<PAGE>
As filed with the Securities and Exchange Commission on October 25, 1999
Registration No. 333-78365
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2
To
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 (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification
Incorporation or Number)
Organization)
---------------
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. Cooley Godward LLP
2595 Canyon Boulevard, Suite 250
Lexi Methvin, Esq.
Brobeck, Phleger & Harrison LLP Boulder, Colorado 80302
370 Interlocken Boulevard, Suite 500 (303) 546-4000
Broomfield, Colorado 80021
(303) 410-2000
---------------
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. [_]
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 preliminary prospectus is not complete and +
+may be changed. We may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This preliminary 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 OCTOBER 25, 1999
4,500,000 Shares
[LOGO OF eCOLLEGE.COM APPEARS HERE]
Common Stock
This is an initial public offering of common stock of eCollege.com. We are
offering 4,500,000 shares in this offering. No public market currently exists
for our common stock.
We anticipate that the initial public offering price will be between $8.00
and $10.00 per share. We have applied for quotation of our common stock on the
Nasdaq National Market under the symbol "ECLG."
-----------
Investing in our common stock involves risks. See "Risk Factors" on page 9.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds to us $ $
</TABLE>
The underwriters have an option to purchase 675,000 additional shares of
common stock from us at the initial public offering price to cover over-
allotments of shares at anytime until 30 days after the date of this
prospectus.
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.
-----------
Banc of America Securities LLC
William Blair & Company
The date of this prospectus is , 1999.
<PAGE>
[picture of eCollege.com's homepage from its website with text "eCollege.com is
about possibilities. Not merely the possibilities that arise in the wake of
classrooms without walls, but also those which occur when educators are given
the ability to 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 - not only to extend the classroom, but to
elevate its potential."]
2
<PAGE>
[gatefold picture--picture of representative eCollege Campus home page with
text "eCollege is a complete solution for educators seeking to create an online
campus for students taking online courses or course supplements to on-campus
courses. eCollege Campus includes all the traditional on-campus services in the
online environment, such as registration, course catalog, campus library
integration, bookstore, student services, and bursar's office." Picture of
representative home page using eCompanion with text "eCompanion is designed for
faculty who teach in a classroom and want to use the power of the Internet to
make teaching easier and more effective. It has all the great communication
features of eCollege.com's eToolKit, plus it allows educators to make lectures
available online, conduct online practice tests, guide students to Internet
resources, share documents and continue class discussion outside of the
classroom. And students and educators can access their eCompanion from any Web
browser, anywhere, anytime." Picture of representative home page using eCourse
with text "eCourse provides educators with an easy to use set of tools for
managing and delivering online courses over the Internet. eCourse includes
everything you need for course management, outlining assignments, delivering
lectures, testing, grading and interacting with students. And students and
educators can access their eCourse from any Web browser, anywhere, anytime."
Picture of representative home page using eToolKit with text "eToolKit is a
free set of online tools that allow educators to easily create a secure and
private Internet environment for their courses. Educators can post and update
their syllabus, build an online calendar, automatically email the class without
having to track down student email addresses, post grades, and more. And
students and educators can access eToolKit from any Web browser, anywhere,
anytime." Graphic also includes captions "eCollege.com webifies Universities"
and "Educators working for Educators," 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............................................................. 9
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 34
Management............................................................... 44
Certain Transactions..................................................... 54
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
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 and a two for three
reverse stock split of our common stock and preferred stock.
eCollege.com
eCollege.com, formerly Real Education, Inc., is a leading provider of
technology and services that enable colleges and universities to offer an
online environment for distance and on-campus learning. Our software and
services allow colleges and universities to outsource the creation, launch,
management and support of a comprehensive online education platform. Our
comprehensive solution consists of online campuses, courses, course supplements
and support services, including design, development, management and hosting
services, as well as ongoing administration, faculty and student support. We
can create and deliver a complete online campus, including training of faculty
and administration, typically in 60 business days. We charge our customers an
upfront fee for creating an online campus and for developing each course. In
addition, we charge a per student fee for each student enrolled in a course
utilizing our solution, and ongoing fees for maintenance, support and faculty
training. Our technology enables our customers to reach a large number of
additional students who wish to take online courses at convenient times and
locations. Our customers can also use our technology to supplement their on-
campus courses with an online learning environment.
As of September 30, 1999, we had 112 contracts covering over 140 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 student enrollments in online courses provided by us.
The Internet's universal accessibility and real-time interactivity make it
an ideal platform for distance learning and for providing online course
supplements for on-campus classes. Accordingly, distance learning has become a
fast growing segment 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. In addition, educators are increasingly using the
Internet to supplement their on-campus course offerings. 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. In addition, we believe
that many colleges and universities have found internally developed solutions
to be time-consuming, expensive and difficult to implement. As a result of
these challenges, a growing number of colleges and universities are outsourcing
the development and maintenance of their online campus and courses.
Our solution is designed to be flexible to meet the online learning needs of
colleges and universities and their students. Our comprehensive suite of
products enables colleges and universities to either completely outsource the
development of their online campus and courses or to select those products that
meet their needs.
4
<PAGE>
The eCollege.com solution has the following key elements:
Comprehensive Products and Services. We provide a comprehensive suite of
software consisting of online campuses, courses, course supplements and
services, including design, development, management, and hosting services, as
well as ongoing administration, faculty and student support. We can create an
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 can
also work with faculty to convert courses for online delivery or provide online
supplements for on-campus courses. We host the online campuses, courses and
course supplements on our reliable infrastructure.
Rapid, Cost-Effective Development of Online Campuses and Courses. We can
create and deliver a complete online campus, including training of faculty and
administration, typically in 60 business days. Our flexible pricing structure
allows our customers to purchase products and services that meet their needs.
We believe most colleges and universities would incur substantially greater
costs to develop a comparable solution internally.
Easy Online Course Development. We typically work with faculty members to
convert courses into effective presentations designed for delivery over the
Internet 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 develop and update their courses through a standard
Web browser.
Easy to Use Online Learning Environment. We believe our online campuses and
courses are easy for students and faculty to use and our other services, such
as faculty and student support, allow colleges and universities to provide a
well-supported online learning environment. Using a standard Web browser,
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 have made
significant investments in our infrastructure and technical support to ensure
the reliability and scalability of our solution. We utilize multiple or
"redundant" high bandwidth sources for Internet connections. As a result, we
are capable of achieving nearly 100% uptime.
We target more than 3,800 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 90 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. The following list demonstrates the geographic diversity of some
of our well-known customers: 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, The 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 to further develop our
presence within the continuing education and corporate training markets. The
key elements of our growth strategy are to:
Add Additional Colleges and Universities. Using a focused regional approach,
we are actively targeting more than 3,800 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.
5
<PAGE>
Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently implemented a
$10 million grant program designed to assist new and existing customers in
increasing the number of online courses they offer using our solution. The
grants will be used by our customers to increase marketing of our customers'
online courses, increase the online teaching skills of our customers'
educators, as well as fund the purchase of computer equipment to allow our
customers to facilitate online education.
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.
Unbundle and Expand Product Offerings for New and Existing
Customers. Historically we marketed and sold our campus product bundled with a
minimum number of courses, as well as maintenance and support. We recently
unbundled these offerings in order to provide our potential customers with
greater flexibility in meeting their individual needs. Customers can also
purchase implementation services and training on an as-needed basis. We believe
this sales approach will expand the number of prospects that will be interested
in purchasing our product and services. In addition, we have recently
introduced several new products to expand our targeted online education market.
Recent Operating Results
Based on preliminary information as to our recent results of operations, we
had revenue of approximately $ for the nine months ended September 30, 1999.
Our operating loss for the nine months ended was approximately $ .
Risk Factors
Investing in our common stock involves a high degree of risk. Risk factors
of this offering include:
. our limited operating history;
. our history of more than $17 million of losses since inception and
expected future losses;
. our unproven business model;
. our highly competitive market;
. our reliance on a single service offering; and
. the uncertain acceptance of online learning by academics and
educators.
For a discussion of these and other risk factors you should consider carefully
before you decide to buy our common stock, see "Risk Factors."
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us........ 4,500,000 shares
Common stock outstanding after
this offering.................... 13,862,395 shares
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 September 30, 1999 and excludes 1,880,126 shares of common
stock issuable upon the exercise of outstanding stock options and 686,519
shares of common stock issuable upon the exercise of outstanding warrants. The
outstanding options and warrants, have an aggregate, weighted-average exercise
price of $4.41. See "Capitalization" and Note 4 in the notes to financial
statements.
----------------
Our company was incorporated in Colorado on July 26, 1996 and was
reincorporated in Delaware as eCollege.com on June 22, 1999. Our principal
executive offices are located at 10200 A East Girard Avenue, Denver, Colorado
80231. Our telephone number is (303) 873-7400. 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.com, our logo, eCollege System, eCollege Campus, eCollege eCourse,
eTeaching Solutions, eCompanion and eToolKit 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.
7
<PAGE>
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 Six Months Ended
July 26, 1996 31, June 30,
(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 $ 406 $ 658
Student fees........... 22 400 579 221 737
--------- --------- --------- --------- ---------
Total revenue.......... 22 1,028 1,665 627 1,395
Cost of revenue......... 110 528 2,065 456 2,737
--------- --------- --------- --------- ---------
Gross profit (loss).... (88) 500 (400) 171 (1,342)
Operating expenses:
Selling and marketing.. 25 106 3,394 869 3,188
General and administra-
tive.................. 249 768 2,509 1,217 1,778
Development............ 60 212 1,099 225 1,358
--------- --------- --------- --------- ---------
Total operating ex-
penses................ 334 1,086 7,002 2,311 6,324
--------- --------- --------- --------- ---------
Net loss from opera-
tions.................. (422) (586) (7,402) (2,140) (7,666)
Other income (expense),
net.................... 18 (29) 112 89 202
--------- --------- --------- --------- ---------
Net loss from continuing
operations............. $(404) $ (615) $(7,290) $(2,051) $(7,464)
========= ========= ========= ========= =========
Net loss from continuing
operations applicable
to common stockhold-
ers.................... $(404) $ (674) $(7,993) $(2,360) $(8,715)
========= ========= ========= ========= =========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $(0.16) $(1.58) $(0.47) $(1.70)
Weighted average common
shares outstanding--ba-
sic and di-
luted.................. -- 4,107,964 5,074,697 5,037,683 5,135,349
Pro forma net loss from
continuing operations
per common share--basic
and diluted (unau-
dited)................. $ (1.02) $ (0.30) $ (0.81)
Pro forma weighted aver-
age common shares out-
standing--pro forma ba-
sic and diluted (unau-
dited)................. 7,120,022 6,890,806 9,235,527
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of all shares of our preferred stock
into common stock upon completion of this offering. The pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the 4,500,000
shares of common stock we are selling in this offering at an assumed initial
public offering price of $9.00 per share, after deducting estimated
underwriting discounts and expenses.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- -------------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 6,318 $6,318 $43,009
Working capital .......................... 4,095 4,095 40,786
Total assets.............................. 10,506 10,506 47,197
Total liabilities......................... 4,235 4,235 4,235
Mandatorily redeemable, convertible
preferred stock.......................... 23,150 -- --
Total stockholders' equity (deficit)...... (16,879) 6,271 42,962
</TABLE>
8
<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.
Our prospects are difficult to evaluate because we have only been operating our
business since July 1996
We began offering our services in July 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 operating losses each year since our inception in
July 1996, including losses of $422,075 for the period from inception to
December 31, 1996, and $585,800 and $7,402,336 for the years ended December 31,
1997 and 1998, respectively, and $7,666,582 for the six months ended June 30,
1999. We may never achieve profitability, and if we do, we may not be able to
sustain profitability. 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.
9
<PAGE>
Our operating results are likely to fluctuate significantly and may be below
the expectations of analysts and investors
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 for us to
predict the timing of particular sales, the rate at which online campuses,
courses and/or course supplements 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 campus and/or course 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 and courses;
. our ability to sell support services;
. 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;
. 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.
We cannot predict our success because 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 generally includes initial campus and course development fees
from colleges and universities, fees for student and faculty support 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. 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.
10
<PAGE>
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. As a result, we may not be able to forecast the
timing and amount of specific sales and resulting revenue. Our customers
typically conduct 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
forego purchases altogether. 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.
Since our business focuses solely on online education, we are particularly
vulnerable to uncertain market acceptance, competing services, implementation
difficulties and other factors that could inhibit our ability to generate sales
and achieve market penetration
We currently derive substantially all of our revenues from developing and
delivering our online education platform. We expect that revenues from these
services will continue to account for substantially all of our revenues in
future periods. Consequently, if online learning does not become a widely
accepted alternative and/or companion to classroom instruction, our business
will not be successful. 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 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
Through our relationships with educational institutions and educators we
understand that 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 has resulted in some concerns from the academic
community about the protection of intellectual property associated with course
content, which may impose additional burdens on companies offering online
learning. We are unaware of any legal action resulting from course content
being delivered over the Internet. 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 and may
not continue to develop
The market for online learning is new and emerging. 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
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<PAGE>
we have entered into contracts 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 contracts are
likely to be less risk-averse than most colleges and universities. Accordingly,
the rate at which we have been able to enter into contracts with colleges and
universities in the past may not be indicative of the rate at which we will be
able to enter into contracts 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 continuing market acceptance would have a
material adverse effect on our business and financial results.
We operate in a highly competitive market and we may not have adequate
resources to compete successfully
The online learning market is quickly evolving and is subject to rapid
technological change. Although the market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. 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. Some 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.
Our market is characterized by rapid technological change, and our services may
become obsolete or unmarketable
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
Our operating results could be impaired if we become subject to burdensome
government regulation and legal uncertainties. We may be subject to certain
government laws and regulations, such as the Family
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<PAGE>
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, it is possible that a number of laws and
regulations may be adopted with respect to the Internet, relating to
. user privacy;
. pricing;
. content;
. copyrights;
. distribution; and
. characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the Internet. A decline in the growth of the
Internet could decrease demand for our products and services and increase our
cost of doing business. Moreover, the applicability of existing laws to the
Internet is uncertain with regard to many issues including property ownership,
intellectual property, export of encryption technology, sales tax, libel and
personal privacy. Our business and financial results could be seriously harmed
by any new legislation or regulation of these types. 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.
College and university accreditation standards could adversely affect our
business
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 business and financial results.
We are dependent on government funding of higher education
Federal and state governments provide various forms of direct and indirect
support for higher education, including guaranteed student loan programs as
well as direct subsidies and grants. Accordingly, most of the colleges and
universities we serve and intend to serve in the future depend substantially on
government funding. Thus, decreases or delays in government funding of higher
education could affect student enrollments and impede an institution's ability
to fund an online learning program. Any decrease or delay in government funding
could therefore have a material adverse effect on our business and financial
results.
Managing our growth effectively may be difficult
We are currently experiencing a period of significant expansion, which may
be difficult to manage. 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 245 employees as of September 30, 1999. This growth 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. If we
cannot effectively manage our expanding operations, we may not be able to
continue to grow, or may grow at a slower pace. 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.
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<PAGE>
We must expand our customer service and support department and it may be
difficult for us to do so
As we increase the number of colleges and universities we serve, we will
require greater numbers of development personnel and account service
representatives to ensure rapid and successful implementation of our solution.
For these positions, we seek individuals with postgraduate degrees and we face
great competition in hiring them. 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. As of September 30, 1999, we had 105 individuals in various
departments servicing our customers. In the past we have not experienced any
difficulty providing customer support. Our failure to continue to provide a
high level of customer support 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 provider or our network
backbone provider, which provides us with our Internet connection, 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. Our system is
designed to prevent unauthorized access from the Internet and, to date, our
operations have not been affected by security breaks; nevertheless, in the
future we may not be able to prevent unauthorized disruptions of our network
operations, whether caused unintentionally or by computer "hackers." As such,
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 Internet's
infrastructure
Our success depends, in large part, upon the maintenance of the Internet's
infrastructure with the necessary speed, data capacity and security, and timely
development of enabling products such as high speed modems, for providing
reliable Web access and services as well as improved content. We currently
depend on Web servers located in three commercial data centers, commonly known
as Web "server farms," to provide us a network backbone connection and are in
the process of increasing our number of Web server farms to five. Increases in
the number of users, frequency of use or bandwidth requirements may strain the
Internet's 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 that are designed to
handle increased levels of activity, could reduce the viability of the
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<PAGE>
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.
If use of the Internet does not continue to grow, our business could be harmed
Our success is highly dependent on the continued growth in the general use
of the Internet. There can be no guarantee that the general use of the Internet
will continue to grow. Several factors, including concerns related to security,
cost and ease of use and access could limit future growth in Internet use,
which could materially and adversely impact our business and financial results.
We depend on our key personnel and may have difficulty attracting and retaining
skilled employees
We depend on our key personnel and may have difficulty attracting and
retaining skilled employees. If we are unable to retain key personnel or
attract new personnel, it could have a material adverse effect on our business.
The loss of the services of any of our key personnel or our inability to
successfully attract and retain qualified personnel in the future would have a
material adverse effect on our business. Our future success depends on the
continued service of Robert N. Helmick, our President and Chief Executive
Officer, Charles P. Schneider, our Chief Operating Officer and Executive Vice
President, and Douglas H. Kelsall, our Chief Financial Officer and Treasurer.
We maintain a life insurance policy on Mr. Helmick which has a face value of
$1,000,000. The loss of the services of Mr. Helmick, Mr. Schneider or Mr.
Kelsall 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 any international operations could materially and adversely effect our
business and financial results.
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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, and employee and third-party nondisclosure agreements to
protect our proprietary rights. Despite our efforts to protect these rights,
unauthorized parties may attempt to duplicate or copy aspects of our 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.
Any acquisitions or investments we make could be disruptive to our business,
have adverse accounting consequences or be dilutive to our investors
Although we have no present agreement or understanding relating to any
material acquisition or investment, from time to time we have had discussions
with companies regarding 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 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 governmental
agencies and their designees. For example, in the United States, the National
Science Foundation has appointed Network Solutions, Inc. as the exclusive
registrar for the ".com," ".net," and ".org" generic domains. The regulation of
domain names in the United States and in foreign countries is subject to
change. Governing bodies could appoint additional domain name registrars or
modify the requirements for holding domain names. Governing bodies could also
establish additional "top-level" domains, which are the portion of a Web
address that appears to the right of the "dot," such as "com," "gov" or "org."
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.
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We would lose revenues, incur significant costs and potentially lose customers
if our systems do not prove to be Year 2000 compliant
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 have completed the testing of our
internal information technology and non-information technology systems. Based
on our Year 2000 assessment and confirmation by an outside firm specializing in
Year 2000 issues, we believe that our system, and those on which we rely, are
Year 2000 compliant. The most reasonably likely worst case scenario is a
systemic failure beyond our control such as prolonged telecommunications or
electrical failure. Such a failure could prevent us from operating our
customers' online campuses and online courses. The primary business risk, in
the event of such failure would include loss of revenue and customers. 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. We have obtained
Year 2000 compliance certificates from all of our software vendors that provide
system components, all firms that provide network bandwidth, and all providers
of software development tools used in the creation of our product. These
vendors are in the process of reviewing and implementing their own Year 2000
compliance programs. 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 and could potentially bring claims
of mismanagement, misrepresentation or breach of contract; these claims and the
related litigation could be costly and time consuming to defend. 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 need additional capital in the future and it may not be available on
acceptable terms, or at all
We expect the proceeds of this offering, together with cash generated from
operations and our current cash, cash equivalents and short term investments to
meet our working capital and capital expenditure requirements for at least the
next 12 months. However, after that time, we may need to raise additional funds
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, to increase our promotional and
marketing activities, 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 $5.90 in the pro forma net tangible book value per
share of common stock from the assumed initial public offering price. Net
tangible book value represents the amount of our tangible assets less our total
liabilities. To the extent outstanding options and warrants to purchase common
stock are exercised, there may be further dilution to investors, because most
of our outstanding options and warrants have an exercise price below the
initial public
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offering price. As of September 30, 1999, 2,566,645 shares of our common stock
were issuable upon the exercise of outstanding stock options and warrants with
a weighted average exercise price of $4.41 per share.
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 76.5%
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, and
might act in a manner inconsistent with the wishes of our other stockholders.
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
9,040,381 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. Banc of America Securities LLC may, in its sole
discretion, release all or some of the shares covered by these lock-up
agreements. 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."
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. For example, our
board of directors will have the authority to issue up to 5,000,000 shares of
preferred stock. Further, without any further vote or action on the part of the
stockholders, the board of directors will have the authority to determine the
price, rights, preferences, privileges and restrictions of the preferred stock.
This preferred stock, if it is ever issued, may have preference over and harm
the rights of the holders of common stock. Although the issuance of this
preferred stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, this issuance may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock. We currently have no plans to issue preferred stock. Further, our
directors may only be removed from office by the affirmative vote of the
holders of a majority of our capital stock, and the removal must be for cause.
Our certificate of incorporation provides that the board of directors may fill
vacancies or increase the size of the board. Also, our bylaws do not allow
stockholders to call a special meeting and place limits on their ability to
make proposals for stockholder action or nominations for our board of
directors.
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USE OF PROCEEDS
The net proceeds we will receive from the sale of the 4,500,000 shares of
common stock offered hereby are estimated to be $36,691,168 ($42,340,918 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 $9.00 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. In addition, 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. Although we have from time to time had discussions with companies
in the online learning market regarding our acquiring or investing in their
businesses, we have no present agreement or understanding relating to any
material acquisition or investment. 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. We do not expect to pay any cash dividends in the foreseeable future
and pursuant to the terms of our line of credit we are prohibited from paying
dividends on our common stock. We currently intend to retain future earnings,
if any, to finance the expansion of our business.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. On an actual basis, including the two-for-three reverse stock split of
our common stock and preferred stock;
. 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 4,150,402 shares of common stock upon
the completion of this offering; and
. On a pro forma as adjusted basis to reflect to the sale of 4,500,000
shares common stock offered hereby, at an assumed initial public offering
price of $9.00 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>
June 30, 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; 616,000 shares
authorized, issued and outstanding, actual;
no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted.......... $ 1,191 -- --
-------- -------- --------
Series B, mandatorily redeemable, convertible
preferred stock, no par value, 1,525,218
shares authorized, issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted..................................... 6,837 -- --
-------- -------- --------
Series C, mandatorily redeemable, convertible
preferred stock, no par value, 2,009,184
shares authorized, issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted..................................... 15,122 -- --
-------- -------- --------
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, $.01 par value, 50,000,000
shares authorized; 5,188,163 shares issued
and outstanding, actual; 9,338,565 shares
issued and outstanding, pro forma; and
13,838,565 shares issued and outstanding, pro
forma as adjusted............................ 52 $ 93 $ 138
Additional paid-in capital.................... 489 23,598 60,244
Warrants and stock options.................... 4,323 4,323 4,323
Notes receivable.............................. (341) (341) (341)
Deferred compensation......................... (3,650) (3,650) (3,650)
Accumulated deficit........................... (17,752) (17,752) (17,752)
-------- -------- --------
Total stockholders' equity................... (16,879) 6,271 42,962
-------- -------- --------
Total capitalization....................... $ 6,271 $ 6,271 $ 42,962
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999. We are
permitted, and in some cases obligated, to issue shares of
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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:
. 1,880,126 shares that could be issued upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $5.28 per share;
. 686,519 shares that could be issued upon exercise of outstanding warrants
as of September 30, 1999 at a weighted average exercise price of $2.00
per share;
. 666,667 shares that can be issued to our employees who elect to buy stock
in the future under our employee stock purchase plan;
. 940,583 shares that can be issued pursuant to our stock incentive plan;
and
. 30,000 shares pursuant to a warrant to be issued in connection with our
line of credit at an exercise price equal to the initial offering price
of common stock sold in this offering, assuming an offering price of
$9.00 per share. See "Description of Capital Stock--Warrants."
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $6,270,970, or
approximately $0.67 per share. Pro forma net tangible book value per share
represents the amount of tangible assets less total liabilities, assuming the
consummation of the bridge loan in October 1999, 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 June 30, 1999, other than
the sale of the shares offered hereby at an assumed offering price of $9.00 per
share, our pro forma net tangible book value as of June 30, 1999 would have
been $42,962,138, or $3.10 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 $36.7 million. This represents an immediate
increase in net tangible book value to existing stockholders attributable to
new investors of $2.43 per share and the immediate dilution of $5.90 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $9.00
Pro forma book value per share before this offering............... $0.67
Increase per share attributable to new investors.................. $2.43
-----
Pro forma net tangible book value per share after this offering.... $3.10
-----
Dilution per share to new investors................................ $5.90
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
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 $9.00
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...... 9,362,395 68% $22,619,585 36% $2.42
New investors.............. 4,500,000 32% $40,500,000 64% $9.00
---------- --- ----------- --- -----
Total.................... 13,862,395 100% $63,119,585 100% $4.55
========== === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
September 30, 1999.
As of September 30, 1999, there were options outstanding to purchase
1,880,126 shares of common stock at a weighted average exercise price of $5.28
per share, warrants outstanding to purchase 686,519 shares of common stock at a
weighted average exercise price of $2.00 per share, and 1,607,250 additional
shares reserved for future grants under our stock incentive plan and employee
stock purchase plan. In connection with our line of credit obtained in October
1999, we will issue a warrant to purchase 30,000 shares of common stock at an
exercise price equal to the initial offering price of common stock sold in this
offering, assuming an offering price of $9.00 per share. To the extent that any
of these options or warrants are exercised, there will be further dilution to
new investors.
22
<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, is 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 June 30, 1999 and
for the six months ended June 30, 1998 and 1999 is 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 six months ended June 30, 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 Six Months Ended
through 31, June 30,
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 $ 406 $ 658
Student fees........... 22 400 579 221 737
----- --------- --------- --------- ---------
Total revenue.......... 22 1,028 1,665 627 1,395
Cost of revenue......... 110 528 2,065 456 2,737
----- --------- --------- --------- ---------
Gross profit (loss)..... (88) 500 (400) 171 (1,342)
Operating expenses:
Selling and marketing.. 25 106 3,394 869 3,188
General and
administrative........ 249 768 2,509 1,217 1,778
Development............ 60 212 1,099 225 1,358
----- --------- --------- --------- ---------
Total operating
expenses.............. 334 1,086 7,002 2,311 6,324
----- --------- --------- --------- ---------
Net loss from
operations............. (422) (586) (7,402) (2,140) (7,666)
Other income (expense),
net.................... 18 (29) 112 89 202
----- --------- --------- --------- ---------
Net loss from continuing
operations............. $(404) $ (615) $(7,290) $(2,051) $(7,464)
===== ========= ========= ========= =========
Net loss from continuing
operations applicable
to common
stockholders........... $(404) $ (674) $(7,993) $(2,360) $(8,715)
===== ========= ========= ========= =========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.16) $ (1.58) $ (0.47) $ (1.70)
Weighted average common
shares outstanding--
basic and diluted...... -- 4,107,964 5,074,697 5,037,683 5,135,349
Pro forma net loss from
continuing operations
per common share--basic
and diluted
(unaudited)............ $ (1.02) $ (0.30) $ (0.81)
Pro forma weighted
average common shares
outstanding--pro forma
basic and diluted
(unaudited)............ 7,120,122 6,890,806 9,235,527
</TABLE>
23
<PAGE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of all shares of our preferred stock
into common stock upon completion of this offering. The pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the 4,500,000
shares of common stock we are selling in this offering at an assumed initial
public offering price of $9.00 per share, after deducting estimated
underwriting discounts and expenses.
<TABLE>
<CAPTION>
December 31, June 30, 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
equivalents............ $ 20 $ 208 $11,661 $ 6,318 $ 6,318 $43,009
Working capital......... (657) 58 9,577 4,095 4,095 40,786
Total assets............ 269 748 13,660 10,506 10,506 47,197
Long-term notes payable
to related parties..... -- 231 -- -- -- --
Total liabilities....... 703 621 2,549 4,235 4,235 4,235
Mandatorily redeemable,
convertible preferred
stock.................. -- 1,029 19,649 23,150 -- --
Total stockholders'
equity (deficit)....... (434) (902) (8,539) (16,879) 6,271 42,962
</TABLE>
24
<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
eCollege.com is a leading provider of technology and services that enable
colleges and universities to offer an online environment for distance and on-
campus learning. Our software and services allow colleges and universities to
outsource the creation, launch, management and support of a comprehensive
online education platform. Our comprehensive solution consists of online
campuses, courses, course supplements and support services, including design,
development, management and hosting services, as well as ongoing
administration, faculty and student support. We can create and deliver a
complete online campus, including training of faculty and administration,
typically in 60 business days. We charge our customers an upfront fee for
creating an online campus, and for developing each course. In addition, we
charge a per student fee for each student enrolled in a course utilizing our
solution, and ongoing fees for maintenance, support and faculty training. Our
technology enables our customers to reach a large number of additional students
who wish to take online courses at convenient times and locations. Our
customers can also use our technology to supplement their on-campus courses
with an online learning environment.
As of September 30, 1999, we had 112 contracts covering over 140 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 student enrollments in online courses provided by us.
Revenue
We primarily generate revenue from three sources:
. an initial development and design services fee to build an online campus;
. development and design services fees to build online courses; and
. per student fees for each enrollment in an online course.
Historically, we offered our campus product bundled with a minimum number of
courses, as well as maintenance and support. In September 1999, we made the
strategic decision to unbundle these offerings to provide more flexibility for
prospective customers. Accordingly, we have recently begun to generate revenues
from additional sources, including:
.maintenance fees to manage the online campus during the term of the
agreement; and
.service fees, including online campus implementation, faculty training and
support and technical consulting services.
We typically enter into multi-year contracts with colleges and universities
to provide online learning solutions. These contracts specify the online campus
purchased, the initial number of online courses purchased as well as the price
for additional online courses and services. 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 generally fixed, covering development and design of the
online campus and the initial courses purchased. We recognize our initial fee
as the online campus, course development and design services are performed. In
addition, customers are charged a per student fee for each student enrolled in
an online course or on-campus class using online course supplements. Such fees
are recognized ratably over the duration of the course. Subsequent incremental
fees for additional courses and services are recognized as the course
development and design services are performed.
25
<PAGE>
Our business model is based upon a number of factors, including increasing
the acceptance of online learning among colleges and universities, adding new
customers, developing additional courses for our existing customers, increasing
student enrollment in online courses, and selling new products and services to
our clients. From our inception through September 30, 1999, the majority of our
revenue has been generated by development and design services fees for building
campuses and courses, and, to a lesser extent, per student fees. We expect that
the development revenue stream will continue to grow, but that the per student
fees will become a larger percentage of total revenue as the number of online
courses offered by our customers and the numbers of students in those courses
continue to increase. We also expect service and maintenance fees will commence
and increase as we develop new online campuses. Revenue is recognized primarily
using the percentage of completion method. Our use of this method requires
management to estimate the degree of completion of each contract. To the extent
the original estimate proves to be inaccurate, the revenues and gross profit
reported for the periods during which work on the contract is ongoing may not
accurately reflect the final results of the contract. Any anticipated losses on
contracts are charged to earnings when identified.
In October 1998 we were awarded a grant of $1.9 million by the National
Institute of Standards and Technology, or NIST, a department of the U.S.
Department of Commerce. We are entitled to receive payments under the grant as
we perform research related to automated course content creation and
organization, and tutoring delivery systems. Maximum payments under the NIST
grant are $713,000 in 1999, $583,000 in 2000 and $583,000 in 2001. As of June
30, 1999, we had received an aggregate of $114,119 from the NIST grant.
Pursuant to the terms of the NIST grant, work must be performed at a prescribed
format and pace. We believe we will be able to perform under the terms of the
NIST grant, however, there is no assurance we will continue to receive payments
under the NIST grant. We do not intend that revenue from such grant will
constitute a significant portion of our revenue in the future. We may apply for
other grants in the future, although we have no present plans to do so.
Cost of Revenue
Our cost of revenue consists primarily of employee compensation and benefits
for development, course design, account management, technical personnel, and
sales commission. 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.
Historically, our sales commissions have been paid when a new contract is
signed, and when a customer was invoiced for the development of courses in
excess of the original number of courses purchased. Beginning in the year 2000,
sales commissions will be paid as the development work is completed and the
student fees are earned to more closely match the revenue recognized. As we
implement our grant program, cost of revenue will include costs such as faculty
stipends, technology and travel funds to the extent such costs relate to the
development of online courses. We have also hired personnel and made
investments in our infrastructure to support future growth which has resulted
in a cost of revenue that exceeds current revenue. As most of our costs are
fixed and based on anticipated revenue levels, we expect revenue will exceed
our cost of revenue in the future. We experienced a negative gross margin of
$1,341,825 for the six months ended June 30, 1999 as compared to a gross margin
of $170,205 for the six months ended June 30, 1998. The reduction in margin
over the prior period is due to an increase in the amount of commissions,
promotional contract pricing, and an increase in production staff in
anticipation of increased development activity.
Grant Program
We recently implemented a $10 million dollar grant program designed to
assist new and existing customers in increasing the number of online courses
they offer using our solution. The grants will be used by our customers to
increase marketing of our customers' online courses, increase the online
teaching skills of our customers' educators, as well as fund the purchase of
computer equipment to allow our customers to facilitate online education.
Grants are awarded, at our discretion, to institutions based on demonstrated
commitment to a quality online degree program, the number of current and
potential students, the college or university's unique approach to online
learning and other factors.
26
<PAGE>
The grant will consist of both marketing funds and development funds.
Marketing funds will be recorded as marketing expenses over the period that our
customers earn these funds. Development funds will be expensed when the
development revenue to build such courses or campuses is recognized. However,
for grants where the development costs, including grant development funds, are
in excess of the revenue to build a customer's campus or courses, such excess
will be expensed as a contract loss in the quarter in which the grant is
awarded. We expect that in certain cases, the award of grants will result in
such losses. The grant program has been structured to be awarded in the fourth
quarter of 1999. Since we expect that the award of certain grants will result
in estimated contract losses, we expect to record estimated contract losses
associated with these programs in our fourth quarter of 1999.
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 related occupancy
and depreciation expenses. As revenue increases, we expect total selling and
marketing expenses to increase but to decrease as a percentage of revenue.
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. As operations increase, we expect total general and
administrative expenses to increase but to decrease as a percentage of
revenues.
Development
Development expenses consist primarily of employee compensation and related
benefits for development personnel and related depreciation, occupancy costs
and consulting fees associated with developing, maintaining, and improving our
product.
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 $17,751,696 as
of June 30, 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.
Due to the seasonality inherent in the academic calendar which typically
consists of three academic terms, as well as our customers' plans for online
campus and course development, we experience fluctuations in our quarterly
results. We typically have lower revenue in the summer academic term which
spans the second and third calendar quarters. Our operating expenses are
relatively fixed in nature and seasonal fluctuations in revenue will result in
seasonal fluctuation in our operating results. As a result, quarter-to-quarter
financial results are not directly comparable.
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.
Six Months Ended June 30, 1999 and 1998
Revenue. Revenue increased to $1,395,524 for the six months ended June 30,
1999 from $626,606 for the six months ended June 30, 1998. Increases in revenue
are due to increased student enrollment in online courses, as well as an
increased number of online campuses and courses developed. Student fees
represented $737,041 and $220,906 of total revenue for the six months ended
June 30, 1999 and 1998, respectively. Campus and course development fees
represented $658,483 and $405,700 of total revenue, respectively, for these
same periods. Revenue from the NIST grant was $114,119 for the six months ended
June 30, 1999 and is included in development revenue.
27
<PAGE>
Cost of Revenue. Cost of revenue increased to $2,737,349 for the six months
ended June 30, 1999 from $456,401 for the six months ended June 30, 1998. Our
cost of revenue increased primarily due to increased personnel costs,
depreciation expense and sales commissions, which historically have been earned
when a new contract is signed and when a customer is invoiced for the purchase
of courses in excess of the original number of courses purchased. Beginning in
2000, sales commissions will be paid as the development work is completed and
the student fees are earned to more closely match the revenue recognized. These
costs were approximately 196% and 73% of total revenue for the six months ended
June 30, 1999 and 1998, respectively. Our operations and account management
personnel increased to 94 at June 30, 1999 from 39 at June 30, 1998.
Selling and Marketing. Selling and marketing expenses increased to $3,188,551
for the six months ended June 30, 1998. The increase was primarily due to the
increases in the number of selling and marketing personnel and increases in
compensation and travel expense. Our selling and marketing personnel increased
to 49 at June 30, 1999 from 17 at June 30, 1998. The increase in selling and
marketing expenses also reflects an increase in advertising to $487,202 for the
six months ended June 30, 1999 from $279,120 for the six months ended June 30,
1998.
General and Administrative. General and administrative expenses increased to
$1,777,704 for the six months ended June 30, 1999 from $1,217,184 for the six
months ended June 30, 1998. The increase was primarily due to an increase in
the number of general and administrative personnel to 33 at June 30, 1999 from
17 at June 30, 1998. In addition, outside consulting, professional fees,
recruiting fees and travel expenses increased, reflecting our expanded business
activities.
Through June 30, 1999, we recorded aggregate deferred compensation totaling
approximately $4.1 million in connection with the grant of certain options to
employees. During the first six months of 1999, we recorded aggregate deferred
compensation in the amount of approximately $2.7 million. The deferred charge
is being amortized over the vesting period of such options, which ranges from 2
to 3 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 $107,000
and $183,000 was amortized in the first two quarters of 1999, respectively. We
expect approximate future per quarter amortization related to deferred
compensation to be as follows:
<TABLE>
<CAPTION>
Quarters
in the
Year
Ended
December
31, Quarterly Amount
-------- --------------------
<S> <C>
1999 $365,000
2000 $340,000 -- $350,000
2001 $280,000 -- $340,000
2002 $ 80,000 -- $200,000
</TABLE>
The majority of compensation expense related to such options is included in
general and administrative expense. However, a portion of such compensation
expense has been and will continue to be allocated to selling and marketing
expense and research and development expense as appropriate.
Development. Development expenses increased to $1,358,502 for the six months
ended June 30, 1999 from $224,925 for the six months ended June 30, 1998. The
increase was primarily due to an increase in the number of development
personnel to 39 at June 30, 1999 from 12 at June 30, 1998.
Other Income (Expense). Other income (expense), which consists primarily of
interest earnings on our cash and cash equivalents, increased to $202,254 for
the six months ended June 30, 1999 from $88,565 for the six months ended June
30, 1998, primarily due to the completion of a private placement of equity
securities in February 1999, which provided net proceeds of $14,188,955, of
which $11,938,955 was received as of December 31, 1998.
28
<PAGE>
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 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 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.
The majority of compensation expense related to such options is included in
general and administrative expense. However, a portion of such compensation
expense has been and will continue to be allocated to selling and marketing
expense and research and development expense as appropriate.
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 late 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.
29
<PAGE>
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 June 30, 1999. 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. At June 30, 1999, we had
$6,318,018 in cash and cash equivalents. The decrease from December 31, 1998
reflects cash used to fund our operations during the six months then ended,
offset by $2,250,000 in cash from sales of preferred stock. As of September 30,
1999 we had cash and cash equivalents of $ .
Our investment in property and equipment for the twelve months ended
December 31, 1998 was $1,663,128 and $1,096,394 for the first six months of
1999. Installation of network infrastructure equipment, equipment for new
employees and leasehold improvements related to expansions accounted for most
of our capital expenditures during these periods. We intend to continue to make
investments in these types of equipment and property, although we have no
material 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 $22,099,491 from inception through June 30, 1999.
In October 1999, we entered into a $2.5 million line of credit with a
financial institution. Pursuant to this line of credit, $1,650,000 will be
immediately available. The remaining $850,000 will be available only if we
raise additional private equity in a manner acceptable to the lender. The line
of credit will mature and any amounts borrowed thereunder will be due on
January 14, 2000, unless extended to February 13, 2000 pursuant to the terms of
the line of credit. If we raise a minimum of $40,000,000 in gross proceeds in
equity prior to the maturity date, the line of credit will be converted into a
revolving line of credit with a maturity date of November 1, 2000. The line of
credit contains covenants limiting our ability to obtain additional debt
financing and to enter into mergers and acquisitions. The line of credit is
secured by all of our assets. As of September 30, 1999, there were no amounts
outstanding under the line of credit.
In connection with the line of credit and assuming an offering price of
common stock pursuant to this offering of $9.00 per share, we will provide the
lender with a warrant to purchase 30,000 shares of our common stock that have
been calculated to have a value of $231,000. Additionally, we have agreed to
grant the lender additional warrants under certain terms and conditions. If the
line of credit is converted into a permanent line of credit and the maturity
date of the facility is thereby extended, we will expense the value of the
warrants over the life of the facility. If the maturity date of the line of
credit is not extended, the warrant expense will be recorded in the fourth
quarter of 1999. The line of credit bears interest at an adjustable rate of
prime plus 2.75%.
Without this offering, management believes that current cash on hand, funds
available under the line of credit, and other sources of liquidity are
sufficient to fund the company's operations through at least December 31, 1999,
albeit at lower levels of activities. As noted above, any amounts borrowed
under the line of credit are due January 14, 2000 unless extended to February
13, 2000 pursuant to the terms of the line of credit.
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We expect the proceeds of this offering, together with cash generated from
operations and our current cash, cash equivalents and short term investments to
meet our working capital and capital expenditure requirements for at least the
next 12 months.
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 have completed the process of testing our internal information technology
and non-information technology systems. Internal information technology
includes our production and operational software and hardware. Non-information
technology refers to elements outside our operations and production
environment. We have a dedicated Year 2000 project manager and our own
personnel have performed all of the testing we have completed. 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 retained an outside firm specializing in Year 2000
issues. The outside firm found no material non-compliant systems operated by
us.
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 may be affected by Year 2000 issues related to non-
compliant information technology ("IT") systems or non-IT systems operated by
third parties. We have conducted testing of such third-party software and
hardware to determine Year 2000 compliance. Our testing included over 200 check
points and has produced no results that would lead us to believe such software
is not Year 2000 compliant. In addition, we have completed 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.
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.
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We have completed our Year 2000 compliance program, including any necessary
remediation measures. Other than the cost of the outside consulting firm, which
was approximately $90,000, 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. To the
extent that our assessment is finalized without any additional material non-
compliant IT system operated by us or by third party vendors, the most
reasonably likely worst case scenario is a systemic failure beyond our control,
such as prolonged telecommunications or electrical failure. Such failure could
prevent us from operating our business and prevent users from accessing our
customers' online campuses and courses. The primary business risk in the event
of such failure, would include, but not be limited to, loss of revenues and
loss of customers. We have developed a contingency plan to ensure the
continuity of our core business processes in the event of a Year 2000-related
failure of our systems and to mitigate any interruption in our services. The
contingency plan includes an analysis of the business operations,
communications requirements, staff availability, plan execution authorities and
triggers, and plan process. The plan focuses on but is not limited to the most
complicated recovery situation. That plan includes a determination of the
critical core processes that would be at risk during a system failure. The plan
prioritizes the areas where resources should be applied. 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 September 30, 1999, 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.
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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
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 did not 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, 2001. 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.
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BUSINESS
Overview
eCollege.com is a leading provider of technology and services that enable
colleges and universities to offer an online environment for distance and on-
campus learning. Our software and services allow colleges and universities to
outsource the creation, launch, management and support of a comprehensive
online education platform. Our comprehensive solution consists of online
campuses, courses, course supplements and support services including design,
development, management and hosting services, as well as ongoing
administration, faculty and student support. We can create and deliver a
complete online campus, including training of faculty and administration,
typically in 60 business days. We charge our customers an upfront fee for
creating an online campus, and for developing each course. In addition, we
charge a per student fee for each student enrolled in a course utilizing our
solution, and ongoing fees for maintenance, support and faculty training. Our
technology enables our customers to reach a large number of additional students
who wish to take online courses at convenient times and locations. Our
customers can also use our technology to supplement their on-campus courses
with an online learning environment.
As of September 30, 1999, we had 112 contracts covering over 140 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 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. The U.S. Department of Education
estimated that for 1996, adults over 24 years of age comprised approximately
6.1 million, or 42.7%, 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 universal accessibility and real-time interactive nature make
it an ideal platform for distance learning and for providing online course
supplements for on-campus classes. Accordingly, distance learning has become a
fast growing segment of the education marketplace. 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. In addition, educators are increasingly using the Internet
to supplement their on-campus course offerings.
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. In
addition, 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.
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The eCollege.com Solution
Our solution is designed to be flexible to meet the online learning needs of
colleges and universities and their students. Our comprehesive suite of
products enables colleges and universities to either completely outsource the
development of their online campus and courses or to select those products that
meet their needs. The eCollege.com solution has the following key elements:
Comprehensive Products and Services. We provide a comprehensive suite of
software consisting of online campuses, courses, course supplements and
services, including design, development, management and hosting services, as
well as ongoing administration, faculty and student support. We can create an
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 can
also work with faculty to convert courses for online delivery or provide online
supplements for on-campus courses. We host the online campuses, courses and
course supplements on our reliable infrastructure.
Rapid, Cost-Effective Development of Online Campuses and Courses. We can
create and deliver a complete online campus, including training of faculty and
administration, typically in 60 business days. Our flexible pricing structure
allows our customers to purchase products and services that meet their needs.
We believe most colleges and universities would incur substantially greater
costs to develop a comparable solution internally.
Easy Online Course Development. We typically work with faculty members to
convert courses into effective presentations designated for delivery over the
Internet 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 develop and update their courses easily through a
standard Web browser. We believe that ease of use for 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. We believe the online campuses and
courses are easy for students and faculty to use and our other services, such
as faculty and student support, allow colleges and universities to provide a
well-supported online learning experience. 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 hosting
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 multiple or
"redundant" high bandwidth sources for Internet connections. As a result, we
are capable of achieving nearly 100% uptime.
Growth Strategy
Our objective is to become the leading provider of online learning solutions
for colleges and universities and to further develop our presence within the
continuing education and corporate training markets. The key elements of our
growth strategy are to:
Add Additional Colleges and Universities. Using a focused regional approach,
we are actively targeting more than 3,800 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.
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Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently implemented a
$10 million grant program designed to assist new and existing customers in
increasing the number of online courses they offer using our solution. The
grants will be used by our customers to increase marketing of our customers'
online courses, increase the online teaching skills of our customers'
educators, as well as fund additional technology to allow our customers to
facilitate online education. We have received over 200 applications for the
grant program from both existing and prospective customers.
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. We are available to assist faculty and administrators on an ongoing
basis. To further develop the relationships with our customers' faculty, we
recently developed an area within the eCollege.com 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.
Unbundle and Expand Product Offerings for New and Existing
Customers. Historically we marketed and sold our campus product bundled with a
minimum number of courses, as well as maintenance and support. We recently
unbundled these offerings in order to provide our potential customers with
greater flexibility in meeting their individual needs. Customers can also
purchase implementation services and training on an as-needed basis. We believe
this sales approach will expand the number of prospects that will be interested
in purchasing our products and services.
In addition, we have recently introduced several new products to expand our
targeted online education market. These new products include eToolkit, a basic
version of our online course development software, which allows web-based
communication between faculty and students, and encourages professors to begin
using our solutions; and eCompanion, a full-featured product which enables
instructors to supplement their existing on-campus courses with an online
learning environment. We believe these new offerings will enable us to further
penetrate our existing customer base, as well as expand our offerings to new
customers.
eCollege.com Customers
We target more than 3,800 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 90 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. The following list demonstrates the geographic diversity of some
of our well-known customers: 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, The University of Montana and The University of Wyoming. The
University of Colorado accounted for 10% of our revenue in the first half 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.
eCollege System
The eCollege System is made up of the following integrated and scalable
components: eCollege Campus, a complete solution for educational institutions
seeking to create an online campus; eCollege eTeaching Solutions, three
versions of a course delivery and course authoring system for delivering
academic content online, available through a college or university's specific
eCollege Campus or through the eCollege.com
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Website; and eCollege Administrative Reports, a component of eCollege Campus
that allows administrators to monitor and control their online program and
student enrollment.
Graphic depicting components of eCollege System: eCollege System (SM)
Students/Faculty/Administrators Web Browser -----------------------------------
----------------------------- eCollege Campus (SM) eCollege.com Website *
Unique Welcome Page * Searchable Course Catalog * Registration * Personal
Homepage & Calendar * Inquiry Form * Technical Requirements * Technical
Requirements * Reference Tools * Student Services * Registration Feature *
Searchable Course Catalog * Online Payment * Academic Calendar ----------------
------------------------------------------------ --------------------------
eCollege .com Administrative Reports (Restricted Access) * Student tracking *
Payment records * Bulk email notification --------------------------
- -------------------------------------------------------------------------------
- - eCollege eTeaching Solutions (Restricted Access) ----------------------------
- ---------------------------------------------------- -------------------- -----
---------------- ------------------- eCollege eCollege eCollege eCourse
eCompanion eToolKit * Personal Homepage * Personal Homepage * Personal Homepage
* Message Center * Message Center * Calendar * Document Sharing * Document
Sharing * Syllabus * Journal * Journal * Class Email * Class Email * Class
Email * Chat Room * Webliography * Webliography * Gradebook * Threaded
Discussion * Threaded Discussion * Authoring Tool * Testing Functions * Testing
Functions * Gradebook * Gradebook * Drop/Add Functions * Multi-media * Multi-
media * Authoring Tool * Authoring Tool -------------------- ------------------
--- -------------------
eCollege Campus and eCollege.com Website. eCollege Campus is a complete
solution for educational institutions seeking to create an online campus
offering online courses. eCollege Campus includes college or university
specific logos, colors, fonts and student services. The eCollege Campus is an
initial entry point for
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all student, faculty and administrative services, including class drop/add
functions, account balance information, online bookstores, online admissions,
course catalogs, registration and online tutorial, as well as the personal
homepage listing each course in which a student is currently enrolled. This is
the entry point to access the password protected eCollege eCourse or
eCompanion, which contain the online courses and course material. eCollege
Campus is designed to be easy to use and to reflect a college's distinctive
character and unique preferences. The eCollege.com Website enables colleges and
universities without an online campus to offer online courses.
Administrative Reports. The Administrative Reports, one component of
eCollege Campus, capture and display student information for college and
university officials and administrators. College and university administrators
can sort information by class code, student name, city or state or the
student's Internet provider. 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.
Below and on the following page 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, appears here]
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[Picture of web page from "setonworldwide.net,"
the online campus of Seton Hall University, appears here]
eCollege eCourse. eCourse is a complete course delivery system for managing
and delivering online courses over the Internet. eCourse includes everything
necessary for course management, outlining assignments, conducting lectures,
testing, grading and interacting with students. eCollege eCourse presents
course material online with features that enable faculty to track and manage
student progression through a course. eCollege eCourse also emphasizes student-
to-faculty and student-to-student communication. Substantially all online
courses begin with an introduction to the course and incorporate an audio or
video presentation (using streaming technology--a new industry standard for
delivering audio or video files through the Internet immediately as the files
are downloaded through the Internet) introducing the faculty member. Within the
eCollege eCourse, faculty members using a wide variety of online teaching tools
can create, administer and score a variety of types of exams. Faculty members
are also able to incorporate multimedia capabilities to enhance presentations.
eCollege eCompanion. eCompanion offers customers a choice of all of the
functions of eCollege eCourse, and provides professors with the tools necessary
to create interactive supplements to traditional on-campus courses. Designed
for the professor who wants to enhance classroom learning with Internet
capabilities, eCompanion allows the professor to make lectures available
online, conduct online practice tests, guide students to Internet resources,
share documents and continue class discussion outside of the classroom.
eCollege eToolKit. eToolKit is a set of online tools created for professors
interested in using the Internet to administer classes more easily and open
channels of communication with students. Through any Web browser, a professor
can update the course syllabus, build an online calendar, chat with students in
real-time and post grades. eToolKit provides professors with the ability to
automate course administration and concentrate on teaching their courses. We
provide eToolKit to professors free of charge through the eCollege.com Website
and for a small fee through the college or university online campus. By
providing a product with a limited functionality for free through our Website,
our strategy is to increase awareness and usage of the eCollege.com system,
thereby increasing the likelihood of selling our other products.
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The eCollege Authoring System is included in each of the eTeaching
Solutions, but with limited features in eToolKit. Our course developers and
faculty use the Authoring System to build online courses and materials. The
Authoring System also provides faculty with an organized format for inputting
content into the Authoring System for display while offering design flexibility
in the use of communications and assessment tools in their courses. After
minimal training, faculty can use the Authoring System 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.
eCollege.com Services and Support
We offer a comprehensive suite of fee-based services that include
implementation and training, course development, instructional design,
maintenance and support. We believe that our comprehensive service offering is
a key competitive advantage and will be an important factor in achieving market
acceptance and maintaining long-term relationships with colleges and
universities.
Implementation. Our service representatives are responsible for
implementation and management of our customer contracts and for overseeing all
services provided to our customers. Account service representatives facilitate
the efficient development and growth of the online campus and other
eCollege.com products, 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 or the
eCollege.com eTeaching Solutions are adopted, the account service
representatives assist the customer with ongoing maintenance issues and manage
all aspects of our relationship with the college or university. In addition to
a base salary, these representatives earn a bonus based on customer revenue.
Instructional Design. 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.
Course Development. Our course developers help faculty build their online
courses. Course developers use our proprietory Authoring System to input
content and 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.
Faculty can also send audio and video clips to us and we will insert the media
into online courses.
Maintenance and Support. For an annual maintenance fee, a college or
university may receive upgrades, system maintenance and content updates for its
online campus or courses. In addition, 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 3,800 colleges and universities in the United
States and Canada. We have a sales force of over 40 individuals, most with a
background in education and/or technology. We compensate our sales personnel
with a combination of a salary and commissions. Our sales force covers 20
regions throughout the entire continental United States and Canada. We divide
the United States and Canada into two geographic areas, each managed by a
regional vice president who is responsible for approximately 10 smaller
regions. These regions are covered by account 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;
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. 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 account managers,
inquiries to the website and through attendance at conferences or trade shows.
After a lead is generated, the account 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, courses or course supplements.
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
market to faculty through an area within the eCollege.com 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
. awareness of advanced degree, continuing education and corporate training
alternatives.
We recently implemented a $10 million dollar grant program designed to
assist new and existing customers in increasing the number of online courses
they offer using our solution. Grants are 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.
Technology
Our technology strategy is to employ the best available software on stable
and scalable platforms. All of our software products, such as eCollege Campus,
eTeaching Solutions and eCollege Administrative Reports, contain our
proprietary software, which we have created using a combination of our custom
software and widely-available software products we license from third parties.
To create the custom components of our software, we employ Microsoft's
commonly used Internet programming technologies.
Because our business depends on our ability to host Web-based software
applications for our customers, one of our primary technical goals is to
provide a highly reliable, fault tolerant system. To do so, we have made
substantial investments in systems monitoring, fault handling, technology
redundancy and other system uptime
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enhancements. For example, we continuously monitor our customers' websites and
our own core systems. All of our primary servers contain fault-tolerant disk
storage technology, backup network cards and power supplies which eliminate the
possibility of a single point of failure in our servers and decrease their
downtime. Our database servers contain the latest clustering technology that
uses a combination of scaleable hardware and Microsoft software technologies.
Finally, we maintain sophisticated "firewall" technology to prevent access by
unauthorized users and to minimize known vulnerabilities to system security.
Our products are delivered to our customers from a network of centralized
Web servers. Our Web servers are located in three commercial data centers,
commonly known as Web "server farms," which house our servers and provide us
with scalable, high bandwidth Internet connections. These facilities are
located in California and Colorado. We are in the process of implementing
additional data centers in California and New Jersey. Having multiple data
centers allows us to use "load balancing" to spread Internet traffic among
various locations, thereby protecting our customers from experiencing Internet
outages in any geographic region.
Competition
The online learning market is quickly evolving and is subject to rapid
technological change. Although the market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. We
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;
. 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. Some 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.
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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, including "eCollege.com," "eTeaching
Solutions," "eToolKit," "eCompanion" and "eCourse" and our logo. 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 our
intellectual property and proprietary rights."
Employees
As of September 30, 1999, we employed 245 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 69,000 square feet and is leased under two
separate leases which expire on June 30, 2002 and April 30, 2003, respectively.
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.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of eCollege.com as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- --- ---------------------------------------------
<S> <C> <C>
Executive Officers and
Directors
Robert N. Helmick............ 42 Chairman, President and Chief Executive
Officer
Charles P. Schneider......... 41 Chief Operating Officer and Executive Vice
President
Douglas H. Kelsall........... 45 Chief Financial Officer and Treasurer
Jonathan M. Dobrin........... 27 Vice President, Chief Technology Officer and
Director
Ray Henderson................ 36 Senior Vice President, Engineering &
Technology
John V. Helmick.............. 40 Vice President, Corporate Services and
Secretary
Mark J. Fine................. 43 Vice President, Sales
Kevin L. Johnson............. 38 Vice President, Business Development
James N. Sigman.............. 38 Vice President, Professional Services
Ginger C. Smith.............. 39 Vice President, Finance
Jack W. Blumenstein (1) (2).. 55 Director
Christopher E. Girgenti (1)
(2)......................... 35 Director
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
</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.
Charles P. Schneider has served as our Chief Operating Officer and Executive
Vice President since June 1999. From March 1994 to June 1999, Mr. Schneider was
employed by Oracle Corporation, initially as Vice President, Oracle Vertical
Markets & Solutions, and then as Senior Vice President, Consumer Sector. As
Senior Vice President, Consumer Sector, Mr. Schneider was responsible for
product and service definition, including identification of strategic
acquisitions and partnerships, and product marketing and positioning.
Additionally, Mr. Schneider created the marketing, sales, strategy and
consulting organizations worldwide for Oracle Corporation's business in the
consumer sector. As Vice President, Oracle Vertical Markets & Solutions, Mr.
Schneider was responsible for building and leading a team to create Oracle's
vertical industry strategy and program. Mr. Schneider received an MBA from New
York University and a BS from Drexel University.
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Douglas H. Kelsall has served as our Chief Financial Officer and Treasurer
since September 1999. From July 1997 to August 1999, Mr. Kelsall served as
Chief Financial Officer of TAVA Technologies, Inc.; from December 1995 to June
1997, he served as Chief Financial Officer of Evolving Systems, Inc.; from June
1993 to December 1995, he served as President of Caribou Capital Corporation.
Prior to that time, Mr. Kelsall served in various management and Vice President
positions at Colorado National Bank. Mr. Kelsall holds a Bachelor of Arts
degree from the University of Colorado and a Master of Business Administration
degree from the University of Denver.
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. From June
through October 1994, Mr. Dobrin was pursuing personal interests. Mr. Dobrin
received a BA from the University of Vermont.
Ray Henderson has served as our Senior Vice President, Engineering &
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 scaleable technology
infrastructure for producing Internet-based educational products. Mr. Henderson
received a BS from Trinity University.
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.
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.
James N. Sigman has served as our Vice President, Professional 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.
Ginger C. Smith has served as our Vice President, Finance since July 1999
and from March 1998 through June 1999 Ms. Smith served as our Controller. 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, Ms. Smith 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.
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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. TBG, a partnership with GS Capital Partners II, is a
private equity fund that focuses on capital transactions in the information
industry. 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.
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.
Directors' Terms
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified.
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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 "--1999 Stock Incentive 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.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1997 Stock Option Plan. The 1999 Stock Incentive Plan
was adopted by the board and effective as of September 1999 and was
subsequently approved by the stockholders. The 1999 Stock Incentive Plan will
become effective upon the effective date of the offering. All outstanding
options under our predecessor plan will at that time be incorporated into the
1999 Stock Incentive Plan, and no further option grants will be made under that
plan. The incorporated options will continue to be governed by their existing
terms, unless the plan administrator elects to extend one or more features of
the 1999 Stock Incentive Plan to those options. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be in
effect for grants made under the Discretionary Option Grant Program of the 1999
Stock Incentive Plan.
2,902,708 shares of common stock have been authorized for issuance under the
1999 Stock Incentive Plan. As of September 30, 1999, 1,828,791 options have
been issued under the plan. This share reserve consists of the number of shares
estimated to remain available for issuance under our predecessor plan,
including the shares subject to outstanding options thereunder. The share
reserve will automatically increase on the first trading day in January each
calendar year, beginning January 2, 2000, by an amount equal to three percent
(3%) of the total number of shares of common stock outstanding on the last
trading day in December in the preceding calendar year, but in no event will
this annual increase exceed 1,000,000 shares. In addition, no participant in
the 1999 Stock Incentive Plan may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances for more than
500,000 shares of common stock in total per calendar year.
The 1999 Stock Incentive Plan is divided into five separate programs:
. The discretionary option grant program under which eligible individuals
in the employ of eCollege.com may be granted options to purchase shares
of common stock at an exercise price not less than 100% of the fair
market value of those shares on the grant date;
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. The stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the performance of services;
. The salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
. The automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
. The director fee option grant program which may, in the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special below-
market option grants.
The discretionary option grant program and the stock issuance program will
be administered by our Compensation Committee. This committee will determine
which eligible individuals are to receive option grants or stock issuances
under those programs, the time or times when such option grants or stock
issuances are to be made, the number of shares subject to each such grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the Federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding. The compensation
committee will also have the authority to select the executive officers and
other highly compensated employees who may participate in the salary investment
option grant program in the event that program is activated for one or more
calendar years.
Plan Features. The 1999 Stock Incentive Plan will include the following
features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
eCollege.com equal to the fair market value of the vested shares of
common stock subject to the surrendered option less the exercise price
payable for those shares. eCollege.com may make the payment in cash or in
shares of common stock.
The 1999 Stock Incentive Plan will include the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
. In the event that the eCollege.com is acquired by merger or asset sale or
a board-approved sale of more than fifty percent of eCollege.com stock by
its stockholders, each outstanding option under the discretionary option
grant program which is not assumed or continued by the successor
corporation will immediately become exercisable for all the option
shares, and all unvested shares will immediately vest, except to the
extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation.
. The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in the acquisition but the optionee's
service with eCollege.com or the acquiring entity is subsequently
terminated. The vesting of
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outstanding shares under the 1999 Stock Incentive Plan may be accelerated
upon similar terms and conditions;
. The plan administrator may also grant options which will immediately vest
upon an acquisition of eCollege.com, whether or not those options are
assumed by the successor corporation; and
. The plan administrator may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a successful tender offer for more
than fifty percent (50%) of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
In the event of a merger, tender or takeover offer, or 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 full automatic vesting and exercisability of each non-qualified option
granted under the 1997 Stock Option Plan, including shares which would not
otherwise be exercisable. An option exercise under the 1997 Stock Option Plan
may be made contingent upon the 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.
In the event the Compensation Committee decides to put this program into
effect for one or more calendar years, each of our executive officers and other
highly compensated employees selected for participation may elect to reduce his
or her base salary for that calendar year by a specified dollar amount not less
than $10,000 nor more than $50,000. Each selected individual who makes this
election will automatically be granted, on the first trading day in January of
the calendar year for which that salary reduction is to be in effect, an option
to purchase that number of shares of common stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
common stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve (12) equal monthly installments over the calendar year
for which the salary reduction is to be in effect and will be subject to full
and immediate vesting upon certain changes in our ownership or control.
Each individual who first becomes a non-employee board member at any time
after the completion of this offering will automatically receive an option
grant for 5,000 shares on the date such individual joins the board, provided
such individual has not been in our prior employ. In addition, on the date of
each meeting of stockholders held after the completion of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 2,500 shares of
common stock, provided such individual has served on the board for at least six
months.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The option
will be immediately exercisable for all of the option shares; however, any
unvested shares purchased under the option will be subject to repurchase by
eCollege.com, at the exercise price paid per share, should the optionee cease
board service prior to vesting in those shares. Each automatic option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by the Company,
at the exercise price paid per share, should the optionee cease to serve on the
board prior to vesting in those shares. The shares subject to each 5,000 share
automatic option grant will vest over a four (4) year period in successive
equal annual installments upon the individual's completion of each year of
board service over the four (4) year period measured from the option grant
date. Each 2,500 share automatic option grant will vest upon the individual's
completion of one year of board service measured from the option grant date.
However, the shares subject to each automatic grant will immediately vest in
full upon certain changes in control or ownership of eCollege.com or upon the
optionee's death or disability while a board member.
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If this program is put into effect in the future, then each non-employee
board member may elect to apply all or a portion of any annual retainer fee
otherwise payable in cash to the acquisition of a below-market option grant.
The option grant will automatically be made on the first trading day in January
in the year for which the retainer fee would otherwise be payable in cash. The
option will have an exercise price per share equal to one-third of the fair
market value of the option shares on the grant date, and the number of shares
of common stock subject to the option will be determined by dividing the amount
of the retainer fee applied to the program by two-thirds of the fair market
value per share of common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the aggregate exercise price payable for those shares will be equal
to the portion of the retainer fee invested in that option. The option will
become exercisable in a series of twelve (12) equal monthly installments over
the calendar year for which the election is to be in effect. However, the
option will become immediately exercisable for all the option shares upon
certain changes in the ownership or control of eCollege.com or the death or
disability of the optionee while serving as a board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, salary investment option
grant and director fee option grant programs and may be granted to one or more
of our officers as part of their option grants under the discretionary option
grant program. Options with limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than
50% of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share based on the highest price per share of common stock
paid in connection with the tender offer.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan
will terminate no later than August 31, 2009.
1999 Employee Stock Purchase Plan
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board
in June 1999 and approved by the stockholders in June 1999. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
Share Reserve. 666,667 shares of our common stock will initially be reserved
for issuance.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for our initial public
offering and will end on the last business day of October 2001. The next
offering period will start on the first business day in November 2001, and
subsequent offering periods will be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 1,000
shares on any purchase date, and not more than 166,667 shares may be purchased
in total by all participants on any purchase date.
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Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of July,
2009; and
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
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 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........... 23,334 -0- $196,239 $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 $9.00 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 N. Helmick. The
agreement sets a base salary for Mr. Helmick which salary may be adjusted by
the Compensation Committee. In addition to a base
51
<PAGE>
salary, Mr. Helmick is eligible for an annual bonus of up to $200,000 payable
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.
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.
We have entered into an employment agreement with Mr. Schneider. The
agreement sets an annual base salary for Mr. Schneider of $195,000, which
salary may be adjusted by the board of directors. In addition to a base salary,
Mr. Schneider is eligible for an annual bonus of up to $100,000, payable in
cash. We also issued to Mr. Schneider options to purchase up to 326,667 shares
of our common stock at an exercise price of $6.00 per share. These options are
subject to vesting requirements. All unvested options will vest upon a change
of control of eCollege.com. Mr. Schneider is also entitled to standard benefits
including vacation days, participation in a flexible reimbursement plan, and
medical/dental insurance.
Mr. Schneider's employment may be terminated by eCollege.com or by him at
any time and for any reason. 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; or
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
52
<PAGE>
We have agreed to provide Mr. Schneider with severance pay equal to six
months of his base salary, unless his employment is terminated for cause, as
defined in the agreement.
The agreement contains non-competition provisions during the term of
employment and for the period six months after termination of employment. Under
these provisions, Mr. Schneider may not:
. own an interest in, participate in the management of, or perform services
for any competitive business or activity; or
. for a period of 12 months subsequent to termination, solicit any of our
employees to terminate their employment.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Schneider during the term of the agreement.
We have entered into an employment agreement with Mr. Kelsall. The agreement
sets an annual base salary for Mr. Kelsall of $168,000, which salary may be
adjusted by the board of directors. In addition to a base salary, Mr. Kelsall
is eligible for an annual bonus of up to $85,000, payable in cash. We also
issued to Mr. Kelsall options to purchase up to 133,334 shares of our common
stock at an exercise price of $9.00 per share. These options are subject to
vesting requirements. All unvested options will vest upon a change of control
of eCollege.com. Mr. Kelsall is also entitled to standard benefits including
vacation days, participation in a flexible reimbursement plan, and
medical/dental insurance.
Mr. Kelsall's employment may be terminated by eCollege.com or by him at any
time and for any reason. 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; or
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
We have agreed to provide Mr. Kelsall with severance pay equal to six months
of his base salary, unless his employment is terminated for cause, as defined
in the agreement.
The agreement contains non-competition provisions during the term of
employment and for the period six months after termination of employment. Under
these provisions, Mr. Kelsall may not:
. own an interest in, participate in the management of, or perform services
for any competitive business or activity; or
. for a period of 12 months subsequent to termination, solicit any of our
employees to terminate their employment.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Kelsall during the term of the agreement.
53
<PAGE>
CERTAIN TRANSACTIONS
Transactions With Management and Others
The following are brief descriptions of transactions between us and any of
our directors, executive officers or stockholders known to us to own
beneficially more than 5% of our shares, or any member of the immediate family
of any of those persons, since our inception, where the amount involved
exceeded $60,000:
Sales of Common Stock
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................................. 4,526,666 $0.03 $130,950
Mr. J. Dobrin.................................. 140,000 0.03 4,050
Mr. J. Helmick................................. 233,334 0.03 6,750
</TABLE>
Mr. R. Helmick's contribution of $130,950 was paid in the form of services
he performed as our Chief Executive Officer. Mr. Dobrin's contribution of
$4,050 was in the form of assets, including computer equipment, office
furniture and computer software.
On March 4, 1998, Mr. Sigman, our Vice President, Accounts and Services,
purchased 69,953 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.
Sales of Preferred Stock
On June 11, 1997, we entered into a Unit Purchase Agreement with New World
Equities, Inc., Steven M. Singer, Robert C. Douglas, William E. Waldeck,
Patrick T. DeLacey and David P. Shieldrop. New World Equities, Inc. is the
beneficial owner of 9.5% of our common stock before the offering, and
Christopher E. Girgenti, one of our directors, 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
approximately 4.6667 shares of Series A Convertible Preferred Stock and a
warrant to purchase approximately 4.6667 shares of our common stock at an
exercise price of $1.62 per share. The shares of Series A Preferred Stock will
convert into a total of 616,000 shares of common stock upon the completion of
this offering. New World Equities, Inc. purchased 66,000 units for an aggregate
purchase price of $500,000.
On February 2, 1998, we entered into a Series B Preferred Share Purchase
Agreement with Blumenstein/Thorne Information Partners I, L.P., the beneficial
owner of 15.4% of our common stock before the offering, Stanley R. Dobrin, the
father of Jonathan M. Dobrin, our Vice President, Chief Technology Officer and
Director, and Alan L. Sigman, the father of James N. Sigman, our Vice
President, Professional Services. 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.
The following parties were also purchasers under the Series B Preferred Share
Purchase Agreement: Alan L. Sigman, Lee S. Mendel, Davis B. Weidner, James F.
Hemmer, Michael J. Walker, Robert A. Conway & Darlene A. Conway, JTWROS, Mark
A. Timmerman, Silver Family Trust U/D/T December 19, 1997, Jay S. Perlmutter,
William O. Kasten, McDonald & Co. Securities, Inc., McDonald Venture Capital
Fund, L.P., Sue Thompson, Robert C. Douglas and McDonald & Co. Securities,
Inc., as Custodian for William E. Waldeck. Under the agreement we sold a total
of 1,525,218 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 1,525,218 shares of common stock upon the completion of
this offering. Blumenstein/Thorne Information
54
<PAGE>
Partners I, L.P. purchased 1,270,878 shares of Series B Preferred Stock for an
aggregate purchase price of $4,999,997. Stanley R. Dobrin purchased 12,707
shares of Series B Preferred Stock for an aggregate purchase price of $49,994.
Alan L. Sigman purchased 6,356 shares of Series B Preferred Stock for an
aggregate purchase price of $25,006.
On December 21, 1998, we entered into a Series C Preferred Share Purchase
Agreement with MediaOne Interactive Services, Inc., VSI Holdings, Inc.,
Blumenstein/Thorne Information Partners I, L.P., New World Equities, Inc. and
Stanley R. and Carol L. Dobrin, JTWOS. MediaOne Interactive Services, Inc. is
the beneficial owner of 10.0% of our common stock before the offering. Director
Jeri Korshak is Vice President of Strategy for MediaOne Interactive Services,
Inc. VSI Holdings, Inc. is the beneficial owner of 5.0% of our common stock
before the offering. Stanley R. and Carol L. Dobrin are the parents of Jonathan
M. Dobrin, our Vice President, Chief Technology Officer and Director. The
following parties were also purchasers under the Series C Preferred Share
Purchase Agreement: H&K Partners V, Davis Weidner and Sue Thompson, and N.T.
Ruddock Company. Under the agreement we sold a total of 2,009,184 shares of
Series C Convertible Preferred Stock for an aggregate purchase price of
$15,000,000 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
2,009,184 shares of common stock upon the completion of this offering. MediaOne
Interactive Services, Inc. purchased 937,622 shares of Series C Preferred Stock
for an aggregate purchase price of $7,000,017. VSI Holdings, Inc. purchased
468,808 shares of Series C Preferred Stock for an aggregate purchase price of
$3,499,992. New World Equities, Inc. purchased 301,378 shares of Series C
Preferred Stock for an aggregate purchase price of $2,250,002.
Blumenstein/Thorne Information Partners I, L.P. purchased 172,097 shares of
Series C Preferred Stock for an aggregate purchase price of $1,284,830. Stanley
R. and Carol L. Dobrin, JTWOS purchased 6,696 shares of Series C Preferred
Stock for an aggregate purchase price of $49,995.
Amended and Restated Shareholders Agreement
In connection with the sale of Series C Preferred Stock, we entered into an
amended and restated shareholders agreement with the Series C Preferred
purchasers and our Series A Preferred and Series B Preferred and certain of our
common stockholders. The amended and restated shareholders agreement provided
that our board of directors would consist of ten members. The agreement was
subsequently amended as of January 1999 to provide that the board would consist
of seven members, to be designated as follows:
. The common stockholders have the right to designate three directors, one
of whom shall be an independent director;
. The holders of Series A Preferred Stock have the right to designate one
director;
. Blumenstein/Thorne Information Partners I, L.P. has the right to
designate one director;
. MediaOne Interactive Services, Inc. has the right to designate one
director; and
. All stockholders as a group will vote to elect one director, provided
that this director must receive the affirmative vote of at least 66.67%
of the shares voting.
In addition, the agreement restricts the sale or transfer of shares of stock
except in limited instances or in compliance with a co-sale procedure which
permits each other stockholder to participate in the proposed sale, based on
such stockholder's pro-rata stock holdings on an as converted basis. The entire
agreement, including the board of directors designation provisions and the co-
sale provisions, will terminate upon the completion of this offering.
Amended and Restated Registration Rights Agreement
In connection with the sale of Series C Preferred Stock, we also entered
into an amended and restated registration agreement which provided the
Series A, Series B and Series C stockholders with demand and piggyback
registration rights. 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
55
<PAGE>
registration statement. We are not required to effect more than two
registrations pursuant to these demand registrations rights. The holders 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. Please see "Description of Capital
Stock--Registration Rights."
Indemnification Agreements
We have entered into indemnification agreements with our non-employee
directors, Mr. Blumenstein, Mr. Girgenti and Ms. Korshak.
Certain Other Transactions
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.
Certain Business Relationships
During 1998 we paid $35,245 in legal fees to Dorsey & Whitney LLP and we
have paid $102,615 in legal fees to that firm as of September 30, 1999. Robert
H. Helmick, Esq., the father of Mr. R. Helmick and Mr. J. Helmick, is a partner
of that firm.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of shares offered hereby assuming no exercise of the over-
allotment option, 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 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.......................... 4,550,000 (1) 48.5% 32.8%
Jonathan M. Dobrin......................... 206,112 (2) 2.2% 1.5%
Blumenstein/Thorne Information Partners I,
L.P. ..................................... 1,442,975 (3) 15.4% 10.4%
MediaOne Interactive Services, Inc. ....... 937,622 (4) 10.0% 6.8%
New World Equities, Inc. .................. 917,378 (5) 9.5% 6.5%
VSI Holding, Inc........................... 468,808 (6) 5.0% 3.4%
Jack W. Blumenstein........................ 1,442,975 (7) 15.4% 10.4%
Christopher E. Girgenti.................... 917,378 (8) 9.5% 6.5%
Oakleigh Thorne............................ 1,442,975 (9) 15.4% 10.4%
Jeri Korshak............................... -- -- --
All directors and executive officers as a
group..................................... 7,539,856 (10) 76.5% 52.5%
</TABLE>
- --------
(1) Consists of 4,526,666 shares held by the Robert N. Helmick Trust and
options to purchase 23,334 shares of common stock exercisable within 60
days of September 30, 1999. The address for Mr. Helmick is 10200 A East
Girard Avenue, Denver, Colorado 80231.
(2) Includes options to purchase 66,112 shares of common stock exercisable
within 60 days of September 30, 1999. 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) Consists of 609,378 shares and warrants to purchase 308,000 shares of
common stock exercisable within 60 days of September 30, 1999. 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 609,378 shares and warrants to purchase 308,000 shares of
common stock exerciseable within 60 days of September 30, 1999,
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 186,172 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999 and 308,000 shares issuable upon the
exercise of warrants exercisable within 60 days of September 30, 1999. See
notes 1, 2 7, 8 and 9 above.
57
<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.
In June 1999, we reincorporated in Delaware. Upon the completion of this
offering we plan to further amend and restate our Certificate of Incorporation.
The following summary of the 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 62 stockholders. There will be 13,862,395 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 warrant agreements that entitle the warrant holders to
purchase 639,334 shares of common stock at a purchase price of $1.62 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 40,185 shares of common stock at a purchase
price of $7.47 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 7,000 shares of common stock. The exercise price of the warrant is
$3.93 per share for fifty percent of the shares of common stock and $7.47 per
share for the remaining fifty percent. In the event that we are acquired by
another entity,
58
<PAGE>
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."
Assuming an offering price of the common stock sold in this offering of
$9.00 per share, we will issue to the lender of our line of credit a warrant to
purchase 30,000 shares of common stock. The exercise price of this warrant will
be equal to the price of the common stock sold in this offering, with a maximum
exercise price of $21 per share. If the offering price of the common stock sold
in this offering is: (i) less than $12.00 per share, we will issue the lender a
warrant to purchase 30,000 of common stock, (ii) greater than $12.00 per share
and less than $16.00 per share, we will issue the lender a warrant to purchase
36,667 shares of common stock or (iii) greater than $16.00 per share, we will
issue the lender a warrant to purchase 46,667 shares. All shares of common
stock issuable upon exercise of these warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights."
Options
As of September 30, 1999, options to purchase a total of 1,880,126 shares of
common stock were outstanding, all of which are subject to lock-up
arrangements. Options to purchase a total of 940,583 shares of common stock may
be granted under the 1999 Stock Incentive Plan. See "Management--1999 Stock
Incentive 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 4,150,402
shares of common stock issuable upon the conversion of all of the outstanding
preferred stock, and warrants to purchase an additional 623,000 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 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
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
59
<PAGE>
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, provisions of the Amended and Restated Certificate of
Incorporation 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-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 Amended and Restated Certificate of Incorporation 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 Amended and Restated Certificate of Incorporation provides that
stockholders may not take action by written consent, but only at duly called
annual or special meetings of stockholders. The Bylaws further provide that
special meetings of stockholders of eCollege.com may be called only by the
President, 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.
60
<PAGE>
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 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 13,862,395
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, 1,880,126 shares of common stock will be issuable
upon exercise of outstanding options, of which 580,767 shares will be vested
and exercisable, and 686,519 shares of common stock will be issuable upon
exercise of outstanding warrants (which does not include the warrants to be
issued in connection with the line of credit). Of the outstanding 13,862,395
shares, the 4,500,000 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 9,362,395 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>
9,063,714............... 180 days after the date of this prospectus
298,681................. At various times from the date of this prospectus
</TABLE>
Of these shares, approximately 8,452,115 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 1999 Stock Incentive 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."
61
<PAGE>
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 1999 Stock Incentive Plan and our 1999 Employee
Stock Purchase Plan. Such registration statement will automatically become
effective upon filing. 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--1999 Stock Incentive Plan" and
"--1999 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, in some circumstances and subject to conditions,
holders of 4,773,402 shares of our outstanding common stock will have 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 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."
62
<PAGE>
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of investment banks, which will purchase the common stock
directly from eCollege.com for distribution to the public, referred to as
underwriters. Banc of America Securities LLC and William Blair & Company,
L.L.C. are the representatives of the underwriters and will negotiate on behalf
of the underwriters and will enter into the underwriting agreement with us.
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
Shares
Underwriter ----------
<S> <C>
Banc of America Securities LLC.......................................
William Blair & Company, L.L.C.......................................
<CAPTION>
----------
<S> <C>
Total.............................................................. 4,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, than all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets, that we deliver to
the underwriters customary closing documents such as various certificates and
opinions of counsel, and that this registration statement has been declared
effective by the SEC.
We have granted an option to the underwriters to buy up to 675,000
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.
The representatives of the underwriters have advised us that the
underwriters propose initially to offer the shares of common stock to the
public at the price set forth on the cover page of this prospectus, and to
certain dealers, such as stockbrokers, at that price less a concession not in
excess of $ per share of common stock. The underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of common stock
to certain other dealers. After the inititial public offering, the public
offering price, concession and discount may change.
The following table shows the per share and total underwriting discount to
be paid by us to the underwriters and the proceeds before expenses to us. This
information is presented assuming both no exercise and full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to
eCollege.com............................ $ $ $
</TABLE>
The underwriting fee will be an amount equal to the offering price per share
to the public of the common stock, less the amount paid by the underwriters to
eCollege.com per share of common stock. The underwriting fee currently is not
expected to exceed 7% of the initial public offering price. The expenses of the
offering, exclusive of the underwriting discount, are estimated at $973,832 and
are payable entirely by us. The expenses consist of the following:
63
<PAGE>
.a registration fee of $14,067;
.an NASD filing fee of $6,250
.Nasdaq application and listing fee of $95,000;
.estimated blue sky qualification fees and expenses of $10,000;
.estimated printing and engraving expenses of $250,000;
.estimated legal fees and expenses of $300,000;
.estimated accounting fees and expenses of $250,000;
.estimated transfer agent and registrar fees of $15,000; and
.estimated miscellaneous fees and expenses of $33,515.
We and all holders of our stock prior to this offering, as well as all
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, Banc of America Securities LLC may, in its sole discretion,
release all or some of the securities from these lock-up agreements.
We have agreed to indemnify the underwriters against liabilities, including
liabilities for misstatements and omissions under the Securities Act of 1933
and liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:
.Stabilizing transactions--The representatives may make bids or purchases for
the purpose of pegging, fixing or maintaining the price of the shares, so
long as stabilizing bids do not exceed a specified maximum.
.Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
.Penalty bids--Penalty bids occur when a particular underwriter repays to the
other underwriters a portion of the underwriting discount received by it
because the representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or covering transactions.
.Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to certain limitations, until the time, if ever, at which a stabilizing
bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither eCollege.com nor the underwriters make any representation or
prediction as to the effect that the transactions described above may have the
price of the shares. These transactions may occur on the Nasdaq National Market
or otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
64
<PAGE>
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. The primary 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, such as the evaluation of the above factors
in relation to the market valuation of companies in related businesses.
The underwriters have reserved up to 5% of the common stock offered hereby
for sale to certain of our employees and their families, directors, customers
and vendors 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.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for eCollege.com by Brobeck, Phleger & Harrison LLP, Broomfield, 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 in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
65
<PAGE>
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.
66
<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 reverse 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
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 , 1999).
F-2
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------------ June 30, June 30, 1999
1997 1998 1999 (See Note 2)
----------- ----------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents............ $ 208,346 $11,661,186 $ 6,318,108
Accounts receivable,
net.................... 214,660 258,980 1,448,905
Accrued revenue
receivable............. 10,000 57,885 10,730
Other current assets.... 15,550 112,357 475,194
----------- ----------- ------------
Total current assets.. 448,556 12,090,408 8,252,937
PROPERTY AND EQUIPMENT,
net..................... 299,842 1,569,129 2,252,642
----------- ----------- ------------
TOTAL ASSETS............. $ 748,398 $13,659,537 $ 10,505,579
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable........ $ 229,337 $ 658,643 $ 1,102,809
Accounts payable-
related party.......... 6,500 -- 23,222
Accrued liabilities..... 79,725 1,284,967 1,033,101
Deferred revenue........ 35,750 569,599 1,998,841
Current portion of
notes payable to
related parties........ 39,441 -- --
----------- ----------- ------------
Total current
liabilities.......... 390,753 2,513,209 4,157,973
OTHER LIABILITIES........ -- 35,900 76,636
NOTES PAYABLE TO RELATED
PARTIES................. 230,534 -- --
COMMITMENTS AND
CONTINGENCIES (Notes 1
and 8)
CONVERTIBLE PREFERRED
STOCK SUBJECT TO
MANDATORY REDEMPTION, no
par value;
Series A; 616,000,
616,000, 616,000 and 0
(unaudited, pro forma)
shares authorized,
issued and
outstanding,
respectively; entitled
to preference in
liquidation (includes
cumulative preferred
return of $55,030,
$155,086, $205,110 and
$0, respectively)...... 1,029,284 1,136,803 1,190,557 $ --
Series B; 0, 1,525,218,
1,525,218 and 0
(unaudited, pro forma)
shares authorized,
issued and
outstanding,
respectively; entitled
to preference in
liquidation (includes
cumulative preferred
return of $0,
$550,060, $850,092 and
$0, respectively)...... -- 6,534,046 6,837,380 --
Series C; 0, 2,009,184,
2,009,184 and 0
(unaudited, pro forma)
shares authorized,
respectively; 0,
1,707,809, 2,009,184
and 0 shares issued
and outstanding,
respectively; entitled
to preference in
liquidation (includes
cumulative preferred
return of $0, $31,438,
$761,680 and $0,
respectively).......... -- 11,978,566 15,122,274 --
STOCKHOLDERS' EQUITY
(DEFICIT)
Common stock, $0.01 par
value; 50,000,000
shares authorized;
4,900,047, 5,112,333,
5,188,163 and
9,338,565 (unaudited,
pro forma) shares,
respectively, issued
and outstanding........ 49,000 51,123 51,882 93,386
Additional paid-in
capital................ 92,376 405,067 489,113 23,597,820
Warrants and options
for common stock....... -- 1,626,426 4,322,509 4,322,509
Notes receivable........ -- (341,024) (341,024) (341,024)
Deferred compensation... -- (1,244,007) (3,650,025) (3,650,025)
Accumulated deficit..... (1,043,549) (9,036,572) (17,751,696) (17,751,696)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit)..... (902,173) (8,538,987) (16,879,241) $ 6,270,970
----------- ----------- ------------ ============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)............... $ 748,398 $13,659,537 $ 10,505,579
=========== =========== ============
</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 Six
(July 26, 1996) Ended Months Ended
through December 31, June 30,
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 $ 405,700 $ 658,483
Student fees........... 22,464 399,930 579,047 220,906 737,041
--------- --------- ----------- ----------- -----------
Total revenue........ 22,464 1,028,180 1,665,069 626,606 1,395,524
COST OF REVENUE......... 109,974 528,090 2,064,909 456,401 2,737,349
--------- --------- ----------- ----------- -----------
Gross profit (loss).. (87,510) 500,090 (399,840) 170,205 (1,341,825)
--------- --------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling and
marketing............. 25,474 106,026 3,394,000 868,938 3,188,551
General and
administrative........ 248,884 767,812 2,509,496 1,217,184 1,777,704
Development............ 60,207 212,052 1,099,000 224,925 1,358,502
--------- --------- ----------- ----------- -----------
Total operating
expenses............ 334,565 1,085,890 7,002,496 2,311,047 6,324,757
--------- --------- ----------- ----------- -----------
LOSS FROM OPERATIONS.... (422,075) (585,800) (7,402,336) (2,140,842) (7,666,582)
OTHER INCOME (EXPENSE):
Interest and other
income................ 27,001 8,993 149,308 89,597 202,254
Interest expense....... (9,186) (37,990) (36,819) (1,032) --
--------- --------- ----------- ----------- -----------
NET LOSS FROM CONTINUING
OPERATIONS............. (404,260) (614,797) (7,289,847) (2,052,277) (7,464,328)
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) $(2,052,277) $(7,464,328)
========= ========= =========== =========== ===========
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss............... $(433,499) $(550,916) $(7,289,847) $(2,052,277) $(7,464,328)
Dividends on
mandatorily
redeemable,
convertible preferred
stock................. -- (55,030) (681,554) (300,524) (1,080,298)
Accretion of
mandatorily
redeemable,
convertible preferred
stock................. -- (4,104) (21,622) (7,488) (170,498)
--------- --------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(433,499) $(610,050) $(7,993,023) $(2,360,289) $(8,715,124)
========= ========= =========== =========== ===========
BASIC AND DILUTED NET
LOSS FROM CONTINUING
OPERATIONS PER SHARE .. $ -- $ (0.16) $ (1.58) $ (0.47) $ (1.70)
========= ========= =========== =========== ===========
BASIC AND DILUTED NET
LOSS PER SHARE ........ $ -- $ (0.15) $ (1.58) $ (0.47) $ (1.70)
========= ========= =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND
DILUTED................ -- 4,107,964 5,074,697 5,037,683 5,135,349
========= ========= =========== =========== ===========
PRO FORMA NET LOSS FROM
CONTINUING
OPERATIONS PER SHARE
(UNAUDITED--Note 2):
Basic and diluted net
loss per share........ $ (1.02) $ (0.30) $ (0.81)
=========== =========== ===========
Weighted average
common shares
outstanding--basic
and diluted........... 7,120,022 6,890,806 9,235,527
=========== =========== ===========
</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
----------------------------
Additional Warrants
Par Paid-in and Notes Deferred Accumulated
Shares Value Capital Options Receivable Compensation Deficit Total
--------- ------- ---------- ---------- ---------- ------------ ------------ ------------
<S> <C> <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
$0.03 per share....... 373,333 3,733 7,067 -- -- -- -- 10,800
Issuance of common
stock in February 1997
for services
provided.............. 4,526,667 45,267 85,233 -- -- -- -- 130,500
Common stock issued
upon exercise of
warrants.............. 47 -- 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................... 4,900,047 49,000 92,376 -- -- -- (1,043,549) (902,173)
Issuance of common
stock upon exercise of
warrants and options
...................... 212,286 2,123 342,691 -- (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 line
of credit............. -- -- -- 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................... 5,112,333 51,123 405,067 1,626,426 (341,024) (1,244,007) (9,036,572) (8,538,987)
Issuance of common
stock upon exercise of
options (Unaudited)... 75,830 759 84,046 -- -- -- -- 84,805
Deferred compensation
(Unaudited)........... -- -- -- 2,696,083 -- (2,696,083) -- --
Amortization of
deferred compensation
(Unaudited)........... -- -- -- -- -- 290,065 -- 290,065
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock (Unaudited)..... -- -- -- -- -- -- (1,080,298) (1,080,298)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value (Unaudited)..... -- -- -- -- -- -- (170,498) (170,498)
Net loss (Unaudited)... -- -- -- -- -- -- (7,464,328) (7,464,328)
--------- ------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, JUNE 30, 1999
(UNAUDITED)............ 5,188,163 $51,882 $489,113 $4,322,509 $(341,024) $(3,650,025) $(17,751,696) $(16,879,241)
========= ======= ======== ========== ========= =========== ============ ============
</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 Six
(July 26, 1996) For the Years Ended Months Ended
through December 31, June 30,
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) $ (2,052,277) $ (7,464,328)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................. 18,376 126,199 393,841 133,691 412,881
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 35,545 290,065
Noncash interest expense...................... -- -- 27,819 -- --
Change in-
Accounts receivable and accrued
revenue receivables......................... (14,433) (190,607) (102,005) (130,495) (1,142,770)
Other current assets......................... (1,399) (14,151) (96,807) (77,366) (62,287)
Accounts payable and accrued liabilities..... 112,379 268,433 972,048 340,489 871,522
Deferred revenue............................. 35,000 750 533,849 296,602 1,429,242
Other liabilities............................ -- -- 35,900 -- 40,736
--------- ---------- ------------ ------------ ------------
Net cash used in operating activities...... (283,576) (329,674) (5,315,867) (1,453,811) (5,624,939)
--------- ---------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (53,090) (369,653) (1,663,128) (860,707) (1,096,394)
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) (860,707) (1,096,394)
--------- ---------- ------------ ------------ ------------
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 line of credit .................. -- -- 500,000 -- --
Payments on line of credit .................... -- -- (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) (269,975) --
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 -- 84,805
Deferred initial public offering costs......... -- -- -- -- (300,550)
--------- ---------- ------------ ------------ ------------
Net cash provided by financing activities.. 434,465 687,536 18,431,835 5,678,025 1,378,255
--------- ---------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 20,137 188,209 11,452,840 3,363,507 (5,343,078)
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 $ 3,571,853 $ 6,318,108
========= ========== ============ ============ ============
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 $ 300,524 $ 1,080,298
========= ========== ============ ============ ============
Accretion on Series A, B and C mandatorily
redeemable, convertible preferred stock...... $ -- $ 4,104 $ 21,622 $ 7,488 $ 170,498
========= ========== ============ ============ ============
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 Six Months
Ended June 30, 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 reincorporated
in the State of Delaware on June 22, 1999. 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 platform of
software and services allows colleges and universities to outsource the
creation, launch, management and support of a comprehensive online campus 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.
Unaudited
The Company's current business plan contemplates significant growth, and the
Company believes that for at least the next 12 months it will experience
operating losses and will generate negative cash flows from operating and
investing activities. The Company had cash and cash equivalents of $6.3 million
at June 30, 1999 and at September 30, 1999. In October 1999, the Company
secured a $2.5 million line of credit which allows for $1,650,000 of
immediately available borrowings. In connection with the line of credit, the
Company issued warrants to the lender for 30,000 shares of common stock, which
number may be increased in certain circumstances. In the opinion of management,
the Company's existing cash balances and the amount of cash immediately
available under the line of credit will allow the Company to continue
operations through at least December 31, 1999, although the level of operations
may be curtailed. However, amounts drawn under the line of credit may be
required to be repaid on January 14, 2000, unless the Company extends the
maturity, in accordance with its terms, to February 13, 2000. Such extension
will require the Company to issue additional warrants. Due to the above, the
Company will be required to secure additional financings in order to remain
viable subsequent to December 31, 1999. The Company is currently in the process
of an initial public offering of its common stock.
(2) Summary of Significant Accounting Policies
Interim Financial Statements (Unaudited)
The interim financial statements for the six months ended June 30, 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.
F-7
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 developed.
Revenue 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 as well as other direct contract costs.
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 or billed to 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.
F-8
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-9
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-10
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Six Months Ended
December 31, June 30,
------------------------------ --------------------------------------------
1997 1998 1998 1999
--------- ----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
$ 18,000 $ 1,097,000 $279,120 $487,202
======== =========== ======== ========
</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 and related interpretations.
Stock Split
Upon the reincorporation of the Company discussed in Note 11, the Company
effected a seven-for-one split of its common and preferred stock, and changed
its authorized common stock to 50,000,000 shares and preferred stock to
5,000,000 shares. All references in the accompanying financial statements to
the number of common and preferred shares have been retroactively restated to
reflect the stock split and the increase in the authorized common and preferred
stock.
Additionally, as discussed in Note 11, upon the completion of its proposed
initial public offering the Company will effect a two-for-three reverse stock
split. Such reverse stock split has been retroactively reflected in the
accompanying financial statements.
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
F-11
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
For the years ended December 31,
1997.......................................................... 387,917
=========
1998.......................................................... 2,794,140
=========
For the six months ended June 30,
1998 (unaudited).............................................. 2,315,458
=========
1999 (unaudited).............................................. 5,118,715
=========
</TABLE>
At December 31, 1998, the Company had issued rights to 5,764,892 shares of
common stock under such agreements.
Net loss from continuing operations per share is calculated as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- ------------------------
1997 1998 1998 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Numerator: (Unaudited)
Net loss from continuing
operations............. $ (614,797) $ (7,289,847) $(2,052,277) $(7,464,328)
Dividends on mandatorily
redeemable, convertible
preferred stock........ (55,030) (681,554) (300,524) (1,080,298)
Accretion of mandatorily
redeemable, convertible
preferred stock........ (4,104) (21,622) (7,488) (170,498)
----------- ------------ ----------- -----------
Net loss from continuing
operations applicable
to common sharehold-
ers.................... $ (673,931) $ (7,993,023) $(2,360,289) $(8,715,124)
=========== ============ =========== ===========
Denominator:
Weighted average shares
outstanding............ 4,107,964 5,074,697 5,037,683 5,135,349
=========== ============ =========== ===========
</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.
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 4,150,402 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 June 30, 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
F-12
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute basic and diluted net loss per share of approximately
2,045,325, 1,853,123 and 4,100,178 shares for the year ended December 31, 1998
and for the six months ended June 30, 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.
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.
F-13
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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
$1.62 per share, net
of stock issuance
costs of $29,850..... 616,000 970,150 -- -- -- --
Dividends accrued..... -- 55,030 -- -- -- --
Accretion to
redemption value..... -- 4,104 -- -- -- --
------- ---------- --------- ---------- --------- -----------
Balances, December 31,
1997.................... 616,000 1,029,284 -- -- -- --
Issuance of Series B
mandatorily
redeemable,
convertible preferred
stock in February
1998 for cash of
approximately $3.93
per share, net of
stock issuance costs
of $22,000........... -- -- 1,525,218 5,978,000 -- --
Issuance of Series C
mandatorily
redeemable,
convertible preferred
stock in December
1998 for cash of
approximately $7.47
per share, net of
stock issuance costs
of $811,065.......... -- -- -- -- 1,707,809 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.................... 616,000 1,136,803 1,525,218 6,534,046 1,707,809 11,978,566
Issuances of Series C
mandatorily
redeemable,
convertible preferred
stock in January,
February and March
1999 for cash of
approximately $7.47
per share
(unaudited).......... -- -- -- -- 301,375 2,250,000
Dividends accrued
(unaudited).......... -- 50,024 -- 300,032 -- 730,242
Accretion to
redemption value
(unaudited).......... -- 3,730 -- 3,302 -- 163,466
------- ---------- --------- ---------- --------- -----------
Balances, June 30, 1999
(unaudited)............. 616,000 $1,190,557 1,525,218 $6,837,380 2,009,184 $15,122,274
======= ========== ========= ========== ========= ===========
</TABLE>
F-14
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the Company's certificate 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:
<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) 616,000 $1.62 $0.162
========= ===== ======
Series B mandatorily redeemable,
convertible preferred stock (Series
B) 1,525,218 $3.93 $0.393
========= ===== ======
Series C mandatorily redeemable,
convertible preferred stock (Series
C) 1,707,809 $7.47 $0.747
========= ===== ======
</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. Upon conversion, accrued and
unpaid dividends are not paid or converted and are extinguished. 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 $7.47 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 $3.93 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 $1.62 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.
F-15
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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 $1.62, $3.93 and
$7.47 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 $1.62, $3.93 and $7.47 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 one share 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 40,185 warrants
to purchase one share of the Company's common stock for approximately $7.47.
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.
F-16
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the sale of Series A, the Company issued 616,000 warrants
to purchase one share of the Company's common stock for approximately $1.62.
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.
The Company valued the warrants using the Black-Scholes option pricing
model, and the following assumptions:
<TABLE>
<CAPTION>
Series A Series C
Warrants Warrants
-------- --------
<S> <C> <C>
Risk-free interest rate.................................. 6.04% 5.00%
Expected dividend yield.................................. 0.00% 0.00%
Expected lives outstanding............................... 3 years 3 years
Expected volatility...................................... 50% 70%
Fair market value of the underlying common stock on the
date of issuance........................................ $0.54 $7.47
</TABLE>
(4) Stockholders' Equity
Common Stock
In February 1997, the Company issued 373,333 shares of common stock for cash
of approximately $0.03 per share. In 1998, an individual exercised options for
2,333 shares of common stock for cash of approximately $1.62 per share.
Noncash Common Stock Issuance
In February 1997, the Company issued 4,526,667 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 $0.03 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 280,000 shares of common stock
with an exercise price of approximately $1.62. The warrants vested immediately
and are exercisable for a period of three years. In 1997, the Company issued 47
shares of common stock upon the exercise of warrants in return for cash
consideration totaling $76. During 1998, the Company issued 209,953 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 46,667 warrants issued to an employee
of the Company for $30,000, their intrinsic value on the date of purchase. As
of December 31, 1998, 23,333 of the original 280,000 warrants remained
outstanding.
F-17
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company obtained a $500,000 line of credit from a
bank. In connection with the line of credit, the Company issued 7,000 warrants
to the bank. Fifty-percent of the warrants have a strike price of $3.93 and
fifty-percent have a strike price of $7.47. 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 1,096,667 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 $2,696,083 during the six months ended June 30, 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 six months ended June 30, 1998 and 1999, the Company
recognized $35,545 and $290,065 of such compensation, respectively (unaudited).
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............. -- $ -- 513,800 $ 1.51
Granted.................................... 513,800 1.51 456,167 2.12
Forfeited or canceled...................... -- -- (95,667) (1.74)
Exercised.................................. -- -- (2,333) (1.62)
------- ----- ------- ------
Outstanding, end of year................... 513,800 $1.51 871,967 $ 1.81
======= ===== ======= ======
Exercisable, end of year................... 70,000 $1.72 266,233 $ 1.57
======= ===== ======= ======
Weighted average fair value of options
granted during the year................... $0.32 $ 3.30
===== ======
</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>
$0.54-$0.59 88,667 3.34 $ .54 44,333 $ .54
$1.62-$1.79 366,800 4.90 1.73 212,567 1.76
$2.14 416,500 5.88 2.14 9,333 2.14
------- ---- ----- ------------- -----------
871,967 5.21 $1.81 266,233 $1.57
======= ==== ===== ============= ===========
</TABLE>
F-18
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, during March 1997 the Company issued options for 56,000 shares
of common stock outside of the Plan with an exercise price of $0.59. All such
options vested over a two year period from March 1997 to March 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.
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.................................... $ (0.15) $ (1.58)
========= ===========
Pro forma...................................... $ (0.15) $ (1.58)
========= ===========
</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>
F-19
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(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 line
of credit (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.
F-20
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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>
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>
F-21
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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.
F-22
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
Stock Option Grants
From January 1, 1999 through September 30, 1999, the Company granted stock
options to employees to purchase 1,099,990 shares of common stock at a weighted
average exercise price of $7.80 per share. In connection with these option
grants, the Company recognized unearned compensation totaling approximately
$3.8 million which is being amortized over the vesting period of the related
options.
Reincorporation
On June 22, 1999, the Company reincorporated in the State of Delaware, at
which time each share of Real Education, Inc. common and preferred stock was
exchanged for seven shares of eCollege.com common and preferred stock,
respectively. The reincorporation has been reflected retroactively in the
accompanying financial statements and notes thereto.
Initial Public Offering
On May 13, 1999, the Company filed a registration statement with the SEC on
Form S-1.
Upon the completion of its initial public offering, the Company will effect
a two-for-three reverse stock split, which has been retroactively reflected in
the accompanying financial statements and notes thereto.
F-23
<PAGE>
[Inside back cover - logos of representative customers with caption
"Relationships Dedicated to Online Learning" at bottom of page. Caption reads:
The above logos represent the geographic diversity of some of our well-known
customers.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 Shares
[LOGO OF ECOLLEGE.COM APPEARS HERE]
Common Stock
Banc of America Securities LLC
William Blair & Company
You may rely on the information contained in this prospectus. Neither we nor
any of the underwriters or the selling stockholder have authorized anyone to
provide information different from that contained in this prospectus. When you
make a decision about whether to invest in our common stock, you should not
rely upon any information other than the information in this prospectus.
Neither the delivery of this prospectus nor sale of common stock means that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or solicitation of an offer
to buy these shares of the common stock in any circumstances under which the
offer or solicitation is unlawful.
Until , 1999 (25 days after the date of this Prospectus), all dealers
that buy, sell or trade these shares common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............................................ $ 14,067
NASD filing fee................................................. 6,250
Nasdaq National Market listing fee.............................. 95,000
Legal fees and expenses......................................... 300,000
Accounting fees and expenses.................................... 250,000
Printing and engraving.......................................... 250,000
Blue sky fees and expenses (including legal fees)............... 10,000
Transfer agent fees............................................. 15,000
Miscellaneous................................................... 33,515
--------
Total......................................................... $973,832
</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 corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses
II-1
<PAGE>
(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) 4,526,666 shares of its common stock, no par value per share, to its
founder Robert N. Helmick in exchange for $130,950 in services, (ii) 233,333
shares of its common stock to John V. Helmick in exchange for $6,750 in cash,
and (iii) 140,000 shares of its common stock, no par value per share, to
Jonathan M. Dobrin, in exchange for $4,050 in property. The above securities
were offered and sold by the Registrant in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act.
On June 11, 1997, the Registrant issued an aggregate of 132,000 investment
units; each unit consisting of 4.6667 shares of Series A Convertible Preferred
Stock (the "Series A Preferred") and one warrant to purchase 4.6667 shares of
Registrant's common stock (exercisable at a price of $1.62 per share), at a
purchase price of $7.58 per unit, to certain investors in consideration for the
payment of approximately $1,000,000. Upon the closing of this offering, all of
the outstanding shares of Series A Preferred will convert into an aggregate of
616,000 shares of common stock. The above securities were offered and sold by
the Registrant in reliance upon exemptions from registration pursuant to Rule
504 and Rule 506 of Regulation D promulgated under the Securities Act.
On February 2, 1998, the Registrant issued an aggregate of 1,525,218 shares
of Series B Convertible Preferred Stock (the "Series B Preferred"), at a
purchase price of $3.93 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 1,525,218 shares of common stock. The above securities were offered and sold
by the Registrant in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
In a series of closings from December 21, 1998 through March 1, 1999, the
Registrant issued an aggregate of 2,009,184 shares of Series C Convertible
Preferred Stock (the "Series C Preferred"), at a purchase price of $7.47 per
share, to certain investors in consideration for the payment of $15,000,000.
Upon the closing of this offering, all of the outstanding shares of Series C
Preferred will convert into an aggregate of 2,009,184 shares of common stock.
The above securities were offered and sold by the Registrant in reliance upon
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
Warrants. The Registrant from time to time has granted warrants to
investors, consultants and other third parties in connection with business
transactions. Except as otherwise noted below, these warrants were issued in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities.
<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................. 896,000 $1.62
January 1, 1998 to December 31, 1998................. 7,000 $5.70
January 1 to June 30, 1999........................... 40,185 $7.47
</TABLE>
- --------
1. 616,000 of these warrants were issued to purchasers of our Series A
Preferred, as described above. 280,000 of these warrants were issued to
executive officers, in reliance upon the exemption from registration provided
by Rule 701 promulgated under the Securities Act and by Section 4(2) of the
Securities Act.
2. These warrants were issued to a bank in connection with entering into a
credit facility.
3. These warrants were issued to Hambrecht & Quist LLC in connection with
serving as placement agent for our Series C Preferred financing.
II-2
<PAGE>
Options. The Registrant from time to time has granted stock options to
employees in reliance upon exemption from registration pursuant to either (i)
Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the
Securities Act.
<TABLE>
<CAPTION>
Shares
Remaining
as of
Number of Exercise September
Shares Prices 30, 1999
--------- -------- ---------
<S> <C> <C> <C>
July 26, 1996 (inception) to April 30,
1997..................................... 51,335 $0.59 51,335
May 1, 1997............................... 88,669 $0.54 46,668
July 15, 1997 through January 6, 1998..... 443,806 $1.79 352,804
January 7, 1998 to December 31, 1998...... 438,215 $2.14 335,863
January 1, 1999 to June 30, 1999.......... 438,909 $6.00 433,775
July 1, 1999 to September 20, 1999........ 661,081 $9.00 659,681
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15, except that Hambrecht & Quist LLC received a fee
of $645,000 and warrants to purchase 40,185 of Common Stock for $7.47 per share
in connection with the sale of our Series C Preferred.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect a 2-for-3 reverse stock split to
be effected immediately prior to the closing of this offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Amended and Restated Certificate of Incorporation, as amended.
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.
10.8** Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9** Form of Common Stock Purchase Warrant expiring June 11, 2000 issued
pursuant to the Unit Purchase Agreement dated June 11, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
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** [Not Used]
10.13** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.14** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.15 1999 Employee Stock Purchase Plan.
10.16 1999 Stock Incentive Plan.
10.17 Employment Agreement dated as of April 12, 1999 between the Registrant
and Charles P. Schneider.
10.18 Employment Agreement dated as of August 9, 1999 between the Registrant
and Douglas H. Kelsall.
10.19 Amendment to Amended and Restated Stockholders Agreement.
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 filed by amendment.
** Previously filed.
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 th day of October, 1999.
eCollege.com
By: /s/ Robert N. Helmick_
Name:Robert N. Helmick
Title:President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints Robert N. Helmick, Douglas H. Kelsall
and Jonathan M. Dobrin and each of them, our true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for it and in
our name, place and stead, in any and all capacities, to sign any and all
amendments, including any post-effective amendments, to this Registration
Statement on Form S-3, or any registration statement relating to the offering
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
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 October , 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/ Douglas H. Kelsall Chief Financial Officer and Treasurer
___________________________________________ (principal financial officer)
Douglas H. Kelsall
/s/ Ginger C. Smith Vice President, Finance (principal
___________________________________________ accounting officer)
Ginger C. Smith
/s/ Jonathan M. Dobrin Vice President, Chief Technology Officer
___________________________________________ and Director
Jonathan M. Dobrin
* Director
___________________________________________
Jack W. Blumenstein
/s/ Christopher E. Girgenti Director
___________________________________________
Christopher E. Girgenti
* Director
___________________________________________
Oakleigh Thorne
/s/ Jeri Korshak Director
___________________________________________
Jeri Korshak
</TABLE>
Robert N. Helmick
*By: /s/__________________
Robert N. Helmick
Attorney-in-Fact
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** Amended and Restated Certificate of Incorporation, as amended.
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** Form of Common Stock Purchase Warrant expiring June 11, 2000, issued
pursuant to the Unit Purchase Agreement dated June 11, 1997.
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** [Not Used]
10.13** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.14** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.15 1999 Employee Stock Purchase Plan.
10.16 1999 Stock Incentive Plan.
10.17 Employment Agreement dated as of April 12, 1999 between the Registrant
and Charles P Schneider.
10.18 Employment Agreement dated as of August 9, 1999 between the Registrant
and Douglas H. Kelsall.
10.19 Amendment to Amended and Restated Stockholders Agreement.
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 filed by amendment.
** Previously filed.
<PAGE>
_______________ Shares
ecollege.com, Inc.
Common Stock
Underwriting Agreement
dated ____________, 1999
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Representations and Warranties of the Company....................................................... 2
(a) Compliance with Registration Requirements...................................................... 2
(b) Offering Materials Furnished to Underwriters................................................... 2
(c) Distribution of Offering Material By the Company............................................... 2
(d) The Underwriting Agreement..................................................................... 3
(e) Authorization of the Common Shares............................................................. 3
(f) No Applicable Registration or Other Similar Rights............................................. 3
(g) No Material Adverse Change..................................................................... 3
(h) Independent Accountants........................................................................ 3
(i) Preparation of the Financial Statements........................................................ 3
(j) Incorporation and Good Standing of the Company................................................. 3
(k) Capitalization and Other Capital Stock Matters................................................. 4
(l) Stock Exchange Listing......................................................................... 4
(m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required..... 4
(n) No Conflict with Reincorporation............................................................... 5
(o) No Material Actions or Proceedings............................................................. 5
(p) Intellectual Property Rights................................................................... 5
(q) All Necessary Permits, etc..................................................................... 5
(r) Title to Properties............................................................................ 5
(s) Tax Law Compliance............................................................................. 6
(t) Company Not an "Investment Company"............................................................ 6
(u) Insurance...................................................................................... 6
(v) No Price Stabilization or Manipulation......................................................... 6
(w) Related Party Transactions..................................................................... 6
(x) No Unlawful Contributions or Other Payments.................................................... 6
(y) Company's Accounting System.................................................................... 6
(z) ERISA Compliance............................................................................... 7
(aa) Year 2000..................................................................................... 7
Section 2. Section 2. Purchase, Sale and Delivery of the Common Shares........................................ 7
</TABLE>
i.
<PAGE>
Table Of Contents
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C>
(a) The Firm Common Shares......................................................................... 7
(b) The First Closing Date......................................................................... 7
(c) The Optional Common Shares; the Second Closing Date............................................ 8
(d) Public Offering of the Common Shares........................................................... 8
(e) Payment for the Common Shares.................................................................. 8
(f) Delivery of the Common Shares.................................................................. 9
(g) Delivery of Prospectus to the Underwriters..................................................... 9
Section 3. Additional Covenants of the Company................................................................. 9
(a) Representatives' Review of Proposed Amendments and Supplements................................. 9
(b) Securities Act Compliance...................................................................... 9
(c) Amendments and Supplements to the Prospectus and Other Securities Act Matters.................. 10
(d) Copies of any Amendments and Supplements to the Prospectus..................................... 10
(e) Blue Sky Compliance............................................................................ 10
(f) Use of Proceeds................................................................................ 10
(g) Transfer Agent................................................................................. 11
(h) Earnings Statement............................................................................. 11
(i) Periodic Reporting Obligations................................................................. 11
(j) Agreement Not To Offer or Sell Additional Securities........................................... 11
(k) Future Reports to the Representatives.......................................................... 11
Section 4. Payment of Expenses................................................................................. 11
Section 5. Conditions of the Obligations of the Underwriters................................................... 12
(a) Accountants' Comfort Letter.................................................................... 12
(b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD............... 12
(c) No Material Adverse Change or Ratings Agency Change............................................ 13
(d) Opinion of Counsel for the Company............................................................. 13
(e) Opinion of Counsel for the Underwriters........................................................ 13
(f) Officers' Certificate.......................................................................... 13
</TABLE>
ii.
<PAGE>
Table Of Contents
(CONTINUED)
<TABLE>
<CAPTION>
Page
<S> <C>
(g) Bring-down Comfort Letter...................................................................... 13
(h) Lock-Up Agreement.............................................................................. 14
(i) Additional Documents........................................................................... 14
Section 6. Reimbursement of Underwriters' Expenses............................................................. 14
Section 7. Effectiveness of this Agreement..................................................................... 14
Section 8. Indemnification..................................................................................... 15
(a) Indemnification of the Underwriters............................................................ 15
(b) Indemnification of the Company, its Directors and Officers..................................... 16
(c) Notifications and Other Indemnification Procedures............................................. 16
(d) Settlements.................................................................................... 17
Section 9. Contribution........................................................................................ 17
Section 10. Default of One or More of the Several Underwriters.................................................. 18
Section 11. Termination of this Agreement....................................................................... 19
Section 12. Representations and Indemnities to Survive Delivery................................................. 19
Section 13. Notices............................................................................................. 20
Section 14. Successors.......................................................................................... 20
Section 15. Partial Unenforceability............................................................................ 20
Section 16. (a) Governing Law Provisions........................................................................ 20
Section 17. General Provisions.................................................................................. 21
</TABLE>
iii.
<PAGE>
Underwriting Agreement
[Date]
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY
As Representatives of the Several Underwriters
c/o BANC OF AMERICA SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. eCollege.com, Inc., a Delaware corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Common
- ----------
Shares") of its Common Stock, par value $.01 per share (the "Common Stock"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] shares (the "Optional Common Shares") of Common Stock, as
provided in Section 2. The Firm Common Shares and, if and to the extent such
option is exercised, the Optional Common Shares are collectively called the
"Common Shares." Banc of America Securities LLC ("BAS"), and William Blair &
Company have agreed to act as representatives of the several Underwriters (in
such capacity, the "Representatives") in connection with the offering and sale
of the Common Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-78365), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of BAS, elected to rely upon Rule
434 under the Securities Act, the term "Prospectus" shall mean the Company's
prospectus subject to completion (each, a "preliminary prospectus") dated [___]
(such preliminary prospectus is called the "Rule 434 preliminary prospectus"),
together with the applicable term sheet (the "Term Sheet") prepared and filed by
the Company with the Commission under Rules 434 and 424(b) under the Securities
Act and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus, the Prospectus or the Term Sheet, or any amendments or supplements
to any of
1.
<PAGE>
the foregoing, shall include any copy thereof filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-
T under the Securities Act), was identical to the copy thereof delivered to
the Underwriters for use in connection with the offer and sale of the
Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times, did not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or
filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete manually signed copies of
the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the Prospectus, as
amended or supplemented, in such quantities and at such places as the
Representatives have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with
the offering and sale of the Common Shares other than a preliminary
prospectus, the Prospectus or the Registration Statement.
2.
<PAGE>
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company (any such
change is called a "Material Adverse Change"); (ii) the Company has not
incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business;
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company or, except for dividends paid to the Company on
any class of capital stock or repurchase or redemption by the Company.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used
in this Agreement includes the related notes thereto) filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as
required by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and
included in the Prospectus present fairly the consolidated financial
position of the Company as of and at the dates indicated and the results of
its operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto.
No other financial statements or supporting schedules are required to be
included in the Registration Statement. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Selected
Financial Data", "Selected Financial Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration
Statement.
(j) Incorporation and Good Standing of the Company. The Company has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and to enter into
and
3.
<PAGE>
perform its obligations under this Agreement. The Company is duly qualified
as a foreign corporation to transact business and is in good standing in
the State of Colorado and each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions (other
than the state of Colorado) where the failure to so qualify or to be in
good standing would not, individually or in the aggregate, result in a
Material Adverse Change. The Company has no subsidiaries. The
reincorporation of the Company from a Colorado corporation into a Delaware
corporation (the "Merger") was duly and properly effectuated as a merger in
accordance with the Delaware and Colorado corporation laws, the successor
Company succeeded to all rights, privileges and obligations of the
predecessor Company and the offer and sale of the securities issued in
connection with the Merger were in compliance with the applicable federal
and state securities laws.
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in
the Prospectus). The Common Stock (including the Common Shares) conforms in
all material respects to the description thereof contained in the
Prospectus. All of the issued and outstanding shares of Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable
and have been issued in compliance with federal and state securities laws.
None of the outstanding shares of Common Stock were issued in violation of
any preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. The Company is not in violation of
its charter or by-laws or is in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") under any indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or
other instrument to which the Company is a party or by which it may be
bound, or to which any of the property or assets of the Company is subject
(each, an "Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the Prospectus
(i) have been duly authorized by all necessary corporate action and will
not result in any violation of the provisions of the charter or by-laws of
the Company, (ii) will not conflict with or constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company pursuant to, or
require the consent of any other party to, any Existing Instrument, except
for such conflicts, breaches, Defaults, liens, charges or encumbrances as
would not, individually or in the aggregate, result in a Material Adverse
Change and (iii) will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to
the Company. No consent, approval, authorization or other order of, or
registration or filing with, any court or other
4.
<PAGE>
governmental or regulatory authority or agency, is required for the
Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the Prospectus,
except such as have been obtained or made by the Company and are in full
force and effect under the Securities Act, applicable state securities or
blue sky laws and from the National Association of Securities Dealers, Inc.
(the "NASD").
(n) No Conflict with Reincorporation. Neither the Agreement and Plan
of Merger dated as of May 24, 1999 between the Company and Real Education,
Inc. a Colorado corporation, nor the exchange of shares consummated in
connection therewith contravened, conflicted with or results in a material
violation or breach of, or resulted in a default under, any provisions of
any agreement or contract of the Company or its predecessor Colorado
corporation, except for (i) any contravention, conflict, violation, breach
or default which could not reasonably be expected to result in a Material
Adverse Change, (ii) gave any person the right to (a) declare a default or
exercise any remedy under any such agreement or contract, except where any
such default or exercise of a remedy could not reasonably be expected to
result in a Material Adverse Change, (b) accelerate the maturity or
performance of any such agreement or contract, except where such
acceleration could not reasonably be expected to result in a Material
Adverse Change, or (c) cancel, terminate or modify any such contract,
except where any such cancellation, termination or modification could not
reasonably be expected to result in a Material Adverse Change; or (iii)
result in the imposition or creation of any encumbrance upon or with
respect to any of the shares of capital stock or the assets of the Company,
except where such encumbrance would not result in a Material Adverse Change
on the Company.
(o) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or affecting the Company, (ii)
which has as the subject thereof any officer or director of, or property
owned or leased by, the Company or (iii) relating to environmental or
discrimination matters, where in any such case (A) there is a reasonable
possibility that such action, suit or proceeding might be determined
adversely to the Company and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the
employees of the Company exists or, to the best of the Company's knowledge,
is threatened or imminent.
(p) Intellectual Property Rights. The Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct their
businesses as now conducted; and the expected expiration of any of such
Intellectual Property Rights would not result in a Material Adverse Change.
The Company has not received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
Material Adverse Change.
(q) All Necessary Permits, etc. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to
conduct its business, and the Company has not received any notice of
proceedings relating to the revocation or modification of, or non-
compliance with, any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in a Material Adverse Change.
(r) Title to Properties. The Company has good and marketable title to
all the properties and assets reflected as owned in the financial
statements referred to in Section 1(i) above, in each
5.
<PAGE>
case free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
materially interfere with the use made or proposed to be made of such
property by the Company. The real property, improvements, equipment and
personal property held under lease by the Company are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company.
(s) Tax Law Compliance. The Company has filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
required to be paid by it and, if due and payable, any related or similar
assessment, fine or penalty levied against it. The Company has made
adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal,
state and foreign income and franchise taxes for all periods as to which
the tax liability of the Company has not been finally determined.
(t) Company Not an "Investment Company". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(u) Insurance. The Company is insured by recognized, financially
sound and reputable institutions with policies in such amounts and with
such deductibles and covering such risks as are generally deemed adequate
and customary for their businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and earthquakes. The Company
has no reason to believe that it will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. The Company has not been
denied any insurance coverage which it has sought or for which it has
applied.
(v) No Price Stabilization or Manipulation . The Company has not
taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(w) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any other person
required to be described in the Prospectus which have not been described as
required.
(x) No Unlawful Contributions or Other Payments. The Company nor, to
the best of the Company's knowledge, any employee or agent of the Company,
has made any contribution or other payment to any official of, or candidate
for, any federal, state or foreign office in violation of any law or of the
character required to be disclosed in the Prospectus.
(y) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted
6.
<PAGE>
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(z) ERISA Compliance. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, or its
"ERISA Affiliates" (as defined below) are in compliance in all material
respects with ERISA. "ERISA Affiliate" means, with respect to the Company,
any member of any group of organizations described in Sections
414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and
the regulations and published interpretations thereunder (the "Code") of
which the Company is a member. No "reportable event" (as defined under
ERISA) has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, or any of
its ERISA Affiliates. No "employee benefit plan" established or maintained
by the Company, or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, nor any of its
ERISA Affiliates has incurred or reasonably expects to incur any liability
under (i) Title IV of ERISA with respect to termination of, or withdrawal
from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B
of the Code. Each "employee benefit plan" established or maintained by the
Company, or any of its ERISA Affiliates that is intended to be qualified
under Section 401(a) of the Code is so qualified and nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification.
(aa) Year 2000. All disclosure regarding year 2000 compliance that is
required to be described under the 1933 Act and 1933 Regulations (including
disclosures required by Staff Legal Bulletin No. 5) has been included in
the Prospectus. The Company will not incur significant operating expenses
or costs to ensure that its information systems will be year 2000
complaint, other than as disclosed in the Prospectus.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
Section 2. Section 2. Purchase, Sale and Delivery of the Common Shares.
(a) The Firm Common Shares. The Company agrees to issue and sell to
the several Underwriters the Firm Common Shares upon the terms herein set
forth. On the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein
set forth, the Underwriters agree, severally and not jointly, to purchase
from the Company the respective number of Firm Common Shares set forth
opposite their names on Schedule A. The purchase price per Firm Common
----------
Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor
shall be made at the offices of BAS, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Representatives) at 6:00 a.m. San Francisco time, on the fourth full day
after
7.
<PAGE>
the date of this Agreement, or such other time and date not later than
10:30 a.m. San Francisco time, on the tenth day following the original
contemplated First Closing Date as the Representatives shall designate by
notice to the Company (the time and date of such closing are called the
"First Closing Date"). The Company hereby acknowledges that circumstances
under which the Representatives may provide notice to postpone the First
Closing Date as originally scheduled include, but are in no way limited to,
any determination by the Company or the Representatives to recirculate to
the public copies of an amended or supplemented Prospectus or a delay as
contemplated by the provisions of Section 10.
(c) The Optional Common Shares; the Second Closing Date. In addition,
on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of [___] Optional
Common Shares from the Company at the purchase price per share to be paid
by the Underwriters for the Firm Common Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-
allotments in connection with the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not
more than once) upon notice by the Representatives to the Company, which
notice may be given at any time within 30 days from the date of this
Agreement. Such notice shall set forth (i) the aggregate number of Optional
Common Shares as to which the Underwriters are exercising the option, (ii)
the names and denominations in which the certificates for the Optional
Common Shares are to be registered and (iii) the time, date and place at
which such certificates will be delivered (which time and date may be
simultaneous with, but not earlier than, the First Closing Date; and in
such case the term "First Closing Date" shall refer to the time and date of
delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five
full business days after delivery of such notice of exercise. If any
Optional Common Shares are to be purchased, each Underwriter agrees,
severally and not jointly, to purchase the number of Optional Common Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Optional Common Shares to be purchased as the number of Firm
Common Shares set forth on Schedule A opposite the name of such Underwriter
----------
bears to the total number of Firm Common Shares. The Representatives may
cancel the option at any time prior to its expiration by giving written
notice of such cancellation to the Company.
(d) Public Offering of the Common Shares. The Representatives hereby
advise the Company that the Underwriters intend to offer for sale to the
public, as described in the Prospectus, their respective portions of the
Common Shares as soon after this Agreement has been executed and the
Registration Statement has been declared effective as the Representatives,
in their sole judgments, have determined is advisable and practicable.
(e) Payment for the Common Shares. Payment for the Common Shares
shall be made at the First Closing Date (and, if applicable, at the Second
Closing Date) by wire transfer of immediately available funds to the order
of the Company.
8.
<PAGE>
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for,
the Firm Common Shares and any Optional Common Shares the Underwriters have
agreed to purchase. The Representatives, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to)
make payment for any Common Shares to be purchased by any Underwriter whose
funds shall not have been received by the Representatives by the First
Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
(f) Delivery of the Common Shares. The Company shall deliver, or
cause to be delivered, to the Representatives for the accounts of the
several Underwriters certificates for the Firm Common Shares at the First
Closing Date, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
The Company shall also deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters, certificates
for the Optional Common Shares the Underwriters have agreed to purchase at
the First Closing Date or the Second Closing Date, as the case may be,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The certificates for
the Common Shares shall be in definitive form and registered in such names
and denominations as the Representatives shall have requested at least two
full business days prior to the First Closing Date (or the Second Closing
Date, as the case may be) and shall be made available for inspection on the
business day preceding the First Closing Date (or the Second Closing Date,
as the case may be) at a location in New York City as the Representatives
may designate. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
p.m. on the second business day following the date the Common Shares are
first released by the Underwriters for sale to the public, the Company
shall deliver or cause to be delivered, copies of the Prospectus in such
quantities and at such places as the Representatives shall request.
Section 3. Additional Covenants of the Company.
The Company further covenants and agrees with each Underwriter as
follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus, the Company shall furnish to
the Representatives for review a copy of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably objects.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or
9.
<PAGE>
supplement to any preliminary prospectus or the Prospectus, (iii) of the
time and date that any post-effective amendment to the Registration
Statement becomes effective and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or any post-effective amendment thereto or of any order preventing or
suspending the use of any preliminary prospectus or the Prospectus, or of
any proceedings to remove, suspend or terminate from listing or quotation
the Common Stock from any securities exchange upon which it is listed for
trading or included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the Commission
shall enter any such stop order at any time, the Company will use its best
efforts to obtain the lifting of such order at the earliest possible
moment. Additionally, the Company agrees that it shall comply with the
provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a
timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall
occur or condition exist as a result of which it is necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if in the opinion of the Representatives or counsel for
the Underwriters it is otherwise necessary to amend or supplement the
Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial Securities
laws of those jurisdictions designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service
of process in any such jurisdiction where it is not presently qualified or
where it would be subject to taxation as a foreign corporation. The Company
will advise the Representatives promptly of the suspension of the
qualification or registration of (or any such exemption relating to) the
Common Shares for offering, sale or trading in any jurisdiction or any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification,
registration or exemption, the Company shall use its best efforts to obtain
the withdrawal thereof at the earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
10.
<PAGE>
(g) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited), no later than 15 months
after the effective date of the Registration Statement, covering a period
of at least 12 consecutive months beginning after the effective date of the
Registration Statement that satisfies the provisions of Section 11(a) of
the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Exchange Act. Additionally, the Company shall report the use of
proceeds from the issuance of the Common Shares as may be required under
Rule 463 under the Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of BAS (which consent may be
withheld at the sole discretion of BAS), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act, or otherwise dispose of or transfer, or announce the
offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire
shares of the Common Stock or securities exchangeable or exercisable for or
convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Common Shares); provided, however, that the
Company may issue shares of its Common Stock or options to purchase its
Common Stock, or Common Stock upon exercise of options, pursuant to any
stock option, stock bonus or other stock plan or arrangement described in
the Prospectus, but only if the holders of such shares, options, or shares
issued upon exercise of such options, agree in writing not to sell, offer,
dispose of or otherwise transfer any such shares or options during such 180
day period without the prior written consent of BAS (which consent may be
withheld at the sole discretion of the BAS).
(k) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to BAS at 600 Montgomery Street,
San Francisco, CA 94111 Attention: Barry Newman: (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the
Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows
for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
BAS, on behalf of the several Underwriters, may, in its sole discretion,
waive in writing the performance by the Company of any one or more of the
foregoing covenants or extend the time for their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the
11.
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transactions contemplated hereby, including without limitation (i) all expenses
incident to the issuance and delivery of the Common Shares (including all
printing and engraving costs), (ii) all fees and expenses of the registrar and
transfer agent of the Common Stock, (iii) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Common Shares
to the Underwriters, (iv) all fees and expenses of the Company's counsel,
independent public or certified public accountants and other advisors, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement (including
financial statements, exhibits, schedules, consents and certificates of
experts), each preliminary prospectus and the Prospectus, and all amendments and
supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees
and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the state securities or blue sky laws or the provincial securities laws of
Canada, and, if requested by the Representatives, preparing and printing a "Blue
Sky Survey" or memorandum, and any supplements thereto, advising the
Underwriters of such qualifications, registrations and exemptions, (vii) the
filing fees incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with listing the Common Stock on
the Nasdaq National Market, and (ix) all other fees, costs and expenses referred
to in Item 13 of Part II of the Registration Statement. Except as provided in
this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Arthur Andersen LLP,
independent public or certified public accountants for the Company, a
letter dated the date hereof addressed to the Underwriters, in form
and substance satisfactory to the Representatives, containing
statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to
Statement of Auditing Standards No. 72 (or any successor bulletin),
with respect to the audited and unaudited financial statements and
certain financial information contained in the Registration Statement
and the Prospectus.
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of
this Agreement and prior to the First Closing Date and, with respect
to the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under
the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration
Statement containing the information required by such Rule 430A,
and such post-effective amendment shall have become effective;
or, if the Company elected to rely upon Rule 434 under the
Securities Act and obtained the Representatives' consent thereto,
the
12.
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Company shall have filed a Term Sheet with the Commission in the
manner and within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date in the judgment of the Representatives there shall not have
occurred any Material Adverse Change.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Brobeck Phleger & Harrison LLP, counsel for the
Company, dated as of such Closing Date, the form of which is agreed to by
the Representatives (and the Representatives shall have received an
additional two conformed copies of such counsel's legal opinion for each of
the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Cooley Godward LLP, counsel for the
Underwriters, dated as of such Closing Date (and the Representatives shall
have received an additional two conformed copies of such counsel's legal
opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (b)(ii) of this Section 5, and further to
the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and correct
with the same force and effect as though expressly made on and as of
such Closing Date; and
(iii) the Company has complied with all the agreements
hereunder and satisfied all the conditions on its part to be performed
or satisfied hereunder at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Arthur
Andersen LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance satisfactory to
the Representatives, to the effect that they reaffirm the statements made
in the letter furnished by them pursuant to subsection (a) of this Section
5, except that the
13.
<PAGE>
specified date referred to therein for the carrying out of procedures shall
be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be.
(h) Lock-Up Agreement. On the date hereof, the Company shall have
furnished to the Representatives an agreement in the form of Exhibit A
---------
hereto from each director, officer and each beneficial owner of Common
Stock (as defined and determined according to Rule 13d-3 under the Exchange
Act), and such agreement shall be in full force and effect on each of the
First Closing Date and the Second Closing Date.
(i) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11, or if the sale to the Underwriters of the Common Shares on the
First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply
with any provision hereof, the Company agrees to reimburse the Representatives
and the other Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all out-of-
pocket expenses that shall have been reasonably incurred by the Representatives
and the Underwriters in connection with the proposed purchase and the offering
and sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
14.
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Section 8. Indemnification.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees,
and each person, if any, who controls any Underwriter within the meaning of
the Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as
such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434
under the Securities Act, or the omission or alleged omission therefrom of
a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; or (iii) in whole or in part
upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the
Company to perform its obligations hereunder or under law; or (v) any act
or failure to act or any alleged act or failure to act by any Underwriter
in connection with, or relating in any manner to, the Common Stock or the
offering contemplated hereby, and which is included as part of or referred
to in any loss, claim, damage, liability or action arising out of or based
upon any matter covered by clause (i) or (ii) above, provided that the
Company shall not be liable under this clause (v) to the extent that a
court of competent jurisdiction shall have determined by a final judgment
that such loss, claim, damage, liability or action resulted directly from
any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse
each Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by BAS) as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or action;
provided, however, that the foregoing indemnity agreement shall not apply
to any loss, claim, damage, liability or expense to the extent, but only to
the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and
in conformity with written information furnished to the Company by the
Representatives expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the
benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale of
the Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense. The indemnity agreement set forth in this
Section 8(a) shall be in addition to any liabilities that the Company may
otherwise have.
15.
<PAGE>
(b) Indemnification of the Company, its Directors and Officers . Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred, to
which the Company, or any such director, officer or controlling person may
become subject, under the Securities Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of such Underwriter), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the
Registration Statement, any preliminary prospectus, the Prospectus (or any
amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Representatives
expressly for use therein; and to reimburse the Company, or any such
director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. The Company hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) are the statements set forth in the
table in the first paragraph, as the second paragraph, and as the ninth and
tenth paragraphs concerning stabilization by the Underwriters, and twelfth
and fourteenth paragraphs under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct.
The indemnity agreement set forth in this Section 8(b) shall be in addition
to any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such
16.
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indemnifying party's election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one separate
counsel (together with local counsel), approved by the indemnifying party
(BAS in the case of Section 8(b) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying
party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to
the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been
a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand, and the Underwriters, on the other hand, in
connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, and the total underwriting discount received by the Underwriters, in
each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the
<PAGE>
Securities Act is used, the corresponding location on the Term Sheet) bear to
the aggregate initial public offering price of the Common Shares as set forth on
such cover. The relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company, on the one hand, or the Underwriters, on
the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date,
18.
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and arrangements satisfactory to the Representatives and the Company for the
purchase of such Common Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, Section 6, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq National Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant to
this Section 11 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 4 and
6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at all
times be effective and shall survive such termination.
Section 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
19.
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Section 13. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: Jeffrey Lapic, Esq.
If to the Company:
eCollege.com, Inc.
10200 A East Girard Avenue
Denver, CO 80231
Facsimile: (303) 873-7449
Attention: Robert Helmick
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
Section 15. Partial Unenforceability. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 16. (A) Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
20.
<PAGE>
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
Section 17. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
.21
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
ECOLLEGE.COM, INC.
By:_________________________________________
Robert N. Helmick, President and
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives in San Francisco, California as of the date first above
written.
BANC OF AMERICA SECURITIES LLC
WILLIAM BLAIR & COMPANY
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By BANC OF AMERICA SECURITIES LLC
By:_______________________________
Name:_____________________________
Title:____________________________
Underwriting Agreement
Signature Page
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
UNDERWRITERS to be Purchased
<S> <C>
Banc of America Securities LLC.................. [___]
William Blair & Company......................... [___]
Total........................................ [___]
</TABLE>
<PAGE>
EXHIBIT A
[Date]
Banc of America Securities LLC
William Blair & Company
As Representatives of the Several Underwriters
c/o Banc of America Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: eCollege.com, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of BAS (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
1
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
_________________________________________________
Printed Name of Holder
By:______________________________________________
Signature
_________________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
2
<PAGE>
EXHIBIT 4.1
- -------------- --------------
Number Common Stock Shares
Par Value $0.01
- -------------- --------------
eCollege
.com
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
CUSIP 27887E 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF
eCollege.com, a Delaware corporation (hereinafter referred to as the
"Corporation"), transferable on the books of the Corporation in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the transfer agent and
registered by the registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE] [SEAL]
SECRETARY CHIEF EXECUTIVE OFFICE-PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
eCollege.com
The Corporation will furnish without charge to each stockholder who so
requests, a copy of the designations, powers, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such requests may be made to the Secretary of
the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-................... Custodian.....................
(Cust) (Minor)
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act...............................................
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
_________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE,
OF ASSIGNEE)
_________________________________________________________________
_________________________________________________________________
__________________________________________________________ shares
of the stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________ Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated _______________________________
X ____________________________________
NOTICE: (SIGNATURE)
THE SIGNATURE(S) TO
THE ASSIGNMENT MUST
CORRESPOND WITH THE
NAMES(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT
ALTERATION OR EN-
LARGEMENT OR ANY
CHANGE WHATEVER. X ____________________________________
(SIGNATURE)
--------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
--------------------------------------
SIGNATURE(S) GUARANTEED BY:
--------------------------------------
<PAGE>
Exhibit 10.15
ECOLLEGE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This 1999 Employee Stock Purchase Plan is intended to promote the
interests of eCollege.com, a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed One Million
(1,000,000) shares.
B. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities purchasable per
Participant and in the aggregate on any one Purchase Date and (iii) the number
and class of securities and the price per share in effect under each outstanding
purchase right in order to prevent the dilution or enlargement of benefits
thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
<PAGE>
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in October
2001. Subsequent offering periods shall commence as designated by the Plan
Administrator.
C. Each offering period shall be comprised of a series of one or
more successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May each year to the last business day in October of the same
year and from the first business day in November each year to the last business
day in April of the following year. However, the first Purchase Interval in
effect under the initial offering period shall commence at the Effective Time
and terminate on the last business day in April 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of
an offering period under the Plan may enter that offering period on such start
date or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
2
<PAGE>
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the appropriate form with the Plan Administrator. The
Participant may not, however, effect more than one (1) such reduction per
Purchase Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the rate of his or
her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
3
<PAGE>
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. Purchase Price. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date within
the offering period shall be equal to eighty-five percent (85%) of the lower of
(i) the Fair Market Value per share of Common Stock on the Participant's Entry
Date into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date during the offering
period shall be the number of whole shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Interval ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed One Thousand Five Hundred (1,500) shares, subject to periodic adjustments
in the event of certain changes in the Corporation's capitalization. In
addition, the maximum number of shares of Common Stock purchasable in the
aggregate by all Participants on any one Purchase Date shall not exceed Two
Hundred Fifty Thousand (250,000) shares, subject to periodic adjustments in the
event of certain changes in the corporation's capitalization.
E. Excess Payroll Deductions. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
govern the termination of outstanding purchase rights:
4
<PAGE>
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding
purchase right by filing the appropriate form with the Plan Administrator
(or its designate), and no further payroll deductions shall be collected
from the Participant with respect to the terminated purchase right. Any
payroll deductions collected during the Purchase Interval in which such
termination occurs shall, at the Participant's election, be immediately
refunded or held for the purchase of shares on the next Purchase Date. If
no such election is made at the time such purchase right is terminated,
then the payroll deductions collected with respect to the terminated right
shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the Plan
during the Purchase Interval in which the purchase right was terminated. In
order to resume participation in any subsequent Purchase Interval, such
individual must re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry Date.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for the
Purchase Interval in which the purchase right so terminates shall be immediately
refunded. However, should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant shall have
the right, exercisable up until the last business day of the Purchase Interval
in which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or (b) have
such funds held for the purchase of shares on his or her behalf on the next
scheduled Purchase Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (x) within ninety (90) days following the
commencement of such leave or (y) prior to the expiration of any longer period
for which such Participant's right to reemployment with the Corporation is
guaranteed by statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in
5
<PAGE>
effect at the time the leave began, unless the Participant withdraws from
the Plan prior to his or her return. An individual who returns to active
employment following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new Employee for
purposes of subsequent participation in the Plan and must accordingly re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the offering
period.
G. Corporate Transaction. Each outstanding purchase right shall
---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Interval in which such Corporate Transaction occurs to the
purchase of whole shares of Common Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Common Stock on the Participant's Entry Date into the offering period in which
such Corporate Transaction occurs or (ii) the Fair Market Value per share of
Common Stock immediately prior to the effective date of such Corporate
Transaction. However, the applicable limitations on the number of shares of
Common Stock purchasable per Participant and in the aggregate shall continue to
apply to any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.
H. Proration of Purchase Rights. Should the total number of shares
----------------------------
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
-------------
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would
6
<PAGE>
otherwise permit such Participant to purchase more than Twenty-Five Thousand
Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value per share on the date or dates
such rights are granted) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on __________, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in October 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan or the
maximum number of shares purchasable per Participant on any one Purchase Date,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the
State of Colorado without regard to that State's conflict-of-laws rules.
8
<PAGE>
Schedule A
----------
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
eCollege.com
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Cash Earnings shall mean the (i) base salary payable to a
-------------
Participant by one or more Participating Corporations during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall not include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
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(iii) the acquisition, directly or indirectly by an person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
G. Corporation shall mean eCollege.com, a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of eCollege.com which shall by appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Time shall designate a subsequent Effective
Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
A-2
<PAGE>
(iii) For purposes of the initial offering period which begins at
the Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as setforth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be April 28, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in May
----------------------
and November each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.
A-3
<PAGE>
Exhibit 10.16
ECOLLEGE.COM
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
eCollege.com, a Delaware corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary
invested each year in special options,
(iii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such shares
or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary),
(iv) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at periodic
intervals to purchase shares of Common Stock; and
(v) the Director Fee Option Grant Program under which non-
employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The following provisions shall govern the administration of the
Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part to
the Primary Committee.
(ii) Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate
in those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
(iii) The Primary Committee shall have the sole and exclusive
authority to determine which Section 16 Insiders and other highly
compensated Employees shall be eligible for participation in the Salary
Investment Option Grant Program for one or more calendar years. However,
all option grants under the Salary Investment Option Grant Program shall be
made in accordance with the express terms of that program, and the Primary
Committee shall not exercise any discretionary functions with respect to
the option grants made under that program.
(iv) Administration of the Automatic Option Grant and Director
Fee Option Grant Programs shall be self-executing in accordance with the
terms of those programs.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations, to
construe and interpret the provisions of the Plan and the awards thereunder
and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards are
to be made, the number of shares to be covered by each such award, the
vesting schedule (if any) applicable to the award, the status of a granted
option as either an Incentive Option or a Non-Statutory Option and the
maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with the
consent of the holder or accelerate the vesting of such award; and
2
<PAGE>
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors
of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
____________________________ (____________) shares. Such authorized share
reserve consists of (i) the number of shares which remain available for
issuance, as of the Plan Effective Date, under the Predecessor Plan, including
the shares subject to the outstanding options to be incorporated into the Plan
and the additional shares which would otherwise be available for future grant,
plus (ii) an increase of
3
<PAGE>
__________________________ (_____________) shares authorized by the Board
subject to stockholder approval prior to the Section 12 Registration Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2000 calendar year, by an
amount equal to three percent (3%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall any such annual increase exceed one million five hundred thousand
(1,500,000) shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than seven hundred and fifty thousand (750,000) shares of Common Stock in
the aggregate per calendar year, beginning with the 1999 calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance. Shares of Common Stock
underlying one or more stock appreciation rights exercised under the Plan shall
not be available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities by which the share reserve is
to increase each calendar year pursuant to the automatic share increase
provisions of the Plan, (iii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iv) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (v) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (vi) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan. Such
adjustments to the outstanding options are to be effected in a manner
4
<PAGE>
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
5
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant, but shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section II of Article
Seven and the documents evidencing the option, be payable in cash or check made
payable to the Corporation. Should the Common Stock be registered under Section
12 of the 1934 Act at the time the option is exercised, then the exercise price
may also be paid as follows:
(i) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
6
<PAGE>
C. Cessation of Service.
---------------------
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service to such
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee
7
<PAGE>
cease Service while holding such unvested shares, the Corporation shall have the
right to repurchase, at the exercise price paid per share, any or all of those
unvested shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than to a Beneficiary following the
Optionee's death. Non-Statutory Options shall be subject to the same
restrictions, except that a Non-Statutory Option may, to the extent permitted by
the Plan Administrator, be assigned in whole or in part during the Optionee's
lifetime (i) as a gift to one or more members of the Optionee's immediate
family, to a trust in which Optionee and/or one or more such family members hold
more than fifty percent (50%) of the beneficial interest or to an entity in
which more than fifty percent (50%) of the voting interests are owned by one or
more such family members or (ii) pursuant to a domestic relations order. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
8
<PAGE>
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but not
otherwise fully-vested shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all of the shares of Common Stock at the time subject to that
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
--------
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in full or in part in connection with a
Change in Control, whether or not those options are assumed or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Any such option shall accordingly become exercisable,
9
<PAGE>
immediately prior to the effective date of such Change in Control, for all or
part of the shares of Common Stock at the time subject to that option and may be
exercised for some or all of those shares as fully-vested shares of Common
Stock. In addition, the Plan Administrator may at any time provide that one or
more of the Corporation's repurchase rights shall not be assignable in
connection with such Change in Control and shall terminate upon the consummation
of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in full or in part upon an Involuntary
Termination of the Optionee's Service within a designated period (not to exceed
eighteen (18) months) following the effective date of any Change in Control in
which those options do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully-vested shares until the earlier of (i) the
-------
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may at any time provide that one or more of the
Corporation's repurchase rights shall immediately terminate upon such
Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in full or in part in connection with a
Hostile Take-Over. Any such option shall become exercisable, immediately prior
to the effective date of such Hostile Take-Over, for all or part of the shares
of Common Stock at the time subject to that option and may be exercised for some
or all of those shares as fully-vested shares of Common Stock. In addition, the
Plan Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall terminate automatically upon the consummation of such
Hostile Take-Over. Alternatively, the Plan Administrator may condition such
automatic acceleration and termination upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of such Hostile Take-Over. Each option so
accelerated shall remain exercisable for fully-vested shares until the
expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in connection with
a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a Non-
Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
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<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option Grant
Program for one or more calendar years beginning after the Underwriting Date and
select the Section 16 Insiders and other highly compensated Employees eligible
to participate in the Salary Investment Option Grant Program for each such
calendar year. Each selected individual who elects to participate in the Salary
Investment Option Grant Program must, prior to the start of each calendar year
of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Ten Thousand Dollars
($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary
Committee shall have complete discretion to determine whether to approve the
filed authorization in whole or in part. To the extent the Primary Committee
approves the authorization, the individual who filed that authorization shall be
granted an option under the Salary Investment Grant Program on the first trading
day in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
--------
that each such document shall comply with the terms specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the Optionee's
base salary for the calendar year, and
11
<PAGE>
B is the Fair Market Value per share of Common Stock on the option
grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Cessation of Service. Each option outstanding at the time of the
--------------------
Optionee's cessation of Service shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Service, each outstanding option shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Change in Control or Hostile Take-Over, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as fully-
vested shares of Common Stock. Each such option accelerated in connection with
a Change in Control shall terminate upon the Change in Control, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
12
<PAGE>
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
13
<PAGE>
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening options. Shares
of Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.
A. Purchase Price.
--------------
1. The purchase price per share of Common Stock subject to direct
issuance shall be fixed by the Plan Administrator, but shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the issuance date.
2. Subject to the provisions of Section II of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting/Issuance Provisions.
---------------------------
1. The Plan Administrator may issue shares of Common Stock which
are fully and immediately vested upon issuance or which are to vest in one or
more installments over the Participant's period of Service or upon attainment of
specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is
14
<PAGE>
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
6. Outstanding share right awards shall automatically terminate,
and no shares of Common Stock shall actually be issued in satisfaction of those
awards, if the performance goals or Service requirements established for such
awards are not attained. The Plan Administrator, however, shall have the
authority to issue shares of Common Stock in satisfaction of one or more
outstanding share right awards as to which the designated performance goals or
Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any Change in
Control or Hostile Take-Over in which those repurchase rights are assigned to
the successor corporation (or parent thereof) or otherwise continue in full
force and effect.
15
<PAGE>
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
16
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Options shall be made on the dates specified below:
-----------
1. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase five thousand (5,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
3. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as a non-employee
Board member, whether or not that individual is standing for re-election to the
Board, shall automatically be granted a Non-Statutory Option to purchase two
thousand five hundred (2,500) shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be
-------------------------------
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial 5,000 share grant shall
vest, and the Corporation's repurchase right shall lapse, in a series of four
(4) successive equal annual installments over the Optionee's period of continued
service as a Board member, with the first such installment to vest upon the
Optionee's completion of one (1) year of Board service measured from the option
grant date. Each annual 2,500 share option grant shall vest, and the
Corporation's repurchase right shall lapse upon the Optionee's completion of one
(1) year of Board service measured from the option grant date.
E. Cessation of Board Service. The following provisions shall
--------------------------
govern the exercise of any options outstanding at the time of the Optionee's
cessation of Board service:
17
<PAGE>
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for a
twelve (12)-month period following the date of such cessation of Board
service, but in no event shall such option be exercisable after the
expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) Following the Optionee's cessation of Board service, the
option may not be exercised in the aggregate for more than the number of
shares for which the option was exercisable on the date of such cessation
of Board service. Upon the expiration of the applicable exercise period or
(if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Board service, terminate and cease to be
outstanding for any and all shares for which the option is not otherwise at
that time exercisable.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at the
time subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control or Hostile
Take-Over, became fully exercisable for all of the shares of Common Stock at the
time subject to such option and maybe exercised for all or any of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. All outstanding repurchase rights shall automatically terminate
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Change in Control or Hostile Take-
Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding
18
<PAGE>
options. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Option Surrender
Value of the shares of Common Stock at the time subject to each surrendered
option (whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
--------
exercise price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for options made under
the Discretionary Option Grant Program.
19
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Board may implement the Director Fee Option Grant Program as of
the first day of any calendar year beginning after the Underwriting Date. Upon
such implementation of the Program, each non-employee Board member may elect to
apply all or any portion of the annual retainer fee otherwise payable in cash
for his or her service on the Board to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the election is to be in effect. Each non-employee Board member
who files such a timely election with respect to the annul retainer fee shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which that fee
would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the option
grant date.
20
<PAGE>
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each month of Board service during the calendar year in
which the option is granted. Each option shall have a maximum term of ten (10)
years measured from the option grant date.
D. Cessation of Board Service. Should the Optionee cease Board
--------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options, then each such option shall remain exercisable, for any or
all of the shares for which the option is exercisable at the time of such
cessation of Board service, until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. However, each option
held by the Optionee at the time of such cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
E. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee shall immediately become exercisable for all the
shares of Common Stock at the time subject to that option, and the option may be
exercised for any or all of those shares as fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options, then each such option may be exercised, for any or
all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
-------
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while
the Optionee remains in Board service, each outstanding option held by such
Optionee shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control or Hostile
Take-Over, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such option
accelerated in connection with a Change in Control shall terminate upon the
Change in Control, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise expressly continued in full force and effect
pursuant to the terms of the Change in Control. Each such option accelerated in
connection with a Hostile Take-Over shall remain exercisable until the
expiration or sooner termination of the option term.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an
21
<PAGE>
amount equal to the excess of (i) the Option Surrender Value of the shares of
Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
22
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Withholding Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%) designated by the
holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
23
<PAGE>
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan
Effective Date. However, the Salary Investment Option Grant and Director Fee
Option Grant Programs shall not be implemented until such time as the Primary
Committee or the Board may deem appropriate. Options may be granted under the
Discretionary Option Grant Program at any time on or after the Plan Effective
Date. However, no options granted under the Plan may be exercised, and no
shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further options or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) ______, 2009,
--------
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess
24
<PAGE>
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
25
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under the Plan.
B. Beneficiary shall mean, in the event the Plan Administrator
-----------
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
descent and distribution.
C. Board shall mean the Corporation's Board of Directors.
-----
D. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than fifty
------
percent (50%) of the total combined voting power of the voting securities
of the successor corporation are immediately thereafter beneficially owned,
directly or indirectly and in substantially the same proportion, by the
persons who beneficially owned the Corporation's outstanding voting
securities immediately prior to such transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board recommends such
stockholders accept.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
----
F. Common Stock shall mean the Corporation's common stock.
------------
G. Corporation shall mean eCollege.com, a Delaware corporation, and
-----------
any corporate successor to all or substantially all of the assets or voting
stock of eCollege.com which shall by appropriate action adopt the Plan.
A-1
<PAGE>
H. Director Fee Option Grant Program shall mean the director fee
---------------------------------
option grant program in effect under the Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under the Plan.
J. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
L. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
M. Hostile Take-Over shall mean:
-----------------
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board
A-2
<PAGE>
members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
N. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
O. Involuntary Termination shall mean the termination of the Service
-----------------------
of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation or Parent or Subsidiary
employing the individual which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B)
a reduction in his or her level of compensation (including base salary,
fringe benefits and target bonus under any performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a relocation
of such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.
P. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. This shall not limit the grounds for the dismissal or discharge of any
person in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
R. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
S. Option Surrender Value shall mean the Fair Market Value per share
----------------------
of Common Stock on the date the option is surrendered to the Corporation or, in
the event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction. However, the
Primary Committee shall have the plenary authority to make all factual
determinations and to construe and interpret any and all ambiguities under the
Plan to the extent such authority is not otherwise expressly delegated to any
other Plan Administrator.
Z. Plan Effective Date shall mean ________, 1999, the date on which
-------------------
the Plan was adopted by the Board.
AA. Predecessor Plan shall mean the Corporation's pre-existing 1997
----------------
Stock Option Plan in effect immediately prior to the Plan Effective Date
hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program with
respect to all eligible individuals.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment grant program in effect under the Plan.
DD. Secondary Committee shall mean a committee of one (1) or more
-------------------
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
A-4
<PAGE>
EE. Section 12 Registration Date shall mean the date on which the
----------------------------
Common Stock is first registered under Section 12(g) of the 1934 Act.
FF. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
GG. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
HH. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under the Plan.
JJ. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
KK. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
LL. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
NN. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection with
the exercise of those options or the vesting of those shares.
A-5
<PAGE>
EXHIBIT 10.17
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
EMPLOYMENT AGREEMENT
DATE: April 12, 1999
PARTIES: Real Education, Inc., a Colorado corporation (the "Company")
Charles Schneider, a resident of California (the "Employee")
RECITAL:
The Company is engaged in the business of online web production, online
education and online training. The Company desires to employ and retain the
unique experience, abilities, and services of Employee as the Company's
Executive Vice President.
AGREEMENT:
The parties agree as follows:
1) EMPLOYMENT
a) Duties. Company shall employ Employee as Executive Vice President.
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
the duties and responsibilities described on Schedule A to this Agreement.
In performing such duties, Employee shall be subject to the direction and
control of the CEO 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 (for the purposes of this paragraph, the term
"business services" shall not include passive investment by Employee of
his personal assets) that are not first submitted in writing to the CEO of
the Company, and approved in writing by the CEO shall be deemed a breach
of this Agreement.
b) Term. Employment of the Employee shall begin on or before June,
1999 on a date determined by Employee and the Company's CEO
-1-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
("Start Date") and shall end on the date of termination pursuant to
Section 5 of this Employment Agreement (the "Agreement")
2) COVENANT NOT TO COMPETE; CONFIDENTIALITY
a) Noncompetition. During the term of this Agreement and for a period of
six (6) months after the termination of this Agreement, Employee shall
not, within the United States or Canada, directly or indirectly: (1) own
(as a proprietor, partner, stockholder, or otherwise) an interest of
five percent (5%) or more 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 division
or business unit of an enterprise, to the extent that such division or
business unit is engaged, directly or indirectly, or any company or
other entity engaged primarily, in the online education or online
training business except with the prior written consent of the CEO of
the Company; 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 online education or online
training business 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 during the period referred to
in the prior paragraph 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.
b) Confidentiality. Employee acknowledges and agrees that all product
specifications, product planning information, lists of the Company's
customers and suppliers, marketing plans, 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.
c) 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 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,
-2-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
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 (except for any
associated, reasonable out-of-pocket expenses of Employee which Company
will pay), 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 or other instruments.
Notwithstanding the foregoing, the Company hereby notifies the Employee
that the provisions of this Section 2)c) 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.
d) Nondisparagement. During the term of this Agreement and for a period of two
years following the voluntary or involuntary termination of the Employee's
employment, the parties shall not make any statements concerning the other
party that would tend to diminish the esteem, respect, good will, or
confidence in which that party is held by members of the community in which
that party, or its officers, directors and employees, conduct their
business affairs or that would provoke adverse or derogatory feelings or
opinions in such members of those communities as to that party.
e) Return of Documents and Computer Data. Employee acknowledges and agrees
that all originals and copies of all computer data, 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.
f) Injunction. Employee agrees that it would be difficult to measure damage to
the Company from any breach by Employee of Section 2)a), 2)b), or 2)c) 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)a), 2)b), or 2)c), 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.
-3-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
g) 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 set forth herein pursuant to Section 2)a),
2)b), 2)c), 2)d), or 2)e) or Company from any obligations set forth herein
pursuant to Section 2)d) or 5.
-4-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
3) COMPENSATION
a) 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.
b) Other Benefits. Employee has been provided with a brochure that provides
a brief, general description of the Company's benefits. Employee agrees
and acknowledges that the benefits provided by the Company may be
changed or amended from time to time, and at any time, at the sole
discretion of the Company. Employee shall allowed to participate in any
benefit program created by the Compensation Committee of the Board and
approved by the Board and/or created by the Board, as a benefit program
to the members of the Management Committee of the Company.
4) COMPANY POLICIES
a) General Policy Descriptions. Employee has been provided with the Real
Education Employee Benefits Summary, which includes descriptions of
Medical Insurance and Prescription Card, Dental Insurance, Flexible
Reimbursement Program, Personal Days, Paid Holidays, Direct Deposit,
Bonus Programs, Employee Referral Program and Smoke Free Work
Environment as of March 31, 1999. Additional policies and standards of
the Company will be provided to Employee during the New Employee
Orientation, and from time to time during the Employee's employment.
b) Abide by All Policies Established by the Company. Employee agrees to
abide by all rules, policies, standards and regulations of the Company,
and in particular the three rules identified in Schedule B of this
Agreement.
c) Changes to Company Policies. Employee agrees and acknowledges that the
Company's policies may be created, eliminated, changed or amended from
time to time, and at any time, at the sole discretion of the Company.
5) TERMINATION
a) At-Will Employment. Employee agrees and acknowledges that, just as he
has the right to terminate his employment with the Company at any time
for any reason, the Company has the same right, and may terminate his
employment with the Company at any time for any reason.
b) Severance. The Company shall provide Employee with severance pay equal
to six months of Employee's base salary paid on the Company's normal
payroll dates, plus the pro-rata portion of any earned bonus (paid on
the normal date for payment of the bonus), plus/less any
positive/negative accrued vacation days, regardless of whether
-5-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
the termination was voluntary or involuntary, provided that the Employee
executes the severance agreement (attached hereto) waiving any claims
against the Company and in which the Company waives claims against the
Employee.
c) Immediate Termination. The employment of Employee by the Company may be
terminated immediately in the sole discretion of the either the CEO or the
Board of Directors of the Company upon the occurrence of any one of the
following events:
i) If the Employee willfully fails or refuses to comply, in a
material manner, with the policies, standards, and regulations of the
Company following written notice of breach and a reasonable opportunity to
cure;
ii) Employee engages in fraud, dishonesty, or any other act of
misconduct in the performance of Employee's duties on behalf of the
Company;
iii) 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 a reasonable opportunity to cure such breach;
iv) Employee violates one or more of the rules identified on
Schedule B.
Termination as a result of the foregoing will be deemed a termination for
cause for the purposes of this Agreement. All other terminations by the
Company will be deemed terminations without cause for the purposes of this
Agreement. A voluntary resignation by Employee resulting from a material
breach of this Agreement by the Company, a material lessening of
Employee's role, duties or status with the Company or requirement that
Employee's principal office be other than in the Denver, Colorado
metropolitan area will be deemed a termination without cause for the
purposes of this Agreement.
6) REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
a) No Other Employment Agreements. 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.
b) Special Needs. There are no special accommodations required to be made by
Company for Employee to perform his duties and responsibilities.
7) MISCELLANEOUS PROVISIONS
a) Notices a) Notices a) 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, by e-
-6-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
mail 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 Education, Inc.
Attn: John V. Helmick
10200 "A" East Girard Ave.
Denver, Colorado 80231
Fax: 1-303-873-7449
If to Employee:
---------------
Charles Schneider
10200 "A" East Girard Ave.
Denver, Colorado 80231
Fax: 1-303-873-7449
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.
b) AmendmentsAmendmentsAmendments. This Agreement may be amended only by an
instrument in writing executed by all the parties.
c) Entire AgreementEntire AgreementEntire 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.
d) CounterpartsCounterpartsCounterparts. 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.
e) SeverabilitySeverabilitySeverability. 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
-7-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
Agreement and, upon so agreeing, shall incorporate such substitute
provision into this Agreement.
f) WaiverWaiverWaiver. 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.
g) Further AssurancesFurther AssurancesFurther 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.
h) No Third-Party BeneficiariesNo Third-Party BeneficiariesNo 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.
i) ExpensesExpensesExpenses. Except as otherwise provided herein, each party
shall bear its own expenses in connection with this Agreement and the
transactions contemplated by this Agreement.
j) ExhibitsExhibitsExhibits. The exhibits and schedules referenced in this
Agreement are a part of this Agreement as if fully set forth in this
Agreement.
k) Governing LawGoverning LawGoverning 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.
l) ArbitrationArbitrationArbitration.
i) Any controversy or claim arising out of or relating to this Agreement,
including, without limitation, the making, performance, or
interpretation of this Agreement, any claim for employment
discrimination, wrongful termination or violation of any state or
federal law related to employment, shall be settled by arbitration.
ii) The parties may choose 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 Employment Arbitration Rules of the American Arbitration
Association in Denver, Colorado. 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
Employment 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
-8-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
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 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.
iii) 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.
iv) The arbitrator shall award all direct costs of the arbitration,
including arbitrator's fees and arbitration filing fees to the
substantially prevailing party. However, each party shall bear their
own costs related to the arbitration, such as attorneys' fees,
deposition costs, copy costs, express delivery costs, travel costs,
witness costs and postage.
v) 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
seventy five (75) days following the date that the arbitrator is
appointed.
vi) 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 EDUCATION, INC.
By:_____________________________________
Robert N. Helmick, CEO
_____________________________________
Charles Schneider
-9-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
SCHEDULE A
COMPENSATION AND DUTIES
1) SALARY. For the period beginning the Start Date through July 31, 2000
(subject to (2), below), compensation to the Employee shall be at the rate
of $195,000 per year, payable on the Company's normal payroll dates.
2) SALARY ADJUSTMENT. Employee base compensation for periods after July 31,
2000 shall be at the rate as set by the Board of the Company, at the
recommendation of the CEO and the Compensation Committee, payable on the
Company's normal payroll dates. Salary adjustments shall be determined in
August of each year, and made retroactive to the Start Date anniversary of
that year. Salary adjustments will include any cost of living increase
provided generally to all members of the Management Committee. Salary will
not be adjusted downward except as part of a general reduction in the
salaries of senior executives of the Company.
3) BONUS/OTHER COMPENSATION. Employee shall be eligible for a an annual bonus
of up to $100,000 based upon reasonable criteria and a bonus plan
established by the Compensation Committee and administered by the CEO. The
bonus will be paid following the annual audit of the Company's financial
records, but no later than March 31 of the year following the year in which
the bonus was earned. In any year in which the Employee is not employed by
the Company for the entire year, the bonus will be prorated according to the
number of days in the year that the Employee was employed by the Company.
4) STOCK OPTIONS. Employee shall be issued non-qualified stock options for
70,000 shares of the common stock, no par value, of the Company with an
exercise price of $28 per share. Options on 17,500 shares shall vest on the
first anniversary of Employee's employment; thereafter, options on 1,458
shares shall vest on the last day of each month following the month of the
Employees first anniversary. The initial 17,500 shares shall immediately
vest upon a termination without cause in the first 364 days of employment.
All unvested options will vest on a change of control of the Company. All
terms of the options shall be more fully described in the Stock Option
Agreement. The Stock Option Agreement shall include a net exercise feature.
6) BONUS; MOVING ALLOWANCE. As a condition of Company's employment of Employee,
Employee has agreed to relocate to the greater Denver Colorado area
(including Boulder and Douglas County). In recognition of Employee's
obligation to relocate by moving his primary residence to Colorado, and
moving his family and household possessions to Denver Colorado, the Company
shall provide Employee with bonus and moving allowance of $108,000, fifty
percent (50%) paid on the Employees within three (3) business days of the
first day of employment and fifty percent (50%) paid within three (3)
business days following Employee's relocation to Denver, Colorado.
-10-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
7) DUTIES AND JOB DESCRIPTION. As Executive Vice President. Employee's duties
shall include:
. Executive Management of the Sales, Marketing and Account Services
departments and activity of the Company;
. Attend and participate in all Management Committee meetings and
activities
. Report directly to CEO and perform such other duties and
responsibilities as assigned by the CEO
Employee acknowledges that he has read and fully understands all terms set forth
in this Schedule A.
_________________________
Charles Schneider
-11-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
SCHEDULE B
All employees must abide by the following rules of the company:
HONESTY. Employees shall conduct their affairs with honesty and integrity and
shall not engage in fraud, dishonesty or any act of material misconduct.
SIGNING AGREEMENTS. Employees shall not sign any document or agreement that
creates a legally binding obligation on the Company. The only person authorized
to sign agreements is the CEO, Robert Helmick.
WRITTEN AGREEMENT. All employees of the Company and all independent contractors
of the Company must have a signed, written agreement with the Company prior to
performing work for the Company.
Any violation of the above rules may result in disciplinary action, including
termination of any employee found to have violated one or more of the above
rules.
Employee acknowledges that he has read and fully understands all terms set forth
in this Schedule B.
____________________________
Charles Schneider
-12-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
ACKNOWLEDGMENT
I acknowledge that I have received, read, and understood the Employment
Agreement, the Schedules attached thereto, and the Employee Benefits Handbook of
Real Education, Inc., (the "Company"). Further, I understand and agree to the
following:
1. The Employment Agreement, the Schedules attached thereto, and the
Employee Benefits Handbook (the "Employment Documents") contain a brief summary
of some important Company guidelines and policies. Consequently, the Employment
Documents are not all-inclusive and do not include all guidelines and policies
which may affect my employment with the Company.
2. The Company may alter, amend, delete or add to any of the statements
contained in the Employment Documents, or any of its policies or guidelines, at
any time, with or without notice, and my continued employment with the Company
after any such deletion or addition constitutes acceptance.
3. No contract, agreement, understanding, course of dealing, practice, or
statement of any kind by any employee, supervisor, officer, director, or
representative of the Company shall be effective or binding upon the Company
unless it is in writing, refers to and names me personally, and is signed by me
and by an authorized Company representative.
4. Just as I have the right to terminate my employment with the Company at
any time for any reason, with or without cause and with or without notice, the
Company has the same right, and may terminate my employment with the Company at
any time for any reason, with or without cause, and with or without notice.
5. The Employment Documents provide for arbitration of any matter related
to my employment and any matter or claim between the Company any me. I
understand that by signing the Employment Agreement, I am waiving my rights to
have any claim against the Company (including claims relating to employment or
termination) filed and heard in state or federal court, and the Company has also
waived its rights to have any claim against me filed and heard in state or
federal court. Instead, the Company and I have agreed to have all disputes
resolved by arbitration before the American Arbitration Association.
________________________________
Charles Schneider
-13-
<PAGE>
DRAFT DATED APRIL 23, 1999 COMPARED AGAINST DRAFT DATED APRIL 23, 1999
________________
Date
- ------------------ COMPARISON OF HEADERS ------------------
- ------------------ COMPARISON OF FOOTERS ------------------
12
-14-
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
DATE: August 9, 1999
PARTIES: eCollege.com, Inc., a Delaware corporation (the "Company")
Doug Kelsall, a resident of Colorado (the "Employee")
RECITAL:
The Company is engaged in the business of online web production, online
education and online training. The Company desires to employ and retain the
unique experience, abilities, and services of Employee as the Company's Chief
Financial Officer.
AGREEMENT:
The parties agree as follows:
1) EMPLOYMENT
a) Duties. Company shall employ Employee as Chief Financial Officer.
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 the duties and responsibilities described on Schedule
A to this Agreement. In performing such duties, Employee shall be
subject to the direction and control of the CEO 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 of which Employee is given
written (including email) notice, 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 (for the purposes of this paragraph, the term "business
services" shall not include passive investment by Employee of his
personal assets) that are not first submitted in writing to the CEO of
the Company, and approved in writing by the CEO shall be deemed a
breach of this Agreement.
b) Term. Employment of the Employee shall begin on or before
___________________ on a date determined by Employee and the Company's
CEO ("Start Date") and shall end on the date of termination pursuant to
Section 5 of this Employment Agreement (the "Agreement").
2) COVENANT NOT TO COMPETE; CONFIDENTIALITY
a) Noncompetition. During the term of this Agreement and for a period of
six (6) months after the termination of this Agreement, Employee shall
not, within the United States or Canada, directly or indirectly: (1)
own (as a proprietor, partner, stockholder, or otherwise) an interest
of five percent (5%) or more in; or (2) participate (as an officer,
Page 1 - Doug Kelsall Employment Agreement
<PAGE>
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 division
or business unit of an enterprise, to the extent that such division or
business unit is engaged, directly or indirectly, or any company or
other entity engaged primarily, in the online education or online
training business except with the prior written consent of the CEO of
the Company; 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 online education or online
training business products and services provided by the Company to its
customers during the term hereof.
In addition, during the term of this Agreement and for a period of 12
months after the termination of employment with the Company, 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.
b) Confidentiality. Employee acknowledges and agrees that all product
specifications, product planning information, lists of the Company's
customers and suppliers, marketing plans, 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, information that Employee knew before the date
of this Agreement, information that becomes public knowledge without
fault of Employee, or information lawfully made available to Employee
from another source prior to or after the term of employment, 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.
c) 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 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 (except for
any associated, reasonable out-of-pocket expenses of Employee which
Company will pay), 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 or other instruments.
Page 2 - Doug Kelsall Employment Agreement
<PAGE>
Notwithstanding the foregoing, the Company hereby notifies the Employee
that the provisions of this Section 2)c) 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.
d) Nondisparagement. During the term of this Agreement and for a period of
two years following the voluntary or involuntary termination of the
Employee's employment, the parties shall not make any statements
concerning the other party that would tend to diminish the esteem,
respect, good will, or confidence in which that party is held by
members of the community in which that party, or its officers,
directors and employees, conduct their business affairs or that would
provoke adverse or derogatory feelings or opinions in such members of
those communities as to that party.
e) Return of Documents and Computer Data. Employee acknowledges and agrees
that all originals and copies of all computer data, 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.
f) Injunction. Employee and Company agree that it would be difficult to
measure damages to the Company or Employee from any breach by Employee
or Company of Section 2)a), 2)b), 2)c) or 2)d) and that monetary
damages would be an inadequate remedy for any such breach. Accordingly,
Employee and Company agrees that if Employee or Company shall breach or
take steps preliminary to breaching Section 2)a), 2)b), 2)c) or 2)d),
the Employee or Company, as appropriate, 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 Employee or
Company.
g) 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 set forth herein pursuant to
Section 2)a), 2)b), 2)c), 2)d), or 2)e) or Company from any obligations
set forth herein pursuant to Section 2)d) or 5.
3) COMPENSATION
a) 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.
b) Other Benefits. Employee has been provided with a brochure that
provides a brief, general description of the Company's benefits.
Employee agrees and acknowledges that the benefits provided by the
Company may be changed or amended from time to time, and at any time,
at the sole discretion of the Company. Employee shall be allowed to
participate in any benefit program created by the Compensation
Committee of the
Page 3 - Doug Kelsall Employment Agreement
<PAGE>
Board and approved by the Board and/or created by the Board, as a
benefit program provided to all members of the Management Committee of
the Company.
4) COMPANY POLICIES
a) General Policy Descriptions. Employee has been provided with the
eCollege.com Employee Benefits Summary, which includes descriptions of
Medical Insurance and Prescription Card, Dental Insurance, Flexible
Reimbursement Program, Personal Days, Paid Holidays, Direct Deposit,
Bonus Programs, Employee Referral Program and Smoke Free Work
Environment as of March 31, 1999. Additional policies and standards of
the Company will be provided to Employee during the New Employee
Orientation, and from time to time during the Employee's employment.
b) Abide by All Policies Established by the Company. Employee agrees to
abide by all rules, policies, standards and regulations of the Company,
and in particular the three rules identified in Schedule B of this
Agreement.
c) Changes to Company Policies. Employee agrees and acknowledges that the
Company's policies may be created, eliminated, changed or amended from
time to time, and at any time, at the sole discretion of the Company.
5) TERMINATION
a) At-Will Employment. Employee agrees and acknowledges that, just as he
has the right to terminate his employment with the Company at any time
for any reason, the Company has the same right, and may terminate his
employment with the Company at any time for any reason.
b) Severance. The Company shall provide Employee with severance pay equal
to six months of Employee's base salary paid on the Company's normal
payroll dates, plus the pro-rata portion of any earned bonus (paid on
the normal date for payment of the bonus), plus/less any
positive/negative accrued vacation days, regardless of whether the
termination was voluntary or involuntary, provided that the termination
was not a termination for cause (as defined in Paragraph 5)c) below and
the Employee executes the severance agreement (attached hereto) waiving
any claims against the Company and in which the Company waives claims
against the Employee.
b) Immediate Termination. The employment of Employee by the Company may be
terminated immediately in the reasonable discretion of the either the
CEO or the Board of Directors of the Company upon the occurrence of any
one of the following events:
i) If the Employee willfully fails or refuses to comply, in a
material manner, with the policies, standards, and regulations of
the Company following written notice of breach and a reasonable
opportunity to cure;
ii) Employee engages in fraud, dishonesty, or any other act of
misconduct in the performance of Employee's duties on behalf of
the Company;
iii) 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
Page 4 - Doug Kelsall Employment Agreement
<PAGE>
Employee will receive reasonable, written notice of breach and a
reasonable opportunity to cure such breach;
iv) Employee violates one or more of the rules identified on Schedule
B.
Termination as a result of the foregoing will be deemed a "termination
for cause" for the purposes of this Agreement. All other terminations
by the Company will be deemed terminations without cause for the
purposes of this Agreement. A voluntary resignation by Employee
resulting from a material breach of this Agreement by the Company, a
material lessening of Employee's role, duties or status with the
Company or requirement that Employee's principal office be other than
in the Denver, Colorado metropolitan area will be deemed a termination
without cause for the purposes of this Agreement.
6) REPRESENTATIONS AND WARRANTIES OF EMPLOYEE
a) No Other Employment Agreements. 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.
b) Special Needs. There are no special accommodations required to be made
by Company for Employee to perform his duties and responsibilities.
7) MISCELLANEOUS PROVISIONS
a) 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,
by e-mail 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:
eCollege.com
Attn: Denise Pilkington, General Counsel
Building A, 4th Floor
10200 East Girard Ave.
Denver, Colorado 80231
Fax: 1-303-873-7449
If to Employee:
Doug Kelsall
Building A, 4th Floor
10200 East Girard Ave.
Denver, Colorado 80231
Fax: 1-303-873-7449
Page 5 - Doug Kelsall Employment Agreement
<PAGE>
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.
b) Amendments. This Agreement may be amended only by an instrument in
writing executed by all the parties.
c) 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.
d) 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.
e) 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.
f) 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.
g) 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.
h) 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.
i) 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.
j) Exhibits. The exhibits and schedules referenced in this Agreement are a
part of this Agreement as if fully set forth in this Agreement.
Page 6 - Doug Kelsall Employment Agreement
<PAGE>
k) 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.
l) Arbitration.
i) Any controversy or claim arising out of or relating to this
Agreement, including, without limitation, the making,
performance, or interpretation of this Agreement, any claim for
employment discrimination, wrongful termination or violation of
any state or federal law related to employment, shall be settled
by arbitration.
ii) The parties may choose 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 Employment Arbitration Rules of the
American Arbitration Association in Denver, Colorado. 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 Employment 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 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.
iii) 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.
iv) The arbitrator shall award all direct costs of the arbitration,
including arbitrator's fees and arbitration filing fees to the
substantially prevailing party. However, each party shall bear
their own costs related to the arbitration, such as attorneys'
fees, deposition costs, copy costs, express delivery costs,
travel costs, witness costs and postage.
v) 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 seventy five (75) days following the date that the
arbitrator is appointed.
Page 7 - Doug Kelsall Employment Agreement
<PAGE>
vi) 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.
eCollege.com, Inc.
By:_____________________________________
Robert N. Helmick, CEO
_____________________________________
Doug Kelsall
Page 8 - Doug Kelsall Employment Agreement
<PAGE>
SCHEDULE A
COMPENSATION AND DUTIES
1) SALARY. For the period beginning the Start Date through October 1, 2000
(subject to (2), below), compensation to the Employee shall be at the rate
of $168,000 per year, payable on the Company's normal payroll dates.
2) SALARY ADJUSTMENT. Employee base compensation for periods after October 1,
2000 shall be at the rate as set by the Board of the Company, at the
recommendation of the CEO and the Compensation Committee, payable on the
Company's normal payroll dates. Salary adjustments will include any cost of
living increase provided generally to all members of the Management
Committee. Salary will not be adjusted downward except as part of a general
reduction in the salaries of senior executives of the Company.
3) BONUS/OTHER COMPENSATION. Employee shall be eligible for an annual bonus of
up to $85,000 based upon reasonable criteria and a bonus plan established
by the Compensation Committee and administered by the CEO. The bonus will
be paid following the annual audit of the Company's financial records, but
no later than March 31 of the year following the year in which the bonus
was earned. In any year in which the Employee is not employed by the
Company for the entire year, the bonus will be prorated according to the
number of days in the year that the Employee was employed by the Company.
4) STOCK OPTIONS. Employee shall be issued non-qualified stock options for
200,000 shares of the common stock, no par value, of the Company with an
exercise price of $10 per share. Options for 50,000 shares shall be vested
on the Start Date ("Start Date Options"). Option for an additional 50,000
shares shall vest on the first anniversary of the Start Date. Thereafter,
options on 4,166 shares shall vest on the last day of each month. Employee
shall not be allowed to exercise any options until he has been employed for
at least 12 consecutive months, and Employee shall not be allowed to
exercise any of the Start Date Options if he is not employed on the date of
the exercise of the Start Date Options; provided, however, that this
sentence shall not apply if Employee is terminated without cause during the
first 12 months of employment. All unvested options will vest on a change
of control of the Company. The stock options will provide for a net
exercise feature. All terms of the options shall be more fully described in
the Stock Option Agreement.
5) DUTIES AND JOB DESCRIPTION. As Chief Financial Officer Employee's duties
shall include:
. Manage the Finance Department and the financial affairs of the Company
. Manage the Corporate Services Department
. Report directly to CEO and perform such other duties and responsibilities
as assigned by the CEO
Employee acknowledges that he has read and fully understands all terms set forth
in this Schedule A.
_________________________
Doug Kelsall
Page 9 - Doug Kelsall Employment Agreement
<PAGE>
SCHEDULE B
All employees must abide by the following rules of the Company:
HONESTY. Employees shall conduct their affairs with honesty and integrity and
shall not engage in fraud, dishonesty or any act of material misconduct.
SIGNING AGREEMENTS. Unless authorized by the Board or the CEO, Employees shall
not sign any document or agreement that creates a legally binding obligation on
the Company. The only person authorized to sign agreements is the CEO, Robert
Helmick.
WRITTEN AGREEMENT. All employees of the Company and all independent contractors
of the Company must have a signed, written agreement with the Company prior to
performing work for the Company.
Any violation of the above rules may result in disciplinary action, including
termination of any employee found to have violated one or more of the above
rules.
Employee acknowledges that he has read and fully understands all terms set forth
in this Schedule B.
____________________________
Doug Kelsall
Page 10 - Doug Kelsall Employment Agreement
<PAGE>
ACKNOWLEDGMENT
--------------
I acknowledge that I have received, read, and understood the Employment
Agreement, the Schedules attached thereto, and the Employee Benefits Handbook of
eCollege.com, Inc., (the "Company"). Further, I understand and agree to the
following:
1. The Employment Agreement, the Schedules attached thereto, and the
Employee Benefits Handbook (the "Employment Documents") contain a brief summary
of some important Company guidelines and policies. Consequently, the Employment
Documents are not all-inclusive and do not include all guidelines and policies
which may affect my employment with the Company.
2. The Company may alter, amend, delete or add to any of the statements
contained in the Employment Documents, or any of its policies or guidelines, at
any time, with or without notice, and my continued employment with the Company
after any such deletion or addition constitutes acceptance.
3. No contract, agreement, understanding, course of dealing, practice, or
statement of any kind by any employee, supervisor, officer, director, or
representative of the Company shall be effective or binding upon the Company
unless it is in writing, refers to and names me personally, and is signed by me
and by an authorized Company representative.
4. Subject to the terms of the Agreement, just as I have the right to
terminate my employment with the Company at any time for any reason, with or
without cause and with or without notice, the Company has the same right, and
may terminate my employment with the Company at any time for any reason, with or
without cause, and with or without notice.
5. The Employment Documents provide for arbitration of any matter related
to my employment and any matter or claim between the Company any me. I
understand that by signing the Employment Agreement, I am waiving my rights to
have any claim against the Company (including claims relating to employment or
termination) filed and heard in state or federal court, and the Company has also
waived its rights to have any claim against me filed and heard in state or
federal court. Instead, the Company and I have agreed to have all disputes
resolved by arbitration before the American Arbitration Association.
________________________________
Doug Kelsall
________________
Date
Page 11 - Doug Kelsall Employment Agreement
<PAGE>
EXHIBIT 10.5
ECOLLEGE.COM, INC.
AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
--------------------------------------------------------
This Amendment to Amended and Restated Shareholders Agreement, dated
as of January 1, 1999 (the "Amendment"), is entered into by and among
eCollege.com, Inc., a Delaware corporation (the "Company"), and the stockholders
of the Company set forth on the signature pages hereto (each a "Stockholder" and
collectively, the "Stockholders").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and certain of its stockholders entered into an
Amended and Restated Shareholders Agreement on December 21, 1998 (the
"Agreement"); and
WHEREAS, the Company and the Stockholders desire to amend the
Agreement in certain respects; and
WHEREAS, pursuant to Section 7(a) of the Agreement, such Agreement may
be amended upon the prior written consent of (i) the Company, (ii) the holders
of at least sixty six and two-thirds percent (66 2/3%) of the Company's
outstanding Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, voting together as one class, (iii) the holders of at least
sixty seven percent (67%) of the Company's outstanding Series C Preferred Stock,
voting separately as a class and (iv) the holders of at least a majority of the
Company's outstanding Common Stock, voting separately as a class.
NOW, THEREFORE, in consideration of the premises and the agreements
set forth herein, and intending to be legally bound hereby, the parties hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. Capitalized terms used herein and not otherwise
-----------
defined herein shall have the respective meanings set forth in the Agreement.
ARTICLE II
AMENDMENT
2.1 Section 2 of the Agreement is hereby amended and restated in its
entirety, to read in full as follows:
"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
seven (7) members.
1.
<PAGE>
b) The Shareholders further agree that the Common Shareholders shall
have the right to designate three representatives to serve on the
Board (the "Common Shareholders' Designees"), at least one of whom
shall be an individual that is not an employee of the Company (the
"Independent Director"), that the Series A Investors shall have the
right to designate one (1) representatives to serve on the Board (the
"Series A Designee"), and that one of the Series B Investors,
Blumenstein/Thorne Information Partners I, L.P., shall have the right
to designate one (1) representative to serve on the Board (the "Series
B Designee"), that one of the Series C Purchasers, MediaOne or its
assignee, shall have the right to designate one (1) representative to
serve on the Board (the "Series C Designee"), and that all
shareholders, including Common Shareholders, Series A Investors,
Series B Investors and Series C Purchasers - shall vote to elect one
representative to the Board; provided that the director shall be
elected by the affirmative vote of at least two-thirds (66.67%) of the
total shares voting in the election ("All Shareholders Designee").
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 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.
2.
<PAGE>
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 January 29, 1999, the members of the Compensation Committee
shall be (1) the Series A Designee, (2) the Series B Designee, (3) the
Series C Designee and (4) the Independent Director. As of the
January 29, 1999, the members of the Audit Committee shall be (1) the
Series B Designee, (2) the Series A Designee (3) the Series C
Designee, and (4) the Independent Director."
2.2 In accordance with Section 7(a) of the Agreement, this Amendment
shall be effective upon execution by (i) the Company, (ii) the holders of at
least sixty six and two-thirds percent (66 2/3%) of the Company's outstanding
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
voting together as one class, (iii) the holders of at least sixty seven percent
(67%) of the Company's outstanding Series C Preferred Stock, voting separately
as a class and (iv) the holders of at least a majority of the Company's
outstanding Common Stock, voting separately as a class.
ARTICLE III
MISCELLANEOUS
3.1 Governing Law. This Agreement shall be governed by and
-------------
interpreted in accordance with the laws of the State of Colorado as applied to
agreements executed and performed wholly within the State of Colorado, without
regard to its conflict of law principles.
3.2 Headings. The Section headings appearing in this Agreement are
--------
for reference purposes only and shall not be considered a part of this
Agreement. Such headings shall not modify, amend or affect the provisions
hereof.
3.3 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Assignment and Binding Effect. Subject to the foregoing, all of
-----------------------------
the terms and provisions of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the successors and assigns of each of the
parties hereto. All references herein to any party shall be deemed to include
any successor to such party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
eCollege.com, Inc.
By: /s/ Robert N. Helmick
-------------------------------------
Robert N. Helmick
President and Chief Executive Officer
STOCKHOLDERS:
------------
JAMES R. NOLLSCH
/s/ James R. Nollsch
----------------------------------------
James R. Nollsch
NIKKI PIKE
/s/ Nikki Pike
----------------------------------------
Nikki Pike
STEVEN SINGER
/s/ Steven Singer
----------------------------------------
Steven Singer
WILLIAM E. WALDECK
/s/ William E. Waldeck
----------------------------------------
William E. Waldeck
4.
<PAGE>
NEW WORLD EQUITIES, INC.
By:_____________________________________
Its:____________________________________
ALAN L. SIGMAN
/s/ Alan L. Sigman
----------------------------------------
Alan L. Sigman
JAMES F. HEMMER
/s/ James F. Hemmer
----------------------------------------
James F. Hemmer
MICHAEL J. WALKER
/s/ Michael J. Walker
----------------------------------------
Michael J. Walker
BRADLEY FELIX
/s/ Bradley Felix
----------------------------------------
Bradley Felix
ADEL HAZAN
/s/ Adel Hazan
----------------------------------------
Adel Hazan
5.
<PAGE>
ROBERT C. DOUGLAS
/s/ Robert C. Douglas
----------------------------------------
Robert C. Douglas
DAVID P. SCHIELDROP
/s/ David P. Schieldrop
----------------------------------------
David P. Schieldrop
PATRICK C. DELACEY
/s/ Patrick C. DeLacey
----------------------------------------
Patrick C. DeLacey
ROBERT A. CONWAY AND
DARLENE A. CONWAY, JTWROS
/s/ Robert A. Conway
----------------------------------------
Robert A. Conway
/s/ Darlene A. Conway
----------------------------------------
Darlene A. Conway
LEE S. MENDEL
/s/ Lee S. Mendel
----------------------------------------
Lee S. Mendel
STANLEY R. DOBRIN
/s/ Stanley R. Dobrin
----------------------------------------
Stanley R. Dobrin
6.
<PAGE>
MARK A. TIMMERMAN
/s/ Mark A. Timmerman
----------------------------------------
Mark A. Timmerman
McD VENTURE CAPITAL FUND, L.P.
By:_____________________________________
Its:____________________________________
MCDONALD & COMPANY SECURITIES, INC., As
Custodian for William E. Waldeck IRA
By:_____________________________________
Its:____________________________________
MCDONALD & CO. SECURITIES, INC.
By:_____________________________________
Its:____________________________________
SILVER FAMILY TRUST U/D/T
/s/ Martin J. Silver, Trustee
----------------------------------------
Martin J. Silver, Trustee
/s/ Victoria H. Silver, Trustee
----------------------------------------
Victoria H. Silver, Trustee
7.
<PAGE>
WILLIAM O. KASTEN
/s/ William O. Kasten
----------------------------------------
William O. Kasten
DAVIS B. WEIDNER
/s/ Davis B. Weidner
----------------------------------------
Davis B. Weidner
JAY S. PERLMUTTER
/s/ Jay S. Perlmutter
----------------------------------------
Jay S. Perlmutter
STANLEY R. DOBRIN & CAROL DOBRIN, JTWROS
/s/ Stanley R. Dobrin
----------------------------------------
Stanley R. Dobrin
/s/ Carol Dobrin
----------------------------------------
Carol Dobrin
SUE THOMPSON
/s/ Sue Thompson
----------------------------------------
Sue Thompson
8.
<PAGE>
H & K PARTNERS V
By: /s/ William Kasten
-------------------------------------
William Kasten, _____________________
N.T. RUDDOCK CO.
By: /s/ Samuel James Ruddock
-------------------------------------
Samuel James Ruddock, Vice President
BLUMENSTEIN/THORNE
INFORMATION PARTNERS I, L.P.
By: Blumenstein Thorne Information
Partners, L.L.C., as General Partner
/s/
----------------------------------------
Jack Blumenstein, Co-President
MEDIAONE INTERACTIVE SERVICES, INC.
By: /s/ Thomas Cullen
-------------------------------------
Thomas Cullen, President
VSI HOLDINGS, INC.
By: /s/ Terry L. Davis
-------------------------------------
Terry L. Davis, Executive Vice President
9.
<PAGE>
ROBERT N. HELMICK
/s/ Robert N. Helmick
----------------------------------------
Robert N. Helmick
JOHN V. HELMICK
/s/ John V. Helmick
----------------------------------------
John V. Helmick
JONATHAN M. DOBRIN
/s/ Jonathan M. Dobrin
----------------------------------------
Jonathan M. Dobrin
JAMES N. SIGMAN
/s/ James N. Sigman
----------------------------------------
James N. Sigman
10.
<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
June 18, 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 6,318,108
<SECURITIES> 0 0
<RECEIVABLES> 326,665 1,469,435
<ALLOWANCES> 9,800 9,800
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,090,408 8,252,937
<PP&E> 2,082,377 3,178,771
<DEPRECIATION> (513,248) (926,129)
<TOTAL-ASSETS> 13,659,537 10,505,579
<CURRENT-LIABILITIES> 2,513,209 4,157,973
<BONDS> 0 0
19,649,415 23,150,211
0 0
<COMMON> 456,190 540,975
<OTHER-SE> (8,995,177) (17,420,236)
<TOTAL-LIABILITY-AND-EQUITY> 13,659,537 10,505,579
<SALES> 1,665,069 1,395,524
<TOTAL-REVENUES> 1,665,069 1,395,524
<CGS> 0 0
<TOTAL-COSTS> 2,064,909 2,737,349
<OTHER-EXPENSES> 6,992,696 6,324,757
<LOSS-PROVISION> 9,800 9,800
<INTEREST-EXPENSE> 36,819 0
<INCOME-PRETAX> (7,289,847) (7,464,328)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,289,847) (7,464,328)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,289,847) (7,464,328)
<EPS-BASIC> (1.58) (1.70)
<EPS-DILUTED> (1.58) (1.70)
</TABLE>
