<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1999
Registration No. 333-78365
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
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 Number)
Incorporation or
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. Michael L. Platt, Esq.
Brobeck, Phleger & Harrison LLP Cooley Godward LLP
370 Interlocken Boulevard, Suite 500 2595 Canyon Boulevard, Suite 250
Broomfield, Colorado 80021 Boulder, Colorado 80302
(303) 410-2000 (303) 546-4000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effectiv
e 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 prospectus is not complete and may be +
+changed. The underwriters may not confirm sales of these securities until the +
+registration statement filed with the Securities and Exchange Commission +
+becomes effective. This prospectus is not an offer to sell these securities, +
+and it is not soliciting an offer to buy these securities in any state where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 22, 1999
Shares
[LOGO OF eCOLLEGE.COM APPEARS HERE]
Common Stock
eCollege.com is offering shares of its common stock. This is our initial
public offering. We intend to apply to have our common stock listed on the
Nasdaq National Market under the symbol "ECLG." We estimate that the initial
public offering price will be between $ and $ .
-----------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 8.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $ $
Discounts and Commissions to Underwriters $ $
Proceeds to eCollege.com $ $
</TABLE>
Neither the Securities and Exch
ange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
-----------
Banc of America Securities LLC
Thomas Weisel Partners LLC
William Blair & Company
The date of this prospectus is , 1999.
<PAGE>
[picture of woman working on a laptop computer in a train station]
2
<PAGE>
[Picture of representative course home page from student perspective depicting
interactive syllabus for a microeconomics course. Text appearing above picture
reads: "eCollege.com is about possibilities. Not merely the possibilities that
arise in the wake of classrooms without walls, but those which occur when
educators communicate with students through a whole new medium. At
eCollege.com, our sole purpose is to provide educators and students with
unparalleled options for learning to not only extend the classroom, but to
elevate its potential." Graphic also includes caption "Teaching in a Whole New
Way. Beyond the chalk and the board -- students," together with the Company's
logo.]
<PAGE>
[Picture of course home page from the faculty perspective depicting interactive
syllabus from course entitled "Teaching with eCollege.com." Text below the
picture reads: "Think of the interactive syllabus, located on the Course
Homepage on the left, as your guide to the unlimited technological potential of
eCollege System 3.0SM. Providing immediate access to the wide array of
multimedia and communication tools that make up our course delivery system, the
Interactive Syllabus ensures that every component of your virtual classroom is
just a "click" away." Graphic also includes caption "Teaching in a Whole New
Way. Beyond the chalk and the board -- faculty," together with the company's
logo.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 31
Management............................................................... 41
Certain Transactions..................................................... 48
Principal Stockholders................................................... 51
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. Unless otherwise indicated,
all information contained in this prospectus assumes that the underwriters will
not exercise their over-allotment option. This prospectus contains forward-
looking statements, which involve risks and uncertainties. eCollege.com's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this prospectus. Unless otherwise
indicated, all information contained in this prospectus reflects the conversion
of our outstanding preferred stock into common stock, a seven-for-one split of
our common stock and our reincorporation in Delaware on or before completion of
this offering.
eCollege.com
eCollege.com, formerly Real Education, Inc., is a leading provider of a
complete solution that enables colleges and universities to deliver an online
campus and courses over the Internet. Our integrated platform of software and
services allows colleges and universities to outsource the creation, launch,
management and support of a comprehensive online campus and courses. We
typically create and deliver a complete online campus, including faculty and
administration training, in 60 business days. We charge our customers an
initial online campus and course development fee, an additional development fee
for each incremental online course, and a per student fee for each enrollment
in an online course. Our comprehensive solution, which includes design,
development, management and hosting of online campuses and courses as well as
ongoing customer support, allows colleges and universities to reach a large
number of additional students and enables students to participate in courses at
convenient times and from a variety of geographic locations. As of May 12,
1999, we had 80 contracts covering over 100 individual campuses. Since our
inception in 1996, our customers have purchased more than 1,500 online courses
from us. During the Spring 1999 term, our customers had approximately 5,000
student enrollments in online courses provided by us.
The Internet's universal accessibility and real-time interactivity make it
an ideal platform for distance learning. Accordingly, distance learning has
become one of the fastest growing segments of the education marketplace.
International Data Corporation estimated that the number of Web users worldwide
would exceed 95 million by the end of 1998 and will grow to over 320 million by
the end of 2002. International Data Corporation also estimates that
approximately 85% of higher education institutions will offer distance learning
courses by 2002 and that the number of students taking such courses will
increase by more than 30% per year through 2002. Despite this projected growth,
colleges and universities face several challenges in delivering high quality
online courses. Effective online education requires that students receive a
learning experience of comparable quality, content and student/faculty
interaction to an on-campus education. We believe that many colleges and
universities have found internally developed solutions to be time-consuming,
expensive and difficult to implement. As a result of these problems, a growing
number of colleges and universities are outsourcing the development and
maintenance of their online campus and courses.
Our solution is designed to meet the online learning needs of colleges and
universities and their students. The eCollege.com solution has the following
key elements:
Comprehensive Services. We provide a comprehensive suite of services,
including design, development, management and hosting of online campuses and
courses, as well as ongoing customer support. Our online campus model
replicates key services of a physical campus, including admissions,
registration, bookstore, library, academic advising, career counseling, student
union, bursar's office and financial aid services.
Rapid, Cost-Effective Development of Online Campuses. We can build an online
campus for a college or university, typically within 60 business days. Our
initial development fee of $30,000 includes the online campus and ten courses.
We believe most colleges and universities would incur substantially greater
costs to develop a comparable solution internally.
Easy Online Course Development. We work with faculty members to convert
courses into effective presentations designed for delivery over the Internet
using an array of course design tools and support services.
4
<PAGE>
Our automated, user-friendly authoring tools enable faculty, with little or no
programming experience, to easily develop and update their courses through a
standard Web browser.
Easy to Use, Online Learning Environment. We believe our customized online
campuses and courses are easy for students and faculty to use. 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 utilize
multiple or "redundant" high bandwidth sources for Internet connections. We
also employ groups of servers arranged such that they work together so that the
failure of a single server can be recovered by others in the cluster. Further,
we use fault-tolerant storage technology that allows the system to keep working
in the event of hardware or software faults as well as load distribution
capabilities that evenly distribute traffic across the group servers.
We target more than 3,000 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 50 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. 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 for providers of
continuing education and corporate training worldwide. The key elements of our
growth strategy are:
Add Additional Colleges and Universities. Using a focused regional approach,
our recently expanded sales force is now actively targeting more than 3,000
colleges and universities. We are also increasing our marketing efforts,
including increased print and online media advertising and greater
participation in trade shows and executive speaking engagements.
Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently announced a
$12 million grant and scholarship program. This program is designed to increase
the number of degree courses offered online by offering free online campus and
course design to selected colleges and universities. It is also designed to
increase the number of online students by offering tuition scholarships to
selected students.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We believe this will be a key factor in our ability to serve
additional departments within the college or university.
Enter New Markets. We intend to further expand into the continuing education
and corporate training markets and to pursue opportunities with international
colleges and universities.
----------------
5
<PAGE>
Our company was incorporated in Colorado on July 26, 1996. On or before
completion of this offering, we will be reincorporated in Delaware as
eCollege.com. Our principal executive offices are located at 10200 A East
Girard Avenue, Denver, Colorado 80231. Our telephone number is (303) 873-7400.
Information contained on our website is not incorporated by reference into this
prospectus and you should not consider such information a part of this
prospectus.
eCollege and our logo are trademarks, and eCollege System, eCollege Campus
and eCollege Course are service marks, of eCollege.com. Each trademark, trade
name or service mark of any other company appearing in this prospectus belongs
to its holder.
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 losses and expected future losses
. our unproven business model
. our highly competitive market
. our reliance on a single service offering
. 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."
The Offering
<TABLE>
<S> <C>
Common stock offered.............. shares
Common stock to be outstanding shares
after this offering..............
Use of proceeds................... To fund anticipated operating losses, to
substantially increase promotional and
marketing activities and for other general
corporate purposes, including adding
personnel to expand development and
marketing capacities. A portion of the net
proceeds may also be used for the
acquisition of businesses, products,
services or technologies that are
complementary to those of eCollege.com. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol........................... ECLG
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of April 30, 1999 and excludes 1,668,450 shares of common stock
issuable upon the exercise of outstanding stock options and 891,177 shares of
common stock issuable upon the exercise of outstanding warrants. These options
and warrants have a weighted average exercise price of $1.41 per share. See
"Capitalization" and Note 4 in the notes to financial statements.
6
<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 Three Months Ended
July 26, 1996 31, March 31,
(inception) through --------------------- ---------------------
December 31, 1996 1997 1998 1998 1999
------------------- --------- ---------- --------- ----------
(Unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course de-
velopment fees........ $ -- $ 628 $ 1,086 $ 155 $ 325
Student fees........... 22 400 579 93 286
----- --------- ---------- --------- ----------
Total revenue.......... 22 1,028 1,665 248 611
Cost of revenue......... 110 528 2,065 236 1,188
----- --------- ---------- --------- ----------
Gross margin........... (88) 500 (400) 12 (577)
Operating expenses:
Selling and marketing.. 25 106 3,394 237 1,321
General and administra-
tive.................. 249 768 2,509 450 717
Development............ 60 212 1,099 108 633
----- --------- ---------- --------- ----------
Total operating ex-
penses................ 334 1,086 7,002 795 2,671
----- --------- ---------- --------- ----------
Net loss from opera-
tions.................. (422) (586) (7,402) (783) (3,248)
Other income (expense),
net.................... 18 (29) 112 30 120
----- --------- ---------- --------- ----------
Net loss from continuing
operations............. $(404) $ (615) $ (7,290) $ (753) $ (3,128)
===== ========= ========== ========= ==========
Net loss from continuing
operations applicable
to common stockhold-
ers.................... $(404) $ (674) $ (7,993) $ (881) $ (3,743)
===== ========= ========== ========= ==========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.11) $ (1.05) $ (0.12) $ (0.49)
===== ========= ========== ========= ==========
Weighted average common
shares outstanding--ba-
sic and diluted........ -- 6,161,946 7,612,045 7,444,549 7,674,345
===== ========= ========== ========= ==========
Pro forma net loss from
continuing operations
per common share--basic
and diluted (unau-
dited)................. $ (0.68) $ (0.08) $ (0.23)
========== ========= ==========
Pro forma weighted aver-
age common shares out-
standing--pro forma ba-
sic and diluted (unau-
dited)................. 10,680,033 9,792,090 13,899,956
========== ========= ==========
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of our preferred stock into common
stock upon the completion of this offering, and the pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the
shares of common stock we are selling in this offering at an assumed initial
public offering price of per share, after deducting estimated underwriting
discounts and expenses.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- -------------- -----------
(Unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $ 9,927 $ 9,927 $
Working capital ......................... 8,679 8,679
Total assets............................. 12,818 12,818
Long-term notes payable.................. -- --
Total liabilities........................ 2,469 2,469
Mandatorily redeemable, convertible
preferred stock......................... 22,515 --
Total stockholders' equity (deficit)..... (12,166) 10,349
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties that we do not
presently know about or that we currently believe are immaterial may also
adversely impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are usually accompanied by
words such as "believes," "anticipates," "plans," "expects" and similar
expressions. Our actual results may differ materially from the results
discussed in the forward-looking statements because of factors such as the Risk
Factors discussed below.
Our prospects are difficult to evaluate because we have only been operating our
business since August 1996
We began offering our services in August 1996. Accordingly, we have a
limited operating history from which you may evaluate our business and
prospects. Our revenue growth to date may not be indicative of our future
operating results. As an early stage company in the new and rapidly changing
market for online education services, we face numerous risks and uncertainties.
Some of these risks relate to our ability to:
. maintain and increase our college and university customer base;
. increase courses and enrollments at our customers' online campuses;
. implement an evolving and unproven business model;
. compete favorably in a highly competitive market;
. expand our service offerings;
. attract, motivate and retain qualified employees;
. access sufficient capital to support our growth;
. build an infrastructure to effectively handle our growth; and
. upgrade and enhance our technologies.
We may not be successful in addressing these risks, and the failure to do so
would have a material adverse effect on our business and financial results.
We have a history of net operating losses and expect net operating losses and
negative cash flow for the foreseeable future
We have experienced net 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 $3,247,479 for the quarter ended March 31,
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.
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
8
<PAGE>
for us to predict the timing of particular sales, the rate at which online
courses will be implemented or the number of students who will enroll in the
online courses. The cancellation or delay of even a small number of campus 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;
. 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 includes an initial campus and course development fee from
colleges and universities, additional development fees for each incremental
course we develop and a per student fee for each enrollment in an online
course. Our contracts do not require customers to guarantee any minimum number
of student enrollments or to commit to developing any courses beyond the
initial courses covered by the contract. This pricing model may not be
successful and it may not achieve or maintain revenue growth in the future. The
failure of either our business model or our pricing model would have a material
adverse affect on our business and financial results.
OUR SALES CYCLE IS LENGTHY AND CAN VARY WIDELY
The sales cycle between initial customer contact and signing of a contract
varies widely, reflecting differences in our customers' decision-making
processes and budget cycles. As a result, we may not be able to
9
<PAGE>
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
forgo 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 we provide a single service offering, 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 online campuses and courses for colleges and universities. 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 to classroom instruction, our business
will not be successful. Our dependence upon a single service also makes us
particularly vulnerable to successful introductions of competing services. Our
inability to generate sufficient sales and achieve market penetration of our
service due to competitive factors, implementation difficulties or other
reasons, would have a material adverse effect on our business and financial
results.
We may have difficulty identifying and meeting the needs of colleges and
universities
We must accurately determine the features and functionality required by
colleges and universities and design and implement services that meet those
requirements in a timely and efficient manner. We may not be able to accurately
determine customer requirements or deliver features and functions that will
satisfy customer demands. Furthermore, even if we correctly identify our
customers' requirements, we may not be able to design and implement services
incorporating these features in a timely and efficient manner. Our failure to
determine and address customer requirements in a timely and efficient manner
would have a material adverse effect on our business and financial results.
Online learning may not be broadly accepted by academics and educators
Some academics and educators are opposed to online learning in principle.
They also have expressed concerns regarding the perceived loss of control over
the education process that can result from the outsourcing of online campuses
and courses. Some of these critics, particularly college and university
professors, have the capacity to influence the market for our services, and
their opposition could have a material adverse impact on our business and
financial results. Further, the growth and development of the market for online
learning 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 a new and emerging market. Although online
learning solutions have been available for several years, they currently
represent only a small portion of the overall higher education market.
Accordingly, our success depends upon colleges and universities adopting online
learning solutions. Although we have 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
10
<PAGE>
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 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;
11
<PAGE>
. 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 197 employees as of March 31, 1999. Our success will depend, in part,
upon our ability to effectively manage any future growth. This will require us
to implement additional management information systems, to further develop our
operating, administrative, financial and accounting systems and controls and to
maintain close coordination among our technology development, accounting,
finance, marketing, sales, and customer service and support departments. Our
failure to successfully manage growth and to develop financial controls and
accounting and reporting systems or to add and retain personnel that adequately
support our growth would have a material adverse effect on our business and
financial results.
We must expand our customer service and support department 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,
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<PAGE>
especially during the initial implementation and development of our services.
As of March 31, 1999, we had 79 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 depend on a
single company, Frontier Globalcenter, Inc., to provide us a network backbone
connection. 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 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
13
<PAGE>
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. 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 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.
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,
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<PAGE>
copyright, and trade secret protection may not be available in every country in
which our products and services are made available online. Our proprietary
rights and technology may not be adequate, and our competitors could
independently develop similar rights and technology. Our failure to
meaningfully protect our intellectual property could have a material adverse
effect on our business and financial results.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. Although we believe that our intellectual
property rights are sufficient to allow us to market our existing services
without incurring liability to third parties, and we are not aware of any
disputes with third parties relating to competing intellectual property rights,
we might not prevail in such disputes. Failure to prevail in one or more such
disputes could impair our right to market our services, which, in turn, could
have a material adverse effect on our business and financial results.
To date, we have not been notified that our services infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim that our current or future services are infringing their
proprietary rights.
WE MUST MONITOR AND PROTECT OUR INTERNET DOMAIN
We currently hold various Internet domain names. Third parties may acquire
substantially similar or conceptually similar domain names that decrease the
value of our domain name and trademarks and other proprietary rights which may
hurt our business. Domain names generally are regulated by 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.
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 are in the process of testing our
internal information technology and non-information technology systems, and
have additionally retained an outside firm specializing in Year 2000 issues to
analyze our Year 2000 issues. Based on our Year 2000 assessment to date, we
believe that our system, and those on which we rely, are Year 2000 compliant.
To the extent that our assessment is finalized without identifying any
additional material non-compliant IT systems operated by us or by third
parties, 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
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<PAGE>
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 compliant 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."
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 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 $ 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 offering price. As of April 30, 1999, 2,559,627 shares of our
common stock were issuable upon the exercise of outstanding stock options and
warrants with a weighted average exercise price of $1.41 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 78% of
our outstanding capital stock. Upon consummation of this
16
<PAGE>
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
9,010,764 shares of our common stock are eligible for resale after this
offering immediately upon the expiration of 180-day lock-up agreements, subject
in many cases to the volume limitations and other restrictions of Rule 144
under the Securities Act. 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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<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common
stock offered hereby are estimated to be $ ($ if the underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discount and offering expenses and assuming an initial public
offering price of $ per share.
We intend to use the net proceeds from this offering to fund anticipated
operating losses, to substantially increase our promotional and marketing
activities, and for other general corporate purposes, including adding
personnel to expand our development and marketing capacities. 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 and we do not expect to pay any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. On an actual basis;
. On a pro forma basis to reflect the automatic conversion of all
outstanding shares of Series A, B and C mandatorily redeemable,
convertible preferred stock into 6,225,611 shares of common stock upon
the completion of this offering and the effectiveness of our
reincorporation in Delaware; and
. On a pro forma as adjusted basis to reflect to the sale of shares
common stock offered hereby, at an assumed initial public offering price
of $ per share (after deducting the estimated underwriting discounts
and commissions and offering expenses) and the application of the net
proceeds therefrom.
This table should be read together with the financial statements and notes
to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(Unaudited)
(in thousands, except share
data)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock:
Series A, mandatorily redeemable, convertible
preferred stock, no par value; 132,000 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ $ 1,164
Series B, mandatorily redeemable, convertible
preferred stock, no par value, 326,833 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ 6,686
Series C, mandatorily redeemable, convertible
preferred stock, no par value, 430,540 shares
authorized, issued and outstanding, actual; no
shares authorized, issued or outstanding, pro
forma and pro forma as adjusted................ 14,665
Stockholders' equity:
Preferred stock, no shares authorized, issued or
outstanding, actual; $0.01 par value, 5,000,000
shares authorized, no shares issued and
outstanding, pro forma and pro forma as
adjusted.......................................
Common stock, no par value, 50,000,000 shares
authorized; 7,686,000 shares issued and
outstanding, actual; $.01 par value 13,911,611
shares issued and outstanding, pro forma; and
$.01 par value, shares issued and
outstanding, pro forma as adjusted............. 469 $22,984
Additional paid-in capital....................... -- --
Notes receivable................................. (341) (341)
Warrants and stock options....................... 2,336 2,336
Deferred compensation............................ (1,850) (1,850)
Accumulated deficit.............................. (12,780) (12,780)
------- ------- --------
Total stockholders' equity..................... (12,166) 10,349
------- ------- --------
Total capitalization......................... $10,349 $10,349
======= ======= ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 31, 1999. We are
permitted, and in some cases obligated, to issue shares of
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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:
. 1,492,750 shares that could be issued upon the exercise of options
outstanding as of March 31, 1999 at a weighted average exercise price of
$1.38 per share;
. 1,029,777 shares that could be issued upon exercise of outstanding
warrants as of March 31, 1999 at a weighted average exercise price of
$1.34 per share; and
. 1,000,000 shares that can be issued to our employees who elect to buy
stock in the future under our employee stock purchase plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $10,348,719,
or approximately $0.74 per share. Pro forma net tangible book value represents
the amount of tangible assets less total liabilities, divided by the number of
shares of common stock outstanding, assuming conversion of all outstanding
shares of preferred stock into common stock. Without taking into account any
other changes in the net tangible book value after March 31, 1999, other than
the sale of the shares offered hereby at an assumed offering price of $ per
share, our pro forma net tangible book value as of March 31, 1999 would have
been $ , or $ per share. The pro forma net tangible book value assumes
that the proceeds to us, net of offering expenses and underwriting discount,
will be approximately $ . This represents an immediate increase in net
tangible book value to existing stockholders attributable to new investors of
$ per share and the immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma book value per share before this offering................ $0.74
Increase per share attributable to new investors...................
-----
Pro forma net tangible book value per share after this offering.....
----
Dilution per share to new investors................................. $
====
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with
respect to (1) the number of shares of common stock purchased from us, (2) the
total consideration paid to us and (3) the average price paid per share by
existing stockholders and by the new investors purchasing shares of common
stock in this offering, at an assumed initial public offering price of $ per
share. Underwriting discounts, commissions and other estimated offering
expenses have not been deducted.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 13,911,611 % $22,498,750 % $1.62
New investors..............
---------- --- ----------- --- -----
Total.................... 100% 100% $
========== === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
March 31, 1999.
As of March 31, 1999, there were options outstanding to purchase 1,492,750
shares of common stock at a weighted average exercise price of $1.38 per share,
warrants outstanding to purchase 1,029,777 shares of common stock at a weighted
average exercise price of $1.34 per share, and 1,183,850 additional shares
reserved for future grants under our stock option plans. To the extent that any
of these options are exercised, there will be further dilution to new
investors.
21
<PAGE>
SELECTED FINANCIAL DATA
The data should be read in conjunction with the financial statements and the
notes to such statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The selected financial data as of December 31, 1997 and 1998, for
the period from July 26, 1996 (inception) through December 31, 1996 and for the
years ended December 31, 1997 and 1998, are derived from our audited financial
statements included elsewhere in this prospectus. The balance sheet data as of
December 31, 1996 is derived from audited financial statements not included
elsewhere in this prospectus. The selected financial data at March 31, 1999 and
for the three months ended March 31, 1998 and 1999 are derived from unaudited
financial statements included elsewhere in this prospectus. The unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments which we consider necessary for the fair presentation of
our financial position and results of operations for these periods. Operating
results for the three months ended March 31, 1999 are not necessarily
indicative of the results that we will experience for the entire year.
Historical results are not necessarily indications of the results to be
expected in the future. Please see Note 2 in the notes to financial statements
for the method of computing pro forma basic and diluted net loss from
continuing operations per share.
<TABLE>
<CAPTION>
Period from
July 26, 1996
(inception) Year Ended December Three Months Ended
through 31, March 31,
December 31, --------------------- ---------------------
1996 1997 1998 1998 1999
------------- --------- ---------- --------- ----------
(Unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course
development fees...... $ -- $ 628 $ 1,086 $ 155 $ 325
Student fees........... 22 400 579 93 286
----- --------- ---------- --------- ----------
Total revenue.......... 22 1,028 1,665 248 611
Cost of revenue......... 110 528 2,065 236 1,188
----- --------- ---------- --------- ----------
Gross margin............ (88) 500 (400) 12 (577)
Operating expenses:
Selling and marketing.. 25 106 3,394 237 1,321
General and
administrative........ 249 768 2,509 450 717
Development............ 60 212 1,099 108 633
----- --------- ---------- --------- ----------
Total operating
expenses.............. 334 1,086 7,002 795 2,671
----- --------- ---------- --------- ----------
Net loss from
operations............. (422) (586) (7,402) (783) (3,248)
Other income (expense),
net.................... 18 (29) 112 30 120
----- --------- ---------- --------- ----------
Net loss from continuing
operations............. $(404) $ (615) $ (7,290) $ (753) $ (3,128)
===== ========= ========== ========= ==========
Net loss from continuing
operations applicable
to common
stockholders........... $(404) $ (674) $ (7,993) $ (881) $ (3,743)
===== ========= ========== ========= ==========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.11) $ (1.05) $ (0.12) $ (0.49)
===== ========= ========== ========= ==========
Weighted average common
shares outstanding--
basic and diluted...... -- 6,161,946 7,612,045 7,444,549 7,674,345
===== ========= ========== ========= ==========
Pro forma net loss from
continuing operations
per common share--basic
and diluted
(unaudited)............ $ (0.68) $ (0.08) $ (0.23)
========== ========= ==========
Pro forma weighted
average common shares
outstanding--pro forma
basic and diluted
(unaudited)............ 10,680,033 9,792,090 13,899,956
========== ========= ==========
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of our preferred stock into common
stock, upon completion of this offering, and the pro forma as adjusted column
also reflects our receipt of the estimated net proceeds of the shares of
common stock we are selling in this offering at an assumed initial public
offering price of $ per share, after deducting estimated underwriting
discounts and expenses.
22
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31, 1999
-------------------- ------------------------------
Pro Forma
1996 1997 1998 Actual Pro Forma As Adjusted
---- ----- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
(in thousands)
Balance Sheet Data:
Cash and cash
equivalents............. $ 20 $ 208 $11,661 $ 9,927 $9,927 $
Working capital.......... (657) 58 9,577 8,679 8,679
Total assets............. 269 748 13,660 12,818 12,818
Long-term notes payable
to related parties...... -- 231 -- -- --
Total liabilities........ 703 621 2,549 2,469 2,469
Mandatorily redeemable,
convertible preferred
stock................... -- 1,029 19,650 22,515 --
Total stockholders'
equity (deficit)........ (434) (902) (8,539) (12,166) 10,349
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and notes attached to
those statements included elsewhere in this prospectus. This discussion
contains certain forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors" elsewhere in this prospectus.
Overview
We are a leading provider of a complete solution that enables colleges and
universities to deliver an online campus and courses over the Internet. Our
integrated platform of software and services allows colleges and universities
to outsource the creation, launch, management and support of a comprehensive
online campus and courses. We typically create and deliver a complete online
campus, including faculty and administration training, in 60 business days. We
charge our customers an initial online campus and course development fee, an
additional development fee for each incremental online course, and a per
student fee for each enrollment in an online course. Our comprehensive solution
allows colleges and universities to reach a large number of additional students
and enables students to participate in courses at convenient times and from a
variety of geographic locations. As of May 12, 1999, we had 80 contracts
covering over 100 individual campuses. Student enrollments per year at these
campuses are approximately 8.8 million. Since inception, our customers have
purchased more than 1,500 online courses from us. During the Spring 1999 term,
our customers had approximately 5,000 student enrollments in online courses
provided by us.
In 1996, we acquired Brecknet Internet Services, an Internet service
provider doing business as ColoradoNet, for cash of $80,000 and a note payable
of $129,000. In May 1997, we sold ColoradoNet to a third party due to our
determination that the Internet service provider business did not complement
our primary business focus of Internet education. The business of ColoradoNet
has been treated as a discontinued operation. Please see the notes to our
financial statements.
Revenue
We primarily generate revenue from two sources:
. An initial development fee to build an online campus and a specified
number of courses, as well as incremental fees to build additional
courses; and
. Per student fees for each enrollment in an online course.
We typically enter into multi-year contracts with colleges and universities
to provide online learning solutions. These contracts specify the initial
number of courses purchased as well as the price for additional courses. Our
contracts do not require customers to guarantee any minimum number of student
enrollments or to commit to developing any courses beyond the initial courses
covered by the contract. The initial fee is fixed, covering development of the
online campus as well as the initial number of courses. We recognize our
initial fee as the online campus design services and course design services are
performed. Subsequent incremental fees for additional courses are recognized as
the design services are performed. Student fees are recognized ratably over the
duration of the course.
Our business model is based upon a number of factors, including increasing
acceptance of online learning among colleges and universities, adding new
customers, developing additional courses for our existing customers and
increasing student enrollment in online courses. Through March 31, 1999, the
majority of our revenue has been generated by fees for building campuses and
courses, and, to a lesser extent, per student fees. We expect that both revenue
streams will continue to grow, but that the per student fees will become larger
than the development fees as the number of courses offered by our customers and
the numbers of students in those courses continue to increase.
In October 1998 we were awarded a grant of $1.8 million by the National
Institute of Standards and Technology, a department of the U.S. Department of
Commerce. We are entitled to receive payments under the
24
<PAGE>
grant as we perform research related to automated course content creation and
organization, and tutoring delivery systems. Maximum payments under the grant
are $750,000 in 1999, $550,000 in 2000 and $550,000 in 2001. To date we have
not received, and there is no assurance we will ever receive, any material
payments under the grant. 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 and technical personnel. We
also allocate a portion of our occupancy and infrastructure costs to cost of
revenue. To continue to execute our business plan, we intend to expand our
operations, including our marketing, technical, operational and customer
support resources.
Selling and Marketing
The principal components of our selling and marketing expenses are employee
compensation and benefits, advertising and travel. Other significant components
include marketing collateral expenses, consulting fees and depreciation.
General and Administrative
The principal component of our general and administrative expenses is
employee compensation and benefits. Other components include facilities,
depreciation, communications, professional and consulting fees and deferred
compensation.
Development
Development expenses consist primarily of employee compensation and related
benefits for development personnel and related depreciation, occupancy costs
and consulting fees.
Results of Continuing Operations
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $9,036,572 as of December 31, 1998, and $12,779,696 as
of March 31, 1999. We intend to continue to make investments in technology,
which may involve the development, acquisition or licensing of technologies
that complement or augment our existing services and technologies. We also
intend to continue to invest heavily in marketing activities. Accordingly, we
expect to incur significant operating losses for the foreseeable future.
We experience fluctuations in our quarterly results due to the seasonality
inherent in the academic calendar and due to the relatively fixed nature of our
operating expenses.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that our revenue and other operating results
should not be relied upon as indications of future performance.
Three Months Ended March 31, 1999 and 1998
Revenue. Revenue increased to $610,957 for the three months ended March 31,
1999 from $248,514 for the three months ended March 31, 1998. Increases in
revenue are due to an increased number of online campuses and courses
developed, as well as increased student enrollment in online courses. Campus
and course development fees represented 53% and 62% of total revenue for the
three months ended March 31, 1999 and 1998, respectively. Student fees
represented 47% and 38% of total revenue, respectively, for these same periods.
Cost of Revenue. Cost of revenue increased to $1,187,599 for the three
months ended March 31, 1999 from $236,236 for the three months ended March 31,
1998. Our cost of revenue increased primarily due to increased personnel costs,
depreciation expense and sales commissions, which are payable upon the signing
of a contract and upon our invoicing the customer for courses in excess of the
number originally contracted for. These costs were approximately 194% and 95%
of total revenue for the three months ended March 31, 1999 and 1998,
respectively. Our operations and account management personnel increased to 79
as of March 31, 1999 from 29 as of March 31, 1998.
25
<PAGE>
Selling and Marketing. Selling and marketing expenses increased to
$1,320,551 for the three months ended March 31, 1999 from $237,299 for the
three months ended March 31, 1998. The increase was primarily due to increases
in the number of selling and marketing personnel and increases in compensation
and travel expense. Our selling and marketing personnel increased to 53 as of
March 31, 1999 from 12 as of March 31, 1998. The increase in selling and
marketing expenses also reflects an increase in advertising to $281,114 for the
three months ended March 31, 1999 from $41,207 for the three months ended March
31, 1998.
General and Administrative. General and administrative expenses increased to
$716,784 for the three months ended March 31, 1999 from $450,240 for the three
months ended March 31, 1998. The increase was primarily due to an increase in
the number of general and administrative personnel to 28 as of March 31, 1999
from 13 as of March 31, 1998. In addition, outside consulting, professional
fees, recruiting fees and travel expenses increased, reflecting our expanded
business activities.
Through March 31, 1999, we recorded aggregate deferred compensation totaling
approximately $2.4 million in connection with the grant of certain options to
employees. During the first quarter of 1999, we recorded aggregate deferred
compensation in the amount of approximately $946,000 and in April 1999, we
recorded an additional $400,000 of such deferred compensation. The deferred
charge is being amortized over the vesting period of such options, which ranges
from 2 to 5 years. Of the total deferred compensation, approximately $17,000,
$18,000, $27,000 and $137,000 were amortized in the quarters ended March 31,
June 30, September 30 and December 31, 1998, respectively, and approximately
$103,000 was amortized in the first quarter of 1999. We expect approximate per
quarter amortization in future years related to deferred compensation to be as
follows:
<TABLE>
<CAPTION>
QUARTERS
IN THE
YEAR
ENDED
DECEMBER
31, AMOUNT
-------- --------------------
<S> <C>
1999 $105,000 -- $160,000
2000 $130,000 -- $140,000
2001 $130,000
2002 $120,000
2003 $ 90,000 -- $120,000
2004 $ 0 -- $ 50,000
</TABLE>
Development. Development expenses increased to $633,502 for the three months
ended March 31, 1999 from $107,404 for the three months ended March 31, 1998.
The increase was primarily due to an increase in the number of development
personnel to 37 as of March 31, 1999 from 9 as of March 31, 1998.
Other Income (Expense). Other income (expense), which consists primarily of
interest earnings on our cash and cash equivalents, increased to $119,896 for
the three months ended March 31, 1999 from $29,920 for the three months ended
March 31, 1998, primarily due to the completion of a private placement of
equity securities in December 1998, which provided net proceeds of $11,938,955.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenue. Revenue increased to $1,665,069 for 1998 from $1,028,180 for 1997
and $22,464 for 1996. Increases in revenue are due to an increased number of
online campuses and courses developed, as well as increased student enrollment
in online courses. Campus and course development fees represented 65%, 61% and
0% of 1998, 1997 and 1996 total revenue, respectively. Per student fees
represented 35%, 39% and 100%, respectively, of total revenue. We expect that
per student fees will account for a greater percentage of total revenue in the
future.
Cost of Revenue. Since 1996, the growth in the number of online campuses
and courses has resulted in increased cost of revenue. Cost of revenue
increased to $2,064,909 for 1998 from $528,090 for 1997 and $109,974 for 1996.
Our cost of revenue increased in 1998 and 1997 primarily due to increased
personnel costs, depreciation expense and sales commissions. Our operations and
account management personnel increased to 65 from 21 and from 5 at December 31,
1998, 1997 and 1996, respectively. During 1998, cost of revenue was
26
<PAGE>
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.
Development. Development expenses increased to $1,099,000 for 1998 from
$212,052 for 1997 and $60,207 for 1996. The increases in 1998 and 1997 were
primarily due to ongoing development and improvement of our current online
learning solutions, as well as increases in the number of development
personnel, which numbered 28, 8 and 2 at December 31, 1998, 1997 and 1996,
respectively.
Other Income (Expense). Other income, which is comprised primarily of
interest earnings on our cash and cash equivalents, was $149,308 for 1998,
$8,993 for 1997 and $27,001 for 1996. We completed private placements of equity
securities in June 1997, February 1998 and December 1998, which provided net
proceeds of $970,150, $5,978,000 and $11,938,955, respectively. Interest
expense from notes payable and a bridge loan was $36,819 in 1998, $37,990 in
1997 and $9,186 in 1996. The notes payable and the bridge loan were repaid in
1998.
INCOME TAXES
Income taxes will consist of federal, state and local taxes, when
applicable. We expect significant net losses for the forseeable future that
should generate net operating loss carryforwards. However, utilization of such
prospective net operating loss carryforwards may be subject to certain
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. If we achieve operating profits
and the net operating loss carryforwards have been exhausted or have expired,
we may experience significant tax expense. We have recorded no provision or
benefit for federal and state income taxes because we incurred net operating
losses from inception through December 31, 1998. As of December 31, 1998 we had
approximately $7,800,000 of federal and state operating net operating loss
carryforwards available to offset future taxable income which expire in varying
amounts beginning in 2011. We have established a valuation allowance against
the entire amount of our deferred tax asset because our management has not been
able to conclude that it is more likely than not that we will be able to
realize the deferred tax asset, due primarily to our history of operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased from $208,346 at December 31, 1997
to $11,661,186 at December 31, 1998. This net change occurred primarily because
we raised $18,750,020 in proceeds from the sale of equity securities and
incurred a net loss of $7,289,847 during 1998.
Our investment in property and equipment during 1998 was $1,663,128.
Installation of network infrastructure equipment, equipment for new employees
and leasehold improvements related to expansions
27
<PAGE>
accounted for most of our capital expenditures in 1998. 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 $19,764,686 from inception through December 31, 1998.
We expect to experience substantial negative cash flow from operating
activities for at least the next few years as we make significant investments
in corporate infrastructure for our planned expansion, to enhance and/or expand
the range of services we offer and to increase our promotional and marketing
activities. We believe that the net proceeds from the sale of common stock
offered hereby, together with our current cash, cash equivalents and short-term
investment balances and cash generated from operations, will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. After that time our operating and investing activities may
require us to obtain additional equity or debt financing. In addition, although
there are no present understandings, commitments or agreements with respect to
any acquisition of other businesses, products and technologies to consummate
potential acquisitions, we may need additional equity or debt financing in the
future.
Without regard to this offering, management believes that cash on hand and
other sources of liquidity at March 31, 1999 are sufficient to fund the
Company's operations through at least March 31, 2000, albeit at significantly
lower levels of activities.
YEAR 2000 ISSUES
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. This could result in system
failures or miscalculations causing disruptions of operations for any company
using such computer programs or hardware, including, among other things, an
inability to connect to the Internet, process transactions, send invoices or
engage in normal business activities. As a result, many companies and
individuals must upgrade or replace their computer systems to avoid "Year 2000"
issues.
The software and hardware we use to manage our business has substantially
all been purchased or developed by us within the last 30 months. While this
does not uniformly protect us against Year 2000 exposure, we believe that our
information technology is not based upon "legacy" hardware and software
systems. "Legacy system" is a term often used to describe hardware and software
systems that were developed in previous decades when there was less awareness
of Year 2000 issues. Generally, hardware and software design within the current
decade, and the past several years in particular, has given greater
consideration to Year 2000 issues. All of the software code we have internally
developed to manage our network and to develop courses, for example, is written
with four digits to define the applicable year.
We are in the process of testing our internal information technology and
non-information technology systems. 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. To date, we have
completed our initial testing of our internally developed information
technology and non-information technology software. Our initial testing
produced no results that would lead us to believe such software is not Year
2000 compliant. Nevertheless, we may experience material unexpected costs
caused by undetected errors or defects in the technology used in our systems.
To confirm our results, we retained an outside firm specializing in Year 2000
issues. This firm has completed two out of three phases on the project and has
found no material non-compliant systems operated by us. The final phase of
their analysis is expected to be complete by June 30, 1999.
28
<PAGE>
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.
We expect to substantially complete our Year 2000 compliance program,
including any necessary remediation measures, by June 30, 1999. Other than the
cost of the outside consulting firm, which we do not expect to exceed $75,000,
we have not incurred any significant expenses to date and we are not aware of
any material costs associated with our anticipated Year 2000 efforts. Costs or
other amounts incurred in connection with Year 2000 issues have been expensed
or will be expensed as they occur. However, if we, a significant number of our
users, our providers of hardware and software or our third-party network or
utility providers fail to remedy any Year 2000 issues, we would experience a
material loss of revenue that could materially adversely affect our business,
results of operations and financial condition. We would consider an
interruption in our ability to provide our services to be the most likely
result of any failure by us, or failure by the third parties upon whom we rely,
to achieve Year 2000 compliance. Presently, we are unable to reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenue. In addition, we provide a warranty to
our customers regarding the Year 2000 compliance of our system, including our
software and the interfaces necessary to deliver courses over the Internet. If
we were to breach this representation, our customers would have the right to
terminate their contracts with us upon 30 days notice. 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 are currently developing a contingency plan to ensure the continuity of our
core business processes in the event of a Year 2000-related failure of our
systems 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. We expect that the plan will include a determination of the critical
core processes that would be at risk during a system failure. The plan will
also prioritize the areas where resources should be applied. To date, the costs
of developing the plan have not been material. Although future costs are
difficult to estimate, we do not currently expect that such costs will be
material.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are, or may become, exposed to market
29
<PAGE>
risk in the areas of changes in United States interest rates and changes in
foreign currency exchange rates as measured against the United States Dollar.
These exposures are directly related to our normal operating and funding
activities. Historically and as of December 31, 1998, we have not used
derivative instruments or engaged in hedging activities.
Interest Rate Risk
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes
in interest rates will result in a material effect on our future earnings, fair
values or cash flows.
Foreign Currency Risk
We may enter into contracts where we pay or a third party pays us in a
foreign currency. This would expose us to changes in exchange rates. Changes in
the foreign exchange rates may positively or negatively affect our financial
position, results of operations or cash flows. We do not believe that near-term
changes in exchange rates will result in a material effect on future earnings,
fair values or cash flows, and therefore, have chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the foreign exchange rates.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the cost of such software. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. We do
not expect that the adoption of SOP No. 98-1 will have a material impact on our
1999 financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). We are required to adopt
SFAS No. 133 in the year ended December 31, 2000. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, we have not entered into any derivative financial instruments or hedging
activities.
30
<PAGE>
BUSINESS
Overview
eCollege.com, formerly Real Education, Inc., is a leading provider of a
complete solution that enables colleges and universities to deliver an online
campus and courses over the Internet. Our integrated platform of software and
services allows colleges and universities to outsource the creation, launch,
management and support of a comprehensive online campus and courses. We
typically create and deliver a complete online campus, including faculty and
administration training, in 60 business days. We charge our customers an
initial online campus and course development fee, an additional development fee
for each incremental online course, and a per student fee for each enrollment
in an online course. Our comprehensive solution, which includes design,
development, management and hosting of online campuses and courses as well as
ongoing customer support, allows colleges and universities to reach a large
number of additional students and enables students to participate in courses at
convenient times and from a variety of geographic locations. As of May 12,
1999, we had 80 contracts covering over 100 individual campuses. Since our
inception in 1996, our customers have purchased more than 1,500 online courses
from us. During the Spring 1999 term, our customers had approximately 5,000
student enrollments in online courses provided by us.
Market Opportunity
The market for higher education is large and growing. The U.S. Department of
Education estimates that more than $200 billion is spent annually in the higher
education market and that more than 14.5 million students were enrolled in
colleges and universities in 1998. We believe that a growing demand for skilled
labor, a larger population of potential students and the economic value of
post-secondary education to students will continue to drive demand for higher
education over the next decade. Moreover, a change in demographics has resulted
in a greater percentage of older students. International Data Corporation
estimated that for 1996, adults over 24 years of age comprised approximately
6.2 million, or 43.5%, of the students enrolled in higher education programs.
The U.S. Bureau of Census estimates that approximately 75% of students over the
age of 24 work while attending school. This growing population of older
students has caused colleges and universities to alter their approach to
traditional education to meet the different needs of this population.
The Internet's universal accessibility and real-time interactive nature make
it an ideal platform for distance learning. 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. Online learning allows students to participate in courses at times that
are convenient for them and from a variety of geographic locations, including
satellite campuses or their own homes. Colleges and universities are
experiencing increased demand for online learning and are increasingly
recognizing that online learning allows them to reach more students, presenting
additional revenue opportunities. International Data Corporation also estimates
that approximately 85% of higher education institutions will offer distance
learning courses by 2002 and that the number of students taking such courses
will increase by more than 30% per year through 2002.
Despite this projected growth, colleges and universities face several
challenges in delivering high quality online courses. Effective online learning
requires that students receive a learning experience of comparable quality,
content and student/faculty interaction to an on-campus education. A college or
university may attempt to develop an online education solution internally,
creating its own software or purchasing software components from a vendor.
However, we believe that many colleges and universities have found internally
developed solutions to be time-consuming, expensive and difficult to implement.
As a result, a growing number of colleges and universities are outsourcing the
development and maintenance of their online campus and courses.
The eCollege.com Solution
Our solution is designed to meet the online learning needs of colleges and
universities and their students. The eCollege.com solution has the following
key elements:
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Comprehensive Services. We provide a comprehensive suite of services,
including design, development, management and hosting of online campuses and
courses, as well as ongoing customer support. Our account service
representatives serve as the point of contact for all services provided to
customers and facilitate the efficient development and growth of an online
campus. The account service representatives work with college and university
administrators to design a unique online campus which replicates key services
of a physical campus, including admissions, registration, bookstore, library,
academic advising, career counseling, student union, bursar's office and
financial aid services. We also provide ongoing service and training to our
customers through a technical support staff and an online help desk. We host
the online campus on our reliable infrastructure, achieving nearly 100% uptime.
We believe our integrated software and services offer the most comprehensive
solution to colleges and universities seeking to outsource the development,
delivery and maintenance of their online campus and courses.
Rapid, Cost-Effective Development of Online Campuses. We can build an online
campus for a college or university, typically within 60 business days. Our
initial development fee of $30,000 includes the online campus and ten courses.
We believe most colleges and universities would incur substantially greater
costs to develop a comparable solution internally.
Easy Online Course Development. We work with faculty members to convert
courses into effective 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 easily develop and update their courses through a standard Web
browser. We believe that ease of use by the faculty and the availability of our
technical support services are critical to achieving faculty acceptance of our
solution.
Easy to Use, Online Learning Environment. The customized online campuses and
courses are easy for students and faculty to use. A student can access our
system with a Pentium 75 megahertz computer with a 28.8 kilobits-per-second
modem and a standard Web browser. The online campus includes easily navigable
screens, as well as highly customizable courses and student services. Our
system allows the use of rich multimedia content, including video and audio
clips, and a variety of interactive learning tools. Our high capacity, fully-
redundant infrastructure helps to ensure availability of the online campus and
convenient "anytime/anywhere" delivery of courses. Our customer support
personnel are available 24 hours a day, seven days a week.
Standard, Scalable Technology. We integrate industry standard, open
technology to provide a scalable and reliable delivery system. We have made
significant investments in our infrastructure and technical support to ensure
the reliability and scalability of our solution. We utilize multiple or
"redundant" high bandwidth sources for Internet connections. We also employ
groups of servers arranged such that they work together so that the failure of
a single server can be recovered by others in the cluster. Further, we use
fault-tolerant storage technology that allows the system to keep working in the
event of hardware or software faults as well as load distribution capabilities
that evenly distribute traffic across group servers.
Growth Strategy
Our objective is to become the leading provider of outsourced online
learning solutions for colleges and universities and for providers of
continuing education and corporate training worldwide. The key elements of our
growth strategy are:
Add Additional Colleges and Universities. In order to capitalize on the
significant interest from colleges and universities, we increased our sales
force from 4 to 40 in mid-1998 and have entered into more than 50 new contracts
since then. Using a focused regional approach, we are now actively targeting
more than 3,000 colleges and universities. In addition, we intend to further
develop the eCollege.com brand and reputation by increasing our marketing
efforts, including increased use of print and online media advertising and
greater participation at trade shows and executive speaking engagements. We
believe our larger sales force and an increased marketing effort will enable us
to further penetrate the higher education market.
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Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently announced a
$12 million grant and scholarship program. This program is designed to increase
the number of degree courses offered online by offering free online campus and
course design to selected colleges and universities. It is also designed to
increase the number of online students by offering tuition scholarships to
selected students.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We invest heavily in course deve
lopment personnel and technology
and work closely with faculty to ensure easy-to-implement, high quality
courses. Our account service representatives are available to assist faculty
and administrators on an ongoing basis. To further develop the relationships
with our customers' faculty, we recently developed faculty.com, a website
focused on faculty issues relating to online learning. We believe that
development of long-term relationships with our customers will help us to
penetrate additional departments within the college or university, and will
create a strong barrier to exit.
Enter New Markets. We currently focus on North American colleges and
universities, but also intend to offer our integrated software and services to
the continuing education and corporate training markets. Accordingly, we are
actively marketing to selected continuing education providers, corporate
training companies and trade and professional associations. Although we
currently do not operate internationally, we will evalu
ate international
expansion opportunities as they arise.
eCollege.com Customers
We target more than 3,000 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 50 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. 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 Colorad
o accounted for 11% of our revenue in the first quarter of
1999, 21% of our revenue in 1998, 62% of our revenue in 1997 and 93% of our
revenue in 1996. In addition, we have contracts with several providers of
continuing education and corporate training, including DeVry/Becker Educational
Development Corp., Earth Tech, Inc., National Association of Realtors and
Palmer Chiropractic University Foundation d/b/a Palmer Institute for
Professional Advancement.
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<PAGE>
eCollege System
The eCollege System is made up of four components that are integrated and
scalable: eCollege Campus, eCollege Course, Course Manager and Administrative
Reports. The eCollege Campus serves as the entry point for students, faculty
and administrators to enter the eCollege System. With a valid password,
students, faculty and administrators can also access the eCollege Course.
Faculty can access the Course Manager to create and update online course
material, while administrators can access the Administrative Reports to review
and sort student information.
Graphic depicting components of eCollege System:
eCollege System (SM)
Students/Faculty/Administrators
Web Browser
eCollege Campus (SM)
-----------------------------------------------------
* Welcome Page * Tuition & Fees
* Course Catalog * Technical Requirements
* Admissions * Academic Information
* Registration * Financial information
-----------------------------------------------------
------------------
Restricted Access:
Password Required
------------------
--------------------
eCollege Course (SM)
* Personal Homepage
* Message Center
* Multimedia Support
* Add/Drop Courses
* Class Email
* Testing Functions
* Learning Tools
--------------------
- -------------------------------------- ------------------------------------
Course Manager Administrative Reports
* Administer communications tools * Student records: payment history
* Administer assessment tools payment status and grades
* Upload text, graphics and multimedia * Database of college and
- -------------------------------------- university specific inquiries
Faculty * Bulk email notification
------------------------------------
Administrators
eCollege Campus. The eCollege Campus is the initial entry point for all
student, faculty and administrative services, including online admissions and
registration, as well as the entry point t
o access the password protected
eCollege Course, which contains the online courses and course material. We
design each eCollege Campus to be easy to use and to reflect a college's
distinctive character and unique preferences. We also design each eCollege
Campus to replicate the key services available on-campus.
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<PAGE>
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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<PAGE>
[Picture of web page from "setonworldwide.net,"
the online campus of Seton Hall University, appears here]
eCollege Course. After entering the password protected eCollege Course, an
individual views a customized personal homepage. This page is unique for each
student, faculty member or administrator and offers access to several features
and services, including add/drop functions, account balance information, the
online bookstore and personal emails. The personal homepage also lists each
course in which a student is currently enrolled and provides an online
tutorial. The eCollege Course presents course material online with features
that enable faculty to track and manage student progression through a course.
The eCollege Co
urse also emphasizes student-to-faculty and student-to-student
communication. Faculty members may use a variety of online teaching tools to
conduct courses. Each online course begins with an introduction to the course
and incorporates an audio or video presentation (using streaming technology--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 Course, faculty members can create,
administer and score a variety of types of exams. Faculty members are also able
to incorporate multimedia capabilities to enhance presentations.
Course Manager. Our course developers use the Course Manager to build online
courses and materials. The Course Manager also provides faculty with an
organized format to display content while offering design flexibility in the
use of communications and assessment tools in their courses. After minimal
training, faculty can use the Course
Manager to create and update their own
course material in real time. This functionality encourages faculty to
continually improve and update their courses, leading to better quality courses
and materials for students.
Administrative Reports. The Administrative Reports capture and display
student information for college and university officials and administrators.
Our customers can sort information by class code, student name, city or state
or the registrant's Internet provider. Further, the Administrative Reports
maintain faculty and student evaluations and offer the ability to broadcast
email messages to any group, based on enrollment classifications, demographics
or other characteristics.
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<PAGE>
Additional eCollege.com Support and Services
We support the development of the online campus and courses with account
service representatives, course developers, instructional design consultants
and a help desk. We believe that providing attentive service is a key
competitive advantage and will be an important factor in achieving market
acceptance and maintaining long-term relationships with colleges and
universities.
Account service representatives. Account service representatives 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, frequently consult with college and university administrators and serve
as a point of contact for all services. The account service representatives
gather information regarding the distinctive character and preferences of each
college or university and serve as a liaison to our design and technology
teams. After the online campus is built, the account service representatives
assist the customer with ongoing maintenance issues and manage all aspects of
our relationship with the college or university. In addition to a base salary,
these representatives earn a commission when our customers purchase courses in
excess of the number stated in the initial contract.
Course developers. Our course developers help faculty build online courses
using content provided by faculty. Course developers input the content into the
Course Manager to build an online course to the faculty member's
specifications. We offer a studio for faculty to record lectures and our course
developers work with our audio and video group to create multimedia content for
online courses. Faculty can also send audio and video clips to us and we will
insert the media into online courses.
Instructional design consultants. Our instructional design consultants
train faculty, provide written and multimedia resources and work individually
with faculty to help them present their material in an attractive online
format. In addition, they consult with faculty and our research and technology
teams to generate ideas for improving our course delivery system.
Help desk. Our help desk provides technical support to students and faculty
using the eCollege System. The help desk is available through email and
telephone 24 hours a day, seven days a week.
Sales and Marketing
Sales. We target more than 3,000 colleges and universities in the United
States and Canada. We have a sales force of 40 individuals, most with a
background in education and/or technology. Our sales force covers 27 regions
throughout the entire continental United States and Canada, and a National
Accounts Manager covers 50 colleges and universities which we consider
strategic because of their size or academic reputation. We divide the United
States and Canada into three geographic areas, each managed by a regional vice
president who is responsible for approximately 10 smaller regions. These
regions are covered by regional managers who are located within the territories
they serve. Their assignments and objectives include:
. working with our marketing department team to develop awareness of our
services in each manager's region;
. developing the initial business relationship with the roughly 100
colleges and universities in their region; and
. broadening the business relationship by working with additional
departments in a given college or university.
The sales process is based on leads generated by the regional managers,
inquiries to the website and through attendance at conferences or trade shows.
After a lead is generated, the regional manager qualifies each prospect. We
typically give each prospect access to a demonstration course and make an
appointment for a presentation. Each presentation includes an online or CD-ROM
demonstration of our system. Subsequent presentations may be scheduled with
faculty and other interested parties. Once a contract is signed, we begin
implementation of the online campus.
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<PAGE>
We are also pursuing opportunities in the continuing education and corporate
training markets. We recently transferred two individuals to focus on
continuing education, corporate training and trade association customers and
prospects. These corporate sales managers respond to inquiries from customers
and prospects, work with our marketing department to increase awareness of our
services and proactively develop relationships with additional providers of
continuing education and corporate training.
Marketing. We market our solution through a combination of print and online
media advertising, trade shows and direct marketing to promote our services to
colleges and universities. Our website has been designed as our primary
marketing communications tool, incorporating a demonstration of the eCollege
System, information on industry trends, market research, webcasts from industry
experts, and other important events in online learning. We also advertise in
industry periodicals such as The Chronicle of Higher Education to address key
decision-makers in our target market, generally senior administrators, faculty
and IT administrators. We continue to strengthen our brand identity by
participating in trade shows, conferences and executive speaking engagements.
Finally, we hold online learning symposiums to build market awareness and
identify qualified prospects.
We market to students through our website, which highlights the benefits of
online learning and provides students with information on online higher
education alternatives. We intend to continue to develop our website for
students as an important source for their online learning needs. We also intend
to market to faculty through faculty.com, a website focused on faculty issues
relating to online learning.
We provide our customers with additional marketing support to drive
enrollment of online students, including:
. an instructional enrollment marketing kit for our customers including
media plans, sample advertisements and public relations and Web marketing
strategies;
. pamphlets distributed on campus;
. marketing consulting services;
. international promotion and recruitment; and
. awareness of advanced degree, continuing education and corporate training
alternatives.
We recently announced a twelve million dollar grant and scholarship program
dedicated to increasing the number of degree courses currently offered online
and increasing the number of students pursuing an online education. Grants will
be awarded, at our discretion, to institutions based on demonstrated commitment
to a quality online degree program, the number of current and potential
students, the institution's unique approach to online learning and other
factors. Scholarships will be awarded based on a variety of student
characteristics, including financial need and scholastic aptitude.
Technology
Our technology strategy is to employ the best available software on stable
and scalable platforms. The eCollege System consists of widely known off-the-
shelf components combined to create a proprietary architecture. We use
Microsoft NT 4.0 as our operating system for both our development and
production environments. Our course content storage architecture is based on
Microsoft SQL Server, version 6.0. Our webserver component, as well as our
authentication systems, are provided by the Microsoft Commercial Internet
System. The proprietary elements of the eCollege System are based on a
combination of Microsoft programming languages, including Visual Basic, Active
Server Pages and Web Classes. The eCollege System is load balanced using
Microsoft's Windows Load Balancing Services, resulting in a scalable delivery
system.
The eCollege System is delivered from a centralized webserver to our
customers. We have made a substantial investment in fault-detection, fault-
handling and general system uptime enhancements, resulting in a highly reliable
Web hosting infrastructure. Our server hardware consists of Hewlett Packard
servers, using Intel
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<PAGE>
microprocessors, typically configured with twin processors and one gigabyte of
memory. All primary servers contain backup network cards and power supplies
which eliminate the possibility of a single point of failure in our servers and
decrease their downtime, as well as fault-tolerant disk storage solutions for
added redundancy. Our service contracts with Hewlett Packard include a four-
hour hardware response time. Our database servers contain the latest clustering
technology that uses a combination of Hewlett Packard hardware and Microsoft
software technologies for scalability and speed. Finally, we maintain
sophisticated "firewall" technology manufactured by Netscreen to protect
against security breaches and "hackers." This firewall technology consists of a
device designed to prevent service to unauthorized users and to minimize known
vulnerabilities to system security.
Our network engineering infrastructure generally follows a traditional co-
location model. Currently, all of our primary servers are co-located at an
independent facility operated by Frontier Globalcenter in Sunnyvale,
California. This facility ensures us a minimum of ten megabyte connection to
the Internet. In addition, we maintain a backup data center in Denver,
utilizing a redundant fiber optic connection to another tier one service
provider, Cerfnet/AT&T. Additionally, our bandwidth is scalable to accommodate
unforeseen spikes in user activity. Our current Internet backbone employs both
DS-3 ATM and OC-3c to OC-12c packet over SONET links. For increased
reliability, we outsource fully-redundant components using state-of-the-art
technology from leading industry vendors. Our outsourced digital distribution
architecture is comprised of more than 60 high-speed private peering network
connections to major Internet carriers such as MCI Worldcom, Sprint and AT&T.
In addition, it provides high-speed links to eight Internet exchanges with over
100 public peering arrangements, geographically dispersed Media Distribution
Centers and intelligent end-user routing software.
Competition
The online learning market is quickly evolving and is subject to rapid
technological change. 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
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<PAGE>
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures we face. Increased competition may result in
reduced operating margins, as well as loss of market share and brand
recognition. We may not be able to compete successfully against current and
future competitors, and competitive pressures we face could have a material
adverse effect on our business and financial results.
Proprietary Rights and Technology
Although our business model and the services we provide define our business,
our software and our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property are also very
important to our success. We rely on a combination of trademark and copyright
laws, trade secret protection and confidentiality and/or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. We have applied for the registration of certain of our trademarks and
service marks in the United States, including "eCollege.com" 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 or
intellectual property and proprietary rights."
Employees
As of March 31, 1999, we employed 197 people. None of our employees is
subject to any collective bargaining agreements, and we consider our relations
with our employees to be good.
Facilities
Our corporate headquarters are located in Denver, Colorado. The headquarters
facility encompasses approximately 44,000 square feet and is leased for three
years. The lease expires on June 30, 2002. 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.
40
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of eCollege.com as of
April 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Robert N. Helmick............ 41 Chairman, President and Chief Executive
Officer
Jonathan M. Dobrin........... 27 Vice President, Chief Technology Officer and
Director
Charles Schneider............ 41 Executive Vice President
Steven M. Singer............. 44 Vice President, Finance and Administration
and Chief Financial Officer
John V. Helmick.............. 40 Vice President, Corporate Services
Mark J. Fine................. 43 Vice President, Sales
Ray Henderson................ 35 Vice President, Product Systems & Technology
Kevin L. Johnson............. 38 Vice President, Business Development
Daniel H. Meitus............. 43 Vice President, Marketing
James N. Sigman.............. 37 Vice President, Accounts and Services
Jack W. Blumenstein (1) (2).. 55 Director
Christopher E. Girgenti (1) 35 Director
(2).........................
Jeri Korshak (1) (2)......... 44 Director
Oakleigh Thorne.............. 41 Director
Key Employees
Bradley V. Felix............. 25 Vice President, Systems Development
Denise LaBier Pilkington..... 36 General Counsel
James R. Nollsch............. 26 Vice President, Web Development
Ginger Smith................. 39 Controller
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Robert N. Helmick founded eCollege.com in July 1996 and has served as our
Chairman of the Board, President and Chief Executive Officer since our
inception. Mr. Helmick founded and served as Chief Executive Officer of Helmick
and Associates, International, a consulting firm for higher education from 1990
through 1996. During that time, he served on the Board of Trustees of several
universities. Previously, he practiced law with Bradshaw, Fowler, Proctor and
Fairgrave, a law firm in Des Moines, Iowa, from 1982 through 1990. Mr. Helmick
received a JD from the University of Southern California Law School and a BA
from Drake University. Mr. Helmick is the brother of John V. Helmick, our Vice
President, Corporate Services.
Jonathan M. Dobrin has served as our Vice President and Chief Technology
Officer since August 1998. Mr. Dobrin also served as our Vice President and
Chief Operating Officer from July 1996 through July 1998. Mr. Dobrin has served
as a director since 1997. He founded and served as Vice President of Real
Information Systems LLC, a company that specialized in the development and
deployment of premium Web sites, from October 1994 through July 1996. From June
through October 1994, Mr. Dobrin was pursuing personal interests. Mr. Dobrin
received a BA from the University of Vermont.
Charles Schneider has served as our 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
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<PAGE>
& 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.
Steven M. Singer has served as our Vice P
resident, Finance and
Administration and Chief Financial Officer since December 1997. Mr. Singer has
served as our Treasurer since January 1998 and served as a director from June
1997 to January 1999. Mr. Singer was an investment banker with McDonald & Co.
from July 1997 through December 1997, with The Chicago Corporation (now ABN
AMRO, Inc.) from October 1994 through July 1997 and with Dain Bosworth from
April 1991 through October 1994. He received a BBA and an MBA from the
University of Wisconsin. Mr. Singer is a Certified Public Accountant.
John V. Helmick has served as our Vice President, Corporate Services since
March 1999. Mr. Helmick has served as our Secretary since our inception. He
also served as a director from our inception through January 1999, as our
General Counsel from August 1996 through March 1999 and as our Treasurer from
our inception through January 1998. Mr. Helmick was an attorney specializing in
corporate finance and securities regulation with Hershner, Hunter, Moulton,
Andre
ws & Neill in Eugene, Oregon from 1993 until joining the Company in 1996.
Mr. Helmick received a JD from Yale Law School and a BBA from the University of
Texas at Austin. Mr. Helmick is the brother of Robert N. Helmick, our Chairman,
President and Chief Executive Officer.
Mark J. Fine has served as our Vice President, Sales since October 1997.
From August 1980 through April 1996, he held various positions at Columbine
JDS, a leading provider of software and services to the broadcasting and cable
industries, including Vice President, Corporate Development, Vice President,
Director of Automation Business Unit and most recently, Vice President, Sales
and Marketing. Mr. Fine holds a BS in Quantitative Business Analysis from
Arizona State University.
Ray Henderson has served as our Vice President, Product Systems and
Technology since January 1, 1999. From 1987 to 1998, he was employed by Simon &
Schuster's Higher Education Division, where he was Vice President, Product
Systems & Technology. In this
role he pioneered many of the higher education
industry's first Web-based products, and created a highly scalable technology
infrastructure for producing Internet-based educational products. Mr. Henderson
received a BS from Trinity University.
Kevin L. Johnson has served as our Vice President, Business Development
since October 1998. From December 1984 through October 1998, he held various
positions, most recently as the Director of Strategic Relationships for the
Simon & Schuster Higher Education Distributed Learning Group responsible for
business development and partnership work as well as sales management of
several regional sales managers. Mr. Johnson has over fifteen years of higher
education sales, editorial and business development experience. Mr. Johnson
received a BA from Middlebury College.
Daniel H. Meitus has served as our Vice President, Marketing since May 1998.
From December 1996 through April 1998, he was a senior consultant with Meitus &
Associates, performing services for In
tegro, Inc., where he led the sales force
automation practice. From 1995 to 1996, he was Director of Analog Services for
Nextel Communications, Inc. where he managed the nationwide operations of its
wireless communications product line. From 1992 through 1995, Mr. Meitus was
the Director of Marketing of OneComm, Inc. From 1983 to 1992 Mr. Meitus held
several marketing management positions for Hewlett-Packard Company, where he
was responsible for business development, product management, program
management and strategic planning. Mr. Meitus received an MBA from the Wharton
School, University of Pennsylvania, and a BS from Washington University in St.
Louis.
James N. Sigman has served as our Vice President, Accounts and Services
since our inception. From 1992 through May 1996, he was an attorney with
Laurence J. Rich & Associates, specializing in corporate law,
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<PAGE>
employment law and litigation. Mr. Sigman received a JD from the University of
Denver Law School and a BA from Tulane University.
Jack W. Blumenstein has served as a member of our board of directors since
February 1998. Mr. Blumenstein has been the President of TBG Information
Investors, LLC, and the co-president of Blumenstein/Thorne Information
Partners, L.L.C. since October 1996, and is a co-founder of these private
equity investment firms. 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.
James R. Nollsch has served as our Vice President, Web Development since
July 1996. From November 1995 to July 1996, Mr. Nollsch served as Director of
Product Development for Real Information Systems, LLC. From June 1994 to
November 1995, Mr. Nollsch pursued personal interests. Mr. Nollsch attended the
University of Colorado, where he received a BA in 1994.
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<PAGE>
Ginger C. Smith has served as our Controller since March 1998. Ms. Smith has
over fourteen years of experience in finance and accounting. She has held
financial management positions at NovaLogic, Inc., a software start-up, and
Paramount Pictures. From 1985 to 1990, she was an auditor at Coopers & Lybrand.
She received an MBA from California State University, and a BS in Finance and a
BA in Accounting from George Mason University.
Directors' Terms
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified.
Board Committees
The Compensation Committee consists of Messrs. Girgenti and Blumenstein, and
Ms. Korshak. There is currently one vacancy on the Compensation Committee. The
Compensation Committee reviews and evaluates the salaries, supplemental
compensation and benefits of our officers, reviews general policy matters
relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also administers our stock option and stock purchase
plans. See "--1997 Stock Option Plan" and "--1999 Employee Stock Purchase
Plan."
The Audit Committee consists of Messrs. Girgenti and Blumenstein, and Ms.
Korshak. The Audit Committee reviews with our independent auditor the scope and
timing of its audit services, the auditor's report on our financial statements
following completion of its audit and our policies and procedures with respect
to internal accounting and financial controls. In addition, the Audit Committee
will make annual recommendations to the board of directors for the appointment
of independent auditors for the ensuing year.
Director Compensation
We do not currently compensate directors for attending meetings of the board
of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was at any time an employee of
eCollege.com. None of our executive officers serves as a member of the board of
directors or Compensation Committee of any other entity which has one or more
executive officers serving as a member of our board of directors or
Compensation Committee.
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted in 1997, and amended on April 13,
1999. The 1997 plan provides for the granting to employees of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, and for
the granting of nonqualified stock options to employees and/or consultants.
Unless terminated sooner, the 1997 plan will terminate automatically in 2007. A
total of 2,800,000 shares of common stock have been reserved for issuance under
the 1997 plan. As of April 30, 1999, options to purchase 1,452,850 shares of
common stock were outstanding under the 1997 plan, and 1,176,700 shares of
common stock remained available.
The 1997 plan may be administered by the board or a committee appointed by
the board to administer the plan. The board or committee has full power and
authority to administer and interpret the plan. Such powers include, but are
not limited to, authority to determine the employees and consultants to be
granted stock options under the plan, to determine the size, type, and
applicable terms and conditions of grants to be made to such employees and
consultants, to determine a time when stock options will be granted, and to
authorize grants to eligible employees and consultants. The exercise price of
incentive stock options must be at least equal to the
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<PAGE>
fair market value of the common stock on the date of the grant. During all
times we are subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), each member of the board
who participates in administration must be a "disinterested person" as that
term is defined in Rule 16b-3 of the Exchange Act.
The option or purchase price of all nonqualified and incentive stock options
granted under the 1997 plan will be determined by the board. Payment of such
purchase price must be made in cash, or in accordance with procedures for a
"cashless exercise" as we may establish from time to time with a brokerage firm
to facilitate exercises of options and sales of shares under the 1997 plan.
Also, payment for shares upon the exercise of options may be made with shares
of our common stock valued at the fair market value of those shares. Upon
exercise of a nonqualified stock option, in addition to the exercise price, the
optionee must pay the amount of federal, state, and local income tax and FICA
taxes we are required to withhold. An optionee can elect to pay these taxes by
having us withhold shares of common stock with a value equal to the amount of
taxes required to be withheld.
The 1997 plan provides that in the event of a merger, a tender or takeover
offer (other than one by us) or a sale of all or substantially all of our
assets (collectively, a "Change of Control Event"), or stockholder approval of
our dissolution, the board has the authority to provide for the full automatic
vesting and exercisability within a specified period of time of each
nonqualified stock option, including shares as to which the option would not
otherwise be exercisable. An option exercise may be made contingent upon
completion of a Change of Control Event. After a Change of Control Event occurs
or articles of dissolution are filed, all unexercised options will terminate.
1999 Employee Stock Purchase Plan
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. 1,000,000 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 July 2001. The next offering
period will start on the first business day in August 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 February and August 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 January and July
each year. In no event, however, may any participant purchase more than 1,500
shares on any purchase date, and not more than 250,000 shares may be purchased
in total by all participants on any purchase date.
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
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<PAGE>
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.
. 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 of
annual salary and bonus in 1998.
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name and Principal Position Year Salary Bonus
- --------------------------- ---- -------- -----
<S> <C> <C> <C>
Robert N. Helmick
President and Chief Executive Officer...................... 1998 $120,000 -0-
</TABLE>
Aggregate Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by Mr. Robert Helmick at December 31, 1998.
Mr. Helmick did not exercise options to purchase common stock during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert N. Helmick........... 35,000 -0- -0-
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $ per share, less the applicable
exercise price per share, multiplied by the number of shares underlying
such options.
Employment Agreement
We have entered into an employment agreement with Mr. Robert Helmick. The
agreement sets a base salary for Mr. Helmick which salary may be adjusted by
the Compensation Committee. In addition to a base salary, Mr. Helmick is
eligible for a bonus in cash, eCollege.com stock, or other consideration as
determined
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<PAGE>
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.
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<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................................. 6,790,000 $0.02 $130,500
Mr. Dobrin..................................... 210,000 0.02 4,050
Mr. J. Helmick................................. 350,000 0.02 6,750
</TABLE>
Mr. R. Helmick's contribution of $130,500 was 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 104,930 shares of our common stock for $113,624 pursuant to the
exercise of warrants. As payment for the shares Mr. Sigman issued us a
promissory note. The note has an interest rate of 8% per annum, and is
repayable in twenty-four monthly payments of $5,500 beginning March 31, 2000.
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. Shielddrop. New World Equities, Inc. is the
beneficial owner of 12.8% 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. Steven M. Singer is our Vice President, Finance and
Administration and Chief Financial Officer. Under the agreement we sold a total
of 132,000 units for an aggregate purchase price of $1,000,000. Each unit
consisted of one share of Series A Convertible Preferred Stock and a warrant to
purchase seven shares of our common stock at an exercise price of $1.08 per
share. The shares of Series A Preferred Stock will convert into a total of
924,000 shares of common stock upon the completion of this offering. New World
Equities, Inc. purchased 66,000 units for an aggregate purchase price of
$500,000. Steven M. Singer purchased 19,800 units for an aggregate purchase
price of $150,000.
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 15.6% 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, Accounts and 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: 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.,
Robert C. Douglas and McDonald & Co. Securities, Inc., as Custodian for William
E. Waldeck. Under the agreement we sold a total
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<PAGE>
of 326,833 shares of Series B Convertible Preferred Stock for an aggregate
purchase price of $6,000,000. The shares of Series B Preferred Stock will
convert into a total of 2,287,831 shares of common stock upon the completion of
this offering. Blumenstein/Thorne Information Partners I, L.P. purchased
272,331 shares of Series B Preferred Stock for an aggregate purchase price of
$4,999,997.16. Stanley R. Dobrin purchased 2,723 shares of Series B Preferred
Stock for an aggregate purchase price of $49,994.28. Alan L. Sigman purchased
1,362 shares of Series B Preferred Stock for an aggregate purchase price of
$25,006.32.
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 10.1% 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 430,540 shares of
Series C Convertible Preferred Stock for an aggregate purchase price of
$15,000,020 in a series of closings from December 21, 1998 through March 1,
1999. The shares of Series C Preferred Stock will convert into a total of
3,013,780 shares of common stock upon the completion of this offering. MediaOne
Interactive Services, Inc. purchased 200,919 shares of Series C Preferred Stock
for an aggregate purchase price of $7,000,017.96. VSI Holdings, Inc. purchased
100,459 shares of Series C Preferred Stock for an aggregate purchase price of
$3,499,991.56. New World Equities, Inc. purchased 64,581 shares of Series C
Preferred Stock for an aggregate purchase price of $2,250,002.04.
Blumenstein/Thorne Information Partners I, L.P. purchased 35,878 shares of
Series C Preferred Stock for an aggregate purchase price of $1,249,989.52.
Stanley R. and Carol L. Dobrin, JTWOS purchased 1,435 shares of Series C
Preferred Stock for an aggregate purchase price of $49,995.40.
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, Series B Preferred and common
stockholders. The amended and restated shareholders agreement provided that our
board of directors would consist of ten members. The Agreement was subsequently
amended in 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.
. 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.
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<PAGE>
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 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 $57,426 in legal fees to that firm thus far in 1999. Robert H.
Helmick, Esq., the father of Mr. R. Helmick and Mr. J. Helmick, is a partner of
that firm.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of shares offered hereby, by (1) each of our directors, (2) our Chief
Executive Officer, (3) each person (or group of affiliated persons) known by us
to beneficially own more than 5% of our common stock and (4) all directors and
executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power or shares such power with his or her spouse with
respect to all shares of capital stock listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of shares of common stock outstanding for
each listed person includes any shares the individual has the right to acquire
within 60 days.
<TABLE>
<CAPTION>
Percent of
Number of Ownership
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Robert N. Helmick........................... 6,825,000(1) 48.9%
Jonathan M. Dobrin.......................... 280,000(2) 2.0%
Blumenstein/Thorne Information Partners I,
L.P. ...................................... 2,164,463(3) 15.6%
MediaOne Interactive Services, Inc. ........ 1,406,433(4) 10.1%
New World Equities, Inc. ................... 1,376,067(5) 9.6%
VSI Holding, Inc............................ 703,213(6) 5.0%
Jack W. Blumenstein......................... 2,164,463(7) 15.6%
Christopher E. Girgenti..................... 1,376,067(8) 9.6%
Oakleigh Thorne............................. 2,164,463(9) 15.6%
Jeri Korshak................................ -- --
All directors and executive officers as a
group...................................... 11,675,230(10) 78.0%
</TABLE>
- --------
(1) Consists of 6,790,000 shares held by the Robert N. Helmick Trust and
options to purchase 35,000 shares of common stock exercisable within 60
days of June 16, 1999. The address for Mr. Helmick is 10200 A East Girard
Avenue, Denver, Colorado 80231.
(2) Includes options to purchase 70,000 shares of common stock exercisable
within 60 days of June 16, 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) Includes warrants to purchase 462,000 shares of common stock exercisable
within 60 days of June 16, 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 shares beneficially owned by New World Equities, Inc., of which
Mr. Girgenti is a Senior Managing Director. Mr. Girgenti disclaims
beneficial ownership of such shares, except to the extent of his pecuniary
interest, if any. The address for Mr. Girgenti is 1603 Orrington Avenue,
Suite 1070, Evanston, Illinois 60201.
(9) Consists of shares beneficially owned by Blumenstein/Thorne Information
Partners I, L.P. Mr. Thorne is a co-President of Blumenstein/Thorne
Information Partners L.L.C., the general partner of Blumenstein/Thorne
Information Partners I, L.P. Mr. Thorne disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest, if any. The
address for Mr. Thorne is P.O. Box 871, Lake Forest, Illinois 60045.
(10) Includes 402,500 shares issuable upon the exercise of options exercisable
within 60 days of June 16, 1999 and 600,600 shares issuable upon the
exercise of warrants exercisable within 60 days of June 16, 1999. See
notes 1, 2 and 5 above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share.
Prior to completion of this offering, we will reincorporate in Delaware and
amend and restate our Certificate of Incorporation. The following summary of
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 38 stockholders. There will be shares of common stock outstanding
upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding preferred stock. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all of our assets remaining after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
sold in this offering will be, when issued in consideration for payment
thereof, fully paid and nonassessable. The rights, preferences and privileges
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future. Upon completion of this offering, there
will be no shares of preferred stock outstanding.
Preferred Stock
Upon completion of this offering, the board of directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. We have no present plans to issue
any shares of preferred stock.
Warrants
We are a party to warrant agreements that entitle the warrant holders to
purchase 959,000 shares of common stock at a purchase price of $1.08 per share.
All shares of common stock issuable upon exercise of these warrants are
entitled to certain registration rights. See "Description of Capital Stock--
Registration Rights." The warrants expire if not exercised on or prior to June
11, 2000. The warrants provide the holders with anti-dilution protection under
certain circumstances. We are also a party to a warrant agreement that entitles
the warrant holder to purchase 60,277 shares of common stock at a purchase
price of $4.98 per share. This warrant expires if not exercised on or prior to
February 26, 2002. The terms of this warrant are the same as those of the
warrants described above.
We are also a party to a warrant agreement that entitles the warrant holder
to purchase 10,500 shares of common stock. The exercise price of the warrant is
$2.62 per share for fifty percent of the shares of common
52
<PAGE>
stock, and $4.98 per share for the remaining fifty percent. In the event that
we are acquired by another entity, the warrant holder, at its option, may elect
to receive either (i) the consideration to be received by the holders of common
stock, or (ii) cash in an amount equal to the difference between the fair
market value of the consideration that the warrant holder would otherwise have
received and the exercise price of the warrant. The warrant shares are subject
to an anti-dilution agreement. In addition, all shares of common stock issuable
upon exercise of this warrant are entitled to certain registration rights. See
"Description of Capital Stock--Registration Rights."
Options
As of April 30, 1999, options to purchase a total of 1,529,850 shares of
common stock were outstanding, all of which are subject to lock-up agreements.
Options to purchase a total of 2,800,000 shares of common stock may be granted
under the Stock Option Plan. See "Management--Stock Option Plan" and "Shares
Eligible for Future Sale."
Registration Rights
We entered into registration rights agreements with certain of our
stockholders. After the completion of this offering, the holders of 6,225,611
shares of common stock issuable upon the conversion of all of the outstanding
preferred stock, and warrants to purchase an additional 934,500 shares of
common stock, will be entitled to certain demand registration rights with
respect to the registration of their registrable securities under the
Securities Act. The holders of 30% or more of the registrable securities are
entitled to demand that we register their registrable securities under the
Securities Act on Form S-1 or any similar long form registration statement. We
are not required to effect more than two registrations pursuant to these demand
registrations rights. The holders of the of the registrable securities are
entitled to demand that we register their registrable securities under the
Securities Act on Form S-3 or any similar short form registration statement
then available to the Company, provided that the anticipated aggregate offering
price of the securities to be registered exceeds $500,000. In addition, the
holders of registrable securities are entitled to require us to include their
registrable securities in future registration statements that we may file.
These registration rights are subject to various conditions and limitations,
including the right of the underwriters of an offering to limit the number of
registrable securities that may be included in the offering. In addition,
holders of all of these shares will be restricted from exercising their demand
rights until 180 days after the date of this prospectus. We are generally
required to bear all of the expenses of these registrations, except
underwriting discounts and selling commissions. Registration of any of the
registrable securities held by security holders with registration rights will
result in shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration.
Anti-Takeover Effects of 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
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 Certificate and Bylaws, which provisions will
be in effect upon the closing of this offering and are summarized in the
following paragraphs, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best
53
<PAGE>
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Board of Directors Vacancies
The Certificate authorizes the board of directors to fill vacant
directorships or increase the size of the board of directors. This may deter a
stockholder from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies created by such
removal with its own nominees.
Stockholder Action; Special Meeting of Stockholders
The Certificate provides that stockholders may not take action by written
consent, but only at duly called annual or special meetings of stockholders.
The 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.
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.
54
<PAGE>
Upon the closing of this offering, we will have an aggregate of shares
of common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Upon the
closing of this offering, shares of common stock will be issuable upon
exercise of outstanding options and shares of common stock will be issuable
upon exercise of outstanding warrants. Of the outstanding shares, the
shares sold in this offering will be freely tradable, except that any shares
held by our "affiliates" (as that term is defined in Rule 144 promulgated under
the Securities Act) may only be sold in compliance with the limitations
described below. The remaining 13,685,861 shares of common stock will be deemed
"restricted securities" as defined under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. After taking into account
the 180-day lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
9,010,764...................... 180 days after the date of this prospectus
4,955,097...................... At various times after 180 days
from the date of this prospectus
</TABLE>
In addition, approximately 12,113,493 of the shares that will become
eligible for resale after the expiration of the 180-day lock-up agreements are
held by affiliates and therefore will remain subject to the volume limitations
and other restrictions of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of common stock (approximately shares immediately after
this offering) or (ii) the average weekly trading volume in the common stock
during the four calendar weeks preceding the date on which notice of such sale
is filed, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate of us at any time during the 90 days preceding
a sale and who has beneficially owned the shares proposed to be sold for at
least two years would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. To the extent that shares were
acquired from an affiliate of us such person's holding period for the purpose
of effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
Rule 701 promulgated under the Securities Act provides that shares of common
stock acquired pursuant to written plans such as the 1997 Stock Option Plan may
be resold by persons other than affiliates, beginning 90 days after the date of
this prospectus, subject only to the manner of sale provisions of Rule 144, and
by affiliates, beginning 90 days after the date of this prospectus, subject to
all provisions of Rule 144 except its one-year minimum holding period.
All of our directors, officers and stockholders, and our optionholders and
warrantholders have agreed that they will not, without the prior written
consent of the representatives of the underwriters, sell or otherwise dispose
of any shares of common stock or options to acquire shares of common stock
during the 180-day period following the date of this prospectus. See
"Underwriting."
We intend to file a Form S-8 registration statement under the Securities Act
on or immediately after the date of this prospectus to register all shares of
common stock issuable under the 1997 Stock Option Plan and our 1999 Employee
Stock Purchase Plan. Such registration statement will automatically become
effective upon filing. Accordingly, shares covered by that registration
statement will thereupon be eligible for sale in the public markets, unless
such options are subject to vesting restrictions or the contractual
restrictions described above. See "Management-- 1997 Stock Option Plan" and "--
1997 Employee Stock Purchase Plan."
55
<PAGE>
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 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."
56
<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, Thomas Weisel Partners LLC and
William Blair & Company 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
Underwriter Shares
- ----------- ---------
<S> <C>
Banc of America Securities LLC........................................
Thomas Weisel Partners LLC............................................
William Blair & Company...............................................
---------
Total...............................................................
=========
</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, then 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 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 initial 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 and
are payable entirely by us. The expenses consist of the following:
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<PAGE>
.a registration fee of $15,985;
.an NASD filing fee of $30,500;
.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 on
the price of the shares. These transactions may occur on the Nasdaq
58
<PAGE>
National Market or otherwise. If these transactions are commenced, they may be
discontinued without notice at any time.
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.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 27 filed public offerings of equity securities, of which eleven have
been completed, and has acted as a syndicate member in an additional ten public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
The underwriters have reserved up to 5% of the common stock offered hereby
for sale to certain of our employees 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, Denver, Colorado.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Cooley Godward LLP, Boulder, Colorado.
EXPERTS
The financial statements included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein upon the authority of said
firm as experts in accounting and auditing in giving said reports.
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<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.
60
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
After the re-incorporation and stock split discussed in Note 11 to the
Company's financial statements is effected, we expect to be in a position to
render the following audit report.
Arthur Andersen LLP
Denver, Colorado,
April 23, 1999.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eCollege.com:
We have audited the accompanying balance sheets of eCollege.com (a Delaware
corporation, formerly Real Education, Inc.) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' deficit and cash flows
for the period from inception (July 26, 1996) to December 31, 1996, and for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eCollege.com as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from inception (July 26, 1996) to December 31, 1996, and for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Denver, Colorado,
April 23, 1999 (except with
respect to the matters discussed
in Note 11, as to which the date
is May , 1999).
F-2
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------------ March 31, March 31, 1999
1997 1998 1999 (See Note 2)
----------- ----------- ------------ --------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 208,346 $11,661,186 $ 9,927,383
Accounts receivable,
net................... 214,660 258,980 910,733
Accrued revenue
receivable............ 10,000 57,885 86,600
Other current assets... 15,550 112,357 173,005
----------- ----------- ------------
Total current
assets.............. 448,556 12,090,408 11,097,721
PROPERTY AND EQUIPMENT,
net.................... 299,842 1,569,129 1,720,278
----------- ----------- ------------
TOTAL ASSETS............ $ 748,398 $13,659,537 $ 12,817,999
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable....... $ 229,337 $ 658,643 $ 656,913
Accounts payable
related party......... 6,500 -- --
Accrued liabilities.... 79,725 1,284,967 573,305
Deferred revenue....... 35,750 569,599 1,188,498
Current portion of
notes payable to
related parties....... 39,441 -- --
----------- ----------- ------------
Total current
liabilities......... 390,753 2,513,209 2,418,716
OTHER LIABILITIES....... -- 35,900 50,564
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; 132,000,
132,000, 132,000 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, $180,098
and $0,
respectively)......... 1,029,284 1,136,803 1,163,680 $ --
Series B; 0, 326,833,
326,833 and 0
(unaudited, pro
forma) shares
authorized, issued
and outstanding,
respectively;
entitled to
preference in
liquidation (includes
cumulative preferred
return of $0,
$550,060, $700,076
and $0,
respectively)......... -- 6,534,046 6,685,713 --
Series C; 0, 430,540,
430,540 and 0
(unaudited, pro
forma) shares
authorized,
respectively; 0,
365,959, 430,540 and
0 shares issued and
outstanding,
respectively;
entitled to
preference in
liquidation (includes
cumulative preferred
return of $0,
$31,438, $386,680 and
$0, respectively)..... -- 11,978,566 14,665,563 --
STOCKHOLDERS' EQUITY
(DEFICIT)
Common stock, no par
value; 50,000,000
shares authorized;
7,350,070, 7,668,500,
7,686,000 and
13,911,611
(unaudited, pro
forma) shares,
respectively, issued
and outstanding....... 141,376 456,190 468,730 22,983,686
Warrants and options
for common stock...... -- 1,626,426 2,572,826 2,572,826
Notes receivable....... -- (341,024) (341,024) (341,024)
Deferred
compensation.......... -- (1,244,007) (2,087,073) (2,087,073)
Accumulated deficit.... (1,043,549) (9,036,572) (12,779,696) (12,779,696)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit).... (902,173) (8,538,987) (12,166,237) $ 10,348,719
----------- ----------- ------------ ============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT).............. $ 748,398 $13,659,537 $ 12,817,999
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Years For the Three
(July 26, 1996) Ended Months Ended
through December 31, March 31,
December 31, ---------------------- ----------------------
1996 1997 1998 1998 1999
--------------- --------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Campus and course
development fees...... $ -- $ 628,250 $ 1,086,022 $ 155,050 $ 325,010
Student fees........... 22,464 399,930 579,047 93,464 285,947
--------- --------- ----------- --------- -----------
Total revenue........ 22,464 1,028,180 1,665,069 248,514 610,957
COST OF REVENUE......... 109,974 528,090 2,064,909 236,236 1,187,599
--------- --------- ----------- --------- -----------
Gross profit (loss).. (87,510) 500,090 (399,840) 12,278 (576,642)
--------- --------- ----------- --------- -----------
OPERATING EXPENSES:
Selling and
marketing............. 25,474 106,026 3,394,000 237,299 1,320,551
General and
administrative........ 248,884 767,812 2,509,496 450,240 716,784
Development............ 60,207 212,052 1,099,000 107,404 633,502
--------- --------- ----------- --------- -----------
Total operating
expenses............ 334,565 1,085,890 7,002,496 794,943 2,670,837
--------- --------- ----------- --------- -----------
LOSS FROM OPERATIONS.... (422,075) (585,800) (7,402,336) (782,665) (3,247,479)
OTHER INCOME (EXPENSE):
Interest and other
income................ 27,001 8,993 149,308 30,952 119,896
Interest expense....... (9,186) (37,990) (36,819) (1,032) --
--------- --------- ----------- --------- -----------
NET LOSS FROM CONTINUING
OPERATIONS............. (404,260) (614,797) (7,289,847) (752,745) (3,127,583)
--------- --------- ----------- --------- -----------
DISCONTINUED OPERATIONS
(Note 5):
Income (loss) from
operations............ (29,239) 29,249 -- -- --
Gain on disposal of
discontinued
operations............ -- 34,632 -- -- --
--------- --------- ----------- --------- -----------
NET LOSS................ $(433,499) $(550,916) $(7,289,847) $(752,745) $(3,127,583)
========= ========= =========== ========= ===========
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss............... $(433,499) $(550,916) $(7,289,847) $(752,745) $(3,127,583)
Dividends on
mandatorily
redeemable,
convertible preferred
stock................. -- (55,030) (681,554) (125,025) (530,270)
Accretion of
mandatorily
redeemable,
convertible preferred
stock................. -- (4,104) (21,622) (2,954) (85,271)
--------- --------- ----------- --------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(433,499) $(610,050) $(7,993,023) $(880,724) $(3,743,124)
========= ========= =========== ========= ===========
BASIC AND DILUTED NET
LOSS FROM CONTINUING
OPERATIONS PER SHARE .. $ -- $ (0.11) $ (1.05) $ (0.12) $ (.49)
========= ========= =========== ========= ===========
BASIC AND DILUTED NET
LOSS PER SHARE ........ $ -- $ (0.10) $ (1.05) $ (0.12) $ (.49)
========= ========= =========== ========= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND
DILUTED................ -- 6,161,946 7,612,045 7,444,549 7,674,345
========= ========= =========== ========= ===========
PRO FORMA NET LOSS FROM
CONTINUING
OPERATIONS PER SHARE
(UNAUDITED--Note 2):
Basic and diluted net
loss per share........ $ (0.68) $ (0.08) $ (0.23)
=========== ========= ===========
Weighted average
common shares
outstanding--basic
and diluted........... 10,680,033 9,792,090 13,899,956
=========== ========= ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Warrants
------------------ and Notes Deferred Accumulated
Shares Amount Options Receivable Compensation Deficit Total
--------- -------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 26, 1996
(Inception)............ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- -- -- (433,499) (433,499)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1996................... -- -- -- -- -- (433,499) (433,499)
Issuance of common
stock at approximately
$0.02 per share....... 560,000 10,800 -- -- -- -- 10,800
Issuance of common
stock in February 1997
for services
provided.............. 6,790,000 130,500 -- -- -- -- 130,500
Common stock issued
upon exercise of
warrants.............. 70 76 -- -- -- -- 76
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- (55,030) (55,030)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- (4,104) (4,104)
Net loss............... -- -- -- -- -- (550,916) (550,916)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1997................... 7,350,070 141,376 -- -- -- (1,043,549) (902,173)
Issuance of common
stock upon exercise of
warrants and options
...................... 318,430 344,814 -- (341,024) -- -- 3,790
Repurchase of warrants
for common stock...... -- (30,000) -- -- -- -- (30,000)
Deferred compensation.. -- -- 1,443,542 -- (1,443,542) -- --
Amortization of
deferred
compensation.......... -- -- -- -- 199,535 -- 199,535
Warrants for common
stock issued in
connection with bridge
loan.................. -- -- 27,819 -- -- -- 27,819
Warrants for common
stock issued in
connection with Series
C preferred stock..... -- -- 155,065 -- -- -- 155,065
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- (681,554) (681,554)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- (21,622) (21,622)
Net loss............... -- -- -- -- -- (7,289,847) (7,289,847)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1998................... 7,668,500 456,190 1,626,426 (341,024) (1,244,007) (9,036,572) (8,538,987)
Issuance of common
stock upon exercise of
options (Unaudited)... 17,500 12,540 -- -- -- -- 12,540
Deferred compensation
(Unaudited)........... -- -- 946,400 -- (946,400) -- --
Amortization of
deferred compensation
(Unaudited)........... -- -- -- -- 103,334 -- 103,334
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock (Unaudited)..... -- -- -- -- -- (530,270) (530,270)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value (Unaudited)..... -- -- -- -- -- (85,271) (85,271)
Net loss (Unaudited)... -- -- -- -- -- (3,127,583) (3,127,583)
--------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, MARCH 31, 1999
(UNAUDITED)............ 7,686,000 $468,730 $2,572,826 $(341,024) $(2,087,073) $(12,779,696) $(12,166,237)
========= ======== ========== ========= =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Three
(July 26, 1996) For the Years Ended Months Ended
through December 31, March 31,
December 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net loss....................................... $(433,499) $ (550,916) $ (7,289,847) $ (752,745) $ (3,127,583)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................. 18,376 126,199 393,841 66,908 176,602
Provision for doubtful accounts............... -- -- 9,800 -- --
Gain on disposal of discontinued operations... -- (34,632) -- -- --
Common stock issued for services.............. -- 65,250 -- -- --
Deferred compensation......................... -- -- 199,535 -- 103,334
Noncash interest expense...................... -- -- 27,819 -- --
Change in-
Accounts receivable and accrued
revenue receivables......................... (14,433) (190,607) (102,005) 24,630 (680,468)
Other current assets......................... (1,399) (14,151) (96,807) (31,868) (60,648)
Accounts payable and accrued liabilities..... 112,379 268,433 972,048 9,245 (57,392)
Deferred revenue............................. 35,000 750 533,849 88,206 618,899
Other liabilities............................ -- -- 35,900 8,104 14,664
--------- ---------- ------------ ---------- ------------
Net cash used in operating activities...... (283,576) (329,674) (5,315,867) (587,520) (3,012,592)
--------- ---------- ------------ ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (53,090) (369,653) (1,663,128) (420,619) (327,751)
Proceeds from sale of ColoradoNet.............. -- 200,000 -- -- --
Purchase of ColoradoNet, net of cash
acquired...................................... (77,662) -- -- -- --
--------- ---------- ------------ ---------- ------------
Net cash used in investing activities...... (130,752) (169,653) (1,663,128) (420,619) (327,751)
--------- ---------- ------------ ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock...... -- 1,000,000 18,750,020 6,000,000 2,250,000
Proceeds from bridge loan...................... -- -- 500,000 -- --
Payments on bridge loan........................ -- -- (500,000) -- --
Payments on notes payable...................... -- (129,000) -- -- --
Proceeds from notes payable to related
parties....................................... 434,465 120,812 -- -- --
Payments on notes payable to related parties... -- (285,302) (269,975) (3,421) --
Payment of stock issuance costs................ -- (29,850) (22,000) (22,000) (656,000)
Repurchase of warrants......................... -- -- (30,000) (30,000) --
Proceeds from issuance of common stock......... -- 10,876 3,790 -- 12,540
--------- ---------- ------------ ---------- ------------
Net cash provided by financing activities.. 434,465 687,536 18,431,835 5,944,579 1,606,540
--------- ---------- ------------ ---------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 20,137 188,209 11,452,840 4,936,440 (1,733,803)
CASH AND CASH EQUIVALENTS, beginning of year.... -- 20,137 208,346 208,346 11,661,186
--------- ---------- ------------ ---------- ------------
CASH AND CASH EQUIVALENTS, end of year.......... $ 20,137 $ 208,346 $ 11,661,186 $5,144,786 $ 9,927,383
========= ========== ============ ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................ $ -- $ 47,176 $ 9,000 $ 1,032 $ --
========= ========== ============ ========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends accrued on Series A, B and C
mandatorily redeemable, convertible
preferred stock.............................. $ -- $ 55,030 $ 681,554 $ 125,025 $ 530,270
========= ========== ============ ========== ============
Accretion on Series A, B and C mandatorily
redeemable, convertible preferred stock...... $ -- $ 4,104 $ 21,622 $ 2,954 $ 85,271
========= ========== ============ ========== ============
Common stock issued for accrued services
payable...................................... $ -- $ 65,250 $ -- $ -- $ --
========= ========== ============ ========== ============
Issuance of note payable in connection with
acquisition.................................. $ 129,000 $ -- $ -- $ -- $ --
========= ========== ============ ========== ============
Warrants issued for offering costs............ $ -- $ -- $ 155,065 $ -- $ --
========= ========== ============ ========== ============
Accrued offering costs........................ $ -- $ -- $ 656,000 $ -- $ --
========= ========== ============ ========== ============
Common stock issued in exchange for notes
receivable................................... $ -- $ -- $ 341,024 $ -- $ --
========= ========== ============ ========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information as of and for the Three Months
Ended March 31, 1998 and 1999 is Unaudited)
(1) Organization and Nature of Business
eCollege.com (the "Company," formerly Real Education, Inc. and Real
Information Systems, Inc.) was organized and incorporated in the state of
Colorado on July 26, 1996. As discussed in Note 11, the Company expects to file
for reincorporation in the State of Delaware. The Company is a leading provider
of a complete solution that enables colleges and universities to deliver an
online campus and courses over the Internet. The Company's integrated 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.
The Company's current business plan contemplates significant growth. Such
growth will likely result in a period in which the Company reports losses and
cash used in operations, which could result in the Company seeking external
financing. Management believes that cash on hand and other sources of liquidity
at March 31, 1999 are sufficient to fund the Company's operations through at
least March 31, 2000, albeit at significantly lower levels of activities.
(2) Summary of Significant Accounting Policies
Interim Financial Statements (Unaudited)
The interim financial statements for the three months ended March 31, 1998
and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire year. In addition, our
results of operations in interim periods will fluctuate due to the seasonality
inherent in the academic calendar.
Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. Such
investments are held in money market accounts whose costs approximate their
fair market values.
Revenue Recognition
The Company generates revenue primarily from two sources--campus and course
development revenue and per-course student fees.
Online campus and course design and development services are generally
conducted under fixed price contracts, and revenue is recognized using the
percentage of completion method. Frequently, customers will elect to add
courses in addition to those under the initial contract, and the Company
recognizes revenue related to these courses as the courses are completed.
Revenues from online campus and course design and development contracts are
recognized on the percentage of completion method for individual contracts,
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that hours incurred bear to total estimated hours at completion. The
Company's use of the percentage of completion method of revenue recognition
requires estimates of percentage of project completion. Changes in job
performance, estimated profitability and final contract settlements may result
in revisions to the estimated degree of completion and corresponding revenue in
the period in which the revisions are determined. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable. Contract costs include all labor costs directly related to
contract performance.
Revenue that is recognized is reflected as accrued revenue receivable to the
extent that the customer has not yet been billed for such services. The Company
records deferred revenue for amounts received from customers in excess of the
revenue that has been earned.
The Company also generates student fee revenue when students sign up for
online courses developed by the Company for its customers at an agreed upon
price with the customer. This student fee revenue is recognized ratably over
the period the course is delivered.
Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 152,750 $ 607,750
Estimated earnings................................. 16,500 5,136
--------- -----------
169,250 612,886
Less: Billings to date............................. (195,000) (1,104,000)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
Included in accompanying balance sheets under the
following captions:
Accrued revenue receivable....................... $ 10,000 $ 57,885
Deferred revenue--development.................... (35,750) (548,999)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
</TABLE>
In addition to the amounts disclosed above, at December 31, 1998 the Company
had $20,600 of deferred revenue related to student fees.
F-8
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounts Receivable
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. At December 31, 1997 and 1998,
the allowance for doubtful accounts was approximately $0 and $10,000,
respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company has no significant off-balance sheet
concentrations of credit risk, such as foreign exchange contracts, option
contracts or other foreign currency hedging arrangements. The Company maintains
its cash balances in the form of bank demand deposits and money market accounts
with financial institutions that management believes are creditworthy. Accounts
receivable are typically unsecured and are derived from transactions with and
from educational institutions primarily located in the United States.
Accordingly, the Company may be exposed to credit risk generally associated
with educational institutions. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential credit losses.
As discussed in Note 9, the Company had one customer in 1996, two customers
in 1997 and one customer in 1998 that accounted for more than 10% of revenue.
In addition, as of December 31, 1997 and 1998, the Company had five and four
customers, respectively, that individually accounted for more than 10% of
accounts receivable. These customers in the aggregate accounted for 99% and 53%
of accounts receivable balances at December 31, 1997 and 1998, respectively.
The loss of such customers could result in a significant reduction of revenues.
Property and Equipment
Property and equipment are stated at cost and depreciation is provided using
the straight-line method, generally over estimated useful lives of three to
five years. Maintenance and repairs are expensed as incurred and major
additions, replacements and improvements are capitalized.
Leasehold improvements are amortized using the straight-line method over the
shorter of the useful life or the life of the lease.
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment................................ $ 308,795 $1,609,401
Office furniture and equipment.................... 19,805 349,305
Leasehold improvements............................ 90,649 123,671
--------- ----------
419,249 2,082,377
Less: Accumulated depreciation and amortization... (119,407) (513,248)
--------- ----------
$ 299,842 $1,569,129
========= ==========
</TABLE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates the recoverability of its long-lived
assets based on estimated undiscounted future cash flows and provides for
impairment if such undiscounted cash flows are insufficient to recover the
carrying amount of the long-lived asset.
F-9
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-term
trade receivables and payables, and notes payable. The carrying values of the
cash equivalents and short-term trade receivables and payables approximate
their fair values. Based on borrowing rates currently used by the Company for
financing, the carrying value of the notes payable approximates estimated fair
value. Financial instruments also consist of convertible preferred stock
subject to mandatory redemption, whose fair value at December 31, 1997 and
1998, was approximately $1.2 million and $28.7 million, respectively. Such
values were estimated based upon the estimated value of the common stock into
which such preferred stock could be converted.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable on tax return filings each year. Deferred tax assets and
liabilities are recorded for the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and amounts
reported in the accompanying balance sheets, and for operating loss and tax
credit carryforwards. The change in deferred tax assets and liabilities for the
period measures the deferred tax provision or benefit for the period. Effects
of changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax asset is sufficiently assured at each balance sheet date (Note
10).
Development
Costs incurred in the development of new software and enhancements to
existing software and services are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying statements of operations. Advertising
expense for each of the periods presented in the accompanying statement of
operations related to continuing operations is as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Three Months
December 31, Ended March 31,
----------------------------- ----------------------------------
1997 1998 1998 1999
--------- ----------- ------- --------
(Unaudited)
<S> <C> <C> <C>
$ 18,000 $ 1,097,000 $41,000 $281,000
======== =========== ======= ========
</TABLE>
For the period from inception to December 31, 1996, approximately $9,000 of
advertising expense was incurred in connection with discontinued operations.
Stock-Based Compensation
The Company accounts for its employee stock option plans and other stock-
based compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25"), and related interpretations. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma disclosures for employee
stock grants made in 1997 and future years as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123.
F-10
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Split
Upon the reincorporation of the Company discussed in Note 11, the Company
will effect a seven-for-one split of its common stock, and change its
authorized common stock to 50,000,000 shares and preferred stock to 5,000,000
shares. In connection with the common stock split, the Company will change its
conversion ratios on the preferred stock to reflect the split. All references
in the accompanying financial statements to the number of common shares have
been retroactively restated to reflect the common stock split, the increase in
the authorized common and preferred stock and the change in the preferred stock
conversion ratios.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to
common shareholders for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. The Company has excluded the weighted
average effect (using the treasury stock method) of common stock issuable upon
conversion of all convertible preferred stock, warrants and stock options from
the computation of diluted earnings per share as the effect of all such
securities is anti-dilutive for all periods presented. The shares excluded are
as follows:
<TABLE>
<S> <C> <C>
For the years ended December 31,
1997...................................................... 581,875
========= ===
1998...................................................... 4,341,694
========= ===
For the three months ended March 31,
1998 (unaudited).......................................... 3,298,155
========= ===
1999 (unaudited).......................................... 8,368,710
========= ===
</TABLE>
At December 31, 1998, the Company had issued rights to 8,647,338 shares of
common stock under such agreements.
Net loss from continuing operations per share is calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------- -----------------------
1997 1998 1998 1999
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Numerator: (Unaudited)
Net loss from continuing
operations.............. $ (614,797) $ (7,289,847) $(752,745) $ (3,127,583)
Dividends on mandatorily
redeemable, convertible
preferred stock......... (55,030) (681,554) (125,025) (530,270)
Accretion of mandatorily
redeemable, convertible
preferred stock......... (4,104) (21,622) (2,954) (85,271)
----------- ------------ --------- ------------
Net loss from continuing
operations applicable to
common shareholders..... $ (673,931) $ (7,993,023) $(880,724) $ (3,743,124)
=========== ============ ========= ============
Denominator:
Weighted average shares
outstanding............. 6,161,946 7,612,045 7,444,549 7,674,345
=========== ============ ========= ============
</TABLE>
The Company was incorporated in 1996 without capital contributions. As of
December 31, 1996, no shares of common stock were outstanding. Therefore, no
earnings per share amounts have been reflected for the period from inception to
December 31, 1996.
F-11
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of the Company's planned initial public offering,
the outstanding shares of Series Preferred (as defined below) will
automatically convert into 6,225,611 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma balance sheet at March 31, 1999.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1998 is
computed using the net loss and weighted average number of common shares
outstanding, including the pro forma effects of the assumed conversion of the
Company's Series A, B and C convertible preferred stock into shares of the
Company's common stock as if such conversion occurred on January 1, 1998, or at
date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares used to compute basic and
diluted net loss per share of approximately 3,067,988, 2,347,541 and 6,225,611
shares for the year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999, respectively, and pro forma entries to eliminate
preferred stock dividend accruals and accretion charges for each period. The
pro forma effects of these transactions are unaudited.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. Since inception, comprehensive loss has
been the same as net loss.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it has one reportable operating segment at December
31, 1998.
Start-Up Activities
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." In general, SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Initial application of SOP 98-5 is reported as the cumulative effect
of a change in accounting principle. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of its
operations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which provides guidance on accounting for the cost of such
software. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 did not have a
material impact on the Company's financial statements.
F-12
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. To date, the Company
has not entered into any derivative financial instruments or hedging
activities.
Reclassifications
Certain prior years balances were reclassified to conform to current year
presentation.
(3) Convertible Preferred Stock Subject to Mandatory Redemption
A summary of the Company's mandatorily redeemable, convertible preferred
stock is presented in the table below:
<TABLE>
<CAPTION>
Series A Series B Series C
------------------ ------------------ -------------------
Shares Amount Shares Amount Shares Amount
------- ---------- ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996 -- $ -- -- $ -- -- $ --
Issuance of Series A
mandatorily
redeemable,
convertible preferred
stock in May 1997 for
cash of approximately
$7.58 per share, net
of stock issuance
costs of $29,850..... 132,000 970,150 -- -- -- --
Dividends accrued..... -- 55,030 -- -- -- --
Accretion to
redemption value..... -- 4,104 -- -- -- --
------- ---------- ------- ---------- ------- -----------
Balances, December 31,
1997.................... 132,000 1,029,284 -- -- -- --
Issuance of Series B
mandatorily
redeemable,
convertible preferred
stock in February
1998 for cash of
approximately $18.36
per share, net of
stock issuance costs
of $22,000........... -- -- 326,833 5,978,000 -- --
Issuance of Series C
mandatorily
redeemable,
convertible preferred
stock in December
1998 for cash of
approximately $34.84
per share, net of
stock issuance costs
of $811,065.......... -- -- -- -- 365,959 11,938,955
Dividends accrued..... -- 100,056 -- 550,060 -- 31,438
Accretion to
redemption value..... -- 7,463 -- 5,986 -- 8,173
------- ---------- ------- ---------- ------- -----------
Balances, December 31,
1998.................... 132,000 1,136,803 326,833 6,534,046 365,959 11,978,566
Issuances of Series C
mandatorily
redeemable,
convertible preferred
stock in January,
February and March
1999 for cash of
approximately $34.84
per share
(unaudited).......... -- -- -- -- 64,581 2,250,000
Dividends accrued
(unaudited).......... -- 25,012 -- 150,016 -- 355,242
Accretion to
redemption value
(unaudited).......... -- 1,865 -- 1,651 -- 81,755
------- ---------- ------- ---------- ------- -----------
Balances, March 31, 1999
(unaudited)............. 132,000 $1,163,680 326,833 $6,685,713 430,540 $14,665,563
======= ========== ======= ========== ======= ===========
</TABLE>
Under the Company's articles of incorporation, the Company is authorized to
issue 889,373 shares of preferred stock. Shares of preferred stock may be
issued from time to time in one or more series, with designations, rights,
preferences and limitations established by the Company's Board of Directors. As
of December 31, 1998, the Company has the following shares of preferred stock
authorized for issuance:
F-13
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Liquidation,
Redemption Annual
Shares Value per Dividend
Outstanding Share Rate
----------- ------------ --------
<S> <C> <C> <C>
Series A mandatorily redeemable,
convertible preferred stock (Series
A) 132,000 $ 7.58 $0.758
======= ====== ======
Series B mandatorily redeemable,
convertible preferred stock (Series
B) 326,833 $18.36 $1.836
======= ====== ======
Series C mandatorily redeemable,
convertible preferred stock (Series
C) 365,959 $34.84 $3.484
======= ====== ======
</TABLE>
Dividends
Dividends accrue at an annual rate of ten-percent of the face value of the
preferred stock. Dividends accrue whether or not they have been declared, are
cumulative, and in addition, to the extent there are unpaid dividends,
dividends are payable on such unpaid dividends. 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 $34.84 per share (an
aggregate of approximately $15 million), plus accrued and unpaid dividends,
upon any liquidation, dissolution or winding up of the Company before
distribution or payment is made upon Series A, Series B or the Company's
common stock. Holders of Series B are entitled to a preference of $18.36 per
share (an aggregate of approximately $6 million), plus accrued and unpaid
dividends, upon any liquidation, dissolution or winding up of the Company
before distribution or payment is made upon Series A or the Company's common
stock. Holders of Series A are entitled to a preference of $7.58 per share (an
aggregate of approximately $1 million), plus accrued and unpaid dividends upon
the occurrence of such events. Remaining proceeds, if any, from such events
are allocable to the holders of the Company's common stock. Holders of
Preferred Stock have the option to have the proceeds from such events
allocated to them as common stockholders on an as-if-converted to common stock
basis.
Mandatory Redemption
The Preferred Stock outstanding as of December 31, 1998 is subject to
redemption at the following dates:
<TABLE>
<CAPTION>
Series A Series B Series C Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
June 15 -
2001....................... $ 385,215 $2,183,571 $ 4,260,486 $ 6,829,272
2002....................... 385,215 2,183,571 4,260,486 6,829,272
2003....................... 385,216 2,183,572 4,260,486 6,829,274
---------- ---------- ----------- -----------
Total.................... 1,155,646 6,550,714 12,781,458 20,487,818
Less: Unaccreted issuance
costs................... (18,843) (16,668) (802,892) (838,403)
---------- ---------- ----------- -----------
$1,136,803 $6,534,046 $11,978,566 $19,649,415
========== ========== =========== ===========
</TABLE>
F-14
<PAGE>
ECOLLEGE.COM
(FORMERLY REAL EDUCATION, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
If the Preferred Stock is still outstanding at June 1, 2001, holders of the
Preferred Stock may require redemption of all or a portion of their stock on or
before June 15, 2001. The redemption amount per share is $7.58, $18.36 and
$34.84 for the Series A, Series B and Series C, respectively, plus accrued and
unpaid dividends. The redemption will be made in three equal annual
redemptions. If the Preferred Stock is outstanding at June 1, 2002, then on or
before June 15, 2002, holders of Preferred Stock may require redemption of all
or a portion of their preferred shares. The redemption price upon such election
is the greater of $7.58, $18.36 and $34.84 for the Series A, Series B and
Series C per share, respectively, plus accrued and unpaid dividends or the
market value of the Preferred Stock.
Accretion
The difference between the redemption price and the recorded value, which is
net of the offering costs of $29,850, $22,000 and $811,065 for Series A, Series
B and Series C, respectively, is being accreted to the earliest possible
redemption date.
Voting Rights
The Preferred Stock is entitled to vote on an as-if-converted to common
stock basis.
Conversion Rights
At any time, any holder may convert all or any portion of such shares into
common stock at a rate of seven shares of common stock per one share of
preferred stock. The conversion price is subject to adjustment to prevent
dilution based on criteria defined in the articles of incorporation. Upon
conversion, accrued and unpaid dividends are not paid or converted and are
extinguished. Each share of Preferred Stock is subject to a mandatory
conversion to common stock at the conversion price in effect at that time
immediately upon the closing of a public offering which meets certain
conditions.
Warrants
In connection with the sale of Series C, the Company issued 60,277 warrants
to purchase one share of the Company's common stock for approximately $4.98.
Upon issuance, the warrants had a value totaling $155,065, which has been
reflected as a cost of the offering. The warrants vest immediately and are
exercisable for a period of three years. As of December 31, 1998, none of the
warrants have been exercised. In addition, the Company incurred $656,000 of
direct costs in connection with the issuance of Series C.
In connection with the sale of Series A, the Company issued 924,000 warrants
to purchase one share of the Company's common stock for approximately $1.08.
The warrants vest immediately and are exercisable for a period of three years.
Based upon the fair market value of the common stock at the date of issuance,
the fair value of the warrants was determined to be immaterial. As of December
31, 1998, none of the warrants have been exercised.
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........................................ $0.36 $4.98
</TABLE>
F-15
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Stockholders' Equity
Common Stock
In February 1997, the Company issued 560,000 shares of common stock for cash
of approximately $0.02 per share. In 1998, an individual exercised options for
3,500 shares of common stock for cash of approximately $1.08 per share.
Noncash Common Stock Issuance
In February 1997, the Company issued 6,790,000 shares of common stock for
services provided during formation of the Company, a portion of which was
accrued at December 31, 1996. The Company recorded the stock at its fair market
value of approximately $0.02 per share, which approximated the value of the
services rendered with the corresponding expense being recorded in the
Company's statement of operations over the period that the services were
provided.
Warrants
In June 1997, the Company issued warrants for 420,000 shares of common stock
with an exercise price of approximately $1.08. The warrants vested immediately
and are exercisable for a period of three years. In 1997, the Company issued 70
shares of common stock upon the exercise of warrants in return for cash
consideration totaling $76. During 1998, the Company issued 314,930 shares of
common stock upon the exercise of such warrants. The employees issued notes for
the purchase price of the common stock received upon exercise of the warrants.
These notes receivable, totaling $341,024 at December 31, 1998, are reflected
as a reduction of stockholders' equity. Interest on the loans is at a rate of
8% per annum, and the principal and the accrued and unpaid interest is due in
twenty-four monthly payments, beginning on March 31, 2000. The loans are due in
full on February 28, 2002. The loans are full recourse loans and are secured by
the underlying shares of common stock. The Company also issued security buy-
sell agreements in connection with these loans which place restrictions on the
transfer of ownership interests, as defined in the agreement. These agreements
will be removed upon completion of the offering discussed in Note 11.
During 1998, the Company repurchased 70,000 warrants issued to an employee
of the Company for $30,000, their intrinsic value on the date of purchase. As
of December 31, 1998, 35,000 of the original 420,000 warrants remained
outstanding.
In November 1998, the Company obtained a $500,000 bridge loan from a bank.
In connection with the bridge loan, the Company issued 10,500 warrants to the
bank. Fifty-percent of the warrants have a strike price of $2.62 and fifty-
percent have a strike price of $4.98. The value of the warrants at the date of
issuance was approximately $28,000, which is included in interest expense in
the accompanying statement of operations for the year ended December 31, 1998.
The warrants were valued using the Black-Scholes pricing model, assuming
volatility of 70%, risk free interest rate of 5.0%, no expected dividends and a
life of five years.
Employee Stock Option Grants
During 1997, the Company adopted the 1997 Stock Option Plan ("the Plan")
under which the Company is authorized to grant incentive and non-qualified
stock options to acquire up to 1,645,000 shares of the Company's common stock
to employees and directors of the Company. Options granted vest over various
terms, with a maximum vesting period of five years, and expire after a maximum
of 6 years. The Company accounts for the Plan under APB Opinion No. 25, under
which the Company has recorded deferred compensation of $1,443,542 during 1998
and an additional $946,400 during the three months ended March 31,
F-16
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1999 (unaudited) which, will be amortized over the period that services are
provided to the Company. During 1998, the Company recognized $199,535 of such
compensation. During the three months ended March 31, 1998 and 1999, the
Company recognized $17,188 and $103,334 of such compensation, respectively
(unaudited).
The following table summarizes the Plan at December 31, 1997 and 1998, and
activity during the years then ended:
<TABLE>
<CAPTION>
1997 1998
---------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year........... -- $ -- 770,700 $ 1.01
Granted.................................. 770,700 1.01 684,250 1.41
Forfeited or canceled.................... -- -- (143,500) (1.16)
Exercised................................ -- -- (3,500) (1.08)
------- ----- --------- ------
Outstanding, end of year................. 770,700 $1.01 1,307,950 $ 1.20
======= ===== ========= ======
Exercisable, end of year................. 105,000 $1.19 399,350 $ 1.04
======= ===== ========= ======
Weighted average fair value of options
granted during the year................. $0.21 $ 2.20
===== ======
</TABLE>
The status of stock options outstanding and exercisable under the Plan as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------ ---------------------------
Weighted
Average Weighted
Range of Remaining Weighted Average
Exercise Number of Contractual Average Number of Exercise
Prices Shares Life Exercise Price Shares Price
- ----------- --------- ----------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.36-$0.39 133,000 3.34 $ .36 66,500 $ .36
$1.08-$1.19 550,200 4.90 1.15 318,850 1.17
$1.43 624,750 5.88 1.43 14,000 1.43
--------- ---- ----- ------------- -----------
1,307,950 5.21 $1.20 399,350 $1.04
========= ==== ===== ============= ===========
</TABLE>
In addition, during March 1997 the Company issued options for 84,000 shares
of common stock outside of the Plan with an exercise price of $0.39. All such
options are fully vested at March 31, 1999.
Pro Forma Fair Value Disclosures
The fair value of each option grant is calculated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Risk-free interest rate........................... 5.8% 5.0%
Expected dividend yield........................... 0% 0%
Expected lives outstanding........................ 2.0 years 2.9 years
Expected volatility............................... 0.001% 0.001%
</TABLE>
F-17
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.................................... $ (0.10) $ (1.05)
========= ===========
Pro forma...................................... $ (0.10) $ (1.05)
========= ===========
</TABLE>
(5) Discontinued Operations
Pursuant to a Stock Purchase Agreement dated August 5, 1996, the Company
acquired Brecknet Internet Services, Inc. ("ColoradoNet"), an Internet access
provider for cash of $80,000 and a note payable of $129,000. The acquisition
was accounted for in accordance with the purchase method of accounting, and
accordingly, a new basis of accounting for the assets acquired was established
as of August 5, 1996, based on the fair market value of the assets acquired.
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
Fair Value of
Net Assets Acquired
--------------------
<S> <C>
Cash................................................. $ 2,338
Accounts receivable.................................. 19,620
Furniture, fixtures and equipment.................... 37,196
Leasehold improvements............................... 7,295
Cost in excess of identifiable assets acquired....... 142,551
--------
Total cost of purchased assets................... $209,000
========
</TABLE>
On March 24, 1997, the Board of Directors approved the disposition of
ColoradoNet, as the Company determined that such business did not compliment
its primary business focus of Internet education. Pursuant to an Asset Purchase
Agreement dated May 30, 1997, the Company sold substantially all of the net
assets of ColoradoNet for cash of $200,000 to a third party. The gain on the
sale of this discontinued operation was $34,632.
Total revenue for ColoradoNet during the Company's operation of the business
was $90,512 and $137,055 in 1996 and 1997, respectively.
F-18
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Notes Payable To Related Parties
As of December 31, 1997, notes payable to related parties consisted of the
following:
<TABLE>
<S> <C>
Unsecured note payable to related party, interest
payable on a quarterly basis at 8% per
annum, principal payments equal to one-sixteenth
of the outstanding principal amount at December 31, 1997,
payable in 16 quarterly installments
beginning June 30, 1998 and ending March 31, 2002............ $193,277
Unsecured note payable to officer of the
Company, interest and principal due in
monthly installments of $1,868, at 10.25%
per annum, matures March 10, 2002............................ 76,698
--------
269,975
Less: Current portion........................................... (39,441)
--------
Long-term portion of notes payable to related parties........... $230,534
========
</TABLE>
On April 7, 1998, the Company repaid the $193,277 note payable to a related
party. On April 17, 1998, the Company repaid the $76,698 note payable to a
related party.
Interest expense for the period from inception to December 31, 1996 and for
the years ended December 31, 1997 and 1998 was $9,186, $37,990 and $36,819,
respectively. Interest expense for the year ended December 31, 1998 includes
$27,819 related to warrants for common stock issued in connection with the
bridge loan (Note 4).
(7) Other Related Party Transactions
The Company engaged the brother of the chief executive officer to provide
legal services to the Company. For the years ended December 31, 1997 and 1998,
the Company incurred approximately $39,000 and $16,400 in legal expenses to
this related party. As of December 31, 1997, the Company owed approximately
$6,500 to this related party for legal services performed.
On February 14, 1997, an officer of the Company extended a loan to the
Company in the amount of $25,000 to fund operations. The note was repaid on May
29, 1997.
(8) Commitments And Contingencies
Operating Lease Obligations
The Company leases its office space under a noncancellable operating lease
agreement which expires in July 2002. Future minimum lease obligations as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1999......................................................... $ 564,467
2000......................................................... 671,811
2001......................................................... 462,858
2002......................................................... 26,925
----------
$1,726,061
==========
</TABLE>
F-19
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense for the period from inception to December 31, 1996 and for the
years ended December 31, 1997 and 1998 was $14,002, $57,426 and $331,219,
respectively.
Legal Matters
The Company is exposed to asserted and unasserted legal claims encountered
in the normal course of business. Management believes that the ultimate
resolution of such matters will not have a material adverse effect on the
operating results or the financial position of the Company.
(9) Major Customers
Below is a listing of major customers, each of which comprised more than 10%
of revenue for the period from inception to December 31, 1996 and for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
Amount % Amount % Amount %
------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Customer 1.......................... $20,944 93% $637,690 62% $346,382 21%
Customer 2.......................... $ -- -- $157,240 15% $121,560 7%
</TABLE>
As of December 31, 1998, Customer 1 owed the Company $9,000 related
primarily to course development fees.
(10) Income Taxes
Components of the income tax provision applicable to federal and state
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Current benefit:
Federal....................................... $ -- $ -- $ --
State......................................... -- -- --
-------- -------- ----------
Total....................................... -- -- --
-------- -------- ----------
Deferred benefit:...............................
Federal....................................... (146,818) (184,891) (2,401,048)
State......................................... (14,250) (17,945) (233,043)
-------- -------- ----------
Total....................................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Total tax benefit........................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Valuation allowance............................. 161,068 202,836 2,634,091
-------- -------- ----------
Net tax benefit............................. $ -- $ -- $ --
======== ======== ==========
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate................................. 34.0% 34.0% 34.0%
Increase (decrease) as a result of-
State income tax net of federal benefit................ 3.3% 3.3% 3.3%
Permanent differences.................................. (0.1%) (0.5%) (1.2%)
Valuation allowance.................................... (37.2%) (36.8%) (36.1%)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
F-20
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities result from the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Deferred tax assets-
Non-current:
Net operating loss carryforward....................... $354,363 $2,919,417
Depreciation differences.............................. 9,541 32,255
Deferred rent......................................... -- 13,391
Current:
Vacation accrual...................................... -- 29,277
Allowance for doubtful accounts....................... -- 3,655
-------- ----------
Total deferred tax assets............................. 363,904 2,997,995
-------- ----------
Less: Valuation allowance................................. (363,904) (2,997,995)
-------- ----------
Net deferred tax assets................................... $ -- $ --
======== ==========
</TABLE>
From its inception, the Company has generated losses for both financial
reporting and tax purposes. Accordingly, for income tax return reporting
purposes, the Company may utilize approximately $7.8 million of net operating
loss carryforwards, which begin to expire in 2011. The Tax Reform Act of 1986
contains provisions which may limit the net operating loss carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership interests.
The Company has determined that approximately $364,000 and $2,998,000 of
deferred tax assets as of December 31, 1997 and 1998, respectively, did not
satisfy the realization criteria set forth in SFAS No. 109, primarily due to
the Company's operating loss since inception and the start up nature of the
Company. Accordingly, a valuation allowance was recorded against the entire
deferred tax asset.
(11) Subsequent Events
Employee Benefit Plan
Effective January 1, 1999, the Company adopted a defined contribution plan
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute up to 15% of their annual compensation. In addition,
the Company may make discretionary and/or matching contributions on behalf of
participating employees.
Stock Option Grants
From January 1999 through April 1999, the Company granted stock options to
employees to purchase 168,350 shares of common stock at an exercise price of $4
per share. In connection with such option grants, the Company recognized
unearned compensation totaling approximately $1.3 million which is being
amortized over the vesting period of the related options.
Reincorporation
On or before the completion of the Initial Public Offering discussed below,
the Company expects to file for reincorporation in the State of Delaware.
Initial Public Offering
On May 13, 1999, the Company filed a registration statement with the SEC on
Form S-1.
F-21
<PAGE>
[Inside back cover - logos of representative customers with caption
"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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[eCollege.com logo]
Common Stock
----------------
Prospectus
, 1999
----------------
Banc of America Securities LLC
Thomas Weisel Partners LLC
William Blair & Company
Until (25 days after the date of this Prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount to
be Paid
----------
<S> <C>
SEC registration fee.......................................... $ 15,985
NASD filing fee............................................... 30,500
Nasdaq National Market listing fee............................ 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....................................................... $1,000,000
* To be supplied by amendment.
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof, and the Registrant's Second Amended and Restated
Certificate of Incorporation to be in effect upon the closing of this offering
(collectively, the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"),
the Registrant's directors shall not be personally liable to the Registrant or
its stockholders for monetary damages for any breach of fiduciary duty as
directors of the Registrant. Under the DGCL, the directors have a fiduciary
duty to the Registrant which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the Registrant as a director
or officer of another
II-1
<PAGE>
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since July 26,
1996 (inception):
Common Stock and Preferred Stock. In February 1997, the Registrant issued
(i) 6,790,000 shares of its common stock, no par value per share, to its
founder Robert N. Helmick in exchange for $130,500 in services, (ii) 350,000
shares of its common stock to John V. Helmick in exchange for $6,750 in cash,
and (iii) 210,000 shares of its common stock, no par value per share, to
Jonathan M. Dobrin, in exchange for $4,050 in property. 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, as amended.
On June 11, 1997, the Registrant issued an aggregate of 132,000 investment
units; each unit consisting of one share of Series A Convertible Preferred
Stock (the "Series A Preferred") and one warrant to purchase seven shares of
Registrant's common stock (exercisable at a price of $1.08 per share), at a
purchase price of $7.58 per unit, to certain investors in consideration for the
payment of $1,000,000. Upon the closing of this offering, all of the
outstanding shares of Series A Preferred will convert into an aggregate of
924,000 shares of Common Stock. 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 326,833 shares of
Series B Convertible Preferred Stock (the "Series B Preferred"), at a purchase
price of $18.36 per share, to certain investors in consideration for the
payment of approximately $6,000,000. Upon the closing of this offering, all of
the outstanding shares of Series B Preferred will convert into an aggregate of
2,287,831 shares of Common Stock. 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 430,540 shares of Series C Convertible
Preferred Stock (the "Series C Preferred"), at a purchase price of $34.84 per
share, to certain investors in consideration for the payment of $15,000,020.
Upon the closing of this offering, all of the outstanding shares of Series C
Preferred will convert into an aggregate of 3,013,780 shares of Common Stock.
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 Act of 1933.
<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............. 1,344,000/1/ $1.08
January 1, 1998 to December 31, 1998............. 10,500/2/ $3.80
January 1 to April 30, 1999...................... 60,277/3/ $4.98
</TABLE>
- --------
1. 924,000 of these warrants were issued to purchasers of our Series A
Preferred, as described above. 420,000 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 of 1933, as amended (the "Securities Act"),
or (ii) Rule 701 promulgated under the Securities Act.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
--------- --------
<S> <C> <C>
July 26, 1996 (inception) to April 30, 1997............ -- --
May 1, 1997............................................ 133,000 $0.36
July 15, 1997 through January 6, 1998.................. 245,700 $1.08
January 7, 1998 to December 31, 1998................... 656,250 $1.43
January 1, 1999 to April 1, 1999....................... 168,350 $4.00
</TABLE>
Of the options granted during the period from January 1, 1997 through
January 6, 1998, to purchase 798,700 shares of common stock, 744,450 remain
outstanding as of April 30, 1999. Of the options granted during the period from
January 7, 1998 through December 31, 1998, to purchase 656,250 shares of common
stock, 617,050 remain outstanding. All options granted in 1999 remained
outstanding as of April 30, 1999.
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 60,277 shares of Common Stock for $4.98
per share.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect a 7-for-1 stock split to be
effected on or before completion of this offering.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation.
3.2 Form of Amended and Restated Certificate of Incorporation.
3.3 Form of Second Amended and Restated Certificate of Incorporation to be
in effect upon the closing of this offering.
3.4 Bylaws.
3.5 Form of Amended and Restated Bylaws to be in effect upon the closing of
this offering.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Unit Purchase Agreement dated June 11, 1997, between the Registrant and
the Persons listed on the Schedule of Purchasers attached thereto.
10.2** Series B Preferred Share Purchase Agreement dated February 2, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3** Series C Preferred Share Purchase Agreement dated December 21, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4** Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors,
each of the Series B Investors and each of the Series C Purchasers.
10.5** Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on
the Schedules attached thereto.
10.6** Form of Indemnification Agreement by and between the Registrant and its
outside directors.
10.7** Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
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 1997 Stock Option Plan, as amended.
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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** 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 22nd day of June, 1999.
eCollege.com
By: /s/ Robert N. Helmick
--------------------------
NAME: ROBERT N. HELMICK
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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 June 22, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<S> <C>
* President, Chief Executive Officer and
___________________________________________ Chairman of the Board of Directors
ROBERT N. HELMICK (principal executive officer)
/s/ Steven M. Singer Vice President, Finance and Administration
___________________________________________ and Chief Financial Officer (principal
STEVEN M. SINGER financial and accounting officer)
* Vice President, Chief Technology Officer
___________________________________________ and Director
JONATHAN M. DOBRIN
* Director
___________________________________________
JACK W. BLUMENSTEIN
* Director
___________________________________________
CHRISTOPHER E. GIRGENTI
* Director
___________________________________________
OAKLEIGH THORNE
* Director
___________________________________________
JERI KORSHAK
</TABLE>
*By: /s/ Steven M. Singer
- -------------------------------------
Steven M. Singer
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 Form of Amended and Restated Certificate of Incorporation.
3.3 Form of Second Amended and Restated Certificate of Incorporation to be
in effect upon the closing of this offering.
3.4 Bylaws.
3.5 Form of Amended and Restated Bylaws to be in effect upon the closing
of this offering.
4.1* Specimen Common Stock certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Unit Purchase Agreement as of June 11, 1997, between the Registrant
and the Persons listed on the Schedule of Purchasers attached thereto.
10.2** Series B Preferred Share Purchase Agreement dated February 2, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3** Series C Preferred Share Purchase Agreement dated December 21, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4** Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors,
each of the Series B Investors and each of the Series C Purchasers.
10.5** Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on
the Schedules attached thereto.
10.6** Form of Indemnification Agreement by and between the Registrant and
its outside directors.
10.7** Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
10.8** Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9 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 1997 Stock Option Plan, as amended.
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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Previously filed.
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION OF
eCOLLEGE.COM, INC.
ARTICLE I
The name of this corporation is eCollege.com, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is the Corporation Service
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
This Corporation is authorized to issue one class of stock to be designated
"Common Stock". The total number of shares which the Corporation is authorized
to issue is Ten (10) shares of Common Stock, $0.0001 par value.
ARTICLE V
The name and mailing address of the incorporator is Lee R. Spiegler,
Brobeck, Phleger & Harrison, LLP, 1125 17th Street, Suite 2525, Denver, CO
80202.
ARTICLE VI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the corporation.
ARTICLE VII
The number of directors of the corporation shall be fixed from time to time
by, or in the manner provided in, the bylaws or amendment thereof duly adopted
by the Board of Directors or by the stockholders.
ARTICLE VIII
Elections of directors need not be by written ballot unless the Bylaws of
the corporation shall so provide.
1.
<PAGE>
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE X
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (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) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporation action
further eliminating or limiting the personal liability of directors then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article X by
the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE XI
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, the undersigned has signed this Certificate this 11th
day of May, 1999.
---------------------------
Lee R. Spiegler
Incorporator
2.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
eCOLLEGE.COM, INC.
a Delaware corporation
ARTICLE I
The name of this Corporation is eCollege.com, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The
name of the registered agent at that address is Corporation Service Company
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware (the "DGCL").
ARTICLE IV
Authorized Capital
------------------
A. Capital Stock
The total number of shares of stock which the Corporation has authority to
issue is 56,225,611 consisting of:
1. 924,000 shares of Series A Convertible Preferred Stock, $.01 par value
per share (the "Series A Preferred Stock");
2. 2,287,831 shares of Series B Convertible Preferred Stock, $.01 par
value per share (the "Series B Preferred Stock" );
3. 3,013,780 shares of Series C Convertible Preferred Stock, $.01 par
value per share (the "Series C Preferred Stock" and, with the Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock,
the "Preferred Stock");
4. 50,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock").
<PAGE>
B. Powers and Special Rights of the Preferred Stock.
1. Dividends.
---------
a. General Obligation. When and as declared by the Board of Directors
------------------
and to the extent permitted under the DGCL, the Corporation will pay
preferential cumulative dividends to the holders of the Preferred Stock as
provided in this Part 1. Except as otherwise provided herein, dividends on
each share of Preferred Stock will accrue on a daily basis at the rate of
10% per annum of the Liquidation Value thereof plus the Accumulated and
Unpaid Dividends (as defined herein) thereon from and including the date of
issuance of such share of Preferred Stock to and including the earlier of
(i) the date on which the Liquidation Value of such share of Preferred
Stock plus any accrued and unpaid dividends thereon is paid upon any
liquidation, dissolution or winding up of the Corporation, (ii) the date on
which such share of Preferred Stock is converted into Common Stock, (iii)
the date on which such share of Preferred Stock is redeemed in accordance
with Part 3 hereof or (iv) upon a Liquidity Event. Such dividends will
accrue whether or not they have been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for
the payment of dividends. The date on which the Corporation initially
issues any share of Preferred Stock will be deemed to be its "date of
issuance" regardless of the number of times transfer of such share of
Preferred Stock is made on the stock records maintained by or for the
Corporation and regardless of the number of certificates which may be
issued to evidence such share of Preferred Stock.
b. Dividend Reference Dates. To the extent not paid on the Dividend
------------------------
Reference Dates, all dividends which have accrued on each share of
Preferred Stock outstanding during the three-month period (or other period
in the case of the initial Dividend Reference Date) shall be accumulated
and shall remain accumulated dividends with respect to each such share of
Preferred Stock until paid (the "Accumulated and Unpaid Dividends").
c. Distribution of Partial Dividend Payments. If at any time the
-----------------------------------------
Corporation pays less than the total amount of dividends then accrued with
respect to the Preferred Stock, such payment will be distributed first to
holders of Series C Preferred Stock, ratably among the holders of the
Series C Preferred Stock on the basis of the number of shares of Series C
Preferred Stock owned by each such holder, then to the holders of Series B
Preferred Stock, ratably among the holders of the Series B Preferred Stock
on the basis of the number of shares of Series B Preferred Stock owned by
each such holder, and then to holders of Series A Preferred Stock on the
basis of the number of shares of Series A Preferred Stock owned by each
such holder.
d. Preference. The Corporation shall not, without prior Series C
----------
Preferred Stock Approval, pay or declare any dividend on the Series B
Preferred Stock, and the Corporation shall not, without prior Series C
Preferred Stock Approval and Series B Preferred Stock Approval, pay or
declare any dividend on the Series A Preferred Stock, and the Corporation
shall not, without prior Preferred Stock Approval, pay or declare any
dividend or distribution on any Junior Securities so long as the Preferred
Stock is still outstanding.
e. Participation in Common Stock Dividends. In the event that the
---------------------------------------
Corporation declares a dividend or distribution on the Common Stock,
subject to the receipt of any required approvals under Paragraph B.1.d.,
the holders of the Preferred Stock and the holders of the Common Stock
shall share pro rata (based, in the case of holders of Preferred Stock, on
the number of shares of Common Stock which each holder of Preferred Stock
would be entitled to
<PAGE>
receive upon conversion of its Preferred Stock into Common Stock) in such
dividend or distribution.
2. Liquidation.
-----------
Upon any liquidation, dissolution or winding up of the Corporation, each
holder of Series C Preferred Stock will be entitled to receive, before any
distribution or payment is made upon any Series B Preferred Stock, Series A
Preferred Stock or any Junior Securities, a Series C Special Redemption
Payment in the form elected by Series C Preferred Stock Approval, as set
forth in Paragraph B.3.d(1).
Upon any liquidation, dissolution or winding up of the Corporation, each
holder of Series B Preferred Stock will be entitled to receive, before any
distribution or payment is made upon any Series A Preferred Stock or any
Junior Securities, a Series B Special Redemption Payment in the form
elected by Series B Preferred Stock Approval, as set forth in Paragraph
B.3.d(1).
Upon any liquidation, dissolution or winding up of the Corporation, each
holder of Series A Preferred Stock will be entitled to receive, before any
distribution or payment is made upon any Junior Securities, a Series A
Special Redemption Payment in the form elected by Series A Preferred Stock
Approval, as set forth in Paragraph B.3.d(1).
If upon any such liquidation, dissolution or winding up of the Corporation,
the Corporation's assets available for distribution to its shareholders are
insufficient to permit payment to the holders of the Preferred Stock of the
aggregate Series C, Series B and Series A Special Redemption Payment of the
Preferred Stock, then the entire assets available for distribution will be
distributed among the holders of the Series C Preferred Stock pro rata,
based upon the amount of each such holder's aggregate investment in the
Series C Preferred Stock plus all accrued and unpaid dividends thereon, and
then any surplus shall be distributed among the holders of the Series B
Preferred Stock pro rata, based upon the amount of each such holder's
aggregate investment in the Series B Preferred Stock plus all accrued and
unpaid dividends thereon, then any surplus shall be distributed among the
holders of the Series A Preferred Stock pro rata, on the same basis. If the
Corporation's assets available for distribution to its shareholders upon
any such liquidation, dissolution or winding up exceed the aggregate Series
C, Series B and Series A Special Redemption Payment of the Preferred Stock,
then, after payment shall have been made to the holders of the Series C,
Series B and Series A Preferred Stock of the Series C, Series B and Series
A Special Redemption Payments of the Preferred Stock, the holders of the
Common Stock shall share pro rata in all remaining assets of the
Corporation available for distribution. The Corporation will mail written
notice of any liquidation, dissolution or winding up to each record holder
of Preferred Stock not less than 30 days prior to the effective date
thereof. Neither the consolidation or merger of the Corporation into or
with any other corporation or corporations, nor the sale or transfer by the
Corporation of all or a substantial part of its assets, nor the reduction
of the capital stock of the Corporation, will be deemed to be a
liquidation, dissolution or winding up of the Corporation within the
meaning of this Part 2, but instead will be treated as a "Liquidity Event"
subject to Paragraph B.3.d. hereof.
<PAGE>
3. Redemptions.
-----------
a. Optional Redemptions.
--------------------
(1) If no Liquidity Event has occurred on or before June 1, 2001,
then on or before June 15, 2001, each of the holders of the then
outstanding Preferred Stock shall have the right to require the Corporation
to redeem all or any of their shares of Preferred Stock in accordance with
this Part 3 at a price per share of Preferred Stock equal to the Redemption
Price (calculated as of the Redemption Dates), such right being referred to
as the "Redemption Right." Any holder of Preferred Stock may exercise his,
her or its Redemption Right by delivering to the Corporation a Redemption
Notice. Within ten (10) days after receipt of a Redemption Notice from any
holder of Preferred Stock, the Corporation shall notify all other holders
of Preferred Stock that the Redemption Right has been exercised, and each
other holder shall have the right, exercisable by written notice delivered
to the Corporation within ten (10) days after receipt of such notice from
the Corporation, to request that all or a portion of such other holder's
shares of Preferred Stock be redeemed on the Redemption Dates together with
the shares of Preferred Stock of the holders who delivered the Redemption
Notice. The Corporation shall be obligated to redeem the total number of
shares of Preferred Stock specified in any Redemption Notice in a series of
three equal annual redemptions, such redemptions to occur on the Redemption
Dates.
(2) If no Liquidity Event has occurred on or before June 1, 2002,
then on or before June 15, 2002, those holders of the then outstanding
Preferred Stock who have not previously exercised their Redemption Rights
as to all of their shares pursuant to Paragraph B.3.a(1) hereof may require
the Corporation to redeem all or any of their shares of Preferred Stock in
accordance with this Paragraph B.3.a(2) at a price per share of Preferred
Stock equal to the higher of (i) the Market Value of the their respective
series of Preferred Stock, determined as of the date the Redemption Notice
is delivered to the Corporation, or (ii) the Redemption Price (calculated
as of the Secondary Redemption Dates), such right being referred to as the
"Secondary Redemption Right." Any holder of the Preferred Stock may
exercise the Secondary Redemption Right by delivering to the Corporation a
Redemption Notice. Within five (5) days after receipt of a Redemption
Notice relating to a Secondary Redemption from any holder of Preferred
Stock, the Corporation shall notify all other holders of Preferred Stock
that the Secondary Redemption Right has been exercised, and each other
holder shall have the right, exercisable by written notice delivered to the
Corporation within ten (10) days after receipt of such notice from the
Corporation, to request that all or a portion of such other holder's shares
of Preferred Stock be redeemed on the Secondary Redemption Dates together
with the shares of Preferred Stock of the holders who delivered the
Redemption Notice. The Corporation shall be obligated to redeem the total
number of shares of Preferred Stock specified in any Redemption Notice
under this Subparagraph in a series of three equal annual redemptions, such
redemptions to occur on the Secondary Redemption Dates.
b. Inadequate Funds. If the funds of the Corporation legally
----------------
available for redemption of Preferred Stock on any Redemption Date or
Secondary Redemption Date are insufficient to redeem the total number of
shares of Preferred Stock to be redeemed on such date, those funds which
are legally available will be used first to redeem the maximum possible
number of shares of Series C Preferred Stock ratably among the holders of
such shares to be redeemed based upon the respective redemption amounts
then owed to each shareholder, and second, to redeem the maximum possible
number of shares of Series B Preferred Stock ratably
<PAGE>
among the holders of such shares to be redeemed based upon the respective
redemption amounts then owed to each shareholder, and third to redeem the
maximum possible number of shares of Series A Preferred Stock ratably among
the holders of such shares to be redeemed based upon the respective
redemption amounts then owed to each shareholder. Thereafter, when
additional funds of the Corporation are legally available for the
redemption of Preferred Stock, such funds will be used to redeem the
balance of the shares of, first, Series C Preferred Stock, then, second,
the Series B Preferred Stock, and then, third, the Series A Preferred Stock
which the Corporation became obligated to redeem on such Redemption Date or
Secondary Redemption Date but which it has not redeemed (such redemptions
to be made on a monthly basis). Notwithstanding the foregoing, the
Corporation may not redeem Series A Preferred Stock or Series B Preferred
Stock if the payments made in connection with such redemption could, in the
reasonable judgment of the Corporation's auditors, render the Corporation
unable to make future redemption payments in full, when due, on the Series
C Preferred Stock.
c. Reissuance of Certificate. In case fewer than the total number of
-------------------------
shares of Preferred Stock represented by any certificate are redeemed in
any installment, a new certificate representing the number of unredeemed
shares of such Preferred Stock will be issued to the holder thereof without
cost to such holder promptly after surrender of the certificate
representing the redeemed shares of Preferred Stock.
d. Special Redemptions.
-------------------
(1) If a Liquidity Event is to occur, the Corporation will notify
each holder of Preferred Stock in writing of such pending Liquidity Event
not less than 35 days prior to the consummation thereof. Such notice will
describe the material terms and conditions of the Liquidity Event
(including, but not limited to, the amount and nature of the total
consideration to be paid in connection therewith) and the provisions of
this Subparagraph B.3.d(1). The Corporation will thereafter give each
holder prompt notice of any material changes in such terms and conditions.
Within 20 days after receipt of notice from the Corporation, each
holder of Preferred Stock shall notify the Corporation in writing,
identifying which of the below-described options such holder of Preferred
Stock elects. The options are based on whether the Liquidity Event is a
Partial Company Liquidity Event or Whole Company Liquidity Event, and on
whether the consideration is cash or non-cash securities. If the
consideration is part cash and part non-cash securities, the holders of
Preferred Stock shall proceed under the cash provisions with respect to the
cash proceeds, and under the non-cash provisions with respect to the non-
cash proceeds. The amount payable by the Corporation to the holders of
Preferred Stock pursuant to subparagraphs (i) through (iv) below is
referred to as the "Special Redemption Payment." If the Liquidity Event
does not occur, all requests for redemption will be rescinded.
(i) In a Partial Company Liquidity Event where the
consideration is cash, each holder of Preferred Stock may elect from
the following options with respect to all or any portion of the
Preferred Stock owned by such holder: (a) such holder may request the
Corporation to redeem all or any portion of such holder's Preferred
Stock at a price per share equal to the applicable Redemption Price,
provided, if there are insufficient funds to pay all holders who elect
this option, the funds shall be allocated among the holders of
Preferred Stock in the manner specified in Section B.3.b, or (b) such
holder may request that the proceeds of the Liquidity Event which
remain after
<PAGE>
the payments pursuant to clause (a) above be allocated pro-rata
between the Common Stock and the Preferred Stock which is not redeemed
under clause (a) (with the Preferred Stock treated as if it had
converted to Common Stock), provided, however, if there are
insufficient funds under clause (a), then no amounts shall be paid
pursuant to this clause (b). If a holder elects to proceed pursuant to
clause (a) with respect to any shares, the shares for which a
Redemption Payment is paid shall be cancelled and not reissued; all
other shares shall remain outstanding.
(ii) In a Whole Company Liquidity Event where the
consideration is cash, each holder of Preferred Stock shall be deemed
to elect the option below which entitles the holder to the larger
amount of cash: (a) redemption of all or any portion of the Preferred
Stock owned by such holder at a price per share equal to the
applicable Redemption Price (and, if there are insufficient funds to
pay all holders who elect this option, the funds shall be allocated
among the holders of Preferred Stock in the manner specified in
Section B.3.b), or (b) pro-rata allocation of the proceeds of the
Liquidity Event between the Common Stock and the Preferred Stock which
is not redeemed under clause (a) (with the Preferred Stock treated as
if it had converted to Common Stock), provided, however, if there are
insufficient funds under clause (a), then no amounts shall be paid
pursuant to this clause (b). The shares for which a Redemption
Payment is paid shall be cancelled and not reissued; all other shares
shall remain outstanding.
(iii) In a Partial Company Liquidity Event where the
consideration is non-cash securities, each holder of Preferred Stock
may elect from the following options with respect to all or any
portion of the Preferred Stock owned by such holder: (a) such holder
may request the Corporation to redeem all or any portion of the
Preferred Stock owned by such holder by payment of securities received
upon the Liquidity Event (valued at Market Value), at a price per
share equal to the applicable Redemption Price, provided, each holder
may, in lieu of receiving securities, request that the securities be
sold and that the Redemption Price be paid in cash (and, if any holder
elects this option, no securities shall be delivered to holders of any
junior or pari passu series of Preferred Stock or to any holder of
Common Stock until the securities have been sold), provided further,
if there are insufficient funds or securities to pay all holders who
elect this option, the funds or securities shall be allocated among
the holders of Preferred Stock in the manner specified in Section
B.3.b, or (b) such holder may request that securities received upon
the Liquidity Event which remain after the payments pursuant to clause
(a) above be allocated pro-rata between the Common Stock and the
Preferred Stock which is not redeemed under clause (a) (with the
Preferred Stock treated as if it had converted to Common Stock),
provided, however, if there are insufficient funds under clause (a),
then no amounts shall be paid pursuant to this clause (b). If a
holder elects to proceed pursuant to clause (a) with respect to any
shares, the shares for which a Redemption Payment is paid shall be
cancelled and not reissued; all other shares shall remain outstanding
(unless otherwise cancelled in connection with the terms of the
Liquidity Event).
(iv) In a Whole Company Liquidity Event where the
consideration is non-cash securities, each holder of Preferred Stock
may elect from the following options with respect to all or any
portion of the Preferred Stock owned by such holder: (a) such holder
may request the Corporation to redeem all or any portion of the
Preferred Stock owned by such holder by payment of securities received
upon the Liquidity Event
<PAGE>
(valued at Market Value or Market Price, whichever is applicable), at
a price per share equal to the applicable Redemption Price, provided,
each holder may, in lieu of receiving securities, request that the
securities be sold and that the Redemption Price be paid in cash (and,
if any holder elects this option, no securities shall be delivered to
holders of any junior or pari passu series of Preferred Stock or to
any holder of Common Stock until the securities have been sold),
provided further, if there are insufficient funds or securities to pay
all holders who elect this option, the funds or securities shall be
allocated among the holders of Preferred Stock in the manner specified
in Section B.3.b, or (b) such holder may request that securities
received upon the Liquidity Event which remain after the payments
pursuant to clause (a) above be allocated pro-rata between the Common
Stock and the Preferred Stock which is not redeemed under clause (a)
(with the Preferred Stock treated as if it had converted to Common
Stock), provided, however, if there are insufficient funds under
clause (a), then no amounts shall be paid pursuant to this clause (b).
If a holder elects to proceed pursuant to clause (a) with respect to
any shares, the shares for which a Redemption Payment is paid shall be
cancelled and not reissued; all other shares shall remain outstanding
(unless otherwise cancelled in connection with the terms of the
Liquidity Event).
(2) If and to the extent that applicable law or any other
restriction prohibits the payment to the holders of Preferred Stock of all
or any portion of the amounts required to be paid under Subparagraph (1)
above, such unpaid amounts will be paid to the holders of Preferred Stock
by the Person (other than the Corporation) who is a party to the Liquidity
Event upon the closing thereof by purchase of such shares of Preferred
Stock under an agreement which will provide that such purchased shares will
be canceled effective upon the closing of the Liquidity Event. In the event
the full amount of any payment hereunder is not paid to the holders of
Preferred Stock upon or immediately prior to the closing of the Liquidity
Event in accordance herewith, then the entire amount payable in respect of
the Liquidity Event will be distributed ratably, first, among the holders
of Series C Preferred Stock, and then second, among the holders of Series B
Preferred Stock, and then third among the holders of Series A Preferred
Stock, in the case of each such series in proportion to the aggregate
amount of the Special Redemption Payment.
(3) In the event that the requirements of Subparagraphs (1) and
(2) above are not complied with, the Corporation will either:
(a) cause the closing of the Liquidity Event to be postponed
until such time as the requirements of Subparagraphs (1) and (2) above have
been complied with; or
(b) cancel such Liquidity Event, in which event the rights,
preferences and privileges of the holders of Preferred Stock shall revert
to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in
Subparagraph (1) above.
e. Redeemed or Otherwise Acquired Shares. Any shares of Preferred
-------------------------------------
Stock which are redeemed or otherwise acquired by the Corporation will be
canceled and will not be reissued, sold or otherwise transferred.
4. Voting Rights.
-------------
<PAGE>
a. Voting Rights. Except as otherwise required by law, the holders of
-------------
Preferred Stock will be entitled to vote with the holders of the Common
Stock on each matter submitted to a vote of the Corporation's shareholders,
with each share of Preferred Stock having a number of votes equal to the
number of votes possessed by the number of shares of Common Stock into
which such share of Preferred Stock is convertible as of the record date
for the determination of shareholders entitled to vote on such matter.
b. Series A Class Voting Rights. At any time when at least 581,000
----------------------------
total shares of Series A Preferred Stock are outstanding, Series A
Preferred Stock Approval shall be required for any of the following:
(1) altering or changing the rights, preferences or privileges of
the Series A Preferred Stock; and
(2) increasing or decreasing, other than by redemption or
conversion, the authorized number of shares of Series A Preferred Stock.
c. Series B Class Voting Rights. At any time when at least 1,365,000
----------------------------
total shares of Series B Preferred Stock are outstanding, Series B
Preferred Stock Approval shall be required for any of the following:
(1) altering or changing the rights, preferences or privileges of
the Series B Preferred Stock; and
(2) increasing or decreasing, other than by redemption or
conversion, the authorized number of shares of Series B Preferred Stock.
d. Series C Class Voting Rights. At any time when at least 1,003,590
----------------------------
total shares of Series C Preferred Stock are outstanding, Series C
Preferred Stock Approval shall be required for any of the following:
(1) altering or changing the rights, preferences or privileges of
the Series C Preferred Stock;
(2) increasing or decreasing, other than by redemption or
conversion, the authorized number of shares of Series C Preferred Stock;
and
(3) create or issue any security which (i) has a preference over
or equal to the Series C Preferred Stock, (ii) is convertible into a
security which has a preference over or equal to the Series C Preferred
Stock, (iii) is issued at a price-per-share (with respect to Common Stock)
or at a price-per-Common Share-equivalent (with respect to securities that
are convertible into Common Stock) that is less than the greater of
$4.977143 per share or Fair Value (provided, no stockholder other than
MediaOne shall be permitted to proceed pursuant to the Fair Value
provision, above) (other than securities issued pursuant to Option plans
described in Section B.5.c.(1)(a)), or (iv) has a payment-in-kind feature
that results in an increase in the number of shares of Common Stock (or in
the number of shares of Common Stock to be received upon conversion, with
respect to securities that are convertible into Common Stock) with the
passage of time.
<PAGE>
5. Conversion.
----------
a. Conversion Procedure.
--------------------
(1) At any time and from time to time, any holder of shares of
Series A Preferred Stock may convert all or any portion of such shares
(including any fraction of a share) into the number of shares of Common
Stock computed by multiplying the number of shares of Preferred Stock to be
converted times $1.082857 per share and dividing the result by the Series A
Conversion Price determined pursuant to Paragraph B.5.b.
(2) At any time and from time to time, any holder of shares of
Series B Preferred Stock may convert all or any portion of such shares
(including any fraction of a share) into the number of shares of Common
Stock computed by multiplying the number of shares of Preferred Stock to be
converted times $2.622857 per share and dividing the result by the Series B
Conversion Price determined pursuant to Paragraph B.5.b.
(3) At any time and from time to time, any holder of shares of
Series C Preferred Stock may convert all or any portion of such shares
(including any fraction of a share) into the number of shares of Common
Stock computed by multiplying the number of shares of Preferred Stock to be
converted times $4.977143 per share and dividing the result by the Series C
Conversion Price determined pursuant to Paragraph B.5.b.
(4) Each conversion of Preferred Stock will be deemed to have
been effected as of the close of business on the date on which the
certificate or certificates representing the Preferred Stock to be
converted have been surrendered at the principal office of the Corporation.
At such time as such conversion has been effected, the rights of the holder
of such Preferred Stock as such holder will cease, except that the rights
pursuant to the Amended and Restated Registration Agreement dated December
21, 1998, among the Corporation and certain investors, shall continue and
the Person or Persons in whose name or names any certificate or
certificates for shares of Common Stock are to be issued upon such
conversion will be deemed to have become the holder or holders of record of
the shares of Common Stock represented thereby.
(5) As soon as possible after a conversion has been effected and
in no event later than ten (10) business days thereafter, the Corporation
will deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Common Stock issuable by reason of such conversion in such name
or names and such denomination or denominations as the converting holder
has specified,
(b) the amount payable under Subparagraph B.5.a(8) below with
respect to such conversion; and
(c) a certificate representing any shares of Preferred Stock
which were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
(6) The issuance of certificates for shares of Common Stock upon
conversion of Preferred Stock will be made without charge to the holders of
such Preferred Stock
<PAGE>
for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of
shares of Common Stock. Upon conversion of any share of Preferred Stock,
the Corporation will take all such actions as are necessary in order to
insure that the Common Stock issued as a result of such conversion is
validly issued, fully paid and nonassessable.
(7) The Corporation will not close its books against the transfer
of Preferred Stock or of Common Stock issued or issuable upon conversion of
Preferred Stock in any manner which interferes with the timely conversion
of Preferred Stock.
(8) If any fractional interest in a share of Common Stock would,
except for the provisions of this Subparagraph B.5.a(8), be deliverable
upon any conversion of the Preferred Stock, the Corporation, in lieu of
delivering the fractional share therefor, shall pay an amount to the holder
thereof equal to the Market Price of such fractional interest as of the
date of conversion.
(9) Any accrued but unpaid dividends under Section B.1.a shall
expire upon conversion of Preferred Stock into Common Stock.
b. Conversion Price.
----------------
(1) In order to prevent dilution of the conversion rights granted
under this subdivision, the Series A, Series B and Series C Conversion
Prices will be subject to adjustment from time to time pursuant to this
Paragraph B.5.b.
(2) If and whenever on or after January 30, 1998, but prior to
January 30, 1999, the Corporation issues or sells, or in accordance with
Paragraph B.5.c is deemed to have issued or sold, any shares of its Common
Stock without consideration or for a consideration per share less than the
Series B Conversion Price in effect immediately prior to the time of such
issuance or sale, then forthwith upon such issuance or sale the Series B
Conversion Price shall be reduced to the lowest net price per share at
which any such share of Common Stock has been issued or sold or is deemed
to have been issued or sold.
(3) If and whenever on or after December 21, 1998 the Corporation
issues or sells, or in accordance with Paragraph B.5.c is deemed to have
issued or sold, any shares of its Common Stock without consideration or for
a consideration per share less than the Series C Conversion Price in effect
immediately prior to the time of such issuance or sale, then forthwith upon
such issuance or sale the Series C Conversion Price shall be reduced to the
lowest net price per share at which any such share of Common Stock has been
issued or sold or is deemed to have been issued or sold.
(4) If and whenever on or after June 11, 1998, the Corporation
issues or sells, or in accordance with Paragraph B.5.c is deemed to have
issued or sold, any shares of its Common Stock without consideration or for
a consideration per share less than the Series A Conversion Price in effect
immediately prior to the time of such issuance or sale, then forthwith upon
such issuance or sale the Series A Conversion Price will be reduced to the
conversion price determined by dividing (a) the sum of (1) the product
derived by multiplying the Series A Conversion Price in effect immediately
prior to such issuance or sale times the number of shares of Common Stock
Deemed Outstanding immediately prior to such issuance or sale, plus (2) the
<PAGE>
consideration, if any, received by the Corporation upon such issuance or
sale, by (b) the number of shares of Common Stock Deemed Outstanding
immediately prior to such issuance or sale plus the number of shares of
Common Stock issued or deemed to have been issued in such sale pursuant to
this Paragraph B.5.
(5) If and whenever on or after January 30, 1999, the Corporation
issues or sells, or in accordance with Paragraph B.5.c is deemed to have
issued or sold, any shares of its Common Stock without consideration or for
a consideration per share less than the Series B Conversion Price in effect
immediately prior to the time of such issuance or sale, then forthwith upon
such issuance or sale the Series B Conversion Price will be reduced to the
conversion price determined by dividing (a) the sum of (1) the product
derived by multiplying the Series B Conversion Price in effect immediately
prior to such issuance or sale times the number of shares of Common Stock
Deemed Outstanding immediately prior to such issuance or sale, plus (2) the
consideration, if any, received by the Corporation upon such issuance or
sale, by (b) the number of shares of Common Stock Deemed Outstanding
immediately prior to such issuance or sale plus the number of shares of
Common Stock issued or deemed to have been issued in such sale pursuant to
this Paragraph B.5.
c. Effect on Conversion Prices of Certain Events.
---------------------------------------------
(1) For purposes of determining the adjusted Conversion Prices
under Paragraph B.5.b, the following will be applicable:
(a) Issuance of Rights or Options. If the Corporation grants,
-----------------------------
issues or sells Options to acquire Common Stock or Convertible Securities
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of any Convertible
Securities issuable upon the exercise of such Options is less than the
Conversion Price in effect immediately prior to the time of the granting,
issuance or sale of such Options, then the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Corporation at the time
of the granting of such Options for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable"
shall be determined by dividing (A) the sum of (i) the amount, if any,
received or receivable by the Corporation as consideration for the granting
of such Options, plus (ii) the minimum aggregate amount of additional
consideration payable to the Corporation upon exercise of all such Options,
plus (iii) in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (B) the
total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No further
adjustment of the Conversion Price shall be made when Convertible
Securities are actually issued upon the exercise of such Options or when
Common Stock is actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities. No adjustment shall
be made for any Common Stock or Options issued pursuant to the Incentive
Stock Option Plan adopted by the Corporation's Board of Directors and
Shareholders on or about March 24, 1997 or any other compensatory stock
option plan approved by both the Compensation Committee of the
Corporation's Board of Directors and by the Board of Directors as a whole.
<PAGE>
(b) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange thereof
is less than the Conversion Price in effect immediately prior to the time
of such issue or sale, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities shall
be deemed to be outstanding and to have been issued and sold by the
Corporation at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this paragraph,
the "price per share for which Common Stock is issuable" shall be
determined by dividing (A) the sum of (i) the amount received or receivable
by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus (ii) the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (B) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment of the Conversion Price shall
be made when Common Stock is actually issued upon the conversion or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Part 5, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(c) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Conversion
Price in effect at the time of such change shall be readjusted to the
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities originally provided for such changed
purchase price, additional consideration or changed conversion rate, as the
case may be, at the time initially granted, issued or sold; provided that
if such adjustment of the Conversion Price would result in an increase in
the Conversion Price then in effect, such adjustment shall not be effective
until 30 days after written notice thereof has been given to all holders of
the Preferred Stock.
(2) For purposes of determining the adjusted Conversion Price under
Subparagraph B.5.b, the following will be applicable:
(a) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Options or the termination of any
----------
right to convert or exchange any Convertible Securities without the
exercise of any such Options or right, the Conversion Price then in effect
hereunder will be adjusted to the Conversion Price which would have been in
effect at the time of such expiration or termination had such Options or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued; provided that if such
adjustment of the Conversion Price would result in an increase in the
Conversion Price then in effect, such adjustment shall not be effective
until 30 days after written notice thereof has been given to all holders of
the Preferred Stock.
(b) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed
to be the gross amount received by the Corporation therefor. In case any
Common Stock, Options or Convertible Securities are issued or
<PAGE>
sold for a consideration other than cash, the amount of the consideration
other than cash received by the Corporation will be the fair value of such
consideration, except where such consideration consists of publicly-traded
securities, in which case the amount of consideration received by the
Corporation will be the Market Price thereof as of the date of receipt. If
any Common Stock, Options or Convertible Securities are issued in
connection with any merger in which the Corporation is the surviving
corporation, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-
surviving corporation as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any
consideration other than cash and publicly-traded securities will be
determined jointly by the Corporation and a representative of the holders
of the Preferred Stock, chosen by Preferred Stock Approval (the
"Representative"). If such parties are unable to reach agreement within 10
days after the occurrence of a Valuation Event, the fair value of such
consideration will be determined by an independent appraiser jointly
selected by the Corporation and the Representative, provided, that, if such
parties are unable to reach agreement upon the selection of an independent
appraiser within 15 days after the Valuation Event, then within 25 days
after the Valuation Event, a qualified independent appraiser reasonably
acceptable to the other party will be chosen by each of the Corporation and
by the Representative and each such appraiser will deliver in writing a
determination of the fair value of such consideration. If the difference
between the two appraisals is 10% or less of the lower amount, the fair
value will be the average of each two appraisals. If the difference between
the two appraisals is greater than 10% of the lower amount, the two
appraisers will, within 35 days after the Valuation Event, jointly choose a
third qualified independent appraiser. Within 45 days after the Valuation
Event, the third appraiser will deliver its determination of fair value and
the final determination of the fair value of such consideration will be
equal to the average of those two appraisals which are nearest to each
other. The expenses of the appraisers will be paid one-half by the
Corporation and one-half by the holders of the Preferred Stock (pro rata
based on the number of shares of Preferred Stock held).
(c) Integrated Transactions. In case any Options are issued in
-----------------------
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01
each.
(d) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or
for the account of the Corporation or any Subsidiary, and the disposition
of any shares so owned or held will be considered an issue or sale of
Common Stock.
(e) Record Date. If the Corporation takes a record of the holders
-----------
of Common Stock or Preferred Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date will be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
upon the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be. Any such
dividends, distributions, and subscription rights may only be granted if
the Corporation is in compliance with Section B.1.e.
<PAGE>
(3) Subdivision or Combination of Common Stock. If the
------------------------------------------
Corporation at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Conversion
Price in effect immediately prior to such subdivision will be
proportionately reduced, and if the Corporation at any time combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased.
(4) Certain Events. If any event occurs of the type contemplated
--------------
by the provisions of this Part 5 but not expressly provided for by such
provisions, then the Board of Directors will make an appropriate adjustment
in each Conversion Price so as to protect the rights of the holders of the
Preferred Stock; provided, however, that, no such adjustment will increase
the Conversion Price as otherwise determined pursuant to this Part 5 or
decrease the number of shares of Common Stock issuable upon conversion of
each share of Preferred Stock.
d. Notices.
-------
(1) Immediately upon any adjustment of the Conversion Price of
any class of Preferred Stock, the Corporation will give written notice
thereof to all holders of such class of Preferred Stock.
(2) The Corporation will give written notice to all holders of
Preferred Stock at least twenty (20) days prior to the date on which the
Corporation closes its books or takes a record (a) with respect to any
dividend or distribution upon Common Stock, (b) with respect to any pro
rata subscription offer to holders of Common Stock or (c) for determining
rights to vote with respect to any Liquidity Event, dissolution or
liquidation.
e. Mandatory Conversion.
--------------------
(1) Upon the closing of a Qualified IPO, the Preferred Stock
shall be converted to Common Stock at the Conversion Price in effect at
that time. Any such mandatory conversion shall only be effected at the time
of and subject to the closing of such initial Public Offering and upon
written notice of such mandatory conversion delivered to all holders of
Preferred Stock at least twenty (20) but not more than 40 days prior to
such closing.
(2) Upon Preferred Stock Approval by any series, the Preferred
Stock in such series shall be converted to Common Stock at the Conversion
Price in effect at that time.
f. Special Mandatory Conversion. Notwithstanding anything to the
----------------------------
contrary hereof, the provisions of this Section B.5.f shall not apply to
the Series C Preferred Stock.
(1) Upon the closing of a Dilutive Financing, each of the shares
of any series of Preferred Stock held by a Dissenting Holder shall be
converted into Non-Adjusting Preferred of a corresponding series. The
rights and obligations of the Non-Adjusting Preferred of a particular
series shall be identical to those of the analogous Preferred Stock, except
that the Conversion Price of such Non-Adjusting Preferred shall be the
Conversion Price in effect with respect to such Dissenting Holders' shares
of such series of Preferred Stock immediately prior to the Dilutive
Financing and such Conversion Price shall not be further adjusted under any
<PAGE>
circumstances, other than to reflect a stock split, stock dividend or
similar transaction. Upon such conversion, such Dissenting Holders' shares
of Preferred Stock shall be canceled and shall not be reissued.
(2) Each Dissenting Holder shall deliver to the Corporation
during regular business hours at the office of the Corporation, the
certificate or certificates for shares of Preferred Stock converted into
Non-Adjusting Preferred under Subparagraph B.5.f(1), duly endorsed or
assigned in blank or to the Corporation. As promptly as practicable
thereafter, the Corporation shall issue and deliver to such Dissenting
Holder, at the place designated by such Dissenting Holder, a certificate or
certificates for the number of shares of Non-Adjusting Preferred to which
such holder is entitled hereunder. The Person in whose name the certificate
of Non-Adjusting Preferred is to be issued shall be deemed to have become a
holder of record of the Non-Adjusting Preferred on the date on which the
Dilutive Financing is consummated.
6. Liquidating Dividends.
---------------------
If the Corporation declares or pays a Liquidating Dividend, then the
Corporation shall pay to the holders of Series A, Series B and Series C
Preferred Stock at the time of payment thereof at their election by
applicable Preferred Stock Approval either (i) the Liquidation Value or
(ii) the Liquidating Dividends which would have been paid on the Common
Stock had such Preferred Stock been converted into Common Stock immediately
prior to the date on which a record is taken for such Liquidating Dividend,
or, if no record is taken, the date as of which the record holders of
Common Stock entitled to such dividends are to be determined. If the total
funds available for the Liquidating Dividend are less than the total amount
due pursuant to elections made under this paragraph B.6, those funds which
are legally available will be used first to pay the amount due to the
holders of Series C Preferred, ratably based upon the respective amounts
owed to each holder of Series C Preferred, and second, to pay the amount
due to the holders of Series B Preferred, ratably based upon the respective
amounts owed to each holder of Series B Preferred, and third, to pay the
amount due to the holders of Series A Preferred, ratably based upon the
respective redemption amounts then owed to each holder of Series A
Preferred. The Preferred Stock and Common Stock shall remain outstanding,
and shall not be cancelled, upon payment of the Liquidating Dividend.
7. Purchase Rights.
---------------
If at any time the Corporation distributes, grants or sells Purchase
Rights, then each holder of Preferred Stock will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase
Rights which such holder could have acquired if such holder had held the
number of shares of Common Stock acquirable upon conversion of such
holder's Preferred Stock immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no
such record is taken, the date as of which the record holders of Common
Stock are to be determined for the distribution, issue or sale of such
Purchase Rights.
8. Registration of Transfer.
------------------------
The Corporation will keep at its principal office a register for the
registration of the Preferred Stock. Upon the surrender of any certificate
representing Preferred Stock at such place, the Corporation will, at the
request of the registered holder of such certificate, execute and deliver
(at the Corporation's expense) a new certificate or certificates in
exchange therefor representing
<PAGE>
in the aggregate the number of shares of Preferred Stock represented by the
surrendered certificate and the Corporation will cancel such surrendered
certificate. Each such new certificate will be registered in such name and
will represent such number of shares of Preferred Stock as is requested by
the holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate.
9. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder will be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate
evidencing shares of Preferred Stock, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (provided that if the holder is an institutional investor
its own agreement will be satisfactory), or, in the case of any such
mutilation, upon surrender of such certificate, the Corporation will (at
its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Preferred
Stock represented by such lost, stolen, destroyed or mutilated certificate
and dated the date of such lost, stolen, destroyed or mutilated
certificate.
10. Definitions.
-----------
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Common Stock Deemed Outstanding" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to
Subparagraphs B.5.c(1) and B.5.c(2) hereof whether or not the Options or
Convertible Securities are actually exercisable at such time, and
securities convertible into or exchangeable for Common Stock, but excluding
any shares of Common Stock issuable upon conversion of the Preferred Stock
or upon exercise of the Options (but only to the extent that including such
shares would result in a double-counting of such shares).
"Compensation Committee" shall mean the Compensation Committee of the
Board of Directors, established pursuant to Section 2.(d) of that certain
Shareholders Agreement, originally dated as of June 11, 1997, as amended,
between the Corporation and the Shareholders, as defined therein.
"Convertible Securities" means securities convertible into or
exchangeable for Common Stock.
"Dilutive Financing" shall mean an equity financing of the Corporation
(i) which has been approved by a majority of the Board of Directors, (ii)
which would result in the reduction of the Conversion Price (as then in
effect) for a series of Preferred Stock and (iii) with respect to which
each holder of Preferred Stock has been given at least twenty (20) days'
prior written notice which sets forth such holder's Full Share of the total
amount of equity securities to be sold by the Corporation in such Dilutive
Financing and offers to such holder an opportunity to purchase such
holder's Full Share.
"Dissenting Holder" means any holder of Preferred Stock who does not,
for any reason, purchase its Full Share of the total amount of equity
securities issued by the Corporation in a Dilutive Financing.
<PAGE>
"Dividend Reference Dates" shall be March 31, June 30, September 30
and December 31 of each year.
"Fair Value" means the value of such securities as determined by the
following procedure, with respect to Section B.4.d.3: first, the
Corporation shall deliver the price to MediaOne; second, MediaOne may
object to such price within 5 business days, and if MediaOne objects,
MediaOne shall propose a price for such securities within 10 business days
after receipt of the notice; third, the Corporation may either accept or
reject MediaOne's proposed value for such securities within 5 business days
of receipt of such value from MediaOne; fourth, if the Corporation rejects
such proposed value, MediaOne shall have 5 business days to hire a
qualified independent appraiser reasonably acceptable to the Corporation,
at MediaOne's expense, and such appraiser will deliver in writing its
determination of the fair value within 20 business days after being hired,
and the value ascribed to such securities shall be the greater of the value
proposed by the appraiser or the Corporation (provided, however, in no
event shall the value be greater than the value proposed by MediaOne).
"Full Share" means the maximum number of shares of equity securities
which a holder of Preferred Stock is entitled to purchase in a Dilutive
Financing upon the exercise of its rights under Section 4.L of the Series A
Purchase Agreement or Section 4.L of the Series B Purchase Agreement, any
other agreement providing for preemptive rights to which such holder is a
party.
"Junior Securities" means any of the Corporation's equity securities
other than the Preferred Stock.
"Liquidating Dividend" means a dividend upon the Common Stock payable
otherwise than in cash out of earnings or earned surplus (determined in
accordance with generally accepted accounting principles, consistently
applied) except for a stock dividend payable in shares of Common Stock or a
stock split.
"Liquidation Value" means, as to each share of Series A Preferred
Stock, $1.082857 per share, as to each share of Series B Preferred Stock,
$2.622857 per share, and as to each share of Series C Preferred Stock,
$4.977143 per share, subject in each case to adjustment in the event of any
stock dividends, stock splits, combinations, subdivision or split-ups.
"Liquidity Event" means (a) a sale or transfer of more than 25% of the
assets of the Corporation on a consolidated basis in any transaction or
series of related transactions (other than sales in the ordinary course of
business), (b) any merger, consolidation or reorganization to which the
Corporation is a party, except for a merger, consolidation or
reorganization in which the Corporation is the surviving corporation and,
after giving effect to such merger, consolidation or reorganization, the
holders of the Corporation's outstanding capital stock (on a fully-diluted
basis) immediately prior to the merger, consolidation or reorganization
will own immediately following the merger, consolidation or reorganization
the Corporation's outstanding capital stock (on a fully-diluted basis)
having the ordinary voting power to elect a majority of the Board of
Directors, (c) any sale or series of sales of shares of the Corporation's
capital stock by the holders thereof which results in any Person or group
of affiliated Persons owning capital stock of the Corporation possessing
the voting power (under ordinary circumstances) to elect a majority of the
Board of Directors or (d) any liquidation, dissolution or winding up of the
Corporation.
<PAGE>
"Market Price" of any security means the average of the closing prices
of such security's sales on all securities exchanges on which such security
may at the time be listed, or, if there has been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such
security is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if
on any day such security is not quoted in the NASDAQ System, the average of
the highest bid and lowest asked prices on such day in the domestic over-
the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case
averaged over the 20 consecutive business days prior to such day. If at any
time such security is not listed on any securities exchange or quoted in
the NASDAQ System or the over-the-counter market, the "Market Price" will
be the fair value thereof determined jointly by the Corporation and by
Preferred Stock Approval. If such parties are unable to reach agreement
within a reasonable period of time, such fair value will be determined by
an independent appraiser jointly selected by the Corporation and by
Preferred Stock Approval.
"Market Value" means the fair value of such securities as determined
by the Corporation and a representative selected by the holders of a
majority of the outstanding Preferred Stock being redeemed, provided, that,
if such parties are unable to reach agreement upon the fair value (i) with
respect to Section B.3.d(1) within 15 days after the Corporation receives
notice of election from the holders of Preferred Stock pursuant to
Subparagraph B.3.d(1) hereof ("Election"), or (ii) in all other cases,
within 15 days after the initial meeting of the Company and the
representative of the holders of the Preferred Stock, then within 25 days
after the Election (or initial meeting), the Corporation and the holders of
a majority of the Preferred Stock then outstanding will each choose a
qualified independent appraiser reasonably acceptable to the other party
and each such appraiser will deliver in writing its determination of the
fair value of such consideration. If the difference between the two
appraisals is 10% or less of the lower amount, the fair value will be the
average of each two appraisals. If the difference between the two
appraisals is greater than 10% of the lower amount, the two appraisers
will, within 35 days after the Election (or initial meeting), jointly
choose a third qualified independent appraiser. Within 45 days after the
Election (or initial meeting), the third appraiser will deliver its
determination of fair value and the final determination of the fair value
of such consideration will be equal to the average of those two appraisals
which are nearest to each other. The expenses of the appraisers will be
paid one-half by the Corporation and one-half by the holders of the
Preferred Stock (pro rata based on the number of shares of Preferred Stock
held).
"MediaOne" means MediaOne Interactive Services, Inc.
"Non-Adjusting Preferred" means a new class of convertible preferred
stock, no par value per share, to be created pursuant to an amendment to
these Articles of Incorporation which will be adopted by the Board of
Directors and approved by the holders of Preferred Stock prior to the
closing of a Dilutive Financing.
"Options" means any grant, issue or sale by the Corporation of any
right or option to subscribe for or to purchase Common Stock or any
Convertible Securities.
"Partial Company Liquidity Event" is a Liquidity Event involving the
sale of less than the entire Corporation or less than all of the
Corporation's assets, and includes all Liquidity Events which are not Whole
Company Liquidity Events.
<PAGE>
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock Approval" means an affirmative vote, at a meeting or
by written consent, of the holders of sixty-six and two-thirds percent (66
2/3%) of the outstanding Preferred Stock, or of the applicable series, as
indicated by the context.
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement
under the Securities Act of 1933, as then in effect, or any comparable
statement under any similar federal statute then in force; provided that a
Public Offering will not include an offering made in connection with a
business acquisition.
"Purchase Rights" means any Options, Convertible Securities or rights
to purchase stock, warrants, securities or other property which are
distributed, granted or sold to all record holders of any class of Common
Stock.
"Qualified IPO" means a firm commitment underwritten initial Public
Offering of shares of the Corporation's Common Stock in which (i) the net
proceeds received by the Corporation are at least $15,000,000 and (ii) the
price per share paid by the public for such shares will be at least
$7.465714 (adjusted for any stock dividend, stock split or in connection
with any combination of shares, recapitalization or other reorganization).
"Redemption Dates" means September 15, 2001, June 1, 2002, and June 1,
2003.
"Redemption Notice" means a written notice by one or more holders of
the Preferred Stock to the Corporation stating their intention to exercise
the Redemption Right or the Secondary Redemption Right and the number of
each such holder's shares of Preferred Stock to be redeemed.
"Redemption Price" means for each share of Preferred Stock, the
Corporation will be obligated to pay to the holder thereof (upon surrender
by such holder at the Corporation's principal office of the certificate
representing such share of Preferred Stock) an amount in immediately
available funds equal to the Liquidation Value thereof plus all Accumulated
and Unpaid Dividends.
"Redemption Right" shall have the meaning provided in Paragraph
B.3.a(1).
"Secondary Redemption Dates" means September 15, 2002, June 1, 2003,
and June 1, 2004.
"Secondary Redemption Right" shall have the meaning provided in
Paragraph B.3.a(2).
"Series A Conversion Price" initially means the $1.082857, as
subsequently adjusted pursuant to Paragraph B.5.b.
"Series B Conversion Price" initially means the $2.622857, as
subsequently adjusted pursuant to Paragraph B.5.b.
<PAGE>
"Series B Purchase Agreement" means that certain Share Purchase
Agreement, dated as of January 30, 1998, by and between the Corporation and
certain investors.
"Series C Conversion Price" initially means the $4.977143, as
subsequently adjusted pursuant to Paragraph B.5.b.
"Series C Purchase Agreement" means that certain Share Purchase
Agreement, dated as of December 21, 1998, by and between the Corporation
and certain investors.
"Special Redemption Payment" shall have the meaning provided in
Paragraph B.3.d(1).
"Subsidiary" means any corporation of which the shares of stock having
a majority of the general voting power in electing the Board of Directors
are, at the time as of which any determination is being made, owned by the
Corporation either directly or indirectly through Subsidiaries.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon conversion of the Preferred Stock and (ii) any Common Stock
issued or issuable with respect to the Common Stock referred to in clause
(i) above by way of stock dividend or stock split or in connection with a
combination or other reorganization.
"Valuation Event" means the issuance or sale by the Corporation of
Common Stock, Options or Convertible Securities for a consideration other
than cash or publicly-traded securities.
"Whole Company Liquidity Event" is a Liquidity Event involving the
sale of the entire Corporation or all of the Corporation's assets
(including liquidation, dissolution, winding up, and mergers in which pre-
merger Common Stock and Preferred Stock are cancelled and ownership in
Company is transferred to Persons who do not control the Company prior to
the merger).
11. Amendment and Waiver.
--------------------
No amendment, modification or waiver will be binding or effective with
respect to any provision of this Section B without Preferred Stock Approval
of each Series of Preferred Stock. No change in the terms hereof may be
accomplished by merger or consolidation of the Corporation with another
corporation unless the Corporation has obtained prior Preferred Stock
Approval of each Series of Preferred Stock.
12. Notices.
-------
Except as otherwise expressly provided, all notices referred to herein
shall be in writing and shall be delivered by registered or certified mail,
return receipt requested, postage prepaid and shall be deemed to have been
delivered when so mailed (i) to the Corporation, at its principal executive
offices and (ii) to any shareholder, at such holder's address as it appears
in the stock records of the Corporation (unless otherwise indicated in
writing by any such holder).
C. Common Stock
<PAGE>
1. Voting Rights. Except as otherwise required by law and the other
-------------
provisions of this Article II, the holders of the Common Stock will be
entitled to one vote per share on all matters to be voted on by the
Corporation's shareholders.
2. Dividends. Subject to the limitations contained in Paragraph B.1.d
---------
hereof, the holders of Common Stock will be entitled to dividends if, when,
and as declared by the Board of Directors, out of funds legally available
therefor, whether payable in cash, property or securities of the
Corporation.
3. Registration of Transfer. The Corporation will keep at its principal
------------------------
office (or such other place as the Corporation reasonably designates) a
register for the registration of shares of Common Stock or shall engage a
professional transfer agent (the "Transfer Agent"). Upon the surrender of
any certificate representing shares of Common Stock at such place, the
Corporation or the Transfer Agent will, at the request of the registered
holder of such certificate, execute and deliver (at the Corporation's
expense) a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares of Common Stock
represented by the surrendered certificate, and the Corporation or the
Transfer Agent will cancel such surrendered certificate. Each such new
certificate will be registered in such name and will represent such number
of shares of Common Stock as is requested by the holder of the surrendered
certificate and will be substantially identical in form to the surrendered
certificate provided, however, that any transfer shall be subject to any
applicable restrictions on the transfer of such shares and the payment of
any applicable transfer taxes, if any, by the holder thereof.
4. Replacement. Upon receipt of evidence reasonably satisfactory to the
-----------
Corporation (an affidavit of the registered holder will be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any
certificate evidencing shares of Common Stock, and in the case of any such
loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is an
institutional investor its own agreement will be satisfactory), or, in the
case of any such mutilation, upon surrender of such certificate, the
Corporation will (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the number of
shares of Common Stock represented by such lost, stolen, destroyed or
mutilated certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.
<PAGE>
ARTICLE V
A director of the Corporation shall, to the fullest extent permitted
by the General Corporation Law as it now exists or as it may hereafter be
amended, not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (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) under
Section 174 of the General Corporation Law, or (iv) for any transaction from
which the director derived any improper personal benefit. If the General
Corporation Law is amended, after approval by the stockholders of this Article
V, to authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law, as so amended.
Any amendment, repeal or modification of this Article V, or the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article V by the stockholders of the
Corporation shall not apply to or adversely affect any right or protection of a
director of the Corporation existing at the time of such amendment, repeal,
modification or adoption.
ARTICLE VI
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of the Corporation (and any other persons to which State law permits the
Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the State General Corporation Law, subject
only to limits created by applicable State law (statutory or non-statutory),
with respect to actions for breach of duty to the Corporation, its stockholders,
and others.
Any amendment, repeal or modification of the foregoing provision of
this Article VI shall not adversely affect any right or protection of a
director, officer, agent, or other person existing at the time of, or increase
the liability of any director of this Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal, modification or adoption.
ARTICLE VII
The Corporation reserves the right to adopt, amend, alter, supplement,
rescind or repeal in any respect any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or hereafter prescribed
by statute or applicable law, and all rights conferred upon stockholders herein
are granted subject to this reservation.
ARTICLE VIII
Subject to the provisions of Article IV hereof, the Board of Directors
may from time to time adopt, amend, alter, supplement, rescind or repeal any or
all of the Bylaws of the Corporation without any action on the part of the
stockholders; provided, however, that the stockholders may adopt, amend or
repeal any Bylaw adopted by the Board of Directors, and no amendment or
supplement to the Bylaws adopted by the Board of Directors shall vary or
conflict with any amendment or supplement adopted by the stockholders.
<PAGE>
ARTICLE IX
Subject to the provisions of Article IV, the number of directors of
the Corporation shall be set from time to time by resolution of the Board of
Directors.
ARTICLE X
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any statutory requirements) outside the State of Delaware at such
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the Corporation.
<PAGE>
EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
eCOLLEGE.COM, INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
eCOLLEGE.com, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation filed its original Certificate of
Incorporation with the Secretary of State of Delaware on May 11, 1999. On
________, 1999, the Corporation filed an Amended and Restated Certificate of
Incorporation in connection with the filing of an Agreement and Plan of Merger
between Real Education, Inc., a Colorado corporation, and the Corporation.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Amended and Restated Certificate of
Incorporation of the Corporation, declaring said amendment and restatement to be
advisable and in the best interests of the Corporation and its stockholders, and
authorizing the appropriate officers of the Corporation to solicit the consent
of the stockholders of the issued and outstanding Common Stock, $0.01 par value,
and Preferred Stock, $0.01 par value, voting as a single class and as separate
classes, all in accordance with the applicable provisions of Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Second Amended and Restated Certificate of
Incorporation of the Corporation be amended and restated in its
entirety as follows:
ARTICLE I
Name
The name of the Corporation is eCollege.com.
1.
<PAGE>
ARTICLE II
Registered Office
The address of the registered office of the Corporation in the State
of Delaware is 1013 Centre Road in the City of Wilmington, State of Delaware
19805, County of New Castle. The name of the registered agent at such address
is Corporation Service Company.
ARTICLE III
Powers/Term
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law. The Corporation is to have perpetual existence.
ARTICLE IV
Capital Stock
A. Classes of Stock. The Corporation is authorized to issue two
----------------
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is 55,000,000 shares. 50,000,000 shares, par value $0.01 per share, shall be
Common Stock and 5,000,000 shares, par value $0.01 per share, shall be Preferred
Stock. The consideration for the issuance of the shares shall be paid to or
received by the Corporation in full before their issuance and shall not be less
than the par value per share. The number of authorized shares of Common Stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of Delaware.
B. Common Stock.
------------
(1) General. All shares of Common Stock will be identical and will
-------
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of any then outstanding Preferred Stock.
(2) Dividends. Dividends may be declared and paid on the Common
---------
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
(3) Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the
2.
<PAGE>
holders of Common Stock, subject to any preferential rights of any then
outstanding Preferred Stock.
(4) Voting Rights. Except as otherwise required by law or this
-------------
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Preferred Stock shall
vote together with holders of Common Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
(5) Redemption. The Common Stock is not redeemable.
----------
C. Preferred Stock. The Board of Directors is authorized, subject to
---------------
limitations prescribed by law, by the rules of a national securities exchange,
if applicable, and by the provisions of this ARTICLE IV, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences, and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include,
but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(5) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
3.
<PAGE>
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights or priority, if any, of payment of shares of that series;
and
(8) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution to holders
of shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
D. Preemptive Rights. No holder of any of the shares of any class or
-----------------
series of stock or of options, warrants or other rights to purchase shares of
any class or series of stock or of other securities of the Corporation shall
have any preemptive right to purchase or subscribe for any unissued stock of any
class or series, or any unissued bonds, certificates of indebtedness, debentures
or other securities convertible into or exchangeable for stock of any class or
series or carrying any right to purchase stock of any class or series; but any
such unissued stock, bonds, certificates or indebtedness, debentures or other
securities convertible into or exchangeable for stock or carrying any right to
purchase stock may be issued pursuant to resolution of the Board of Directors of
the Corporation to such persons, firms, corporations or associations, whether or
not holders thereof, and upon such terms as may be deemed advisable by the Board
of Directors in the exercise of its sole discretion.
ARTICLE V
Directors
A. Number. The number of directors of the Corporation shall be such
------
number, not less than five (5) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws. Vacancies in the Board of Directors of the Corporation,
however caused, and newly created directorships shall be filled by a vote of a
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires and when the director's successor is elected and qualified.
B. Removal of Directors. Notwithstanding any other provisions of
--------------------
this Certificate or the bylaws of the Corporation, any director or the entire
Board of Directors of the Corporation may be removed, at any time, but only for
cause and only by the affirmative vote of the holders of not less than a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (considered for this purpose as
4.
<PAGE>
one class) cast at a meeting of the stockholders called for that purpose.
Notwithstanding the foregoing, whenever the holders of any one or more series of
preferred stock of the Corporation shall have the right, voting separately as a
class, to elect one or more directors of the Corporation, the preceding
provisions of this ARTICLE V shall not apply with respect to the director or
directors elected by such holders of preferred stock.
ARTICLE VI
Stockholder Meetings
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of the Corporation. The stockholders of
the Corporation may not take any action by written consent in lieu of a meeting.
ARTICLE VII
Limitation of Directors' Liability
Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. If the General Corporation Law is amended after approval by the
stockholders of this ARTICLE VII to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior to
such amendment.
ARTICLE VIII
Indemnification
The Corporation may, to the fullest extent permitted by Section 145 of
the General Corporation Law of Delaware, as amended from time to time, indemnify
each 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 he is or
was, or has agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the Corporation, as a
director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts
5.
<PAGE>
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the Indemnitee to repay
such payment if it is ultimately determined that such person is not entitled to
indemnification under this ARTICLE VIII, which undertaking may be accepted
without reference to the financial ability of such person to make such
repayment.
The Corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of Directors
of the Corporation.
The indemnification rights provided in this ARTICLE VIII (i) shall not
be deemed exclusive of any other rights to which Indemnitees may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this ARTICLE VIII.
ARTICLE IX
Amendment of Bylaws
In furtherance of and not in limitation of powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of
a majority of the Board of Directors. In addition, the bylaws may be amended by
the affirmative vote of the holders of at least a majority of the outstanding
shares of voting stock of the Corporation entitled to vote at an election of
directors.
ARTICLE X
Amendment of Certificate
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Second Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Second Amended and Restated Certificate of Incorporation, and all rights
conferred upon stockholders herein are granted subject to this reservation.
Notwithstanding the foregoing, the provisions set forth in ARTICLES VII, VIII,
IX and this ARTICLE X may not be repealed, altered, amended or rescinded in any
respect unless the same is approved by the affirmative vote of the holders of
not less than a majority of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of
6.
<PAGE>
directors (considered for this purpose as a single class) cast at a meeting of
the stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting).
* * *
FOURTH: That said amendments were duly adopted in accordance with
the provisions of Section 242 and 245 of the General Corporation Law.
7.
<PAGE>
IN WITNESS WHEREOF, this Second Amended and Restated Certificate of
Incorporation has been signed by the President and the Assistant Secretary of
the Corporation this ____ day of _______________, 1999.
________________________________________
Robert N. Helmick
President and Chief Executive Officer
and Chairman of the Board of Directors
________________________________________
Secretary
8.
<PAGE>
Exhibit 3.4
BYLAWS
OF
eCOLLEGE.COM, INC.,
a Delaware corporation
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office shall be at the office
-----------------
of CSC in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders for the
--------------
election of directors shall be held at such place either within or without the
State of Delaware as shall be designated on an annual basis by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof. Any other proper business may be transacted
at the annual meeting.
Section 2. Notice of Annual Meeting. Written notice of the annual meeting
------------------------
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 3. Voting List. The officer who has charge of the stock ledger of
-----------
the corporation shall prepare and make, or cause a third party to prepare and
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
1
<PAGE>
Section 4. Special Meetings. Special meetings of the stockholders of this
----------------
corporation, for any purpose or purposes, unless otherwise prescribed by statute
or by the Certificate of Incorporation, shall be called by the President or
Secretary at the request in writing of a majority of the members of the Board of
Directors or holders of a majority of the total voting power of all outstanding
shares of stock of this corporation then entitled to vote, and may not be called
absent such a request. Such request shall state the purpose or purposes of the
proposed meeting.
Section 5. Notice of Special Meetings. As soon as reasonably practicable
--------------------------
after receipt of a request as provided in Section 4 of this Article II, written
notice of a special meeting, stating the place, date (which shall be not less
than ten nor more than sixty days from the date of the notice) and hour of the
special meeting and the purpose or purposes for which the special meeting is
called, shall be given to each stockholder entitled to vote at such special
meeting.
Section 6. Scope of Business at Special Meeting. Business transacted at
------------------------------------
any special meeting of stockholders shall be limited to the purposes stated in
the notice.
Section 7. Quorum. The holders of a majority of the stock issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting or
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting as provided in Section 5 of this Article
II.
Section 8. Qualifications to Vote. The stockholders of record on the books
----------------------
of the corporation at the close of business on the record date as determined by
the Board of Directors and only such stockholders shall be entitled to vote at
any meeting of stockholders or any adjournment thereof.
Section 9. Record Date. The Board of Directors may fix a record date for
-----------
the determination of the stockholders entitled to notice of or to vote at any
stockholders' meeting and at any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action. The record date shall not be more
than sixty nor less than ten days before the date of such meeting, and not more
than sixty days prior to any other action. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of
2.
<PAGE>
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 10. Action at Meetings. When a quorum is present at any meeting,
------------------
the vote of the holders of a majority of the stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of
applicable law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
Section 11. Voting and Proxies. Unless otherwise provided in the
------------------
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but no proxy shall
be voted on after three years from its date, unless the proxy provides for a
longer period. Each proxy shall be revocable unless expressly provided therein
to be irrevocable and unless it is coupled with an interest sufficient in law to
support an irrevocable power.
Section 12. Action by Stockholders Without a Meeting. Unless otherwise
----------------------------------------
provided in the Certificate of Incorporation, any action required to be taken at
any annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in Delaware
(by hand or by certified or registered mail, return receipt requested), to its
principal place of business, or to an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded provided, however, that action by written consent to elect directors,
if less than unanimous, shall be in lieu of holding an annual meeting only if
all the directorships to which directors could be elected at an annual meeting
held at the effective time of such action are vacant and are filled by such
action. Prompt notice of the taking of corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of stockholders to take the action were delivered to the corporation by
delivery to its registered office in Delaware (by hand or by certified or
registered mail, return receipt requested), to its principal place of business,
or to an officer or agent of the corporation having custody of the book in which
proceedings or meetings of stockholders are recorded the preceding language is
derived from Section 228 of the Delaware General Corporation Law.
3.
<PAGE>
ARTICLE III.
DIRECTORS
Section 1. Powers. The business of the corporation shall be managed by or
------
under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not by
applicable law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. Number; Election; Tenure and Qualification. The number of
------------------------------------------
directors which shall constitute the whole board shall be fixed from time to
time by resolution of the Board of Directors or by the Stockholders at an annual
meeting of the Stockholders (unless the directors are elected by written consent
in lieu of an annual meeting as provided in Article II, Section 12); provided
that the number of directors shall be not less than 1 nor more than 10. With the
exception of the first Board of Directors, which shall be elected by the
incorporator, and except as provided in the corporation's Certificate of
Incorporation or in Section 3 of this Article III, the directors shall be
elected at the annual meeting of the stockholders by a plurality vote of the
shares represented in person or by proxy and each director elected shall hold
office until his successor is elected and qualified unless he shall resign,
become disqualified, disabled, or otherwise removed. Directors need not be
stockholders.
Section 3. Vacancies and Newly Created Directorships. Unless otherwise
-----------------------------------------
provided in the Certificate of Incorporation, vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen shall serve
until the next annual election and until their successors are duly elected and
shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by statute.
If, at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of shares at the time outstanding having
the right to vote for such directors, summarily order an election to be held to
fill any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office.
Section 4. Location of Meetings. The Board of Directors of the
--------------------
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 5. Meeting of Newly Elected Board of Directors. The first meeting
-------------------------------------------
of each newly elected Board of Directors shall be held immediately following the
annual meeting of stockholders and no notice of such meeting shall be necessary
to the newly elected directors in order legally to constitute the meeting,
provided a quorum shall be present. In the event such meeting is not held at
such time, the meeting may be held at such time and place as shall be specified
in a notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held without notice at such time and at such place as shall from time to
time be determined by
4.
<PAGE>
the Board of Directors; provided that any director who is absent when such a
determination is made shall be given notice of such location.
Section 7. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the President on two days' notice to each director by mail,
overnight courier service or facsimile; special meetings shall be called by the
President or Secretary in a like manner and on like notice on the written
request of two directors unless the Board of Directors consists of only one
director, in which case special meetings shall be called by the President or
Secretary in a like manner and on like notice on the written request of the sole
director. Notice may be waived in accordance with Section 229 of the Delaware
General Corporation Law.
Section 8. Quorum and Action at Meetings. At all meetings of the Board of
-----------------------------
Directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. Action Without a Meeting. Unless otherwise restricted by the
------------------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. Telephonic Meeting. Unless otherwise restricted by the
------------------
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
Section 11. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Section 12. Committee Authority. Any such committee, to the extent
-------------------
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may
5.
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authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to (a) approving, adopting or recommending to the stockholders, any action or
matter expressly required by the Delaware General Corporation Law to be
submitted to stockholders for approval, or (b) adopting, amending or repealing
any Bylaw of the corporation. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors.
Section 13. Committee Minutes. Each committee shall keep regular minutes
-----------------
of its meetings and report the same to the Board of Directors when required to
do so by the Board of Directors.
Section 14. Directors Compensation. Unless otherwise restricted by the
----------------------
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 15. Resignation. Any director or officer of the corporation may
-----------
resign at any time. Each such resignation shall be made in writing and shall
take effect at the time specified therein, or, if no time is specified, at the
time of its receipt by either the Board of Directors, the President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless expressly so provided in the resignation.
Section 16. Removal. Unless otherwise restricted by the Certificate of
-------
Incorporation, these Bylaws or applicable law, any director or the entire Board
of Directors may be removed, with or without cause, by the holders of a majority
of shares entitled to vote at an election of directors.
ARTICLE IV.
NOTICES
Section 1. Notice to Directors and Stockholders. Whenever, under the
------------------------------------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. An affidavit of the Secretary or an
Assistant Secretary or of the transfer agent of the corporation that the notice
has been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. Notice to directors may also be given by telephone,
facsimile or telegram (with confirmation of receipt).
6.
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Section 2. Waiver. Whenever any notice is required to be given under the
------
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. The written waiver need not specify the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express purpose of objecting at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at the meeting is not a
waiver of any right to object to the consideration of matters required by the
Delaware General Corporation Law to be included in the notice of the meeting but
not so included, if such objection is expressly made at the meeting.
ARTICLE V.
OFFICERS
Section 1. Enumeration. The officers of the corporation shall be chosen by
-----------
the Board of Directors and shall include a President, a Secretary, a Treasurer
or Chief Financial Officer and such other officers with such other titles as the
Board of Directors shall determine. The Board of Directors may elect from among
its members a Chairman or Chairmen of the Board and a Vice Chairman of the
Board. The Board of Directors may also choose one or more Vice-Presidents,
Assistant Secretaries and Assistant Treasurers. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these Bylaws
otherwise provide.
Section 2. Election. The Board of Directors at its first meeting after
--------
each annual meeting of stockholders shall elect a President, a Secretary, a
Treasurer and such other officers with such other titles as the Board of
Directors shall determine.
Section 3. Appointment of Other Agents. The Board of Directors may appoint
---------------------------
such other officers and agents as it shall deem necessary, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
Section 4. Compensation. The salaries of all officers of the corporation
------------
shall be fixed by the Board of Directors or a committee thereof. The salaries of
agents of the corporation shall be fixed by the President or any Vice-President
of the corporation.
Section 5. Tenure. The officers of the corporation shall hold office until
------
their successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the directors of the Board of Directors. Any vacancy occurring in
any office of the corporation shall be filled by the Board of Directors.
Section 6. Chairman of the Board and Vice-Chairman of the Board. The
----------------------------------------------------
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which the Chairman shall be present. The
Chairman shall have and may exercise such powers as are, from time to time,
assigned to the Chairman by the Board of Directors and as
7.
<PAGE>
may be provided by law. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which the Vice Chairman shall be present.
The Vice Chairman shall have and may exercise such powers as are, from time to
time, assigned to such person by the Board of Directors and as may be provided
by law.
Section 7. President. The President shall be the Chief Executive Officer
---------
of the corporation unless such title is assigned to another officer of the
corporation; in the absence of a Chairman and Vice Chairman of the Board, the
President shall preside as the chairman of meetings of the stockholders and the
Board of Directors; and the President shall have general and active management
of the business of the corporation and shall see that all orders and resolutions
of the Board of Directors are carried into effect. The President or any Vice-
President shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the corporation.
Section 8. Vice-President. In the absence of the President or in the event
--------------
of the President's inability or refusal to act, the Vice-President, if any (or
in the event there be more than one Vice-President, the Vice-Presidents in the
order designated by the Board of Directors, or in the absence of any
designation, then in the order of their election) shall perform the duties of
the President, and when so acting shall have all the powers of and be subject to
all the restrictions upon the President. The Vice-President shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
Section 9. Secretary. The Secretary shall attend all meetings of the Board
---------
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision the Secretary shall be subject. The
Secretary shall have custody of the corporate seal of the corporation and the
Secretary, or an Assistant Secretary, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the
Secretary's signature or by the signature of such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing by such officer's signature.
Section 10. Assistant Secretary. The Assistant Secretary, or if there be
-------------------
more than one, the Assistant Secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
Section 11. Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books
8.
<PAGE>
belonging to the corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the Board of Directors. The Treasurer shall disburse the
funds of the corporation as may be ordered by the Board of Directors , President
or Chief Executive Officer, taking proper vouchers for such disbursements, and
shall render to the President, Chief Executive Officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all such transactions as Treasurer and of the financial condition
of the corporation. If required by the Board of Directors, the Treasurer shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the Treasurer's office
and for the restoration to the corporation, in case of the Treasurer's death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the possession or under the control
of the Treasurer that belongs to the corporation.
Section 12. Assistant Treasurer. The Assistant Treasurer, or if there be
-------------------
more than one, the Assistant Treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
ARTICLE VI.
CAPITAL STOCK
Section 1. Certificates. The shares of the corporation shall be
------------
represented by a certificate, unless and until the Board of Directors adopts a
resolution permitting shares to be uncertificated. Certificates shall be signed
by, or in the name of the corporation by, (a) the Chairman of the Board, the
Vice-Chairman of the Board, the President or a Vice-President, and (b) the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares owned by such stockholder in the corporation.
Certificates may be issued for partly paid shares and in such case upon the face
or back of the certificates issued to represent any such partly paid shares, the
total amount of the consideration to be paid therefor and the amount paid
thereon shall be specified.
Section 2. Class or Series. If the corporation shall be authorized to
---------------
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the Delaware General
Corporation Law, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the
9.
<PAGE>
issuance or transfer of uncertificated stock, the corporation shall send to the
registered owner thereof a written notice containing the information required to
be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or
218(a) of the Delaware Corporation Law or a statement that the corporation will
furnish without charge, to each stockholder who so requests, the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 3. Signature. Any of or all of the signatures on a certificate may
---------
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or such owner's legal representative, to advertise the same in
such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 5. Transfer of Stock. Upon surrender to the corporation or the
-----------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares such uncertificated shares shall
be canceled and issuance of new equivalent uncertificated shares or certificated
shares shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the corporation.
Section 6. Record Date. In order that the corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
10.
<PAGE>
Section 7. Registered Stockholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE VII.
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
---------
subject to the applicable provisions, if any, of the Certificate of
Incorporation, may be declared by the Board of Directors at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property or
in shares of capital stock, subject to the provisions of the Certificate of
Incorporation. Before payment of any dividend, there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the Board
of Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the Board of Directors shall think conducive to the interest of the
corporation, and the Board of Directors may modify or abolish any such reserve
in the manner in which it was created.
Section 2. Checks. All checks or demands for money and notes of the
------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed
-----------
by resolution of the Board of Directors.
Section 4. Seal. The Board of Directors may adopt a corporate seal having
----
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 5. Loans. The Board of Directors of this corporation may, without
-----
stockholder approval, authorize loans to, or guaranty obligations of, or
otherwise assist, including, without limitation, the adoption of employee
benefit plans under which loans and guarantees may be made, any officer or other
employee of the corporation or of its subsidiary, including any officer or
employee who is a director of the corporation or its subsidiary, whenever, in
the judgment of the Board of Directors, such loan, guaranty or assistance may
reasonably be expected to benefit the corporation. The loan, guaranty or other
assistance may be with or without interest, and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation.
11.
<PAGE>
ARTICLE VIII.
INDEMNIFICATION
Section 1. Scope. The corporation shall, to the fullest extent permitted
-----
by Section 145 of the Delaware General Corporation Law, as that Section may be
amended and supplemented from time to time, indemnify any director, officer,
employee or agent of the corporation, against expenses (including attorneys'
fees), judgments, fines, amounts paid in settlement and/or other matters
referred to in or covered by that Section, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
Section 2. Advancing Expenses. Expenses (including attorneys' fees)
------------------
incurred by a present or former director or officer of the corporation in
defending a civil, criminal, administrative or investigative action, suit or
proceeding by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation (or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that such
person is not entitled to be indemnified by the corporation as authorized by
relevant provisions of the Delaware General Corporation Law; provided, however,
the corporation shall not be required to advance such expenses to a director (i)
who commences any action, suit or proceeding as a plaintiff unless such advance
is specifically approved by a majority of the Board of Directors, or (ii) who is
a party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors which alleges willful misappropriation
of corporate assets by such director, disclosure of confidential information in
violation of such director's fiduciary or contractual obligations to the
corporation, or any other willful and deliberate breach in bad faith of such
director's duty to the corporation or its stockholders.
Section 3. Liability Offset. The corporation's obligation to provide
----------------
indemnification under this Article VIII shall be offset to the extent the
indemnified party is indemnified by any other source including, but not limited
to, any applicable insurance coverage under a policy maintained by the
corporation, the indemnified party or any other person.
Section 4. Continuing Obligation. The provisions of this Article VIII
---------------------
shall be deemed to be a contract between the corporation and each director of
the corporation who serves in such capacity at any time while this bylaw is in
effect, and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts.
Section 5. Nonexclusive. The indemnification and advancement of expenses
------------
provided for in this Article VIII shall (i) not be deemed exclusive of any other
rights to which those indemnified may be entitled under any bylaw, agreement or
vote of stockholders or disinterested directors or otherwise, both as to action
in their official capacities and as to action
12.
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in another capacity while holding such office, (ii) continue as to a person who
has ceased to be a director and (iii) inure to the benefit of the heirs,
executors and administrators of such a person.
Section 6. Other Persons. In addition to the indemnification rights of
-------------
directors, officers, employees, or agents of the corporation, the Board of
Directors in its discretion shall have the power on behalf of the corporation to
indemnify any other person made a party to any action, suit or proceeding who
the corporation may indemnify under Section 145 of the Delaware General
Corporation Law.
Section 7. Definitions. The phrases and terms set forth in this Article
VIII shall be given the same meaning as the identical terms and phrases are
given in Section 145 of the Delaware General Corporation Law, as that Section
may be amended and supplemented from time to time.
ARTICLE IX.
AMENDMENTS
Except as otherwise provided in the Certificate of Incorporation, these
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the
holders of a majority of the outstanding voting shares or by the Board of
Directors, when such power is conferred upon the Board of Directors by the
Certificate of Incorporation, at any regular meeting of the stockholders or of
the Board of Directors or at any special meeting of the stockholders or of the
Board of Directors if notice of such alteration, amendment, repeal or adoption
of new Bylaws be contained in the notice of such special meeting. If the power
to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the
Certificate of Incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal Bylaws.
13.
<PAGE>
CERTIFICATE OF SECRETARY OF
eCOLLEGE.COM, INC.
The undersigned certifies:
1. That the undersigned is the duly elected and acting Secretary of
eCollege.com, Inc., a Delaware corporation (the "Corporation"); and
2. That the foregoing Bylaws constitute the Bylaws of the Corporation as
duly adopted by the Action by Unanimous Written Consent in Lieu of the
Organizational Meeting by the Board of Directors of eCollege.com, Inc., dated
the _______ day of ______________, 1999.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of the Corporation as of this _____ day of __________, 1999.
--------------------------------------------
-----------------------------,
Secretary
<PAGE>
EXHIBIT 3.5
AMENDED AND RESTATED BY-LAWS
OF
eCOLLEGE.COM
ARTICLE I
Certificate of Incorporation and Bylaws
Section 1. These By-Laws are subject to the Certificate of Incorporation
of the Corporation. In these By-Laws, references to law, the Certificate of
Incorporation and By-Laws mean the law, the provisions of the Certificate of
Incorporation and the By-Laws as from time to time in effect.
ARTICLE II
Offices
Section 1. The registered office shall be in the city of Wilmington, state
of Delaware.
Section 2. The Corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE III
Meetings of Stockholders
Section 1. All meetings of the stockholders for the election of directors
shall be held at such place as may be fixed from time to time by the Board of
Directors, or at such other place either within or without the State of Delaware
as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders shall be held at such date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting, at which they shall elect by a plurality
vote the directors to be elected at such meeting, and transact such other
business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
<PAGE>
Section 4. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of the Chairman of the Board of
Directors or the Board of Directors.
Section 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the Certificate of Incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no
2
<PAGE>
proxy shall be voted on after three years from its date, unless the proxy
provides for a longer period.
Section 11.
A. Annual Meetings of Stockholders
-------------------------------
1. Nominations of persons for election to the Board of Directors and
the proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice of
meeting, (b) by or at the direction of the Board of Directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this Section 11, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
11.
2. For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Section 11, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
one hundred twentieth (120th) day nor earlier than the close of business on the
one hundred fiftieth (150th) day prior to the first anniversary of the date of
the proxy statement delivered to stockholders in connection with the preceding
year's annual meeting; provided, however, that if either (i) the date of the
annual meeting is more than thirty (30) days before or more than sixty (60) days
after such an anniversary date or (ii) no proxy statement was delivered to
stockholders in connection with the preceding year's annual meeting, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director it elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of capital stock of the
Corporation that are owned beneficially and held of record by such stockholder
and such beneficial owner.
3. Notwithstanding anything in the second sentence of paragraph (A)(2)
of this Section 11 to the contrary, in the event that the number of directors to
be elected to
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the Board of Directors of the Corporation is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least seventy (70)
days prior to the first anniversary of the preceding year's annual meeting (or,
if the annual meeting is held more than thirty (30) days before or sixty (60)
days after such anniversary date, at least seventy (70) days prior to such
annual meeting), a stockholder's notice required by this Section 11 shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive office of the Corporation not later than the close of
business on the tenth (10th) day following the day on which such public
announcement is first made by the Corporation.
B. Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 11. If the
Corporation calls a special meeting of stockholders for the purpose of electing
one or more directors to the Board of Directors, any such stockholder may
nominate a person or persons (as the case may be), for election to such
position(s) as specified in the Corporation's notice of meeting, if the
stockholder's notice required by paragraph (A)(2) of this Section 11 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the ninetieth (90th) day prior to such special meeting not
later than the later of (x) the close of business of the sixtieth (60th) day
prior to such special meeting or (y) the close of business of the tenth (10th)
day following the day on which public announcement is first made of the date of
such special meeting and of the nominees proposed by the Board of Directors to
be elected at such meeting.
C. General.
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1. Only such persons who are nominated in accordance with the
procedures set forth in this Section 11 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 11. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 11 and, if any proposed
nomination or business is not incompliance herewith, to declare that such
defective proposal or nomination shall be disregarded.
2. For purposes of this Section 11, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 and 15(d) of the Exchange Act.
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3. Notwithstanding the foregoing provisions of this Section 11, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in this Section 11 shall be deemed to affect any rights
(i) of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of Preferred Stock to elect directors under specified
circumstances.
Notwithstanding any other provision of law, the Certificate of
Incorporation or these By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least a majority of the votes which all the stockholders would be entitled to
cast at any annual election of directors or class of directors shall be required
to amend or repeal, or to adopt any provision inconsistent with, this Section
11.
ARTICLE IV
Directors
Section 1. The number of directors which shall constitute the whole Board
shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article. Directors need not be stockholders.
Section 2. Vacancies and new created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election at which directors are to be elected and until their successors are
duly elected and shall qualify, unless sooner displaced.
Section 3. The business of the Corporation shall be managed by or under
the direction of its Board of Directors which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute or
by the Certificate of Incorporation or by these By-Laws directed or required to
be exercised or done by the stockholders.
Meetings of the Board of Directors
Section 4. The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board. Members of the Board of Directors may participate in regular or
special meetings by means of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each other.
Such participation shall constitute presence in person.
Section 6. Special meetings of the Board may be called by the president on
two (2) days' notice to each director by mail or forty-eight (48) hours notice
to each director either personally or by telegram; special meetings shall be
called by the president or secretary in like manner and on like notice on the
written request of two directors unless the Board consists
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of only one director, in which case special meetings shall be called by the
president or secretary in like manner and on like notice on the written request
of the sole director.
Section 7. At all meetings of the Board a majority of the directors fixed
by Section 1 shall constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 8. Unless otherwise restricted by the Certificate of Incorporation
of these By-Laws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
Section 9. Unless otherwise restricted by the Certificate of Incorporation
or these By-Laws, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in a meeting of the Board of
Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Committees of Directors
Section 10. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of one or more of the directors of the Corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-Laws of the Corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend
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or to authorize the issuance of stock. Such committee or committees shall have
such name or names as may be determined from time to time by resolution adopted
by the Board of Directors.
Section 11. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
Compensation of Directors
Section 12. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Director and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Removal of Directors
Section 13. Any director or the entire Board of Directors may be removed
only in accordance with the provisions of the Corporation's Certificate of
Incorporation.
ARTICLE V
Notices
Section 1. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these By-Laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE VI
Officers
Section 1. The officers of the Corporation shall be chosen by the Board of
Directors and shall be a chief executive officer, chief financial officer,
president, treasurer and a secretary. The Board of Directors may elect from
among its members a Chairman of the Board and a Vice Chairman of the Board. The
Board of Directors may also choose one or more vice-
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presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these By-Laws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer, and a secretary
and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
The Chairman of the Board
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which such
individual shall be present. Such individual shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice Chairman
of the Board, if any, shall preside at all meetings of the Board of Directors
and of the stockholders at which such individual shall be present. Such
individual shall have and may exercise such powers as are, from time to time,
assigned to him by the Board and as may be provided by law.
Chief Executive Officer
Section 8. Such individual shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
Section 9. Such individual shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
The President and Vice-Presidents
Section 10. In the absence of the Chairman and Vice Chairman of the Board
the President shall preside at all meetings of the stockholders and the Board of
Directors; such individual shall have general and active management of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried into effect.
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Section 11. Such individual shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
Section 12. In the absence of the president or in the event of his
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
The Secretary and Assistant Secretary
Section 13. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. Such individual shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or president, under whose supervision such individual shall be. Such individual
shall have custody of the corporate seal of the Corporation and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
Section 14. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of directors may from
time to time prescribe.
The Treasurer and Assistant Treasurers
Section 15. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors.
Section 16. The treasurer shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of
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Directors so requires, an account of all his transactions as treasurer and of
the financial condition of the Corporation.
Section 17. If required by the Board of Directors, such individual shall
give the Corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
Section 18. The assistant treasurer, or if there shall be more than one,
the assistant treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VII
Certificate of Stock
Section 1. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation by, the
chairman or vice-chairman of the Board of Directors, or the president or a vice-
president and the treasurer or an assistant treasurer, or the secretary or an
assistant secretary of the Corporation, certifying the number of shares owned by
him in the Corporation.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions or such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
individual were such office, transfer agent or registrar at the date of issue.
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Lost Certificates
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Transfer of Stock
Section 4. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Fixing Record Date
Section 5. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholder or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Registered Stockholders
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE VIII
General Provisions
Dividends
Section 1. Dividends upon the capital stock of the Corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purposes as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Checks
Section 3. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
Fiscal Year
Section 4. The fiscal year of the Corporation shall end on December 31,
unless otherwise fixed by resolution of the Board of Directors.
Seal
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Indemnification
Section 6. The Corporation shall, to the fullest extent authorized under
the laws of the State of Delaware, as those laws may be amended and supplemented
from time to time, indemnify any director or officer made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director or officer of the
Corporation or a predecessor corporation or, at the Corporation's request, a
director or officer of another corporation, provided, however, that the
Corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the Corporation. The indemnification provided for in this Section 6
shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or
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disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
Corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the Corporation or
any other person.
Expenses incurred by a director or officer of the Corporation in defending
a civil or criminal action, suit or proceeding by reason of the fact that such
individual is or was a director of the Corporation (or was serving at the
Corporation's request as a director or officer of another corporation) shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that such individual is
not entitled to be indemnified by the Corporation as authorized by relevant
sections of the General Corporation Law of Delaware. Notwithstanding the
foregoing, the Corporation shall not be required to advance such expenses to an
agent who is a party to an action, suit or proceeding brought by the Corporation
and approved by a majority of the Board of Directors of the Corporation which
alleges willful misappropriation of corporate assets by such agent, disclosure
of confidential information in violation of such agent's fiduciary or
contractual obligations to the Corporation or any other willful and deliberate
breach in bad faith of such agent's duty to the Corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a contract
between the Corporation and each director who serves in such capacity at any
time while this bylaw is in effect, and any repeal or modification thereof shall
not affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought based in whole or in part upon any such state of facts.
To assure indemnification under this Section 6 of all directors and
officers who are determined by the Corporation or otherwise to be or to have
been "fiduciaries" of any employee benefit plan of the Corporation which may
exist from time to time, Section 145 of the General Corporation Law of Delaware
shall, for the purposes of this Section 6, be interpreted as follows: and "other
enterprise" shall be deemed to include such an employee benefit plan, including
without limitation, any plan of the Corporation which is governed by the Act of
Congress entitled "Employee Retirement Income Security Act of 1974," as amended
from time to time; the Corporation shall be deemed to have requested a person to
serve an employee benefit plan where the performance by such person of his
duties to the Corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a person with respect to an employee benefit plan pursuant to
such Act of Congress shall be deemed "fines."
Transactions with Interested Parties
Section 7. No contract or transaction between the Corporation and one or
more of the directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of the directors or officers
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are directors or officers, or have a financial interest, shall be void or
voidable solely for this reason, or solely because such director or officer is
present at or participates in the meeting of the Board of Directors or a
committee of the Board of Directors which authorizes the contract or transaction
or solely because his, her or their votes are counted for such purpose, if:
(1) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum;
(2) The material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the Corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
ARTICLE IX
Amendments
These By-Laws may be repealed, altered, amended or rescinded by the
stockholders of the Corporation by vote of not less than a majority of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting). In addition, in accordance with the
Corporation's Certificate of Incorporation, the Board of Directors may repeal,
alter, amend or rescind these By-Laws by vote of a majority of the Board of
Directors.
14
<PAGE>
EXHIBIT 10.9
Neither this Warrant nor the shares of Common Stock issuable upon exercise of
this Warrant have been registered under the Securities Act of 1933, and this
Warrant cannot be sold or transferred, and the shares of Common Stock issuable
upon exercise of this Warrant cannot be sold or transferred, unless and until
they are so registered or upon receipt of an opinion of Warrantholder's counsel,
satisfactory to the Corporation, that such registration is not then required
under the circumstances of such sale or transfer.
REAL EDUCATION, INC.
COMMON STOCK PURCHASE WARRANT
EXPIRING JUNE 11, 2000
No. 001
WARRANTHOLDER: ________________________
NAME: __________________________________________________________
ADDRESS: ________________________
No. of Shares of Common Stock to be issued upon exercise in full: _______
Purchase price per share: $7.58
For Value Received, Real Education, Inc., a Colorado corporation (the
"Corporation"), promises to issue to the holder of this Warrant
("Warrantholder"), its nominees, successors or assigns the nonassessable shares
(the "Shares") of the Common Stock, no par value (as more fully defined in
Section 2.8 below), of the Corporation at any time on or prior to June 11, 2000
(the "Expiration Date") upon the payment by the Warrantholder to the Corporation
of the purchase price per share set forth above (the "Purchase Price") and to
deliver to the Warrantholder a certificate or certificates representing the
Shares purchased. The Warrantholder shall have the right to exercise this
Warrant in whole or in part at any time or times on or prior to the Expiration
Date. Subject to the conditions hereinafter set forth, the Warrantholder may
sell, assign and transfer this Warrant, in whole or in part, and, in the event
of any such sale, assignment and transfer, the Corporation agrees to reissue a
Warrant or Warrants of like tenor for the unexercised portion hereof. The number
of Shares purchasable upon exercise of this Warrant and the Purchase Price per
Share shall be subject to adjustment from time to time as set forth herein.
1. Covenants of the Corporation. The Corporation will at all times reserve
----------------------------
and keep available out of its authorized shares of Common Stock or its treasury
shares, solely for the purpose of issue upon the exercise of this Warrant as
herein provided, such number of shares of Common Stock as shall then be issuable
upon the exercise of this Warrant. The Corporation
<PAGE>
covenants that all shares of Common Stock which shall be so issued shall be duly
and validly issued and fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issuance thereof. The Corporation will
take all such action as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable requirements
of any federal or state securities laws or of any national stock exchange upon
which the shares of Common Stock of the Corporation may be listed. The
Corporation will not take any action which results in any adjustment of the
Purchase Price if the total number of shares of Common Stock issuable after such
action upon exercise of this Warrant would exceed the total number of shares of
Common Stock then authorized by the Corporation's Articles of Incorporation.
2. Terms of Warrant.
----------------
2.1. Dividends. No payment or adjustment shall be made upon any exercise of
---------
this Warrant on account of any previous cash dividends.
2.2. Purchase Price. The Purchase Price shall be $7.58 per share or, in
--------------
case an adjustment of such price has taken place pursuant to the provisions of
this Section 2, then the Purchase Price shall be the price as last adjusted and
in effect at the date this Warrant (or any part hereof) is surrendered for
exercise.
2.3. Adjustment of Purchase Price. Upon each adjustment of the Purchase
----------------------------
Price, the Warrantholder shall thereafter be entitled to purchase at the
adjusted Purchase Price, the number of shares of Common Stock obtained by
multiplying the Purchase Price in effect immediately prior to such adjustment by
the number of shares of Common Stock purchasable immediately prior to such
adjustment and dividing the product by the Purchase Price as adjusted. No
adjustment of the Purchase Price shall be made in an amount less than $.01 per
share, but any such lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which together with
any adjustments so carried forward shall amount to $.01 per share or more.
2.4. Subdivision or Combination of Stock.
-----------------------------------
(a) In case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares or declare a dividend or
make any other distribution upon the Common Stock of the Corporation payable in
Common Stock, the Purchase Price in effect immediately prior to such
subdivision, dividend or distribution shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Corporation
shall be combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
(b) Record Date. In case the Corporation shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them to receive a
dividend or other distribution payable in Common Stock, then such record date
shall be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution, as the case may be.
2.5. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
2
<PAGE>
(a) If any capital reorganization or reclassification of the capital stock
of the Corporation, or any consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then the Corporation agrees that, as a condition of
such reorganization, reclassification, consolidation, merger or sale, it shall
require that lawful and adequate provisions be made whereby the holder of this
Warrant shall thereafter have the right to receive upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
of the Corporation immediately theretofore receivable upon the exercise of this
Warrant, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such stock immediately receivable upon
the exercise of this Warrant had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of such holder
to the end that the provisions hereof (including without limitation provisions
for adjustments of the Purchase Price) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
(b) In the event of a merger or consolidation of the Corporation with or
into another corporation as a result of which a greater or lesser number of
shares of common stock of the surviving corporation are issuable to holders of
Common Stock of the Corporation outstanding immediately prior to such merger or
consolidation, then the Purchase Price in effect immediately prior to such
merger or consolidation shall be adjusted in the same manner as though there
were a subdivision or combination of the outstanding shares of Common Stock of
the Corporation. The Corporation will not effect any such consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed or delivered to the registered holder hereof at the last address of
such holder appearing on the books of the Corporation, the obligation to deliver
to such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive.
(c) If a purchase, tender or exchange offer is made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock of the
Corporation, the Corporation shall not effect any consolidation, merger or sale
with the person having made such offer or with any affiliate of such person,
unless prior to the consummation of such consolidation, merger or sale the
holder hereof shall have been given a reasonable opportunity to then elect to
receive, upon exercise of this Warrant, either the stock, securities or assets
then issuable with respect to the Common Stock of the Corporation or the stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer.
2.6. Notice of Adjustment. Upon any adjustment of the Purchase Price, then
--------------------
and in each such case the Corporation shall give written notice thereof, which
notice shall state the Purchase Price resulting from such adjustment, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
3
<PAGE>
2.7. Other Notices. In case at any time:
-----------------------------------
(a) the Corporation shall declare any dividend upon its Common Stock
payable in stock;
(b) the Corporation shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other rights;
(c) there shall be any capital reorganization, or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with, or sale of all or substantially all of its assets to, another corporation;
or
(d) there shall be a voluntary dissolution, liquidation or winding up of
the Corporation; then, in any one or more of said cases, the Corporation shall
give, (i) at least 20 days prior written notice of the date on which the books
of the Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, and (ii) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (i) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (ii)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
2.8. Definition of Common Stock. As used in this Section 2, the term
--------------------------
"Common Stock" shall mean and include all of Corporation's authorized Common
Stock, no par value, of any class as constituted on the effective date hereof,
and shall also include any capital stock of any class of the Corporation
thereafter authorized which shall not be limited to a fixed sum or percentage of
par value in respect of the rights of the holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation.
2.9. Issue Tax. The issuance of certificates for shares of Common Stock
---------
upon exercise of this Warrant shall be made without charge to the holder hereof
for any issuance tax in respect thereof, provided that the Corporation shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the holder of this Warrant.
2.10. Closing of Books. The Corporation will not close its books against
----------------
the transfer of any shares of Common Stock issued or issuable upon the exercise
of this Warrant.
3. Transferability and Registration Under Securities Act.
-----------------------------------------------------
4
<PAGE>
3.1. (1) The Warrants have not been registered under the Securities Act of
1933, as amended (the "Act"), or the securities laws of any state, based upon an
exemption from such registration requirements for non-public offerings pursuant
to Regulation D under the Act; (2) the Warrants are and will be "restricted
securities", as said term is defined in Rule 144 of the Rules and Regulations
promulgated under the Act; (3) the Warrants may not be sold or otherwise
transferred unless they have been first registered under the Act and all
applicable state securities laws, or unless exemptions from such registration
provisions are available with respect to said resale or transfer; (4) the
Corporation is under no obligation to register the Warrants under the Act or any
state securities laws, or to take any action to make any exemption from any such
registration provisions available; and (5) stop transfer instructions will be
placed with the transfer agent for the Warrants;
3.2. The Warrants or any interest therein may not be sold or transferred
unless and until: (1) said Warrants shall have first been registered under the
Act and all applicable state securities laws; or (2) the Warrantholder shall
have first delivered to the Corporation a written opinion of counsel (which
counsel and opinion (in form and substance) shall be reasonably satisfactory to
the Corporation), to the effect that the proposed sale or transfer is exempt
from the registration provisions of the Act and all applicable state securities
laws. The restrictions of this Section 3.2 shall also apply to the
transferability and registration of any shares of Common Stock or other
securities acquired upon exercise hereof.
3.3. The Shares issuable upon exercise of this Warrant are subject to the
provisions of a certain Registration Agreement, dated June 11, 1997 between the
Corporation and certain investors.
4. Notice. Any notice or other document required or permitted to be
------
given or delivered to the Warrantholder(s) and holder(s) of shares issued upon
exercise of this Warrant shall be sent by certified or registered mail, return
receipt requested, to the Warrantholder at the address now shown on this Warrant
or at such other address as the holder(s) shall furnish to the Corporation in
writing. Any notice or other document required or permitted to be given or
delivered to the Corporation at 9000 E. Chenango Avenue, Greenwood Village,
Colorado 80111 or such other address as shall have been furnished to the
Warrantholder(s) and holder(s) of Shares by the Corporation.
5. Manner of Exercise of Warrant. In order to exercise this Warrant, the
-----------------------------
Warrantholder shall deliver to the Corporation (i) a written notice of such
holder's election to exercise this Warrant, specifying the number of shares of
Common Stock to be purchased, and (ii) payment in cash or by a certified or
cashier's check of the required Purchaser Price. The Corporation may require the
Warrantholder to furnish a written statement that the Shares are being purchased
for its own account and not with a view to the distribution thereof. Upon
receipt of written notice, the Corporation shall as promptly as practicable
execute or cause to be executed and delivered to such holder a certificate or
certificates representing the aggregate number of Shares purchased. If this
Warrant shall have been exercised only in part, the Corporation shall also
deliver a new Warrant of like tenor evidencing the rights of such holder to
purchase the remaining Shares called for by this Warrant.
6. Limitation of Liability. No provisions hereof, in the absence of
-----------------------
affirmative action by the Warrantholder to purchase Shares hereunder, and no
mere enumeration herein of the
5
<PAGE>
rights or privileges of the Warrantholder shall give rise to any liability of
such holder for the Purchase Price or as a shareholder of the Corporation
(whether such liability is asserted by the Corporation or creditors of the
Corporation).
7. Mutilated Or Missing Warrant. In case the certificate or certificates
----------------------------
evidencing the Warrant shall be mutilated, lost, stolen or destroyed, the
Corporation shall, at the request of the Warrantholder, issue and deliver in
exchange and substitution for the certificate or certificates lost, stolen or
destroyed a new Warrant certificate or certificates of like tenor and
representing an equivalent right or interest. The Warrantholder shall indemnify
the Corporation for the reasonable cost of issuing and delivering any
certificate under the terms of this Section 7 and for any direct and foreseeable
damages incurred by the Corporation with respect to such lost, stolen or
destroyed certificates that do not arise from the Corporation's gross negligence
or willful misconduct.
8. Miscellaneous.
-------------
8.1. Amendment and Waiver. No modification, amendment or waiver of any
--------------------
provision of this Warrant shall be effective against the Corporation or the
Warrantholder unless such modification, amendment or waiver is approved in
writing by the Corporation and the Warrantholder. The failure of any party to
enforce any of the provisions of this Warrant shall in no way be construed as a
waiver of such provisions and shall not affect the right of such party
thereafter to enforce each and every provision of this Warrant in accordance
with its terms.
8.2. Applicable Law. This Warrant shall be deemed to be a contract made
--------------
under the laws of the State of Colorado and for all purposes shall be construed
in accordance with the laws of said State.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its President or a Vice President, thereunto duly authorized, the execution
hereof to be attested by its Secretary or an Assistant Secretary; and the
affixing of its corporate seal on this ____ day of ____, ____.
ATTEST
Real Education, Inc.
- ------------------------------- -------------------------------
6
<PAGE>
EXHIBIT 10.12
REAL EDUCATION, INC.
1997 STOCK OPTION PLAN
(Adopted March 24, 1997; Amended April 13, 1999)
1. INTRODUCTIONS AND DEFINITIONS
1.1 THE PLAN
This 1997 Stock Option Plan (hereinafter, this "Plan") establishes the
right of and procedures for Real Education, Inc. (the "Company") to grant stock
options to its employees and/or consultants. This Plan provides for the
granting of two types of options, namely (1) Incentive Stock Options, as defined
and governed by Section 422 of the Internal Revenue Code of 1986, as amended,
and (2) Nonqualified Stock Options. This Plan sets forth provisions applicable
to both types of options, to Incentive Stock Options only, to Nonqualified Stock
Options only, and to the procedures allowed for the conversion of Nonqualified
Stock Options into Incentive Stock Options.
1.2 DEFINITIONS
Capitalized terms used in this Plan shall have the following meanings:
"ACT" means the Securities Act of 1933.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL EVENT" means a merger, consolidation, tender offer,
takeover bid, or sale of assets, as the case may be and as described in
Subsections (1) through (3) of Section 3.4(a).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means a committee appointed by the Board, pursuant to Section
2.3 hereof, to administer the provisions of this Plan, and in the absence of any
such committee, references to the Committee shall mean the Board.
"COMPANY" means Real Education, Inc.
"CONSULTANT" means any person engaged by the Company or any current or
future subsidiary of the Company to perform services as a non-employee service
provider, advisor or consultant pursuant to the terms of a written plan or
contract. "Consultants" is the plural of Consultant.
"EMPLOYEE" means, for purposes of this Plan, persons continuously employed
by the Company or by any current or future foreign or domestic subsidiary of the
Company on a
<PAGE>
regular basis, whether full-time or part-time, at any time during the duration
hereof. "Employees" is the plural of Employee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as from time to
time amended, or any replacement act or legislation.
"FAIR MARKET VALUE" of the Company's equity Securities shall be determined
by the Board or, in the event the Company's Securities are listed on any
national exchange, over-the-counter, or other stock trading market, then as of
any time based upon the prevailing bid price of the Company's common stock as of
such time.
"INCENTIVE STOCK OPTION" means an option issued by the Company to purchase
shares of stock of the Company that meets the definition of "incentive stock
option" contained in Section 422 of the Internal Revenue Code of 1986, as
amended, and that is issued by the Company to be an Incentive Stock Option.
"Incentive Stock Options" is the plural of Incentive Stock Option.
"NONQUALIFIED STOCK OPTION" means an option issued by the Company to
purchase shares of stock of the Company that is not an Incentive Stock Option.
"Nonqualified Stock Options" is the plural of Nonqualified Stock Option.
"OPTIONED SHARES" means Shares subject to a Stock Option.
"OPTIONEE" means the recipient of a Stock Option pursuant to a Stock Option
Agreement. "Optionees" is the plural of Optionee.
"PLAN" means this Real Education, Inc. 1997 Stock Option Plan, as amended,
which also may be referred to as the "Real Education Stock Option Plan."
"PLAN GUIDELINES" shall mean the guidelines, rules, policies, regulations,
forms of notice, and forms of agreements and instruments, if any, adopted and
amended by the Board from time to time with respect to this Plan pursuant to
Section 2.3.
"SHARES" shall mean the Shares of the Company reserved for issuance under
this Plan as further defined in Section 2.2.
"STOCK OPTION" means an agreement entered into by the Company granting the
recipient the right to purchase shares of stock of the Company, at certain
times, and under certain conditions, subject to certain obligations and
responsibilities as defined in this Plan and in the written Stock Option
Agreement, whether an Incentive Stock Option or a Nonqualified Stock Option.
"Stock Options" is the plural of Stock Option.
"STOCK OPTION AGREEMENT" means the written contract by which a Stock Option
is granted by the Company to an Optionee. "Stock Option Agreements" is the
plural of Stock Option Agreement.
Page 2 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
2. GENERAL PROVISIONS APPLICABLE TO BOTH NONQUALIFIED STOCK OPTIONS AND
INCENTIVE STOCK OPTIONS GRANTED BY THE COMPANY.
2.1 OBJECTIVES OF THIS PLAN
The purpose of this Plan is to encourage ownership of common stock of the
Company by Employees and to provide a means of granting Stock Options to
Consultants. This Plan is intended to provide an incentive to Employees for
maximum effort in the successful operation of the Company and is expected to
benefit the shareholders by enabling the Company to attract and retain personnel
of the best available talent through the opportunity to share in the increased
value of the Company's shares to which such personnel have contributed. The
benefits of this Plan are not a substitute for compensation otherwise payable to
Employees pursuant to the terms of their employment. This Plan may be referred
to as the Real Education, Inc. Stock Option Plan.
2.2 STOCK RESERVED FOR THIS PLAN
The stock initially reserved by the Board for issue upon the exercise of
Stock Options granted under this Plan shall be four hundred thousand 400,000
shares of the no par value common stock of the Company (the "Shares") which
Shares shall be reserved from the Company's authorized and unissued shares.
Shares subject to any Stock Option under this Plan which are not exercised in
full or Shares as to which the right to purchase is forfeited through default or
otherwise, shall remain available for other Stock Options under this Plan. The
aggregate number of Shares subject to Stock Options under this Plan or reserved
for issuance by the Board shall not exceed the number approved by the
shareholders at the time of adoption hereof unless such increase is approved by
the Company's shareholders. Such approval shall be by the affirmative vote of
shareholders holding a majority of the issued and outstanding shares of common
stock of the Company entitled to vote at a meeting called to approve said
increase.
2.3 ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board, provided that at all times
during which the Company is subject to the periodic reporting requirements of
the Exchange Act each member of the Board who participates in administration
must be a "disinterested person" as that term is defined in Rule 16b(3) of the
Exchange Act. The Board may appoint a Board committee ( the "Committee") to
administer this Plan in the name of the Board. The Board or the Committee so
appointed shall have full power and authority to administer and interpret this
Plan and to adopt, from time to time, such guidelines, rules, policies,
regulations, forms of notice, and forms of agreements and instruments for the
administration of this Plan (collectively, "Plan Guidelines") as the Board or
such Committee, as the case may be, deems necessary or advisable. Such powers
include, but are not limited to (subject to the specific limitations described
herein), authority to determine the Employees and Consultants to be granted
Stock Options under this Plan, to determine the size, type, and applicable terms
and conditions of grants to be made to such Employees and Consultants, to
determine a time when Stock Options will be granted, and to authorize grants to
eligible Employees and Consultants.
Page 3 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
The Board's interpretations of this Plan and all Stock Option Agreements,
including the definitions of terms used herein and in Stock Option Agreements,
and all actions taken and determinations made by the Board concerning any matter
arising under or with respect to this Plan or any Stock Options granted pursuant
to this Plan, shall be final, binding, and conclusive on all interested parties,
including the Company, its shareholders, and all former, present, and future
Employees and Consultants of the Company. So long as the Company is not subject
to the reporting requirements of the Exchange Act, the Board may delegate some
or all of its power and authority hereunder to the duly elected officers of the
Company, such delegation to be subject to such terms and conditions as the Board
in its discretion shall determine. Such delegation of authority may be
contained in the Plan Guidelines. The Board may, as to questions of accounting,
rely conclusively upon any determinations made by independent public accountants
of the Company.
2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING STOCK OPTIONS
The Board shall have the authority to determine the persons eligible to
receive a Stock Option, the time or times at which the Optioned Shares may be
purchased and whether all of the Stock Options may be exercised at one time or
in increments.
2.5 STOCK OPTION AGREEMENTS; TERMS AND EXPIRATION OF STOCK OPTIONS
Each Stock Option granted under this Plan shall be pursuant to a written
Stock Option Agreement, shall be subject to such amendment or modification from
time to time as the Board shall deem necessary or appropriate to comply with or
take advantage of applicable laws or regulations and shall contain provisions as
to the following effect, together with such other provisions as the Board shall
from time to time approve:
(a) that, subject to the provisions of Section 2.5(b) below, the Stock
Option, as to the whole or any part thereof, may be exercised only by the
Optionee or Optionee's personal representative;
(b) that neither the whole nor any part of the Stock Option shall be
transferable by the Optionee or by operation of law other than by will of, or by
the laws of descent and distribution applicable to, a deceased Optionee and that
the Stock Option and any and all rights granted to the Optionee thereunder and
not theretofore effectively and completely exercised shall automatically
terminate and expire upon any sale, transfer, or hypothecation or any attempted
sale, transfer, or hypothecation of such rights or upon the bankruptcy or
insolvency of the Optionee or Optionee's estate;
(c) that subject to the foregoing provisions, a Stock Option may be
exercised at different times for portions of the total number of Shares for
which the right to purchase shall have vested provided that such portions are in
multiples of ten (10) shares if the Optionee holds vested Stock Options for
ninety-nine (99) or fewer shares and otherwise in multiples of one hundred (100)
shares;
(d) that no Optionee shall have the right to receive any dividend on or to
vote or exercise any right in respect to any Shares unless and until the
certificates for such Shares have been issued to such Optionee;
Page 4 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
(e) that, unless otherwise provided in the Stock Option Agreement, the
Stock Option shall expire at the earliest of the following:
(1) The date specified in the Stock Option Agreement;
(2) With respect to Employees, ninety (90) days after voluntary or
involuntary termination of Optionee's employment other than termination as
described in Paragraphs (3) or (4) below;
(3) With respect to Employees, upon the discharge of Optionee for
misconduct, willfully or wantonly harmful to the Company;
(4) With respect to Employees, twelve (12) months after Optionee's
death or disability; or
(5) In the event of a Change of Control Event, or the filing of
Articles of Dissolution, as the case may be and as described in subsections (1)
through (4) of Section 3.4(a), on the date specified in Section 3.4(c).
However, if the Change of Control Event does not occur or if Articles of
Dissolution are not filed, as the case may be and as described in Subsections
(1) through (4) of Section 3.4(a), all Stock Options which are terminated
pursuant to this Subsection (e)(5) shall be reinstated as if no action with
respect to any of said events had been contemplated or taken by any party
thereto and all Optionees shall be returned to their respective positions on the
date of termination;
(f) that, to the extent a Stock Option Agreement provides for the vesting
of the right to purchase in increments, such vesting shall cease as of the date
of the Optionee's death, disability, or voluntary or involuntary termination of
Optionee's employment with the Company;
(g) that the terms of the Stock Option Agreement shall be a contract
between the Company and the Optionee; and the specific terms of any Stock Option
Agreement shall govern over the more general terms hereof; and
(f) With respect to Employees, subject to the Plan Guidelines, the Stock
Option Agreement shall not be affected by any changes of duties or position so
long as the Optionee shall continue to be an Employee, and, subject to the terms
hereof.
2.6 NOTICE OF INTENT TO EXERCISE STOCK OPTION
The Optionee (or other person or persons, if any, entitled hereunder)
desiring to exercise a Stock Option as to all or part of the Shares covered
thereby shall in writing notify the Company at its principal office in the state
of Colorado, specifying the number of Stock Option Shares to be purchased and,
if required by the Company, representing in form satisfactory to the Company
that the Shares are being purchased for investment and not with a view to resale
or distribution. The Company from time to time may issue or specify to
Optionees a written form for use in connection with any such exercise. With
respect to any Shares conditionally purchased pursuant to Section 3.4(a) below
and for which such purchase has not been voluntarily or otherwise rescinded
pursuant to Section 3.4(b), the Optionee shall be deemed to have given to the
Company the notice of exercise required by this Section 2.6 as of ten (10) days
prior to the closing or effective date of the Change of Control Event or the
filing of Articles
Page 5 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
of Dissolution, as the case may be and as described in Subsections (1) through
(4) of Section 2.5(a).
2.7 METHOD OF EXERCISE OF STOCK OPTION
Within ten (10) days after receipt by the Company of the notice provided in
Section 2.6, but not later than the expiration date specified in Section 3.4(e),
the Stock Option shall be exercised as to the number of Shares specified in the
notice by payment by the Optionee to the Company of the amount specified below
in Section 3.2. Payment of such purchase price shall be made in cash, or in
accordance with procedures for a "cashless exercise" as the same reasonably will
be established from time to time by the Company and the brokerage firm, if any,
designated by the Company to facilitate exercises of Stock Options and sales of
shares under this Plan. Payment in shares of the Company's common stock shall
be deemed to be the equivalent of payment in cash at the Fair Market Value of
those shares. For purposes of the preceding sentence, "fair market value" shall
be determined by the Board in the same manner as utilized in determining the
fair market value at the time other Stock Options are granted.
2.8 RECAPITALIZATION
The aggregate number of Shares for which Stock Options may be granted
hereunder, the number of Shares covered by each outstanding Stock Option, and
the price per Share thereof in each such Stock Option Agreement shall be
proportionately adjusted for an increase or decrease in the number of
outstanding shares of common stock of the Company resulting from a stock split
or reverse split of shares or any other capital adjustment or the payment of a
stock dividend or other increase or decrease in such shares effected without
receipt of consideration by the Company excluding any decrease resulting from a
redemption of shares by the Company. If the adjustment would result in a
fractional Share the Optionee shall be entitled to one (1) additional Share,
provided that the total number of Shares to be granted under this Plan shall not
be increased above the equivalent number of Shares initially allocated or later
increased by approved amendment to this Plan.
2.9 SUBSTITUTIONS AND ASSUMPTIONS
The Board shall have the right to substitute, replace, or assume options in
connection with mergers, reorganizations, separations, or other "corporate
transactions" as that term is defined in and said substitutions and assumptions
are permitted by Section 425 of the Code and the regulations promulgated
thereunder. The number of Shares reserved pursuant to Section 2.2 may be
increased by the corresponding number of options assumed and, in the case of a
substitution, by the net increase in the number of Shares subject to options
before and after the substitution.
2.10 TERMINAL DATE OF PLAN
This Plan shall not extend beyond a date ten (10) years from the original
date of adoption by the Board, provided that any Stock Option to purchase shares
duly granted hereunder prior to such date shall be exercisable pursuant to its
terms and the terms hereof until expiration or earlier termination of such Stock
Option.
Page 6 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
2.11 GRANTING OF STOCK OPTIONS
The granting of any Stock Option pursuant to this Plan shall be entirely in
the discretion of the Board and nothing herein contained shall be construed to
give any Employee any right to participate under this Plan or to receive any
Stock Option under it.
The granting of a Stock Option pursuant to this Plan shall not constitute
any agreement or an understanding, express or implied on the part of the Company
or a Subsidiary to employ the Optionee for any specified period.
2.12 WITHDRAWAL
An Optionee may at any time elect in writing to abandon a Stock Option with
respect to the number of Shares as to which the Stock Option shall not have been
exercised.
2.13 GOVERNMENT REGULATIONS
This Plan and the granting and exercise of any Stock Option hereunder and
the obligations of the Company to sell and deliver Shares under any such Stock
Option shall be subject to all applicable laws, rules, and regulations and to
such approvals by any governmental agencies as may be required.
2.14 PROCEEDS FROM SALE OF STOCK
Proceeds of the purchase of Optioned Shares by an Optionee shall be used
for the general business purposes of the Company.
2.15 SHAREHOLDER APPROVAL
This Plan shall be submitted to the shareholders for their approval within
twelve (12) months from the date hereof. The Company may grant Stock Options
prior to such approval which shall be conditioned upon subsequent shareholder
approval.
2.16 COMPLIANCE WITH SECURITIES LAWS
The Board shall have the right to:
(a) require an Optionee to execute, as a condition of exercise of a Stock
Option, a letter evidencing Optionee's intent to acquire the Shares for
investment and not with a view to the resale or distribution thereof;
(b) place appropriate legends upon the certificate or certificates for the
Shares; and
(c) take such other acts as it deems necessary in order to cause the
issuance of Optioned Shares to comply with applicable provisions of state and
federal securities laws.
In furtherance of the foregoing, and not by way of limitation thereof, no
Stock Option shall be exercisable unless such Stock Option and the Shares to be
issued pursuant thereto shall be registered under appropriate federal and state
securities laws, or shall be exempt
Page 7 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
therefrom, in the opinion of the Board upon advice of counsel to the Company.
Each Stock Option Agreement shall contain adequate provisions to assure that
there will be no violation of such laws. This provision shall in no way obligate
the Company to undertake registration of Stock Options or Shares hereunder.
Issue, transfer or delivery of certificates for Shares pursuant to the exercise
of Stock Options may be delayed, at the discretion of the Board until the Board
is satisfied that the applicable requirements of the federal and state
securities laws have been met.
3. PROVISIONS APPLICABLE SOLELY TO NONQUALIFIED STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any Stock Options granted under this Plan which are not Incentive
Stock Options.
3.1 OPTION PRICE
The option, or purchase, price of each Share optioned as a Nonqualified
Stock Option under this Plan shall be determined by the Board and set forth in
the Stock Option Agreement.
3.2 METHOD OF EXERCISE OF STOCK OPTION
The amount to be paid by the Optionee upon exercise of a Nonqualified
Option shall be the exercise price provided for in the Stock Option Agreement,
together with the amount of federal, state, and local income and FICA taxes
required to be withheld by the Company. An Optionee may elect to pay Optionee's
federal, state, or local income and FICA withholding tax by having the Company
withhold shares of Company common stock having a value equal to the amount
required to be withheld. The value of the shares to be withheld is deemed to
equal the fair market value of the shares on the day the option is exercised.
An election by an Optionee to have shares withheld for this purpose will be
subject to the following restrictions:
(a) If an Optionee has received multiple Stock Option grants, a separate
election must be made for each grant;
(b) The election must be made prior to the day the Stock Option is
exercised;
(c) The election will be irrevocable;
(d) The election will be subject to the disapproval of the Board;
(e) If the Optionee is an "officer" of the Company within the meaning of
Section 16 of the Exchange Act ("Section 16") as defined in Rule 16a-1
promulgated by the Securities Exchange Commission, the election may not be made
within six (6) months following the grant of the Stock Option; and
(f) If the Optionee is an "officer" of the Company within the meaning of
Section 16 as so defined, the election must be made either six (6) months prior
to the day the Stock Option is exercised or during the period beginning on the
third business day following the date of release of the Company's quarterly or
annual summary statement of sales and earnings and ending on the twelfth
business day following such date.
Page 8 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
3.3 ASSIGNMENT
The Company may allow limited assignment rights for the gifting by Optionee
of rights hereunder to vested Nonqualified Stock Options, on terms to be
determined by the Board from time to time.
3.4 RIGHTS OF OPTIONEE IN CHANGE OF CONTROL EVENTS--MERGER, CONSOLIDATION,
TENDER OFFER, TAKEOVER BID, SALE OF ASSETS--OR ON DISSOLUTION
(a) As a condition of the grant of any Nonqualified Stock Option, the
Board of Directors may provide, notwithstanding anything in this Plan to the
contrary, the Optionee may purchase the full amount of Optioned Shares for which
Nonqualified Stock Options have been granted to the Optionee and for which the
Nonqualified Stock Options have not been exercised under the following
conditions:
(1) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing twenty-seven (27) days and ending seven (7)
days prior to the scheduled effective date of a merger or consolidation (as such
effective date may be delayed from time to time) wherein the Company's
shareholders prior to the merger will not continue to hold, in exchange for or
as a result of their shares in the Company, a majority of the voting shares of
the surviving corporation;
(2) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing on the initial date of a tender offer or
takeover bid for the Shares (other than a tender offer by the Company) subject
to the Securities Exchange Act of 1934 and the rules promulgated thereunder and
ending on the day preceding the scheduled termination date of acceptance of
tenders of Shares by the offeror under any such tender offer or takeover bid (as
such termination date may be extended by such offeror);
(3) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing the date the shareholders of the Company
approve a sale of substantially all the assets of the Company and ending seven
(7) days prior to the scheduled closing date of such sale (as such closing date
may be delayed from time to time), or when and if the Company or its
shareholders, in a transaction or series of related transactions, transfer
sufficient shares to a third party or third parties acting in concert such that
the third party or third parties acquire a majority of the outstanding voting
shares of the Company and ending seven (7) days prior to the scheduled closing
date of such sale (as such closing date may be delayed from time to time.
(4) The Optionee may conditionally purchase any or all Optioned
Shares during the period commencing the date the shareholders of the Company
approve the dissolution of the Company and ending seven (7) days prior to the
date of filing its Articles of Dissolution.
(b) If the merger, consolidation, tender offer, takeover bid, sale of
assets (collectively, a "Change of Control Event"), or dissolution, as the case
may be and as described in subsections (1) through (4) of Section 3.4(a), once
commenced, is canceled or revoked, the conditional purchase of Shares for which
the option to purchase would not have otherwise been exercisable at the time of
said cancellation or revocation, but for the operation of this Section
Page 9 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
3.4, shall be rescinded. With respect to all other Shares conditionally
purchased, the Optionee may rescind such purchase at Optionee's option.
(c) If the Change of Control Event does occur or Articles of Dissolution
are filed, as the case may be and as described in subsections (1) through (4) of
Section 3.4(a), and the Optionee has not conditionally purchased all Optioned
Shares, all unexercised options shall terminate on the effective, termination,
closing, or filing date, as the case may be.
(d) If the Company shall be the surviving corporation in any merger or is
a party to a merger or consolidation which is between or among the Company and
other corporations related to or affiliated with the Company, any Nonqualified
Stock Option granted hereunder shall pertain and apply to the securities to
which a holder of the number of Shares of common stock subject to the
Nonqualified Stock Option would have been entitled.
(e) Nothing herein shall allow the Optionee to purchase Optioned Shares,
the options for which have expired.
4. PROVISIONS APPLICABLE SOLELY TO INCENTIVE STOCK OPTIONS
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any Stock Options granted under this Plan which are Incentive
Stock Options.
4.1 CONFORMANCE WITH INTERNAL REVENUE CODE
Stock Options granted under this Plan which are "Incentive Stock Options"
shall conform to, be governed by, and be interpreted in accordance with Section
422 of the Code and any regulations promulgated thereunder and amendments to the
Code and Regulations. Only Employees may be granted Incentive Stock Options
hereunder--Consultants may not receive Incentive Stock Options hereunder.
---
4.2 OPTION PRICE
The option, or purchase, price of each Share optioned as an Incentive Stock
Option under this Plan shall be determined by the Board at the time of the
action for the granting of the Stock Option and set forth in the Stock Option
Agreement, but shall not, in any event, be less than the fair market value of
the Company's common stock on the date of grant.
4.3 LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTION
The aggregate fair market value of the Optioned Shares, as determined on
the date of grant, vesting in any one calendar year with respect to which an
Employee has the right to purchase (under this Plan or any other plan of the
Company which authorizes Incentive Stock Options) shall not exceed $100,000; and
to the extent any Stock Option purporting to be an Incentive Stock Option grants
an Employee the right to purchase Optioned Shares with an aggregate fair market
value vesting in any one calendar year in excess of $100,000, as so determined
(under this Plan or any other plan of the Company which authorizes Incentive
Stock Options), shall be deemed a Nonqualified Stock Option for such excess
amount.
Page 10 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
4.4 LIMITATION ON GRANTS TO SUBSTANTIAL SHAREHOLDERS
It is the Company's intent that in the case of any Employee who,
immediately prior to the grant of a Stock Option hereunder, owns stock in the
Company representing more than ten percent (10%) of the voting power of all
classes of stock of the Company, will not be granted Incentive Stock Options
unless the per share option price specified by the Board for the Incentive Stock
Options granted such an Employee is at least one hundred ten percent (110%) of
the fair market value of the Company's stock on the date of grant and such Stock
Option, by its terms, is not exercisable after the expiration of five (5) years
from the date such Stock Option is granted. Any Stock Option that by its terms
purports to be an Incentive Stock Option that is issued to an Employee who owns
stock in the Company representing more than ten percent (10%) of the voting
power of all classes of stock of the Company that does not have an exercise
price of at least one hundred ten percent (110%) of the fair market value of the
Company's stock on the date of grant or that is, by its terms, exercisable after
the expiration of five (5) years from the date such Stock Option is granted,
shall be deemed a Nonqualified Stock Option.
4.5 METHOD OF EXERCISE OF STOCK OPTION
The amount to be paid by the Optionee upon exercise of an Incentive Stock
Option shall be the purchase price per share provided for in the Stock Option
Agreement.
5. EXCHANGE OF NONQUALIFIED STOCK OPTIONS FOR INCENTIVE STOCK
OPTIONS
At the Optionee's election and in accordance with the procedures described
below, an Employee may exchange a Nonqualified Stock Option granted pursuant to
this Plan for an Incentive Stock Option for the identical number of Shares.
5.1 NOTICE OF INTENT TO EXCHANGE
Not less than seven (7) days prior to the desired date of exchange, the
Optionee shall notify the Company in writing specifying the number of Shares
subject to grants as Nonqualified Stock Options under this Plan which are to be
exchanged for Shares subject to grants as Incentive Stock Options under this
Plan and the desired date of exchange.
5.2 LIMITATIONS ON AMOUNT OF STOCK OPTIONS EXCHANGED
Notwithstanding the number of Optioned Shares specified by the Optionee as
desired to be exchanged pursuant to this Section 5, the Company will allow
exchanges for only so many Stock Options as will not violate the aggregate
dollar limitations specified in Section 4.3 above with that limit being based on
a calculation of the fair market value on the date of exchange. If an Optionee
requests to exchange more Optioned Shares than would be allowed by the preceding
sentence, the Company shall deem the request to apply only to the maximum number
of Optioned Shares which would be allowed and shall disregard the request as to
the excess. Exchanges may not occur after the terminal date of this Plan.
Page 11 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
5.3 EFFECT OF EXCHANGE
If an exchange does occur, the Optionee shall surrender the Nonqualified
Stock Option Agreement for cancellation and shall execute a new Incentive Stock
Option Agreement for the number of Optioned Shares exchanged and, if all of the
Nonqualified Stock Options have not been exchanged, shall execute a new
Nonqualified Stock Option (or an amendment to the existing Nonqualified Stock
Option Agreement) to specify the remainder of Shares under the Nonqualified
Stock Option. The new Incentive Stock Option shall be deemed a new option
granted on the new Stock Option Agreement is executed with the exercise price
established as of such date.
6. SHAREHOLDER'S AGREEMENT
Upon any exercise of any Stock Option hereunder, an Optionee shall be bound
to the terms of the Company's ISO Shareholders Agreement dated as of April 13,
1999, and as amended from time to time, by the terms of which, Optionee is
restricted as to resale, is subject to repurchase and certain rights of first
offer and first refusal, and is restricted from selling shares acquired upon
exercise of Stock Options within 180 days following the Company's initial public
offering of Common Stock.
7. AMENDMENT
This Plan, the Plan Guidelines, and all rules and regulations adopted in
respect hereof may be terminated, suspended, or amended at any time by a
majority vote of the Board, provided that no such action shall adversely affect
any material rights of Optionees granted under this Plan prior to such action.
The Board may amend the terms and conditions of outstanding Stock Options,
provided, however, that (i) no such amendment would be adverse to the holders of
such Stock Options, (ii) no such amendment shall extend the period for exercise
of a Stock Option, and (iii) the amended terms of a Stock Option would be
permitted under this Plan.
8. FOREIGN EMPLOYEES
Without amending this Plan, the Board may grant Stock Options to eligible
Employees who are foreign nationals on such terms and conditions different from
those specified in this Plan as may in the judgment of the Board be necessary or
desirable to foster and promote achievement of the purposes of this Plan, and,
in furtherance of such purposes the Board may make such modifications,
amendments, procedures, subplans, and the like as may be necessary or advisable
to comply with the provisions of the laws in other countries in which the
Company operates or has Employees.
9. REGISTRATION, LISTING, AND QUALIFICATION OF SHARES
Each Stock Option shall be subject to the requirement that if at any time
the Board shall determine that the registration, listing, or qualification of
the shares covered thereby upon any securities exchange or under any foreign,
federal, state, or local law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Stock Option or the purchase of shares thereunder, no
Page 12 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
such Stock Option may be exercised unless and until such registration, listing,
qualification, consent, or approval shall have been effected or obtained free of
any condition not acceptable to the Board. Any person exercising a Stock Option
shall make such representations and agreements and furnish such information as
the Board may request to assure compliance with the foregoing or any other
applicable legal requirements.
10. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS; NO DAMAGES
No Employee or other person shall have any claim or right to be granted a
Stock Option under this Plan. Having received a Stock Option under this Plan
shall not give an Employee any right to receive any other grant or Stock Option
under this Plan. Optionee agrees that continuation of the engagement of each
Employee or Consultant of the Company is, in the absence of any written and
signed contract to the contrary, terminable at the will of the Company. An
Optionee shall have no rights to or interest in any Stock Option except as set
forth herein. Neither this Plan nor any action taken hereunder shall be
construed as giving any Employee any right to be retained in the employ of the
Company. Neither this Plan nor any action taken hereunder shall be construed as
giving any Consultant any right to be retained or engaged by the Company.
Nothing in this Plan shall restrict the Company's rights to adopt other option
plans pertaining to any or all of the Employees or Consultants covered under
this Plan or other Employees or Consultants not covered under this Plan. Each
Optionee shall be required to specifically acknowledge and agree that their
engagement by the Company as Employee or Consultant is at will, is not for any
fixed or minimum time period, is subject to the mutual consent of the Company
and the Optionee, and may be terminated at any time, with or without cause or
notice, for any reason or no reason, and without any kind of pre- or post-
termination warning, discipline or procedure.
Each Stock Option granted hereunder may be affected, with regard to both
vesting schedule and termination, by leaves of absence, a reduction in the
number of hours worked, partial disability, and other changes in Optionee's
Employee or Consultant status, as the case may be. The Company's policies in
such matters shall be contained in the Plan Guidelines adopted by the Board.
The Plan Guidelines and the guidelines, rules, policies and regulations
contained therein may be amended at any time and from time to time by the Board
or the Committee, in its sole discretion and with or without notice. Optionee's
rights hereunder or under any Stock Option granted hereunder at any time shall
be governed by the Plan Guidelines in effect at the time of any change in
Optionee's employment status as contemplated above.
Each Optionee must acknowledge and agree that, regardless of whether
Optionee's engagement as an employment or Consultant is terminated with or
without cause or notice, or with or without any kind of pre- or post-termination
warning, discipline or procedure, that Optionee has no right to, will not bring,
and specifically waives any legal claim or action against the Company or any
officer, Employee, or director thereof for any damages or losses arising from
having to exercise any vested portion of any Stock Option during any defined
period after termination or any cancellation of any unvested portion of any
Stock Option, or of any vested by unexercised portion of any Stock Option.
Page 13 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
11. COSTS AND EXPENSES
Except as provided herein with respect to the payment of taxes, all costs
and expenses of administering this Plan shall be borne by the Company and shall
not be charged to any grant or any Employee receiving a grant.
12. PLAN UNFUNDED
This Plan shall be unfunded. Except for the Board's reservation of a
sufficient number of authorized shares to the extent required by law to meet the
requirements of this Plan, the Company shall not be required to establish any
special or separate fund or to make any other segregation of assets to assure
payment of any grant under this Plan.
13. GOVERNING LAW
This Plan shall be governed by and construed in accordance with the laws of
the state of Colorado.
Page 14 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
[Form of]
REAL EDUCATION, INC.
(THE "COMPANY")
STOCK OPTION AGREEMENT FOR PURCHASE OF STOCK
We are pleased to inform you that the Company has granted to you, as the
individual named below (the "Optionee"), this Stock Option. This Stock Option
Agreement is a contract between you and the Company. It grants to you certain
defined rights, at certain times, and under certain conditions, to purchase
shares of the Company's common stock, and in exchange you accept certain
obligations and responsibilities, as described below and in the Company's 1997
STOCK OPTION PLAN (the "Plan") and the attached Terms and Conditions.
FOR VALUABLE CONSIDERATION, the Company does hereby grant to the Optionee,
as of the Date of Option Grant specified below, the right and option to purchase
the Number of Option Shares of common stock of the Company specified below (the
"Option Shares") for the Exercise Price Per Share specified below, and the right
to purchase the Option Shares under this Stock Option Agreement shall accrue and
vest according to the Vesting Schedule specified below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
NAME OF OPTIONEE:
-----------------------------------------------------------------------------------------
<S> <C>
Type of Option: [_] Employee Incentive Stock
Option
[_] Employee Nonqualified Stock
Option
[_] Consultant Nonqualified Stock
Option
-----------------------------------------------------------------------------------------
NUMBER OF OPTION SHARES:
-----------------------------------------------------------------------------------------
Exercise Price Per Share:
-----------------------------------------------------------------------------------------
Date of Option Grant:
-----------------------------------------------------------------------------------------
Expiration of Option
-----------------------------------------------------------------------------------------
Term of Option: __ Years from Date of Option Grant
-----------------------------------------------------------------------------------------
VESTING SCHEDULE: 33% of the Option Shares (rounding up
any fraction of a share up to the next
whole number) on the one year
anniversary of the Date of Option
Grant, then a number of shares equal
to 1/24th of the remaining Option
Shares (rounding up any fraction of a
share to the next whole number) on the
first of each month thereafter
-----------------------------------------------------------------------------------------
</TABLE>
Page 15 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
EXECUTED as of the Date of Option Grant.
REAL EDUCATION, INC.
___________________________________________
Robert N. Helmick, CEO and President
BY SIGNING BELOW AND ENTERING INTO THIS STOCK OPTION AGREEMENT,
OPTIONEE AGREES TO THE TERMS HEREOF, AND ALL OBLIGATIONS AND
RESPONSIBILITIES AS DESCRIBED IN PLAN AND THE ATTACHED TERMS AND
CONDITIONS.
OPTIONEE
By_________________________________________
, as Optionee
Page 16 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
TERMS AND CONDITIONS OF STOCK OPTION AGREEMENT
STOCK OPTIONS ARE SUBJECT TO THE TERMS HEREOF AND OF THE COMPANY'S 1997 STOCK
OPTION PLAN ("PLAN").
CAPITALIZED TERMS USED IN THIS STOCK OPTION AGREEMENT (THIS "AGREEMENT"),
IF NOT OTHERWISE DEFINED, HAVE THE MEANINGS GIVEN THEM IN THE PLAN.
1. a. Any Option Shares which become purchasable ("vest") but are not
purchased on a vesting date or anniversary date, as the case may be, may be
purchased on any subsequent date, provided all options for the purchase of
Option Shares must be exercised within the time periods specified in Section 2
below.
b. Optionees may have conditional purchase rights in the event of
any Change of Control Event as described in the Plan.
2. If Optionee is or becomes an Employee, all UNVESTED options shall
expire upon any termination of Optionee's employment with the Company, whether
voluntary or involuntary, or upon the death or disability of Optionee.
Subject to the terms hereof, all VESTED options (i.e., options for which
the right to purchase has accrued) shall expire at the earliest of the
following:
a. The earlier of the end of the Term of Option specified on the
first page of this Agreement or Ten (10) years from the Date of Option Grant
specified on the first page of this Agreement;
b. If Optionee is or becomes an Employee, ninety (90) days after
voluntary or involuntary termination of Optionee's employment other than
termination as described in Paragraphs (c) or (d) below;
c. If Optionee is or becomes an Employee, upon discharge of Optionee
for misconduct, willfully or wantonly harmful to the Company;
d. If Optionee is or becomes an Employee, Twelve (12) months after
Optionee's death or disability; or
3. This Stock Option may be exercised at different times for portions of
the total number of Option Shares for which the right to purchase shall have
accrued and vested hereunder, provided that such portions are in multiples of
ten (10) shares if the Optionee holds vested portions for ninety-nine (99) or
fewer shares and otherwise in multiples of one hundred (100) shares.
4. This Stock Option shall be adjusted for recapitalizations, stock
splits, stock dividends, and the like as described in the Plan.
5. This is not an employment contract and while the benefits, if any, of
this Stock Option may be an incident of the Optionee's employment with the
Company, the terms and conditions of such employment are otherwise wholly
independent hereof.
6. Neither this Stock Option nor any right under this Agreement is
assignable, and rights under this Agreement may be exercised only by the
Optionee or a person to whom the rights under this Agreement shall pass by will
or the laws of descent and distribution.
7. The Optionee shall indicate Optionee's intention to exercise this
Stock Option with respect to vested Option Shares by notifying the Company in
writing of such intention, indicating the number of Option Shares Optionee
intends to purchase, and, within ten (10) days thereafter, paying to the Company
an amount sufficient to cover the total option price of such Option Shares.
Payment of the Exercise Price Per Share specified on the first page of this
Agreement shall be made in cash or in accordance with such procedures for a
"cashless exercise" as reasonable will be established from time to time by the
Company and the brokerage firm, if any, designated by the Company to facilitate
exercises of Stock Options and sales of Optioned Shares under the Plan.
8. If the Optionee, immediately prior to the grant of an Incentive Stock
Option hereunder, owns stock in the Company representing more than ten percent
(10%) of the voting power of all classes of stock of the Company, the Exercise
Price Per Share specified on the first page of this Agreement for Incentive
Stock Options granted hereunder shall be not less than one hundred ten percent
(110%) of the fair market value of the Company's common stock on the Date of
Option Grant specified on the first page of this Agreement, and such Incentive
Stock Option shall not be exercisable after the expiration of five (5) years
from said Date of Option Grant, and notwithstanding any pricing or vesting terms
hereof which appear at variance with the foregoing, all pricing and vesting
terms hereof shall be deemed hereby to conform with the foregoing limitations.
In lieu of the foregoing, the Optionee may elect to have a Stock Option that
purports to be an Incentive Stock Option treated as a Non-Qualified Stock Option
pursuant to the original terms of this Agreement.
9. Notwithstanding the foregoing, no Stock Option shall be exercisable,
and rights under this Agreement are not enforceable, unless and until all
requirements imposed by or pursuant to Section 2.16 of the Plan are satisfied.
SECTION 2.16 OF PLAN DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO
FEDERAL AND STATE SECURITIES LAWS THAT MUST BE SATISFIED BEFORE THIS OPTION CAN
BE EXERCISED AND BEFORE THE COMPANY CAN ISSUE ANY OPTION SHARES TO THE OPTIONEE.
AT THE PRESENT TIME THE PLAN IS NOT REGISTERED AND, ALTHOUGH SHARES MAY BE
ISSUED UPON EXERCISE, THE SHARES SO ISSUED ARE NOT FREELY TRADABLE.
THERE CAN BE NO ASSURANCE THAT THE EXEMPTION(S) ALLOWING ISSUANCE OF THE
SHARES UPON EXERCISE WILL REMAIN AVAILABLE, NOR IS THERE ASSURANCE THAT ISSUED
SHARES WILL BE REGISTERED OR THAT ONCE REGISTERED THE REGISTRATION WILL BE
MAINTAINED. IF THE SHARES ARE NOT REGISTERED OR IF THE REGISTRATION IS NOT
MAINTAINED, THE OPTIONEE WILL NOT BE ABLE TO TRADE SHARES OBTAINED UPON EXERCISE
OF THIS STOCK OPTION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE
PRESENT TIME,
Page 17 of 18 - 1997 Stock Option Plan, as amended April 13, 1999
<PAGE>
EXEMPTIONS FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES LAWS ARE VERY
LIMITED AND MIGHT BE UNAVAILABLE TO THE OPTIONEE PRIOR TO THE EXPIRATION OF THIS
OPTION. AS A CONSEQUENCE OF THE FOREGOING, THE OPTIONEE MIGHT NOT HAVE AN
OPPORTUNITY TO EXERCISE THIS OPTION AND TO RECEIVE OPTION SHARES UPON SUCH
EXERCISE, AND, IF THE OPTIONEE IS ABLE TO EXERCISE THIS OPTION AND TO RECEIVE
OPTION SHARES UPON SUCH EXERCISE, THE OPTIONEE MIGHT NOT HAVE THE OPPORTUNITY TO
TRADE SUCH OPTION SHARES.
10. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS; NO DAMAGES
Neither Optionee nor any other person shall have any claim or right to be
granted a Stock Option under the Plan. Having received a Stock Option under the
Plan shall not give Optionee any right to receive any other grant or option
under the Plan. Optionee agrees that continuation of the engagement of Optionee
as an Employee or Consultant of the Company, as the case may be, is, in the
absence of any written and signed contract to the contrary, terminable at the
will of the Company. Optionee shall have no rights to or interest in any Option
except as set forth herein, in the Plan, or in another Option specifically
granted by the Company to Optionee. Neither this Option, the Plan, nor any
action taken hereunder or under the Plan shall be construed as giving any
Employee or Consultant any right to be retained in the employ of, or be engaged
as a Consultant to, the Company, as the case may be. Nothing in the Plan
restricts the Company's rights to adopt other option plans pertaining to any or
all of the Employees or Consultants covered under the Plan or other Employees or
Consultants not covered under the Plan.
OPTIONEE SPECIFICALLY ACKNOWLEDGES AND AGREES THAT OPTIONEE'S ENGAGEMENT BY
THE COMPANY AS AN EMPLOYEE OR CONSULTANT IS "AT WILL", IS NOT FOR ANY FIXED OR
MINIMUM TIME PERIOD, IS SUBJECT TO THE MUTUAL CONSENT OF THE COMPANY AND THE
OPTIONEE, AND MAY BE TERMINATED BY THE COMPANY AT ANY TIME, WITH OR WITHOUT
CAUSE OR NOTICE, FOR ANY REASON OR NO REASON, AND WITHOUT ANY KIND OF PRE- OR
POST-TERMINATION WARNING, DISCIPLINE OR PROCEDURE.
THIS AGREEMENT AND THE STOCK OPTION REPRESENTED HEREBY MAY BE AFFECTED,
WITH REGARD TO BOTH VESTING SCHEDULE AND TERMINATION, BY LEAVES OF ABSENCE, A
REDUCTION IN THE NUMBER OF HOURS WORKED, PARTIAL DISABILITY, AND OTHER CHANGES
IN OPTIONEE'S EMPLOYEE OR CONSULTANT STATUS, AS THE CASE MAY BE. THE COMPANY'S
POLICIES IN SUCH MATTERS, IF ANY, SHALL BE CONTAINED IN THE PLAN GUIDELINES
ADOPTED BY THE BOARD. THE PLAN GUIDELINES AND THE GUIDELINES, RULES, POLICIES
AND REGULATIONS CONTAINED THEREIN MAY BE AMENDED AT ANY TIME AND FROM TIME TO
TIME BY THE BOARD OF DIRECTORS OF THE COMPANY, OR THE COMMITTEE APPOINTED BY
SUCH BOARD, IN ITS SOLE DISCRETION AND WITH OR WITHOUT NOTICE. OPTIONEE'S
RIGHTS HEREUNDER OR UNDER THE PLAN AT ANY TIME SHALL BE GOVERNED BY THE PLAN
GUIDELINES IN EFFECT AT THE TIME OF ANY CHANGE IN OPTIONEE'S EMPLOYMENT STATUS
AS CONTEMPLATED ABOVE.
11. This Agreement and the Stock Option represented hereby is granted
pursuant to and is controlled by the Plan and by the Plan Guidelines, if any, as
adopted by the Board and amended from time to time. Optionee, by execution
hereof, acknowledges receipt of the Plan and the Plan Guidelines as they
currently exist and acceptance of the terms and conditions of the Plan, the Plan
Guidelines and of this Agreement.
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eCollege.com
(THE "COMPANY")
STOCK OPTION AGREEMENT FOR PURCHASE OF STOCK
We are pleased to inform you that the Company has granted to you, as the
individual named below (the "Optionee"), this Stock Option. This Stock Option
Agreement is a contract between you and the Company. It grants to you certain
defined rights, at certain times, and under certain conditions, to purchase
shares of the Company's common stock, and in exchange you accept certain
obligations and responsibilities, as described below and in the Company's 1997
Stock Option Plan (the "Plan") and the attached Terms and Conditions.
FOR VALUABLE CONSIDERATION, the Company does hereby grant to the Optionee,
as of the Date of Option Grant specified below, the right and option to purchase
the Number of Option Shares of common stock of the Company specified below (the
"Option Shares") for the Exercise Price Per Share specified below, and the right
to purchase the Option Shares under this Stock Option Agreement shall accrue and
vest according to the Vesting Schedule specified below:
- --------------------------------------------------------------------------------
Name of Optionee:
- --------------------------------------------------------------------------------
Type of Option: [_] Employee Incentive Stock Option
[_] Employee Nonqualified Stock Option
[_] Consultant Nonqualified Stock Option
- --------------------------------------------------------------------------------
Number of Option Shares:
- --------------------------------------------------------------------------------
Exercise Price Per Share: $
- --------------------------------------------------------------------------------
Date of Option Grant:
- --------------------------------------------------------------------------------
Expiration of Option
- --------------------------------------------------------------------------------
Term of Option: ___ Years from Date of Option Grant
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Vesting Schedule: 33% of the Option Shares (rounding up any
fraction of a share up to the next whole
number) on the one year anniversary of the Date
of Option Grant, then a number of shares equal
to 1/24th of the remaining Option Shares
(rounding up any fraction of a share to the
next whole number) on the first of each month
thereafter, until all shares are vested.
- --------------------------------------------------------------------------------
EXECUTED as of _______________, and shall amend and replace that certain
Option Agreement, dated _________ by and among Optionee and Company.
eCollege.com
_______________________________________
Robert N. Helmick, CEO and President
By signing below and entering into this Stock Option Agreement, Optionee
agrees to the terms hereof, and all obligations and responsibilities as
described in Plan and the attached Terms and Conditions.
OPTIONEE
By_____________________________________
______________, as Optionee
<PAGE>
TERMS AND CONDITIONS OF STOCK OPTION AGREEMENT
Stock Options are subject to the terms hereof and of the Company's 1997 Stock
Option Plan ("Plan"). Capitalized Terms used in this Stock Option
Agreement (this "Agreement"), if not otherwise defined,
have the meanings given them in the Plan.
1. a. Any Option Shares which become purchasable ("vest") but are not
purchased on a vesting date or anniversary date, as the case may be, may be
purchased on any subsequent date, provided all options for the purchase of
Option Shares must be exercised within the time periods specified in Section 2
below.
b. Optionees may have conditional purchase rights in the event of
any Change of Control Event as described in the Plan.
2. If Optionee is or becomes an Employee, all unvested options shall
expire upon any termination of Optionee's employment with the Company, whether
voluntary or involuntary, or upon the death or disability of Optionee.
Subject to the terms hereof, all vested options (i.e., options for which
the right to purchase has accrued) shall expire at the earliest of the
following:
a. The earlier of the end of the Term of Option specified on the
first page of this Agreement or Ten (10) years from the Date of Option Grant
specified on the first page of this Agreement;
b. If Optionee is or becomes an Employee, ninety (90) days after
voluntary or involuntary termination of Optionee's employment other than
termination as described in Paragraphs (c) or (d) below;
c. If Optionee is or becomes an Employee, upon discharge of Optionee
for misconduct, willfully or wantonly harmful to the Company;
d. If Optionee is or becomes an Employee, Twelve (12) months after
Optionee's death or disability; or
3. This Stock Option may be exercised at different times for portions of
the total number of Option Shares for which the right to purchase shall have
accrued and vested hereunder, provided that such portions are in multiples of
ten (10) shares if the Optionee holds vested portions for ninety-nine (99) or
fewer shares and otherwise in multiples of one hundred (100) shares.
4. This Stock Option shall be adjusted for recapitalizations, stock
splits, stock dividends, and the like as described in the Plan.
5. This is not an employment contract and while the benefits, if any, of
this Stock Option may be an incident of the Optionee's employment with the
Company, the terms and conditions of such employment are otherwise wholly
independent hereof.
6. Neither this Stock Option nor any right under this Agreement is
assignable, and rights under this Agreement may be exercised only by the
Optionee or a person to whom the rights under this Agreement shall pass by will
or the laws of descent and distribution.
7. The Optionee shall indicate Optionee's intention to exercise this
Stock Option with respect to vested Option Shares by notifying the Company in
writing of such intention, indicating the number of Option Shares Optionee
intends to purchase, and, within ten (10) days thereafter, paying to the Company
an amount sufficient to cover the total option price of such Option Shares.
Payment of the Exercise Price Per Share specified on the first page of this
Agreement shall be made in cash or in accordance with such procedures for a
"cashless exercise" as reasonable will be established from time to time by the
Company and the brokerage firm, if any, designated by the Company to facilitate
exercises of Stock Options and sales of Optioned Shares under the Plan.
8. If the Optionee, immediately prior to the grant of an Incentive Stock
Option hereunder, owns stock in the Company representing more than ten percent
(10%) of the voting power of all classes of stock of the Company, the Exercise
Price Per Share specified on the first page of this Agreement for Incentive
Stock Options granted hereunder shall be not less than one hundred ten percent
(110%) of the fair market value of the Company's common stock on the Date of
Option Grant specified on the first page of this Agreement, and such Incentive
Stock Option shall not be exercisable after the expiration of five (5) years
from said Date of Option Grant, and notwithstanding any pricing or vesting terms
hereof which appear at variance with the foregoing, all pricing and vesting
terms hereof shall be deemed hereby to conform with the foregoing limitations.
In lieu of the foregoing, the Optionee may elect to have a Stock Option that
purports to be an Incentive Stock Option treated as a Non-Qualified Stock Option
pursuant to the original terms of this Agreement.
9. Notwithstanding the foregoing, no Stock Option shall be exercisable,
and rights under this Agreement are not enforceable, unless and until all
requirements imposed by or pursuant to Section 2.16 of the Plan are satisfied.
SECTION 2.16 OF PLAN DESCRIBES CERTAIN IMPORTANT CONDITIONS RELATING TO
FEDERAL AND STATE SECURITIES LAWS THAT MUST BE SATISFIED BEFORE THIS OPTION CAN
BE EXERCISED AND BEFORE THE COMPANY CAN ISSUE ANY OPTION SHARES TO THE OPTIONEE.
AT THE PRESENT TIME THE PLAN IS NOT REGISTERED AND, ALTHOUGH SHARES MAY BE
ISSUED UPON EXERCISE, THE SHARES SO ISSUED ARE NOT FREELY TRADABLE.
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THERE CAN BE NO ASSURANCE THAT THE EXEMPTION(S) ALLOWING ISSUANCE OF THE
SHARES UPON EXERCISE WILL REMAIN AVAILABLE, NOR IS THERE ASSURANCE THAT ISSUED
SHARES WILL BE REGISTERED OR THAT ONCE REGISTERED THE REGISTRATION WILL BE
MAINTAINED. IF THE SHARES ARE NOT REGISTERED OR IF THE REGISTRATION IS NOT
MAINTAINED, THE OPTIONEE WILL NOT BE ABLE TO TRADE SHARES OBTAINED UPON EXERCISE
OF THIS STOCK OPTION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. AT THE
PRESENT TIME, EXEMPTIONS FROM REGISTRATION UNDER FEDERAL AND STATE SECURITIES
LAWS ARE VERY LIMITED AND MIGHT BE UNAVAILABLE TO THE OPTIONEE PRIOR TO THE
EXPIRATION OF THIS OPTION. AS A CONSEQUENCE OF THE FOREGOING, THE OPTIONEE MIGHT
NOT HAVE AN OPPORTUNITY TO EXERCISE THIS OPTION AND TO RECEIVE OPTION SHARES
UPON SUCH EXERCISE, AND, IF THE OPTIONEE IS ABLE TO EXERCISE THIS OPTION AND TO
RECEIVE OPTION SHARES UPON SUCH EXERCISE, THE OPTIONEE MIGHT NOT HAVE THE
OPPORTUNITY TO TRADE SUCH OPTION SHARES .
10. NO RIGHTS TO STOCK OPTIONS OR EMPLOYMENT; NO RESTRICTIONS; NO DAMAGES
Neither Optionee nor any other person shall have any claim or right to be
granted a Stock Option under the Plan. Having received a Stock Option under the
Plan shall not give Optionee any right to receive any other grant or option
under the Plan. Optionee agrees that continuation of the engagement of Optionee
as an Employee or Consultant of the Company, as the case may be, is, in the
absence of any written and signed contract to the contrary, terminable at the
will of the Company. Optionee shall have no rights to or interest in any Option
except as set forth herein, in the Plan, or in another Option specifically
granted by the Company to Optionee. Neither this Option, the Plan, nor any
action taken hereunder or under the Plan shall be construed as giving any
Employee or Consultant any right to be retained in the employ of, or be engaged
as a Consultant to, the Company, as the case may be. Nothing in the Plan
restricts the Company's rights to adopt other option plans pertaining to any or
all of the Employees or Consultants covered under the Plan or other Employees or
Consultants not covered under the Plan.
Optionee specifically acknowledges and agrees that Optionee's engagement by
the Company as an Employee or Consultant is "at will", is not for any fixed or
minimum time period, is subject to the mutual consent of the Company and the
Optionee, and may be terminated by the Company at any time, with or without
cause or notice, for any reason or no reason, and without any kind of pre- or
post-termination warning, discipline or procedure.
This Agreement and the Stock Option represented hereby may be affected,
with regard to both vesting schedule and termination, by leaves of absence, a
reduction in the number of hours worked, partial disability, and other changes
in Optionee's Employee or Consultant status, as the case may be. The Company's
policies in such matters, if any, shall be contained in the Plan Guidelines
adopted by the Board. The Plan Guidelines and the guidelines, rules, policies
and regulations contained therein may be amended at any time and from time to
time by the Board of Directors of the Company, or the Committee appointed by
such Board, in its sole discretion and with or without notice. Optionee's
rights hereunder or under the Plan at any time shall be governed by the Plan
Guidelines in effect at the time of any change in Optionee's employment status
as contemplated above.
11. This Agreement and the Stock Option represented hereby is granted
pursuant to and is controlled by the Plan and by the Plan Guidelines, if any, as
adopted by the Board and amended from time to time. Optionee, by execution
hereof, acknowledges receipt of the Plan and the Plan Guidelines as they
currently exist and acceptance of the terms and conditions of the Plan, the Plan
Guidelines and of this Agreement.
<PAGE>
EXHIBIT 10.13
KENNEDY THE
CENTER PARTNERSHIP DEVELOPMENT GROUP
Leasing Office
10200 East Girard Avenue
Denver, Colorado 80231
LEASE AGREEMENT
THIS LEASE made and entered into this 10th day of May , 1999, by and between
KENNEDY CENTER PARTNERSHIP, hereinafter referred to as "Landlord," and
Real Education, Inc. dba eCollege.com
hereinafter referred to as "Tenant,"
WITNESSETH:
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DESCRIPTION OF WHEREAS, Tenant is desirous of leasing and hiring from Landlord certain premises in that
PROPERTY certain building located in Kennedy Center, 10200 East Girard Avenue, Denver, Colorado
AND TERM 80231, hereinafter referred to as the "building."
NOW THEREFORE, it is mutually agreed by and between the parties as follows:
1: (a) For and in consideration of the agreement of Tenant to pay the rental and other sums herein provided
for and to perform the terms, covenants and conditions on its part herein contained, the full performance and
observance of which and all thereof being hereby agreed by Tenant to be conditions precedent and subsequent
to the covenants on the part of Landlord, and, at the option of Landlord, to the continuance of this lease,
Landlord hereby leases to Tenant, and Tenant hereby hires and takes from Landlord approximately 33,387 square
feet on Floor No. 1 (One), 2 (Two), 3 (Three), and 4 (Four), Building A at Kennedy Center, 10200 East Girard
Avenue, Denver, Colorado, 80231 known as Suites A-100, A-200, A-300 and A-400 as more particularly designated
on the floor plan attached hereto as Exhibit "A" and made a part of this lease, and hereinafter referred to
as the "premises." The net rentable area will be computed by measuring to the outside finish of permanent
outer building walls, the corridor side of partitions of public corridors, and the center of common
partitions which separate adjoining rentable areas, without a deduction for columns or other projections
necessary to the structure of the building. There shall be no allocation to Tenant for space for restrooms,
janitorial closets, electrical or telephone closets, and elevator shafts. Public corridors and public
conference room shall be allocated pro rata to Tenants.
(b) The term of this lease shall be for a period of 37 months, commencing on the day that possession is
tendered to Tenant, which Landlord estimates will be June 1, 1999. Upon such tender, Tenant agrees to take
possession of the premises. In the event that the premises are not ready for occupancy on or before June 1,
1999 , for any reason, Landlord shall not be liable therefore, but, at the option of either party upon
written notice to the other, this lease may be cancelled and declared on no further force and effect. Any
security deposit made by Tenant shall be returned to Tenant by Landlord forthwith and each of the parties
shall thereupon be released from all liability hereunder.
RENTAL 2.(a) Tenant agrees to pay, as rental at Landlord's offices, 10200 East Girard Avenue, Denver, Colorado
80231, the sum of (see paragraph 29) per month, in advance on the first day of each calendar month during the
lease term, without any deduction or offset whatsoever. If the lease term commences on any day other than the
first day of the calendar month, a pro rata fraction of a full month's rental shall be paid on the first day
of said lease term and a corresponding pro rata fraction shall be paid for the partial month at the end of
said lease term. Tenant further agrees to pay Landlord any excise, sales or privilege tax imposed or levied
by any government or governmental agency upon Landlord on account of this lease or the rental paid hereunder.
A late charge equal to 5% of the rental payment due hereunder shall be paid by Tenant for each rental payment
more than 10 days in arrears, for each month said payment is in arrears.
(b) Contemporaneously with the execution of this lease, Tenant has deposited with Landlord the sum of $
22,412 receipt of which is hereby acknowledged by Landlord, as security (but not as a trust fund) for the
performance by Tenant of all the terms, covenants and conditions of this lease to be kept and performed by
Tenant. Such security deposit shall be returned to Tenant, without interest, upon the termination of this
lease, provided Tenant has complied with all of the terms, covenants and conditions hereof.
USE OF PREMISES 3. (a) Tenant shall use the premises for OUT-SOURCED EDUCATION TECHNOLOGY COMPANY
and for no other purpose.
(b) Tenant shall not commit, or suffer to be committed, any nuisance or other act or thing against public
policy, or which may disturb the quiet enjoyment of any other tenant of the building. Tenant agrees not to
deface or damage the building in any manner or overload the floors of the premises.
(c)Tenant agrees not to use or permit the use of the premises or any part thereof for any purpose prohibited
by law, and Tenant agrees, at its sole expense, to comply with and conform to all the requirements of all
governmental authorities having jurisdiction thereof, present or future, relating in any way to the
condition, use and occupancy of the premises throughout the entire term of this lease.
(d) No goods, merchandise or materials shall be kept, stored or sold by Tenant on or about the premises which
are in any way hazardous, and Tenant shall not suffer or permit any acts of omission or commission to be done
on or about the premises which will increase the existing rate of fire insurance. If the said insurance rate
is increased by such an act, then the increased cost of such insurance on the building shall be paid by
Tenant to Landlord with the next succeeding installment of rental. Tenant, at its sole expense, shall comply
with any and all requirements of any insurance organization or company necessary for the maintenance of
reasonable fire and public liability insurance covering the premises and the building.
SERVICES AND 4. Landlord agrees to provide 110-120 volt wiring and electricity for lighting and light office machines,
UTILITIES water, heat, refrigerated air- conditioning, window cleaning, janitor service, building maintenance service
and elevator service. Landlord shall not be liable for the stoppage or interruption of any of said services
or utilities caused by riots, strikes, labor disputes, accidents, necessary repairs or conditions beyond
Landlord's control. Landlord shall be the sole judge as to the amount and kind of services and utilities to
be provided under the provisions hereof, and any additional services or utilities required by Tenant shall be
at its sole expense. Tenant agrees not to connect to or alter any utilities or equipment provided by Landlord
without the consent of Landlord.
NO REPRESENTATIONS 5. It is mutually agreed that no representations, warranties, covenants or agreements, express or implied,
have been made, other than as expressly set forth herein.
ACCEPTANCE OF 6. No representations, except such as are contained herein, have been made to Tenant respecting the
PREMISES condition of the premises. By entry hereunder, Tenant accepts the premises as being free from defects and in
good, clean and sanitary order, condition and repair, and agrees to keep the premises in such condition.
Tenant further agrees on the last day of the term hereby created, or sooner termination of this lease, to
surrender unto Landlord the premises in the same condition as when received, ordinary wear and tear excepted.
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DESTRUCTION OF 7. In the event of a partial or total destruction of the premises during the lease term from any cause
PREMISES other than by failure or neglect on the part of the Tenant to perform or observe any term, covenant or
condition hereof Landlord shall forthwith repair the same, unless Landlord shall elect to terminate this
lease as hereinafter set forth. Such destruction shall in nowise annul or void this lease, except that Tenant
shall be entitled to a proportionate reduction of the rental while such repairs are being made, such
proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with
business carried on by Tenant on or about said premises. In respect to any damage or destruction which
Landlord is obligated to repair or may elect to repair under the terms of the paragraph, Tenant hereby waives
all rights under any law in existence during the term of this lease authorizing the termination of a lease
upon the complete or partial destruction of the leased premises. In the event that the premises are partially
or totally destroyed by a cause or casualty other than those covered by fire and extended coverage insurance,
or in the event that the building is destroyed by any cause or casualty to the extent of not less than
thirty-three and one-third (33 1/3%) percent of the replacement cost thereof, whether the premises be
damaged or not, Landlord may elect to terminate this lease by giving notice to Tenant within ninety (90) days
after the occurrence of such destruction.
EMINENT DOMAIN 8. If any part of the premises shall be taken for public or quasi-public use by right of eminent domain, or
transferred by agreement in connection with such public or quasi-public use, with or without any condemnation
action or proceeding being instituted, this lease shall terminate as of the date title shall vest in the
condemnor. All compensation or damages awarded upon such taking or transfer shall go to Landlord and Tenant
shall have no claim thereto.
ALTERATIONS AND 9.(a) Tenant shall construct and install at its sole expense any and all leasehold improvements and fixtures,
IMPROVEMENTS subject to the terms and conditions herein contained, it being expressly understood that Landlord' sole
construction obligation is to construct and install, in accordance with the general standards of the
building, the walls, doors, ceiling, central toilet facilities, and such finished partitioning, electrical
outlets and electrical fixtures as may be shown on Exhibit "A" attached hereto. Tenant agrees not to make any
alterations of or additions to the premises without the prior written consent of Landlord. All alterations of
or additions to the premises except movable trade fixtures and equipment shall take place under the
supervision of Landlord and shall become a part of the realty. Tenant shall keep the premises and the
improvements thereon free and clear of all liens arising out of or claimed by reason of any work performed,
material furnished or obligations incurred by or at the instance of Tenant, and indemnify and save Landlord
and the premises and the building harmless of all such liens or claims of lien and all attorney's fees and
other costs and expenses incurred by reason thereof. Color and material of drapes installed by Tenant shall
be subject to approval of Landlord.
(b) Anything in this lease to the contrary notwithstanding, Landlord and Tenant agree that the ownership,
right to possession and control of all carpet installed in the premises, shall vest in Landlord. Tenant
hereby agrees to use pads to protect the carpet under each chair and further agrees to repair, replace and
maintain (except for janitorial service) the carpet in the premises.
(c) Landlord shall have the right at any time to alter, repair or improve the premises and the building, and
Landlord and its representatives for that purpose may enter on and about the premises and the building with
such material as Landlord may deem necessary, and may erect scaffolding and all other necessary structures on
or about the premises and the building. Tenant waives any claim for damages including loss of business
resulting therefrom. In the exercise of its rights under this sub-paragraph, Landlord shall not unreasonably
interfere with the conduct of Tenant's business.
LIABILITY 10. Tenant agrees that Landlord shall not at any time or to any extent whatsoever be liable, responsible or
in anywise accountable for any loss, injury, death or damage to persons or property, from any cause or causes
whatsoever, except that caused by the negligence of Landlord, its agents or employees, which at any time may
be suffered or sustained by Tenant, or by any person whosoever arising out of any such loss, injury, death or
damage, except that caused by the negligence of Landlord, its agents or employees, however occurring. Tenant
agrees to pay for all damages done to the premises or the building by Tenant or any person or persons
permitted on the premises by Tenant.
ENTRY BY LANDLORD 11. Landlord and its representatives shall have the right to enter the premises at all reasonable times to
inspect the same, to make repairs and to maintain the building, to post such reasonable notices as Landlord
may desire to protect its rights, or during the sixty (60) days prior to the expiration of this lease, to
exhibit the premises to prospective tenants and to place upon the doors or in the windows of the premises any
usual or ordinary "to let" or "to lease" signs."
TENANT'S FIXTURES 12. Tenant, at any time Tenant is not in default hereunder, may remove its movable trade fixtures and
equipment, and upon expiration or termination of this lease, if so requested by Landlord, shall remove all
fixtures and equipment installed on the premises by Tenant, whether or not such fixtures and equipment are
fastened to the building and regardless of the manner in which they are so fastened; provided, however, that
Tenant shall fully repair damage of any kind or character occasioned by the removal of any such fixtures or
equipment and shall leave the premises and building in a good, clean and sanitary condition.
ABANDONMENT 13. Tenant shall not vacate or abandon the premises at any time during the term of this lease; and, if Tenant
shall vacate, abandon or surrender the premises or be dispossessed by process of law or otherwise, any
personal property left on the premises shall be deemed to be abandoned at the option of Landlord.
TRANSFER OF 14. Landlord hereby reserves the right to sell, assign or transfer this lease upon the condition that
LANDLORD'S INTEREST in such event this lease shall remain in full force and effect, subject to the performance by Tenant of all
the terms, covenants and conditions on its part to be performed. Upon any such sale, assignment or transfer,
other than merely as security, Tenant agrees to look solely to the responsibility of assignee or transferee
with respect to all matters in connection with this lease and Landlord shall be released from any further
obligations hereunder. If any security deposit has been made by Tenant under paragraph 2(b) hereof, Landlord
may transfer such security deposit to such assignee or transferee and thereupon Landlord shall be discharged
from any further liability in reference thereto.
ASSIGNMENT AND 15. (a) Tenant shall not assign this lease, nor sublet all or any portion of the premises, nor permit the
SUBLETTING use of all or any part of the premises by persons other than Tenant, its servants and agents, without the
prior written consent of Landlord, and any such assignment, sublease or permission without such consent shall
be void and, at the option of Landlord, shall terminate this lease.
(b) Tenant agrees that in the event any proceedings under the Bankruptcy Act or any amendment thereto be
commenced by or against Tenant, and, if against Tenant, said proceedings shall not be dismissed before either
an adjudication in bankruptcy or the confirmation of a composition, arrangement or plan or reorganization, or
in the event Tenant be adjudged insolvent or make an assignment for the benefit of its creditors, or if a
writ of attachment or execution be levied on the leasehold estate hereby created and be not released or
satisfied within (15) days thereafter, or if a receiver be appointed in any proceeding or action to which
Tenant is party with authority to take possession or control of the premises or the business conducted
thereon by Tenant and such receiver be not discharged within a period of fifteen (15) days after his
appointment, any such event shall constitute a breach of this lease by Tenant and, at the option of Landlord
and without notice or entry or other action Landlord shall terminate this lease and also all rights of Tenant
under this lease and any and all persons claiming under Tenant, in and to the premises.
RULES AND REGULATIONS 16. The Landlord shall have the right from time to time to prescribe rules and regulations, which, in its
judgement, may be desirable, for the use, entry, operation and management of the premises and the building,
each of which rules and regulations shall become a part of this lease. Tenant agrees to comply with such
rules and regulations.
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DEFAULT 17. (a) If Tenant shall fail to pay any part of the rent herein provided or any other sum requested by this
lease to be paid to Landlord at the times or in the manner provided, or if default shall be made in any of
the other covenants or conditions on its part agreed to be performed, besides other rights or remedies it may
have, under this lease or otherwise, if such failure to pay rent or such other sum or such default shall
continue for ten (10) days after written notice thereof from Landlord to Tenant, then Landlord, may either
(i) terminate this lease, or (ii) re-enter the premises by summary proceedings or otherwise, remove all
persons and property from the premises without liability to any person for damages sustained by reason of
such removal, and re-let the premises at such rental and upon such other terms and conditions as Landlord in
its sole discretion may deem advisable. In such event, Tenant shall remain liable for the monthly rent
reserved in this lease, plus the reasonable cost of obtaining possession of and re-letting the premises and
of any repairs and alterations necessary to prepare them for re-letting, less the rents received from such
re-letting, if any. Any and all monthly deficiencies so payable by Tenant shall be paid monthly on the date
herein provided for the payment of rent. No such re-entry or taking possession of the premises by Landlord
shall be construed as an election on its part to terminate this lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such re-letting without termination, Landlord may at anytime thereafter
elect to terminate this lease for such previous breach. Should Landlord at any time terminate this lease for
any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may
incur by reason of such breach, including the cost of recovering the premises, and including the worth at the
time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved
in this lease for the remainder of the stated term over the then reasonable rental value of the premises for
the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to
Landlord.
(b) All remedies herein conferred upon Landlord shall be cumulative and no one exclusive of any other remedy
conferred herein or by law. If Tenant is in default, Landlord may prevent removal of property from the
premises by any lawful means it deems necessary to protect its interests.
ATTORNEY FEES 18. (a) If any person not a party to this lease shall institute an action against Tenant in which Landlord,
involuntarily and without cause, shall be made a party defendant, Tenant shall indemnify and save Landlord
harmless from all liabilities by reason thereof, including reasonable attorney fees and all costs incurred by
Landlord in such action.
(b) If an action shall be brought to recover any rental under this lease, or for or on account of any breach
of or to enforce or interpret any of the terms, covenants or conditions of this lease, or for the recovery of
possession of the premises, the prevailing party shall be entitled to recover from the other party, as part
of prevailing party's costs, a reasonable attorney's fee, the amount of which shall be fixed by the court and
shall be made a part of any judgment rendered.
(c) In the event of any dispute (other than payment of rental) parties agree they shall initiate arbitration
in lieu of instituting civil action.
HOLDING OVER 19. Should Tenant hold possession hereunder after the expiration of the lease term hereby created with the
consent of Landlord, Tenant shall become a tenant on a month-to-month tenancy upon all the terms, covenants
and conditions herein specified.
SUBORDINATION 20. Landlord expressly reserves the right at any time to place liens and encumbrances on and against the
premises and the building, superior in lien and effect to this lease and the estate created hereby. This
lease, at the option of Landlord, is and shall be subject, subordinate and inferior to the lien and estate of
any liens and encumbrances, renewals, extensions or replacements thereof now or hereafter imposed by Landlord
upon the premises or the building. Tenant agrees to execute and deliver upon demand such further instrument
or instruments subordinating this lease to any such liens or encumbrances as shall be desired by Landlord,
and hereby irrevocably appoints Landlord its attorney in fact to execute and deliver any such instrument or
instruments for or in the name of Tenant.
NOTICES 21. All notices, demands or other writing in this lease provided to be given, made or sent by either party
hereto to the other shall be deemed to have been fully given, made or sent when made in writing and deposited
in the United States mail certified or registered and postage prepaid and addressed as follows:
TO LANDLORD: KENNEDY CENTER PARTNERSHIP TO TENANT: On the leased premises
10200 E. Girard Avenue
Denver, Colorado 80231
The address to which any notice demand or other writing may be given, made or sent to either party may be
changed by written notice given by such party as above provided.
WAIVER 22. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be
deemed to be a waiver of such term, covenant or condition herein contained. The subsequent acceptance of
rental hereunder by Landlord shall not be deemed a waiver of any preceding breach by Tenant of any term,
covenant or condition of this lease, other than the failure of Tenant to pay the particular rental so
accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such
rental. None of the terms, covenants or conditions of this lease can be waived by either Landlord or Tenant
except by appropriate written agreement duly executed by both of the parties hereto.
CONSTRUCTION OF LEASE 23. The language in all parts of this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for nor against either Landlord or Tenant. Paragraph headings in this lease are for
convenience only and are not to be construed as a part of this lease or in any way defining, limiting or
amplifying the provisions hereof. Time is of the essence of this lease and of every term, covenant and
condition hereof. The words "Landlord" and "Tenant," as herein used, shall include the plural as well as the
singular. The neuter gender includes the masculine and feminine. In the event there is more than one Tenant,
the obligations to be performed shall be joint and several. Landlord and Tenant agree that in the event any
term, covenant or condition herein contained is held to be invalid or void by any court of competent
jurisdiction, the invalidity of any such term, covenant or condition shall in no way affect any other term,
covenant or condition herein contained.
SUCCESSORS AND 24. Subject to the provisions of Paragraph 15 hereof, all the terms, covenants and conditions of this
ASSIGNS lease shall be binding upon and inure to the benefit of and shall apply to the respective heirs, executors,
administrators, successors, assigns and legal representatives of Landlord and Tenant.
REASONABLE CONSENT 25. Landlord agrees not to unreasonably withhold its approval of or consent to any act of Tenant, where such
approval or consent is required by the terms of this lease.
RENT ADJUSTMENT 26. The rental set forth in this lease was predicated upon "actual operating expenses" for the building in
any calendar year amounting to $6.00 per square foot of leaseable area within the building adjusted to
reflect a full calendar year of operation. At the end of the first calendar year during the term of this
lease, Tenant shall pay unto Landlord in a lump sum its share of any excess in "actual operating expenses"
over and above the sum of $6.00 per square foot as reflected in a statement of "actual operating expenses"
for the building for such calendar year submitted by Landlord to Tenant. The Tenant's share of said excess in
"actual operation expenses" shall be computed as follows:
The total amount of "actual operating expenses" as adjusted shall be divided by 40,033 sq ft. times
(3) buildings representing 95% of the leasable area within the buildings to derive the amount per
square foot paid during said calendar year for "actual operating expenses." The amount so derived in
excess of $6.00 per square foot times the number of square feet within the Demised Premises shall
constitute Tenant's share of the excess "actual operating costs." In no event shall the amount of
rental paid by Tenant be reduced regardless of the amount of "actual operating expenses."
The Tenant's share of said excess as above determined for the first calendar year shall be considered the
Tenant's share of the excess in "actual operating expenses" for the next succeeding year and Tenant shall pay
1/12th of the amount of such excess each month of the next succeeding calendar year concurrently with the
payment of rental. Any sums due for any months of the current year that may have transpired prior to
presentment of the statement of "actual operating expenses" for the preceding calendar year shall be paid
upon the presentment of such statement and thereafter in installments as above provided. The amount of
installments payable by Tenant in the manner above provided shall be adjusted at the end of each calendar
year during the term of this lease based on the amount of "actual operating expenses" for the immediately
preceding calendar year.
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For the purpose of determining the rent adjustment under this lease, the term "actual operating expenses"
shall include the operating expenses of the "building", and are herein defined to comprise the following:
1. The wages and salaries of all employees engaged in the operation and maintenance of the building,
including employer's Social Security taxes and any other taxes which may be levied on such wages and
salaries.
2. All janitor and office supplies and materials used in the operation and maintenance of the building.
3. The cost of water and power, heating, lighting, ventilating, electricity, and air conditioning the
building.
4. The cost of all maintenance and service agreements on equipment, including window cleaning and elevator
maintenance.
5. Insurance premiums.
6. The cost of repairs and general maintenance, exclusive of expenses as alteration of premises for the
accommodations of a specific tenant or tenants, and exclusive also of expenditures made for capital
investment or improvements.
7. All taxes and assessments, and governmental charges whether federal, state, county or municipal, which
are levied on or charges against real estate, street lights, personal property, or rents, or on the right
or privilege of leasing real estate or collecting rents thereon, and any other taxes and assessments
attributable to the "building" or its operation, excluding, however, Federal and State income taxes.
SECURITY INTEREST 27. In consideration of mutual benefits arising by virtue of this lease, Tenant does hereby grant a security
interest unto Landlord of all property of Tenant now or hereafter placed in or upon the premises and such
property is hereby subjected to a lien in favor of Landlord and shall be and remain subject to such lien of
Landlord for payment of all rents and other sums agreed to be paid by Tenant herein. Said lien shall be in
addition to and cumulative of other remedies provided by law. Tenant will at Landlord's request execute and
deliver to Landlord a financing statement appropriate for filing under the Colorado Uniform Commercial Code.
28. Landlord acknowledges that Tenant operates a relatively new business operation and that Tenant is
concerned that the business will grow to such an extent that the Leased Premises herein demised will not be
sufficient to accommodate Tenant's needs for the entire term of this lease. In the event such a situation
shall arise prior to the end of the Lease Term and Tenant so advises Landlord at any date after September 1,
1999, then the following shall occur.
A) Landlord shall use its good faith efforts to locate additional space within the Kennedy Center for
usage by Tenant and lease said space to Tenant upon terms and conditions mutually satisfactory to both
parties.
B) If additional space within the Kennedy Center is not available or is not satisfactory to Tenant, the
Tenant may present to Landlord a proposal containing the following:
(a) the acquisition of land,
(b) the construction of an office building thereon,
(c) the method of financing of the building improvements,
(d) the allocation of ownership interests between Landlord and Tenant and their respective
financial obligations.
(e) the space to be leased within such new office building by Tenant and the terms of such lease,
including, but not limited to, term of lease and rental to be paid, and
(f) such other information as may be relevant.
Landlord shall in good faith review the Tenant's proposal and shall endeavor to reach agreement with
Tenant to provide such new office building and thereupon to proceed with all due diligence to provide
such office space to Tenant at the earliest possible date. If this plan is proven feasible and becomes a
reality, this lease shall terminate upon the date Tenant is obligated to pay rental for space in the new
office building.
Except as provided in Paragraphs 7 and 8 of the Amended Lease for the termination of this Amended Lease prior
to its stated expiration date no other right of early termination shall exist except as herein above
expressly provided.
29. Tenant shall remit monthly rent to Landlord per the following schedule:
June 1, 1999 through January 31, 2000 = $38,951
February 1, 2000 through June 30, 2002 = $42,686
30. Landlord allowed Tenant $200,000 in tenant finish to finish all of the 22,412 sq. ft. on the 3rd and 4th
floors of Building A, and has provided $16,292.50 to finish the 6,517 sq. ft. on the 1st floor of Building.
A, and $11,145 to finish the 2nd floor of 4,458 sq. ft. of Building A.
31. Landlord will extend to Tenant the right of first refusal to any space that becomes available in Bldg. A.
To exercise this option, Tenant must however answer, in writing, within three (3) days of Landlord's written
offer for said space.
32. Signatures by Tenant and Landlord to this amended Lease Agreement makes null and void that Lease
Agreement between the same two parties dated July 30, 1998.
ADDITIONAL PROVISIONS IN WITNESS WHEREOF, the parties hereto have executed this instrument by proper persons hereunto duly
authorized so to do the day and year first hereinafter written.
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KENNEDY CENTER PARTNERSHIP
BY /s/ JACK G. SHAFFER
____________________________________________
JACK G. SHAFFER
Real Education, Inc. d/b/a
eCollege.com
BY /s/ ROBERT N. HELMICK
____________________________________________
ROBERT N. HELMICK, PRESIDENT/CEO
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EXHIBIT 10.14
KENNEDY THE
CENTER PARTNERSHIP DEVELOPMENT GROUP
Leasing Office
10200 East Girard Avenue
Denver, Colorado 80231
LEASE AGREEMENT
THIS LEASE made and entered into this 10th day of May, 1999, by and between
KENNEDY CENTER PARTNERSHIP, hereinafter referred to as "Landlord," and
Real Education, Inc. dba eCollege.com
hereinafter referred to as "Tenant,"
WITNESSETH:
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DESCRIPTION OF WHEREAS, Tenant is desirous of leasing and hiring from Landlord certain premises in that certain building
PROPERTY located in Kennedy Center, 10200 East Girard Avenue, Denver, Colorado 80231, hereinafter referred to as the
AND TERM "building."
NOW THEREFORE, it is mutually agreed by and between the parties as follows:
1. (a) For and in consideration of the agreement of Tenant to pay the rental and other sums herein provided
for and to perform the terms, covenants and conditions on its part herein contained, the full performance and
observance of which and all thereof being hereby agreed by Tenant to be conditions precedent and subsequent
to the covenants on the part of Landlord, and, at the option of Landlord, to the continuance of this lease,
Landlord hereby leases to Tenant, and Tenant hereby hires and takes from Landlord approximately 11,206 square
feet on Floor No. Four (4), Building B, at Kennedy Center, 10200 East Girard Avenue, Denver, Colorado, 80231
known as Suite B-430 as more particularly designated on the floor plan attached hereto as Exhibit "A" and
made a part of this lease, and hereinafter referred to as the "premises." The net rentable area will be
computed by measuring to the outside finish of permanent outer building walls, the corridor side of
partitions of public corridors, and the center of common partitions which separate adjoining rentable areas,
without a deduction for columns or other projections necessary to the structure of the building. There shall
be no allocation to Tenant for space for restrooms, janitorial closets, electrical or telephone closets, and
elevator shafts. Public corridors and public conference room shall be allocated pro rata to Tenants.
(b) The term of this lease shall be for a period of 37 months, commencing on the day that possession is
tendered to Tenant, which Landlord estimates will be June 1, 1999. Upon such tender Tenant agrees to take
possession of the premises. In the event that the premises are not ready for occupancy on or before June 1,
1999, for any reason, Landlord shall not be liable therefore, but, at the option of either party upon written
notice to the other, this lease may be cancelled and declared on no further force and effect. Any security
deposit made by Tenant shall be returned to Tenant by Landlord forthwith and each of the parties shall
thereupon be released from all liability hereunder.
RENTAL 2.(a) Tenant agrees to pay, as rental at Landlord's offices, 10200 East Girard Avenue, Denver, Colorado
80231, the sum of $13,250, for the month of June, 1999 and $15,375, for the remaining 36 months of this
Lease Agreement, in advance on the first day of each calendar month during the lease term, without any
deduction or offset whatsoever. If the lease term commences on any day other than the first day of the
calendar month, a pro rata fraction of a full month's rental shall be paid on the first day of said lease
term and a corresponding pro rata fraction shall be paid for the partial month at the end of said lease term.
Tenant further agrees to pay Landlord any excise, sales or privilege tax imposed or levied by any government
or governmental agency upon Landlord on account of this lease or the rental paid hereunder. A late charge
equal to 5% of the rental payment due hereunder shall be paid by Tenant for each rental payment more than 10
days in arrears, for each month said payment is in arrears.
(b) Contemporaneously with the execution of this lease, Tenant has deposited with Landlord the sum of $6,500
receipt of which is hereby acknowledged by Landlord, as security (but not as a trust fund) for the
performance by Tenant of all the terms, covenants and conditions of this lease to be kept and performed by
Tenant. Such security deposit shall be returned to Tenant, without interest, upon the termination of this
lease, provided Tenant has complied with all of the terms, covenants and conditions hereof.
USE OF PREMISES 3. (a) Tenant shall use the premises for OUT-SOURCED EDUCATION TECHNOLOGY COMPANY
and for no other purpose.
(b) Tenant shall not commit, or suffer to be committed, any nuisance or other act or thing against public
policy, or which may disturb the quiet enjoyment of any other tenant of the building. Tenant agrees not to
deface or damage the building in any manner or overload the floors of the premises.
(c)Tenant agrees not to use or permit the use of the premises or any part thereof for any purpose prohibited
by law, and Tenant agrees, at its sole expense, to comply with and conform to all the requirements of all
governmental authorities having jurisdiction thereof, present or future, relating in any way to the
condition, use and occupancy of the premises throughout the entire term of this lease.
(d) No goods, merchandise or materials shall be kept, stored or sold by Tenant on or about the premises which
are in any way hazardous, and Tenant shall not suffer or permit any acts of omission or commission to be done
on or about the premises which will increase the existing rate of fire insurance. If the said insurance rate
is increased by such an act, then the increased cost of such insurance on the building shall be paid by
Tenant to Landlord with the next succeeding installment of rental. Tenant, at its sole expense, shall comply
with any and all requirements of any insurance organization or company necessary for the maintenance of
reasonable fire and public liability insurance covering the premises and the building.
SERVICES AND 4. Landlord agrees to provide 110-120 volt wiring and electricity for lighting and light office machines,
UTILITIES water, heat, refrigerated air- conditioning, window cleaning, janitor service, building maintenance service
and elevator service. Landlord shall not be liable for the stoppage or interruption of any of said services
or utilities caused by riots, strikes, labor disputes, accidents, necessary repairs or conditions beyond
Landlord's control. Landlord shall be the sole judge as to the amount and kind of services and utilities to
be provided under the provisions hereof, and any additional services or utilities required by Tenant shall be
at its sole expense. Tenant agrees not to connect to or alter any utilities or equipment provided by Landlord
without the consent of Landlord.
NO REPRESENTATIONS 5. It is mutually agreed that no representations, warranties, covenants or agreements, express or implied,
have been made, other than as expressly set forth herein.
ACCEPTANCE OF 6. No representations, except such as are contained herein, have been made to Tenant respecting the condition
PREMISES of the premises. By entry hereunder, Tenant accepts the premises as being free from defects and in good,
clean and sanitary order, condition and repair, and agrees to keep the premises in such condition. Tenant
further agrees on the last day of the term hereby created, or sooner termination of this lease, to surrender
unto Landlord the premises in the same condition as when received, ordinary wear and tear excepted.
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DESTRUCTION OF 7. In the event of a partial or total destruction of the premises during the lease term from any cause other
PREMISES than by failure or neglect on the part of the Tenant to perform or observe any term, covenant or condition
hereof, Landlord shall forthwith repair the same, unless Landlord shall elect to terminate this lease as
hereinafter set forth. Such destruction shall in nowise annul or void this lease, except that Tenant shall be
entitled to a proportionate reduction of the rental while such repairs are being made, such proportionate
reduction to be based upon the extent to which the making of such repairs shall interfere with business
carried on by Tenant on or about said premises. In respect to any damage or destruction which Landlord is
obligated to repair or may elect to repair under the terms of the paragraph, Tenant hereby waives all rights
under any law in existence during the term of this lease authorizing the termination of a lease upon the
complete or partial destruction of the leased premises. In the event that the premises are partially or
totally destroyed by a cause or casualty other than those covered by fire and extended coverage insurance, or
in the event that the building is destroyed by any cause or casualty to the extent of not less than thirty-
three and one-third (33 1/3%) percent of the replacement cost thereof, whether the premises be damaged or
not, Landlord may elect to terminate this lease by giving notice to Tenant within ninety (90) days after the
occurrence of such destruction.
EMINENT DOMAIN 8. If any part of the premises shall be taken for public or quasi-public use by right of eminent domain, or
transferred by agreement in connection with such public or quasi-public use, with or without any condemnation
action or proceeding being instituted, this lease shall terminate as of the date title shall vest in the
condemner. All compensation or damages awarded upon such taking or transfer shall go to Landlord and Tenant
shall have no claim thereto.
ALTERATIONS AND 9.(a) Tenant shall construct and install at its sole expense any and all leasehold improvements and fixtures,
IMPROVEMENTS subject to the terms and conditions herein contained, it being expressly understood that Landlord' sole
construction obligation is to construct and install, in accordance with the general standards of the
building, the walls, doors, ceiling, central toilet facilities, and such finished partitioning, electrical
outlets and electrical fixtures as may be shown on Exhibit "A" attached hereto. Tenant agrees not to make any
alterations of or additions to the premises without the prior written consent of Landlord. All alterations of
or additions to the premises except movable trade fixtures and equipment shall take place under the
supervision of Landlord and shall become a part of the realty. Tenant shall keep the premises and the
improvements thereon free and clear of all liens arising out of or claimed by reason of any work performed,
material furnished or obligations incurred by or at the instance of Tenant, and indemnify and save Landlord
and the premises and the building harmless of all such liens or claims of lien and all attorney's fees and
other costs and expenses incurred by reason thereof. Color and material of drapes installed by Tenant shall
be subject to approval of Landlord..
(b) Anything in this lease to the contrary notwithstanding, Landlord and Tenant agree that the ownership,
right to possession and control of all carpet installed in the premises, shall vest in Landlord. Tenant
hereby agrees to use pads to protect the carpet under each chair and further agrees to repair, replace and
maintain (except for janitorial service) the carpet in the premises.
(c)Landlord shall have the right at any time to alter, repair or improve the premises and the building, and
Landlord and its representatives for that purpose may enter on and about the premises and the building with
such material as Landlord may deem necessary, and may erect scaffolding and all other necessary structures on
or about the premises and the building. Tenant waives any claim for damages including loss of business
resulting therefrom. In the exercise of its rights under this sub-paragraph, Landlord shall not unreasonably
interfere with the conduct of Tenant's business.
LIABILITY 10. Tenant agrees that Landlord shall not at any time or to any extent whatsoever be liable, responsible or
in anywise accountable for any loss, injury, death or damage to persons or property, from any cause or causes
whatsoever, except that caused by the negligence of Landlord, its agents or employees, which at any time may
be suffered or sustained by Tenant, or by any person whosoever arising out of any such loss, injury, death or
damage, except that caused by the negligence of Landlord, its agents or employees, however occurring. Tenant
agrees to pay for all damages done to the premises or the building by Tenant or any person or persons
permitted on the premises by Tenant.
ENTRY BY LANDLORD 11. Landlord and its representatives shall have the right to enter the premises at all reasonable times to
inspect the same, to make repairs and to maintain the building, to post such reasonable notices as Landlord
may desire to protect its rights, or during the sixty (60) days prior to the expiration of this lease, to
exhibit the premises to prospective tenants and to place upon the doors or in the windows of the premises any
usual or ordinary "to let" or "to lease" signs."
TENANT'S FIXTURES 12. Tenant, at any time Tenant is not in default hereunder, may remove its movable trade fixtures and
equipment, and upon expiration or termination of this lease, if so requested by Landlord, shall remove all
fixtures and equipment installed on the premises by Tenant, whether or not such fixtures and equipment are
fastened to the building and regardless of the manner in which they are so fastened; provided, however, that
Tenant shall fully repair damage of any kind or character occasioned by the removal of any such fixtures or
equipment and shall leave the premises and building in a good, clean and sanitary condition.
ABANDONMENT 13. Tenant shall not vacate or abandon the premises at any time during the term of this lease; and, if Tenant
shall vacate, abandon or surrender the premises or be dispossessed by process of law or otherwise, any
personal property left on the premises shall be deemed to be abandoned at the option of Landlord.
TRANSFER OF 14. Landlord hereby reserves the right to sell, assign or transfer this lease upon the condition that in such
LANDLORD'S INTEREST event this lease shall remain in full force and effect, subject to the performance by Tenant of all the
terms, covenants and conditions on its part to be performed. Upon any such sale, assignment or transfer,
other than merely as security, Tenant agrees to look solely to the responsibility of assignee or transferee
with respect to all matters in connection with this lease and Landlord shall be released from any further
obligations hereunder. If any security deposit has been made by Tenant under paragraph 2(b) hereof, Landlord
may transfer such security deposit to such assignee or transferee and thereupon Landlord shall be discharged
from any further liability in reference thereto.
ASSIGNMENT AND 15. (a) Tenant shall not assign this lease, nor sublet all or any portion of the premises, nor permit the use
SUBLETTING of all or any part of the premises by persons other than Tenant, its servants and agents, without the prior
written consent of Landlord, and any such assignment, sublease or permission without such consent shall be
void and, at the option of Landlord, shall terminate this lease.
(b) Tenant agrees that in the event any proceedings under the Bankruptcy Act or any amendment thereto be
commenced by or against Tenant, and, if against Tenant, said proceedings shall not be dismissed before either
an adjudication in bankruptcy or the confirmation of a composition, arrangement or plan or reorganization, or
in the event Tenant be adjudged insolvent or make an assignment for the benefit of its creditors, or if a
writ of attachment or execution be levied on the leasehold estate hereby created and be not released or
satisfied within (15) days thereafter, or if a receiver be appointed in any proceeding or action to which
Tenant is party with authority to take possession or control of the premises or the business conducted
thereon by Tenant and such receiver be not discharged within a period of fifteen (15) days after his
appointment, any such event shall constitute a breach of this lease by Tenant and, at the option of Landlord
and without notice or entry or other action Landlord shall terminate this lease and also all rights of Tenant
under this lease and any and all persons claiming under Tenant, in and to the premises.
RULES AND REGULATIONS 16. The Landlord shall have the right from time to time to prescribe rules and regulations, which, in its
judgement, may be desirable, for the use, entry, operation and management of the premises and the building,
each of which rules and regulations shall become a part of this lease. Tenant agrees to comply with such
rules and regulations.
SIGNS 17. Tenant shall not place or permit to be placed any sign, advertisement, notice or other display on any
part of the inside or outside of the premises, except of such color, size and style and in such locations as
shall be designated by Landlord. Tenant, upon request of Landlord, shall immediately remove any sign,
advertisement, notice or other display which Tenant has placed or permitted to be placed on any part of the
inside or outside of the premises, which in the opinion of Landlord, is objectionable, offensive or not in
good taste, and if Tenant shall fail to do so, Landlord may enter the premises and remove the same at the
expense of Tenant.
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DEFAULT 18. (a) If Tenant shall fail to pay any part of the rent herein provided or any other sum requested by this
lease to be paid to Landlord at the times or in the manner provided, or if default shall be made in any of
the other covenants or conditions on its part agreed to be performed, besides other rights or remedies it may
have, under this lease or otherwise, if such failure to pay rent or such other sum or such default shall
continue for ten (10) days after written notice thereof from Landlord to Tenant, then Landlord, may either
(I) terminate this lease, or (ii) re-enter the premises by summary proceedings or otherwise, remove all
persons and property from the premises without liability to any person for damages sustained by reason of
such removal, and re-let the premises at such rental and upon such other terms and conditions as Landlord in
its sole discretion may deem advisable. In such event, Tenant shall remain liable for the monthly rent
reserved in this lease, plus the reasonable cost of obtaining possession of and re-letting the premises and
of any repairs and alterations necessary to prepare them for re-letting, less the rents received from such
re-letting, if any. Any and all monthly deficiencies so payable by Tenant shall be paid monthly on the date
herein provided for the payment of rent. No such re-entry or taking possession of the premises by Landlord
shall be construed as an election on its part to terminate this lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be decreed by a court of competent
jurisdiction. Notwithstanding any such re-letting without termination, Landlord may at anytime thereafter
elect to terminate this lease for such previous breach. Should Landlord at any time terminate this lease for
any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may
incur by reason of such breach, including the cost of recovering the premises, and including the worth at the
time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved
in this lease for the remainder of the stated term over the then reasonable rental value of the premises for
the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to
Landlord.
(b) All remedies herein conferred upon Landlord shall be cumulative and no one exclusive of any other remedy
conferred herein or by law. If Tenant is in default, Landlord may prevent removal of property from the
premises by any lawful means it deems necessary to protect its interests.
ATTORNEY FEES 19. (a) If any person not a party to this lease shall institute an action against Tenant in which Landlord,
involuntarily and without cause, shall be made a party defendant, Tenant shall indemnify and save Landlord
harmless from all liabilities by reason thereof, including reasonable attorney fees and all costs incurred by
Landlord in such action.
(b) If an action shall be brought to recover any rental under this lease, or for or on account of any breach
of or to enforce or interpret any of the terms, covenants or conditions of this lease, or for the recovery of
possession of the premises, the prevailing party shall be entitled to recover from the other party, as part
of prevailing party's costs, a reasonable attorney's fee, the amount of which shall be fixed by the court and
shall be made a part of any judgment rendered.
HOLDING OVER 20. Should Tenant hold possession hereunder after the expiration of the lease term hereby created with the
consent of Landlord, Tenant shall become a tenant on a month-to-month tenancy upon all the terms, covenants
and conditions herein specified.
SUBORDINATION 21. Landlord expressly reserves the right at any time to place liens and encumbrances on and against the
premises and the building, superior in lien and effect to this lease and the estate created hereby. This
lease, at the option of Landlord, is and shall be subject, subordinate and inferior to the lien and estate of
any liens and encumbrances, renewals, extensions or replacements thereof now or hereafter imposed by Landlord
upon the premises or the building. Tenant agrees to execute and deliver upon demand such further instrument
or instruments subordinating this lease to any such liens or encumbrances as shall be desired by Landlord,
and hereby irrevocably appoints Landlord its attorney in fact to execute and deliver any such instrument or
instruments for or in the name of Tenant.
NOTICES 22. All notices, demands or other writing in this lease provided to be given, made or sent by either party
hereto to the other shall be deemed to have been fully given, made or sent when made in writing and deposited
in the United States mail certified or registered and postage prepaid and addressed as follows:
TO LANDLORD: KENNEDY CENTER PARTNERSHIP TO TENANT: On the leased premises
10200 E. Girard Avenue
Denver, Colorado 80231
The address to which any notice demand or other writing may be given, made or sent to either party may be
changed by written notice given by such party as above provided.
WAIVER 23. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be
deemed to be a waiver of such term, covenant or condition herein contained. The subsequent acceptance of
rental hereunder by Landlord shall not be deemed a waiver of any preceding breach by Tenant of any term,
covenant or condition of this lease, other than the failure of Tenant to pay the particular rental so
accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such
rental. None of the terms, covenants or conditions of this lease can be waived by either Landlord or Tenant
except by appropriate written agreement duly executed by both of the parties hereto.
CONSTRUCTION OF LEASE 24. The language in all parts of this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for nor against either Landlord or Tenant. Paragraph headings in this lease are for
convenience only and are not to be construed as a part of this lease or in any way defining, limiting or
amplifying the provisions hereof. Time is of the essence of this lease and of every term, covenant and
condition hereof. The words "Landlord" and "Tenant," as herein used, shall include the plural as well as the
singular. The neuter gender includes the masculine and feminine. In the event there is more than one Tenant,
the obligations to be performed shall be joint and several. Landlord and Tenant agree that in the event any
term, covenant or condition herein contained is held to be invalid or void by any court of competent
jurisdiction, the invalidity of any such term, covenant or condition shall in no way affect any other term,
covenant or condition herein contained.
SUCCESSORS AND 25. Subject to the provisions of Paragraph 15 hereof, all the terms, covenants and conditions of this lease
ASSIGNS shall be binding upon and inure to the benefit of and shall apply to the respective heirs, executors,
administrators, successors, assigns and legal representatives of Landlord and Tenant.
REASONABLE CONSENT 26. Landlord agrees not to unreasonably withhold its approval of or consent to any act of Tenant, where such
approval or consent is required by the terms of this lease.
RENT ADJUSTMENT 27. The rental set forth in this lease was predicated upon "actual operating expenses" for the building in
any calendar year amounting to $6.OO per square foot of leaseable area within the building adjusted to
reflect a full calendar year of operation. At the end of the first calendar year during the term of this
lease, Tenant shall pay unto Landlord in a lump sum its share of any excess in "actual operating expenses"
over and above the sum of $6.00 per square foot as reflected in a statement of "actual operating expenses"
for the building for such calendar year submitted by Landlord to Tenant. The Tenant's share of said excess in
"actual operation expenses" shall be computed as follows:
The total amount of "actual operating expenses" as adjusted shall be divided by 40,033 sq ft. times (3)
buildings representing 95% of the leasable area within the buildings to derive the amount per square
foot paid during said calendar year for "actual operating expenses." The amount so derived in excess of
$6.00 per square foot times the number of square feet within the Demised Premises shall constitute
Tenant's share of the excess "actual operating costs." In no event shall the amount of rental paid by
Tenant be reduced regardless of the amount of "actual operating expenses."
The Tenant's share of said excess as above determined for the first calendar year shall be
considered the Tenant's share of the excess in "actual operating expenses" for the next
succeeding year and Tenant shall pay 1/12th of the amount of such excess each month of the
next succeeding calendar year concurrently with the payment of rental. Any sums due for
any months of the current year that may have transpired prior to presentment of the
statement of "actual operating expenses" for the preceding calendar year shall be paid upon
the presentment of such statement and thereafter in installments as above provided. The
amount of installments payable by Tenant in the manner above provided shall be adjusted at
the end of each calendar year during the term of this lease based on the amount of "actual
operating expenses" for the immediately preceding calendar year.
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For the purpose of determining the rent adjustment under this lease, the term "actual operating expenses"
shall include the operating expenses of the "building," and are herein defined to comprise the following:
1. The wages and salaries of all employees engaged in the operation and maintenance of the building,
including employer' Social Security taxes and any other taxes which may be levied on such wages and
salaries.
2. All janitor and office supplies and materials used in the operation and maintenance of
the building.
3. The cost of water and power, heating, lighting, ventilating, electricity, and air conditioning the
building.
4. The cost of all maintenance and service agreements on equipment, including window cleaning and elevator
maintenance.
5. Insurance premiums.
6. The cost of repairs and general maintenance, exclusive of expenses as alteration of premises for the
accommodations of a specific tenant or tenants, and exclusive also of expenditures made for capital
investment or improvements.
7. All taxes and assessments, and governmental charges whether federal, state, county or municipal, which
are levied on or charges against real estate, street lights, personal property, or rents, or on the right
or privilege of leasing real estate or collecting rents thereon, and any other taxes and assessments
attributable to the "building" or its operation, excluding, however, Federal and State income taxes.
SECURITY INTEREST 28. In consideration of mutual benefits arising by virtue of this lease, Tenant does hereby grant a security
interest unto Landlord of all property of Tenant now or hereafter placed in or upon the premises and such
property is hereby subjected to a lien in favor of Landlord and shall be and remain subject to such lien of
Landlord for payment of all rents and other sums agreed to be paid by Tenant herein. Said lien shall be in
addition to and cumulative of other remedies provided by law. Tenant will at Landlord's request execute and
deliver to Landlord a financing statement appropriate for filing under the Colorado Uniform Commercial Code.
29. Landlord will allow Tenant $25,652.50 for tenant finish for Suite B-430; however, if Tenant will also
execute the (2) leases dated May 10, 1999 between the same two parties for Suites 100, 118, 200, 300, & 400
in Building "A" at the Kennedy Center, Landlord will allow Tenant $50,652.50 for Suite B-430 tenant
finish..
30. Tenant will contract and insure the re-location and successful operation of telephone, fax, computers and
conference video from the current suite on the 4th floor of Building B for DemagDelaval to their new suite on
the 2nd floor of Building B.
31. Signatures by both Landlord and Tenant will make null and void that Lease Agreement between the same two
parties dated April 16, 1999.
ADDITIONAL PROVISIONS IN WITNESS WHEREOF, the parties hereto have executed this instrument by proper persons hereunto duly
authorized so to do the day and year first hereinafter written.
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KENNEDY CENTER PARTNERSHIP
BY /s/ Jack G. Shaffer
----------------------------------------------------------
JACK G. SHAFFER
Real Education, Inc. d/b/a
eCollege.com
BY /s/ Robert N. Helmick
----------------------------------------------------------
ROBERT N. HELMICK, PRESIDENT/CEO
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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.
