEE.
AT THE PRESENT TIME THE PLAN IS NOT REGISTERED AND, ALTHOUGH SHARES MAY BE
ISSUED UPON EXERCISE, THE SHARES SO ISSUED ARE NOT FREELY TRADABLE.
THERE CAN BE NO ASSURANCE THAT THE EXEMPTION(S) ALLOWING ISSUANCE OF THE
SHARES UPON EXERCISE WILL REMAIN AVAILABLE, NOR IS THERE ASSURANCE THAT ISSUED
SHARES WILL BE REGISTERED OR THAT ONCE REGISTERED THE REGISTRATION WILL BE
MAINTAINED. IF THE SHARES ARE NOT REGISTERED OR IF THE REGISTRATION IS NOT
MAINTAINED, THE OPTIONEE WILL NOT BE ABLE TO TRADE SHARES OBTAINED UPON EXERCISE
OF THIS STOCK OPTION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE
PRESENT TIME,
Page 17 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
EXEMPTIONS FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY
LIMITED AND MIGHT BE UNAVAILABLE TO THE OPTIONEE PRIOR TO THE EXPIRATION OF THIS
OPTION. AS A CONSEQUENCE OF THE FOREGOING, THE OPTIONEE MIGHT NOT HAVE AN
OPPORTUNITY TO EXERCISE THIS OPTION AND TO RECEIVE OPTION SHARES UPON SUCH
EXERCISE, AND, IF THE OPTIONEE IS ABLE TO EXERCISE THIS OPTION AND TO RECEIVE
OPTION SHARES UPON SUCH EXERCISE, THE OPTIONEE MIGHT NOT HAVE THE OPPORTUNITY TO
TRADE SUCH OPTION SHARES.
10. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS; NO DAMAGES
Neither Optionee nor any other person shall have any claim or right to be
granted a Stock Option under the Plan. Having received a Stock Option under the
Plan shall not give Optionee any right to receive any other grant or option
under the Plan. Optionee agrees that continuation of the engagement of Optionee
as an Employee or Consultant of the Company, as the case may be, is, in the
absence of any written and signed contract to the contrary, terminable at the
will of the Company. Optionee shall have no rights to or interest in any Option
except as set forth herein, in the Plan, or in another Option specifically
granted by the Company to Optionee. Neither this Option, the Plan, nor any
action taken hereunder or under the Plan shall be construed as giving any
Employee or Consultant any right to be retained in the employ of, or be engaged
as a Consultant to, the Company, as the case may be. Nothing in the Plan
restricts the Company's rights to adopt other option plans pertaining to any or
all of the Employees or Consultants covered under the Plan or other Employees or
Consultants not covered under the Plan.
OPTIONEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT OPTIONEE'S ENGAGEMENT BY
THE COMPANY AS AN EMPLOYEE OR CONSULTANT IS "AT WILL", IS NOT FOR ANY FIXED OR
MINIMUM TIME PERIOD, IS SUBJECT TO THE MUTUAL CONSENT OF THE COMPANY AND THE
OPTIONEE, AND MAY BE TERMINATED BY THE COMPANY AT ANY TIME, WITH OR WITHOUT
CAUSE OR NOTICE, FOR ANY REASON OR NO REASON, AND WITHOUT ANY KIND OF PRE- OR
POST-TERMINATION WARNING, DISCIPLINE OR PROCEDURE.
THIS AGREEMENT AND THE STOCK OPTION REPRESENTED HEREBY MAY BE AFFECTED,
WITH REGARD TO BOTH VESTING SCHEDULE AND TERMINATION, BY LEAVES OF ABSENCE, A
REDUCTION IN THE NUMBER OF HOURS WORKED, PARTIAL DISABILITY, AND OTHER CHANGES
IN OPTIONEE'S EMPLOYEE OR CONSULTANT STATUS, AS THE CASE MAY BE. THE COMPANY'S
POLICIES IN SUCH MATTERS, IF ANY, SHALL BE CONTAINED IN THE PLAN GUIDELINES
ADOPTED BY THE BOARD. THE PLAN GUIDELINES AND THE GUIDELINES, RULES, POLICIES
AND REGULATIONS CONTAINED THEREIN MAY BE AMENDED AT ANY TIME AND FROM TIME TO
TIME BY THE BOARD OF DIRECTORS OF THE COMPANY, OR THE COMMITTEE APPOINTED BY
SUCH BOARD, IN ITS SOLE DISCRETION AND WITH OR WITHOUT NOTICE. OPTIONEE'S
RIGHTS HEREUNDER OR UNDER THE PLAN AT ANY TIME SHALL BE GOVERNED BY THE PLAN
GUIDELINES IN EFFECT AT THE TIME OF ANY CHANGE IN OPTIONEE'S EMPLOYMENT STATUS
AS CONTEMPLATED ABOVE.
11. This Agreement and the Stock Option represented hereby is granted
pursuant to and is controlled by the Plan and by the Plan Guidelines, if any, as
adopted by the Board and amended from time to time. Optionee, by execution
hereof, acknowledges receipt of the Plan and the Plan Guidelines as they
currently exist and acceptance of the terms and conditions of the Plan, the Plan
Guidelines and of this Agreement.
Page 18 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
EXHIBIT 23.1
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
May 12, 1999,
Denver, Colorado.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 AND THE INCOME STATEMENTS FOR
THE YEAR AND THREE MONTHS THEN ENDED, RESPECTIVELY, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 MAR-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 11,661,186 9,927,383
<SECURITIES> 0 0
<RECEIVABLES> 326,665 1,007,133
<ALLOWANCES> 9,800 9,800
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,090,408 11,097,721
<PP&E> 2,082,377 2,410,128
<DEPRECIATION> (513,248) (689,850)
<TOTAL-ASSETS> 13,659,537 12,817,999
<CURRENT-LIABILITIES> 2,513,209 2,418,716
<BONDS> 0 0
19,649,415 22,514,956
0 0
<COMMON> 456,190 468,730
<OTHER-SE> (8,995,177) (12,634,967)
<TOTAL-LIABILITY-AND-EQUITY> 13,659,537 12,817,999
<SALES> 1,665,069 610,957
<TOTAL-REVENUES> 1,665,069 610,957
<CGS> 0 0
<TOTAL-COSTS> 2,064,909 1,187,599
<OTHER-EXPENSES> 6,992,696 2,670,837
<LOSS-PROVISION> 9,800 0
<INTEREST-EXPENSE> 36,819 0
<INCOME-PRETAX> (7,289,847) (3,127,583)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,289,847) (3,127,583)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,289,847) (3,127,583)
<EPS-PRIMARY> (1.05) (0.49)
<EPS-DILUTED> (1.05) (0.49)
</TABLE>
