<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000
REGISTRATION NO. 333-90103
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE LIGHTSPAN PARTNERSHIP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 8299 33-0585210
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN T. KERNAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE LIGHTSPAN PARTNERSHIP, INC.
10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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M. WAINWRIGHT FISHBURN, JR., ESQ. KAREN K. DREYFUS, ESQ.
CHRISTOPHER J. KEARNS, ESQ. CHRISTOPHER A. WHYTOCK, ESQ.
ETHAN E. CHRISTENSEN, ESQ. CHRISTOPHER M. LAL, ESQ.
COOLEY GODWARD LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1100 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CA 92121 NEWPORT BEACH, CA 92660-6429
(858) 550-6000 (949) 760-9600
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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, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000
7,500,000 Shares
LIGHTSPAN LOGO
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $10.00 and $12.00 per share. Our common stock has been approved for
listing upon notice of issuance on The Nasdaq Stock Market's National Market
under the symbol "LSPN."
The underwriters have an option to purchase a maximum of 1,125,000
additional shares to cover over-allotments of shares.
In connection with and conditioned upon the sale of the shares in the
initial public offering, we will sell to CINAR Corporation in a concurrent
private placement an additional $10.0 million of shares of common stock at the
initial public offering price. Also conditioned upon the sale of the shares in
the initial public offering and other requirements, we will sell to Cox
Communications Holdings, Inc. and Gateway Companies, Inc. in concurrent private
placements an additional $12.5 million and $3.0 million, respectively, of shares
of common stock at the initial public offering price.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LIGHTSPAN
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 2000.
<PAGE> 3
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
[PHOTO OF THREE SMILING CHILDREN WITH "HOW SMART CAN A KID GET?"]
INSIDE TWO-PAGE GATEFOLD SPREAD
[PHOTOS OF LIGHTSPAN ACHIEVE NOW PRODUCTS]
LIGHTSPAN ACHIEVE NOW
A series of media-rich, interactive software programs for K-8 students that
covers the core curriculum -- language arts, reading and math. Used in
classrooms and at home, Lightspan Achieve Now adds critical learning time to
every day, gets families involved in their children's learning, and is highly
motivating to students. The availability of a very low cost delivery platform
lets schools provide this learning opportunity to all students.
ACADEMIC SYSTEMS
Interactive, comprehensive curriculum in Mathematics and English which
addresses the needs of under-prepared college students. The courses are designed
to adapt to each student's academic needs and learning style. Faculty members
orchestrate the instruction and receive reports on student performance on the
Internet or the college's local area network.
[PHOTO OF ACADEMIC SYSTEMS WEB SITE HOME PAGE]
LIGHTSPAN YOUR SCHOOL ONLINE
A free home page builder for schools. It integrates with Lightspan
PageOne's classroom home pages and includes the ability to organize Web links, a
calendar to keep students and families informed about school events, and Web
usage statistics.
THE LIGHTSPAN NETWORK(R)
The Lightspan Network is Lightspan's premier online classroom resource,
providing a rich array of K-8 curriculum-based content correlated to state
academic standards. A subscription service, TLN provides a commercial-free
environment that offers curriculum that can be customized by state, as well as
in-house customer support.
LIGHTSPAN PAGEONE
Lets teachers easily build a classroom home page with the online
educational resources they need: access to 115,000 reviewed Web sites, learning
activities, lesson plans, tools to post homework, online dictionary, thesaurus
and encyclopedias, and the ability to share these features with students'
families.
[PHOTO OF LIGHTSPAN.COM HOME PAGE]
LIGHTSPAN.COM
The portal for K-12 education. This site is the gateway to all the learning
services Lightspan provides: Lightspan PageOne, Global Schoolhouse, StudyWeb,
The Lightspan Network, The Lightspan Learning Store, and Your School Online.
GLOBAL SCHOOLHOUSE
An online community of educators who share ideas and projects for online
education. Global Schoolhouse facilitates collaborative learning projects among
classrooms, community organizations, businesses and individuals around the
world.
THE LIGHTSPAN LEARNING STORE
An online store developed in partnership with Smarterkids.com. The
Lightspan Learning Store offers educational products to teachers and families.
STUDYWEB
An online "homework helper" categorized by subject matter and including
grade level recommendations and content descriptions. Study Web helps students
easily find research resources on the Web without encountering inappropriate
materials.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
FORWARD-LOOKING STATEMENTS............ 16
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 20
SELECTED CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL DATA............ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING
RESULTS............................. 24
BUSINESS.............................. 37
</TABLE>
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PAGE
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MANAGEMENT............................ 58
RELATED-PARTY TRANSACTIONS............ 66
PRINCIPAL STOCKHOLDERS................ 68
DESCRIPTION OF CAPITAL STOCK.......... 72
SHARES ELIGIBLE FOR FUTURE SALE....... 74
UNDERWRITING.......................... 76
NOTICE TO CANADIAN RESIDENTS.......... 79
LEGAL MATTERS......................... 80
EXPERTS............................... 80
ADDITIONAL INFORMATION................ 80
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU WHEN YOU ARE CONSIDERING THE INFORMATION IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus carefully.
THE LIGHTSPAN PARTNERSHIP, INC.
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts for use in both the classroom and at
home. The Lightspan Achieve Now curriculum has already been purchased by over
873 school districts in 46 states and implemented in over 2,250 schools and
11,075 classrooms. Our Academic Systems products provide a series of
curriculum-based software that addresses the math and writing needs of under-
prepared college students. These products are currently used in over 225
colleges and universities across the United States.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, a curriculum-based online subscription service
marketed to schools for classroom and home use;
- Lightspan PageOne, a service that enables teachers to easily create
customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site where teachers can
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find educational information and resources on the Web;
- The Lightspan Learning Store, a Web site that sells educational products
online; and
- selected additional content for teachers, parents and students.
The need to improve student achievement is a top priority in American
education, and educators are increasingly using educational technology to help
accomplish this objective. According to the Department of Education, the United
States spent an estimated $351 billion on kindergarten through twelfth grade, or
K-12, education in the 1997 - 1998 school year, and industry sources project
that spending on educational technology will increase from an estimated $7
billion during 1998 - 1999 to approximately $10 billion by the 2001 - 2002
school year. This growth has created a significant market opportunity for
educational technology providers whose products and services help educators
provide students with the tools they need to improve achievement. By increasing
students' time spent on the core curriculum, their motivation to learn, and
their families' involvement with their learning, our curriculum-based
educational software and Internet products and services provide a unique and
powerful solution for improving student achievement.
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. To achieve this objective, we expect to
draw on the educational technology and Internet experience of our management,
sales and marketing and Internet teams to pursue the following strategies:
- capitalize on our current market position;
- continue to develop and enhance Lightspan.com;
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<PAGE> 6
- enhance our Lightspan Achieve Now curriculum with content delivery
available through new Internet and broadband technologies;
- create additional Internet-based revenue streams; and
- pursue strategic acquisitions and relationships.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Through June 1996, our
activities consisted primarily of designing and developing Lightspan Achieve
Now. To supplement our product offerings, we introduced The Lightspan Network in
January 1997 and launched Lightspan PageOne in June 1999. We acquired Academic
Systems and Global Schoolhouse in September 1999 and StudyWeb in October 1999.
Our principal executive offices are located at 10140 Campus Point Drive, San
Diego, CA 92121, where our telephone number is (858) 824-8000. We maintain Web
sites at www.lightspan.com and www.academic.com. Information on our Web sites is
not part of this prospectus.
THE OFFERING
Common stock offered.................... 7,500,000 shares
Common stock to be outstanding after the
offering................................ 43,294,487 shares
Use of proceeds......................... For general corporate purposes,
including expanding our sales and
marketing activities and continued
development of our products and
services, particularly our Internet
offerings. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.................................. LSPN
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after the offering
is based upon the actual number of shares outstanding as of December 31, 1999,
and giving effect to:
- the conversion of all of our outstanding preferred stock into 27,087,826
shares of common stock in connection with the offering;
- 909,091 shares, assuming an initial public offering price of $11 per
share, expected to be issued to CINAR Corporation in a private placement
concurrently with the closing of this offering;
- 1,136,364 shares, assuming an initial public offering price of $11 per
share, expected to be issued to Cox Communication Holdings, Inc. in a
private placement concurrently with the closing of this offering;
- 272,727 shares, assuming an initial public offering price of $11 per
share, expected to be issued to Gateway Companies, Inc. in a private
placement concurrently with the closing of this offering; and
- warrants to purchase up to 1,663,056 shares of common stock, assuming an
initial public offering price of $11.00 per share, which will be
exercised for $0.02 per share upon completion of this offering.
However, it does not include, as of December 31, 1999:
- 5,153,941 shares of common stock reserved for issuance under our stock
benefit plans, 3,737,451 of which were covered by outstanding options
with a weighted average exercise price of $3.96 per share and 242,773 of
which were available for future grants;
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<PAGE> 7
- 1,250,000 and 500,000 additional shares of common stock that will be
reserved for issuance as of the closing of this offering under our 2000
Equity Incentive Plan and our 2000 Employee Stock Purchase Plan,
respectively;
- warrants to purchase 749,605 shares of preferred stock, which will become
warrants to purchase 403,591 shares of common stock at a weighted average
exercise price of $6.64 per share upon completion of this offering;
- a warrant to purchase 750,000 shares of common stock scheduled to be
issued to Cox Communications Holdings, Inc. concurrently with the closing
of this offering; and
- a warrant to purchase 500,000 shares of Series E preferred stock issued
to CINAR Corporation.
RECENT DEVELOPMENTS
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators worldwide. CINAR is an international supplier of animated and
live-action children's and family programming that it markets and distributes to
broadcast, cable and other media outlets. As part of our agreement, CINAR
purchased 2,500,000 shares of our Series E preferred stock, which will convert
into 1,250,000 shares of common stock at the close of this offering, at $5.00
per share. CINAR also agreed to purchase $10 million of our common stock at the
initial public offering price in a private placement scheduled to occur
concurrently with our initial public offering. Thus, assuming an initial public
offering price of $11 per share, we will issue 909,091 shares to CINAR. We also
granted CINAR a warrant to purchase 500,000 shares of our Series E preferred
stock that will vest upon the achievement of various agreed-to strategic goals.
This warrant will become a warrant to purchase 250,000 shares of common stock at
the close of this offering.
In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative which provides public schools with free basic cable service and
learning guides. As part of our agreement, Cox Communications agreed to purchase
$12.5 million of our common stock, or 1,136,364 shares assuming an initial
public offering price of $11 per share, in a private placement scheduled to
occur concurrently with our initial public offering upon satisfaction of several
conditions. We also granted Cox Communications a warrant to purchase 750,000
shares of our common stock. The warrant will vest upon the achievement of
various agreed-to strategic goals related to the proposed use of Lightspan
Achieve Now and Lightspan.com products in trials by Cox Communications of cable
offerings over digital set-top boxes.
Also, in January 2000, Gateway Companies, Inc. agreed to purchase $3.0
million of our common stock, or 272,727 shares assuming an initial public
offering price of $11 per share, in a private placement that is scheduled to
occur concurrently with our initial public offering. This investment by Gateway
is subject to the satisfaction of several conditions, including our jointly
entering into an Internet sponsorship agreement whereby Gateway would become a
sponsor of Lightspan.com. Gateway, a manufacturer of personal computers, is
Lightspan's preferred provider of personal computers.
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
The following financial information should be read together with the
"Selected Consolidated Historical and Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this prospectus.
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YEAR ENDED NINE MONTH PERIOD ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
----------------------- -----------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 10,870 $ 17,246 $ 11,282 $ 17,010
Gross profit..................................... 3,210 7,447 4,549 8,692
Loss from operations............................. (33,984) (53,800) (34,999) (45,252)
Net loss......................................... (33,566) (53,271) (34,768) (45,146)
</TABLE>
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AT OCTOBER 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 22,672 $ 35,705 $135,500
Working capital (deficit)................................. (20,570) (7,537) 92,258
Total assets.............................................. 98,767 111,800 211,595
Capital lease obligations, less current portion........... 526 526 526
Total stockholders' equity................................ 33,346 46,379 146,174
</TABLE>
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(1) The Pro Forma consolidated statement of operations data for the year ended
January 31, 1999 and the nine months ended October 31, 1999 assumes that we
purchased Academic Systems as of the beginning of each of these periods and
is based on our historical operating results and those of Academic Systems
for the periods presented, giving effect to the amortization of intangibles
related to the acquisition and decreased interest income representing
foregone interest income at an assumed 3% rate of return.
(2) The Pro Forma column gives effect to the collection of $13,000,000 in stock
subscriptions receivable in November 1999, the exercise of warrants to
purchase 1,663,056 shares of common stock, and the conversion of all of our
outstanding shares of preferred stock into shares of common stock upon the
closing of this offering.
(3) The As Adjusted column reflects our receipt of the net proceeds from our
private sales of common stock to CINAR, Cox Communications and Gateway,
scheduled to occur concurrently with this offering, all at an assumed
initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
-----------------------
Except as otherwise indicated, all information in this prospectus assumes:
- the underwriters' over-allotment option will not be exercised;
- the conversion of all of our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering; and
- the filing, promptly following this offering, of an amended and restated
certificate of incorporation.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
We began selling our Lightspan Achieve Now educational software in January
1996 and entered the Internet market by launching The Lightspan Network in
January 1997. Academic Systems began selling its educational software in April
1994. Since early 1999, we have significantly increased our efforts to expand
our Internet businesses. As a result, both our curriculum-based educational
software and Internet businesses have only a limited operating history on which
you can base your evaluation of our business and prospects. Before investing,
you should evaluate the risks, uncertainties, expenses and difficulties
frequently encountered by early stage companies, particularly companies that are
seeking to significantly increase their presence in new and rapidly evolving
Internet markets.
OUR QUARTERLY RESULTS ARE VOLATILE AND DIFFICULT TO FORECAST, WHICH COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.
Our quarterly results have fluctuated greatly since our inception, for
various reasons. Our quarterly net loss ranged between $8.5 million and $15.6
million over the four quarters ended October 31, 1999. In addition, in fiscal
year 1997 and 1998 we recognized license revenue for our Lightspan Achieve Now
product of $5.6 million and $14.8 million, respectively, in accordance with the
accounting rules in effect at that time. In fiscal years 1999 and 2000, we did
not recognize any Lightspan Achieve Now license revenue, in accordance with new
accounting rules adopted February 1, 1998. We expect to recognize license
revenue during the first two quarters of fiscal year 2001 for cumulative
Lightspan Achieve Now shipments since February 1, 1998. This may result in an
operating profit for one or more quarters, which will not be indicative of our
underlying business in that period, and will not be indicative of results that
may be expected for any subsequent quarters or for the full fiscal year ending
January 31, 2001.
We expect significant fluctuations in our quarterly revenues and operating
results to continue. Demand for our products and services is subject to seasonal
influences based on school calendars, budget cycles and the timing of school
districts' funding sources. Moreover, our sales could be delayed from quarter to
quarter due partly to our need to educate school district decision makers
regarding the uses and benefits of our software, and the lengthy multiple
approval process that typically accompanies significant capital expenditures by
school districts. If a significant sale that we expect to occur in a particular
quarter is delayed and does not occur until a future quarter, or does not occur
at all, our quarterly performance may be worse than expected. Further, our
recently expanded Internet efforts may contribute to fluctuations in our
quarterly operating results because the sales cycles of our Internet businesses
are different than those of our curriculum-based educational software. If our
financial results for one or more quarters fall below the expectations of
analysts and investors, the trading price of our common stock may decline.
WE EXPECT A SUBSTANTIAL INCREASE IN EXPENSES AND NET LOSSES IN THE FUTURE AND
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY, WHICH MAY CAUSE OUR STOCK PRICE TO
FALL.
Since our inception, we have incurred significant losses. As of October 31,
1999, we had an accumulated deficit of $156.5 million. We incurred net losses of
$33.6 million for the fiscal year ended January 31, 1999 and $34.8 million for
the nine months ended October 31, 1999. Except as may otherwise occur due to
revenue recognition for past Lightspan Achieve Now shipments, as described
above, we
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expect our operating losses and negative cash flow to continue and increase for
the foreseeable future as we incur additional costs and expenses related to:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel;
- acquisition of additional office space and other necessary facilities;
and
- amortization of intangible assets and goodwill recorded in connection
with our acquisitions of Academic Systems, Global Schoolhouse and
StudyWeb.
Our ability to become profitable and maintain profitability depends on our
ability to generate and sustain substantially higher revenues while maintaining
reasonable expense levels. Although we intend to increase our spending on the
activities listed above, these efforts may not result in increased revenues. We
conduct operations using estimates as to future expense levels based on our
expectations of future revenues. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending to compensate for any unexpected revenue shortfall. If we achieve
profitability, we cannot be certain that we will be able to sustain or increase
profitability in the future.
WE MAY NEED ADDITIONAL FINANCING TO MEET OUR STRATEGIC BUSINESS OBJECTIVES,
WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT HURT OUR EXISTING
STOCKHOLDERS.
As we enter into new areas of business, like Internet businesses, we will
incur substantially increased expenses for which we do not expect returns for
months or years in the future. We currently anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 18 months. However, we may need to raise additional funds prior to or
after that period. If we raise additional funds through the issuance of equity
or debt securities that have rights senior to those of our stockholders, our
stockholders may experience additional dilution or may lose other rights. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we cannot raise funds on acceptable terms, if
and when needed, we may not be able to take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
developments.
OUR CONTINUED GROWTH WILL STRAIN OUR RESOURCES, AND FAILURE TO MANAGE THIS
GROWTH EFFECTIVELY COULD DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING
THE REVENUES WE EXPECT.
We expect that significant expansion of our operations will be required to
successfully implement our business strategy. For example, the development of
our Internet businesses continues to require increased sales, marketing and
promotion expenditures as well as increased development efforts. This expansion
will strain our management, operational, financial and technological resources,
as well as the infrastructure for our Web sites and services. The growth of our
Lightspan Achieve Now educational software business may strain the resources of
our professional development staff during periods of heavy implementation in
purchasing school districts. Our growth depends on our ability to attract and
retain qualified employees (including employees of businesses that we acquire),
particularly Internet systems, sales and marketing, and product development
personnel. Our failure to manage our growth in a manner that minimizes these
strains on our resources could disrupt our operations and ultimately prevent us
from generating the revenues we expect.
OUR CURRICULUM-BASED EDUCATIONAL SOFTWARE MAY BE UNABLE TO ACHIEVE OR MAINTAIN
BROADER MARKET ACCEPTANCE, WHICH WOULD CAUSE OUR FUTURE REVENUE GROWTH AND
PROFITABILITY TO SUFFER.
We expect to generate a substantial portion of our revenues from Lightspan
Achieve Now software licenses, and will need to increase these revenues in order
to more effectively grow in other areas of our
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business. Revenues from licenses of our curriculum-based educational software
will depend principally on broadening market acceptance of that software, which
may not occur due to a number of factors, including:
- teacher, parent and student preferences for interactive educational
technology are subject to changes in popular entertainment and
educational theory;
- some teachers may be reluctant to use interactive educational technology
to supplement their customary teaching practices;
- we may be unable to continue to demonstrate improvements in academic
performance at schools or colleges that use our educational software; and
- our failure to detect bugs in our software could result in product
failures or poor product performance.
If market acceptance of our curriculum-based educational software is not
broadened, our future revenue growth will suffer and we may never become
profitable.
THE SUCCESS OF OUR BUSINESS MODEL REQUIRES US TO INCREASE OUR REVENUES FROM OUR
INTERNET BUSINESSES, AND WE MAY NEVER BECOME PROFITABLE IF WE ARE UNABLE TO DO
SO.
In order to grow as currently contemplated, we will need to derive an
increasing portion of our revenues from our Internet businesses, including
sponsorship of our Web sites, subscriptions to The Lightspan Network and
electronic commerce. Some of these methods of generating revenues are relatively
new to us and largely untested. Our ability to increase revenues from these
sources depends on:
- improvement of the accessibility and ease of use of our Web sites;
- development of Web sites that are sufficiently engaging to increase and
retain our number of teacher, student and parent visitors;
- purchase by parents and teachers of the products being offered at our
electronic commerce Web sites;
- initiation and growth of sponsorships and banner advertisement sales; and
- our ability to increase the subscriber base of The Lightspan Network
while maintaining a subscription fee.
If we are unable to substantially increase our revenues from our Internet
businesses, we will be unable to execute our current business model and we may
never become profitable.
WE ARE HEAVILY DEPENDENT UPON OUR RELATIONSHIP WITH SONY COMPUTER ENTERTAINMENT,
AND TERMINATION OF THAT RELATIONSHIP, SUPPLY SHORTAGES OF SONY PLAYSTATION GAME
CONSOLES FROM SONY COMPUTER ENTERTAINMENT OR UNANTICIPATED CHANGES IN THE GAME
CONSOLES COULD REDUCE OUR LIGHTSPAN ACHIEVE NOW SALES OR INCREASE RELATED
EXPENSES.
We are heavily dependent upon our relationship with Sony Computer
Entertainment, which supplies the Sony PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home. Without
incurring significant additional expense, there currently is no readily
available operating platform for broad implementation of Lightspan Achieve Now
in the home other than the PlayStation game console. Sony Computer Entertainment
has rights to terminate their agreement with us in various circumstances,
including if it elects to stop producing the PlayStation game console. If our
agreement is terminated, if the PlayStation game console loses popular appeal or
if we are unable to obtain an adequate supply of PlayStation game consoles on a
timely basis, our ability to sell our Lightspan Achieve Now curriculum will be
reduced and we could incur significant additional expenses or lose substantial
revenues.
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The next version of the PlayStation game console, the recently-announced
PlayStation 2 game console, is expected to be available in the United States in
late 2000. If we are unable to enter into agreements to distribute the
PlayStation 2 game console, our Lightspan Achieve Now operations will be
disrupted and we could lose substantial revenues. Certain schools that are
potential purchasers of Lightspan Achieve Now educational software may not want
or be able to afford the PlayStation 2 game console if it is priced
significantly higher than the original PlayStation game console. While we expect
Lightspan Achieve Now to run on the PlayStation 2 game console, we may have to
adapt our software to any changes in or new versions of the PlayStation game
console that occur, which may require us to redirect significant financial and
personnel resources from other development efforts.
WE RELY ON STATISTICAL STUDIES TO DEMONSTRATE THE EFFECTIVENESS OF OUR PRODUCTS,
AND OUR REPUTATION AND SALES AND MARKETING EFFORTS COULD BE HARMED IF THE
RESULTS OF THESE STUDIES ARE NOT REPRESENTATIVE OR IF THEIR INTEGRITY IS
QUESTIONED, WHICH COULD LEAD TO LOWER THAN EXPECTED REVENUES.
We rely heavily on statistical studies, including those cited in this
prospectus, to demonstrate that our curriculum-based educational software
increases student achievement. We believe that these studies accurately reflect
the performance of our products. However, these studies involve the following
risks:
- the limited sample sizes used in our studies may yield results that are
not representative of the general population of students who use our
products;
- the methods used to gather the information upon which these studies are
based depend on cooperation from students and other participants and
inaccurate or incomplete responses could distort results; and
- schools studying the effectiveness of our Lightspan Achieve Now
curriculum administer different tests, and colleges and universities
studying the effectiveness of our Academic Systems curriculum apply
different methodologies and data collection techniques, making results
difficult to aggregate and compare.
We are involved in the Lightspan Achieve Now studies in the following ways:
- we facilitate the collection and analysis of data for these studies; and
- we select and pay researchers to aggregate and present the results of
these studies and, in some cases, to conduct the studies.
Our sales and marketing efforts, as well as our reputation, could be harmed
if the public, including our existing and potential customers, perceives these
studies to be biased due to our involvement, or if the results of these studies
are not representative, which could lead to lower than expected revenues.
CHANGES IN FUNDING FOR PUBLIC SCHOOL SYSTEMS COULD REDUCE OUR REVENUES AND
IMPEDE THE GROWTH OF OUR INTERNET BUSINESSES.
We derive a substantial portion of our revenues from public school funding,
which is heavily dependent on support from federal, state and local governments.
Government budget deficits may adversely affect the availability of this
funding. In addition, the government appropriations process is often slow,
unpredictable and subject to factors outside of our control. Curtailments,
delays or reductions in the funding of schools or colleges, for example a
reduction of funds allocated to schools under Title I of the Elementary and
Secondary Education Act of 1965, could delay or reduce our revenues, in part
because schools may not have sufficient capital to purchase our products or
services. Funding difficulties experienced by schools or colleges could also
cause those institutions to be more resistant to price increases in our
products, compared to other businesses that might better be able to pass on
price increases to their customers. The growth of our Internet businesses
depends on continued investment by public school systems in interactive
educational technology and products. Changes to funding of public school systems
could slow this kind of investment.
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IF WE FAIL TO ENHANCE OUR INTERNET PRODUCTS AND SERVICES WITHOUT SYSTEMS
INTERRUPTIONS AND ADAPT THOSE PRODUCTS AND SERVICES TO CHANGES IN TECHNOLOGY,
OUR FUTURE REVENUE GROWTH AND PROFITABILITY COULD BE LESS THAN WE EXPECT.
We believe that our future revenue growth will depend in large part on
whether we are able to enhance and improve our Web sites and services as
planned. Enhancements and improvements to our Web sites are currently scheduled
for commercial launch, but we cannot assure you that those enhancements and
improvements will gain market acceptance or be launched on schedule and without
systems interruptions. In addition, the Internet is rapidly changing, and we
expect that we will continually need to adapt our Web sites and their related
technology to emerging Internet standards and practices, technological advances
developed by our competition, and changing subscriber, user and sponsor
preferences. Ongoing adaptation of our Web sites and their related technology
will entail significant expense and technical risk, and we may use new
technologies ineffectively or fail to adapt our Web sites and their related
technology on a timely and cost-effective basis. If our enhancements,
improvements and adaptations of our Web sites and their related technology are
delayed or result in systems interruptions or do not gain market acceptance, our
future revenue growth will suffer and we may never become profitable.
WE MAY NOT BE ABLE TO EXECUTE PART OF OUR BUSINESS STRATEGY IF BROADBAND
TECHNOLOGY DOES NOT BECOME MORE PREVALENT OR IF WE CANNOT REACH AGREEMENTS TO
DISTRIBUTE OUR PRODUCTS AND SERVICES USING BROADBAND TECHNOLOGY.
We intend to offer Lightspan Achieve Now and our Internet products and
services as educational channels on a digital set-top box once broadband
technology becomes widely available to cable television subscribers. We cannot
predict that it will ever be economically practical or technologically feasible
for either ourselves or cable television operators to deliver these products
using broadband technology to cable television subscribers. In addition, we may
not be able to reach commercially acceptable agreements with cable operators to
distribute our products and services using broadband technology. If we are
unable to offer Lightspan Achieve Now and our Internet products and services as
educational channels on a digital set-top box, whether because of economic or
technological limitations or a failure to reach commercially acceptable
agreements with cable television operators, we will not be able to execute part
of our business strategy and our growth and revenues will suffer.
OUR SPONSORSHIP REVENUES MAY BE LESS THAN WE EXPECT BECAUSE ADVERTISING OVER THE
INTERNET IN EDUCATIONAL SETTINGS MAY BE UNPOPULAR WITH SPONSORS, THE PUBLIC OR
GOVERNMENT ENTITIES.
We expect to generate revenues from the sale of sponsorships and banner
advertisements on our Web sites. Advertisements in educational settings may not
be accepted by the educational community or by parents and others. Sales of
sponsorships on our Web sites may therefore prove controversial and lead to
negative publicity and action by the government or private interests to
discourage companies from advertising on our Web sites. Third parties that
oppose corporate sponsorships in schools have engaged in publicity campaigns to
encourage boycotts of businesses that advertise in schools, and have sought
legislation to curb advertising in schools. If government or private action
discourages or prevents businesses from advertising in schools or we are not
able to offer potential sponsors access to our Web sites that are primarily
intended for school use, our sponsorship revenues will be significantly less
than we expect and our revenues could suffer.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE, WHICH COULD
PREVENT US FROM SUCCESSFULLY IMPLEMENTING OUR BUSINESS STRATEGY.
The educational technology market is intensely competitive and subject to
increasing commercial attention. Barriers to entering Internet markets are
relatively low, and we expect competition to intensify in the future, as more
businesses use the Internet to enter the student, parent and teacher markets for
education-oriented products and services. Competition among Internet companies
is also intensifying for Web site sponsorships. We also may be adversely
affected by pricing and other operational decisions, like
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<PAGE> 14
the recent decision of several of our competitors that offer educational content
on the Internet to offer a free service rather than charge a fee, which could
hurt our subscription revenues.
Our competitors include:
- software publishers that market educational curriculum products to
schools and homes;
- on-line education-related content and electronic commerce providers
(including Internet content providers that license education-oriented
content from third parties and Internet retailers that may enter the
education electronic commerce market); and
- programs that enable remote learning, assume management of schools, or
provide concentrated tutoring services.
Many of our current and potential competitors have longer operating histories,
larger customer or user bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. Many of these
current and potential competitors can devote substantially greater resources
than we can to product development, marketing and promotional campaigns and Web
site and systems development.
OUR ACQUISITIONS OF OTHER BUSINESSES AND INVOLVEMENT IN STRATEGIC RELATIONSHIPS
MAY NOT BE SUCCESSFUL, WHICH COULD DISTRACT OUR MANAGEMENT OR CAUSE US TO INCUR
ADDITIONAL EXPENSES.
We have acquired businesses and may continue to do so in the future. We are
currently in the process of integrating the operations, systems and personnel of
Academic Systems, Global Schoolhouse and StudyWeb, all of which we acquired in
the second half of 1999. Our integration of these acquisitions or any future
acquisitions could distract our management or cause us to incur additional
expenses, and could cause our business and operations to suffer. We also may
enter into strategic relationships with complementary businesses. For example,
we have agreed to pursue several potential strategic initiatives with CINAR
Corporation, we hope to participate in a digital set-top box trial with Cox
Communications and we expect Gateway will become a sponsor on our Web site. We
cannot assure you that we will implement these initiatives and other activities
and arrangements, particularly because we still need to negotiate some terms of
the arrangements with each of them. If implemented, they, or any other strategic
relationships we may enter into, may increase our expenses or divert efforts of
our management and may not be successful.
THE OPERATIONS OF ACADEMIC SYSTEMS WILL BE SUBSTANTIALLY IMPACTED IF DATABASE
SOFTWARE WE LICENSE FROM ORACLE CORPORATION CEASES TO BE AVAILABLE TO ACADEMIC
SYSTEMS FOR ANY REASON.
Academic Systems is heavily dependent upon its relationship with Oracle
Corporation, which provides a database that Academic Systems uses to accumulate
data on students' progress in its math and writing courses. If Oracle
Corporation terminates its relationship with Academic Systems or its database
fails to function properly for any reason, a portion of our operations could be
interrupted and we could lose revenues.
IF WE DO NOT SUCCESSFULLY ANTICIPATE AND ADAPT TO CHANGES IN COMPUTER PLATFORMS
AND OTHER EVOLVING TECHNOLOGIES, OUR OPERATING RESULTS RELATING TO SALES OF OUR
SOFTWARE PRODUCTS COULD SUFFER.
We must manage our software development efforts to anticipate and adapt to
changes in popular computer operating environments and other evolving
technologies. For example, we are currently reviewing possibilities for
migrating Academic Systems' CD-ROM-based educational software to an
Internet-based product, and expect to devote significant financial resources to
do so. Our curriculum-based educational software is currently delivered in
CD-ROM format on Sony PlayStation game consoles and on Windows-based personal
computers. We will continue to evaluate other operating environments and
computer platforms for our software products as they become available. We may
decide from time to time to make our software products available in other
operating environments or on other computer platforms and our efforts to do so
may involve substantial costs that may not be offset by additional revenues or
may delay our realization of revenues from these activities. Market acceptance
of our software products and our
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operating results relating to their sale could also be worse than we expect if
we are unable to anticipate and adapt to changes in computer platforms and other
evolving technologies on a timely and cost-effective basis.
WE WILL NOT BE ABLE TO GROW OUR INTERNET BUSINESSES IF THE MARKET FOR THOSE
BUSINESSES DOES NOT DEVELOP.
The success of our Internet businesses will depend in large part on the
continued emergence and growth of a market for Internet-based educational
technology products. The market for educational technology is characterized by
rapid technological change and product innovation, unpredictable product life
cycles and unpredictable preferences among students, teachers and parents.
Internet commercial businesses and services are evolving markets as well, and it
is difficult to estimate how and when growth or other changes in those markets
will occur. We therefore cannot predict that the market for Internet-based
educational technology products will continue to grow.
OUR BUSINESS MAY NOT SUCCEED WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET.
Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the Internet traffic and revenues we
need for our business to succeed. In addition, our Lightspan Achieve Now and
Academic Systems curricula are very media-rich and are not currently delivered
over the Internet, given bandwidth limitations. The continued development of the
Internet includes maintenance of a reliable network with the necessary speed,
data capacity and security, as well as timely development of complementary
products for providing reliable Internet access and services. Because the online
exchange of information and global commerce on the Internet is new and evolving,
we cannot predict whether the Internet will prove to be an effective vehicle for
delivering commercial content or will provide a viable marketplace for
electronic commerce in the long term.
As the Internet continues to experience increased numbers of users,
increased frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increased users or bandwidth requirements may harm the performance of the
Internet.
UNLESS WE MAINTAIN A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT GROW AND OUR
FINANCIAL RESULTS MAY SUFFER.
We believe that maintaining and enhancing the value of our Lightspan and
Academic Systems brands is critical to attracting purchasers for our
curriculum-based educational software and sponsors, subscribers and users of our
Internet businesses. Our success in maintaining brand awareness will depend on
our ability to continuously provide educational technology that students enjoy
using and teachers and parents consider beneficial to the learning process. We
cannot assure you that we will be successful in maintaining our brand equity. In
addition, to attract and retain online sponsors, subscribers and users and to
promote and maintain the Lightspan brand, we have spent and intend to continue
spending significant amounts on an aggressive brand-enhancement strategy, which
includes advertising, promotional programs and efforts by our field sales force
and professional development staffs. We may also need to spend significant
amounts in the future to maintain the value of our Lightspan and Academic
Systems brands as they relate to our curriculum-based educational software
business. Revenues from these activities may not be sufficient to offset
associated costs.
CLAIMS RELATING TO DATA COLLECTION FROM OUR USER BASE AND CONTENT AVAILABLE ON
OR ACCESSIBLE FROM OUR WEB SITES MAY SUBJECT US TO LIABILITIES AND ADDITIONAL
EXPENSE AND DECREASE TRAFFIC TO OUR WEB SITES.
We currently collect only the names of teachers who are registering for our
Internet products. However, we may in the future collect names and other
personal information relating to students, teachers and parents, and may sell
our user information on an aggregated, non-individual basis, though we do not
intend to sell information relating to children under 13. We could be subject to
liability claims for misuses of information collected from our users, such as
for unauthorized marketing purposes, and could face
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<PAGE> 16
additional expenses to analyze and comply with increasing regulation in this
area. The Federal Trade Commission, for example, has announced regulations
governing collection of personal information from children under 13 and is
expected to issue and enforce additional regulations in this area. We could also
be subject to liability based on claims relating to content that is published on
our Web sites or that is accessible from our network through links to other Web
sites. In addition to subjecting us to potential liability, claims of this type
could require us to change our Web sites in a manner that could be less
attractive to our customers and divert our financial and development resources.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY INTEGRATE, OUR MANAGEMENT TEAM.
Our success depends on the continued contributions of the principal members
of our sales and marketing, product development, Internet services, and
management departments. The loss of the services of any of our officers or
senior managers would disrupt operations in their respective departments and
could cause our overall financial results to suffer. We do not maintain any "key
person" life insurance policies other than on John T. Kernan, our Chairman and
Chief Executive Officer, and Carl Zeiger, our President and Chief Operating
Officer.
Many of our existing senior management personnel joined us during 1999,
including critical members of our Internet team. Some of these individuals have
not previously worked together and are currently being integrated as a
management team. If our senior managers are unable to work effectively as a
team, our business operations could be significantly disrupted.
YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, AND PREVENT US FROM RUNNING OUR BUSINESS.
Some computer programs cannot tell the difference between the year 2000 and
the year 1900. If we or any third parties with whom we have a material
relationship suffer adverse effects of the change from 1999 to 2000, now or in
coming months, we may be temporarily prevented from operating any and all
aspects of our business in the ordinary course. In a worst case scenario, we may
be unable to make or receive phone calls at our facilities, process or ship
orders, make payments due to third parties and our employees, or operate our
Internet businesses.
WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE, CHARACTERS AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE
THESE ASSETS, THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE
REVENUES, MAY DECREASE.
Our intellectual property includes our trademarks and copyrights,
proprietary software, characters and other proprietary rights. We believe that
our intellectual property is important to our success and our competitive
position, and we try to protect it. However, our efforts may be inadequate. In
addition, our ability to conduct our business may be harmed if others claim we
violate their intellectual property rights. If successful, claims of this nature
could seriously harm our business by requiring us to cease using important
intellectual property or pay monetary damages. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to incur
legal costs and diverting management's attention away from our business.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our stock.
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<PAGE> 17
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 56.9% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering and the private placements expected to occur at the
same time, executive officers, directors and holders of 5% or more of our
outstanding common stock will, in the aggregate, beneficially own 56.9% of our
outstanding common stock. These stockholders will be able to influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of corporate transactions. This concentration of
ownership may also delay, deter or prevent a change in control of our company
and may make some transactions more difficult or impossible to complete without
the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:
- authorize us to issue preferred stock that can be created and issued by
the board of directors without prior stockholder approval, with rights
senior to those of common stock;
- provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
THERE IS NO PRIOR MARKET FOR OUR SECURITIES, AND OUR STOCK PRICE MAY DECLINE
AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock. After the offering, the market price of our common stock may decline
below the initial public offering price. The initial public offering price has
been determined by negotiations between us and representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES AND, IF A LIQUIDATION WERE TO OCCUR, YOU MAY
RECEIVE SIGNIFICANTLY LESS THAN THE PURCHASE PRICE FOR YOUR SHARES.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of our common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since the price per share in this offering will be substantially
higher than it was for our existing stockholders. The dilution will be $8.82 per
share in the net tangible book value of the common stock from the initial public
offering price. If the underwriters exercise their over-allotment option, or if
outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution. As a result of this dilution, in the
event of a liquidation, common stockholders who purchase stock in this offering
may receive significantly less than the purchase price for the shares they
purchased in this offering.
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APPROXIMATELY 35.8 MILLION, OR 82.7%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. WE WILL ALSO ISSUE ADDITIONAL STOCK FOLLOWING THIS OFFERING. THIS WILL
INCREASE THE SUPPLY OF COMMON STOCK AVAILABLE FOR RESALE, AND COULD INCREASE
TRADING ACTIVITY AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After completion of this offering and our expected private sales of
common stock to CINAR, Cox Communications, and Gateway, and the exercise of
warrants to purchase up to 1,663,086 shares of common stock concurrently with
this offering, assuming a public offering price of $11.00 per share, we will
have 43,294,487 shares of common stock outstanding, based on the number of our
outstanding shares on December 31, 1999. The shares offered for sale through the
underwriters will be freely tradable unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters. Of the remaining
35,794,487 shares of common stock outstanding after this offering, 26,993,927
shares will be eligible for sale in the public market beginning 181 days after
the date of this prospectus. The remaining 8,800,560 shares will become
available at various times thereafter upon the expiration of one-year holding
periods. We also intend to register up to approximately 5,730,224 additional
shares of our common stock after this offering for issuance under our equity
plans and may issue additional stock in connection with acquisitions or
strategic relationships and to some of our existing stockholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue"
or "opportunity," the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
actual results or to changes in our expectations.
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USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$75.2 million, at an assumed initial public offering price of $11.00 per share,
after deducting the underwriting discount and commissions and estimated offering
expenses. Our net proceeds from the offering will be approximately $86.7 million
if the over-allotment option is exercised in full. We also expect to receive net
proceeds of approximately $24.6 million after payment of financial advisory fees
relating to our agreements with Cox Communications and Gateway, as a result of
our sales to CINAR, Cox Communications and Gateway, of common stock in private
placements scheduled to occur concurrently with the closing of the initial
public offering.
We expect to use the net proceeds for general corporate purposes, including
expansion of our sales and marketing activities and continued development of our
products and services, particularly our Internet offerings. Our management will
retain broad discretion in the allocation of the net proceeds of this offering.
The amounts we actually spend will depend on a number of factors, including the
amount of our future revenues and other factors described elsewhere in this
prospectus. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies, product lines or products. Pending
such uses, the net proceeds of this offering will be invested in short term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999:
- On an actual basis after giving effect to 2,600,000 shares of Series E
preferred stock subscribed to in October 1999 and issued in November
1999;
- On a pro forma basis after giving effect to the conversion of all of our
outstanding shares of preferred stock into 27,087,826 shares of common
stock upon the closing of the offering and the collection of $13.0
million in stock subscriptions receivable in November 1999; and the
exercise of warrants to purchase up to 1,663,056 shares of common stock
scheduled to occur concurrently with the closing of this offering; and
- On a pro forma as adjusted basis, giving effect to our issuance of common
stock in the offering at an assumed price of $11.00 per share and our
anticipated receipt of the proceeds from our private sales of common
stock to CINAR, Cox Communications, and Gateway.
This information should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Capital lease obligations, less current portion... $ 526,458 $ 526,458 $ 526,458
Stockholders' equity(1):
Series A preferred stock, $.001 par value;
7,615,500 shares authorized and 7,467,500 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 7,467 -- --
Series B preferred stock, $.001 par value;
11,816,664 shares authorized and 11,666,664
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 11,667 -- --
Series C preferred stock, $.001 par value;
3,360,910 shares authorized and 3,264,285 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 3,264 -- --
Series D preferred stock, $.001 par value;
17,000,000 shares authorized and 13,129,444
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 13,129 -- --
Series E preferred stock, $.001 par value;
22,000,000 shares authorized and 16,703,022
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 16,703 -- --
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Common Stock, $.001 par value; 75,000,000 shares
authorized and 4,625,389 shares issued and
outstanding, actual; 33,376,271 shares issued
and outstanding, pro forma (unaudited);
250,000,000 shares authorized, 43,194,453 shares
issued and outstanding, pro forma as adjusted... 4,625 33,376 43,194
Additional paid-in capital........................ 209,464,854 227,781,949 327,567,131
Stock subscriptions receivable.................... (13,000,000) -- --
Deferred advertising expense...................... (400,000) (400,000) (400,000)
Deferred compensation............................. (6,236,490) (6,236,490) (6,236,490)
Accumulated deficit............................... (156,539,154) (174,799,509) (174,799,509)
------------- ------------- -------------
Total stockholders' equity.............. 33,346,065 46,379,326 146,174,326
------------- ------------- -------------
Total capitalization.................... $ 33,872,523 $ 46,905,784 $ 146,700,784
============= ============= =============
</TABLE>
- ---------------
(1) Other than as indicated in the introduction to the table, share numbers in
the table do not include issuances subsequent to October 31, 1999, or the
following shares:
- as of October 31, 1999, 5,153,941 shares of common stock reserved for
issuance under our stock benefit plans, of which 3,714,076 shares were
covered by outstanding options with a weighted average exercise price of
$3.64 per share and 366,361 shares remain available for grant;
- 750,000 shares of common stock issuable at an exercise price of $10.00
per share upon exercise of a warrant scheduled to be issued concurrent
with the closing of this offering;
- 150,000 shares of Series A preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $1.00 per share (which will
become warrants to purchase 75,000 shares of common stock at an exercise
price of $2.00 per share upon the closing of this offering);
- 150,000 shares of Series B preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.00 per share (which will
become warrants to purchase 75,000 shares of common stock at an exercise
price of $6.00 per share upon the closing of this offering);
- 154,189 shares of Series C preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.76 per share (which will
become warrants to purchase 77,096 shares of common stock at an exercise
price of $7.52 per share upon the closing of this offering);
- 183,105 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.76 per share (which will
become warrants to purchase 91,556 shares of common stock at an exercise
price of $7.52 per share upon the closing of this offering);
- 127,659 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $4.70 per share (which will
become warrants to purchase 63,830 shares of common stock at an exercise
price of $9.40 per share upon the closing of this offering);
- 42,216 shares of Series E preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $5.00 per share (which will
become warrants to purchase 21,109 shares of common stock at an exercise
price of $10.00 per share upon the closing of this offering); and
- 500,000 shares of Series E preferred stock issuable upon exercise of an
outstanding warrant at an exercise price of $5.00 per share (which will
become a warrant to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share upon the closing of this offering).
19
<PAGE> 22
DILUTION
As of October 31, 1999, our pro forma net tangible book value, after giving
effect to conversion of all of our preferred stock then outstanding and the
exercise, concurrently with this offering, of warrants to purchase 1,663,056
shares of common stock, was a deficit of approximately $5.7 million, or $(.17)
per share of common stock. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding. After giving effect to our
sale of common stock offered hereby at an assumed initial public offering price
of $11.00 per share, our expected private sales of common stock to CINAR, Cox
Communications, and Gateway and our receipt of the estimated net proceeds from
all of those transactions, our pro forma net tangible book value as of October
31, 1999 would have been approximately $94.1 million, or $2.18 per share. This
represents an immediate increase in net tangible book value of $2.35 per share
to existing stockholders and an immediate dilution of $8.82 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before the
offering............................................... $(.17)
Increase per share attributable to new investors.......... 2.35
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.18
------
Dilution per share to new investors......................... $ 8.82
======
</TABLE>
The following table summarizes, on a pro forma basis as of October 31,
1999, the differences between existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions for this offering and our estimated
offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 33,376,271(1) 77% $158,429 59% $ 4.75
New investors......................... 9,818,182(2) 23% 108,000 41% $11.00
---------- --- -------- ----
Total............................... 43,194,453 100% $266,429 100%
========== === ======== ====
</TABLE>
- ---------------
(1) Gives effect to the conversion of all of our outstanding preferred stock
into 27,087,826 shares of common stock in connection with the offering and
our issuance of 1,663,056 shares of common stock, assuming an initial public
offering price of $11.00 per share, upon exercise of outstanding warrants
for $0.02 per share concurrently with the closing of this offering, and
assumes no exercise of stock options or other warrants outstanding as of
October 31, 1999. As of October 31, 1999, there were options outstanding to
purchase a total of 3,714,076 shares of common stock, with a weighted
average exercise price of $3.64 per share. As of October 31, 1999, there
were also additional warrants outstanding to purchase a total of 749,605
shares of preferred stock. These warrants will become warrants to purchase
403,591 shares of common stock at a weighted average exercise price of $6.63
per share upon completion of this offering. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors. See "Management -- Equity Plans," "Description of Capital Stock"
and Note 5 to the Lightspan financial statements.
(2) Includes 909,091 shares, 1,136,364 shares, and 272,727 shares of common
stock, assuming an initial public offering price of $11.00 per share, that
CINAR, Cox Communications, and Gateway, respectively, have agreed to
purchase upon the close of this offering.
20
<PAGE> 23
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Lightspan and Academic Systems financial statements and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Operating Results" included elsewhere in this prospectus. The pro
forma statement of operations data for the year ended January 31, 1999 and the
nine months ended October 31, 1999 should be read in conjunction with the
unaudited pro forma financial statements included elsewhere in this prospectus.
That data assumes that we purchased Academic Systems as of the beginning of each
of these periods and is based on our historical operating results and those of
Academic Systems for the periods presented, giving effect to the amortization of
intangibles related to the acquisition, decreased interest income representing
foregone interest income at an assumed 3% rate of return, our issuance of shares
of common and preferred stock to complete the acquisition as if such issuance
had occurred at the beginning of each of the periods presented, and the
conversion of all of our outstanding shares of preferred stock as of their
original dates of issuance. Our statement of operations data for the years ended
January 31, 1995, 1996, 1997, 1998 and 1999 and balance sheet data as of January
31, 1995, 1996, 1997, 1998 and 1999 are derived from our audited financial
statements, which are included elsewhere in this prospectus for the years ended
January 31, 1997, 1998 and 1999 and as of January 31, 1998 and 1999. Academic
Systems' statement of operations data for the years ended September 30, 1997 and
1998 are derived from Academic Systems' audited financial statements included
elsewhere in this prospectus. Our statement of operations data for the nine
months ended October 31, 1999 and our balance sheet data as of October 31, 1999
are derived from our audited financial statements included elsewhere in this
prospectus. Our statement of operations data for the nine months ended October
31, 1998 are derived from our unaudited financial statements included elsewhere
in this prospectus. Our pro forma statement of operations data for the year
ended January 31, 1999 and the nine months ended October 31, 1999 are derived
from unaudited pro forma financial statements included elsewhere in this
prospectus. Academic Systems' statement of operations data for the nine months
ended June 30, 1998 and 1999 are derived from its unaudited financial statements
included elsewhere in this prospectus. The unaudited financial statements have
been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the financial
position and results of operations for the periods presented. Historical results
are not necessarily indicative of the results that may be expected in the
future, and the results of interim periods are not necessarily indicative of
results that may be expected for the entire year. The following financial
information is in thousands, except per share data.
21
<PAGE> 24
THE LIGHTSPAN PARTNERSHIP, INC.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------- -------- -------- -------- -------- --------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software Licenses......... $ -- $ -- $ 5,592 $ 14,753 $ -- $ 6,376
Internet Licenses......... -- -- -- 289 1,024 1,024
Services.................. -- -- 554 1,973 3,742 3,742
Hardware.................. -- -- 2,419 5,294 6,104 6,104
------- -------- -------- -------- -------- --------
Total revenues...... -- -- 8,565 22,309 10,870 17,246
Cost of revenues:
Software Licenses......... -- -- 2,964 4,836 -- 2,139
Internet Licenses......... -- -- -- 99 302 302
Services.................. -- -- 563 1,753 2,385 2,385
Hardware.................. -- -- 2,315 4,745 4,973 4,973
------- -------- -------- -------- -------- --------
Total cost of
revenues.......... -- -- 5,842 11,433 7,660 9,799
------- -------- -------- -------- -------- --------
Gross profit............... -- -- 2,723 10,876 3,210 7,447
Operating expenses:
Technology and
development............. 4,907 12,152 18,953 14,816 10,594 13,876
Sales and marketing....... 2,177 6,831 13,773 20,296 22,990 29,738
General and
administrative.......... 1,231 1,460 2,473 2,715 3,590 5,780
Stock-based
compensation............ -- -- -- -- 20 20
Amortization of
intangibles............. -- -- -- -- -- 11,833
------- -------- -------- -------- -------- --------
Total operating
expenses.......... 8,315 20,443 35,199 37,827 37,194 61,247
------- -------- -------- -------- -------- --------
Loss from operations....... (8,315) (20,443) (32,476) (26,951) (33,984) (53,800)
Interest income (expense),
net....................... 86 876 (113) (528) 418 529
------- -------- -------- -------- -------- --------
Net loss................... $(8,229) $(19,567) $(32,589) $(27,479) $(33,566) $(53,271)
======= ======== ======== ======== ======== ========
Historical net loss per
share(1) -- basic and
diluted................... $ (2.72) $ (6.47) $ (10.72) $ (8.65) $ (9.91)
======= ======== ======== ======== ========
Historical weighted average
shares -- basic and
diluted................... 3,024 3,024 3,039 3,177 3,388
======= ======== ======== ======== ========
Pro forma net loss per
share -- basic and
diluted................... $ (1.54)(2) $ (2.05)(3)
======== ========
Pro forma weighted average
shares -- basic and
diluted................... 21,801(2) 25,968(3)
======== ========
<CAPTION>
NINE MONTH PERIOD
ENDED OCTOBER 31,
--------------------------------
1998 1999 1999
-------- -------- --------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software Licenses......... $ -- $ 489 $ 6,217
Internet Licenses......... 639 1,246 1,246
Services.................. 2,961 4,718 4,718
Hardware.................. 4,867 4,829 4,829
-------- -------- --------
Total revenues...... 8,467 11,282 17,010
Cost of revenues:
Software Licenses......... -- 145 1,730
Internet Licenses......... 189 378 378
Services.................. 1,753 2,226 2,226
Hardware.................. 3,986 3,984 3,984
-------- -------- --------
Total cost of
revenues.......... 5,928 6,733 8,318
-------- -------- --------
Gross profit............... 2,539 4,549 8,692
Operating expenses:
Technology and
development............. 8,466 7,526 8,997
Sales and marketing....... 16,926 23,820 27,899
General and
administrative.......... 1,792 4,083 5,533
Stock-based
compensation............ -- 2,503 2,503
Amortization of
intangibles............. -- 1,616 9,012
-------- -------- --------
Total operating
expenses.......... 27,184 39,548 53,944
-------- -------- --------
Loss from operations....... (24,645) (34,999) (45,252)
Interest income (expense),
net....................... 350 231 106
-------- -------- --------
Net loss................... (24,295) (34,768) (45,146)
======== ======== ========
Historical net loss per
share(1) -- basic and
diluted................... $ (7.29) $ (8.93) $ (11.60)
======== ======== ========
Historical weighted average
shares -- basic and
diluted................... 3,331 3,892 3,892
======== ======== ========
Pro forma net loss per
share -- basic and
diluted................... $ (1.42) $ (1.62)(3)
======== ========
Pro forma weighted average
shares -- basic and
diluted................... 24,445 27,940(3)
======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------------------------ OCTOBER 31,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $17,300 $14,733 $ 1,884 $ 4,422 $ 7,143 $ 22,672
Working capital (deficit)................................... 15,795 14,037 (287) 454 (12,233) (20,570)
Total assets................................................ 19,824 18,259 12,852 14,080 22,566 98,767
Capital lease obligations, less current portion............. 1,379 1,460 1,702 775 393 526
Total stockholders' equity (deficit)........................ $16,379 $14,537 $ 1,614 $ 1,682 $(11,249) $ 33,346
</TABLE>
- ---------------
(1) See Note 1 to the Lightspan financial statements for a description of the
computation of the historical net loss per share and the number of shares
used in the historical per share calculation.
(2) Assumes the conversion of all of our outstanding preferred stock as of their
original dates of issuance. See Note 1 to the Lightspan financial statements
for a description of the computation of pro forma net loss per share and the
number of shares used in the pro forma per share calculation.
(3) In addition to the assumption described in (2) above, assumes the issuance
of our shares of common and preferred stock used to complete the acquisition
of Academic Systems as if such issuance had occurred at the beginning of
each of the periods presented.
22
<PAGE> 25
ACADEMIC SYSTEMS CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
------------------ -----------------
1997 1998 1998 1999
-------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 4,399 $ 5,939 $ 2,947 $ 4,870
Cost of revenues......................................... 1,920 2,064 1,183 1,378
-------- ------- ------- -------
Gross profit............................................. 2,479 3,875 1,764 3,492
Operating expenses....................................... 12,737 12,893 10,013 8,003
-------- ------- ------- -------
Loss from operations..................................... (10,259) (9,018) (8,249) (4,511)
Interest income (expense), net........................... 151 347 310 (50)
-------- ------- ------- -------
Net loss................................................. $(10,108) $(8,671) $(7,939) $(4,561)
======== ======= ======= =======
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
OVERVIEW
We develop, market and sell curriculum-based educational software and
Internet products and services used both in school and at home. Our
curriculum-based educational software consists of our Lightspan Achieve Now and
Academic Systems software. Lightspan Achieve Now is our media-rich, interactive
CD-ROM-based software for students in kindergarten through eighth grade that
covers the core curriculum of language arts, reading and math. Its technology,
delivery system and content help increase student interest in learning, parental
involvement in their children's education, and productive interaction among
teachers, parents and students. Our Academic Systems software is also
CD-ROM-based and serves the college market with an English and mathematics
curriculum designed to meet the needs of under-prepared students. We offer the
following integrated family of Internet products and services through our Web
site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use;
- Lightspan PageOne, an online service developed with Yahoo! that enables
teachers to easily create customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find on the Web the educational information and resources they
want;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents; and
- selected additional content for teachers, parents and students.
We charge an annual subscription fee of approximately $2,500 for The
Lightspan Network to subscribing schools. We also plan to generate revenues for
our free Internet products and services, like Lightspan PageOne and Global
Schoolhouse, through sponsorships, advertising and electronic commerce.
Our products and services are sold to school districts by a direct field
sales force and supported by our professional development team who assists in
implementing our curricula in schools.
We commenced operations in September 1993, and through June 1996 our
activities consisted primarily of designing and developing Lightspan Achieve
Now. In January 1996, we released our Lightspan Achieve Now curriculum for use
on Windows-based personal computers. In the fall of that year, we released the
product for use on the Sony PlayStation game console. In January 1997, we
introduced The Lightspan Network to supplement our product offerings. In June
1999, we launched Lightspan PageOne. We acquired Academic Systems and Global
Schoolhouse in September 1999, and StudyWeb in October 1999. We also introduced
the Lightspan Learning Store in October 1999.
RESULTS OF OPERATIONS
Revenues
Our revenues from sales of Lightspan Achieve Now consist of license,
service and hardware revenues, although since February 1, 1998 we have deferred
recognition of license revenues, as described below in "Change in Revenue
Recognition Policy." Our revenues from sales of The Lightspan Network consist of
subscription fees.
In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total fee to each component of
the arrangement based on objective evidence of its fair value, which is specific
to
24
<PAGE> 27
Lightspan. The objective evidence for each element is based on the respective
list prices of each element when sold or offered for sale separately.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
License Revenues. We derive license revenues from the sale of Lightspan
Achieve Now licenses and subscriptions for The Lightspan Network. We recognize
revenue from Lightspan Achieve Now licenses after:
- a license agreement has been executed or a definitive purchase order has
been received;
- the product has been shipped;
- the license fee has become fixed and determinable;
- the collection of the fee is considered probable; and
- the related hardware, if applicable, has been shipped.
We recognize revenue from subscriptions to The Lightspan Network ratably
over the term of the subscription agreement. Subscription licenses are for a
one-year term, and are paid in advance.
Amounts received in excess of revenue that is recognized are recorded as
deferred revenue.
Service Revenues. We derive service revenues from implementation services
and training for our Lightspan Achieve Now curriculum that is provided by our
professional development team and, to a lesser extent, from telephone support
and maintenance. All customers that purchase our Lightspan Achieve Now
curriculum also purchase service and support. This service and support are paid
for in advance and initially recorded as deferred revenues. Service revenues are
recognized when services are performed, in accordance with the standard
implementation, training, service, and evaluation plans that we establish for
the customer. Revenues from telephone support and maintenance arrangements are
recognized ratably over the one-year term of the support and maintenance
agreement.
Hardware Revenues. We derive hardware revenues from the sale of Sony
PlayStation game consoles and accessories. We recognize hardware revenues after
a definitive purchase order has been received, the product has been shipped and
collection of the sales price is considered probable. Substantially all of our
Lightspan Achieve Now customers also purchase Sony PlayStation game consoles.
Our future hardware revenues will vary based on the cost to us of Sony
PlayStation game consoles and accessories.
Future Revenue Sources. We anticipate that the sources of our revenues will
change over time. In the future, we plan to generate revenues from other sources
such as:
- sponsorship of, and advertising on, our Web sites;
- electronic commerce; and
- new titles that may be developed to expand Lightspan Achieve Now.
As broadband technology becomes more prevalent and cable operators provide
more of their customers with digital set-top boxes, we also intend to offer both
Lightspan Achieve Now and all of our Internet products and services as
educational channels on digital cable television systems.
COST OF REVENUES
Our cost of revenues consists of:
- costs for assembly, distribution and materials for CD-ROMs, and packaging
and print material costs;
- labor costs and overhead related to professional development personnel;
- costs for Sony PlayStation game consoles and related accessories;
- costs for third-party royalties and third-party content; and
- costs for server and network fees.
25
<PAGE> 28
CHANGE IN REVENUE RECOGNITION POLICY
We sell our Lightspan Achieve Now licenses in three distinct grade
clusters -- grades K through 2; grades 3 through 4; and grades 5 through 8. Each
grade cluster includes 32 to 36 separate Lightspan Achieve Now titles, with each
title consisting of one distinct CD-ROM. There are a total of 77 separate titles
planned, some of which are included in more than one grade cluster. From the
time we commenced sales of the Lightspan Achieve Now product line, a number of
these titles were not available on the date of the sale, but were under
development at various stages in the development cycle. We consider titles that
have completed the development cycle and have been released for shipment to
customers to be "completed," and we consider titles still in the development
cycle to be "as-yet uncompleted." As of October 31, 1999, 72 of the 77 planned
titles had been completed. The remaining five titles are expected to be
completed during the first and second quarters of the fiscal year ending January
31, 2001.
At the time we began selling Lightspan Achieve Now licenses in 1996, the
compilation of titles which were then complete and available was fully
functional, met the academic objectives which we had committed to our customers,
and contained sufficient content to cover a complete school year's curriculum.
At that time it was our intention to subsequently develop additional titles that
would expand the overall curriculum, and we have continued efforts to do so.
Since the first shipment of Lightspan Achieve Now in 1996, we have established a
practice of providing these additional titles, when completed, to all existing
customers for no additional charge on a when and if available basis, although we
are not contractually obligated to do so. We plan to continue this practice
until we have delivered the last of the 77 planned titles, expected to be prior
to July 31, 2000. We plan to offer any new titles developed after that time to
our existing customers for a separate license fee.
When a customer enters into a Lightspan Achieve Now license, we ship them
the compilation of titles which is then available. The customer is able to begin
using our product immediately and is obligated to pay the entire non-refundable
license fee at that time. Neither the license fee collected from the customer,
nor the customer's ability to use our product, is contingent or dependent upon
our delivery of any additional titles.
Through January 31, 1998, our revenue recognition for Lightspan Achieve Now
licenses was in accordance with AICPA Statement of Position 91-1. Under AICPA
Statement of Position 91-1, we recognized the entire Lightspan Achieve Now
license fee upon the initial shipment of titles.
Effective February 1, 1998, we adopted AICPA Statement of Position 97-2,
which caused a substantial change in our revenue recognition for Lightspan
Achieve Now licenses. Under AICPA Statement of Position 97-2, we are unable to
recognize any Lightspan Achieve Now license fees as revenue until we ship the
final title which we plan to provide to all existing customers for no additional
charge. Therefore, we have deferred revenue recognition for all Lightspan
Achieve Now licenses shipped in the year ended January 31, 1999 and the nine
months ended October 31, 1999. We have also deferred revenue recognition for all
Lightspan Achieve Now licenses shipped in the quarter ended January 31, 2000 and
will do the same for any subsequent quarter until we have shipped the final
title to be provided for that grade cluster. By July 31, 2000, we expect to ship
the final title to be provided to all existing customers for no additional
charge. At that time we expect to recognize all of the revenue related to
shipments of Lightspan Achieve Now for that quarter as well as all prior
quarters since the adoption of AICPA Statement of Position 97-2. This will
result in the recognition of the entire deferred revenue balance, and the
related deferred cost of revenue, at that time. This impact could all occur in a
single quarter, if the final title for each grade cluster is completed in the
same quarter, or it could occur over two quarters, if the final title for one or
two grade clusters is completed in one quarter and the final title for the other
one or two grade clusters is completed in a subsequent quarter.
Since we defer all of the Lightspan Achieve Now license revenue pursuant to
AICPA Statement of Position 97-2, we also defer all of the costs of duplicating
the product and packaging it for distribution. We will recognize these amounts
as cost of license revenue when we recognize the related revenue.
26
<PAGE> 29
The following table shows the amount of license revenue and the amount of
cost of license revenue we have deferred since the adoption of AICPA Statement
of Position 97-2:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
---------------------------------------- YEAR ENDED ------------------------------
APRIL 30, JULY 31, OCT 31, JAN 31, JAN 31, APRIL 30, JULY 31, OCT 31,
1998 1998 1998 1999 1999 1999 1999 1999
--------- -------- ------- ------- ---------- --------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License Revenue
Deferred During the
Period............. $2,958 $ 7,803 $4,920 $ 5,036 $20,717 $3,578 $ 8,763 $ 7,149
Cost of License
Revenue Deferred
During the Period.. 560 1,066 860 1,069 3,555 651 1,657 1,230
<CAPTION>
NINE MONTHS TOTAL AMOUNTS
ENDED DEFERRED AT
OCT 31, OCTOBER 31,
1999 1999
----------- -------------
($ IN THOUSANDS)
<S> <C> <C>
License Revenue
Deferred During the
Period............. $19,490 $40,207
Cost of License
Revenue Deferred
During the Period.. 3,538 7,093
</TABLE>
We will recognize the cumulative deferred license revenue of $40.2 million
and deferred cost of license revenue of $7.1 million in the quarters ending
April 30 and July 31, 2000.
OPERATING EXPENSES
During the years ended January 31, 1998 and 1999, our technology and
development and sales and marketing expenses related primarily to the
development, release, marketing, sale and distribution of Lightspan Achieve Now.
During the nine months ended October 31, 1999, our expenses relating to the
development, sale and marketing of our Internet products and services increased.
We expect that we will continue to make investments in product development,
sales and marketing to enhance our Lightspan Achieve Now and Academic Systems
curricula and expand our existing customer base. However, an increasingly
important part of our strategy and spending will focus on building our
technology and development and sales and marketing teams to support our Internet
products and services.
Technology and Development. Our technology and development costs consist
primarily of payroll and related costs for design, art, production, development,
maintenance and testing of our Lightspan Achieve Now curriculum and for
performing Web site design, development and testing. We believe that continued
investment in Web site development is critical to attain our strategic
objectives and therefore anticipate that Web site development expenses will
increase significantly in future periods.
Sales and Marketing. Our sales and marketing expenses consist primarily of
salaries, commissions, bonuses, related payroll and travel costs, advertising,
promotional activities, customer incentive programs and research and evaluation
of our current customers and markets. We expect that sales and marketing
expenses will increase significantly in future periods and we intend to continue
to pursue aggressive branding and marketing campaigns to retain and increase
sales to current customers, attract new customers, and broaden our markets. We
expect that most of these activities will be directed toward the target users
and markets for our Internet products and services.
General and Administrative. Our general and administrative expenses consist
primarily of payroll and related costs for executive and administrative
personnel, professional services expenses and other general corporate expenses.
We expect that general and administrative expenses will increase as our business
grows and we expand our staff, increase our infrastructure, and incur costs
associated with being a public company.
Stock-Based Compensation. We have recorded deferred stock-based
compensation as a result of our granting of stock options to employees with
exercise prices per share deemed to be below the fair values per share for our
common stock on the dates those options were granted. The deferred stock-based
compensation is being amortized to expense on an accelerated basis over the
vesting period of the individual options, generally four years. As of October
31, 1999, there was approximately $6.2 million to be amortized in future
periods.
Amortization of Intangible Assets. In connection with the acquisitions of
Academic Systems, Global Schoolhouse and StudyWeb, we recorded intangible assets
totaling an aggregate of approximately $53.7 million, including goodwill of
$27.9 million. We amortize intangible assets over their respective useful lives,
ranging from three to ten years.
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Operating Losses
We have incurred significant losses since our inception and, as of October
31, 1999, had an accumulated deficit of approximately $156.5 million. We expect
to continue to incur substantial operating losses for the foreseeable future.
However, in the quarters in which we ship the final Lightspan Achieve Now
titles, which we intend to provide for the different grade clusters to existing
customers for no additional charge, we may have an operating profit. We expect
this will occur in the quarters ending April 30, 2000 and July 31, 2000.
However, because we may complete the final titles for one or two grade clusters
in one quarter and complete the final titles for the remaining one or two grade
clusters in the next quarter, the impact could be spread over multiple quarters.
The operating results in that period or periods will not be indicative of our
underlying business in that period or periods, and will not be indicative of
results that may be expected for any subsequent quarters or for the full year
ending January 31, 2001.
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
Our revenues increased to $11.3 million in the nine months ended October
31, 1999 from $8.5 million for the comparable period of 1998, an increase of
33%. No one customer accounted for more than 10% of total revenues for the nine
month periods ended October 31, 1999 or 1998.
License Revenues. Our license revenues grew to $1.7 million from $0.6
million, an increase of 171%.
Our revenues from subscription fees for The Lightspan Network increased to
$1.2 million from $0.6 million, an increase of 95%. This increase was due
primarily to an increase in the number of subscribers to The Lightspan Network.
Academic Systems license revenues were $0.5 million from the date of
acquisition (September 20, 1999) through October 31, 1999.
Due to our adoption of AICPA Statement of Position 97-2 on February 1,
1998, we did not record any license revenues related to Lightspan Achieve Now in
the nine months ended October 31, 1999 or 1998. We recorded deferred revenue of
$19.5 million in fiscal 1999, an increase of 24% from $15.7 million in fiscal
1998. This increase was due to increased shipments of Lightspan Achieve Now
licenses in fiscal 1999, which resulted from increased sales and marketing
efforts, continued market acceptance of our products and expansion of our
customer base.
Service Revenues. Our service revenues increased to $4.7 million from $3.0
million, an increase of 59%. This increase was due primarily to an increase in
sales of Lightspan Achieve Now licenses. All customers that purchase our
Lightspan Achieve Now curriculum also purchase professional service and support.
Hardware Revenues. Our hardware revenues declined to $4.8 million from $4.9
million, a decrease of 1%. This decrease was due to a decrease in the average
selling price of the Sony PlayStation game console, offset in part by an
increase in the number of units we shipped.
Cost of Revenues
Our cost of revenues increased to $6.7 million for the nine months ended
October 31, 1999 from $5.9 million for the comparable period in 1998, an
increase of 13%. Gross margin as a percentage of total revenues was 40% and 30%
for the nine months ended October 31, 1999 and 1998, respectively. We expect our
gross margins as a percentage of total revenues will increase significantly when
we begin recognizing revenue on shipments of Lightspan Achieve Now.
Cost of License Revenues. Our cost of license revenues increased to $0.5
million from $0.2 million, an increase of 177%.
Our cost of revenues for subscriptions to The Lightspan Network increased
to $0.4 million from $0.2 million, an increase of 100%. This growth was due
primarily to an increase in third-party content fees
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driven by an increase in subscriptions. Gross margin as a percentage of
subscription fee revenues from The Lightspan Network decreased to 70% from 71%.
This decrease was primarily due to additional network and server costs and, to a
lesser extent, additional support personnel costs required to support a larger
subscription base.
Our cost of revenues for Academic Systems licenses was $0.1 million from
the date of acquisition (September 20, 1999) through October 31, 1999. Gross
margin as a percentage of license revenues was 70%.
Because we deferred all revenue related to shipments of Lightspan Achieve
Now in the first nine months of both 1999 and 1998, we also deferred the related
cost of revenue. Our deferred cost of license revenues for Lightspan Achieve Now
licenses was $3.5 million in the first nine months of 1999, and 2.5 million in
the first nine months of 1998, a 42% increase. Gross margin related to deferred
Lightspan Achieve Now revenues and deferred cost of revenue was 82% in the first
nine months of 1999 compared to 84% in the first nine months of 1998.
Cost of Service Revenues. Our cost of service revenues increased to $2.2
million from $1.8 million, an increase of 27%. This increase was primarily due
to an increase in professional services and support personnel to accommodate the
growth in sales of Lightspan Achieve Now licenses and related services. Gross
margin as a percentage of service revenues increased to 53% from 41%. This
increase was primarily due to our service revenues increasing at a greater rate
than our fixed professional development costs.
Cost of Hardware Revenues. Our cost of hardware revenues remained steady at
$4.0 million. Gross margin as a percentage of hardware revenues remained
relatively constant. We expect that gross margins as a percentage of hardware
revenue may fluctuate from period-to-period based on variations in the product
mix of hardware accessories.
Technology and Development
Our technology and development expenses decreased to $7.5 million for the
nine months ended October 31, 1999 from $8.5 million for the comparable period
of 1998, a decrease of 11%. This decrease was due to a reduction in development
personnel and related costs that occurred in the second half of the prior fiscal
year. The reduction occurred following completion of initial design and
development of substantially all of our Lightspan Achieve Now titles. This
reduction was partially offset by our hiring of additional personnel for Web
site design and development and a shift of some existing development personnel
and related costs to our Internet business as we expanded our Internet
offerings.
Sales and Marketing
Our sales and marketing expenses increased to $23.8 million for the nine
months ended October 31, 1999 from $16.9 million for the comparable period in
1998, an increase of 41%. This increase was attributable to an increase in
marketing personnel and marketing and promotional activities, particularly in
connection with the launch of Lightspan PageOne.
General and Administrative
Our general and administrative expenses increased to $4.1 million for the
nine months ended October 31, 1999 from $1.8 million for the comparable period
in 1998, an increase of 128%. This increase was due primarily to increased
personnel and related costs, particularly in our finance and management
information systems departments. The increase was also due to additional legal
fees and settlement costs associated with a lawsuit brought by a former
employee, which was settled in August 1999, in addition to an increase in our
allowance for doubtful accounts.
Stock-Based Compensation
During the year ended January 31, 1999 and the nine months ended October
31, 1999, we granted stock options with exercise prices that were less than the
deemed fair value of the underlying shares of
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common stock on the date of grant. As a result, we have recorded and will
continue to record deferred stock-based compensation expense over the period
that these options vest. The deferred stock-based compensation expense was
approximately $2.5 million for the nine months ended October 31, 1999.
Amortization of Intangible Assets
Our amortization of intangible assets totaled $1.6 million for the nine
months ended October 31, 1999 and represents amortization related to Academic
Systems since September 20, 1999, Global Schoolhouse since September 2, 1999,
and StudyWeb since October 28, 1999.
Interest Income (Expense)
Our net interest income decreased to $0.2 million for the nine months ended
October 31, 1999 from $0.4 million for the comparable period in 1998, a decrease
of 34%. This decrease was due to higher average cash balances in the prior
comparable period.
COMPARISON OF YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Revenues
Our revenues decreased to $10.9 million during the year ended January 31,
1999, or fiscal 1999, from $22.3 million during the year ended January 31, 1998,
or fiscal 1998, and increased from $8.6 million during the year ended January
31, 1997, or fiscal 1997. Revenues declined by 51% in fiscal 1999 and grew by
160% in fiscal 1998.
Our license revenues decreased to $1.0 million from $15.0 million and $5.6
million in fiscal 1998 and fiscal 1997, respectively. The decreases in 1999
compared to prior years were due to the adoption of AICPA Statement of Position
97-2, under which we were required to defer $20.7 million of revenue related to
shipments of Lightspan Achieve Now licenses made in 1999 which would otherwise
have been recognized under AICPA Statement of Position 91-1. The 169% increase
from fiscal 1997 to fiscal 1998 was due to increases in the sales of Lightspan
Achieve Now licenses, primarily as a result of increased sales and marketing
efforts, continued market acceptance of our products, expansion of our customer
base and availability and release of additional Lightspan Achieve Now titles.
The decrease from 1998 to 1999 was offset, to a lesser extent, by increases in
the number of subscriptions to The Lightspan Network.
Our service revenues were $3.7 million, $2.0 million, and $0.6 million in
fiscal 1999, fiscal 1998, and fiscal 1997, respectively, and grew by 90% in
fiscal 1999 and 256% in fiscal 1998. These increases were due primarily to
increases in sales of Lightspan Achieve Now licenses. All customers that
purchase our Lightspan Achieve Now curriculum also purchase professional service
and support.
Our hardware revenues increased to $6.1 million in fiscal 1999 from $5.3
million in fiscal 1998 and $2.4 million in fiscal 1997. These 15% and 119%
increases were due to increased sales of Lightspan Achieve Now licenses and
hardware, partially offset by reductions in the cost of Sony PlayStation game
consoles to us that we passed through to our customers.
Cost of Revenues
Our cost of revenues decreased to $7.7 million in fiscal 1999 from $11.4
million in fiscal 1998, or 33%, and increased in fiscal 1998 from $5.8 million
in fiscal 1997, or 96%. Gross margin as a percentage of revenues decreased to
30% in fiscal 1999 from 49% in fiscal 1998 and 32% in fiscal 1997.
Our cost of license revenues decreased to $0.3 million in fiscal 1999 from
$4.9 million in fiscal 1998, a decrease of 94%, due to the deferral of cost of
revenue related to Lightspan Achieve Now license revenue deferred as a result of
the adoption of AICPA Statement of Position 97-2. Our cost of license revenues
increased in fiscal 1998 from $3.0 million in fiscal 1997, or by 66%, due to
increases in the sales of Lightspan Achieve Now licenses. Gross margin as a
percentage of license revenues increased to 70% in fiscal 1999 from 67% in
fiscal 1998.
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fiscal 1998 and 47% in fiscal 1997. The improvements in gross margin each year
reflected reductions in material and packaging costs, reductions in third-party
royalty rates and an increase in the selling price of Lightspan Achieve Now
licenses.
Our cost of service revenues grew to $2.4 million in fiscal 1999 from $1.8
million in fiscal 1998 and $0.6 million in fiscal 1997. These increases were due
to increases in professional development services and support personnel to
accommodate the growth in sales of Lightspan Achieve Now licenses and related
services. Gross margin as a percentage of service revenue increased to 36% in
fiscal 1999 from 11% in fiscal 1998 and from (2%) in fiscal 1997. These
increases were due to increased utilization of our professional development
staff, an increase in the average number of days of service sold per license,
improved billing of customers for services provided beyond the scope of the
original license agreement, and, in general, our service revenues increasing at
a greater rate than our fixed professional development costs.
Our cost of hardware revenues increased to $5.0 million in fiscal 1999 from
$4.7 million in fiscal 1998 and $2.3 million in fiscal 1997. These increases
were due to increased Lightspan Achieve Now license sales, offset in large part
by our transition to the Sony PlayStation game console, a less expensive
hardware platform than the hardware platforms that we had previously provided to
our Lightspan Achieve Now customers, often at low or negative margins. Gross
margin as a percentage of hardware revenues increased to 19% in fiscal 1999 from
10% in fiscal 1998 and 4% in fiscal 1997. These increases were due to the
transition to the higher-margin Sony PlayStation game console platform.
Technology and Development
Our technology and development expenses decreased to $10.6 million in
fiscal 1999 from $14.8 million in fiscal 1998, a 28% decrease, and by 22% in
fiscal 1998 from $19.0 million in fiscal 1997. These decreases were due to
reductions in development personnel and related costs associated with completion
of most of our Lightspan Achieve Now titles. By the end of fiscal 1999,
substantially all design, development and testing had been completed on our
Lightspan Achieve Now product line.
Sales and Marketing
Our sales and marketing expenses increased to $23.0 million in fiscal 1999
from $20.3 million in fiscal 1998 and $13.8 million in fiscal 1997. These 13%
and 47% increases are the result of increased personnel in marketing, increased
commissions and bonuses as the result of growing sales, and additional marketing
and promotional activities. The increase from fiscal 1998 to fiscal 1999 was
partially offset by a decrease in personnel and related costs in the sales and
professional development organizations due to a reduction in headcount during
the last half of fiscal 1999.
General and Administrative
Our general and administrative expenses increased to $3.6 million in fiscal
1999 from $2.7 million in fiscal 1998 and $2.5 million in fiscal 1997. The 32%
increase in general and administrative expenses in fiscal 1999 compared to
fiscal 1998 was caused primarily by $1.1 million in legal and settlement costs
associated with a lawsuit brought by a former employee, which was settled in
August 1999, and an increase in personnel and other costs related to our growth,
partially offset by decreases in bad debt expense in fiscal 1999 as compared to
fiscal 1998. The 10% increase in general and administrative expenses in fiscal
1998 compared to fiscal 1997 was caused primarily by an increase in bad debt and
rent expenses.
Interest Income (Expense)
We earned net interest income of $0.4 million in fiscal 1999, as compared
to net interest expense of $0.5 million and $0.1 million in fiscal 1998 and
fiscal 1997, respectively. Our net interest income in fiscal 1999 compared to
our net interest expense in fiscal 1998 was due to higher average cash balances
in the six months ended July 31, 1998, when we received proceeds of a Series D
preferred stock financing. Our
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interest expense for fiscal 1999, fiscal 1998 and fiscal 1997 is attributable to
the utilization of our equipment lease lines and borrowings against our
revolving line of credit.
QUARTERLY RESULTS
The following table sets forth certain statement of operations data for us
for each of the seven quarters ended October 31, 1999. This information has been
derived from our audited financial statements. You should read this information
in conjunction with our audited and unaudited financial statements and related
notes appearing elsewhere in this prospectus. Our quarterly operating results
are expected to vary significantly because of seasonal influences on demand for
our Lightspan Achieve Now and Academic Systems curricula and our services based
on school calendars, budget cycles and timing of school districts' funding
sources. Our revenues have historically been highest in our second fiscal
quarter, and lowest in our first fiscal quarter. In light of these factors, our
limited operating history and the rapidly evolving nature of our business, we
believe that period-to-period comparisons of our results are not meaningful and
should not be relied upon as indicators of future performance.
<TABLE>
<CAPTION>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1998 1998 1998 1999 1999 1999 1999
--------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 2,003 $ 3,661 $ 2,803 $ 2,403 $ 2,636 $ 4,166 $ 4,480
Cost of revenues........... 1,345 2,787 1,795 1,733 1,574 2,775 2,384
------- ------- ------- ------- ------- -------- --------
Gross profit............... 658 874 1,008 670 1,062 1,391 2,096
Operating expenses......... 9,268 9,102 8,814 10,010 9,528 12,083 17,937
------- ------- ------- ------- ------- -------- --------
Loss from operations....... (8,610) (8,228) (7,806) (9,340) (8,466) (10,692) (15,841)
Interest income (Expense),
net...................... 93 150 108 67 4 3 224
------- ------- ------- ------- ------- -------- --------
Net loss................... $(8,517) $(8,078) $(7,698) $(9,273) $(8,462) $(10,689) $(15,617)
======= ======= ======= ======= ======= ======== ========
License revenue deferred
during the period........ $ 2,958 $ 7,803 $ 4,920 $ 5,036 $ 3,578 $ 8,763 $ 7,149
Cost of license revenue
deferred during the
period................... 560 1,066 860 1,069 651 1,657 1,230
</TABLE>
ACADEMIC SYSTEMS ACQUISITION
We acquired Academic Systems in September 1999. Academic Systems develops,
markets and sells curriculum-based educational software to colleges and
universities for use by under-prepared college students. Academic Systems offers
five course programs -- four in mathematics covering elementary algebra to
college algebra, and one in English covering remedial writing and freshman
composition. Academic Systems' products also include a student management system
that can be run on the Internet or the college's own network.
Revenues consist primarily of fees for licenses and implementation of
Academic Systems' software, customer training, books and materials, upgrades and
support. Academic Systems enters into license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. License revenues are recognized upon contract signing
and delivery of the software, provided the related fee is fixed and determinable
and collection of the fee is probable. The revenues associated with books and
materials are recognized upon shipment and revenues for services are recognized
when the services are performed.
The cost of license revenues consists of costs related to materials for
CD-ROMs, assembly and distribution of CD-ROMs, print materials and third-party
royalties.
Comparison of Nine Months Ended June 30, 1999 and 1998
Academic Systems' revenues increased to $4.9 million for the nine months
ended June 30, 1999 from $2.9 million for the comparable period in 1998, an
increase of 65%. This increase was due to increases in
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sales of licenses, primarily as a result of expansion of Academic Systems'
customer base. Cost of license revenues increased to $1.4 million from $1.2
million, an increase of 16%. Gross margin as a percentage of revenues increased
to 72% from 60% due to decreases in the cost of materials and third-party
royalties and increased utilization of Academic Systems' support and operations
personnel. Operating expenses declined to $8.0 million from $10.0 million, a
decrease of 20%. This decrease was due to reductions in technology and
development expense, as Academic Systems completed the development of its
product line, and sales and marketing, as staffing and marketing programs were
reduced.
Comparison of Years Ended September 30, 1998 and 1997
Academic Systems' revenues increased to $5.9 million in the year ended
September 30, 1998 from $4.4 million in the year ended September 30, 1997. The
35% increase was due to increases in sales of licenses, as a result of increased
sales and marketing efforts, continued market acceptance of the Academic Systems
curriculum, expansion of the customer base, and the availability of additional
titles. The cost of licenses increased to $2.1 million from $1.9 million. Gross
margin improved to 65% from 56% due to the decreasing cost of materials and
improved utilization of support and operations staffs. Operating expenses
increased to $12.9 million from $12.7 million. Technology and development
expense decreased each year as Academic Systems completed the development of its
product line. Sales and marketing expense increases accounted for the majority
of the growth in operating expenses as Academic Systems increased its sales and
marketing staffs, increased commissions and bonuses as a result of growing
sales, and added marketing and promotional activities.
BUSINESS COMBINATIONS AND PURCHASE ACCOUNTING
The acquisition of Academic Systems, Global Schoolhouse and StudyWeb were
accounted for as purchases. During the nine months ended October 31, 1999, we
paid net cash of $4.3 million for these acquisitions.
The purchase price of Academic Systems was allocated to the assets
acquired, consisting principally of goodwill and intangible assets which are
being amortized over useful lives ranging from 4 to 10 years. The purchase
prices of Global Schoolhouse and StudyWeb were allocated to the assets acquired,
primarily intangibles related to the Web sites acquired, which are being
amortized over useful lives of three years.
The assets and operations of Global Schoolhouse and Study Web are included
in the Internet K-12 segment. The assets, liabilities and operations of Academic
comprise the Higher Education segment. The results of operations for all three
acquired businesses, including the related amortization of intangible assets,
have been included in our consolidated results of operations from the dates of
acquisition.
Amortization of intangibles and goodwill for the nine months ended October
31, 1999 was $1.6 million. We expect to record annual amortization expense
related to these acquisitions of approximately $5.0 million for the year ending
January 31, 2000, $13.4 million for each of fiscal years 2001 and 2002, $12.8
million for fiscal 2003, $7.5 million for fiscal 2004, and approximately $0.3
million for each fiscal year from 2005 through 2009.
SPRINGING WARRANTS
Upon the sale of Lightspan's common stock as described in this prospectus,
outstanding, unexercisable warrants to purchase up to 3,326,112 shares of Series
D preferred stock at $.01 per share could become exercisable. The exact number
of shares that will be issued depends upon the per share public offering price
of our common stock, the closing date of this offering, and whether warrant
holders choose to net exercise their warrants, and is calculated in a manner
designed to ensure an agreed-upon rate of return on investment.
Lightspan will account for the springing warrants as a preferred stock
dividend. As such, on the exercise date we will account for the value of these
warrants by charging retained earnings and increasing
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the carrying amount of preferred stock by a corresponding amount. The amount of
this charge will increase the loss applicable to common stockholders.
If the offering contemplated by this prospectus is completed under the
terms set forth on the cover, warrants to purchase up to 1,663,056 additional
shares of common stock would be exercised concurrently with the close of this
offering at $0.02 per share and the loss applicable to common stockholders would
increase by approximately $18.3 million as a result.
OTHER RELATIONSHIPS
CINAR Corporation
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators. CINAR markets and distributes its animated and live-action children's
and family programming to broadcast, cable and other media outlets worldwide.
CINAR's productions include the two-time Emmy award-winning Arthur, the
top-rated children's television program in the United States, as well as Are You
Afraid of the Dark?, Wimzie's House, Lassie, The Busy World of Richard Scarry
and The Adventures of Paddington Bear. CINAR also publishes and distributes
approximately 2,000 supplemental education products for pre-kindergarten through
eighth grade that enhance classroom curricula and foster continued learning in
the home. CINAR's products are sold each year to more than 1.6 million teachers
and 370,000 daycare providers in North America.
As part of our agreement, CINAR purchased 2,500,000 shares of our Series E
preferred stock at $5.00 per share. CINAR also agreed to purchase $10 million of
our common stock in a private placement scheduled to occur concurrently with our
initial public offering at the initial public offering price. We also granted
CINAR warrants to purchase 500,000 shares of our Series E preferred stock that
will vest upon the achievement of various agreed-to strategic goals. The planned
strategic initiatives include such projects as
- a convergence educational television series, combining broadband
interactive offerings and standard television;
- the co-development of a pre-kindergarten educational portal featuring
CINAR's subsidiary HighReach Learning; and
- a series of other co-marketing and distribution arrangements such as the
international distribution of Lightspan products.
As part of our agreement with CINAR, Ronald A. Weinberg, CINAR's President
and co-CEO, joined our board.
Cox Communications
In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative, which provides public schools with free basic cable service and
learning guides. As part of our agreement, Cox Communications agreed to purchase
$12.5 million of our common stock, or 1,136,364 shares assuming an initial
public offering price of $11 per share, in a private placement scheduled to
occur concurrently with our initial public offering upon satisfaction of several
conditions. We also agreed to grant to Cox Communications a warrant to purchase
750,000 shares of our common stock upon the closing of this offering. The
warrant will vest upon the achievement of various agreed-to strategic goals
related to the proposed use of Lightspan Achieve Now and Lightspan.com products
in trials by Cox Communications of cable offerings over digital set-top boxes.
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As part of our agreement with Cox Communications Holdings, Inc., Thomas F.
Nagel, Cox Communications Inc.'s Vice President of Business Development, will
join our board as of the close of this offering.
Gateway
In January 2000, Gateway Companies, Inc. agreed to purchase $3.0 million of
our common stock, or 272,727 shares assuming an initial public offering price of
$11 per share, in a private placement that is scheduled to occur concurrently
with our initial public offering. This investment by Gateway is subject to the
satisfaction of several conditions, including our jointly entering into an
Internet sponsorship agreement whereby Gateway will become a sponsor of
Lightspan.com. Gateway, a manufacturer of personal computers, is Lightspan's
preferred provider of personal computers.
LEGAL MATTERS
In July 1996, a former Lightspan employee commenced legal action against
us, alleging causes of action for fraud, breach of contract, negligent
misrepresentation and conversion. On August 26, 1999, we entered into a
settlement agreement and release with the former employee, the terms of which
are subject to confidentiality provisions set forth in the agreement.
During the year ended January 31, 1999, we recorded a charge of
approximately $1.1 million for anticipated settlement and legal costs related to
this case. During the quarter and nine months ended October 31, 1999, we
recorded an additional charge of approximately $467,000 to cover additional
costs related to the settlement.
As of October 31, 1999, we had paid approximately $950,000 in legal and
settlement costs related to this case. We anticipate that we will pay an
additional $617,000 shortly following the effective date of this offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through October 31, 1999, we financed our operations and met
our capital expenditure requirements primarily with the net proceeds from
private sales of equity securities totaling approximately $143.6 million. At
October 31, 1999, we had $22.7 million of cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operating losses, capital expenditures and working capital needs. We expect our
operating losses to continue and increase for the foreseeable future.
Our working capital has fluctuated significantly since our inception. This
is due, in large part, to the timing of cash payments to vendors, cash
collections from customers, varying resources required for development efforts
on Lightspan Achieve Now, as well as receipt of cash from our preferred stock
and other financings. We expect that our working capital requirements and cash
position will fluctuate significantly from period to period for the foreseeable
future. These fluctuations may be caused by increased spending to support our
growth in operations, strategic investments, or acquisitions.
Net cash used in operating activities was $11.8 million for the nine months
ended October 31, 1999, $16.5 million for fiscal 1999, $22.5 million for fiscal
1998 and $31.5 million for fiscal 1997. Net cash used during these periods was
primarily to fund technology and development, sales and marketing and general
and administrative costs associated with the development and deployment of our
Lightspan Achieve Now curriculum and Internet products and services. We expect
our negative operating cash flow to continue and increase for the foreseeable
future.
Net cash used in investing activities was $5.6 million for the nine months
ended October 31, 1999, $0.7 million for fiscal 1999 and insignificant in fiscal
1998. The increase in cash used during this period relates primarily to net cash
paid for the acquisitions of Academic Systems, Global Schoolhouse and StudyWeb.
Net cash used during these periods was primarily for the acquisition of property
and equipment. Net cash provided by investing activities was $2.6 million for
fiscal 1997, due to maturities on our short-term investments.
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Net cash provided by financing activities was $33.0 million for the nine
months ended October 31, 1999, $19.9 million for fiscal 1999, $25.4 million for
fiscal 1998 and $21.5 million for fiscal 1997. Our cash provided by financing
activities during these periods was raised by issuing our Series C, D and E
preferred stock to various strategic and financial investors.
In February 1999, we extended our line of credit with a financial
institution. The line of credit bears interest at the bank's prime rate plus
1.5% and expires in April 2000. The amount available under the line of credit
was increased to the lesser of $10 million or 75% of eligible accounts
receivable, and is collateralized by substantially all of our assets.
We entered into a $1.0 million capital leasing line with a financial
institution in April 1999. Under the agreement, which expires in March 2000, we
finance the purchase of capital equipment at an 8.8% interest rate over a 42
month period with a purchase option.
We have also entered into various purchase order commitments with a number
of vendors, primarily for the purchase of hardware, marketing services,
promotional activities and development activities. As of October 31, 1999, our
outstanding purchase order commitments were approximately $0.4 million.
Our future capital requirements will depend on a variety of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to devote substantial capital resources in connection with:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel; and
- acquiring additional office space and other necessary facilities.
In addition, we may devote substantial capital resources to strategic
acquisitions and relationships.
In September 1999 we completed our acquisition of Academic Systems,
pursuant to which we issued 7,191,839 shares of our Series E preferred stock
pursuant to various exchange ratios applied to the various classes and series of
capital stock of Academic Systems. However, we believe a small number of former
Academic Systems stockholders may have rights to additional shares of our stock,
or other compensation in lieu of issuing such shares. As a result, we intend to
issue 1,068,015 shares of Series E preferred stock, subject to regulatory
approval, to those stockholders. Alternatively, we may pay them cash or some
other form of consideration.
We believe that our cash and cash equivalents and the net proceeds from
this offering will be sufficient to fund our operations for at least the next 18
months. Despite our expectations, we may need to raise additional capital before
the end of the next 18 months.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our line of credit, the interest rates under which are tied to market rates, and
our investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at January 31 or October 31, 1999.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
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BUSINESS
OVERVIEW
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts, and it is used by teachers,
students and parents. We typically sell the Lightspan Achieve Now software with
a Sony PlayStation game console that the student uses to run the program at home
throughout the school year.
We also provide a series of curriculum-based software that addresses the
math and writing needs of under-prepared college students through our
subsidiary, Academic Systems Corporation.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use, introduced in January 1997 and redesigned in
September 1999;
- Lightspan PageOne, an online service developed with Yahoo! and launched
in June 1999 that enables teachers to easily create customized home pages
for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site started in 1995 that helps parents,
teachers and students find educational information and resources on the
Web;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents, introduced in October 1999; and
- selected additional content for teachers, parents and students.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Over 873 school
districts in 46 states have purchased our Lightspan Achieve Now curriculum and
implemented it in over 2,250 schools and 11,075 classrooms, representing a total
of 120,750 student and teacher licenses. Students in over 225 colleges and
universities across the United States are currently using Academic Systems'
products. Our Internet K-12 products and services are used in over 6,400
schools, of which over 1,100 schools are using the Lightspan Network.
Lightspan.com is currently being used by over 228,000 unique visitors monthly.
MARKET OPPORTUNITY
Education is the second largest sector of the United States economy, behind
health care. According to the Department of Education, the United States spent
an estimated $351 billion on kindergarten through twelfth grade, or K-12,
education in the 1997 - 1998 school year, which represented over 4% of the
United States gross domestic product. During the 1997 - 1998 school year, an
estimated 52.2 million students were enrolled in K-12 in 110,473 public and
private schools in over 16,400 school districts.
Comparative studies among industrialized countries show that American
students rank near the bottom in educational performance. Thirty-eight percent
of American fourth graders read below the basic reading level and American
eighth graders recently ranked 28th in a study comparing their mathematical
performance to that of students from 40 other countries. In addition, a recent
federal study found that
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approximately 30% of incoming college freshmen in the United States enrolled in
at least one remedial education course.
The need to improve student achievement is a top priority in American
education. Growing concerns about this issue have resulted in educators and
school districts being held increasingly accountable for their students'
educational progress. Educators have responded by seeking alternatives for more
effective K-12 education and have identified key elements that are important for
educational reform. These key elements include:
- students spending more time on core curriculum;
- students being motivated to learn;
- families becoming more actively involved in their children's schooling;
and
- educational resources being accessible to all students, families and
schools, regardless of socioeconomic status.
Educators today are challenged to effectively access and implement educational
technology that addresses key educational reform elements and improves student
performance. Industry sources estimate that spending on educational technology
was approximately $7 billion during the 1998-1999 school year, and this figure
is expected to increase to approximately $10 billion by the 2001 - 2002 school
year.
The Internet is becoming an increasingly important part of American
education, with teachers viewing the Internet as a powerful learning,
communication and information resource for use in both schools and in homes. In
a recent survey, 90% of teachers said they considered Internet access in their
classroom valuable or essential, and over 51% of classrooms had Internet access
in 1998. The number of five through twelve year-old children with Internet
access is expected to grow 155% to 21.9 million between 1998 and 2002. Teachers
are seeking ways to effectively harness the resources available on the Internet
and offer their students safe and appropriate materials.
Increased spending on educational technology, a growing commitment to
improving student achievement, and rising demand for educational reform programs
that are built around or include educational technology has created a
significant market opportunity for providers of software- and Internet-based
educational products and services.
THE LIGHTSPAN SOLUTION
Lightspan offers curriculum-based educational software featuring digital
video technology and entertainment industry production quality. Our software is
used by students in an interactive setting in schools, colleges and homes. We
combine our software offerings with Internet products and services to provide
teachers, students and families with educational tools and resources to help
students learn and succeed. We believe that our competitive advantages include
the following:
We Improve Student Achievement. We have developed curriculum-based
educational software that improves student achievement. Over 340 studies by
schools that use our products and services show that our products improve
student performance in reading or mathematics or in both subjects. A composite
analysis of studies conducted by schools at 36 sites and covering 4,650 students
shows that, on average, 24% more Lightspan Achieve Now students were successful
in reading and 46% more Lightspan Achieve Now students were successful in
mathematics than their peers who did not use the Lightspan Achieve Now
curriculum, as measured by performance on standardized tests. In part because of
its demonstrated impact on student achievement, our Lightspan Achieve Now
curriculum has been included as a skill-and-content-based reform model eligible
for funding by the U.S. Department of Education's Comprehensive School Reform
Demonstration program. Several independent studies conducted by colleges that
use our Academic Systems products have shown that these products, compared to
traditional lecture taught courses, increase pass rates, keep more students
enrolled in the courses covered and increase students' performance in follow-on
course work.
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We Increase Student Motivation. We believe that the engaging Lightspan
Achieve Now interactive learning experience, and the increased involvement of
parents when students use the curriculum at home, motivate K-8 students to focus
more effectively on core curriculum study. Approximately 60% of teachers using
our Lightspan Achieve Now program reported to us in a survey that the program
had a positive impact on student attitude and motivation in their classrooms. We
also believe that the Academic Systems interactive learning experience, which
links writing or math lessons with immediate practice and feedback and allows
students to choose the learning style that works best for them, is a unique
motivational tool for students in remediation courses.
We Extend Learning Beyond Traditional Classroom Time. In addition to their
use in the classroom, our products and services are used both in the home and in
structured after-school and summer-school programs designed to increase the
amount of time students spend learning. Schools that have implemented the
Lightspan Achieve Now curriculum report that 84% of students spend approximately
one half hour or more, and that 41% spend approximately an hour or more, at home
on core curriculum study daily. Moreover, when our products are used in the
home, parents can take a more active role in their child's learning.
Additionally, the learning resources offered through our Internet products and
services can be accessed at any time by teachers, parents and students to
further a broad range of out-of-classroom educational objectives.
We Facilitate Widespread Use of Our Products and Services. We seek to
provide schools with cost-effective ways to give access to enhanced learning
through educational technology to all students, regardless of socioeconomic
status. A school that implements Lightspan Achieve Now generally provides to
students, at no cost to the family, a Sony PlayStation game console to run the
program on a home television. Our Academic Systems software products cost
approximately as much as a textbook, which makes these learning tools accessible
to most students, either in a computer lab or in their residence. For K-12
students that have access to the Internet, we provide free or
paid-for-by-the-school Internet tools that are either customized by their
teacher or correlated to their curriculum. We believe our ability to reach
students will be enhanced as more students get Internet access at home. Also, as
broadband technology becomes more widespread among cable television subscribers,
our products may become available on a digital set-up box provided by cable
operators, and be accessible to all students with cable service whose school
districts use our products and services.
We Have Experienced Staff to Reach the Nation's Educators. We currently
employ 91 direct salespeople and 74 professional development staff members for
our Lightspan and Academic Systems products and services. They are experienced
in selling to and training educators and have established strong relationships
with key decision makers in the education community. We generally hire current
or former education professionals to serve the territories that encompass their
local education communities. As a team, our sales and professional development
staff guides educators through the decision making process for purchasing
educational technology and ease their transition to its use, thereby making
educational technology more accessible to educators and available to more
students. We believe that our ability to successfully transition educators to
the use of our curricula manifests itself in our large number of repeat
customers. For example, during our fiscal year ended January 31, 1999, 74% of
school districts that were using our Lightspan Achieve Now curriculum at the
beginning of the year bought additional products.
We Offer High-Quality, Curriculum-Based Content. We have developed and own
the rights to nearly all of the content on the 77 titles in our Lightspan
Achieve Now curriculum, which aggregate over 1,200 hours of learning-intensive
programs correlated to state academic standards. We have also developed The
Lightspan Network, an online subscription service for classroom and home use
that provides subscribers with a rich array of curriculum-based content that is
correlated to state academic standards. In addition, we have developed and own
the rights to all 5 titles in our Academic Systems curriculum, which aggregate
over 420 hours. We intend to enhance our current content-based products and
services, particularly in connection with our planned expansion of
Lightspan.com.
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STRATEGY
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. In order to achieve this objective, we
intend to pursue the following strategies:
Capitalize on Our Current Market Position. We intend to capitalize on the
relationships that we have established with educators and the strength of our
products and services and Lightspan and Academic Systems brands to increase our
market penetration. We have established our market position to date by directing
our marketing efforts toward becoming the educational technology provider of
choice among teachers. We believe that our established market position will
enable us to do the following:
- migrate our existing installed user base to our Internet offerings;
- sell The Lightspan Network and Lightspan Achieve Now to schools that use
our free Internet services;
- increase the number of schools, colleges, classrooms and college sections
that use our curriculum-based software; and
- extend the use of our Academic Systems curriculum to more high schools
that participate in outreach programs with community colleges that
currently use that curriculum.
Continue to Develop and Enhance Lightspan.com. We intend to continue to
develop and enhance our Lightspan.com Web site to make it the premier online
education destination for teachers, parents and students. To increase
connectivity between schools and homes, we plan to introduce Your School Online,
a free home page builder for schools, at our Lightspan.com Web site in early
2000. Also in early 2000, we plan to increase the offerings for teachers,
parents and students at Lightspan.com, and to further enhance Lightspan.com by
entering into strategic relationships to sell teaching supplies and other
products online. Accordingly, we will seek to ensure that our Lightspan.com Web
site will offer teachers, parents and students:
- tools to enhance communication between classroom, school and home;
- access to curriculum-based interactive K-8 educational content;
- proprietary search capabilities tailored to classroom use; and
- the opportunity to purchase a broad range of educational products and
teaching supplies.
While Lightspan.com's content is currently focused on K-8 students and their
parents and teachers, we intend to later expand its selected educational content
to address the needs of high school students.
Enhance our Lightspan Achieve Now Curriculum With Content Delivery
Available Through New Internet and Broadband Technologies. As technology
evolves, we intend to migrate our customers to new delivery platforms that will
extend our reach. Our Lightspan Achieve Now and Academic Systems curricula are
very media-rich and are not currently delivered over the Internet, given
bandwidth limitations. However, we recently began to manage some of the Academic
Systems curriculum through our Academic Systems Web site, which enables teachers
to efficiently compile information about time-on-task and performance for
students who use that curriculum. We plan to implement use of an Internet
compatible game console or other delivery platform that will provide direct
access from the home to our Internet products and services. We anticipate this
will enable us to enhance future releases of our Lightspan Achieve Now
curriculum with content available through our Internet products and services. As
broadband technology becomes more prevalent and cable operators provide more of
their customers with digital set-top boxes, we intend to offer both Lightspan
Achieve Now and all of our Internet products and services on digital cable
television systems. We expect that, while we will continue to enable these
products and services to be used on Sony PlayStation game consoles and personal
computers, they will also be able to be used on digital set-top boxes and other
new broadband devices.
Create Additional Internet-Based Revenue Streams. We believe that the
complementary nature of our product lines will allow us to cross-promote and
cross-sell our products and services, and to generate and
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sustain multiple revenue streams in the future. With the introduction of our
first Internet service, The Lightspan Network, we gained a renewable stream of
subscription revenue to augment our revenues from software licenses. We expect
to continue to generate a subscription revenue stream with sales of The
Lightspan Network, and ultimately to sell subscriptions for Lightspan Achieve
Now to be delivered using broadband technology. In addition, we plan to focus on
the sale of "Olympic-style" sponsorships, supplemented by sales of banner
advertisements where appropriate, to fund the further development of
Lightspan.com and our other free Internet offerings. We also intend to sell an
increasing array of educational products online. The Lightspan Learning Store, a
Web site where SmarterKids.com sells educational products under the Lightspan
brand to families, was introduced in early October 1999, and we intend to
increase our offerings on that site. We also intend to develop other Web sites
that will sell teaching supplies and other products beginning in early 2000.
Capitalize on the Experience of the Lightspan Team. We have a management
team with extensive educational technology and Internet experience. Both John
Kernan, our Chairman and Chief Executive Officer, and Carl Zeiger, our President
and Chief Operating Officer, started educational technology companies before
they founded Lightspan. Our sales and marketing organizations are headed by
people with extensive experience in educational technology sales at Apple
Computer, Inc. Our sales and marketing personnel also have extensive contacts in
school districts or colleges within their territories and frequently can
leverage their existing relationships with school district and school decision
makers. Our Lightspan Achieve Now product development team is comprised of
former classroom teachers and experienced instructional designers, animators,
and multimedia computer programmers. Our Internet team includes several key
individuals who previously contributed to the development and management of
Disney Online and Disney.com while working at The Walt Disney Company.
Pursue Strategic Acquisitions and Relationships. We have pursued and
entered into strategic acquisitions and relationships to facilitate the growth
of our business, such as our acquisitions of Academic Systems, Global
Schoolhouse and StudyWeb and our relationships with Sony Computer Entertainment
and SmarterKids.com. We intend to continue to pursue strategic acquisitions and
relationships as we attempt to diversify our revenue sources and the delivery
platforms for our curriculum-based content. For example, in October 1999, we
agreed to pursue several potential strategic initiatives with CINAR Corporation.
PRODUCTS
Our products and services are technology-based educational tools and
resources that can be used by teachers, students and families to increase
student performance.
K-8
Lightspan Achieve Now is a series of media-rich, interactive software
programs that covers the core curriculum of language arts, reading and math, and
is designed to enhance learning in both the classroom and at home. Lightspan
Achieve Now is a supplement to textbooks and other materials used in K-8 schools
and covers more than 80% of the typical K-8 reading, language arts and
mathematics curricula. Lightspan Achieve Now incorporates a variety of
interactive formats and varying levels of difficulty to cover a specific set of
educational objectives and to address a diverse range of learning styles, making
it possible to reach each student in a class more effectively. The Lightspan
Achieve Now curriculum features stories and original characters designed around
an active learning approach, which is intended to provide the learner with the
following essential components of an effective learning environment:
- motivation to master a skill or concept;
- learning by doing;
- practice; and
- application of the skill or concept to another situation.
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The Lightspan Achieve Now curriculum was developed using entertainment industry
production techniques and features full motion digital video and 3-D animation.
We deliver our reading and language arts and mathematics curricula in
imaginary "worlds" -- episodic, interactive series with a consistent set of
characters that are designed to cover a broad range of curriculum objectives.
Generally, each world is contained on a series of CD-ROMs, or titles, which are
divided into multiple "Adventures." Our Adventures are developed with the
assistance of an advisory board of reading, language arts and mathematics
educators, an advisory board of video game developers, television writers and
commercial animators. Various characters from our Lightspan worlds are depicted
below.
[A collection of Lightspan characters from various Lightspan Worlds and
Adventures]
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Our Lightspan Achieve Now language arts and reading curriculum provides a
variety of learning paths, all with a single objective -- improving literacy and
communication -- and is designed to ensure that all students succeed in
listening, speaking, reading, writing, viewing and producing. The Adventures
that comprise our Lightspan Achieve Now reading and language arts curriculum
address vocabulary comprehension, critical thinking skills, study skills, the
writing process, print and text recognition, phonics, decoding, and many other
areas covered by the typical K-8 reading and language arts curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW LANGUAGE ARTS AND READING CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Calamity 3-4 Reading informational text
Cosmic Cookoff K-2 Reducing test-taking anxiety
Cosmic Quest K-2 Motivation in learning
Faire Games K-2 Practicing test-taking skills
K9.5 3-4 Strategies for written and oral communication
KazMania 3-4 Literary appreciation and comprehension
Liquid Books K-6 Reading with fluency
Mona & Moki 3-4 Developing vocabulary
Road Writer K-6 Steps in writing process
Stay & Play K-2 Applying skills in everyday experiences
str.at.e.s 5-8 Confidence in reading informational text
WalkAbout K-2 Theme-based activities for literacy
</TABLE>
Our Lightspan Achieve Now math curriculum is designed to provide a set of
experiences that increase student confidence and encourage students to solve
problems, think mathematically and apply and communicate their thinking. The
Adventures that comprise our Lightspan Achieve Now mathematics curriculum
address number sense, critical thinking, number theory, estimation, geometry and
many other areas covered by the typical K-8 mathematics curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW MATH CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Cali's Geo Tools K-2 Mastery of basic math concepts
Cosmic Cookoff 3-4 Reducing test-taking anxiety
Creative Tools 3-4 Interactive scenarios
Faire Games K-2 Practicing test-taking skills
Math Gallery K-6 Understanding math problems
Math on the Move! 3-6 Mental math strategies
P.K.'s Math Studio 3-4 Mastery of basic math by solving word problems
P.K.'s Place 3-4 Practicing math skills
The Quaddle Family Mysteries 3-4 Practicing active math problem solving
The Secret of Googol K-2 Developing strong math foundations
Timeless Math 5-8 Broadening students' awareness of other cultures
through math challenges
</TABLE>
The Lightspan Achieve Now curriculum is divided into grade clusters for
K-2, 3-4, and 5-6. The 5-6 materials are also used in middle schools for poorer
performing grade 7-8 students. Each grade cluster includes 32 to 36 separate
Lightspan Achieve Now titles, with each title consisting of one distinct
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CD-ROM. There are a total of 77 separate titles, some of which are included in
more than one grade cluster. From the time we commenced sales of the Lightspan
Achieve Now product line, a number of these titles were not available on the
date of the sale, but were under development at various stages in the
development cycle. We consider titles that have completed the development cycle
and have been released for shipment to customers to be "completed," and we
consider titles still in the development cycle to be "as-yet uncompleted." While
we are under no contractual obligation to deliver any as-yet uncompleted titles
to our customers, we do intend to deliver the remaining titles on a when-and-if
available basis, and have in the past shipped additional titles to our customers
as titles have been completed. As of October 31, 1999, 72 of the 77 titles had
been completed. The remaining five titles are expected to be completed during
the first and second quarters of the fiscal year ending January 31, 2001. After
the completion and delivery of the last of these 77 titles, we will offer any
newly developed titles for sale to all existing customers at a separate price.
Lightspan Achieve Now licenses are sold on a perpetual license basis for
approximately $600 per student license including the teacher license and
materials. A complete Lightspan Achieve Now program consists of teacher licenses
containing approximately 35 CD-ROM titles appropriate to each grade level,
instructional materials, student licenses for each student containing the same
CD-ROM titles as those included with the teacher licenses, student pre-tests,
post-tests and progress checks, parenting and other materials, professional
development visits, and evaluation criteria to meet accountability standards.
Lightspan Achieve Now's curriculum runs on both Sony PlayStation game
consoles and MPEG-capable, Windows-based personal computers, though use at home
is currently almost always on Sony PlayStation game consoles. We plan to
continue development of new titles to meet changing education trends and to
refresh the product over time.
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K-12 INTERNET
Our family of Internet products and services provides teachers, students
and parents with a wide array of online learning resources.
Lightspan.com
All of our Internet products and services can be found at
www.lightspan.com, including Lightspan PageOne, Global Schoolhouse, The
Lightspan Network, The Lightspan Learning Store and StudyWeb. The information
found on our Web site is not a part of this prospectus, except for the
information we have included in the prospectus. We intend to significantly
expand and enhance the products and services offered through Lightspan.com in
early 2000, including the addition of specific content for teachers, students
and parents.
[Lightspan.com Home Page Screen Shot]
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Lightspan PageOne
Developed with Yahoo!, Lightspan PageOne helps teachers quickly and easily
build customized classroom home pages and assemble the best educational
resources available on the Internet to support their classroom instruction. With
over 35,800 registered users, Lightspan PageOne allows teachers to:
- access a database of over 115,000 educational Web sites, activities and
lesson plans which have been reviewed by educators;
- bookmark favorite sites;
- post homework assignments;
- create class albums, like collections of student artwork or projects;
- access on-line reference resources such as a dictionary, thesaurus, and
encyclopedia;
- use a variety of curriculum-based interactive learning activities in
their classrooms; and
- share these features in a password-protected environment with students'
families.
[Lightspan PageOne Home Page Screen Shot]
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Global Schoolhouse
We recently acquired Global Schoolhouse, a Web site which has over 28,900
registered users. It enables classroom to classroom collaboration by allowing
educators to share ideas and create projects together online. Global Schoolhouse
began as a pilot project of the National Science Foundation. Global Schoolhouse
has teamed with individuals, schools, businesses, and community organizations to
design, develop and manage hundreds of collaborative online learning projects
each year. Global Schoolhouse offers:
- Cyberfair, an annual global Internet competition for children in grades
K-12, who showcase their local communities by designing their own Web
sites;
- CU-Schools Videoconferencing, a real-time, community-building
conferencing system that lets students and their teachers learn and
collaborate online; and
- Internet Projects Registry, a registry of classroom projects from
teachers all over the world.
[Global Schoolhouse Home Page Screen Shot]
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StudyWeb
We recently acquired StudyWeb, a "homework helper" Web site. StudyWeb was
started approximately four years ago to specifically address one of the needs
most frequently cited by parents, teachers and students seeking to use the Web
for educational purposes -- finding research resources as easily as possible on
the Web without encountering inappropriate materials. StudyWeb has developed a
sophisticated system for identifying and reviewing Web sites, and has built a
database with more than 115,000 Web site reviews. Reviews are categorized by
subject matter and include grade level recommendations, content descriptions and
other useful information.
[StudyWeb Home Page Screen Shot]
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The Lightspan Network
The Lightspan Network is our premium online subscription service for
classroom and home use. It provides a rich array of curriculum-based K-8 content
correlated to state academic standards in an advertising-free environment. We
charge a subscription fee of approximately $2,500 annually to each subscribing
school for The Lightspan Network. The Lightspan Network:
- provides Internet activities and lesson plans;
- offers approximately 100 interactive, adventure-filled learning
activities developed by educators that cover reading, mathematics,
writing, vocabulary development, and Web literacy;
- provides access to a database of over 115,000 educational Web sites,
activities and lesson plans that have been reviewed by educators and
correlated to state standards;
- offers teachers and students Ed-mail, a personal e-mail account featuring
special security measures created specifically for use in schools;
- provides tools to enhance Internet research and student learning with a
subscription to Compton's Encyclopedia Online, a leading online reference
tool for K-12 schools; and
- offers customer support through our professional development staff and
access to our telephone help line.
[The Lightspan Network Home Page Screen Shot]
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The Lightspan Learning Store
We developed The Lightspan Learning Store in partnership with
SmarterKids.com to offer educational products online to teachers and families.
As we expand and enhance Lightspan.com, we plan to include links from products
that SmarterKids.com recommends to specific Lightspan learning activities found
on Lightspan.com. We also expect that our Lightspan learning activities will be
linked to the Lightspan Learning Store, allowing users to make an immediate
purchase of educational products related to the learning activity.
[The Lightspan Learning Store Home Page Screen Shot]
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Your School Online
We plan to launch Your School Online, currently in beta test, in early 2000
as a free home page builder for schools. We expect Your School Online to allow
teachers to automatically integrate their classrooms' Lightspan PageOne home
pages with their school's home page. We also expect that Your School Online will
work with many other Web publishing tools that a school might have in place. Its
features include:
- the ability to organize and compile Web links;
- a calendar of events that makes it easy for parents and students to find
out what events or activities are happening at school;
- a simple way for users to connect to Lightspan PageOne home pages for
particular classrooms within a given school;
- a site for teachers to post notes and announcements and receive feedback;
- a school contact page which allows parents to easily send e-mail to a
school representative; and
- easy access to Web site usage statistics to help administrators
understand what is popular on their site.
[Your School Online Home Page Screen Shot]
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Financial information about our Lightspan Achieve Now educational software
and our Internet products and services is included in Note 8 to the Lightspan
financial statements that are included elsewhere in this prospectus.
HIGHER EDUCATION
Academic Systems' products address the needs of under-prepared college
students, and consist of:
- Interactive Mathematics -- Elementary Algebra, which covers whole
numbers, proportional reasoning, signed numbers and introductory geometry
and algebra;
- Interactive Mathematics -- Algebra, which covers polynomials, rational
expressions, linear equations and graphing;
- Interactive Mathematics -- Intermediate Algebra, which covers rational
exponents, quadratic equations, functions, exponential and logarithmic
functions, and non-linear equations and inequalities;
- Interactive Mathematics -- College Algebra, which includes non-linear
functions, equations, conic sections, matrices, determinants, induction,
sequences and counting; and
- Interactive English, which prepares students for academic writing,
including narrative writing, data analysis, text interpretation, and
persuasive writing, and contains concise grammar instructions on common
college writing errors and related reading and comprehension activities.
Academic Systems' products are media-rich with extensive graphics and video
components and are grounded in teaching techniques that focus on students as
individuals. Students take the courses in a computer lab or on a Windows-based
personal computer in their residence, at their own pace. Students review lessons
and then practice the concepts learned. Depending upon the student's performance
in the practice session, the program prompts further review or moves the student
onto the next lesson. Wrong answers will prompt an explanation of how to solve
the question. In the Elementary Algebra course, there is a special help function
featuring video characters. Each character represents a different learning style
and offers multiple approaches to solving the problem, ranging from showing the
method that can be used to solve the problem, to explaining the solution with a
picture or graph, to providing the solution from a theoretical perspective. This
often provides the help that under-prepared college students need to pass the
course and succeed in school. Academic Systems also offers printed practice
materials.
Academic Systems provides management services to educators who use its
curriculum, typically by compiling and communicating information about student
time-on-task and performance while using the curriculum. These management
services can be accessed on the Internet at academic.com or a college's Web
site, and also on a college's local area network.
Academic Systems curriculum products are licensed to colleges and then sold
by the licensing colleges to students on a student-by-student basis for use with
each class, instead of a textbook. The licensing fee to colleges of $60 to $80
per student is approximately equal to an equivalent textbook.
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[ACADEMIC SYSTEMS HOME PAGE SCREEN SHOT]
PRODUCT DESIGN AND DEVELOPMENT
We consider successful product development to be essential to maintaining
and growing our market position. We expect to continue enhancing our Lightspan
Achieve Now and Academic Systems curricula while significantly increasing our
efforts to further develop our Internet products and services.
Lightspan Achieve Now products include a diverse mix of media, formats, and
visual presentations. Every Lightspan Adventure is built according to the
following fundamental design principles, which we believe differentiate our
products from competitive products:
- we correlate each title to state and national academic standards;
- we create interesting characters in engaging stories that unfold with the
help of full-screen, full-motion video and music, and with sophisticated
interactivity representing many of the techniques of the latest video
games; and
- we develop assessment components for the teacher to monitor students'
progress for each of the titles.
All Lightspan Achieve Now programs are designed so they can be used on a
television as well as on a computer screen. Text elements are rendered on the
screen for clear visibility from across the room. Live action video and
animation segments are converted from original footage to the MPEG software
format, and then digitally optimized for a sharp television picture. We believe
these design features offer a unique opportunity to move our Lightspan Achieve
Now curriculum to a digital set-top box once broadband technology becomes widely
available to cable television subscribers. We also believe that our competitors
who have designed their educational technology for use only on a computer screen
will experience difficulties in converting their computer interfaces to
television interfaces, and that we are better positioned to move our products to
a digital set-top box platform.
We are pursuing a broad range of product development efforts to expand and
enhance our Lightspan.com Web site. These product development efforts include
developing new collaborative learning applications for Global Schoolhouse and
enhancing its existing content, developing new content for teachers, parents and
students on Lightspan.com, and expanding our electronic commerce offerings.
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Academic Systems' math and writing products combine media-rich video and
graphics with teaching techniques that focus on students as individuals and
offer extensive help and reinforcement examples. The Academic Systems curriculum
is reviewed each school year based on input from user groups made up of faculty
from across the country, and updated when appropriate.
SALES AND MARKETING
We sell our Lightspan Achieve Now curriculum and The Lightspan Network
directly to school districts. We have identified and are targeting school
districts that routinely implement new and innovative programs. Our programs are
generally sold "top down," with the first presentations made to a school
district's key decision maker, who is often the superintendent or assistant
superintendent in charge of curriculum or technology. Schools are becoming more
involved in the decision process as site-based management is implemented within
school districts. The sales cycle for the initial purchase of our Lightspan
Achieve Now curriculum is typically six to twelve months, with shorter periods
for The Lightspan Network.
A school district will typically purchase the Lightspan Achieve Now
curriculum for a few classrooms in one school. Upon the successful
implementation of the Lightspan Achieve Now curriculum, the school district will
typically add the curriculum in other schools within the district. For example,
during our fiscal year ended January 31, 1999, 74% of school districts that were
using our Lightspan Achieve Now curriculum at the beginning of the year bought
additional products. The product is also often sold deeper into individual
schools, either in additional classrooms in a given grade or in additional grade
levels.
As of October 31, 1999, we employed 73 direct salespeople for grades K-12.
As of that date, this sales force was supported by a 69 person professional
development team that provides pre- and post-sales support and works with
current Lightspan schools to identify additional sales opportunities. While our
sales force and professional development team are focused on selling into new
accounts and increasing our presence in current accounts, they also act as
partners with implementing schools in identifying funding sources. Each member
of our sales force has substantial experience in educational technology sales,
is generally working in his or her home territory and has extensive contacts in
school districts within their territory.
Our marketing efforts include:
- hosting policy forums for education policy makers at industry events;
- giving keynote speeches and presentations at major education conventions;
- participating on the advisory boards of key organizations in education;
- presenting at education trade shows and customer conferences; and
- pursuing focused media relations activities in the education trade press
and in local media in communities that are implementing our Lightspan
Achieve Now curriculum.
Sales of our Internet products and services are supported by our Lightspan
field sales force, including a dedicated team of eight Internet sales people
that focus on driving state-wide sales of our Internet products and services. We
offer customized versions of The Lightspan Network to states having large
contracts, and currently have contracts with the states of Illinois, North
Carolina, Pennsylvania, Oklahoma, Texas, Delaware, and Hawaii. To date, most of
the marketing focus for our Internet products and services has been on the
educational community. For example, a very active campaign of direct mail,
telemarketing and advertising focused on the educational community, along with
participation by our field sales and professional development staffs at the
school district and school site levels and appearances at trade shows, as of
October 31, 1999 had resulted in the registration of over 35,800 teachers for
Lightspan PageOne since its launch in June 1999.
In the future, our focus will expand to include marketing directly to
families. Print advertising will be supplemented with a variety of online
strategies. A series of promotions will be directed at encouraging
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usage and may include sweepstakes, user points affinity programs, and referral
programs. Public relations efforts will focus on educational, consumer and
business press. We have formed an advisory board of educators to assist us with
the design and development of our Internet products and services. Direct
marketing will concentrate on teachers and parents. We expect the results of
these marketing efforts will be an increase in the number of teachers, students
and parents accessing the content and tools provided by Lightspan.com. We
believe that the marketing of Lightspan.com and our Internet products and
services will contribute to sales of The Lightspan Network and sales of our
Lightspan Achieve Now curriculum.
As of October 31, 1999 Academic Systems employed 18 direct sales people in
a separate sales organization. Academic Systems' sales and marketing efforts
focus on statewide, system-wide and district sales, and specifically target
potential purchasers that offer opportunities for sales of the Academic Systems
curriculum to multiple college class sections. A typical initial sale of the
Academic Systems curriculum will be for several sections in a college course. As
the faculty becomes familiar with the Academic Systems curriculum and witnesses
improved results from sections that are using the curriculum, Academic Systems'
contracts tend to be renewed and increased. Over 90% of the institutions that
have installed any portion of the Academic Systems curriculum since it was first
offered remain as installed users. In addition, over 70% of institutions that
have renewed their contracts with Academic Systems over its last four fiscal
years have signed larger contracts. Academic Systems' marketing efforts include
print advertising in periodicals directed at the higher education market, direct
marketing, participation at trade shows, and user conferences.
PROFESSIONAL DEVELOPMENT AND SUPPORT SERVICES
We believe that successfully implementing our products and services in
schools and extending them to the home is necessary to realize potential
improvements in student achievement. We also believe that improvements in
student achievement differentiate the Lightspan Achieve Now curriculum from
products offered by our competitors and generate further support at the school
level for expanded sales. Our goal is to become the partner of schools that
implement our products and services. Given the comprehensive nature of the
Lightspan Achieve Now curriculum, its connection of schools to homes, the rapid
technological changes brought about by the Internet, and educators' needs for
ongoing technical training and mentoring, we commit substantial resources to
train educators in the use of our products and services.
As of October 31, 1999, we maintained a staff of 69 trained professionals,
most of whom are former educators, to provide pre-sale planning and post-sale
implementation, customer support, training services and motivation for teachers,
administrators and parents in Lightspan schools. We also operate a toll-free,
five-day per week technical and curriculum support telephone help line called
Partner Line that is accessible to both teachers and parents. We include
professional development and Partner Line services with the initial purchase of
Lightspan Achieve Now. Schools may purchase additional professional development
or support services. We believe that the on-site training provided by our
professional development staff is a key factor in encouraging school districts
to implement Lightspan products in more schools within the district and in
additional classrooms within an individual school.
We provide pre-sale and post-sale support for college campuses that use our
Academic Systems curriculum in a manner similar to that provided for our
Lightspan Achieve Now curriculum, with a greater emphasis on technical support
and installation related to the Web-based or local area networked student
management system. Installation and support are included with the software
license and additional services may be purchased.
COMPETITION
The market for educational technology content and services is highly
fragmented and competitive, with no company having significant market
penetration. We generally compete for school instructional dollars with textbook
publishers, software publishers, supplemental print publishers, Internet content
and service providers, and training services, among others. We believe our
solution is unique and competes favorably with existing products in these
categories on a price and performance basis.
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In the instructional technology segment of this market, we believe our
existing and prospective competitors may be divided into the following groups:
- comprehensive curriculum software publishers which offer various
school-based computer-based learning systems, including Jostens Learning
Corporation and Computer Curriculum Corporation;
- "edutainment" software vendors, which principally target the consumer
market but also sell to schools;
- education-oriented Internet services and the educational segments of
general on-line service providers;
- distance learning providers; and
- programs that take over management of the school or provide substantial
tutoring help, such as those provided by Edison Schools, Inc. and Sylvan
Learning Systems, Inc.
As Internet and broadband services become more widely deployed in K-12 and
colleges, we believe new and as yet unidentified competition will enter the
market. Traditional media companies and rapidly expanding Internet companies are
likely to present new competition. Many of our current and potential competitors
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. In addition, many of these current and potential competitors can
devote substantially greater resources to product development, marketing and
promotional campaigns and Web site and systems development than we can.
RIGHTS TO CONTENT
We rely principally upon a combination of copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary rights.
We developed and own the rights to nearly all of the content within the
Lightspan Achieve Now curriculum, including the worlds, characters, stories,
educational content, and games. We hold trademarks to all of our Lightspan
Achieve Now worlds, our individual CD-ROM titles, and many of our characters.
SEASONALITY
Our operating results are expected to vary significantly from quarter to
quarter because of seasonal influences on demand for our Lightspan Achieve Now
and Academic Systems curricula and our services based on school calendars,
budget cycles and timing of school districts' funding sources. Our Lightspan
Achieve Now license transactions have historically been highest in our second
fiscal quarter, and lowest in our first fiscal quarter.
EMPLOYEES
As of October 31, 1999, we employed 413 persons, including 132 in
technology and development, 49 in general and administrative, 145 in sales and
marketing and 87 in professional development. We expect that our headcount will
increase, particularly in sales and professional development and Internet
marketing and product development. None of our employees is represented by a
labor union and we consider our employee relations to be excellent.
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FACILITIES
Our headquarters are located in San Diego, California, where we currently
lease approximately 47,000 square feet under a lease expiring in 2003. Warehouse
facilities are located in Carlsbad, California, where we currently lease
approximately 9,000 square feet under a lease expiring in 2002. Additional
facilities for the Internet group are located in Santa Monica, California, where
approximately 6,900 square feet are under a lease expiring in 2002, and, for
Academic Systems, in Mountain View, California, where approximately 15,500
square feet are under a lease expiring in 2001. While we consider our current
facilities adequate for our current operations, we expect that we will need to
lease additional facilities as our operations expand.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information about our executive
officers, key employees and directors as of January 13, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ----------------------------------------------
<S> <C> <C>
John T. Kernan.................... 53 Chief Executive Officer and Chairman
Carl Zeiger....................... 57 President, Chief Operating Officer and
Director
Kathleen R. McElwee............... 45 Vice President of Finance and Chief Financial
Officer
John H. Brandon................... 43 Executive Vice President, President of
Academic Systems and Director
Winifred B. Wechsler.............. 43 Executive Vice President and General Manager
of Internet and Broadband Services
Merritt D. Farren................. 39 Senior Vice President of Corporate Development
Sandra K. Fivecoat................ 50 Senior Vice President of Sales
Bernice Stafford.................. 58 Vice President of School Marketing and
Evaluation
Dr. Larry R. Vaughn............... 61 Senior Vice President of School Reform
James W. Breyer................... 38 Director(1)
L. John Doerr..................... 48 Director(1)
Bradley P. Dusto.................. 46 Director
David D. Hiller................... 46 Director(2)
Thomas F. Nagel................... 36 Director(3)
Bruce W. Ravenel.................. 49 Director
Jeffrey P. Sanderson.............. 40 Director(2)
Barry J. Schiffman................ 54 Director(2)
Ronald A. Weinberg................ 48 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) On January 11, 2000 the board of directors appointed Mr. Nagel as a member
of the board, effective as of the closing of this offering and the purchase
by Cox Communications Holdings, Inc. of $12.5 million of common stock at the
time of closing of this offering.
John T. Kernan co-founded Lightspan and has served as our Chairman and
Chief Executive Officer since September 1993. Prior to founding Lightspan, Mr.
Kernan served as Chairman and Chief Executive Officer of Jostens Learning
Corporation, an educational software company. Mr. Kernan developed Jostens
Learning from a start-up company in 1985 (then named Education Systems
Technology Corporation) to one of the largest educational software businesses in
the United States. Under Mr. Kernan's leadership, Jostens Learning was a leading
supplier of pre-kindergarten through adult educational software. Prior to
founding Jostens Learning, Mr. Kernan was an executive with Gill Cable
Corporation, a Northern California cable TV operator. He also was Vice President
of Product Development for DELTAK, Inc. (now NETg), then the nation's largest
provider of video-based training for technical professionals. Mr. Kernan was the
President of the Software Publishers Association, has been named "Educator of
the Decade" by Electronic Learning Magazine and regional "Entrepreneur of the
Year" by Inc. Magazine, among other distinctions. Mr. Kernan helped found
Academic Systems, which has since been acquired by Lightspan, and Elemental
Software, which has since been acquired by Macromedia. Mr. Kernan sits on the
boards of Teach.com and TechNet. Mr. Kernan holds a Bachelor of Science from
Loyola College.
Carl Zeiger co-founded Lightspan and has served as our President and Chief
Operating Officer and as one of our directors since September 1993. Prior to
founding Lightspan, Mr. Zeiger served as the
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President and Chief Operating Officer of Jostens Learning Corporation. Along
with Mr. Kernan, Mr. Zeiger developed Jostens Learning into a leading supplier
of pre-kindergarten through adult educational software. Prior to joining Jostens
Learning, Mr. Zeiger served as Senior Vice President of Finance for Integrated
Software Systems Corporation, a leading provider of presentation graphics
software, and managed its initial and secondary public offerings and its
eventual sale to Computer Associates. Mr. Zeiger is a certified public
accountant in the State of California and holds a Bachelor of Science from the
University of Denver.
Kathleen R. McElwee has served as our Vice President of Finance and Chief
Financial Officer since January 1999. From November 1997 to January 1999, she
served as Vice President of Finance and Chief Financial Officer of Galoob Toys,
Inc., a developer and marketer of toys. From December 1995 to November 1997, she
served as Vice President of Planning for Galoob. From September 1993 to December
1995, she served as Assistant Controller of Nissan Motor Corporation in USA, an
automobile company. Ms. McElwee holds a Bachelor in Business Administration from
Pennsylvania State University and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
John H. Brandon has served as our Executive Vice President and President of
Academic Systems since we acquired Academic Systems in September 1999. From June
1997 to September 1999, he served as President and Chief Executive Officer of
Academic Systems. From 1987 to May 1997, Mr. Brandon held various management
positions at Adobe Systems, a provider of Web and print publishing software, and
most recently was Vice President and General Manager of Adobe North America. Mr.
Brandon holds a Bachelor of Arts from the University of California at Davis.
Winifred B. Wechsler joined Lightspan in February 1999 and is our Executive
Vice President and General Manager of Internet and Broadband Services. From 1985
to January 1999, Ms. Wechsler served in various management positions at The Walt
Disney Company, a media and entertainment company, and most recently as Senior
Vice President of Buena Vista Internet Group, or BVIG. One of the founders of
Disney Online, Ms. Wechsler launched and managed Disney.com, directing all
operations, including design, production, electronic commerce, advertising and
marketing. In addition, Ms. Wechsler oversaw Disney's investment in Infoseek and
the launch of Go Network and set policy and direction for BVIG. Prior to joining
BVIG, Ms. Wechsler held a variety of positions at the Disney Channel, including
Senior Vice President of New Business Development. Ms. Wechsler holds a Bachelor
of Arts from Wellesley College and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
Merritt D. Farren has served as our Senior Vice President of Corporate
Development since April 1999. From May 1988 to April 1999, Mr. Farren held
various management positions at The Walt Disney Company, a media and
entertainment company, and most recently was Senior Vice President and General
Counsel of The Disneyland Resort, Anaheim, California. Mr. Farren holds a
Bachelor of Arts from Stanford University and a Juris Doctor from the University
of California at Berkeley.
Sandra K. Fivecoat has served as our Senior Vice President of Sales since
February 1999. From April 1998 to January 1999, she served as Regional Vice
President for our South Central Region. From 1987 to April 1998, Ms. Fivecoat
held various sales management positions at Apple Computer, a manufacturer of
computers and software. Ms. Fivecoat holds a Bachelor of Science and a Masters
in Education from the University of Texas at Austin.
Bernice Stafford co-founded Lightspan and has served as our Vice President
of School Marketing and Evaluation since October 1993. From 1989 to 1993, she
served as Director of Sales Programs at Jostens Learning Corporation. Ms.
Stafford holds a Bachelor of Arts and a Master of Arts from the University of
California at Berkeley.
Dr. Larry R. Vaughn, Ed.D. has served as our Senior Vice President of
School Reform since January 1999. From January 1993 to July 1998, he served as
superintendent of Wichita Public Schools in Wichita, Kansas. Dr. Vaughn holds a
Bachelor of Arts from Mississippi State University and a Doctorate in Education
from the University of Houston.
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James W. Breyer has served as one of our directors since December 1993.
Since 1990, Mr. Breyer has been a partner at Accel Partners, a venture capital
firm. He is responsible for Accel's involvement in more than twenty companies
that have completed public offerings or successful mergers. Mr. Breyer currently
serves on the boards of directors of Actuate, a provider of electronic business
services, HearMe, a provider of real-time Internet communication tools,
RealNetworks, a provider of streaming media technology on the Internet, and
several private companies. Mr. Breyer holds a Bachelor of Science degree from
Stanford University and a Masters in Business Administration from the Harvard
Business School.
L. John Doerr has served as one of our directors since December 1993. Since
1980, Mr. Doerr has been a partner at Kleiner Perkins Caufield & Byers, a
venture capital firm. Mr. Doerr was the founding Chief Executive Officer of
Silicon Compilers. Mr. Doerr currently serves on the boards of directors of
Intuit, a producer of electronic finance software, Amazon.com, an online
retailer, Macromedia, a provider of Web publishing software, and Sun
Microsystems, a provider of network computing products and services, as well as
several privately held companies. Mr. Doerr co-manages the Technology Network,
the high-technology community's political action organization. He holds a
Bachelor of Science and Master of Science from Rice University and a Masters in
Business Administration from the Harvard Business School.
Bradley P. Dusto has served as one of our directors since May 1999. Mr.
Dusto is Chief Technology Officer and Executive Vice President for Comcast Cable
Communications, a media company, and is responsible for engineering, product
development and new product operations. Prior to joining Comcast in 1992, Mr.
Dusto held management positions with several companies in the cable television
and satellite industries. He received a Bachelor of Science from Cornell
University and a Masters in Business Administration from New York University.
David D. Hiller has served as one of our directors since September 1996.
Since October 1993, Mr. Hiller has served as Senior Vice President of
Development at Tribune Company, a media company. He is responsible for strategic
planning and acquisitions for all Tribune businesses. Mr. Hiller currently
serves on the boards of directors of several private companies. He holds a
Bachelor of Arts from Harvard College and a Juris Doctor from Harvard Law
School.
Thomas F. Nagel is scheduled to become one of our directors upon the
closing of this offering and the purchase by Cox Communications Holdings, Inc.
of $12.5 million of common stock at the time of the closing of this offering.
Since July 1999 Mr. Nagel has served as Vice President of Business Development
for Cox Communications, Inc. Mr. Nagel joined Cox Communications in 1995 as
Director of Multimedia Applications. Previously, he served two years as Business
Development Manager in the New Media group of Cox Enterprises, Cox
Communications' majority shareholder. Mr. Nagel serves on the board of Liberate
Technologies, Inc., a company developing software and services for advanced
cable set-top boxes. Mr. Nagel holds a Bachelor of Science from Auburn
University and a Masters in Business Administration from the University of North
Carolina.
Bruce W. Ravenel has served as one of our directors since 1994. Since June
1999 he has served as a director and Executive Vice President of Liberty
Digital, Inc., a new media investment company. From September 1998 to June 1999
he was employed by Liberty Media Corporation in connection with the formation of
Liberty Digital. From April 1998 to September 1998, Mr. Ravenel was Executive
Vice President -- Interactive Ventures of TCI Communications, Inc., a former
subsidiary of Tele-Communications, Inc. Mr. Ravenel also served as President and
Chief Executive Officer of TCI.Net, Inc. and Senior Vice President -- Internet
Services of TCI Communications, Inc. from January 1996 to April 1998. Mr.
Ravenel also served as Senior Vice President and Chief Operating Officer of TCI
Technology Ventures, Inc. from March 1994 to January 1996. Mr. Ravenel was a
founder and served on the board of directors of At Home Corporation, a media
company, from March 1995 until March 1999. He serves on the boards of directors
of several private companies. Mr. Ravenel holds a Bachelor of Arts from the
University of Colorado, where he also studied in the doctoral program in
computer science.
Jeffrey P. Sanderson has served as one of our directors since December
1998. Since June 1984, Mr. Sanderson has served as General Manager of Business
Development for the Consumer and Commerce
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Group of Microsoft Corporation, a software company. Mr. Sanderson holds a
Bachelor of Arts from Princeton University and attended the Harvard Business
School.
Barry J. Schiffman has served as one of our directors since August 1997.
Since 1996, Mr. Schiffman has served as President, Chief Investment Officer and
a director of JAFCO America Ventures, Inc., a venture capital firm. Prior to
JAFCO, he was a general partner at Weiss, Peck & Greer Venture Partners, a
venture capital firm. Mr. Schiffman is currently chairman of AirGate PCS, Inc.
(PCSA), an affiliate of Sprint, and member of the board of several private
companies. Mr. Schiffman holds a Bachelor of Science from Georgia Institute of
Technology and a Masters in Business Administration from the Stanford Graduate
School of Business.
Ronald A. Weinberg joined our board of directors in October 1999. Mr.
Weinberg serves as President and co-CEO of CINAR Corporation, an integrated
entertainment and education company, which he founded in 1976. Mr. Weinberg is
the producer on all CINAR productions including some of its most successful
current series, such as Arthur, Are You Afraid of the Dark?, The Busy World of
Richard Scarry, Wimzie's House, and Lassie. Mr. Weinberg currently serves on the
boards of directors of Cossette Communications Group Inc., a communications and
marketing concern, and several private companies and institutions. Mr. Weinberg
holds a Bachelor of Science from Tulane University.
BOARD COMPOSITION
Upon the closing of this offering, in accordance with the terms of our
restated certificate of incorporation, the terms of office of the board of
directors will be divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.
Our Class I directors will be Messrs. Brandon, Doerr, Schiffman and
Sanderson, our Class II directors will be Messrs. Hiller, Dusto, Ravenel and
Zeiger, and our Class III directors will be Messrs. Breyer, Kernan and Weinberg,
and Nagel provided he becomes a member of the board. At each annual meeting of
stockholders after the initial classification, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of our company.
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee consists of David D. Hiller, Jeffrey
P. Sanderson and Barry J. Schiffman. The audit committee makes recommendations
to the board of directors regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by our
independent auditors and reviews and evaluates our audit and control functions.
The compensation committee consists of James W. Breyer and L. John Doerr.
The compensation committee makes recommendations regarding our 1992 Stock Option
Plan and our 2000 Equity Incentive Plan and makes general decisions concerning
salaries and incentive compensation for our employees and consultants.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1999, James W. Breyer and L. John
Doerr served as members of our compensation committee. During that fiscal year,
none of our executive officers or employees served as a director or as a member
of the compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. In addition, all directors are eligible to participate in
our 2000 Equity Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all capacities
during the fiscal year ended January 31, 1999 by our Chief Executive Officer and
two other executive officers. The compensation described in this table does not
include medical, group life insurance or other benefits which are available
generally to all of our salaried employees and certain perquisites and other
personal benefits received which do not exceed the lesser of $50,000 or 10% of
his or her salary and bonus as disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------- --------- --------
<S> <C> <C>
John T. Kernan.............................................. $200,000 --
Chairman and Chief Executive Officer
Carl Zeiger................................................. $200,000 --
President and Chief Operating Officer
Michelle M. Hays(1)......................................... $126,000 $6,000
Former Vice President of Finance and Administration
</TABLE>
- ---------------
(1) Ms. Hays resigned from Lightspan in September 1998.
No options were granted to our executive officers during the fiscal year
ended January 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information as of January 31, 1999 regarding
options held by the executive officers listed. No stock appreciation rights were
outstanding at January 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 31, 1999 JANUARY 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John T. Kernan................................... 0 0 0 0
Carl Zeiger...................................... 0 0 0 0
Michelle M. Hays................................. 82,498 27,502 $66,749 $17,251
</TABLE>
Dollar values in the table above are calculated by taking the fair market
value of our common stock on January 31, 1999, as determined by our board of
directors, subtracting the per share exercise price of the options, and
multiplying the result by the number of shares. Options were granted at an
exercise price equal to the fair market value of our common stock, as determined
by the board of directors on the date of grant.
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<PAGE> 65
Ms. Hays resigned from Lightspan in September 1998. On March 15, 1999, her
options stopped vesting, and in April 1999 all of her unexercised options were
cancelled.
EQUITY PLANS
2000 Equity Incentive Plan
A total of 4,890,272 shares of common stock are currently reserved for
issuance pursuant to our 2000 Equity Incentive Plan. This share reserve shall
automatically increase each year, based upon a formula, by an amount not to
exceed 3% of our total outstanding common stock at the time of the automatic
increases. The 2000 Plan provides for the grant of options to our directors,
officers, employees, consultants and certain of our advisors. As of December 31,
1999, options to purchase 3,485,568 shares under the 2000 Plan were outstanding,
and 242,773 shares remained available for issuance pursuant to the 2000 Plan. We
have also reserved an additional 1,250,000 shares of common stock to become
available for grants beginning at the close of this offering.
The 2000 Plan permits the granting of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 2000 Plan permits the granting of stock bonuses and rights to
purchase restricted stock. No person is eligible to be granted options covering
more than one million shares of common stock in any calendar year.
The 2000 Plan is administered by the board or a committee appointed by the
board. Subject to the limitations set forth in the 2000 Plan, the board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each stock award, to determine whether an
option is to be an incentive stock option or a nonstatutory stock option, to
establish vesting schedules, to specify the option exercise price and the type
of consideration to be paid upon exercise and, subject to certain restrictions,
to specify other terms of stock awards.
The maximum term of options granted under the 2000 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under all of our
incentive plans) may not exceed $100,000 or the options or portion thereof which
exceed such limit (according to the order in which they are granted) shall be
treated as nonstatutory stock options. Stock options granted under the 2000 Plan
generally are non-transferable. Options expire three months after the
termination of an optionee's service.
The exercise price of options granted under the 2000 Plan is determined by
the board of directors in accordance with the guidelines set forth in the 2000
Plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant. Options granted
under the 2000 Plan vest at the rate specified in the option agreement. The
exercise price of incentive stock options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of our capital stock must be at least 110% of the fair
market value of such stock on the date of grant and the term of such incentive
stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
2000 Plan shall be in such form and will contain such terms and conditions as
the board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value of our
common stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the 2000 Plan are generally transferable.
Pursuant to the 2000 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but exercised shares repurchased by us pursuant to a right
of repurchase will not again become available for grant.
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<PAGE> 66
Upon certain changes in control, all outstanding stock awards under the
2000 Plan must either be assumed or substituted for by the surviving entity. In
the event the surviving entity does not assume or substitute for such stock
awards, such stock awards will be accelerated and then terminated to the extent
not exercised prior to such change in control.
The board has the authority to amend or terminate the 2000 Plan. The
existence of the 2000 Plan does not affect the board's ability to grant other
incentives or compensation under other authority that it has.
2000 Employee Stock Purchase Plan
In October 1999, we adopted the 2000 Employee Stock Purchase Plan. A total
of 500,000 shares of common stock has been reserved for issuance under the
Purchase Plan. This share reserve shall automatically increase each year, based
upon a formula, by an amount not to exceed 1% of our total outstanding common
stock at the time of the automatic increases. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code. Under the Purchase Plan, the board may authorize
participation by eligible employees, including officers, in periodic offerings
following the commencement of the Purchase Plan.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least 5 months per calendar year. Employees who participate in an offering may
have up to 15% of their earnings withheld pursuant to the Purchase Plan. The
amount withheld is then used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment.
In the event of a merger, reorganization, consolidation or liquidation, the
board has discretion to provide that each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation or the
board may provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to such merger or other transaction. The board
has the authority to amend or terminate the Purchase Plan, provided, however,
that no such action may adversely affect any outstanding rights to purchase
common stock.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan.
Our 401(k) Plan provides that each participant may contribute up to 20% of his
or her pre-tax gross compensation (up to a statutorily prescribed annual limit
of $10,000 in 1999). Employees must be twenty-one years old to participate and
are eligible on the first day of the quarter following six months as our
employee. All amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect to
invest their contributions in various established funds.
1992 Stock Option Plan
Upon the closing of our acquisition of Academic Systems, we assumed
Academic Systems' 1992 Stock Option Plan, under which outstanding options to
purchase shares of common stock of Academic Systems became exercisable for
263,669 shares of Lightspan common stock. As of December 31, 1999, options to
purchase 251,883 shares of common stock were outstanding under the 1992 Stock
Option Plan. We no longer grant options under the 1992 Stock Option Plan.
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<PAGE> 67
EMPLOYMENT AGREEMENTS
We have no employment agreements with any of our officers or employees.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON LIABILITY
Our bylaws provide that we must indemnify our directors and officers and
may indemnify our employees and other agents to the fullest extent permitted by
Delaware law, except with respect to certain proceedings initiated by these
persons. Our bylaws also allow us to enter into indemnification contracts with
our directors and officers and to purchase insurance on behalf of any person we
are required or permitted to indemnify. Pursuant to this provision, we have
entered into indemnification agreements with each of our directors and executive
officers.
In addition, our restated certificate provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of their fiduciary duties as a director, except for liability for any
breach of the director's duty of loyalty to us or our stockholders; for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; under Section 174 of the Delaware General Corporation Law; or
for any transaction from which the director derives an improper personal
benefit. The restated certificate also provides that if the Delaware General
Corporation Law is amended after our stockholders' approval of the restated
certificate to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. The provision does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
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<PAGE> 68
RELATED-PARTY TRANSACTIONS
The following is a description of transactions occurring after February 1,
1996 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than compensation arrangements which are described under "Management."
The following affiliates of our directors purchased securities in the
amounts set forth in the chart below. Certain additional issuances are discussed
in more detail in the paragraphs below.
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED
PURCHASER(1) STOCK STOCK STOCK WARRANTS
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Entities Affiliated with Directors
Entities affiliated with Accel
Partners(2)........................... 327,381 475,410 1,224,902 38,021
Comcast Cable Corporation(3)............ 297,619 -- 1,000,000 --
Entities affiliated with JAFCO America
Ventures, Inc.(4)..................... -- 2,127,658 -- --
Entities affiliated with Kleiner,
Perkins, Caufield & Byers(5).......... 166,666 475,414 1,235,593 38,023
Entities affiliated with Liberty
Digital, Inc.(6)...................... 297,619 207,174 3,661,951 23,546
Microsoft Corporation(7)................ 297,619 475,415 1,203,243 33,313
Tribune Company(8)...................... 1,666,667 741,373 200,000 30,718
Price Per Share:........................ $6.00 $3.76 $5.00 $3.76 - $5.00
</TABLE>
- -------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Mr. James W. Breyer, one of our directors, is a partner of Accel Partners.
(3) Mr. Bradley P. Dusto, one of our directors, is the Chief Technology Officer
and Executive Vice President of Comcast Cable Communications, Inc.
(4) Mr. Barry J. Schiffman, one of our directors, is President and Chief
Investment Officer of JAFCO America Ventures, Inc.
(5) Mr. L. John Doerr, one of our directors, is a partner of Kleiner, Perkins,
Caufield & Byers.
(6) Mr. Bruce W. Ravenel, one of our directors, is an Executive Vice President
of Liberty Digital, Inc.
(7) Mr. Jeffrey P. Sanderson, one of our directors, is General Manager of
Business Development of Microsoft Corporation.
(8) Mr. David D. Hiller, one of our directors, is Senior Vice President of
Development of Tribune Company.
In September 1999, we acquired Academic Systems. John Brandon and funds
associated with four of our other directors, Messrs. Breyer, Doerr, Ravenel and
Sanderson, were shareholders of Academic Systems and received shares of our
common stock and Series E preferred stock in the acquisition.
In October 1999, CINAR Corporation purchased 2.5 million shares of our
Series E preferred stock (which will convert into 1.25 million shares of common
stock at the close of this offering) at $5.00 per share. CINAR also agreed to
purchase $10 million of our common stock (909,091 shares, assuming an initial
public offering price of $11.00 per share) in a private placement that is
scheduled to occur concurrently with our initial public offering at the initial
public offering price. We also granted CINAR warrants to purchase 500,000 shares
of our Series E preferred stock (which will become a warrant to purchase 250,000
shares of common stock at the close of this offering) that will vest upon the
achievement of various agreed-to strategic goals. As part of our agreement with
CINAR, Ronald A. Weinberg, CINAR's President and co-CEO, joined our board.
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<PAGE> 69
In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. As part of our agreement, Cox Communications
agreed to purchase $12.5 million of our common stock, or 1,136,364 shares
assuming an initial public offering price of $11 per share, in a private
placement that is scheduled to occur concurrently with our initial public
offering. We also agreed to grant to Cox Communications a warrant to purchase
750,000 shares of our Series E preferred stock at the close of this offering,
which will become a warrant to purchase 375,000 of common stock at the close of
this offering. As part of our agreement with Cox Communications, Thomas F.
Nagel, Cox Communications Inc.'s Vice President of Business Development, will
join our board upon the close of this offering and the close of the purchase by
Cox Communications of our common stock.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal shareholders will be approved by a majority of
the independent and disinterested members of the board of directors, will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties and will be in connection with our bona fide business purposes.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
- each person who beneficially owns more than five percent of the common
stock;
- each of our directors;
- each of our executive officers listed in the Summary Compensation Table
under "Management"; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each person or entity named
below is c/o The Lightspan Partnership, Inc., 10140 Campus Point Drive, San
Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership before the offering is based on 31,813,249 shares of common stock
outstanding as of December 31, 1999, as adjusted to reflect the conversion of
all outstanding shares of preferred stock upon the closing of this offering.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 1,125,000 additional shares of our common stock, and up to
44,419,487 shares of common stock will be outstanding after the completion of
this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
John T. Kernan(1)......................................... 1,302,715 4.1% 3.0%
Carl Zeiger............................................... 1,288,500 4.1% 3.0%
John H. Brandon(2)........................................ 323,630 1.0% *
Michelle M. Hays(3)....................................... 25,000 * *
James W. Breyer(4)........................................ 3,011,465 9.5% 7.1%
Accel Partners
L. John Doerr(5).......................................... 2,957,114 9.3% 7.0%
Kleiner, Perkins, Caufield & Byers
Jeffrey P. Sanderson(6)................................... 2,761,417 8.7% 6.5%
Microsoft Corporation
David D. Hiller(7)........................................ 1,800,475 5.7% 4.4%
Tribune Company
Bradley P. Dusto(8)....................................... 2,404,130 7.6% 5.6%
Comcast Cable Corporation
Bruce W. Ravenel(9)....................................... 3,928,932 12.3% 9.1%
Liberty Digital, Inc.
Barry J. Schiffman(10).................................... 1,088,831 3.4% 3.1%
JAFCO America Ventures, Inc.
Ronald A. Weinberg(11).................................... 1,250,000 3.9% 5.0%
CINAR Corporation
Thomas F. Nagel(12)....................................... 0 * 2.6%
Cox Communications Holdings, Inc.
All directors and officers as a group (14 persons)(13).... 22,219,293 69.0% 56.9%
</TABLE>
- ---------------
(1) Includes 1,135 shares issuable under options exercisable by February 29,
2000.
(2) Includes 202,420 shares issuable under options exercisable by February 29,
2000.
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<PAGE> 71
(3) Michelle M. Hays resigned from Lightspan in September 1998.
(4) Mr. Breyer's business address is 428 University Avenue, Palo Alto, CA
94301.
Percentage of shares outstanding includes:
- before the offering, 2,227,941 shares and 14,069 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 55,161 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel IV
L.P., which represents 7.0% and 5.3%, respectively, of the total number
of shares outstanding before and after this offering;
- before the offering, 89,993 shares and 568 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 2,228 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel
Investors '93 L.P., which represents less than 1% of the total number of
shares outstanding before and after this offering;
- before the offering, 46,213 shares and 292 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 1,144 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel
Keiretsu L.P., which represents less than 1% of the total number of
shares outstanding before and after this offering;
- 540,713 shares and 3,142 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel III L.P., which represents 1.7% and
1.3%, respectively, of the total number of shares outstanding before and
after this offering;
- 37,724 shares and 219 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel Investors '92 L.P., which represents
less than 1% of the total number of shares outstanding before and after
this offering; and
- 50,299 shares and 292 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel Japan L.P., which represents less than
1% of the total number of shares outstanding before and after this
offering.
Mr. Breyer shares voting and investment power over the shares held by
each of these entities. Mr. Breyer disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest therein.
(5) Mr. Doerr's business address is 2750 Sand Hill Road, Menlo Park, CA 94025.
Percentage of shares outstanding includes:
- before the offering, 2,662,653 shares and 19,012 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 52,210 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Kleiner,
Perkins, Caufield & Byers VI, which represents 8.4% and 6.3%,
respectively, of the total number of shares outstanding before and after
this offering; and
- before the offering, 275,449 shares and, after the offering, an
additional 8,009 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by KPCB VI
Founders Fund, which represents less than 1% of the total number of
shares outstanding before and after this offering.
Mr. Doerr shares voting and investment power over the shares held by
each of these entities.
(6) Mr. Sanderson's business address is One Microsoft Way, Redmond, WA 98052.
Percentage of shares outstanding includes, before the offering, 15,359
shares issuable upon exercise of a warrant exercisable by February 29, 2000
and, after the offering, an additional 60,219 shares to be issued upon the
exercise of a warrant concurrently with the closing of this offering, all
held by Microsoft Corporation. Mr. Sanderson shares voting and investment
power over these shares.
(7) Mr. Hiller's business address is 435 North Michigan Avenue, Chicago, IL
60611. Percentage of shares outstanding after the offering includes 93,907
shares to be issued upon the exercise of a
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<PAGE> 72
warrant concurrently with the closing of this offering held by Tribune
Company. Mr. Hiller shares voting and investment power over these shares.
(8) Mr. Dusto's business address is 1500 Market Street, Philadelphia, PA 19102.
Includes 500,000 shares held by Comcast Interactive Capital, L.P. and
1,904,130 shares held by Comcast Programming Holdings, Inc., which
represents 1.6% and 1.2%, respectively, of the total number of shares
outstanding before the offering, and 6.0% and 4.4%, respectively, of the
total number of shares outstanding after the offering. Mr. Dusto shares
voting and investment power over these shares.
(9) Mr. Ravenel's business address is 9197 South Peoria Street, Englewood, CO
80112. Percentage of shares outstanding includes, before the offering,
10,239 shares issuable upon exercise of a warrant exercisable by February
29, 2000 and, after the offering, an additional 26,242 shares to be issued
upon the exercise of a warrant concurrently with the closing of this
offering, all held by Liberty Lightspan Holdings, Inc., an indirect
wholly-owned subsidiary of Liberty Digital, Inc. Mr. Ravenel shares voting
and investment power over these shares.
(10) Mr. Schiffman's business address is 505 Hamilton Avenue, Palo Alto, CA
94301.
Percentage of shares outstanding includes:
- before the offering, 425,531 shares and, after the offering, an
additional 107,801 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by U.S.
Information Technology Investment Enterprise Partnership, which
represents 1.3% and 1.2%, respectively, of the total number of shares
outstanding before and after this offering;
- before the offering, 445,531 shares and, after the offering, an
additional 107,801 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by U.S.
Information Technology #2 Investment Enterprise Partnership, which
represents 1.4% and 1.3%, respectively, of the total number of shares
outstanding before and after this offering;
- before the offering, 44,524 shares and, after the offering, an
additional 11,279 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO G-7
(B) Investment Enterprise Partnership, which represents less than 1% of
the total number of shares outstanding before and after this offering;
- before the offering, 44,524 shares and, after the offering, an
additional 11,279 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO G-7
(A) Investment Enterprise Partnership, which represents less than 1% of
the total number of shares outstanding before and after this offering;
- before the offering, 38,101 shares and, after the offering, an
additional 9,652 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO R-2
Investment Enterprise Partnership, which represents less than 1% of the
total number of shares outstanding before and after this offering;
- before the offering, 43,064 shares and, after the offering, an
additional 10,910 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO JS-2
Investment Enterprise Partnership, which represents less than 1% of the
total number of shares outstanding before and after this offering; and
- before the offering, 47,556 shares and, after the offering, an
additional 10,781 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Japan
Associated Finance Co., Ltd., which represents less than 1% of the total
number of shares outstanding before and after this offering.
Mr. Schiffman shares voting and investment power over these shares.
(11) Mr. Weinberg's business address is: 1055, boul. Rene-Levesque Est,
Montreal, Quebec H2L 4S5, Canada. Percentage of shares outstanding after
the offering includes 909,091 shares of common stock, at an assumed initial
public offering price of $11 per share, that will be issued to CINAR
Corporation in a private placement concurrent with the closing of this
offering. Mr. Weinberg shares voting and investment power over these
shares.
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<PAGE> 73
(12) Mr. Nagel is scheduled to become a director upon the closing of this
offering, contingent upon Cox Communications' purchase of our common stock
concurrently with the closing of this offering. Mr. Nagel's business
address is: 1400 Lake Hearn Drive, Atlanta, GA 30319. Percentage of shares
outstanding after the offering includes 1,136,364 shares of common stock,
at an assumed initial public offering price of $11 per share, that is
scheduled to be issued to Cox Communications Holdings, Inc. in a private
placement concurrent with the closing of this offering. Mr. Nagel shares
voting and investment power over these shares.
(13) Percentage of shares outstanding includes 305,639 shares issuable under
options exercisable by February 29, 2000 and 63,192 shares issuable under
warrants exercisable by February 29, 2000. Percentage of shares outstanding
after the offering additionally includes 909,091 and 1,136,364 shares of
common stock, at an assumed initial public offering price of $11 per share,
that are scheduled to be issued to CINAR Corporation and Cox Communications
Holdings, Inc., respectively in private placements concurrent with the
closing of this offering and 568,623 shares to be issued concurrently with
the closing of this offering upon exercise of warrants.
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<PAGE> 74
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 250,000,000 shares of common stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share. As
of December 31, 1999, and assuming the conversion of all outstanding preferred
stock into common stock upon the closing of this offering, there were
outstanding 31,813,249 shares of common stock held of record by 357
stockholders, options to purchase 3,737,451 shares of common stock and warrants
to purchase 2,066,647 shares of common stock.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
As of December 31, 1999, assuming the closing of this offering, all
outstanding shares of preferred stock would have been converted into 27,087,826
shares of common stock. See Note 5 to the Lightspan financial statements for a
description of the currently outstanding preferred stock. Following the
conversion, our certificate of incorporation will be amended and restated to
delete all references to such shares of preferred stock. The certificate, as
restated, gives to the board the authority, without further action by
stockholders, to issue up to 20,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon such preferred stock, including dividend
rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preference and sinking fund terms, any or all of which may be
greater than the rights of the common stock. The issuance of preferred stock
could:
- adversely affect the voting power of holders of common stock and reduce
the likelihood that such holders will receive dividend payments and
payments upon liquidation;
- decrease the market price of the common stock; or
- delay, deter or prevent a change in our control.
We have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investor Rights Agreement, as amended,
between us and some of our investors, the investors, holding an aggregate of
27,087,826 shares of our common stock issuable upon conversion of our
outstanding preferred stock and upon exercise of outstanding warrants to
purchase common stock, have registration rights pertaining to the securities
they hold, exercisable any time following 180 days after the effective date of
this offering. In addition, Cox Communications and Gateway have registration
rights on the securities they are expected to hold as of the close of this
offering, beginning one year after the effective date of this offering. If we
propose to register any of our securities under the Securities Act for our own
account or the account of any of our stockholders other than these holders of
registrable shares, holders of such registrable shares are entitled to notice of
the registration and are entitled to include registrable shares therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration. In
addition, commencing 180 days after the effective date of the registration
statement of which this prospectus is a
72
<PAGE> 75
part, we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least
30% of the registrable shares, or by holders who propose to register securities,
the aggregate offering price of which, net of underwriting discounts and
commissions, equals or exceeds $10,000,000. We are required to use our best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than three of such
stockholder-initiated registrations. Further, holders of registrable securities
may require us to file additional registration statements on Form S-3, subject
to certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity offerings.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public 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 business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sale or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in our control.
Certificate of Incorporation and Bylaw Provisions
Our restated certificate, which will become effective upon the closing of
the offering, provides that the board of directors will be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us and
may maintain the composition of the board of directors, as the classification of
the board of directors generally increases the difficulty of replacing a
majority of directors. Our restated certificate provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
President, our Chief Executive Officer, or by the board of directors pursuant to
a resolution adopted by a majority of the total number of authorized directors.
Our restated certificate also specifies that the authorized number of directors
may be changed only by resolution of the board of directors and does not include
a provision for cumulative voting for directors. Under cumulative voting, a
minority stockholder holding a sufficient percentage of a class of shares may be
able to ensure the election of one or more directors. These and other provisions
contained in our restated certificate and bylaws could delay or discourage
certain types of transactions involving an actual or potential change in control
of us or our management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current prices) and may
limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust
Company of California.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET
Our common stock has been approved for listing upon notice of issuance on
the Nasdaq Stock Market's National Market under the trading symbol "LSPN."
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<PAGE> 76
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 43,294,487
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the shares
offered for sale through the underwriters will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters.
The remaining 35,794,487 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 26,993,927 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. We and our officers, directors and stockholders have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock, for a period of 180 days after the date of this
prospectus. Transfers or dispositions can be made sooner with the prior written
consent of Credit Suisse First Boston Corporation.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 432,945 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 3 months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus. Non-
affiliates will be able to sell their shares subject only to the manner-of-sale
provisions of Rule 144.
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<PAGE> 77
Affiliates will be able to sell their shares without compliance with the holding
period requirements of Rule 144.
Registration Rights. Upon completion of this offering, the holders of
27,087,826 shares of our common stock have rights to have their shares
registered under the Securities Act. Moreover, Cox Communications Holdings, Inc.
and Gateway Companies, Inc., upon purchase of shares as expected at the time of
the initial public offering, will have rights to have those shares registered
under the Securities Act, beginning one year after issuance. Except for shares
purchased by affiliates or covered by lock-up agreements, registration of their
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration.
Stock Options and other Potential Share Issuances. Immediately after this
offering, we intend to file a registration statement under the Securities Act
covering the shares of common stock reserved for issuance upon exercise of
outstanding options. The registration statement is expected to be filed and
become effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under the registration statement will be
available for resale in the open market beginning 180 days after the effective
date of the registration statement of which this prospectus is a part, except
with respect to Rule 144 volume limitations that apply to our affiliates. In
addition, we may issue additional securities in connection with acquisitions or
strategic relationships and to some of our existing stockholders.
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<PAGE> 78
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation......................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
----------
Total............................................. 7,500,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,125,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
Per Share Total
--------------------------------- ---------------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
</TABLE>
We will pay Credit Suisse First Boston Corporation financial advisory fees of
approximately $750,000 and $180,000 relating to our agreements with Cox
Communications and Gateway, respectively.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
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<PAGE> 79
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 has acted as lead or co-manager on numerous public
offerings of equity securities. Thomas Weisel Partners 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.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation, for
a period of 180 days after the date of this prospectus, except issuances
pursuant to the conversion or exchange of convertible or exchangeable securities
or the exercise of warrants or options outstanding on the date of this
prospectus, grants of options or issuances of shares pursuant to our 2000 Equity
Incentive Plan or 1992 Stock Option Plan, and issuances pursuant to our 2000
Employee Stock Purchase Plan. In addition, we may issue up to 534,008 shares of
our common stock to a small number of former Academic Systems stockholders that
we believe may have a right to these shares relating to our acquisition of
Academic Systems, and up to 1,000,000 shares of our common stock in connection
with acquisitions, strategic alliances or joint ventures, subject to the
condition that the recipients of these shares agree to the same restrictions
during the remainder of the 180-day period after the date of this prospectus
that our officers, directors and other stockholders have agreed to. Our
officers, directors and stockholders have agreed that, for a period of 180 days
after the date of this prospectus, they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, or publicly disclose the intention to make any such
offer, sale, pledge or disposal, without the prior written consent of Credit
Suisse First Boston Corporation.
The underwriters have reserved for sale, at the initial public offering
price, less than 5% of the 7,500,000 shares of the common stock offered by the
underwriters in this offering for employees, directors and certain other persons
associated with us who have expressed an interest in purchasing common stock in
the offering. The number of shares available for sale to the general public in
the offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
Our common stock has been approved for listing upon notice of issuance on
The Nasdaq Stock Market's National Market under the trading symbol "LSPN."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history of, and the prospects for, the industry in which we will
compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
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<PAGE> 80
- the recent market prices of, and the demand for, publicly-traded common
stock of companies that are generally comparable to us.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the securities originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE> 81
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE> 82
LEGAL MATTERS
Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus for us. As of the date of
this prospectus, an investment fund created by Cooley Godward LLP owns an
aggregate of 70,000 shares of Series E preferred stock (convertible into 35,000
shares of common stock). O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters in connection with this offering for the
underwriters.
EXPERTS
Ernst & Young LLP have audited our consolidated financial statements as of
January 31, 1998 and 1999 and October 31, 1999 and for the years ended January
31, 1997, 1998 and 1999 and the nine months ended October 31, 1999 and the
financial statements of Academic Systems as of September 30, 1997 and 1998 and
for the years then ended, as set forth in their reports. We have included our
financial statements (including those of Academic Systems) in this prospectus
and elsewhere in the registration statement in reliance on their reports, given
on their authority as experts in accounting and auditing.
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 by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or
any part of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, including
our registration statement and all exhibits and amendments to our registration
statements, are publicly available through the Commission's Web site at
http://www.sec.gov.
The following are trademarks or service marks of The Lightspan Partnership,
Inc.:
- - The Lightspan Network(R)
- - Global Schoolhouse(R)
- - StudyWeb(R)
- - Cosmic Cookoff(R)
- - Faire Games(R)
- - Liquid Books(R)
- - Mona & Moki(R)
- - Math on the Move!(R)
- - P.K.'s Math Studio(R)
- - The Quaddle Family Mysteries(R)
- - The Secret of Googol(R)
- - Timeless Math(R)
- - Lightspan Partnership
- - Lightspan
- - Lightspan Achieve Now
- - Lightspan PageOne
- - Lightspan Adventures
- - Learning Search
- - Calamity
- - K9.5
- - Math Gallery
- - P.K's Place
All other trade names, trademarks and service marks appearing in this prospectus
are the property of their holders.
80
<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE LIGHTSPAN PARTNERSHIP, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of January 31, 1998 and 1999
and October 31, 1999...................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1997, 1998 and 1999 and the nine months ended
October 31, 1998 (unaudited) and 1999..................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1997, 1998 and 1999 and the nine
months ended October 31, 1999............................. F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, 1998 and 1999 and the nine months ended
October 31, 1998 (unaudited) and 1999..................... F-7
Notes to Consolidated Financial Statements.................. F-8
ACADEMIC SYSTEMS CORPORATION
Report of Ernst & Young LLP, Independent Auditors........... F-27
Balance Sheets as of September 30, 1997 and 1998 and June
30, 1999 (unaudited)...................................... F-28
Statements of Operations for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-29
Statements of Shareholders' Equity for the years ended
September 30, 1997 and 1998 and the nine months ended June
30, 1998 and 1999 (unaudited)............................. F-30
Statements of Cash Flows for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-31
Notes to Financial Statements............................... F-32
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended January 31, 1999............ F-40
Unaudited Pro Forma Combined Condensed Statement of
Operations for the nine months ended October 31, 1999..... F-41
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements................................................ F-42
</TABLE>
F-1
<PAGE> 84
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
The Lightspan Partnership, Inc.
We have audited the accompanying consolidated balance sheets of The
Lightspan Partnership, Inc. as of January 31, 1998 and 1999 and October 31,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended January
31, 1999 and the nine months ended October 31, 1999. These financial statements
are the responsibility of Lightspan's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Lightspan Partnership, Inc. at January 31, 1998 and 1999 and October 31, 1999
and the results of its operations and its cash flows for each of the three years
in the period ended January 31, 1999 and the nine months ended October 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
January 28, 2000
F-2
<PAGE> 85
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, PRO FORMA
----------------------------- OCTOBER 31, STOCKHOLDERS'
1998 1999 1999 EQUITY
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,421,617 $ 7,142,938 $ 22,671,611
Accounts receivable, less allowance for doubtful
accounts of $533,168, $400,000 and $827,472 at January
31, 1998 and 1999 and October 31, 1999,
respectively.......................................... 5,243,838 7,794,981 10,798,303
Finished goods inventory................................ 919,142 1,267,237 1,710,104
Deferred cost of revenue................................ -- 3,555,336 7,092,700
Other current assets.................................... 1,086,017 1,045,997 1,719,265
------------- ------------- -------------
Total current assets............................. 11,670,614 20,806,489 43,991,983
Property and equipment, net............................... 2,241,784 1,637,886 2,565,740
Deposits and other assets................................. 167,494 121,178 146,777
Intangible assets, less accumulated amortization of
$1,615,839.............................................. -- -- 52,062,682
------------- ------------- -------------
Total assets..................................... $ 14,079,892 $ 22,565,553 $ 98,767,182
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 3,285,340 $ 3,069,280 $ 5,015,616
Accrued liabilities..................................... 4,203,311 4,878,620 7,142,644
Acquisition consideration payable....................... -- -- 5,341,609
Deferred revenue -- Achieve Now......................... -- 20,717,005 40,207,314
Deferred revenue -- services & other.................... 2,494,072 3,444,098 6,023,828
Current portion of note payable......................... -- -- 224,086
Current portion of capital lease obligations............ 1,234,358 930,040 606,575
------------- ------------- -------------
Total current liabilities........................ 11,217,081 33,039,043 64,561,672
Deferred rent............................................. 406,281 382,486 332,987
Capital lease obligations, less current portion........... 774,889 393,480 526,458
Commitments
Stockholders' equity:
Convertible preferred stock, par value $0.001:
Authorized shares -- 61,793,074
Issued and outstanding shares -- 30,049,176 and
35,527,893 at January 31, 1998 and 1999,
respectively, and 52,230,915 at October 31, 1999; no
shares pro forma....................................
Aggregate liquidation preference -- $90,819,936 and
$111,419,912 at January 31, 1998 and 1999,
respectively, and $194,935,047 at October 31,
1999................................................ 30,049 35,527 52,230 $ --
Common stock, par value $0.001:
Authorized shares -- 75,000,000
Issued and outstanding shares -- 3,275,618 and
3,540,578 at January 31, 1998 and 1999,
respectively, and 4,625,389 at October 31, 1999;
33,376,271 shares pro forma......................... 3,276 3,541 4,625 33,376
Additional paid-in capital.............................. 89,852,909 110,674,833 209,464,854 227,781,949
Stock subscriptions receivable.......................... -- -- (13,000,000) --
Deferred advertising expense............................ -- -- (400,000) (400,000)
Deferred compensation................................... -- (192,196) (6,236,490) (6,236,490)
Accumulated deficit..................................... (88,204,593) (121,771,161) (156,539,154) (174,799,509)
------------- ------------- ------------- -------------
Total stockholders' equity....................... 1,681,641 (11,249,456) 33,346,065 $ 46,379,326
------------- ------------- ------------- =============
Total liabilities and stockholders' equity....... $ 14,079,892 $ 22,565,553 $ 98,767,182
============= ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 86
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------------------ -----------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software Licenses................. $ 5,591,769 $ 14,753,097 $ -- $ -- $ 488,798
Internet Licenses................. -- 288,645 1,023,714 639,490 1,246,100
Services.......................... 553,912 1,973,595 3,742,237 2,960,750 4,718,495
Hardware.......................... 2,419,360 5,293,671 6,103,957 4,866,768 4,828,535
------------ ------------ ------------ ------------ ------------
Total revenues............ 8,565,041 22,309,008 10,869,908 8,467,008 11,281,928
Cost of revenues:
Software Licenses................. 2,963,848 4,835,830 -- -- 145,057
Internet Licenses................. -- 98,903 302,132 188,462 377,484
Services.......................... 563,403 1,753,808 2,385,056 1,753,404 2,226,190
Hardware.......................... 2,314,844 4,744,887 4,973,166 3,985,868 3,983,925
------------ ------------ ------------ ------------ ------------
Total cost of revenues.... 5,842,095 11,433,428 7,660,354 5,927,734 6,732,656
------------ ------------ ------------ ------------ ------------
Gross profit........................ 2,722,946 10,875,580 3,209,554 2,539,274 4,549,272
Operating expenses:
Technology and development........ 18,953,329 14,816,050 10,593,735 8,465,760 7,525,997
Sales and marketing............... 13,773,048 20,295,916 22,990,261 16,925,824 23,820,445
General and administrative........ 2,472,717 2,714,544 3,590,159 1,792,138 4,082,508
Stock-based compensation.......... -- -- 19,680 -- 2,503,458
Amortization of intangible
assets......................... -- -- -- -- 1,615,839
------------ ------------ ------------ ------------ ------------
Total operating
expenses................ 35,199,094 37,826,510 37,193,835 27,183,722 39,548,247
------------ ------------ ------------ ------------ ------------
Loss from operations................ (32,476,148) (26,950,930) (33,984,281) (24,644,448) (34,998,975)
Interest income..................... 444,916 261,875 638,619 531,151 371,819
Interest expense.................... (557,475) (789,534) (220,906) (181,085) (140,837)
------------ ------------ ------------ ------------ ------------
Net loss............................ $(32,588,707) $(27,478,589) $(33,566,568) $(24,294,382) $(34,767,993)
============ ============ ============ ============ ============
Historical net loss per share:
Basic and diluted................. $ (10.72) $ (8.65) $ (9.91) $ (7.29) $ (8.93)
============ ============ ============ ============ ============
Weighted average shares -- basic
and diluted.................... 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Pro forma net loss per share:
Basic and diluted................. $ (1.54) $ (1.42)
============ ============
Weighted average shares -- basic
and diluted.................... 21,801,339 24,445,397
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 87
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997.......... 22,398,449 $22,398 3,068,864 $3,069 $ 62,315,020 $ -- $ --
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $1,405,286.............. 5,984,038 5,984 -- -- 21,088,712 -- --
Issuance of Series D convertible
preferred stock at $3.76 per
share in exchange for bridge
loans from shareholders.......... 1,666,689 1,667 -- -- 6,265,085 -- --
Issuance of warrants to purchase
convertible
preferred stock.................. -- -- -- -- 102,536 -- --
Exercise of stock options.......... -- -- 244,775 245 83,024 -- --
Repurchase of common stock for
cash............................. -- -- (38,021) (38) (1,468) -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1998.......... 30,049,176 30,049 3,275,618 3,276 89,852,909 -- --
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $127,132................ 5,478,717 5,478 -- -- 20,467,364 -- --
Exercise of stock options.......... -- -- 264,960 265 142,684 -- --
Deferred compensation related to
stock options.................... -- -- -- -- 211,876 -- (211,876)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 19,680
Net loss........................... -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1999.......... 35,527,893 35,527 3,540,578 3,541 110,674,833 -- (192,196)
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED STOCKHOLDERS'
EXPENSE DEFICIT EQUITY (DEFICIT)
----------- ------------- ----------------
<S> <C> <C> <C>
Balance at January 31, 1997.......... $ -- $ (60,726,004) $ 1,614,483
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $1,405,286.............. -- -- 21,094,696
Issuance of Series D convertible
preferred stock at $3.76 per
share in exchange for bridge
loans from shareholders.......... -- -- 6,266,752
Issuance of warrants to purchase
convertible
preferred stock.................. -- -- 102,536
Exercise of stock options.......... -- -- 83,269
Repurchase of common stock for
cash............................. -- -- (1,506)
Net loss........................... -- (27,478,589) (27,478,589)
-------- ------------- ------------
Balance at January 31, 1998.......... -- (88,204,593) 1,681,641
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $127,132................ -- -- 20,472,842
Exercise of stock options.......... -- -- 142,949
Deferred compensation related to
stock options.................... -- -- --
Amortization of deferred
compensation..................... -- -- 19,680
Net loss........................... -- (33,566,568) (33,566,568)
-------- ------------- ------------
Balance at January 31, 1999.......... -- (121,771,161) (11,249,456)
</TABLE>
F-5
<PAGE> 88
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs
of $45,559.................... 6,614,183 $ 6,614 -- $ -- $ 33,018,742 $ -- $ --
Issuance of Series E convertible
preferred stock in exchange
for future advertising........ 80,000 80 -- -- 399,920 -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems....................... 7,191,839 7,192 -- -- 35,952,003 -- --
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb...................... 217,000 217 -- -- 1,084,783 -- --
Common stock issued in
connection with the
acquisition of Academic
Systems....................... -- -- 570,356 570 4,710,571 -- --
Options and warrants issued in
connection with the
acquisition of Academic
Systems....................... -- -- -- -- 1,817,707 -- --
Preferred stock at $5.00 per
share......................... 2,600,000 2,600 -- -- 12,997,400 (13,000,000) --
Exercise of stock options....... -- -- 514,455 514 261,143 -- --
Deferred compensation related to
stock options................. -- -- -- -- 8,547,752 -- (8,547,752)
Amortization of deferred
compensation.................. -- -- -- -- -- -- 2,503,458
Net loss........................ -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ ------------ -----------
Balance at October 31, 1999....... 52,230,915 $52,230 4,625,389 $4,625 $209,464,854 $(13,000,000) $(6,236,490)
========== ======= ========= ====== ============ ============ ===========
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED STOCKHOLDERS'
EXPENSE DEFICIT EQUITY
----------- ------------- -------------
<S> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs
of $45,559.................... $ -- $ -- $ 33,025,356
Issuance of Series E convertible
preferred stock in exchange
for future advertising........ (400,000) -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems....................... -- -- 35,959,195
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb...................... -- -- 1,085,000
Common stock issued in
connection with the
acquisition of Academic
Systems....................... -- -- 4,711,141
Options and warrants issued in
connection with the
acquisition of Academic
Systems....................... -- -- 1,817,707
Preferred stock at $5.00 per
share......................... -- -- --
Exercise of stock options....... -- -- 261,657
Deferred compensation related to
stock options................. -- -- --
Amortization of deferred
compensation.................. -- -- 2,503,458
Net loss........................ -- (34,767,993) (34,767,993)
--------- ------------- ------------
Balance at October 31, 1999....... $(400,000) $(156,539,154) $ 33,346,065
========= ============= ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 89
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER
YEARS ENDED JANUARY 31, 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $(32,588,707) $(27,478,589) $(33,566,568) $(24,294,382) $(34,767,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 982,665 1,637,485 1,310,498 1,005,836 865,116
(Gain) loss on disposal of assets.................. (64,827) 37,774 (5,060) 6,175 (1,219)
Provision for doubtful accounts.................... 235,991 297,177 (133,168) 15,776 363,748
Amortization of intangible assets.................. -- -- -- -- 1,615,839
Amortization of deferred stock-based
compensation..................................... -- -- 19,680 -- 2,503,458
Amortization of interest expense issued in
connection with debt............................. 61,509 140,151 -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (5,620,093) (156,913) (2,417,975) (909,623) (1,391,488)
Inventory...................................... (284,871) 174,579 (348,095) (758,537) (160,032)
Deferred cost of Revenue....................... -- -- (3,555,336) (2,485,965) (3,537,364)
Deposits and other assets...................... 160,654 (288,659) 86,336 (76,110) (638,713)
Accounts payable............................... 2,136,259 (149,262) (216,060) (531,903) 1,556,782
Deferred revenue............................... 1,769,315 724,757 21,667,031 17,122,839 20,583,190
Accrued liabilities............................ 1,732,330 2,581,077 651,514 (1,990,834) 1,182,197
------------ ------------ ------------ ------------ ------------
Net cash flows used in operating activities............ (31,479,775) (22,480,423) (16,507,203) (12,896,728) (11,826,479)
INVESTING ACTIVITIES:
Decrease in short-term investments..................... 5,423,307 414,000 -- -- --
Purchase of property and equipment..................... (2,850,709) (422,808) (725,707) (620,234) (1,335,968)
Proceeds from sale of fixed assets..................... -- 30,816 24,167 -- 4,978
Net cash paid for purchase of Academic Systems......... -- -- -- -- (801,698)
Net cash paid for purchase of GlobalSchoolhouse........ -- -- -- -- (2,500,000)
Net cash paid for purchase of StudyWeb................. -- -- -- -- (1,000,000)
------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used in) investing
activities........................................... 2,572,598 22,008 (701,540) (620,234) (5,632,688)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock.............. 19,554,716 21,094,696 20,472,842 20,480,369 33,025,356
Proceeds from convertible bridge notes................. -- 6,266,752 -- -- --
Proceeds from lessor from capital leases............... 2,287,118 339,112 699,538 739,405 587,782
Principal repayments on capital leases................. (1,216,743) (1,527,864) (1,385,265) (1,071,032) (886,955)
Proceeds from notes payable............................ 1,600,000 -- -- -- --
Principal repayments on notes payable.................. (755,152) (844,848) -- -- --
Proceeds from exercise of stock options................ 12,009 83,269 142,949 88,863 261,657
Repurchase of common stock............................. -- (1,506) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash flows provided by financing activities........ 21,481,948 25,409,611 19,930,064 20,237,605 32,987,840
Increase (decrease) in cash and cash equivalents....... (7,425,229) 2,951,196 2,721,321 6,720,643 15,528,673
Cash and cash equivalents at beginning of period....... 8,895,650 1,470,421 4,421,617 4,421,617 7,142,938
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period............. $ 1,470,421 $ 4,421,617 $ 7,142,938 $ 11,142,260 $ 22,671,611
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 495,966 $ 584,035 $ 193,058 $ 149,744 $ 140,428
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of bridge notes into Series D convertible
preferred stock...................................... $ -- $ 6,266,752 $ -- $ -- $ --
============ ============ ============ ============ ============
Deferred stock-based compensation...................... $ -- $ -- $ 211,876 $ -- $ 8,547,752
============ ============ ============ ============ ============
Series E preferred stock issued in connection with the
purchase of Academic Systems......................... $ -- $ -- $ -- $ -- $ 35,959,195
============ ============ ============ ============ ============
Common stock issued in connection with the purchase of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 4,711,141
============ ============ ============ ============ ============
Valuation of options and warrants issued in connection
with the purchase of Academic Systems................ $ -- $ -- $ -- $ -- $ 1,817,707
============ ============ ============ ============ ============
Additional consideration related to the acquisition of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 5,341,609
============ ============ ============ ============ ============
Series E preferred stock issued for future
advertising.......................................... $ -- $ -- $ -- $ -- $ 400,000
============ ============ ============ ============ ============
Series E preferred stock issued for subscriptions
receivable........................................... $ -- $ -- $ -- $ -- $ 13,000,000
============ ============ ============ ============ ============
Series E preferred stock issued in connection with
purchase of StudyWeb................................. $ -- $ -- $ -- $ -- $ 1,085,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 90
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
The Lightspan Partnership ("Lightspan") was founded in 1993. Lightspan
provides curriculum-based educational software and Internet products and
services to schools and school districts that are used both in school and at
home. Lightspan Achieve Now is an interactive CD-ROM-based software product for
kindergarten through eighth grade, or K-8, that covers the core curriculum of
language arts, reading and math. The Lightspan Achieve Now program typically
includes the Lightspan Achieve Now software and a Sony PlayStation(R) game
console that the student uses to run the program at home throughout the school
year. The Lightspan Network is an online subscription service that provides
curriculum-based content for classroom and home use.
The consolidated financial statements include the accounts of Lightspan and
its wholly owned subsidiary, Academic Systems. All intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Lightspan's accounts receivable are from school
districts located throughout the United States. Lightspan provides for estimated
losses from uncollectible accounts and such losses have historically not
exceeded management's expectations.
INVENTORY
Inventory consists primarily of software for resale and is stated at the
lower of cost (first in, first out method) or market.
DEFERRED COST OF REVENUES
Deferred cost of sales consists of costs incurred to duplicate and package
titles shipped for which revenue has been deferred. The deferral of these costs
commenced February 1, 1998, when we adopted AICPA Statement of Position 97-2,
"Software Revenue Recognition."
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated or amortized over
the shorter of the estimated useful life of the related asset (two to five
years) or the term of the lease, using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Lightspan regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's
F-8
<PAGE> 91
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value or discounted estimates of future cash flows. Lightspan has not
identified any such impairment losses to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and capital lease
obligations, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the
lease. The difference between rent expense accrued and amounts paid under the
lease agreements is recorded as deferred rent in the accompanying balance sheet.
REVENUE RECOGNITION
Lightspan derives its revenues from the licensing of software, product
implementation and training services, customer support services, Internet
subscriptions and the sale of PlayStation game consoles and accessories.
In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total fee to each component of
the arrangement based on objective evidence of its fair value, which is specific
to Lightspan. The objective evidence for each element is based on the sale price
of each element when sold or offered for sale separately.
Software Licenses
Lightspan sells its Lightspan Achieve Now licenses in three distinct grade
clusters -- grades K through 2; grades 3 through 4; and grades 5 through 8. Each
grade cluster includes 32 to 36 separate Lightspan Achieve Now titles, with each
title consisting of one distinct CD-ROM. There are a total of 77 separate titles
planned, some of which are included in more than one grade cluster. Throughout
fiscal 1997 and through the first nine months of fiscal 2000, a number of these
titles were still under development at various stages in the development cycle.
Lightspan considers titles that have completed the development cycle and have
been released for shipment to customers to be "completed," and considers titles
still in the development cycle to be "as-yet uncompleted." As of October 31,
1999, 72 of the 77 planned titles had been completed and five of the 77 planned
titles were still under development.
While Lightspan is under no contractual obligation to deliver any as-yet
uncompleted titles to its customers, it does intend to deliver the remaining
titles on a when-and-if available basis. As of October 31, 1999, these titles
are expected to be delivered by July 31, 2001.
Prior to fiscal year 1999, Lightspan recognized revenue under AICPA
Statement of Position, or SOP, 91-1, Software Revenue Recognition. Under SOP
91-1, Lightspan recognized the full sales value of Lightspan Achieve Now
software licenses, including both completed and as-yet uncompleted titles, upon
shipment of the then-completed titles provided that there were no contractual
performance obligations to deliver the uncompleted titles and the collection of
the related receivable was deemed probable. Lightspan accrued the production
costs associated with the as-yet uncompleted titles in the period in which the
F-9
<PAGE> 92
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue was recognized, and included these costs in the cost of software license
revenues and on the balance sheet as accrued cost of revenues.
Prior to fiscal year 1999, when the number of titles to be eventually
completed and delivered had not yet been finalized, Lightspan considered its
plan to deliver as-yet uncompleted titles as a post-contract customer support,
or PCS, obligation. In accordance with the provisions of SOP 91-1, Lightspan
recognized the revenue from the PCS obligation along with the initial license
fee, based on the following five criteria: (i) the PCS fee was bundled with the
initial licensing fee; (ii) the substantial portion of additional titles was
expected to be completed and delivered within one year; (iii) the estimated cost
of providing the PCS, primarily assembly, packaging and delivery costs, were
insignificant; (iv) enhancements offered during the initial period of the PCS
arrangements were historically minimal; and, (v) collectibility of the fee was
probable.
On February 1, 1998, Lightspan adopted the provisions of SOP 97-2, Software
Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of
Certain Provisions of SOP 97-2. Under SOP 97-2, Lightspan recognizes software
license revenue when (i) an agreement has been executed or a definitive purchase
order has been received; (ii) the product has been shipped or services have been
performed; (iii) the fee has become fixed and determinable; (iv) the collection
of the fee is considered probable; (v) the related hardware, if applicable, has
been shipped and (vi) when all titles for a given grade cluster have been
delivered to its customers. Under SOP 97-2, Lightspan defers all revenue
recognition for Achieve Now licenses, since objective fair values of individual
as-yet uncompleted titles cannot be determined and used to allocate the license
fee to the individual titles as they are shipped.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
Customer Support
Revenue derived from telephone support and maintenance arrangements
provided by the professional development organization is recognized ratably over
the one-year term of the support and maintenance period.
Product Implementation and Training Services
Revenue derived from product implementation and customer training provided
by the professional development organization is recognized when services are
performed, in accordance with the standard implementation, training, service,
and evaluation plans that Lightspan establishes for its customers.
Internet Subscriptions
Revenue derived from Internet subscriptions is recognized on a
straight-line basis over the term of the agreement (generally one year).
PlayStation Game Consoles and Related Accessories
Revenue derived from the sale of PlayStation game consoles and related
accessories is recognized upon delivery of the console and the related software
product.
F-10
<PAGE> 93
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Revenue
Payments received in advance of amounts earned are recorded as deferred
revenue in the accompanying financial statements.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established and a definitive decision has been made to
proceed with the commercial launch of the title. To date, these factors have
been met upon substantial completion of the title, and therefore software
development costs subsequent to technological feasibility have been
insignificant.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Lightspan has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB No. 25, if the
exercise price of Lightspan's employee and director stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expense is recognized. When the exercise price of the employee or
director stock options is less than the fair value of the underlying stock on
the grant date, Lightspan records deferred stock compensation for the difference
and amortizes this amount to expense in accordance with FASB Interpretation No.
28, or FIN 28, over the vesting period of the options. Options or stock awards
issued to non-employees are recorded at their fair value as determined in
accordance with SFAS No. 123 and recognized over the related service period.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). For the years ended January 31, 1997, 1998 and 1999
and the nine month periods ended October 31, 1998 and 1999, comprehensive loss
equals the net loss as reported.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Lightspan management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified
to conform with the current period presentation.
F-11
<PAGE> 94
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Lightspan computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Potentially dilutive securities composed of incremental common shares
issuable upon the exercise of stock options and warrants, and common shares
issuable on conversion of preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
The following table sets forth the computation of historical net loss per
share, basic and diluted:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(32,588,707) $(27,478,591) $(33,566,568) $(24,294,382) $(34,767,993)
============ ============ ============ ============ ============
Denominator for
historical basic and
diluted calculations:
Weighted average
common shares
outstanding........ 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Historical net loss per
share:
Basic and diluted..... $ (10.72) $ (8.65) $ (9.91) $ (7.29) $ (8.93)
============ ============ ============ ============ ============
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
Unaudited pro forma stockholders' equity at October 31, 1999, as adjusted
for the conversion of the convertible preferred stock into common stock, is
disclosed on the balance sheet.
F-12
<PAGE> 95
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
2. BALANCE SHEET DETAILS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash............................................ $ 1,608,794 $ 723,190 $ 2,915,486
U.S. Corporate master notes..................... 1,825,000 3,425,000 --
U.S. Corporate repurchase agreements............ 262,000 1,741,000 --
Money market accounts........................... 25,823 27,748 19,716,125
U.S. Government repurchase agreements........... 700,000 1,226,000 --
Certificates of deposit......................... -- -- 40,000
----------- ----------- -----------
$ 4,421,617 $ 7,142,938 $22,671,611
=========== =========== ===========
</TABLE>
Other current assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Prepaid royalties............................... $ 594,883 $ 450,983 $ 427,919
Other receivables............................... 147,587 284,832 140,201
Short-term deposits............................. 221,946 235,578 372,113
Other current assets............................ 121,601 74,604 779,032
----------- ----------- -----------
$ 1,086,017 $ 1,045,997 $ 1,719,265
=========== =========== ===========
</TABLE>
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Customer base................................... $ -- $ -- $16,200,000
Core technology................................. -- -- 5,600,000
Trademark and trade name........................ -- -- 3,000,000
Assembled workforce............................. -- -- 1,000,000
Goodwill........................................ -- -- 27,878,521
----------- ----------- -----------
-- -- 53,678,521
Less accumulated amortization................... -- -- (1,615,839)
----------- ----------- -----------
$ -- $ -- $52,062,682
=========== =========== ===========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment......................... $ 3,978,385 $ 4,339,758 $ 5,370,702
Software........................................ 140,719 244,455 690,192
Office furniture and equipment.................. 1,163,078 1,186,394 1,453,391
----------- ----------- -----------
5,282,182 5,770,607 7,514,285
Less accumulated depreciation and
amortization.................................. (3,040,398) (4,132,721) (4,948,545)
----------- ----------- -----------
$ 2,241,784 $ 1,637,886 $ 2,565,740
=========== =========== ===========
</TABLE>
F-13
<PAGE> 96
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
2. BALANCE SHEET DETAILS (CONTINUED)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- OCTOBER 31,
1998 1999 1999
---------- ---------- -----------
<S> <C> <C> <C>
Other accrued liabilities.......................... $1,337,516 $2,341,935 $2,896,106
Accrued bonuses and commissions.................... 1,130,438 1,669,737 3,351,611
Accrued vacation................................... 572,857 533,157 826,661
Accrued cost of revenues........................... 1,162,500 333,791 68,266
---------- ---------- ----------
$4,203,311 $4,878,620 $7,142,644
========== ========== ==========
</TABLE>
3. LINE OF CREDIT AND LEASE FINANCING
Lightspan has a revolving line of credit with a bank which allows Lightspan
to borrow up to a maximum of the lesser of (a) 75% of eligible accounts
receivable (as defined) or (b) $10,000,000. The line of credit was renewed in
February 1999 and expires in April 2000 and bears interest at the bank's prime
rate plus 1.5% (10.0% at October 31, 1999), payable monthly. The line of credit
is collateralized by substantially all of Lightspan's assets. The loan agreement
with the bank contains various covenants. As of January 31, 1999 and October 31,
1999, there were no amounts outstanding under the line of credit.
In April 1999, Lightspan entered into a $1.0 million capital lease with a
financial institution. Under the agreement, which expires March 2000, Lightspan
finances the purchase of substantially all capital equipment at an 8.8% interest
rate, with payments due over a 42-month period and a purchase option at the end
of the lease term. At October 31, 1999, $499,039 was available for future
borrowing under this agreement.
In connection with the acquisition of Academic Systems, Lightspan assumed a
note payable under a loan agreement with a bank. The note bears interest at the
bank's prime rate plus 0.5%. The principal balance due under the agreement at
October 31, 1999 was $224,086, which Lightspan intends to pay in full within the
next twelve months.
4. COMMITMENTS
Lightspan leases its facilities under an operating lease agreement. The
facilities lease is subject to annual escalation provisions based upon the
Consumer Price Index.
Cost of equipment acquired under capital leases totaled $3,697,293 and
$1,634,993 (and accumulated amortization totaled $2,647,881 and $1,076,727) at
January 31, 1999 and October 31, 1999, respectively. Facilities rent and
operating lease expenses were $1,302,815 and $729,570 for the year ended January
31, 1999 and the nine months ended October 31, 1999, respectively.
In addition, Lightspan subleases a portion of their facility for a period
of one year subject to one-year renewal options. Sublease income was $0,
$125,323, $213,123 and $272,979 for the years ended January 31, 1997, 1998 and
1999, and the nine months ended October 31, 1999, respectively.
F-14
<PAGE> 97
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
4. COMMITMENTS (CONTINUED)
At October 31, 1999, future minimum lease payments for all leases with
initial terms of one year or more are as follows at for each fiscal year ending
January 31:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
2000........................................................ $ 417,387 $ 233,135
2001........................................................ 1,781,144 540,258
2002........................................................ 1,720,968 306,965
2003........................................................ 1,459,963 164,929
2004........................................................ 1,013,153 9,294
---------- ----------
Total minimum lease payments................................ $6,392,615 1,254,581
==========
Less amounts representing interest.......................... 121,548
----------
Present value of future minimum lease payments.............. 1,133,033
Less current portion of capital lease obligations........... 606,575
----------
Long-term capital lease obligations......................... $ 526,458
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At October 31, 1999, convertible preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
DATE ISSUED SERIES PRICE PER SHARE NUMBER OF SHARES LIQUIDATION VALUE
----------- ------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
December 1993......................... A $1.00 7,135,000 $ 7,135,000
March 1994............................ A $1.00 332,500 332,500
February 1995......................... B $3.00 5,833,336 17,500,008
June 1995............................. B $3.00 5,833,328 17,499,984
September 1996........................ C $6.00 3,264,285 19,585,710
June 1997............................. D $3.76 5,984,038 22,499,983
March 1997............................ D $3.76 1,666,689 6,266,751
March 1998............................ D $3.76 5,478,717 20,599,976
July 1999............................. E $5.00 5,294,183 26,470,915
September 1999........................ E $5.00 7,191,839 35,959,220
October 1999.......................... E $5.00 4,217,000 21,085,000
---------- ------------
52,230,915 $194,935,047
========== ============
</TABLE>
In March 1997, in connection with and prior to the Series D convertible
stock financing, Lightspan obtained $6,180,000 in convertible bridge notes from
certain investors. The notes bore interest at a rate of 9.25% per annum. In June
1997, the bridge notes and accrued interest of $86,752 converted into 1,666,689
shares of Series D convertible preferred stock.
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of the initial
public offering contemplated by this prospectus as long as the initial public
offering price and aggregate proceeds meet minimum requirements, as defined by
the agreements. As of October 31, 1999, the Series A, B, C, D and E preferred
stock are convertible, at the option of the holder, into 3,733,750, 5,833,332,
2,604,510, 6,564,722 and 8,351,511 shares of common
F-15
<PAGE> 98
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock, respectively, which has been reserved for issuance upon conversion of the
preferred stock, subject to certain antidilution adjustments.
Holders of the Series A, B, C, D and E preferred stock are entitled to
receive dividends at a rate of $0.10, $0.30, $0.60, $0.376 and $0.50 per share
per annum, whenever funds are legally available and as declared by Lightspan's
board of directors. The holder of each share of preferred stock is entitled to
the number of votes equal to the number of shares of common stock into which the
preferred stock could be converted. Lightspan is subject to certain covenants
under the agreements that require the vote or written consent by a majority of
the then outstanding preferred shares regarding certain changes in the rights
and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of Lightspan,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
Lightspan to the holders of common stock. If, upon the occurrence of such event,
the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of Lightspan
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
Lightspan, which are subject to approval and written consent of a majority of
the shareholders for Series A, C, D and E, voting separately as a single class,
and 57% of the shareholders for Series B, voting separately as single class. The
right of redemption cannot be exercised with respect to any series of preferred
stock prior to the fifth anniversary of the original issue date of the Series D
preferred stock, but may be exercised at any time and from time to time
thereafter.
Upon the sale of Lightspan's common stock as described in this prospectus
within 24 months of the second date on which Series D preferred stock was
issued, and subject to certain criteria being met, outstanding, unexercisable
warrants to purchase up to 3,326,112 shares of Series D preferred stock at $.01
per share could become exercisable. These "springing warrants" will be issued
only if on the measurement date, which is defined as: (i) the closing date of a
qualified public offering; or (ii) the six month anniversary of such offering
(whichever is elected by Lightspan), the fair market value of Lightspan's common
stock (the "measurement price") is less than the defined return benchmark. The
return benchmark is calculated as the number of Series D preferred shares
multiplied by the liquidation preference of such shares, and adjusted for the
number of years elapsed from the original warrant date in a manner designed to
ensure an agreed-upon rate of return on investment. In the event that the return
benchmark exceeds the fair market value at the measurement date (the "wealth
shortfall"), warrants to purchase shares will become exercisable. The number of
shares issuable upon exercise of the warrants will be equal to the wealth
shortfall divided by the measurement price.
If these springing warrants are exercised Lightspan will account for the
intrinsic value of the "springing warrants" as a preferred stock dividend on the
measurement date as a dividend by charging retained earnings and increasing the
carrying amount of preferred stock by a corresponding amount. The amount of such
charge will increase the loss applicable to common stockholders.
If the offering contemplated by this prospectus is completed under the
terms set forth on the cover, warrants to purchase approximately 3,326,112
shares of Series D preferred stock (which will convert to 1,663,056 shares of
common stock), would become exercisable and the loss applicable to common
shareholders would increase by $18,260,355 as a result.
F-16
<PAGE> 99
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In 1993, Lightspan adopted its 1993 Stock Option Plan, which will be
renamed the 2000 Equity Incentive Plan upon the close of this offering (the
"Plan"). Options for common stock may be incentive stock options or
non-statutory stock options and are granted at the discretion of the Board of
Directors. The Plan permits immediate exercise of options with the unvested
portion subject to repurchase by Lightspan at the original exercise price, in
the event of termination of employment or engagement. Non-statutory stock
options may be granted to employees, directors and consultants whereas incentive
stock options may be granted to employees and directors only. The option price
for incentive stock options shall not be less than 100% of the fair value on the
date of grant, and the option price of non-statutory options shall not be less
than 85% of the fair value on the date of grant. The maximum term of options
granted under the Plan is ten years. Incentive stock options granted under the
Plan are immediately exercisable in full and generally vest at the rate of 25%
after one year from the vesting commencement date and 1/36 of the remaining
shares every month thereafter. Non-statutory stock options are immediately
exercisable in full and generally vest at the rate of 50% after one year from
the vesting commencement date and the remaining 50% after two years from such
date.
At October 31, 1999, Lightspan was authorized to issue 5,153,941 shares of
common stock to eligible employees, officers, directors and consultants under
the Plan, of which options to purchase 366,361 shares were available for future
grant at October 31, 1999.
1992 STOCK OPTION PLAN
Upon the closing of its acquisition of Academic Systems, Lightspan assumed
Academic Systems' 1992 Stock Option Plan. All options outstanding under the 1992
Stock Option Plan at the date of acquisition were converted into options to
purchase shares of Lightspan common stock, and are included in the summary
below. Lightspan no longer grants options under this plan.
A summary of Lightspan's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------------------------------------- NINE MONTHS ENDED
1997 1998 1999 OCTOBER 31, 1999
---------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................... 1,144,500 $ .36 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78
Granted........................ 893,000 $ .76 858,500 $ .86 517,438 $1.36 2,722,404 $5.00
Exercised...................... (44,427) $ .28 (244,775) $ .34 (264,960) $ .54 (514,455) $ .50
Forfeited...................... (134,323) $ .54 (521,392) $ .94 (420,874) $ .80 (276,560) $1.20
---------- ---------- ---------- ----------
Outstanding -- end of year....... 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78 3,714,076 $3.80
========== ========== ========== ==========
Exercisable at end of year....... 622,617 968,387 1,031,005 784,678
========== ========== ========== ==========
Weighted average fair value of
options granted during the
year........................... $ .14 $ .20 $ .30 $ 3.92
========== ========== ========== ==========
</TABLE>
F-17
<PAGE> 100
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
RANGE OF AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ----------- ----------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ .0000 - $ 1.0000 817,983 2.2 $ .7056 593,052 $ .6782
$1.0001 - $ 2.0000 976,130 3.8 $ 1.8902 133,715 $ 1.7312
$2.0001 - $ 3.0000 243,500 4.5 $ 3.0000 770 $ 3.0000
$3.0001 - $ 4.0000 893,580 6.8 $ 4.0000 5,391 $ 4.0000
$8.0001 - $ 9.0000 592,010 5.2 $ 8.2600 50,000 $ 8.2600
$9.0001 - $10.0000 190,873 5.6 $10.0000 1,750 $10.0000
--------- -------
3,714,076 4.6 $ 3.6416 784,678 $ 1.3866
========= =======
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if Lightspan had accounted for its employee stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing model
with the following weighted average assumptions for each of the years ended
January 31, 1997, 1998 and 1999 and the nine months ended October 31, 1999,
respectively: risk-free interest rates of 6.00%, 5.13%, 5.00% and 5.19%,
respectively; dividend yields of 0%; and a weighted-average expected life of the
options of four to five years.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because Lightspan's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options.
Lightspan's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED
------------------------------------------ OCTOBER 31,
1997 1998 1999 1999
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Pro forma net loss................. $(32,615,453) $(27,546,519) $(33,625,632) $(37,508,408)
============ ============ ============ ============
Pro forma historical net loss per
share, basic and diluted......... $ (10.73) $ (8.67) $ (9.93) $ (9.64)
------------ ------------ ------------ ------------
</TABLE>
WARRANTS
In connection with debt and equipment lease financing agreements entered
into at various dates, Lightspan issued a total of 749,605 warrants to purchase:
up to 150,000 shares of Series A preferred stock at $1.00 per share, up to
150,000 shares of Series B preferred stock at $3.00 per share, up to 96,625
shares and 57,564 shares of Series C preferred stock at $6.00 per share and
$0.01 per share, respectively, up to 183,105 shares and 127,659 shares of Series
D preferred stock at $3.76 and $4.70 per share, respectively, and up to 42,216
shares of Series E preferred stock at $5.00 per share. The warrants expire on
various dates commencing in 2002 through 2006.
F-18
<PAGE> 101
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The warrants to purchase Series A through D preferred stock were valued at
an aggregate of $201,660, which was recorded as debt discounts and accreted into
interest expense over the life of the applicable financing agreements. The fair
value of the warrants were estimated at the dates of grant using the minimum
value method with the following assumptions: risk free interest rate of 6.00%;
an expected warrant life of two years; and no annual dividends. Interest expense
related to the accretion of the debt discounts totaled $61,509 and $140,151 for
the years ended January 31, 1997 and 1998, respectively. There were no such
amounts included in interest expense for the year ended January 31, 1999 or the
six month periods ended October 31, 1998 and 1999.
In connection with the acquisition of Academic Systems Corporation
("Academic") (see Note 9), Lightspan converted 50,000 warrants to purchase
Academic Series C preferred stock originally issued in connection with lease
financing into 8,000 warrants to purchase Lightspan Series E preferred stock;
and 34,216 warrants to purchase Academic Series F preferred stock originally
issued in connection with debt financing into 34,216 warrants to purchase
Lightspan Series E preferred stock. These warrants were valued at $1.25 per
share and $.33 per share, respectively, in accordance with APB 16, using the
minimum value method, and were accounted for as a part of the purchase price of
Academic.
AGREEMENT WITH CINAR CORPORATION
On October 29, 1999, Lightspan entered into an agreement with CINAR
Corporation (CINAR) pursuant to which CINAR purchased 2.5 million shares of
Lightspan's Series E Preferred Stock (convertible into 1.25 million shares of
common stock) at $5.00 per share and agreed to purchase $10 million of Lightspan
common stock in a private placement that will occur concurrently with the
initial public offering contemplated by this prospectus and at the same price
per share. Lightspan also granted CINAR a warrant to purchase 500,000 shares of
Lightspan's Series E Preferred Stock at an exercise price of $5.00 per share
(which will become a warrant to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share) that will vest upon the achievement of
various agreed-to strategic goals.
Lightspan has accounted for the warrants in accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. Specifically, the
shares that could be issued pursuant to the warrant will be valued the earlier
of a) the date at which a commitment for performance is reached or b) the date
at which CINAR's performance is complete (the "measurement date").
Lightspan believes that it is unlikely that a performance commitment, as
described in EITF 96-18, will be reached until performance is complete.
Therefore, the measurement date will be the date of completion of performance
and accordingly no expense had been recorded through October 31, 1999.
DEFERRED ADVERTISING EXPENSE
On October 29, 1999, Lightspan issued 160,000 shares of Series E
convertible preferred stock to Liberty Digital Corporation in exchange for
$400,000 in cash and $800,000 in future Internet advertising credits. Lightspan
determined that the fair value of the shares issued ($5.00 per share) was more
readily determinable than the fair value of the advertising credits.
As a result, Lightspan recorded the 160,000 shares issued at $800,000 and
recorded deferred advertising expense of $400,000. Lightspan will remeasure, and
expense, such amount as the advertising credits are utilized, in accordance with
EITF 96-18.
F-19
<PAGE> 102
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
Lightspan has recorded deferred compensation of $211,876 and $8,547,752 for
the year ended January 31, 1999 and the nine months ended October 31, 1999,
respectively, in connection with the grants of certain stock options to
employees and consultants. Amortization of deferred stock compensation was
$19,680 and $2,503,458 during the year ended January 31, 1999 and the nine
months ended October 31, 1999, respectively.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
The following table summarizes common shares reserved for future issuance:
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<S> <C>
Convertible preferred stock................................. 27,087,825
Convertible preferred stock warrants........................ 403,591
Common stock options........................................ 3,714,076
----------
Total common shares reserved for issuance................... 31,205,492
==========
</TABLE>
REVERSE STOCK SPLIT
In January 2000, the Company completed a reincorporation in Delaware and a
one for two reverse stock split of its common stock. In addition, immediately
following the closing of the initial public offering, the certificate of
incorporation will be amended to authorize the issuance of up to 250,000,000
shares of common stock and 20,000,000 shares of preferred stock. Consequently,
the common stock and stock option data throughout the financial statements and
notes to the financial statements have been restated to reflect the stock split.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of
Lightspan's deferred tax assets are shown below:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------- OCTOBER 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....... $ 29,109,000 $ 44,925,000 $ 60,656,000
Capitalized research expenses.......... 2,111,000 2,119,000 2,514,000
Research and development credits....... 2,608,000 3,257,000 4,062,000
Other.................................. 1,989,000 1,467,000 1,119,000
------------ ------------ ------------
Total deferred tax assets................ 35,817,000 51,768,000 68,351,000
Valuation allowance for deferred tax
assets.............................. (35,817,000) (51,768,000) (58,144,000)
------------ ------------ ------------
Net deferred tax assets.................. -- -- 10,207,000
------------ ------------ ------------
Deferred tax liabilities:
Acquired intangibles................... -- -- 10,207,000
------------ ------------ ------------
Net deferred tax assets.................. $ -- $ -- $ --
============ ============ ============
</TABLE>
F-20
<PAGE> 103
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate
to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JANUARY 31, ENDED
----------------------------------------- OCTOBER 31,
1997 1998 1999 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. federal taxes at statutory
rate................................ $(11,080,000) $(9,343,000) $(11,413,000) $(11,821,000)
State taxes, net of federal benefit... (1,955,000) (1,649,000) (2,014,000) (2,086,000)
Change in valuation allowance......... 12,783,000 12,164,000 12,543,000 13,482,000
Other nondeductible expenses and
expiration of net operating loss
carryforwards, net.................. 252,000 (1,172,000) 884,000 425,000
------------ ----------- ------------ ------------
$ -- $ -- $ -- $ --
============ =========== ============ ============
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
because management cannot conclude that it is more likely than not that the
deferred tax assets will be realized.
At October 31, 1999, Lightspan had federal and California net operating
loss carryforwards of approximately $146,357,000 and $42,569,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to capitalization of research expenses and limitations on
net operating losses for California tax purposes. The federal tax loss
carryforwards will begin expiring in 2008 unless previously utilized. Through
October 31, 1999, California tax loss carryforwards of $2,150,000 have expired,
and additional loss carryforwards will continue to expire in fiscal 2000.
Lightspan also has federal and California research and development tax credit
carryforwards of $3,077,000 and $1,515,000, respectively, which will begin
expiring in 2008 unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, the use of
Lightspan's net operating loss and credit carryforwards could be limited in the
event of a cumulative change in ownership of more than 50%.
7. RETIREMENT PLAN
Lightspan has a 401(k) defined contribution savings and retirement plan
(the "Retirement Plan"). The Retirement Plan is for the benefit of all
qualifying employees and permits employees voluntary contributions up to 20% of
base salary limited by the IRS imposed maximum. On January 1, 1999, Lightspan
began matching 10% of employee contributions up to 4% of eligible compensation.
Employer contributions were $3,459 for the year ended January 31, 1999 and $0
for the nine months ended October 31, 1999.
NOTE 8. BUSINESS COMBINATIONS
ACQUISITION OF ACADEMIC SYSTEMS CORPORATION
On May 10, 1999, Lightspan entered into a merger agreement with Academic,
which sells and supports interactive multimedia learning systems, principally to
colleges and universities. In connection with the merger agreement which was
consummated on September 20, 1999, Lightspan issued 7,191,839 shares of Series E
convertible preferred stock, 570,356 shares of common stock, options to purchase
263,404 shares of common stock, and warrants to purchase 42,216 shares of Series
E convertible preferred stock, and agreed to pay $1,735,840 cash, in exchange
for all of the outstanding common and preferred shares of Academic and all
outstanding Academic options and warrants. The acquisition was accounted for as
a purchase.
F-21
<PAGE> 104
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
NOTE 8. BUSINESS COMBINATIONS (CONTINUED)
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 263,404 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16 with the fair value determined by the minimum
value method.
Subsequent to September 20, 1999, the date the acquisition was consummated,
Lightspan determined that it will issue additional consideration in the amount
of $5,340,075 in early 2000 to certain Academic stockholders. Lightspan intends
to issue 1,068,015 shares of Series E preferred stock, subject to regulatory
approval, to such stockholders. If regulatory approval is not obtained,
Lightspan intends to issue cash or some other form of additional consideration.
The aggregate purchase price totalled $49,933,078, as follows:
<TABLE>
<S> <C>
Valuation of Series E convertible preferred stock issued.... $35,959,195
Valuation of common stock issued............................ 4,711,141
Issuance of cash pursuant to exercise of "put right"........ 1,734,306
Valuation of options and warrants exchanged for Academic
options and warrants...................................... 1,817,707
Acquisition costs........................................... 369,120
Additional consideration issuable in Series E convertible
preferred stock or cash................................... 5,341,609
-----------
Aggregate purchase price.................................... $49,933,078
===========
</TABLE>
The purchase price was allocated to the assets acquired, consisting
principally of intangible assets and goodwill, which are being amortized over
useful lives ranging from four to ten years.
The accompanying consolidated financial statements include the results of
operations of Academic since September 20, 1999, the date the acquisition was
consummated.
ACQUISITION OF GLOBAL SCHOOLHOUSE
On September 2, 1999, Lightspan acquired certain assets of The Global
SchoolNet Foundation, principally consisting of the Web site
GlobalSchoolhouse.com, an education Web site designed to help teachers develop
and manage collaborative learning projects online, and related intellectual
property, for $2.5 million in cash. The acquisition was accounted for as a
purchase. The purchase price was allocated to the assets acquired, principally
intangible assets related to the Web site, which are being amortized over a
three-year useful life.
The accompanying consolidated financial statements include the results of
operations of Global Schoolhouse since September 2, 1999.
F-22
<PAGE> 105
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
NOTE 8. BUSINESS COMBINATIONS (CONTINUED)
ACQUISITION OF STUDYWEB
On October 28, 1999 Lightspan acquired certain assets of American Computer
Resource, principally consisting of the Web site StudyWeb.com, a research
website designed to help parents, teachers and students find online educational
resources, and related intellectual property, for consideration of $1,000,000 in
cash and 217,000 shares of Series E convertible preferred stock, valued at $5.00
per share. The aggregate purchase price was $2,085,000. The acquisition was
accounted for as a purchase. The purchase price was allocated to the assets
acquired, principally intangible assets related to the Web site, which are being
amortized over a three-year useful life.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information assumes the
acquisitions of Academic, Global Schoolhouse and StudyWeb were consummated on
February 1, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
---------------- -----------------
<S> <C> <C>
Revenues.................................................... $ 17,246,149 $ 17,009,546
Net loss.................................................... $(55,458,967) $(46,651,433)
Historical net loss per share, basic and diluted............ $ (16.37) $ (11.99)
============ ============
Pro forma net loss per share, basic and diluted............. $ (1.98) $ (1.79)
============ ============
</TABLE>
9. REPORTABLE SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES
Lightspan has three reportable segments: Lightspan Achieve Now, K-12
Internet and Higher Education. Revenues derived from the Lightspan Achieve Now
segment typically include the sale of Lightspan Achieve Now software licenses,
Sony PlayStation game consoles and related accessories, and implementation,
training and support services. Revenues derived from the K-12 Internet segment
primarily include subscription fees for The Lightspan Network.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
Lightspan evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS
Lightspan's reportable segments are business units that offer different
products and services.
FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS
Upon the purchase of Academic, Lightspan created a new Higher Education
segment, which is comprised solely of Academic. The assets and results of
operations of Global Schoolhouse and Study Web, including the related
amortization of intangible assets, are included in the K-12 Internet segment.
F-23
<PAGE> 106
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
9. REPORTABLE SEGMENTS (CONTINUED)
The following information is for the Lightspan Achieve Now, K-12 Internet,
and Higher Education segments:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 8,487,916 $ 77,125 $ -- $ 8,565,041
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (107,184) (5,375) -- (112,559)
Depreciation and amortization.............. 977,752 4,913 -- 982,665
Segment loss from operations............... (30,925,268) (1,550,880) -- (32,476,148)
Segment assets............................. 12,773,740 78,407 -- 12,852,147
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 22,020,363 $ 288,645 $ -- $ 22,309,008
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (504,087) (23,572) -- (527,659)
Depreciation and amortization.............. 1,629,299 8,186 -- 1,637,485
Segment loss from operations............... (25,681,113) (1,269,817) -- (26,950,930)
Segment assets............................. 13,925,617 154,275 -- 14,079,892
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 9,846,194 $ 1,023,714 $ -- $ 10,869,908
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. 359,654 58,059 -- 417,713
Depreciation and amortization.............. 1,297,390 13,108 -- 1,310,498
Segment loss from operations............... (31,628,981) (2,355,300) -- (33,984,281)
Segment assets............................. 22,097,121 468,432 -- 22,565,553
Other significant non cash items:
Deferred stock compensation.............. 211,876 -- -- 211,876
Amortization of deferred stock
compensation.......................... 19,680 -- -- 19,680
</TABLE>
F-24
<PAGE> 107
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
9. REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
LIGHTSPAN
ACHIEVE K-12 HIGHER
NOW INTERNET EDUCATION ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers................... $ 9,547,030 $ 1,246,100 $ 488,798 $ -- $ 11,281,928
Inter segment revenues........ -- -- -- -- --
Interest income (expense),
net......................... 217,905 16,769 (3,692) -- 230,982
Depreciation and
amortization................ 816,188 23,670 25,258 -- 865,116
Segment loss from
operations.................. (23,557,362) (9,288,756) (2,152,857) -- (34,998,975)
Segment assets................ 46,997,158 766,096 51,003,928 -- 98,767,182
Other significant non cash
items:
Deferred stock
compensation............. 5,236,905 3,107,200 203,647 -- 8,547,752
Amortization of deferred
stock compensation....... 1,569,255 922,258 11,945 -- 2,503,458
Amortization of intangible
assets................... -- 136,642 1,479,197 -- 1,615,839
</TABLE>
10. LEGAL MATTERS
In July 1996, a former employee (the "Plaintiff") commenced legal action
against Lightspan, alleging causes of action for fraud, breach of contract,
negligent misrepresentation and conversion. On August 26, 1999, the Plaintiff
and Lightspan entered into a settlement agreement and release, the terms of
which are subject to confidentiality provisions, as defined by the agreement.
During the year ended January 31, 1999, Lightspan recorded a charge of
approximately $1.1 million for anticipated settlement and legal costs related to
this case. During the nine months ended October 31, 1999, Lightspan recorded an
additional charge of approximately $467,000 to cover the remaining additional
costs pursuant to the settlement terms.
As of October 31, 1999, Lightspan had paid approximately $950,000 in cash
for legal and settlement costs related to this case. Lightspan anticipates that
it will pay the remaining $617,000 shortly following the effective date of the
offering contemplated by this Prospectus.
11. SUBSEQUENT EVENTS
In January 2000, Lightspan agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative which provides public schools with free basic cable service and
learning guides. As part of the agreement, Cox Communications agreed to purchase
$12.5 million of Lightspan common stock, or 1,136,364 shares assuming an initial
public offering price of $11 per share, in a private placement scheduled to
occur concurrently with our initial public offering upon satisfaction of several
conditions. Lightspan also granted Cox Communications a warrant to purchase
750,000 shares of common stock. The warrant will vest upon the achievement of
various agreed-to strategic goals related to the proposed use of Lightspan
Achieve Now and Lightspan.com products in trials by Cox Communications of cable
offerings over digital set-top boxes.
Lightspan has accounted for the warrants in accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. Specifically, the
shares that could be issued pursuant to the warrant will be valued the
F-25
<PAGE> 108
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
11. SUBSEQUENT EVENTS (CONTINUED)
earlier of a) the date at which a commitment for performance is reached or b)
the date at which Cox Communication's performance is complete (the "measurement
date").
Lightspan believes that it is unlikely that a performance commitment, as
described in EITF 96-18, will be reached until performance is complete.
Therefore, the measurement date will be the date of completion of performance.
Also, in January 2000, Gateway Companies, Inc. agreed to purchase $3.0
million of Lightspan common stock, or 272,727 shares assuming an initial public
offering price of $11 per share, in a private placement that is scheduled to
occur concurrently with the initial public offering. This investment by Gateway
is subject to the satisfaction of several conditions, including Lightspan
jointly entering into an Internet sponsorship agreement whereby Gateway will
become a sponsor of Lightspan.com. Gateway, a manufacturer of personal
computers, is Lightspan's preferred provider of personal computers.
F-26
<PAGE> 109
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Academic Systems Corporation
We have audited the accompanying balance sheets of Academic Systems
Corporation as of September 30, 1997 and 1998, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. 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 Academic Systems Corporation
as of September 30, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 28, 1999
F-27
<PAGE> 110
ACADEMIC SYSTEMS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 13,157,705 $ 4,521,895 $ 2,341,984
Accounts receivable, less allowance for
doubtful accounts of $0, $63,724 and $63,724
at September 30, 1997 and 1998 and June 30,
1999, respectively.......................... 1,142,576 828,931 2,603,255
Other current assets........................... 514,629 582,822 170,622
------------ ------------ ------------
Total current assets............................. 14,814,910 5,933,648 5,115,861
Property and equipment, net...................... 1,131,684 932,918 670,975
------------ ------------ ------------
Total assets........................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 231,733 $ 849,162 $ 304,864
Accrued liabilities............................ 635,439 790,115 1,340,758
Deferred revenue............................... 2,392,049 2,155,423 2,349,934
Current portion of long-term debt.............. 93,731 206,849 3,503,020
Current portion of capital lease obligations... 189,443 140,794 98,769
------------ ------------ ------------
Total current liabilities........................ 3,542,395 4,142,343 7,597,345
Long-term debt, less current portion............. 388,316 241,323 86,187
Capital lease obligations, less current
portion........................................ 242,703 120,768 --
Commitments
Shareholders' equity (deficit):
Convertible preferred stock, no par value:
Authorized shares -- 54,000,000
Issued and outstanding shares -- 29,535,529
and 27,504,693 at September 30, 1997 and
1998, and at June 30, 1999,
respectively..............................
Aggregate liquidation
preference -- $43,197,149 and $41,715,227
at September 30, 1997 and 1998, and June
30, 1999, respectively.................... 42,895,034 42,115,864 42,115,864
Common stock, no par value:
Authorized shares -- 34,761,460
Issued and outstanding shares -- 4,353,339
and 4,715,454 at September 30, 1997 and
1998, respectively, and 8,111,713 at June
30, 1999.................................. 62,681 102,032 404,520
Accumulated deficit............................ (31,184,535) (39,855,764) (44,417,080)
------------ ------------ ------------
Total shareholders' equity (deficit)... 11,773,180 2,362,132 (1,896,696)
------------ ------------ ------------
Total liabilities and shareholders'
equity (deficit)..................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
</TABLE>
See accompanying notes.
F-28
<PAGE> 111
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $ 4,398,994 $ 5,938,618 $ 2,946,885 $ 4,869,613
Cost of revenue.......................... 1,920,439 2,063,800 1,183,409 1,377,878
------------ ------------ ------------ -----------
Gross profit............................. 2,478,555 3,874,818 1,763,476 3,491,735
------------ ------------ ------------ -----------
Operating expenses:
Technology and development............. 4,321,114 3,863,785 3,072,660 1,965,752
Sales and marketing.................... 6,088,928 7,175,302 5,696,939 4,675,330
General and administrative............. 2,327,203 1,853,968 1,243,126 1,362,097
------------ ------------ ------------ -----------
12,737,245 12,893,055 10,012,725 8,003,179
------------ ------------ ------------ -----------
Loss from operations..................... (10,258,690) (9,018,237) (8,249,249) (4,511,444)
Interest income (expense), net........... 150,490 347,008 310,187 (49,872)
------------ ------------ ------------ -----------
Net loss................................. $(10,108,200) $ (8,671,229) $ (7,939,062) $(4,561,316)
============ ============ ============ ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 112
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
------------------------ -------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
---------- ----------- --------- -------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996........................ 14,720,720 $26,943,956 4,024,052 $ 45,865 $(21,076,335) $ 5,913,486
Sale of Series F convertible
preferred stock, net of
issuance costs of
$48,932.................. 12,962,998 13,951,078 -- -- -- 13,951,078
Conversion of bridge loans
into Series F convertible
preferred stock.......... 1,851,811 2,000,000 -- -- -- 2,000,000
Exercise of stock options... -- -- 329,287 16,816 -- 16,816
Net loss.................... -- -- -- -- (10,108,200) (10,108,200)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1997........................ 29,535,529 42,895,034 4,353,339 62,681 (31,184,535) 11,773,180
Repurchase of convertible
preferred stock.......... (2,116,484) (871,670) -- -- -- (871,670)
Issuance of Series F
convertible preferred
stock for services....... 85,648 92,500 -- -- -- 92,500
Exercise of stock options... -- -- 362,115 39,351 -- 39,351
Net loss.................... -- -- -- -- (8,671,229) (8,671,229)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1998........................ 27,504,693 42,115,864 4,715,454 102,032 (39,855,764) 2,362,132
Exercise of stock options
(unaudited)................. -- -- 3,396,259 302,488 -- 302,488
Net loss (unaudited).......... -- -- -- -- (4,561,316) (4,561,316)
---------- ----------- --------- -------- ------------ ------------
Balance at June 30, 1999
(unaudited)................. 27,504,693 $42,115,864 8,111,713 $404,520 $(44,417,080) $ (1,896,696)
========== =========== ========= ======== ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE> 113
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------- -------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $(10,108,200) $(8,671,229) $(7,939,062) $(4,561,316)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 533,494 597,810 407,728 436,544
Loss on sale of property and equipment.............. 17,209 70,451 -- --
Preferred stock issued for services................. -- 92,500 92,500 --
Changes in operating assets and liabilities:
Accounts receivable............................... (686,029) (558,025) (1,979,909) (1,774,324)
Other assets...................................... (192,839) (68,193) 265,701 412,200
Accounts payable.................................. (122,449) 617,429 281,087 (544,298)
Accrued liabilities............................... 280,733 (236,626) 528,927 550,643
Deferred revenue.................................. 1,409,355 154,676 1,251,260 194,511
------------ ----------- ----------- -----------
Net cash flows used in operating activities........... (8,868,726) (8,001,207) (7,091,768) (5,286,040)
INVESTING ACTIVITIES:
Purchase of property and equipment.................... (474,927) (474,332) (363,352) (174,601)
Proceeds from sale of property and equipment.......... 7,572 4,837 -- --
------------ ----------- ----------- -----------
Net cash flows used in investing activities........... (467,355) (469,495) (363,352) (174,601)
------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred
stock............................................... 13,951,078 -- -- --
Exercise of stock options............................. 16,816 39,351 25,877 302,488
Proceeds from debt.................................... 482,048 138,000 138,000 --
Repayment of debt..................................... -- (171,875) (120,163) (158,965)
Proceeds from convertible bridge notes................ 2,000,000 -- -- 3,300,000
Principal payments under capital lease obligations.... (215,034) (170,584) (133,699) (162,793)
------------ ----------- ----------- -----------
Net cash flows provided by (used in) financing
activities.......................................... 16,234,908 (165,108) (89,985) 3,280,730
------------ ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... 6,898,827 (8,635,810) (7,545,105) (2,179,911)
Cash and cash equivalents at beginning of period...... 6,258,878 13,157,705 13,157,705 4,521,895
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 13,157,705 $ 4,521,895 $ 5,612,600 $ 2,341,984
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid....................................... $ 130,804 $ 108,774 $ 85,197 $ 49,168
============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Return of convertible preferred stock in
satisfaction of accounts receivable............... $ -- $ 871,670 $ 871,670 $ --
============ =========== =========== ===========
Conversion of bridge notes into Series F
convertible preferred stock....................... $ 2,000,000 $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 114
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Academic Systems Corporation ("Academic") was founded in 1992. Academic
sells and supports interactive multimedia learning systems, principally to
colleges and universities that install Academic's software systems on campus
servers to deliver instruction, assessment and support to students and faculty.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Academic's accounts receivable are from colleges and
universities located throughout the United States. Academic provides for
estimated losses from uncollectible accounts and such losses have historically
not exceeded management's expectations.
For the years ended September 30, 1997 and 1998, one customer represented
26% and 13% of Academic's revenues, respectively. Accounts receivable from this
customer was $270,000 and $0 at September 30, 1997 and 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated and amortized over
the shorter of the estimated useful life of the assets (three to five years) or
the term of the lease using the straight line method.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Academic regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. Academic has not identified any such impairment
losses to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and capital lease
obligations, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
REVENUE RECOGNITION
Revenue consists primarily of fees for licenses and implementation of
Academic's software products and for customer training, books and materials,
upgrades and support.
Through September 30, 1997, Academic recognized revenue in accordance with
American Institute of Certified Public Accountants Statement of Position (SOP)
91-1, Software Revenue Recognition. Effective
F-32
<PAGE> 115
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 1, 1997, Academic adopted the provisions of SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4.
Academic enters into software license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. The arrangement fee is allocated to the various
elements of the arrangements based upon vendor-specific objective evidence of
the fair value of each of the elements. Software license revenues are recognized
upon contract signing and delivery of the software provided the related fee is
fixed and determinable, and collectability of the fee is probable. The fee for
implementation services is recognized upon completion of the services. The
Company defers revenue related to specified upgrades based upon the established
fair value of the upgrade, until the upgrade has been delivered. The revenue
relating to books and materials is recognized upon shipment. Revenue for
training is recognized when the services are performed.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of technological
feasibility and, accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Academic has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB 25, if the exercise
price of Academic's employee stock options equals or exceeds the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized. When the exercise price of the employee stock options is less than
the fair value of the underlying stock on the grant date, Academic records
deferred stock compensation for the difference and amortizes the difference to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the individual options. Options or stock awards issued to non-employees are
recorded at their fair value and recognized over the related service period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). For the years ended September 30, 1997
F-33
<PAGE> 116
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1998 and the nine month periods ended June 30, 1998 and 1999, comprehensive
loss equals the net loss as reported.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................................... $1,708,512 $1,738,579 $1,415,837
Software................................................. 428,566 500,873 511,577
Furniture and fixtures................................... 281,517 306,483 793,124
---------- ---------- ----------
2,418,595 2,545,935 2,720,538
Less accumulated depreciation and amortization........... 1,286,911 1,613,017 2,049,563
---------- ---------- ----------
$1,131,684 $ 932,918 $ 670,975
========== ========== ==========
</TABLE>
Equipment and furniture and fixtures under capital leases aggregated
$1,077,491 and $508,939 as of September 30, 1997 and 1998, respectively, and the
related accumulated amortization was $744,623 and $371,800, respectively.
3. DEBT
Academic has entered into a loan agreement with a bank whereby Academic can
borrow up to $1,000,000 with interest payable monthly at prime plus 0.50 percent
per annum. As of September 30, 1997 and 1998, principal of $482,047 and
$448,172, respectively, was outstanding. Amounts drawn against the loan
agreement are payable in 36 equal monthly installments.
4. LEASE COMMITMENTS
The Company leases its facility under an operating lease and certain
equipment and furniture and fixtures under capital leases. These leases expire
at various dates through fiscal 2001.
Future minimum lease payments for all leases with initial terms of one year
or more are as follows at September 30, 1998:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING SEPTEMBER 30 LEASES LEASES
------------------------- ---------- --------
<S> <C> <C>
1999........................................................ $ 413,162 $172,172
2000........................................................ 417,843 39,745
2001........................................................ 312,672 81,039
---------- --------
Future minimum lease payments............................... $1,143,677 292,956
==========
Less amount representing interest........................... 31,394
--------
Present value of future minimum lease....................... 261,562
Less current portion........................................ 140,794
--------
Long-term portion........................................... $120,768
========
</TABLE>
F-34
<PAGE> 117
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
4. LEASE COMMITMENTS (CONTINUED)
Rent expense was $429,592 and $440,640 for the years ended September 30,
1997 and 1998, respectively.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At September 30, 1998, convertible preferred stock outstanding is as
follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PRICE PER SHARES SHARES LIQUIDATION
DATE ISSUED SERIES SHARE AUTHORIZED OUTSTANDING VALUE
----------- ------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
February 1993.............................. A $ 0.40 1,173,107 653,382 $ 261,353
February 1993.............................. B $ 0.75 435,000 217,500 163,125
February 1993.............................. C $ 0.80 5,995,741 3,995,741 3,196,593
August 1994................................ D $2.725 4,404,280 4,404,280 12,001,663
August 1996................................ E $ 3.00 5,478,717 3,333,333 9,999,999
July 1997.................................. F $ 1.08 15,740,740 14,900,457 16,092,494
---------- -----------
27,504,693 $41,715,227
========== ===========
</TABLE>
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of a sale of
Academic common stock in a public offering registered under the Securities Act
of 1933 which meets certain minimum requirements, as defined by the agreements.
The shares of preferred stock are convertible, at the option of the holder, into
an aggregate of 27,504,693 shares of common stock, which have been reserved for
issuance upon conversion of the preferred stock, subject to certain antidilution
adjustments.
Holders of the Series A, B, C, D, E and F preferred stock are entitled to
receive dividends at a rate of $0.04, $0.075, $0.08, $0.2725, $0.30 and $0.108
per share per annum, whenever funds are legally available and as declared by
Academic's Board of Directors. The holder of each share of preferred stock is
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted. Academic is subject to
certain covenants under the agreements that require the vote or written consent
by a majority of the then outstanding preferred shares regarding certain changes
in the rights and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
the Company to the holders of common stock. If, upon the occurrence of such
event, the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of the Company
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
the Company, which are subject to approval and written consent of a majority of
the shareholders for Series A, B and C, voting separately as a single class, and
75% of the shareholders for Series D and E, voting separately as single class.
F-35
<PAGE> 118
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In 1992, Academic adopted the 1992 Incentive Stock Option Plan (the
"Plan"). Options for common stock may be incentive stock options or
non-statutory stock options and are granted at the discretion of the Board of
Directors. The Plan permits immediate exercise of options with the unvested
portion subject to repurchase by the Company at the original exercise price, in
the event of termination of employment or engagement. Non-statutory stock
options may be granted to employees and consultants whereas incentive stock
options may be granted to employees only. The option price for incentive stock
options shall not be less than 100% of the fair value on the date of grant, and
the option price of non-statutory options shall not be less than 85% of the fair
value on the date of grant. The maximum term of options granted under the Plan
is ten years. Options granted under the Plan are immediately exercisable in full
and generally vest at the rate of 25% after one year from the date of employment
and 1/36 of the remaining shares every month thereafter.
Academic is authorized to issue 10,798,792 shares of common stock to
eligible employees, officers, directors and consultants under the Plan, of which
options to purchase 1,408,277 shares are available for future grant at September
30, 1998.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1998
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year..................... 2,328,500 $.154 8,121,333 $.095
Granted............................................ 7,874,000 $.107 2,615,000 $.100
Exercised.......................................... (329,287) $.087 (362,115) $.087
Forfeited.......................................... (1,751,880) $ .23 (1,618,251) $.100
---------- ----------
Outstanding -- end of year........................... 8,121,333 $.095 8,755,967 $.096
========== ==========
Exercisable -- end of year........................... 1,315,059 3,167,551
========== ==========
Weighted-average fair value of options granted during
the year........................................... $ .021 $ .018
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------- ------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING WEIGHTED-AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$.05 775,000 0.27 $ .05 775,000 $ .05
$.10 7,977,217 3.87 $ .10 2,390,051 $ .10
$.25 3,750 1.51 $ .25 2,500 $ .25
--------- ---------
8,755,967 $.096 3,167,551 $.088
========= =========
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if Academic had accounted for its employee stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing
F-36
<PAGE> 119
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
model with the following weighted average assumption for 1997 and 1998,
respectively: risk-free interest rates of 6.09% and 6.29%, respectively;
dividend yields of 0%; and a weighted-average expected life of the options of
3.66 and 3.75 years, respectively.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
Pro forma net loss....................................... $(10,138,200) $(8,682,944)
============ ===========
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of
Academic's deferred tax assets are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 10,915,000 $ 13,917,000
Deferred revenue...................................... 600,000 608,000
Research and development credits...................... 852,000 1,020,000
Other................................................. 251,000 181,000
------------ ------------
Total deferred tax assets............................... 12,618,000 15,726,000
Valuation allowance for deferred tax assets........... (12,618,000) (15,726,000)
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
as realization of such assets is uncertain.
At September 30, 1998, Academic has federal and California net operating
loss carryforwards of approximately $37,000,000 and $22,000,000 respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to capitalization of research expenses and limitations on
net operating losses for California tax purposes. The federal tax loss
carryforwards will begin expiring in 2008 unless previously utilized. The
Company also has federal and California research and development tax credit
carryforwards of $689,000 and $486,000, respectively, which will begin expiring
in 2007 unless previously utilized. The above carryforwards were determined as
if the Company were filing tax returns at September 30, 1998. However, for tax
return purposes, the Company uses a June 30 year end.
F-37
<PAGE> 120
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Section 382 and 383, the use of the
Company's net operating loss and credit carryforwards may be limited in the
event of a cumulative change in ownership of more than 50%. Management believes
such limitations will not have a material impact on Academic's ability to use
its carryforwards.
7. SUBSEQUENT EVENTS
CONVERTIBLE PROMISSORY NOTES
In March 1999, Academic issued Convertible Promissory Notes (Notes) in the
amount of approximately $3,300,000 from certain of its existing investors. The
Notes bear interest at the prime rate, and all principal and interest is due and
payable on June 30, 1999. The Notes are convertible into the number and type of
equity security issued in the next equity financing completed by the Company
which results in gross proceeds of at least $5,000,000. The Notes allow for the
issuance of warrants to the noteholders if the Notes are not repaid or converted
by May 1, 1999. Upon the consummation of the merger discussed below, the Notes
were converted into 3,168,165 shares of Academic's Series F convertible
preferred stock.
ACQUISITION BY THE LIGHTSPAN PARTNERSHIP, INC.
On May 10, 1999, Academic entered into a merger agreement with The
Lightspan Partnership, Inc. ("Lightspan".) Under the merger agreement, which was
consummated on September 20, 1999, Lightspan acquired all of Academic's
outstanding shares of common and preferred stock in exchange for Lightspan
Series E convertible preferred stock, Lightspan common stock and cash.
F-38
<PAGE> 121
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
INTRODUCTION
On May 10, 1999, The Lightspan Partnership, Inc. ("Lightspan") entered into
a merger agreement with Academic Systems Corporation ("Academic"), which was
consummated on September 20, 1999.
The unaudited pro forma combined condensed statements of operations which
follow have been prepared by Lightspan based upon the historical financial
statements of Lightspan and Academic, and may not be indicative of the results
that may have actually occurred if the combination had been in effect on the
date indicated or for the periods presented or which may be obtained in the
future. The unaudited pro forma combined condensed statements of operations
includes the statements of operations of both Lightspan and Academic for the
year ended January 31, 1999 and the nine months ended October 31, 1999. The pro
forma combined condensed financial statements should be read in conjunction with
the audited financial statements and notes of Lightspan and Academic included
elsewhere in the Prospectus.
The unaudited pro forma combined condensed statements of operations for the
year ended January 31, 1999 and the nine months ended October 31, 1999 assume
the purchase of Academic had been consummated on February 1, 1998. The pro forma
information is based on the historical financial statements of Lightspan and
Academic giving effect to the transaction under the purchase method of
accounting and the assumptions and adjustments in the accompanying footnotes.
F-39
<PAGE> 122
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 10,869,908 $ 6,376,241 $ -- $ 17,246,149
Cost of revenues.................. 7,660,354 2,138,785 -- 9,799,139
------------ ----------- ------------- ------------
Gross profit...................... 3,209,554 4,237,456 -- 7,447,010
Operating expenses:
Technology and development...... 10,593,735 3,281,876 -- 13,875,611
Sales and marketing............. 22,990,261 6,747,590 -- 29,737,851
General and administrative...... 3,590,159 2,189,785 5,779,944
Stock-based compensation........ 19,680 -- -- 19,680
Amortization of intangible
assets....................... -- -- 11,833,500(1) 11,833,500
------------ ----------- ------------- ------------
Total operating expenses.......... 37,193,835 12,219,251 11,833,500 61,246,586
------------ ----------- ------------- ------------
Loss from operations.............. (33,984,281) (7,981,795) (11,833,500) (53,799,576)
Other income (expense), net....... 417,713 163,747 (52,075)(2) 529,385
------------ ----------- ------------- ------------
Net loss.......................... $(33,566,568) $(7,818,048) $ (11,885,575) $(53,270,191)
============ =========== ============= ============
Historical net loss per share
basic and diluted............... $ (15.72)
============
Shares used in the computation of
historical net loss per share,
basic and diluted............... 3,387,772
============
Pro forma net loss per share,
basic and diluted............... $ (2.05)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted............... 25,967,615(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets and goodwill over estimated
useful lives ranging from four to ten years, and the amortization of
goodwill over four years.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
F-40
<PAGE> 123
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $ 11,281,928 $ 6,216,416 $ (488,798)(4) $ 17,009,546
Cost of revenues.................... 6,732,656 1,730,292 (145,057)(4) 8,317,891
------------ ----------- ------------- ------------
Gross profit........................ 4,549,272 4,486,124 (343,741) 8,691,655
Operating expenses:
Technology and development........ 7,525,997 1,705,034 (233,800)(4) 8,997,231
Sales and marketing............... 23,820,445 4,674,575 (596,602)(4) 27,898,418
General and administrative........ 4,082,508 1,625,850 (175,054)(4) 5,533,304
Stock-based compensation.......... 2,503,458 11,945 (11,945)(4) 2,503,458
Amortization of intangible
assets.......................... 1,615,839 1,479,197 7,395,921(1) 9,011,760
(1,479,197)(4)
------------ ----------- ------------- ------------
Total operating expenses............ 39,548,247 9,496,601 4,899,323 53,944,171
------------ ----------- ------------- ------------
Loss from operations................ (34,998,975) (5,010,477) (5,243,064) (45,252,516)
Other income (expense), net......... 230,982 (89,595) 3,692(4) 106,023
(39,056)(2)
------------ ----------- ------------- ------------
Net loss............................ $(34,767,993) $(5,100,072) $ (5,278,428) $(45,146,493)
============ =========== ============= ============
Historical net loss per share basic
and diluted $ (11.60)
============
Shares used in the computation of
historical net loss per share,
basic and diluted................. 3,891,940
============
Pro forma net loss per share, basic
and diluted....................... $ (1.62)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted................. 27,940,184(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets over estimated useful lives
ranging from four to ten years, and the amortization of goodwill over four
years, for the period February 1, 1999 through September 19, 1999.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
(4) Represents results of operations for Academic Systems from the acquisition
date through October 31, 1999, which are already included in the results of
operations of Lightspan.
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
F-41
<PAGE> 124
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1.
Pursuant to the merger agreement between Lightspan and Academic, the
following consideration was issued: (i) cash of $1,735,840; (ii) 570,356 shares
of Lightspan's common stock valued at $8.26 per share; (iii) 7,191,839 shares of
its Series E convertible preferred stock valued at $5.00 per share; (iv) options
to acquire 263,404 shares of the Lightspan's common stock, valued at $6.82 per
share; and (v) warrants to purchase 42,216 shares of Lightspan's Series E
convertible preferred stock, valued at $1.25 per share for 8,000 shares and
$0.33 per share for the remaining 34,216 shares. Subsequent to September 20,
1999, the date the acquisition was consummated, Lightspan determined that it
will issue additional consideration in the amount of $5,340,075 in early 2000 to
certain Academic stockholders. Lightspan intends to issue 1,068,015 shares of
Series E preferred stock, subject to regulatory approval, to such stockholders.
If regulatory approval is not obtained, Lightspan intends to issue cash or some
other form of consideration. As a result, the aggregate purchase price is
calculated to be $49,933,078, which includes acquisition costs of $369,121. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets acquired..................................... $ 3,287,669
Property, equipment and other assets........................ 480,864
Goodwill.................................................... 23,333,966
Customer base............................................... 16,200,000
Core technology............................................. 5,600,000
Trademark and trade name.................................... 3,000,000
Assembled workforce......................................... 1,000,000
Deferred revenue............................................ (1,486,849)
Liabilities assumed......................................... (1,482,572)
-----------
$49,933,078
===========
</TABLE>
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 262,494 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16, with the fair value determined by the minimum
value method.
Lightspan also converted 50,000 warrants to purchase Academic Series C
preferred stock originally issued in connection with lease financing into 8,000
warrants to purchase Lightspan Series E preferred stock and 34,216 warrants to
purchase Academic Series F preferred stock originally issued in connection with
debt financing into 34,216 warrants to purchase Lightspan Series E preferred
stock. These warrants were valued at $1.25 per share and $0.33 per share,
respectively, in accordance with APB 16, with the fair value determined by the
minimum value method.
F-42
<PAGE> 125
LIGHTSPANLOGO
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration fee............................................ $ 31,970
NASD filing fee............................................. 12,000
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 275,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 550,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 71,030
----------
Total............................................. $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware
Law") and (ii) require the Registrant to indemnify its Directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as Directors and officers.
These provisions do not eliminate the Directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each Director will continue to be subject to liability for breach of the
Director's duty of loyalty to the Registrant, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 127
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1, 1996, we have sold and issued the following unregistered
securities:
(a) On April 26, 1996, we issued and sold a warrant to purchase 26,625
shares of our Series C preferred stock at an exercise price of $6.00 per
share to Comdisco, Inc., an accredited investor. At the close of this
offering, this will become a warrant to purchase 21,243 shares of common
stock at an exercise price of $12.00 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(b) On September 20, 1996, we issued and sold an aggregate of
3,222,618 shares of our Series C preferred stock (convertible into
2,571,235 shares of common stock) to 14 accredited investors for an
aggregate purchase price of $19,335,708. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(c) On November 13, 1996, we issued and sold an aggregate of 41,667
shares of our Series C preferred stock (convertible into 33,245 shares of
common stock) to two accredited investors for an aggregate purchase price
of $250,002. We relied on the exemption provided by Section 4(2) of the
Securities Act of 1933.
(d) On March 24, 1997, we issued a warrant to purchase 70,000 shares
of our Series C preferred stock to Silicon Valley Bank, an accredited
investor, at an exercise price of $6.00 per share. At the close of this
offering, this will become a warrant to purchase 55,850 shares of common
stock at an exercise price of $3.00 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(e) In March, May and June 1997, we issued warrants to purchase an
aggregate of 156,510 shares of Series D preferred stock to twelve
accredited investors at an exercise price of $3.76 per share. At the close
of this offering, these will become warrants to purchase an aggregate of
78,255 shares of common stock at an exercise price of $7.52 per share. We
relied on the exemption provided by Section 4(2) of the Securities Act of
1933.
(f) On June 24, 1997, we issued and sold an aggregate of 6,985,833
shares of our Series D preferred stock (convertible into 3,492,917 shares
of common stock) to twenty-one accredited investors for an aggregate
purchase price of $26,266,732.08. We relied on the exemption provided by
Section 4(2) of the Securities Act of 1933.
(g) On November 14, 1997, we issued and sold an aggregate of 132,978
shares of our Series D preferred stock (convertible into 66,489 shares of
common stock) to Anderson Lightspan Partners, an accredited investor, for
an aggregate purchase price of $499,997.28. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
II-2
<PAGE> 128
(h) On December 15, 1997, we issued and sold an aggregate of 531,915
shares of our Series D preferred stock (convertible into 265,958 shares of
common stock) to three accredited investors for an aggregate purchase price
of $2,000,000.40. We relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.
(i) On March 10, 1998, we issued and sold an aggregate of 5,478,717
shares of our Series D preferred stock (convertible into 2,739,359 shares
of common stock) to twenty-five accredited investors for an aggregate
purchase price of $20,599,975.92. We relied on the exemption provided by
Section 4(2) of the Securities Act of 1933.
(j) On March 10, 1998, we issued warrants to purchase up to 3,326,112
shares of our Series D Preferred Stock to 33 accredited investors at an
exercise price of $0.01 per share. Concurrently with the close of this
offering, these warrants will become warrants to purchase up to 1,663,056
shares of common stock. For the issuance of the warrant, we relied on the
exemption provided by Section 4(2) of the Securities Act of 1933.
(k) On June 24, 1998, we issued a warrant to purchase 127,659 shares
of Series D preferred stock to Montgomery Securities, an accredited
investor, at an exercise price of $4.70 per share. At the close of this
offering, this will become a warrant to purchase 63,830 shares of common
stock at an exercise price of $9.40 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(l) On July 8, 1999 we issued and sold an aggregate of 4,294,183
shares of our Series E preferred stock (convertible into 2,147,092 shares
of common stock) to eight accredited investors for an aggregate purchase
price of $21,470,923. We relied on the exemption provided by Section 4(2)
of the Securities Act of 1933.
(m) On July 27, 1999, we issued and sold an aggregate of 1,000,000
shares of our Series E preferred stock (convertible into 500,000 shares of
common stock) to Comcast Interactive Investments, Inc., and accredited
investors for an aggregate purchase price of $5,000,000. We relied on the
exemption provided by Section 4(2) of the Securities Act of 1933.
(n) On August 16, 1998, we issued and sold an aggregate of 1,150,000
shares of our Series E preferred stock (convertible into 575,000 shares of
common stock) to thirteen accredited investors for an aggregate purchase
price of $5,750,000. We relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.
(o) In September 1999, in connection with our acquisition of Academic
Systems, we issued shares of our Series E preferred stock and shares of our
common stock to the former preferred and common shareholders of Academic
Systems. We relied on the exemption provided by 3(a)(10) of the Securities
Act of 1933.
(p) On October 29, 1999, we sold an aggregate of 250,000 shares of our
Series E preferred stock (convertible into 125,000 shares of common stock)
to three accredited investors for an aggregate purchase price of
$1,250,000. We relied on the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
(q) On October 29, 1999 we issued and sold 217,000 shares of our
Series E preferred stock (convertible into 108,500 shares of common stock)
as partial consideration for assets we purchased from American Computer
Resources, Inc., an accredited investor. We relied on the exemption
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
(r) On November 1, 1999, we sold and issued 2,500,000 shares of our
Series E preferred stock (convertible into 1,250,000 shares of common
stock) and a warrant to purchase up to 500,000 shares of our Series E
preferred stock (convertible into 250,000 shares of common stock) to CINAR
Corporation, an accredited investor, in connection with a strategic
relationship. We relied on the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
II-3
<PAGE> 129
(s) On November 15, 1999 we issued and sold 100,000 shares of our
Series E preferred stock (convertible into 50,000 shares of common stock)
to an accredited investor for an aggregate purchase price of $500,000. We
relied on the exemption provided by Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
(t) On January 11, 2000 we agreed to issue and sell $12.5 million of
common stock to Cox Communications Holdings, Inc., an accredited investor,
concurrently with the close of this offering. We also agreed to issue a
warrant to Cox Communications to purchase 750,000 shares of common stock at
an exercise price of $10.00 per share. We will rely on the exception
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
(u) On January 12, 2000 we agreed to issue $3.0 million of common
stock to Gateway Companies, Inc., an accredited investor, concurrently with
the closing of this offering. We will rely on the exception provided by
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
The recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about us.
II-4
<PAGE> 130
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger.
3.1* Amended and Restated Articles of Incorporation, as currently
in effect.
3.2* Bylaws, as currently in effect.
3.3* Amended and Restated Certificate of Incorporation, to become
effective upon re-incorporation into Delaware.
3.4* Bylaws to become effective upon re-incorporation into
Delaware.
3.5* Amended and Restated Certificate of Incorporation, to be
filed and become effective following the closing of the
offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1* 1992 Stock Option Plan.
10.2* Forms of Incentive and Nonstatutory Stock Option Agreement
under the 1992 Stock Option Plan.
10.3* 2000 Equity Incentive Plan.
10.4* Form of Stock Option Agreement pursuant to the 2000 Equity
Incentive Plan.
10.5* 2000 Employee Stock Purchase Plan and related offering
documents.
10.6* Office Lease by and between the Company and Insurance
Company of the West dated as of May 28, 1996.
10.7* Lease by and between the Travelers Insurance Company and
Academic Systems Corporation dated as of July 1, 1996 and
amended December 3, 1996.
10.8* Office Sublease by and between the Company and Qualcomm
Incorporated dated as of December 1, 1997 and amended
September 21, 1998.
10.9* Office Lease by and between the Company and McWin
Corporation dated as of May 1, 1997.
10.10* Office Lease by and between the Company and Auerbach Plaza
Limited Partnership and Goliac, Inc., dated as of June 4,
1999.
10.11* Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of February 25, 1997 and
amended December 31, 1997, March 31, 1998 and March 26,
1999.
10.12* Master Lease Agreement by and between the Company and
Transamerica Business Credit Corporation dated as of August
14, 1997, including Schedules 1, 2, 3, 4 and 5 thereto.
10.13* Master Equipment Lease by and between the Company and
Pentech Financial Services, Inc. dated as of July 25, 1999,
including supplements 1, 2 and 3 thereto.
10.14* Equipment Financing Agreement by and between the Company and
Pentech Financial Services, Inc. dated as of July 1, 1999.
10.15* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
July 8, 1999.
10.16* Amendment and Waiver dated October 28, 1999.
10.17* Amendment to Investor Rights Agreement dated October 29,
1999.
10.18* Form of Indemnity Agreement between the Company and its
directors and officers.
10.19 Developer Agreement by and between the Company and Sony
Computer Entertainment America dated as of January 26, 1996,
as amended.
10.20+ Sale and License Agreement by and between the Company and
Sony Computer Entertainment America dated as of January 26,
1996.
10.21*+ Letter Agreement by and between the Company and
SmarterKids.com, Inc. dated as of July 12, 1999.
10.22* Academic Systems Fulfillment Agreement by and between
Academic Systems Corporation and FGI Print Management dated
as of June 12, 1998.
</TABLE>
II-5
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.23* Series E Stock Purchase Agreement by and between the Company
and CINAR Corporation dated as of October 29, 1999.
10.24* Warrant Agreement to purchase Series A preferred stock by
and between the Company and Comdisco, Inc. dated as of March
15, 1994.
10.25* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of May
30, 1995.
10.26* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.27* Warrant to purchase Series C preferred stock by and between
the Company and Silicon Valley Bank dated as of March 24,
1997.
10.28* Warrant Agreement to purchase Series C preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.29* Warrant to purchase Series D preferred stock by and between
the Company and Montgomery Securities.
10.30* Form of Warrant to purchase Series D preferred stock.
10.31* Form of Warrant to purchase Series D preferred stock.
10.32+ Letter Agreement regarding strategic initiatives by and
between the Company and CINAR Corporation dated as of
October 29, 1999.
10.33* Amendment and Waiver dated October 28, 1999.
10.34* Warrant to purchase Series E preferred stock by and between
the Company and Comdisco, Inc.
10.35* Form of Warrant to purchase Series E preferred stock.
10.36* Warrant to purchase Series D preferred stock by and between
the Company and SZ Investments L.L.C. dated as of June 6,
1997.
10.37* Oracle Reseller agreement, dated as of August 9, 1994,
including Addendums.
10.38* Form of Warrant to purchase common stock by and between the
Company and Cox Communications Holdings, Inc. to be issued
concurrent with the closing of this offering.
10.39* Stock Purchase Agreement by and between the Company and Cox
Communications Holdings, Inc. dated as of January 11, 2000.
10.40* Stock Purchase Agreement by and between the Company and
Gateway Companies, Inc. dated as of January 12, 2000.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-5.
24.2* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, 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
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 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 Act
and is, therefore, unenforceable. In
II-6
<PAGE> 132
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the 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.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 4 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, County of San Diego, State of California, on February 7, 2000.
By: /s/ CARL ZEIGER
------------------------------------
Carl Zeiger
President and Chief Operating
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer February 7, 2000
- --------------------------------------------------- and Chairman
John T. Kernan (Principal Executive Officer)
/s/ CARL ZEIGER President, Chief Operating February 7, 2000
- --------------------------------------------------- Officer and Director
Carl Zeiger
* Vice President of Finance February 7, 2000
- --------------------------------------------------- and Chief Financial Officer
Kathleen R. McElwee (Principal Financial and
Accounting Officer)
* Executive Vice President, February 7, 2000
- --------------------------------------------------- President of Academic Systems
John H. Brandon and Director
* Director February 7, 2000
- ---------------------------------------------------
James W. Breyer
* Director February 7, 2000
- ---------------------------------------------------
L. John Doerr
* Director February 7, 2000
- ---------------------------------------------------
Jeffrey P. Sanderson
* Director February 7, 2000
- ---------------------------------------------------
David D. Hiller
* Director February 7, 2000
- ---------------------------------------------------
Bradley P. Dusto
* Director February 7, 2000
- ---------------------------------------------------
Bruce W. Ravenel
* Director February 7, 2000
- ---------------------------------------------------
Barry J. Schiffman
* Director February 7, 2000
- ---------------------------------------------------
Ronald A. Weinberg
*By: /s/ CARL ZEIGER
- --------------------------------------------------
(Carl Zeiger)
(Attorney-in-Fact)
</TABLE>
II-8
<PAGE> 134
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger.
3.1* Amended and Restated Articles of Incorporation, as currently
in effect.
3.2* Bylaws, as currently in effect.
3.3* Amended and Restated Certificate of Incorporation, to become
effective upon re-incorporation into Delaware.
3.4* Bylaws to become effective upon re-incorporation into
Delaware.
3.5* Amended and Restated Certificate of Incorporation, to be
filed and become effective following the closing of the
offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1* 1992 Stock Option Plan.
10.2* Forms of Incentive and Nonstatutory Stock Option Agreement
under the 1992 Stock Option Plan.
10.3* 2000 Equity Incentive Plan.
10.4* Form of Stock Option Agreement pursuant to the 2000 Equity
Incentive Plan.
10.5* 2000 Employee Stock Purchase Plan and related offering
documents.
10.6* Office Lease by and between the Company and Insurance
Company of the West dated as of May 28, 1996.
10.7* Lease by and between the Travelers Insurance Company and
Academic Systems Corporation dated as of July 1, 1996 and
amended December 3, 1996.
10.8* Office Sublease by and between the Company and Qualcomm
Incorporated dated as of December 1, 1997 and amended
September 21, 1998.
10.9* Office Lease by and between the Company and McWin
Corporation dated as of May 1, 1997.
10.10* Office Lease by and between the Company and Auerbach Plaza
Limited Partnership and Goliac, Inc., dated as of June 4,
1999.
10.11* Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of February 25, 1997 and
amended December 31, 1997, March 31, 1998 and March 26,
1999.
10.12* Master Lease Agreement by and between the Company and
Transamerica Business Credit Corporation dated as of August
14, 1997, including Schedules 1, 2, 3, 4 and 5 thereto.
10.13* Master Equipment Lease by and between the Company and
Pentech Financial Services, Inc. dated as of July 25, 1999,
including supplements 1, 2 and 3 thereto.
10.14* Equipment Financing Agreement by and between the Company and
Pentech Financial Services, Inc. dated as of July 1, 1999.
10.15* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
July 8, 1999.
10.16* Amendment and Waiver dated October 28, 1999.
10.17* Amendment to Investor Rights Agreement dated October 29,
1999.
10.18* Form of Indemnity Agreement between the Company and its
directors and officers.
10.19 Developer Agreement by and between the Company and Sony
Computer Entertainment America dated as of January 26, 1996,
as amended.
10.20+ Sale and License Agreement by and between the Company and
Sony Computer Entertainment America dated as of January 26,
1996.
10.21*+ Letter Agreement by and between the Company and
SmarterKids.com, Inc. dated as of July 12, 1999.
10.22* Academic Systems Fulfillment Agreement by and between
Academic Systems Corporation and FGI Print Management dated
as of June 12, 1998.
10.23* Series E Stock Purchase Agreement by and between the Company
and CINAR Corporation dated as of October 29, 1999.
</TABLE>
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<C> <S>
10.24* Warrant Agreement to purchase Series A preferred stock by
and between the Company and Comdisco, Inc. dated as of March
15, 1994.
10.25* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of May
30, 1995.
10.26* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.27* Warrant to purchase Series C preferred stock by and between
the Company and Silicon Valley Bank dated as of March 24,
1997.
10.28* Warrant Agreement to purchase Series C preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.29* Warrant to purchase Series D preferred stock by and between
the Company and Montgomery Securities.
10.30* Form of Warrant to purchase Series D preferred stock.
10.31* Form of Warrant to purchase Series D preferred stock.
10.32+ Letter Agreement regarding strategic initiatives by and
between the Company and CINAR Corporation dated as of
October 29, 1999.
10.33* Amendment and Waiver dated October 28, 1999.
10.34* Warrant to purchase Series E preferred stock by and between
the Company and Comdisco, Inc.
10.35* Form of Warrant to purchase Series E preferred stock.
10.36* Warrant to purchase Series D preferred stock by and between
the Company and SZ Investments L.L.C. dated as of June 6,
1997.
10.37* Oracle Reseller agreement, dated as of August 9, 1994,
including Addendums.
10.38* Form of Warrant to purchase common stock by and between the
Company and Cox Communications Holdings, Inc. to be issued
concurrent with the closing of this offering.
10.39* Stock Purchase Agreement by and between the Company and Cox
Communications Holdings, Inc. dated as of January 11, 2000.
10.40* Stock Purchase Agreement by and between the Company and
Gateway Companies, Inc. dated as of January 12, 2000.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of Attorney. Reference is made to page II-5.
24.2* Power of Attorney.
27* Financial Data Schedule.
</TABLE>
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+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
7,500,000 SHARES
THE LIGHTSPAN PARTNERSHIP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
February ___, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY INC.,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. The Lightspan Partnership, Inc., a Delaware
corporation ("COMPANY"), proposes to issue and sell 7,500,000 shares ("FIRM
SECURITIES") of its Common Stock, par value $0.001 per share ("SECURITIES") and
also proposes to issue and sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 1,125,000 additional shares
("OPTIONAL SECURITIES") of its Securities as set forth below. The Firm
Securities and the Optional Securities are herein collectively called the
"OFFERED Securities". As part of the offering contemplated by this Agreement,
Credit Suisse First Boston Corporation (the "DESIGNATED UNDERWRITER") has agreed
to reserve out of the Firm Securities purchased by it under this Agreement, up
to 375,000 shares, for sale to the Company's employees, directors and certain
other persons associated with the Company (collectively, "PARTICIPANTS"), as set
forth in the Prospectus (as defined herein) under the heading "UNDERWRITING"
(the "DIRECTED SHARE PROGRAM"). The Firm Securities to be sold by the Designated
Underwriter pursuant to the Directed Share Program (the "DIRECTED SHARES") will
be sold by the Designated Underwriter pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by a
Participant by the end of the business day on which this Agreement is executed
will be offered to the public by the Underwriters as set forth in the
Prospectus. The Company hereby agrees with the several Underwriters named in
Schedule A hereto ("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-90103) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("COMMISSION") and either (i) has
been declared effective under the Securities Act of 1933 ("ACT") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("INITIAL REGISTRATION STATEMENT") has been declared effective, either
(i) an additional registration statement ("ADDITIONAL REGISTRATION
STATEMENT") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such
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<PAGE> 2
an additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon filing
pursuant to such Rule and upon such filing the Offered Securities will
all have been duly registered under the Act pursuant to the initial
registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration statement
or if an additional registration statement has been filed and the
Company does not propose to amend it, and if any post-effective
amendment to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the
most recent amendment (if any) to each such registration statement has
been declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("RULE 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For purposes
of this Agreement, "EFFECTIVE TIME" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement has
not been filed prior to the execution and delivery of this Agreement but
the Company has advised the Representatives that it proposes to file
one, "EFFECTIVE TIME" with respect to such additional registration
statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b).
"EFFECTIVE DATE" with respect to the initial registration statement or
the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended
at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act,
is hereinafter referred to as the "INITIAL REGISTRATION STATEMENT". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if any)
deemed to be a part of the additional registration statement as of its
Effective Time pursuant to Rule 430A(b), is hereinafter referred to as
the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration
Statement and the Additional Registration Statement are herein referred
to collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is
hereinafter referred to as the "PROSPECTUS". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
("RULES AND REGULATIONS") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
on the Effective Date of the Additional Registration Statement (if any),
each Registration Statement conformed, or will conform, in all material
respects to the requirements of the Act and the Rules and Regulations
and did not include, or will not include, any untrue statement of a
material fact and did not omit, or will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery
of this Agreement, the Additional Registration Statement each conforms,
and at the time of filing of the Prospectus pursuant to Rule 424(b) or
(if no such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and
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<PAGE> 3
the Prospectus will conform in all material respects to the requirements
of the Act and the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, except where
the failure to be so qualified would not have a material adverse effect
on the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole
("MATERIAL ADVERSE EFFECT").
(d) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to
own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct
of its business requires such qualification, except where the failure to
be so qualified would not have a Material Adverse Effect; all of the
issued and outstanding capital stock of each subsidiary of the Company
has been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform in all material respects to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(g) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act, except such a right that is (i) disclosed in
the Prospectus and (ii) effectively waived by such person (A) to the
extent such right would otherwise be exercisable at any time prior to
the expiration of the 180-day period following the effective date of the
offering contemplated by this Agreement and (B) to the extent such right
would otherwise allow such person to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws.
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<PAGE> 4
(j) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result in a
breach or violation of any of the terms and provisions of, or constitute
a default under, (i) any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or
any such subsidiary is subject (except where such breach, violation or
default would not have a Material Adverse Effect), or (ii) the charter
or by-laws of the Company or any such subsidiary, and the Company has
full corporate power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and
delivered by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
could reasonably be expected to have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights
to inventions, know-how, patents, copyrights and other intellectual
property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to
conduct in all material respects the business now operated by them, or
presently employed by them, and have not received any written notice
(or, to the Company's knowledge, any other notice) of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of
its subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse
Effect; and the Company is not aware of any pending investigation which
might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and, to
the Company's knowledge, no such actions, suits or proceedings are
threatened or contemplated.
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<PAGE> 5
(r) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied on
a consistent basis; the schedules included in each Registration
Statement present fairly the information required to be stated therein;
and the assumptions used in preparing the pro forma financial statements
included in each Registration Statement and the Prospectus provide a
reasonable basis for presenting the significant effects directly
attributable to the transactions or events described therein, the
related pro forma adjustments give appropriate effect to those
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical
financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving
a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(t) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus in the section entitled "Use of
Proceeds," will not be an "INVESTMENT COMPANY" as defined in the
Investment Company Act of 1940, as amended.
(u) Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection
with the Directed Share Program, and that (ii) no authorization,
approval, consent, license, order, registration or qualification of or
with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities law and
regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
(v) No sale by the Underwriters of any Securities to any
Participant will violate the NASD's Free-Riding and Withholding
Interpretation, IM-2110-1. The Company's communications with the
Participants regarding the Directed Share Program have been in
compliance with Section 5 of the Act. The Company has not offered, or
caused the Underwriters to offer, any Offered Securities to any person
pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter
the customer's or supplier's level or type of business with the Company
or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
(w) There are no transfer taxes or other similar fees or charges
under federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and
delivery of this Agreement by the Company or the issuance by the Company
or the sale by the Company of the Offered Securities, except for fees or
charges that may be required to be paid in connection with applicable
blue sky laws, which fees and charges the Company hereby agrees to pay.
(x) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price
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<PAGE> 6
of $ per share, the respective numbers of shares of Firm Securities set forth
opposite the names of the Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC")
drawn to the order of the Company at the office of Cooley Godward LLP, San
Diego, California, at 10:00 A.M., New York time, on February ___, 2000, or at
such other time not later than seven full business days thereafter as CSFBC and
the Company determine, such time being herein referred to as the "FIRST CLOSING
DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934,
the First Closing Date (if later than the otherwise applicable settlement date)
shall be the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the offering. The certificates for
the Firm Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CSFBC requests and will be made
available for checking and packaging at the above office of Cooley Godward LLP
at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the above office of Cooley Godward LLP. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the above
office of Cooley Godward LLP at a reasonable time in advance of such Optional
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of
(A) the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement. The Company will advise CSFBC
promptly of any such filing pursuant to Rule 424(b). If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement and an additional registration statement is
necessary to register a portion of the Offered Securities under the Act
but the Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement
or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to
10:00 P.M., New York time, on the date of this Agreement
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<PAGE> 7
or, if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later
time or date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement
as filed or the related prospectus or the Initial Registration
Statement, the Additional Registration Statement (if any) or the
Prospectus and will not effect such amendment or supplementation without
CSFBC's consent; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best
efforts to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent to,
nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of Section
11(a) of the Act. For the purpose of the preceding sentence,
"AVAILABILITY DATE" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of
the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after
the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (of which four will be signed and will
include all exhibits), each related preliminary prospectus, and, so long
as a prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC reasonably requests.
The Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as
CSFBC designates and will continue such qualifications in effect so long
as required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other publicly
available information concerning the Company as CSFBC may reasonably
request.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement, for any filing fees
and other expenses (including fees and disbursements of counsel)
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<PAGE> 8
incurred in connection with qualification of the Offered Securities for
sale under the laws of such jurisdictions as CSFBC designates and the
printing of memoranda relating thereto, for the filing fee incident to,
and the reasonable fees and disbursements of counsel to the Underwriters
in connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company
in connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial
public offering of the Offered Securities (the "LOCK-UP PERIOD"), the
Company will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Commission a
registration statement under the Act relating to, any additional shares
of its Securities or securities convertible into or exchangeable or
exercisable for any shares of its Securities, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of CSFBC, except issuances of
Securities pursuant to the conversion or exchange of convertible or
exchangeable securities or the exercise of warrants or options, in each
case outstanding on the date hereof, grants of stock options or
issuances of shares pursuant to the terms of a plan in effect on the
date hereof and disclosed in the Prospectus, issuances of Securities
pursuant to the exercise of such options, or issuances of Securities
pursuant to an employee stock purchase plan which is in effect on the
date hereof and disclosed in the Prospectus. Notwithstanding the
foregoing, the Company may issue the following Securities in the
following transactions ("EXCEPTED TRANSACTIONS"): (A) a total of up to
534,008 shares of its Securities to former stockholders of Academic
Systems Corporation ("ASC") having rights to such shares in connection
with the Company's acquisition of ASC as disclosed in the Prospectus and
(B) a total of up to 1,000,000 shares of its Securities during the
Lock-up Period in connection with acquisitions, strategic alliances, or
joint ventures; provided, however, that: (i) the Company shall give
CSFBC 5 days prior written notice of any such issuance describing the
Excepted Transaction in reasonable detail and stating the number of
shares of Securities proposed to be issued in the Excepted Transaction,
(ii) all Securities issued in connection with the Excepted Transaction
shall remain subject to the lock-up restrictions of this paragraph 5(i)
for the remainder of the Lock-up Period, (iii) prior to any such
issuance of Securities, each person that is to acquire any such
Securities shall sign a lock-up agreement in form and substance
reasonably acceptable to CSFBC covering all such Securities for the
remainder of the Lock-up Period and (iv) no such issuance shall be made
unless and until the requirements and conditions in the foregoing
clauses (i), (ii) and (iii) have been complied with and satisfied.
(j) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time. The
Company will further use its reasonable best efforts to ensure that none
of the Participants are restricted persons under the NASD's Free-Riding
and Withholding Interpretation, IM-2110-1.
(k) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program.
Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be purchased
on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company herein, to the
accuracy of the statements of Company officers made pursuant to the provisions
hereof, to the performance by the Company of its obligations hereunder and to
the following additional conditions precedent:
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<PAGE> 9
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of Ernst &
Young LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review
of interim financial information as described in Statement of
Auditing Standards No. 71, Interim Financial Information, on the
unaudited financial statements included in the Registration
Statements;
(iii) on the basis of the review referred to in clause
(ii) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting matters and
other specified procedures, nothing came to their attention that
caused them to believe that:
(A) the unaudited financial statements included
in the Registration Statements do not comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to
be in conformity with generally accepted accounting
principles;
(B) the unaudited consolidated net sales, net
operating income, net income and net income per share
amounts for the nine-month periods ended October 1998
and 1999 included in the Prospectus do not agree with
the amounts set forth in the unaudited consolidated
financial statements for those same periods or were not
determined on a basis substantially consistent with that
of the corresponding amounts in the audited statements
of income;
(C) at the date of the latest available balance
sheet read by such accountants, or at a subsequent
specified date not more than three business days prior
to the date of such letter, there was any change in the
capital stock or any increase in short-term indebtedness
or long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any
decrease in consolidated net current assets or net
assets), as compared with amounts shown on the latest
balance sheet included in the Prospectus;
(D) for the period from the closing date of the
latest income statement included in the Prospectus to
the closing date of the latest available income
statement read by such accountants there were any
decreases, as compared with the corresponding period of
the previous year and with the period of corresponding
length ended the date of the latest income statement
included in the Prospectus, in consolidated net sales or
net operating income or in the total or per share
amounts of consolidated income before extraordinary
items or net income; or
(E) the unaudited pro forma financial
information included in the Registration Statements do
not comply as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations (including Rule
11-02 of Regulation S-X) or the pro forma adjustments
have not been properly applied to the historical amounts
in the compilation of those statements;
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<PAGE> 10
except in all cases set forth in clauses (C) and (D)
above for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which
are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries
subject to the internal controls of the Company's accounting
system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading
of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement
with such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to such
execution and delivery, "REGISTRATION STATEMENTS" shall mean the Initial
Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"PROSPECTUS" shall mean the prospectus included in the Registration
Statements.
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later time or date as shall
have been consented to by CSFBC. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and
delivery of this Agreement, such Effective Time shall have occurred not
later than 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later time or date as shall
have been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated
by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as one enterprise which, in the judgment of a
majority in interest of the Underwriters including the Representatives,
is material and adverse and makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating
of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Act), or any public announcement that any such organization
has under surveillance or review its rating of any debt securities or
preferred stock of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any material suspension or material
limitation of trading in securities generally on the New York Stock
Exchange, or any setting of minimum prices for trading on such exchange,
or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (iv) any banking moratorium
declared by U.S. Federal, California or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives,
the effect of any such outbreak, escalation, declaration, calamity or
emergency makes it impractical or inadvisable to proceed with completion
of the public offering or the sale of and payment for the Offered
Securities.
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<PAGE> 11
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Cooley Godward LLP, counsel for the Company, to
the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own or
lease its properties and conduct its business as described in
the Prospectus; and, to the best of such counsel's knowledge,
the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its
business requires such qualification (except where the failure
to so qualify would not have a Material Adverse Effect);
(ii) All outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued, and are
fully paid and nonassessable; the Offered Securities delivered
on such Closing Date have been duly authorized and will be
validly issued, fully paid and nonassessable when issued and
paid for pursuant to this Agreement; the capital stock of the
Company, including the Offered Securities delivered on such
Closing Date, conform to the description thereof contained in
the section of the Prospectus entitled "Description of Capital
Stock"; and the stockholders of the Company have no preemptive
rights with respect to the Securities;
(iii) There are no contracts, agreements or
understandings known to such counsel between the Company and any
person granting such person the right, which has not been
effectively waived, to require the Company to file a
registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application
of the proceeds thereof as described in the section of the
Prospectus entitled "Use of Proceeds," will not be an
"INVESTMENT COMPANY" as defined in the Investment Company Act of
1940, as amended;
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated
by this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required
under state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (A) any statute,
any rule, regulation or order of any governmental agency or body
or any court having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any
agreement or instrument filed as an exhibit to a Registration
Statement to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to
which any of the properties of the Company or any such
subsidiary is subject (except where such breach, violation or
default would not have a Material Adverse Effect), or (B) the
charter or by-laws of the Company or any such subsidiary, and
the Company has full corporate power and authority to authorize,
issue and sell the Offered Securities as contemplated by this
Agreement;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any) was
filed and became effective under the Act as of the date and time
(if determinable) specified in such opinion, the Prospectus
either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the
date specified therein or was included in the Initial
Registration Statement or the Additional Registration Statement
(as the case may be), and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of a
Registration Statement or
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<PAGE> 12
any part thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of
their respective effective or issue dates, complied as to form
in all material respects with the requirements of the Act and
the Rules and Regulations; no facts have come to such counsel's
attention that would cause such counsel to believe that any part
of a Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of
such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact necessary in order to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, the statements in
the sections of the Registration Statements and Prospectus
entitled "Prospectus Summary--Shares Outstanding after the
Offering" and "--Recent Developments," "Risk Factors--We are
heavily dependent upon our relationship with Sony Computer
Entertainment, and termination of that relationship, supply
shortages of Sony PlayStation game consoles from Sony Computer
Entertainment or unanticipated changes in the game consoles
could reduce our Lightspan Achieve Now sales or increase related
expenses," "--Claims relating to data collection from our user
base and content available on or accessible from our Web sites
may subject us to liabilities and additional expense and
decrease traffic to our Web sites," "--It may be difficult for a
third party to acquire our company, and this could depress our
stock price," and "--Approximately 32.7 million, or 81.3%, of
our total outstanding shares are restricted from immediate
resale but may be sold into the market in the near future. We
will also issue additional stock following this offering. This
will increase the supply of common stock available for resale,
and could increase trading activity and cause the market price
of our common stock to drop significantly, even if our business
is doing well," "Management's Discussion and Analysis of
Financial Condition and Operating Results--Springing Warrants,"
"--Other Relationships," "--Legal Matters" and "--Liquidity and
Capital Resources," "Business--Rights to Content" and "--Legal
Proceedings," "Management," "Related-Party Transactions,"
"Principal Stockholders," "Description of Capital Stock" and
"Shares Eligible for Future Sale," insofar as they constitute
summaries of the statutes, legal matters, documents or legal or
governmental proceedings referred to therein, are accurate and
fairly summarize in all material respects the information
required by the Act or the Rules and Regulations to be set forth
therein with respect to such matters; and such counsel do not
know of any legal or governmental proceedings required to be
described in a Registration Statement or the Prospectus which
are not described as required or of any contracts or documents
required to be described in a Registration Statement or the
Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it
being understood that notwithstanding the foregoing, such
counsel need express no opinion as to the financial statements
and financial schedules, the notes to the financial statements,
or the financial and statistical information related to the
financial statements contained in the Registration Statements or
the Prospectus; and
(viii) This Agreement has been duly authorized, executed
and delivered by the Company.
(e) The Representatives shall have received from O'Melveny &
Myers LLP, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to
such counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters.
(f) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation,
shall state that: the representations and warranties of the Company in
this Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional
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<PAGE> 13
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the Prospectus
was printed and distributed to any Underwriter; and, subsequent to the
date of the most recent financial statements in the Prospectus, there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole except as set forth in
or contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
(h) The Representatives shall have received from all officers
and directors of the Company, and all holders of Common Stock, Preferred
Stock or warrants, an agreement in form and substance reasonably
acceptable to CSFBC (each, a "Lock-up Agreement") dated on or before the
date of this Agreement to the effect that, for a period of 180 days
after the initial public offering of the Offered Securities pursuant to
this Agreement, such person will not, without the prior written consent
of CSFBC, offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of Securities or securities
convertible into or exchangeable or exercisable for any shares of
Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposition. In addition, (i) the Company shall have
delivered (or caused to be delivered) to each holder of Common Stock,
Preferred Stock or warrants, a notice in form and substance reasonably
acceptable to CSFBC specifying that the lock-up period under any stock
purchase agreement, investor rights agreement, option agreement or other
agreement between the Company and such holder is 180 days following the
effective date of the Registration Statement and (ii) the
Representatives shall have received a certificate, dated such Closing
Date, of the President or any Vice President of the Company or
representative of the Company's transfer agent in which such person
certifies that the Company has complied with the foregoing clause (i).
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if
any, who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter
in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon
and in conformity with written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as
such in subsection (b) below; and, provided further, that with respect
to any untrue statement or alleged untrue statement in or omission or
alleged omission from any preliminary prospectus, the indemnity
agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased the Offered Securities
concerned, to the extent that a prospectus relating to such Offered
Securities was required to be delivered by such Underwriter under the
Act in connection with such purchase and any such loss, claim, damage
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<PAGE> 14
or liability of such Underwriter results from the fact that there was
not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies
thereof to such Underwriter.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act (the "DESIGNATED ENTITIES"), from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) (i) caused by any untrue statement or alleged untrue statement
of a material fact contained in any material prepared by or with the
consent of the Company for distribution to Participants in connection
with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant agreed to purchase; or (iii)
related to, arising out of, or in connection with the Directed Share
Program, other than losses, claims, damages or liabilities (or expenses
relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of the Designated
Entities.
(b) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company, its directors and officers and each
person, if any, who controls the Company within the meaning of Section
15 of the Act, against any losses, claims, damages or liabilities to
which the Company may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the following information in the Prospectus
furnished on behalf of each Underwriter: the concession and reallowance
figures appearing in the fourth paragraph under the caption
"Underwriting" and the information regarding expected discretionary
sales contained in the sixth paragraph under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above, notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under
subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to
the last paragraph in Section 7 (a) hereof in respect of such action or
proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees
and expenses of not more than one separate firm (in addition to any
local counsel) for the Designated Underwriter for the defense of any
losses, claims, damages and liabilities arising out of the Directed
Share Program, and all persons, if any, who control the Designated
Underwriter within the meaning of either Section 15 of the Act of
Section 20 of the Exchange Act. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened action in respect of which any indemnified
party is or could have been a party and indemnity could have been
-14-
<PAGE> 15
sought hereunder by such indemnified party unless such settlement (i)
includes an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action and
(ii) does not include a statement as to, or an admission of, fault,
culpability or a failure to act by or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a) or (b) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and the Underwriters on the other from the offering of the Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection
(d), no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in addition
to any liability which the respective Underwriters may otherwise have
and shall extend, upon the same terms and conditions, to each director
of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company for the purchase of such
Offered Securities by other persons, including any of the Underwriters, but if
no such arrangements are made by such Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except as provided in Section 9 (provided that if such default occurs
with respect to Optional Securities after the First Closing Date, this Agreement
will not terminate as to the Firm Securities or any Optional Securities
purchased prior to such
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<PAGE> 16
termination). As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. Nothing herein will
relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person, and will
survive delivery of and payment for the Offered Securities. If this Agreement is
terminated pursuant to Section 8 or if for any reason the purchase of the
Offered Securities by the Underwriters is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company and the Underwriters
pursuant to Section 7 shall remain in effect, and if any Offered Securities have
been purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 10140 Campus Point
Drive, San Diego, CA 92121, Attention: John T. Kernan; provided, however, that
any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 7, and no
other person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act
for the several Underwriters in connection with this financing, and any action
under this Agreement taken by the Representatives jointly or by CSFBC will be
binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
-16-
<PAGE> 17
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
THE LIGHTSPAN PARTNERSHIP, INC.
By:________________________________
John T. Kernan
Chairman and Chief Executive Officer
CREDIT SUISSE FIRST BOSTON CORPORATION
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By__________________________________
[Insert title]
-17-
<PAGE> 18
SCHEDULE A
UNDERWRITER
-----------
NUMBER OF
FIRM SECURITIES
---------------
Credit Suisse First Boston Corporation......................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
---------------
Total.....................................
===============
-18-
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF COOLEY GODWARD LLP]
February 3, 2000
The Lightspan Partnership, Inc.
10140 Campus Point Drive
San Diego, CA 92121
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by The Lightspan Partnership, Inc. (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement"), with the
Securities and Exchange Commission (the "Commission"), including a related
prospectus to be filed with the Commission pursuant to Rule 424(b) of Regulation
C (the "Prospectus") promulgated under the Securities Act of 1933, as amended,
and public offering of up to 8,625,000 shares of the Company's common stock
including: (i) 7,500,000 underwritten shares and (ii) up to 1,125,000 shares for
which the underwriters have been granted an over-allotment option (collectively,
the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Articles of Incorporation and Bylaws and the originals or copies
certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below and (ii) assumed that the
shares of the Common Stock will be sold by the Company and the underwriters at a
price established by the Pricing Committee of the Company's Board of Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By:
--------------------------------
Christopher J. Kearns
<PAGE> 1
Exhibit 10.19
DEVELOPER AGREEMENT
THIS DEVELOPER AGREEMENT (the "Developer Agreement" or the "Agreement") is
entered into as of the 26th day of January, 1996, by and between SONY COMPUTER
ENTERTAINMENT AMERICA, a division of Sony Interactive Entertainment Inc.,
formerly known as Sony Electronic Publishing Company, with offices at 550
Madison Avenue, New York, New York 10022 (hereinafter "Sony"), and The Lightspan
Partnership, Inc., with offices at 2382 Faraday Avenue, Suite 300, Carlsbad, CA
92008-7218 (hereinafter "Developer").
WHEREAS, Sony and/or its affiliates have developed a CD-based interactive
console for playing video games and for other entertainment purposes known as
PlayStation(TM) (formerly known under the development code name "PS-X(TM)")
(hereinafter referred to as the "Player") and also own or have the right to
grant licenses to certain intellectual property rights used in connection with
the Player.
WHEREAS, Developer desires to be granted a non-exclusive license to develop
Products (as defined below) for the School Market (as defined below) pursuant to
the terms and conditions set forth in this Agreement.
WHEREAS, Sony and Developer have entered into a Sale and License Agreement,
dated as of January 12, 1996, regarding the distribution of PlayStation consoles
and accessories and Products to the School Market (hereinafter the "License
Agreement").
WHEREAS, Sony is willing, on the terms and subject to the conditions of this
Agreement, to grant Developer the desired non-exclusive license to develop
Products for the School Market.
WHEREAS, the Developer desires to obtain from Sony, and Sony is willing to
provide Developer with, certain software, hardware and documentation for use by
Developer in the development of application software for the Player (the
"Development Tools").
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Developer and Sony
hereby agree as follows:
1. DEFINITION OF TERMS.
1.1 "Developer Software" means Developer's application object code and data
(including audio and video material) developed by Developer in accordance with
this Agreement, which, when linked to any software provided by Sony, create
Executable Software. All Developer Software shall be educational in nature.
1.2 "Documentation" means any document, including the Tool Catalog,
regarding usage of the Hardware Tools or the Software Tools and provided by Sony
to the Developer in writing, on floppy discs, on CD-ROM discs or through
electronic media.
1.3 "Executable Software" means Developer's object code software which
includes the Developer Software and any software (whether in object code or
source code form) provided by Sony which is intended to be combined with
Developer Software for execution on a Player and has the ability to communicate
with the software resident in the Player.
-1- CONFIDENTIAL
<PAGE> 2
1.4 "Hardware Tools" means the hardware described in the Tool Catalog
which was developed by Sony for use in the creation of Executable Software.
1.5 "Intellectual Property Rights" means, by way of example but not by way
of limitation, all current and future worldwide patents and other patent
rights, copyrights, trademarks, service marks, trade names, mask work rights,
trade secret rights, technical information, know-how, and the equivalents of
the foregoing under the laws of any jurisdiction, and all other proprietary or
intellectual property rights throughout the universe, including without
limitation all applications and registrations with respect thereto, and all
renewals and extensions thereof.
1.6 "Products" shall mean the Executable Software embodied on CD-ROM
media.
1.7 "Software Tools" means the software described in the Tool Catalog
which may be provided to the Developer by Sony for use in the creation of
Executable Software on floppy discs, CD-ROM discs or through electronic media.
1.8 "Sony Materials" means any data, object code, source code,
documentation, and hardware provided or supplied to Developer by Sony,
including, without limitation, any portion or portions of the Development Tools.
1.9 "Sony Trademarks" means the trademarks, service marks and logos
designated by Sony. Nothing contained in this Agreement shall in any way grant
Developer the right to use the trademark "Sony" in any manner as a trademark,
trade name, service mark or logo other than as expressly permitted by Sony. Sony
may amend such Sony Trademarks upon reasonable notice to Developer.
1.10 "Tool Catalog" means the PS-X Development Tool Catalog prepared by
Sony and provided separately to the Developer.
1.11 "School Market" shall mean distribution directly by Licensee to and
for elementary and secondary (i.e., K-12) students, through distribution and
sale to elementary and secondary (i.e., K-12) public and private schools in the
United States and Canada.
2. LICENSE AND PROVISION OF DEVELOPMENT TOOLS.
2.1 LICENSE. Sony hereby grants to Developer, and Developer hereby
accepts, for the term of this Agreement, within the United States and Canada,
under Sony's Intellectual Property Rights, including without limitation any
relevant patents Sony may own or have acquired by license, a non-exclusive,
nontransferable license, without the right to sublicense (except as
specifically provided herein) to use the object code version of any software
supplied by Sony that is intended to be combined with Developer Software and
executed on a Player internally as may reasonably be necessary to develop
Products for the School Market. Developer agrees that all rights to
manufacture, market, distribute and sell Products shall be governed by the
terms and conditions of the License Agreement.
2.2 SOFTWARE TOOLS. Sony herby agrees to provide to Developer, and
Developer hereby accepts, for the term and subject to the conditions set forth
herein, the Software Tools. Developer will not, except as provided herein,
permit, directly or indirectly, any third party to use all or any part of the
Software Tools or the Documentation. Developer will only use the Software Tools
internally for the sole purpose of developing the Executable Software in
accordance with the Developer Agreement, and will only use the Documentation
supplied with the Software Tools to
-2- CONFIDENTIAL
<PAGE> 3
support such efforts. Developer shall not sell, lease, license or otherwise
transfer or dispose of the Software Tools, or permit any lien or other
encumbrance with respect to the Software Tools. Developer shall not make any
alterations, additions or modifications to the Software Tools without the
written permission of Sony in its discretion, and, if such permission is
granted, all right, title and interest in alterations or modifications shall
become the property of, and are hereby assigned to, Sony. Developer shall
execute such additional documents as reasonably necessary to effectuate any such
assignment.
2.3 HARDWARE TOOLS. Sony hereby agrees to provide to Developer, and
Developer hereby accepts, for the term and subject to the conditions set forth
herein, the Hardware Tools. Developer will only use the Hardware Tools
internally for the sole purpose of developing the Executable Software in
accordance with the Developer Agreement, and will only use the Documentation
supplied with the Hardware Tools to support such efforts. Sony shall retain
title to the Hardware Tools, and Developer shall keep such system free of all
security interests, liens and other encumbrances. Developer will not, except as
provided herein, permit, directly or indirectly, any third party to use all or
any part of the Hardware Tools. Developer shall not sell, lease or otherwise
transfer or dispose of the Hardware Tools, or permit any lien or other
encumbrance with respect to the Hardware Tools. Developer shall not make any
alterations, additions or modifications to the Hardware Tools without the
written permission of Sony in its discretion, and, if such permission is
granted, all right, title and interest in alterations or modifications shall
become the property of, and are hereby assigned to, Sony. Developer shall
execute such additional documents as reasonably necessary to effectuate any such
assignment.
3. CONSIDERATION AND DELIVERY.
3.1 CONSIDERATION. Sony agrees to provide such number of copies of the
Software Tools, Documentation and other Sony Materials and provide such number
of units of the Hardware Tools as Developer may reasonably request, subject to
availability, during the term of this Developer Agreement. The nonrefundable
amount to be paid by Developer (the "Nonrefundable Payment") for each such copy
and/or unit shall be set forth in the Tool Catalog. The Nonrefundable Payment
for Development Tools may be changed by Sony from time to time without notice to
Developer. Any Nonrefundable Payments are exclusive of any withholding taxes or
other assessments which may be imposed by any governmental authority or any
other U.S. or foreign federal, state or local sales or value-added tax, use or
excise tax, customs duties or other similar taxes or duties, which Sony may be
required to collect or pay. Developer shall be solely responsible for the
payment or reimbursement of any such taxes, fees, and other such charges or
assessments applicable to the payment by Developer of any such Nonrefundable
Payment. In addition, Developer shall pay or reimburse Sony for all personal
property taxes or similar charges, however imposed, on the ownership, use and
possession of the Development Tools during the term of the Developer Agreement.
3.2 DELIVERY. Sony shall deliver the Development Tools and any other
requisite Sony Materials to Developer, when available, at the site listed in
Exhibit A hereto (the "Development Site") for use only at such Development Site,
subject to receipt of the Nonrefundable Payment. Developer shall bear all
transport costs, including but not limited to, any insurance costs, related
thereto and risk of loss or damage in transit to any and all of the Development
Tools shall vest in Developer immediately upon delivery to the carrier.
4. LIMITATIONS ON LICENSES; RESERVATION OF RIGHTS.
4.1 REVERSE ENGINEERING PROHIBITED. Developer hereby agrees not to
disassemble, peel
-3- CONFIDENTIAL
<PAGE> 4
semiconductor components, decompile, or otherwise reverse engineer or attempt
to reverse engineer or derive source code from, all or any portion of the Sony
Materials (whether or not all or any portion of the Sony Materials are
integrated with the Developer Software), or permit or encourage any third party
to do so, or use or acquire any materials from any third party who does so.
Developer shall not use, modify, reproduce, sublicense, distribute, create
derivative works from, or otherwise provide to third parties, the Sony
Materials, in whole or in part, other than as expressly permitted by this
Developer Agreement. Developer shall be required in all cases to pay royalties
in accordance with payments made under the License Agreement to Sony on any
products which are in any way derived from the disassembly, decompilation,
reverse engineering of, or use of source code derived from the Sony Materials.
4.2 RESERVATION OF SONY'S RIGHTS. The licenses granted in this Developers
Agreement extend only to development of Products for the School Market for use
on the Player, in such format as may be designated by Sony. Without limiting
the generality of the foregoing and except as otherwise provided herein,
Developer shall not have the right to publish, manufacture, market, promote,
distribute, sell or transmit the Executable Software or the Products in any
manner, including, but not limited to, distribution or sale outside the School
Market (including without limitation to or through retail channels of
distribution) or via electronic means or any other means now known or hereafter
devised, including without limitation, via wireless, cable, fiber optic means,
telephone lines, microwave and/or radio waves, or over a network of
interconnected computers or other devices. This Developer Agreement does not
grant any right or license, under any Intellectual Property Rights of Sony or
otherwise, except as expressly provided herein, and no other right or license
is to be implied by or inferred from any provision of this Developer Agreement
or the conduct of the parties hereunder. Developer shall not make use of any of
the Development Tools, other Sony Materials or the Player or any Intellectual
Property Rights related to the Sony Materials and Player (or any portion
thereof) except as authorized by and in compliance with the provisions of this
Developer Agreement or as may be otherwise expressly authorized in writing by
Sony. No right, license or privilege has been granted to Developer hereunder
concerning the development of any collateral product or other use or purpose
of any kind whatsoever which displays or depicts any of the Sony Trademarks.
4.3 RESERVATION OF DEVELOPER'S RIGHTS. Developer retains all rights, title
and interest in and to the Developer Software, including without limitation,
Developer's Intellectual Property Rights therein, and nothing in this Agreement
shall be construed to restrict the right of Developer to develop products
incorporating the Developer Software (separate and apart from the Sony
Materials) for any hardware platform or service other than the Player.
4.4 THIRD PARTY DEVELOPMENT. Developer may develop Products under
contract for a third party provided that such third party is: (i) an authorized
developer that has executed a Developer Agreement, or (ii) an authorized
subcontractor that is in compliance with the provisions of Section 15.5.
Developer shall notify Sony in writing of the identity of any such third party
within thirty (30) days of entering into an agreement or other arrangement with
the third party. Developer shall have the responsibility for determining that
such third parties meet the criteria set forth herein. Developer shall not have
the right to develop, publish, manufacture, market, promote, distribute, sell
or transmit the Executable Software or the Products in any manner for end user
or any third parties not in compliance with the above criteria unless Developer
directly enters into a License Agreement with Sony. Developer agrees that,
pursuant to the License Agreement, any publication, marketing, distribution or
sale of Products outside of the School Market may only be made upon negotiation
of a separate agreement with Sony for such rights, and that Sony shall have a
right of first refusal to distribute, publish, market or sell such Products.
-4- CONFIDENTIAL
<PAGE> 5
5. TITLE TO DEVELOPMENT TOOLS. Subject to the rights granted by Sony to
Developer hereunder, all rights with respect to the Development Tools,
including, without limitation, all of Sony's Intellectual Property Rights
therein, are and shall be the exclusive property of Sony. Nothing herein shall
give Developer any right, title or interest in or to the Development Tools (or
any portion thereof), or any Intellectual Property Rights therein other than the
right to use the Development Tools for the development of the Executable
Software solely in accordance with the provisions of this Developer Agreement.
Developer shall not do or cause to be done any act or thing contesting or
in any way impairing or tending to impair any of Sony's rights, title, and/or
interests in or to the Development Tools (or any portion thereof).
6. CONFIDENTIALITY.
6.1 NONDISCLOSURE AGREEMENT. Developer hereby acknowledges that the
Nondisclosure Agreement dated September 28, 1995 between Sony and Developer
("Nondisclosure Agreement") will remain in full force and effect with respect to
the Confidential Information of Sony throughout the term of this Agreement.
Except as otherwise specified herein, the terms and provisions of the
Nondisclosure Agreement shall apply with respect to the Confidential Information
of Sony.
6.2 CONFIDENTIAL INFORMATION OF DEVELOPER. For the purposes of this
Developer Agreement, "Confidential Information" of Developer shall mean the
Developer Software as provided to Sony pursuant to this Developer Agreement and
all documentation and information relating thereto that is disclosed in writing
or in any other form by Developer to Sony if the information is designated as
(or is provided under circumstances indicating the information is) confidential
or proprietary.
6.3 PRESERVATION OF CONFIDENTIALITY: NON-DISCLOSURE. Sony shall take all
steps necessary to preserve the confidentiality of the Confidential Information
of the Developer, and except as may be expressly authorized by Developer or
unless one of the exceptions set forth in Section 6.5 applies, Sony shall not at
any time, either before or after any termination of this Developer Agreement,
directly or indirectly: (i) disclose any Confidential Information to any person
other than an employee or subcontractor of the receiving party who needs to know
or have access to such Confidential Information for the purposes of this
Developer Agreement, and only to the extent necessary for such purposes; (ii)
except as otherwise provided in this Developer Agreement, duplicate the
Confidential Information for any purpose whatsoever; (iii) use the Confidential
Information for any reason or purpose other than as expressly permitted in this
Developer Agreement; or (iv) remove any copyright notice, trademark notice
and/or other proprietary legend set forth on or contained within any of the
Confidential Information.
6.4 OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE. If at any time either Sony
or Developer (the "receiving party") becomes aware of any unauthorized
duplication, access, use, possession or knowledge of any Confidential
Information of the other party (the "disclosing party"), the receiving party
shall immediately notify the disclosing party. The receiving party shall provide
any and all reasonable assistance to the disclosing party to protect the
disclosing party's proprietary rights in any Confidential Information that the
receiving party or its employees or permitted publishers or subcontractors may
have directly or indirectly disclosed or made available and that may be
duplicated, accessed, used, possessed or known in a manner or for a purpose not
expressly authorized by this Developer Agreement including but not limited to
enforcement of confidentiality agreements, commencement and prosecution in good
faith (alone or with the disclosing party) of legal action, and reimbursement
for all reasonable attorneys' fees (and all related costs), costs and expenses
incurred by the disclosing party to protect its proprietary rights in the
Confidential Information. The receiving party shall take all reasonable steps
requested by the disclosing party to prevent the recurrence of any unauthorized
duplication, access, use, possession or knowledge of
-5- CONFIDENTIAL
<PAGE> 6
the Confidential Information.
6.5 EXCEPTIONS. The foregoing restrictions will not apply to information
to the extent that the receiving party can demonstrate such information: (i) was
known to the receiving party at the time of disclosure to the receiving party by
the disclosing party as shown by the files of the receiving party in existence
at the time of disclosure; (ii) becomes part of information in the public domain
through no fault of the receiving party; (iii) has been rightfully received from
a third party authorized by the disclosing party to make such disclosure without
restriction; or (iv) has been disclosed by court order or as otherwise required
by law (including without limitation to the extent that disclosure may be
required under Federal or state securities laws), provided that the receiving
party has notified the disclosing party immediately upon learning of the
possibility of any such court order or legal requirement and has given the
disclosing party a reasonable opportunity (and cooperated with the disclosing
party) to contest or limit the scope of such required disclosure (including
application for a protective order). Information shall not be deemed known to
the receiving party or publicly known for purposes of the above exceptions (A)
merely because it is embraced by more general information in the prior
possession of the receiving party or others, or (B) merely because it is
expressed in public material in general terms not specifically the same as
Confidential information.
6.6 CONFIDENTIALITY OF AGREEMENT. The terms and conditions of this
Developer Agreement shall be treated as Confidential Information; provided that
each party may disclose the terms and conditions of this Developer Agreement:
(i) to legal counsel; (ii) in confidence, to accountants, banks and financing
sources and their advisors; and (iii) in confidence, in connection with the
enforcement of this Developer Agreement or rights under this Developer
Agreement. Both parties shall treat the fact that the parties have entered into
this Developer Agreement as Confidential Information until a public announcement
regarding this Developer Agreement is released by Sony, at its sole discretion,
announcing that Developer has become a Developer under this Developer Agreement.
Notwithstanding the foregoing, Developer shall not disclose any Confidential
Information or any of the terms of this Agreement to TCI (Telecommunications
Inc.), Microsoft or any other investors in Licensee without Sony's prior written
approval.
7. USAGE.
7.1 LOCATION AND ACCESS. Developer agrees to use and store the Sony
Materials solely at the Development Site or other location approved in writing
by Sony and insure that they are accessible only to those employees and
subcontractors entitled to use such Sony Materials. Developer agrees to restrict
access to the Sony Materials so that only those employees and subcontractors
entitled to access to such Sony Materials pursuant to the terms of the
Nondisclosure Agreement may see or use the Sony Materials. In the event that
Developer wishes to change the Development Site, it shall obtain Sony's prior
written approval thereto. Developer shall affix to and maintain on the Hardware
Tools, in a conspicuous location, a notice stating that such hardware is owned
by Sony. In addition, Developer must preserve any other proprietary rights
notices placed on the Sony Materials by Sony and must place all such notices on
any copies made as permitted by the terms hereof.
7.2 DEVELOPER DESIGNEE. Developer agrees that the individual named in
Exhibit A hereto shall act as the designated caretaker of the Sony Materials
(the "Developer Designee"). The Developer Designee shall be responsible for
receiving all Sony Materials, overseeing that the terms of this Section 7 are
fulfilled and shall act as Developer's contact for matters related to the Sony
Materials. In the event that Developer wishes to appoint a new Developer
Designee, it shall give Sony written notice ten (10) days prior to the change.
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7.3 COPIES. Developer agrees that it shall not make, nor allow anyone else
to make, a copy of any Software Tools or Documentation; provided, however, that
Developer may, without payment of any additional license fee, make one (1) copy
of each set of Software Tools and Documentation licensed from Sony for backup
purposes only. In addition, if Sony chooses to provide, or permits Developer to
obtain, any Software Tools or Documentation via electronic media, Developer may
copy such Software Tools and/or Documentation from the electronic media subject
to the payment of the applicable fees for each such copy. Any copies permitted
pursuant to the terms of this Section 7.3 shall be used pursuant to the terms
and conditions hereof.
7.4 VERIFICATION OF COMPLIANCE. Developer agrees that authorized Sony
representatives may at any time or times upon reasonable notice to Developer
inspect the Development Site, the Development Tools and copies of other Sony
Materials during Developer's normal business hours in order to verify that
Developer is complying with its obligations under this Developer Agreement.
7.5 CARE. Developer undertakes, at all times until the Hardware Tools are
returned to Sony, to: (i) take all reasonable and proper care of the Hardware
Tools; (ii) keep the Hardware Tools in good and serviceable condition; (iii)
ensure the full compliance with all instructions relating to the maintenance,
security or operation of the Hardware Tools; (iv) maintain and service with all
due care the Hardware Tools at its expense in accordance with any written
instructions given by Sony; (v) take all such further steps as are necessary to
ensure that the Hardware Tools are safe and constituting no risk to the health
or safety of any person or property; (vi) inform Sony immediately or any failure
or breakdown in the Hardware Tools howsoever caused.
7.6 LIMITATION ON USE. In developing the Executable Software, Developer
shall fully comply in all respects with any and all technical specifications
which may from time to time be issued by Sony or forwarded by Licensed
Publishers to Developer at the instruction of Sony. For purposes of this
Agreement, such technical specifications, whenever issued, shall be deemed to be
Documentation. Developer shall not develop or attempt to develop Executable
Software other than by the use of the Development Tools strictly in accordance
with all the terms and provisions of this Agreement.
8. REPAIRS AND ENHANCEMENTS.
8.1 NOTIFICATION OF DEFECTS. Developer will notify Sony of any material
reproducible errors, bugs or defects that Developer uncovers in the Development
Tools, and in the event that within the first six (6) months of delivery of such
Development Tools to Developer, such Development Tools are found to have such
material errors, bugs or defects (not due to the negligence or fault of
Developer), then Sony shall make such efforts as Sony in its discretion deems
reasonable to fix such errors, bugs or defects in such Development Tools.
8.2 ENHANCEMENTS. During the term of this Developer Agreement, Sony will
notify Developer if and when (i) any revised or updated version of the Software
Tools or Documentation are generally released to Sony's Developers and the terms
of the license therefor, and Developer shall be entitled to license from Sony
such revisions or updates on such terms, and (ii) any updated, modified or
enhanced version or component for the Hardware Tools are generally released to
Sony's Developers, and the terms of delivery therefor, and Developer shall be
entitled to obtain from Sony such update, modification, enhancement or component
on such terms.
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9. REPRESENTATIONS AND WARRANTIES.
9.1 REPRESENTATIONS AND WARRANTIES OF SONY. Sony represents and warrants
solely for the benefit of Developer that Sony has the right, power and
authority to enter into this Developer Agreement and to fully perform its
obligations hereunder.
9.2 REPRESENTATIONS AND WARRANTIES OF DEVELOPER. Developer represents and
warrants that: (i) there is no threatened or pending action, suit, claim or
proceeding alleging that the use by Developer of all or any part of the
Developer Software or any underlying work or content embodied therein, or any
name, designation or trademark used in conjunction with the Products infringes
or otherwise violates any Intellectual Property Right or other right or interest
of any kind whatsoever of any third party, or otherwise contesting any right,
title or interest of Developer in or to the Developer Software or any
underlying work or content embodied therein, or any name, designation or
trademark used in conjunction with the Products; (ii) Developer has the right,
power and authority to enter into this Developer Agreement and to fully perform
its obligations hereunder; (iii) the making of this Developer Agreement by
Developer does not violate any separate agreement, rights or obligations
existing between Developer and any other person or entity, and, throughout the
term of this Developer Agreement, Developer shall not make any separate
agreement with any person or entity that is inconsistent with any of the
provisions of this Developer Agreement; (iv) Developer shall not make any
representation or give any warranty to any person or entity expressly or
impliedly on Sony's behalf, or to the effect that the Products are connected in
any way with Sony (other than that the Products have been developed under
license from Sony); (v) the Executable Software shall be delivered to
Publishers by Developer solely in object code or source code form; (vi) each of
the Products shall be developed in an ethical manner and in accordance with all
applicable laws and regulations and will not contain any obscene matter; and
(vii) Developer's policies and practices with respect to the development of the
Products shall in no manner reflect adversely upon the name, reputation or
goodwill of Sony.
10. INDEMNITIES; LIMITED LIABILITY.
10.1 INDEMNIFICATION BY SONY. Sony shall indemnify and hold Developer
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs incurred
in the settlement or avoidance of any such claim which result from or are in
connection with a breach of any of the warranties provided by Sony herein;
provided, however, that Developer shall give prompt written notice to Sony of
the assertion of any such claim, and provided, further, that Sony shall have
the right to select counsel and control the defense and/or settlement thereof,
subject to the right of Developer to participate in any such action or
proceeding at its own expense with counsel of its own choosing. Sony shall have
the exclusive right, at its discretion, to commence and prosecute at its own
expense any lawsuit or to take such other action with respect to such matters
as shall be deemed appropriate by Sony. Developer agrees to provide Sony, at no
expense to Developer, reasonable assistance and cooperation concerning any such
matter; and Developer shall not agree to the settlement of any such claim,
action or proceeding without Sony's prior written consent.
10.2 INDEMNIFICATION BY DEVELOPER. Developer shall indemnify and hold Sony
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs incurred
in the settlement or avoidance of any such claim, which result from or are
in connection with (i) a breach of any of the representations or warranties
provided by Developer herein, including without limitation claims resulting
from Developer's failure to timely pay any
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withholding taxes or other assessments as set forth in Section 3.1 hereto or
any breach of Developer's confidentiality obligations as set forth in Section 6
hereto; or (ii) any claim of infringement or alleged infringement of any third
party's Intellectual Property Rights with respect to the Developer Software; or
(iii) any claims of or in connection with any bodily injury (including death)
or property damage, by whomsoever such claim is made, arising out of, in whole
or in part, the development of the Products or any use of any of the
Development Tools hereunder, unless due to the negligence of Sony in performing
any of the specific duties and/or providing any of the specific services
required of it hereunder; provided, however, that Sony shall give prompt
written notice to Developer of the assertion of any such claim, and provided,
further, that Developer shall have the right to select counsel and control the
defense and/or settlement thereof, subject to the right of Sony to participate
in any such action or proceeding at its own expense with counsel of its own
choosing. Developer shall have the exclusive right, at its discretion, to
commence and/or prosecute at its own expense any lawsuit or to take such other
action with respect to such matter as shall be deemed appropriate by Developer.
Sony shall provide Developer, at no expense to Sony, reasonable assistance and
cooperation concerning any such matter. If Sony is joined as a party to any
lawsuit initiated by or against Developer, Developer shall indemnify and hold
Sony harmless from and against all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys and court costs, incurred in connection with any such lawsuit. Sony
shall not agree to the settlement of any such claim, action or proceeding
without Developer's prior written consent.
10.3 LIMITATION OF LIABILITY.
10.3.1 LIMITATION OF SONY'S LIABILITY. IN NO EVENT SHALL SONY OR
ITS AFFILIATES, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE
FOR PROSPECTIVE PROFITS, OR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THIS DEVELOPER AGREEMENT, INCLUDING
WITHOUT LIMITATION THE BREACH OF THIS DEVELOPER AGREEMENT BY SONY, THE USE OF
THE PRODUCTS BY DEVELOPER, ANY LICENSED PUBLISHER OR ANY END USERS AND/OR THE
USE OF OR INABILITY TO USE THE DEVELOPMENT TOOLS BY DEVELOPER, WHETHER UNDER
THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY
OR OTHERWISE. SONY SHALL NOT BE LIABLE FOR ANY INJURY, LOSS OR DAMAGE, DIRECT
OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE THE DEVELOPMENT
TOOLS. IN NO EVENT SHALL SONY'S LIABILITY ARISING UNDER OR IN CONNECTION WITH
THIS DEVELOPER AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT
DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 10.1 AND
ANY WARRANTY IN SECTION 9.1 HERETO, EXCEED THE TOTAL AMOUNT PAID BY DEVELOPER
TO SONY UNDER THIS DEVELOPER AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN,
NEITHER SONY NOR ANY AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS,
OFFICERS, EMPLOYEES OR AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY
OR LIABILITY, OF ANY KIND TO DEVELOPER OR TO ANY THIRD PARTIES WITH RESPECT TO
THE QUALITY AND/OR PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS, ANY
PRODUCT, ANY OF THE DEVELOPMENT TOOLS OR ANY PORTION THEREOF.
10.3.2 LIMITATION OF DEVELOPER'S LIABILITY. IN NO EVENT SHALL
DEVELOPER BE LIABLE TO SONY FOR ANY PROSPECTIVE PROFITS, OR SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH (i) THIS
DEVELOPER AGREEMENT, (ii) THE USE IN ACCORDANCE WITH THE TERMS AND CONDITIONS
OF THIS DEVELOPER AGREEMENT OF THE DEVELOPMENT TOOLS, OR (iii) THE USE OR
DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT OF
ANY OBJECT CODE PROVIDED BY SONY, IN WHOLE OR IN PART, WHETHER UNDER THEORY OF
CONTRACT,
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TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE,
PROVIDED THAT SUCH LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM
DEVELOPER'S BREACH OF SECTIONS 2, 4, 5, 6, 10.2 OR 11.2 OF THIS AGREEMENT, AND
PROVIDED FURTHER THAT SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH
DEVELOPER MAY BE REQUIRED TO PAY TO THIRD PARTIES UNDER SECTIONS 10.2 OR 15.9.
10.3.3. DEVELOPER'S OBLIGATIONS. If at any time or times subsequent to
Sony's approval of the Executable Software as contemplated by the License
Agreement to be signed by Licensed Publishers, Sony identifies any bugs with
respect to the Product or any bugs are brought to the attention of Sony,
Developer shall, at no cost to Sony, promptly correct any such bugs, to Sony's
reasonable satisfaction. In the event any units of any of the Products create
any risk of loss or damage to any property or injury to any person, Developer
shall immediately take effective steps or cooperate with the appropriate
Licensed Publisher to take effective steps, at Developer's or Licensed
Publisher's sole liability and expense, to recall and/or remove such defective
product units from any affected channels of distribution. Either Developer or
the appropriate Licensed Publisher shall provide all end-user support for the
Products.
10.4. DISCLAIMER OF WARRANTIES. NEITHER SONY NOR ITS AFFILIATES AND
SUPPLIERS MAKE, NOR DOES DEVELOPER RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY REGARDING THE SONY MATERIALS, THE PLAYER OR THE DEVELOPMENT TOOLS
PROVIDED HEREUNDER, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SONY AND
ITS AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS
UNDER THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS, THE PLAYER OR
THE DEVELOPMENT TOOLS. ANY WARRANTY AGAINST INFRINGEMENT THAT MAY BE PROVIDED
IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER
COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED.
11. COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
11.1 DEVELOPER RIGHTS. The copyrights with respect to the Developer
Software (exclusive of the rights licensed from Sony hereunder) and any names
or other designations used as titles for the Products are and shall be the
exclusive property of Developer or of any third party from which Developer has
been granted, or to whom Developer has granted, the license and related rights
to develop and otherwise exploit any such Developer Software or any such names
or other designations.
11.2 SONY RIGHTS.
11.2.1 LICENSE OF SONY MATERIALS AND PLAYER. Subject to the
rights granted by Sony to Developer hereunder, all rights with respect to the
Sony Materials and Player, including, without limitation, all of Sony's
Intellectual Property Rights therein, are and shall be the exclusive property
of Sony. Nothing herein shall give Developer any right, title or interest in or
to the Sony Materials or the Player (or any portion thereof), other than the
non-exclusive license and privilege during the term hereof to use the Sony
Materials and Player for the development of the Executable Software solely in
accordance with the provisions of this Developer Agreement. Developer shall not
to or cause to be done any act or thing contesting or in any way impairing to
tending to impair any of Sony's rights, title, and/or interests in or to the
Sony Materials or the Player (or any portion thereof).
11.2.1 SONY TRADEMARKS. The Sony Trademarks and the goodwill
associated
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therewith are and shall be the exclusive property of Sony. Nothing herein shall
give Developer any right, title or interest in or to any of the Sony Trademarks.
Developer shall not do or cause to be done any act or thing contesting or in any
way impairing or tending to impair any of Sony's rights, title, or interests in
or to any of the Sony Trademarks, nor shall Developer register any trademark in
its own name or in the name of any other person or entity which is similar to or
is likely to be confused with any of the Sony Trademarks.
11.3 EFFECT OF TERMINATION. Upon the expiration or earlier termination of
this Developer Agreement for any reason, Developer shall immediately cease and
desist from any further use of the Sony Materials licensed hereunder.
12. COPYRIGHT, TRADEMARK AND TRADE SECRET PROTECTION.
In the event that either Developer or Sony discovers or otherwise becomes
aware that any of the Intellectual Property Rights of the other embodied in any
of the Developed Products have been or are being infringed upon by any third
party, then the party with knowledge of such infringement or apparent
infringement shall promptly notify the other party.
13. TERM AND TERMINATION.
13.1 EFFECTIVE DATE; TERM. This Developer Agreement shall not be binding
upon the parties until it has been signed by or on behalf of each party, in
which event it shall be effective as of the date first written above (the
"Effective Date"). Unless sooner terminated in accordance with the provisions
hereof, the initial term of this Developer Agreement shall be four (4) years
from the Effective Date.
13.2 TERMINATION BY SONY. Sony shall have the right to terminate this
Developer Agreement immediately, by providing written notice of such election
to Developer, upon the occurrence of any of the following events or
circumstances: (i) If Developer breaches any of its material obligations
provided for in this Developer Agreement and such breach is not corrected or
cured within thirty (30) days after receipt of written notice of such breach;
(ii) If the License Agreement between Sony and Developer is terminated for any
reason; (iii) If, in Sony's reasonable judgment, the laws or enforcement of the
laws of the country or countries in which the Developer or the Development Site
is located do not protect Sony's Intellectual Property Rights; (iv) Developer's
failure to pay, or a statement that it is unable to pay, any amount due
hereunder, or is unable to pay its debts generally as they shall become due; or
(v) Developer's filing of an application for, or consenting to, or directing
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of all or substantially all of Developer's property,
whether tangible or intangible, wherever located; or (vi) The making by
Developer of a general assignment for the benefit of creditors; or (vii) The
commencing by Developer or Developer's intention to commence a voluntary case
under any applicable bankruptcy laws (as now or hereafter may be in effect); or
(viii) The adjudication that Developer is a bankrupt or insolvent; or (ix) The
filing by Developer or the intent to file by Developer of a petition seeking to
take advantage of any other law providing for the relief of debtors; or (x)
Developer's acquiescence to, intention to acquiesce to, or failure to have
dismissed within ninety (90) days, any petition filed against it in any
involuntary case under any such bankruptcy law; or (xi) If control of more than
fifty percent (50%) of the ownership of Developer or substantially all of
Developer's assets are transferred to any person or entity; or (xii) If,
directly or indirectly, control of more than twenty-five percent (25%) of the
ownership of Licensee or substantially all of Licensee's assets are transferred
to any one of Acclaim Entertainment, Atari, Blockbuster, Electronic Arts,
Hasbro, Matsushita, Mattel, Microsoft, NEC, Nintendo, Philips, Sega, 3DO, Time
Warner, Viacom International, Virgin Games, Williams
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Entertainment, or any other dedicated platform holder, known or unknown.
13.3 PRODUCT-BY-PRODUCT TERMINATION BY SONY. In addition to the events
of termination described in Section 13.2 above, Sony, at its option, shall be
entitled to terminate, on a product-by-product basis, the licenses and related
rights herein granted to Developer in the event that (i) Developer fails to
comply with the requirements of Section 4.4 in connection with the development
of any Product or (ii) any third party with whom Developer has contracted
pursuant to the provisions of Section 4.4 hereto breaches any of its material
obligations to Sony pursuant to its agreement with Sony with respect to such
Product.
13.4 PAYMENTS NONREFUNDABLE. In the event of the termination of this
Developer Agreement in accordance with any of the provisions of Section 13,
above, no portion of any payments of any kind whatsoever, including without
limitation any and all Nonrefundable Payments, previously provided to Sony
hereunder shall be owed or be repayable to Developer.
14. EFFECT OF EXPIRATION OR TERMINATION.
14.1 REVERSION OF RIGHTS. If this Developer Agreement is terminated by
Sony as a result of any breach or default by Developer, all rights herein
granted by Sony to Developer shall immediately revert to Sony, and Developer
shall cease and desist from any further use of the Development Tools,
Documentation, other Sony Materials and any Intellectual Property Rights
therein.
14.2 RETURN OF DEVELOPMENT TOOLS. Upon the expiration or earlier
termination of this Developer Agreement, Developer shall immediately deliver to
Sony, or if and to the extent requested by Sony destroy, all Development Tools,
Documentation, other Sony Materials and any and all copies thereof, including,
without limitation, any Confidential Information including such information,
knowledge, or know-how of which either party, as the receiving party, was
apprised and which was reduced to tangible or written form by such party or on
its behalf at any time during the term of this Developer Agreement. Within five
(5) working days after any such destruction, Developer shall provide Sony with
an itemized statement certified to be accurate by an officer of Developer,
indicating the number of copies and/or units of the Development Tools,
Documentation and other Sony Materials which have been destroyed, the location
and date of such destruction and the disposition of the remains of such
destroyed materials.
14.3 EFFECT OF EXPIRATION OR TERMINATION OF DEVELOPER AGREEMENT. Sony
shall be under no obligation to renew or extend this Developer Agreement
notwithstanding any actions taken by either of the parties prior to the
expiration of this Developer Agreement. Upon the expiration of this Developer
Agreement, neither party shall be liable to the other for any damages (whether
direct, consequential, or incidental, and including, without limitation, any
expenditures, loss of profits, or prospective profits) sustained or arising out
of or alleged to have been sustained or to have arisen out of such expiration.
However, the expiration of this Developer Agreement shall not excuse either
party from its previous breach of any of the provisions of this Developer
Agreement or from any obligations surviving the expiration of this Developer
Agreement, and full legal and equitable remedies shall remain available for any
breach or threatened breach of this Developer Agreement or any obligations
arising therefrom.
14.4 TERMINATION WITHOUT PREJUDICE. The expiration or termination of
this Developer Agreement in accordance with the provisions of Section 13,
above, shall be without prejudice to any rights or remedies which one party may
otherwise have against the other party.
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15. MISCELLANEOUS PROVISIONS.
15.1 NOTICES. All notices or other communications required or desired to be
sent to either of the parties shall be in writing and shall be sent by
registered or certified mail, postage prepaid, return receipt requested, or sent
by recognized international courier service (e.g., Federal Express, DHL, etc.),
telex, telegram or facsimile, with charges prepaid and subject to confirmation
by letter sent via registered or certified mail, postage prepaid, return receipt
requested. The address for all notices or other communications required to be
sent to Sony or Developer, respectively, shall be the mailing address stated in
the preamble hereof, or such other address as may be provided by written notice
from one party to the other on at least ten (10) days' prior written notice. Any
such notice shall be effective upon the date of receipt.
15.2 FORCE MAJEURE. Neither Sony nor Developer shall be liable for any loss
or damage or be deemed to be in breach of this Developer Agreement if its
failure to perform or failure to cure any of its obligations under this
Developer Agreement results from any event or circumstance beyond its reasonable
control, including, without limitation, any natural disaster, fire, flood,
earthquake, or other Act of God; shortage of equipment, materials, supplies, or
transportation facilities; strike or other industrial dispute; war or rebellion;
or compliance with any law, regulation, or order (whether valid or invalid) of
any governmental body, other than an order, requirement, or instruction arising
out of Developer's violation of any applicable law or regulation; provided,
however, that the party interfered with gives the other party written notice
thereof promptly, and, in any event, within fifteen (15) working days of
discovery of any such Force Majeure condition. If notice of the existence of any
Force Majeure condition is provided within such period, the time for performance
or cure shall be extended for a period equal to the duration of the Force
Majeure event or circumstance described in such notice, except that any such
cause shall not excuse the payment of any sums owed to Sony prior to, during, or
after any such Force Majeure condition.
15.3 NO PARTNERSHIP OR JOINT VENTURE. The relationship between Sony and
Developer, respectively, is that of licensor and licensee. Developer is an
independent contractor and is not the legal representative, agent, joint
venturer, partner, or employee of Sony for any purpose whatsoever. Neither party
has any right or authority to assume or create any obligations of any kind or to
make any representation or warranty on behalf of the other party, whether
express or implied, or to bind the other party in any respect whatsoever.
15.4 ASSIGNMENT. Sony has entered into this Developer Agreement based upon
the particular reputation, capabilities and experience of Developer and its
officers, directors and employees. Accordingly, Developer may not assign this
Developer Agreement or any of its rights hereunder, nor delegate or otherwise
transfer any of its obligations hereunder, to any third party unless the prior
written consent of Sony shall first be obtained. Any attempted or purported
assignment, delegation or other such transfer without the required consent of
Sony shall be void and a material breach of this Developer Agreement. Subject to
the foregoing, this Developer Agreement shall inure to the benefit of the
parties and their respective successors and permitted assigns. Sony shall have
the right to assign any and all of its rights and obligations hereunder to any
affiliate(s).
15.5 SUBCONTRACTORS. Developer shall not sell, lease, assign, delegate,
subcontract, license or otherwise transfer or encumber all or any portion of the
rights herein granted. Developer shall have the right to employ suitable
subcontractors for the purposes of assisting Developer with the development of
the Products, provided that Developer must obtain the prior written consent of
Sony, which consent may not be unreasonably withheld or delayed. Developer shall
not disclose to any subcontractor any Confidential Information of Sony (as
defined herein and in the Nondisclosure
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Agreement), including, without limitation, any Development Tools or other Sony
Materials, or allow any usage of the Development Tools by any such
subcontractor unless and until Developer shall have such subcontractor sign a
written agreement containing substantially identical terms to the Nondisclosure
Agreement, the confidentiality provisions of this Agreement and Section 7 of
this Agreement and shall submit a copy of such agreement to Sony. Any and all
agreements between Developer and its permitted subcontractors shall provide
that Sony is a third party beneficiary of such agreements and has the full
right to bring any actions against such subcontractors to comply in all
respects with the terms and conditions of this Agreement and the Developer
Agreement. Notwithstanding any consent which may be granted by Sony for
Developer to employ any such permitted subcontractor(s), or any such separate
agreement(s) that may be entered into by Developer with any such permitted
subcontractor, Developer shall remain fully liable for its compliance with all
of the provisions of this Developer Agreement and for the compliance of any and
all permitted subcontractors with the provisions of any agreements entered into
by such subcontractors in accordance with this Section 15.5. Developer shall
cause its subcontractors to comply in all respects with the terms and
conditions of this Developer Agreement, and hereby unconditionally guarantees
all obligations of its subcontractors. Notwithstanding the foregoing, Developer
shall not subcontract any rights under this Agreement to TCI
(Telecommunications, Inc.) or Microsoft without Sony's prior written approval.
15.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times
comply with all applicable regulations and orders of their respective countries
and all conventions and treaties to which their countries are a party or
relating to or in any way affecting this Developer Agreement and the
performance by the parties of this Developer Agreement. Each party, at its own
expense, shall negotiate and obtain any approval, license or permit required in
the performance of its obligations, and shall declare, record or take such
steps to render this Developer Agreement binding, including, without
limitation, the recording of this Developer Agreement with any appropriate
governmental authorities (if required).
15.7 GOVERNING LAW; CONSENT TO JURISDICTION. This Developer Agreement
shall be governed by and interpreted in accordance with the laws of the State
of New York, excluding that body of law related to choice of laws, and of the
United States of America. Any action or proceeding brought to enforce the terms
of this Developer Agreement or to adjudicate any dispute arising hereunder
shall be brought in the courts of the County of New York, State of New York (if
under State law) or the Southern District of New York (if under Federal law).
Each of the parties hereby submits itself to the exclusive jurisdiction and
venue of such courts for purposes of any such action and agrees that any
service of process may be effected by delivery of the summons in the manner
provided in the delivery of notices set forth in Section 15.1 above.
15.8 LEGAL COSTS AND EXPENSES. In the event it is necessary for either
party to retain the services of an attorney or attorneys to enforce the terms
of this Developer Agreement or to file or defend any action arising out of this
Agreement, then the prevailing party in any such action shall be entitled, in
addition to any other rights and remedies available to it at law or in equity
to recover from the other party its reasonable fees for attorneys and expert
witnesses, plus such court costs and expenses as may be fixed by any court of
competent jurisdiction. The term "prevailing party" for the purposes of this
Section shall include a defendant who has by motion, judgment, verdict or
dismissal by the court, successfully defended against any claim that has been
asserted against it.
15.9 REMEDIES. Unless expressly set forth to the contrary, either party's
election of any remedies provided for in this Developer Agreement shall not be
exclusive of any other remedies available hereunder or otherwise at law or in
equity, and all such remedies shall be deemed to be cumulative. Any breach of
Sections 2, 4, 6, 7 and 11 of this Agreement would cause irreparable
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harm to Sony, the extent of which would be difficult to ascertain. Accordingly,
Developer agrees that, in addition to any other remedies to which Sony may be
entitled, in the event of a breach by Developer or any of its employees or
permitted subcontractors of any such sections of this Agreement. Sony shall be
entitled to the immediate issuance without bond of exparte injunctive relief
enjoining any breach or threatened breach of any or all of such provisions. In
addition, Developer shall indemnify Sony for all losses, damages, liabilities,
costs and expenses (including actual attorneys' fees and all related costs)
which Sony may sustain or incur as a result of such breach.
15.10 SEVERABILITY. In the event that any provision of this Developer
Agreement (or portion thereof) is determined by a court of competent
jurisdiction to be invalid or otherwise unenforceable, such provision (or part
thereof) shall be enforced to the extent possible consistent with the stated
intention of the parties, or, if incapable of such enforcement, shall be deemed
to be deleted from this Developer Agreement, while the remainder of this
Developer Agreement shall continue in full force and remain in effect according
to its stated terms and conditions.
15.11 SECTIONS SURVIVING EXPIRATION OR TERMINATION. The following
sections shall survive the expiration or earlier termination of this Developer
Agreement for any reason: 4, 6, 9.2, 10, 11, 12, 13.3, 14, 15.4, 15.5, 15.7,
15.8, 15.9, and 15.10.
15.12 WAIVER. No failure or delay by either party in exercising any
right, power, or remedy under this Developer Agreement shall operate as a
waiver of any such right, power, or remedy. No waiver of any provision of this
Developer Agreement shall be effective unless in writing and signed by the
party against whom such waiver is sought to be enforced. Any waiver by either
party of any provision of this Developer Agreement shall not be construed as a
waiver of any other provision of this Developer Agreement, nor shall such waiver
operate as or be construed as a waiver of such provision respecting any future
event or circumstance.
15.13 MODIFICATION. No modification of any provision of this Developer
Agreement shall be effective unless in writing and signed by both of the
parties.
15.14 HEADINGS. The section headings used in this Developer Agreement
are intended primarily for reference and shall not by themselves determine the
construction or interpretation of this Developer Agreement or any portion
hereof.
15.15 INTEGRATION. This Developer Agreement (together with the
Exhibits attached hereto) constitutes the entire agreement between Sony and
Developer and supersedes all prior or contemporaneous agreements, proposals,
understandings, and communications between Sony and Developer, whether oral or
written, with respect to the subject matter hereof; provided, however, that
notwithstanding anything to the contrary in the foregoing, the Nondisclosure
Agreement referred to in Section 6 hereto shall remain in full force and effect.
15.16 COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, and both of which together shall
constitute one and the same instrument.
15.17. CONSTRUCTION. This Developer Agreement shall be fairly
interpreted in accordance with its terms and without any strict construction in
favor of or against either of the parties.
15.18 EXPORT. Developer shall not reexport, directly or indirectly,
any Development Tools outside of the United States or Canada. In addition,
Developer certifies that it shall not reexport,
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directly or indirectly, any Development Tools in violation of U.S. law and
regulations. If for any reason Sony permits Developer to reexport Development
Tool, Developer shall be exporter of record and shall be solely responsible for
the obtaining of the compliance with any required export licenses. Developer
certifies that the Development Tools will not be resold or delivered, directly
or indirectly, to entities located in destinations prohibited under U.S. laws
and regulations or resold or delivered, directly or indirectly, to nationals
from those destinations. The prohibited destinations include Cuba, Iraq, Libya,
North Korea, Yugoslavia (Serbia and Montenegro) or any other countries that are
subsequently declared prohibited destinations under such laws or regulations.
Prohibited sales may subject Developer to fines and imprisonment under
applicable U.S. law. Violation of this certification will result in the
termination for cause of this Agreement and all licenses granted hereunder from
Sony to Developer. In addition, Developer shall, at its own expense, obtain and
arrange for the maintenance in full force and effect of all governmental
approvals, consents, licenses, authorizations, declarations, filings and
registrations as may be necessary or advisable for performance of all of the
terms and conditions of this Agreement, including, but not limited to, foreign
exchange approvals, import and offer agent licenses, fair trade approvals and
all approvals which may be required to realize the purposes of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Developer Agreement to be duly
executed as of the day and year first written above.
SONY COMPUTER THE LIGHTSPAN PARTNERSHIP, INC.
ENTERTAINMENT AMERICA
By /s/ Bernard Stolar By /s/ J. T. Kernan
---------------------- --------------------------
Bernard Stolar J. T. Kernan
Title: VP Bus. Dev. Title: Chairman & CEO
------------------- -----------------------
Date: 02-22-26 Date: 1/30/96
-------------------- ------------------------
NOT AN AGREEMENT UNTIL
EXECUTED BY BOTH PARTIES
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EXHIBIT A
Development Site:
2352 FARADAY AVENUE
------------------------
CARLSBAD, CA 92008
------------------------
Developer Designee:
signature illegible
------------------------
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[SONY COMPUTER ENTERTAINMENT AMERICA LETTERHEAD]
January 25, 2000
Etsuko Adelman
The Lightspan Partnership
444 Castro Street
Suite 1200
Mountain View, CA 94041
Etsuko,
Due to the recent delays in executing the Licensed Developer Agreement between
Sony Computer Entertainment America (SCEA) and The Lightspan Partnership, SCEA
hereby extends the Developer Agreement, entered into on January 26, 1996, by
and between SCEA and the Lightspan Partnership, for a period of thirty (30)
days. As a result, the Developer Agreement will expire February 24, 2000.
Best regards,
/s/ MASAYUKI CHATANI
Masayuki Chatani
Vice President, Business and Technology
cc: Andrew Zaffron
Anne Chen
<PAGE> 1
EXHIBIT 10.20
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
Omitted portions have been filed
separately with the Securities and
Exchange Commission
SALE AND LICENSE AGREEMENT
This License Agreement (the "Agreement") is entered into as of the 26th day of
January, 1996, by and between SONY COMPUTER ENTERTAINMENT AMERICA, a division of
Sony Interactive Entertainment Inc. (hereinafter "Sony"), and The Lightspan
Partnership, Inc. (hereinafter "Licensee").
TERM SCHEDULE
All information contained in this Term Schedule is set out for ease of
reference, and is to be incorporated and read in conjunction with the
applicable terms and conditions contained herein, as well as this Agreement in
whole.
1. PARTIES: Sony Computer Entertainment America
The Lightspan Partnership, Inc.
2. NOTICES: Sony Computer Entertainment The Lightspan Partnership,
America Inc.
919 East Hillsdale, 2nd Floor 2382 Faraday Avenue
Foster City, CA 94404 Suite 300
Attn: Executive Vice Carlsbad, CA 92008-7218
President of Business Attn: Bob Greene
Development Fax: (619) 930-2350
Fax: (415) 655-8001
With a copy to: With a copy to:
Sony Interactive
Entertainment Inc.
919 East Hillsdale, 2nd Floor
Foster City, CA 94404
Attn: Executive Vice
President
Fax: (415) 655-8042
3. DESCRIPTION OF
SERVICES: Sale of PlayStation(TM) game consoles for distribution to
the School Market only. License to develop educational
software compatible with the PlayStation game console,
subject to Sony's approval as set forth in Section 6 of
the Agreement.
4. EXCLUSIVITY: The license granted hereunder shall be non-exclusive.
5. LICENSED
TRADEMARKS: a. "PlayStation"
b. PS Logo
c. PlayStation Logo
6. LICENSED
TERRITORY: United States and Canada
7. INITIAL TERM: Four (4) years.
8. NONREFUNDABLE
PAYMENT: See Exhibit B.
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9. MINIMUM ORDER QUANTITY
FOR 1996: [***] of PlayStation Hardware to be ordered and
delivered in 1996. Future minimum order quantities
shall be determined as set forth in Section 4.4.
10. REQUIRED LEGAL COPY: "Licensed by Sony Computer Entertainment America.
PlayStation and the PlayStation logos are
trademarks of Sony Computer Entertainment Inc. (R)
1995 Sony Interactive Entertainment Inc."
Licensee shall consult with Sony regarding the
credit for each software title developed by
Licensee.
[END OF TERM SCHEDULE]
TERMS AND CONDITIONS
WHEREAS, Sony and/or its affiliates have developed a CD-based interactive
console for playing video games and for other entertainment purposes known as
the PlayStation(TM) Game Console (as defined below) and also own or have the
right to grant licenses to certain intellectual property rights including the
trademark(s) identified more fully in the Term Schedule attached hereto (the
"Trademarks") used in connection with the PlayStation Game Console.
WHEREAS, Licensee desires to be granted the right to acquire units of the
PlayStation Game Console for distribution in solely in the School Market, and
desires to be granted a non-exclusive license to develop and distribute
Licensed Products (as defined below) pursuant to the terms and conditions set
forth in this Agreement.
WHEREAS, Sony and Licensee have entered into a Developer Agreement, dated as
of January 12, 1996, regarding the development of educational software for the
PlayStation Game Console (hereinafter the "Developer Agreement").
WHEREAS, Sony is willing, on the terms and subject to the conditions of this
License Agreement, to grant Licensee the right to acquire and distribute units
of the PlayStation Game Console and to grant Licensee the desired non-exclusive
license to distribute Licensed Products solely in the School Market, and Sony
desires to manufacture such Licensed Products for Licensee.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sony
hereby agree as follows:
1. DEFINITION OF TERMS.
1.1 "Discs" shall mean the CD-ROM media which contains Executable
Software.
1.2 "School Market" shall mean distribution directly by Licensee to and
for elementary and secondary (i.e., K-12) students, through distribution and
sale to elementary and secondary (i.e., K-12) public and private schools in the
Licensed Territory.
1.3 "Executable Software" means Licensee's object code software which
includes the Licensee Software and any software (whether in object code or
source code form) provided by
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<PAGE> 3
Sony which is intended to be combined with Licensee Software for execution on a
PlayStation Game Console and has the ability to communicate with the software
resident in the PlayStation Game Console.
1.4 "Intellectual Property Rights" means, by way of example but not by
way of limitation, all current and future worldwide patents and other patent
rights, copyrights, trademarks, service marks, trade names, mask work rights,
trade secret rights, technical information, know-how, and the equivalents of
the foregoing under the laws of any jurisdiction, and all other proprietary or
intellectual property rights throughout the universe, including without
limitation all applications and registrations with respect thereto, and all
renewals and extensions thereof.
1.5 "Licensed Territory" means the countries listed in the Term Schedule.
1.6 "Licensed Products" shall mean each unit of Executable Software
embodied on Discs and including all Printed Materials and Packaging.
1.7 "Licensee Software" means Licensee's application object code and data
(including audio and video material) developed by Licensee in accordance with
this Agreement, which, when linked to any software provided by Sony, create
Executable Software. All Licensee Software shall be educational in nature.
1.8. "PlayStation Game Console" means the Sony video game console Part
No. SCPH-1001940000 or functional equivalent, which version is available to
consumers in the retail market in the Licensed Territory as of the date of this
Agreement.
1.9 "Packaging" means, with respect to each Licensed Product, the carton,
containers, packaging and wrapping materials (but excluding instructional
manuals, liners or other user information for such Licensed Product to be
inserted therein).
1.10 "PlayStation Hardware" means the finished hardware components to be
provided to Licensee by Sony, including the PlayStation Game Console and all
peripherals and accessories related thereto.
1.11 "Sony Materials" means any data, technology, object code, source
code, documentation, and hardware provided or supplied to Licensee by Sony,
including, without limitation, any portion or portions of the PlayStation
Hardware and development tools.
2. LICENSES.
Sony hereby grants to Licensee, and Licensee hereby accepts, for the term
of this Agreement, within the Licensed Territory, under Sony's Intellectual
Property Rights, including without limitation any relevant patents Sony may own
or have acquired by license, a non-exclusive, nontransferable license, without
the right to sublicense (except as specifically provided herein): (i) to
reproduce and distribute executable files for execution on a PlayStation Game
Console incorporating Licensee Software which has been developed in accordance
with the provisions of the Developer Agreement and this License Agreement,
including without limitation, Section 7 of the License Agreement; (ii) to
market, distribute and sell such Licensed Products and the PlayStation Hardware
solely in the School Market; (iii) to use the Licensed Trademarks in connection
with the packaging of the Licensed Products; and (iv) to sublicense to end
users the right to use the Licensed Products for non-commercial purposes only
and not for public performance.
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3. PLAYSTATION HARDWARE.
3.1 SALE OF PLAYSTATION HARDWARE. Sony hereby agrees to sell to Licensee,
and Licensee hereby accepts, for the term and subject to the conditions set
forth herein, the PlayStation Hardware for the consideration set forth below in
Section 4 and Exhibit B hereto. All sales of PlayStation Hardware to Licensee
shall be governed by the Standard Terms and Conditions of Sale attached hereto
as Exhibit A, which may be amended from time to time by Sony ("Terms and
Conditions"). Sony agrees to provide such number of units of the PlayStation
Hardware as Licensee may reasonably request, subject to availability, during
the term of this License Agreement. Licensee agrees to acquire all PlayStation
Hardware directly from Sony or from a Sony-approved supplier and not from any
third party.
3.2 FORECASTS. During the Term of the Agreement, Licensee agrees to give
Sony a written forecast of demand for PlayStation Hardware every three (3)
months for the next eighteen (18) months on a rolling basis in advance of
expected delivery of units to Licensee in order for Sony to have the ability to
meet Licensee's demand.
3.3 SERVICE. The parties shall discuss entering into a separate agreement
for service and maintenance of the PlayStation Hardware, but Sony's warranty on
such PlayStation Hardware sold to Licensee shall otherwise be governed by the
Terms and Conditions and this License Agreement.
3.4 DEMONSTRATION UNITS OF PLAYSTATION HARDWARE. Notwithstanding other
provisions of this Agreement and Exhibits A and B, Sony agrees to provide to
Licensee [***] units of PlayStation Hardware at the then current price as
determined in Exhibit B on the date of delivery of such units provided that no
later than October 1, 1996 Licensee takes delivery of same. Payment for such
units shall not be due and payable until December 31, 1996, at which time
payment shall be due and payable in full. The units of PlayStation Hardware
provided to Licensee in this Section shall be used by Licensee for
demonstration purposes only in order for Licensee to demonstrate the Licensed
Products and PlayStation Hardware to the School Market on a limited trial
basis. Licensee will provide to Sony a written accounting of the use of these
demonstration systems in a manner to be agreed upon mutually by Licensee and
Sony.
4. COMPENSATION FOR PLAYSTATION HARDWARE AND LICENSED PRODUCTS.
4.1 CONSIDERATION FOR PLAYSTATION HARDWARE AND LICENSED PRODUCTS. The
nonrefundable amount to be paid by Licensee (the "Nonrefundable Payment") [***]
shall be as set forth in Exhibit B. [***] All Nonrefundable Payments due
hereunder shall be made in United States currency drawn on a United States
bank, unless otherwise specified between the parties.
4.2 ORDER AND PAYMENT TERMS FOR PLAYSTATION HARDWARE AND LICENSED
PRODUCTS. Licensee shall issue to Sony written purchase order(s) in accordance
with the Terms and Conditions. Such orders shall reference this Agreement,
specify the number of units of PlayStation hardware ordered and state the
requested delivery date, which shall be at least three to six months from the
date of order. Licensee shall provide Sony with a purchase order for each order
placed.
4.3 NO DEDUCTIONS FROM NONREFUNDABLE PAYMENT. No costs incurred in the
development, manufacture, marketing, sale, and/or distribution of the
PlayStation Hardware and Licensed Products shall be deducted from any
Nonrefundable Payments payable to Sony hereunder.
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Similarly, there shall be no deduction from the Nonrefundable Payments
otherwise owed to Sony hereunder as a result of any uncollectible accounts
owed to Licensee, or for any credits, discounts, royalties, allowances or
returns which Licensee may credit or otherwise grant to any third party, or for
any taxes, fees, assessments, or expenses of any kind which may be incurred by
Licensee in connection with its sale and/or distribution of any units of the
PlayStation Hardware and/or Licensed Products and/or arising with respect to
the payment of any Nonrefundable Payment hereunder. In addition to the
Nonrefundable Payments provided to Sony hereunder, Licensee shall be solely
responsible for and bear any cost relating to any withholding taxes or other
assessments which may be imposed by any governmental authority or any other
U.S. or foreign federal, state or local sales or value-added tax, use or excise
tax, customs duties or other similar taxes or duties, which Sony may be
required to collect or pay. Licensee shall be solely responsible for the
payment or reimbursement of any such taxes, fees, and other such charges or
assessments applicable to the payment by Licensee of any such Nonrefundable
Payment. In addition, Licensee shall pay all personal property taxes or similar
charges, however imposed, on the ownership, use and possession of the
PlayStation Hardware and Licensed Products during the term of the License
Agreement. The receipt or acceptance by Sony of any Nonrefundable Payment made
shall not prevent Sony, or its agent, from subsequently challenging the
validity or accuracy of such payment within four years of invoice.
4.4. Minimum Order Quantity Cap. Licensee shall purchase and have
delivered the minimum number of units set forth in the Term Schedule for
calendar year 1996. Licensee shall also be required to meet a minimum order
quantity requirement for subsequent calendar years of the term, which shall be
[***] of the number of units forecasted for such calendar year based on the
forecast provided to Sony by Licensee in October of the preceding calendar
year. Failure of Licensee to place orders for the minimum number of units shall
subject Licensee to the termination provisions of Section 14.2.
5. Limitations on Licenses; Reservation of Rights.
5.1. Reverse Engineering Prohibited. Licensee hereby agrees not to
disassemble, peel semiconductor components, decompile, or otherwise reverse
engineer or attempt to reverse engineer or derive source code from, all or any
portion of the Sony Materials (whether or not all or any portion of the Sony
Materials are integrated with the Licensee Software), or permit or encourage
any third party to do so, or use or acquire any materials from any third party
who does so. Licensee shall not use, modify, reproduce, sublicense, distribute,
create derivative works from, or otherwise provide to third parties, the Sony
Materials, in whole or in part, other than as expressly permitted by this
License Agreement. Licensee shall be required in all cases to make payments in
accordance with Section 4 hereto to Sony on any of Licensee's products
utilizing Sony Materials or which are in any way derived from the disassembly,
decompilation, reverse engineering of, or use of source code derived from, the
Sony Materials.
5.2 Limitations on Distribution.
5.2.1 Limitations on Channel of Distribution. Licensee agrees that the
rights granted herein from Sony to Licensee are granted for the School Market
only. No publication, marketing, distribution or sale of PlayStation Hardware
or Licensed Products, directly or indirectly, may be made or solicited by
Licensee under this License Agreement to third parties in the retail channel or
to distributors, agents, representatives or other third parties who sell to the
retail channel, and Licensee agrees that it will not knowingly sell the
PlayStation Hardware or Licensed Products to any persons who may resell them
outside the School Market. Sales to distributors, agents, representatives
and/or any other third parties shall be subject to Sony's prior written
approval in its sole discretion. In the event that Licensee desires to publish,
market, distribute and/or sell the Licensed Products outside of the School
Market, it must negotiate a separate agreement with Sony for such rights, and
Sony shall have a right of first refusal for any distribution,
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<PAGE> 6
publication, marketing or sale of such Licensed Products. Licensee
agrees that, in the event that units of the PlayStation Hardware or Licensed
Products are returned to Sony, either directly from a consumer or through a
retail distributor or retailer, it will reimburse Sony for either the full
amount of compensation for such unit as set forth in Exhibit B or the amount of
compensation paid by Sony to such retailer for the returned unit, whichever is
less.
5.2.2 LIMITATIONS ON LICENSED TERRITORY. Notwithstanding any other
provisions in this License Agreement, Licensee shall not, directly or
indirectly, solicit orders from and/or sell any units of the Licensed Products
to any person or entity outside of the Licensed Territory, and Licensee further
agrees that it shall not directly or indirectly solicit orders for and/or sell
any units of the Licensed Products in any situation where Licensee reasonably
should know that such Licensed Products will be exported or resold outside of
the Licensed Territory.
5.2.3 LIMITATIONS ON IN-SCHOOL VS. IN-HOME DISTRIBUTION. Licensee
agrees that the ratio of units of PlayStation hardware distributed to schools
for school use vs. units of PlayStation Hardware distributed to students for
home use shall be less than 1 to 5.
5.3 CHANGES TO LICENSED TERRITORY. The licenses granted in Section 2 of
this License Agreement may only be exercised by Licensee in the Licensed
Territory. Sony shall have the right to delete, and intends to delete any
country or countries from the Licensed Territory if, in Sony's reasonable
judgment, the laws or enforcement of such laws in such country or countries do
not protect Sony's Intellectual Property Rights. In the event a country is
deleted from the Licensed Territory, Sony shall deliver to Licensee a notice
stating the number of days within which Licensee shall cease exercising such
licenses in the deleted country or countries. Licensee agrees to cease
exercising such licenses, directly or through subcontractors, in such deleted
country or countries, by the end of the period stated in such notice.
5.4 LIMITATION ON LICENSED TRADEMARKS. The Licensed Trademarks shall be
subject to the Guidelines set forth in Exhibit C hereto. Nothing contained in
the Term Schedule or this License Agreement shall in any way grant Licensee the
right to use the trademark "Sony" in any manner as a trademark, trade name,
service mark or logo other than as expressly permitted by Sony. Sony may amend
the above Licensed Trademarks upon reasonable notice to Licensee. Licensee will
have no right to or interest in any trademarks or trade names owned, used or
claimed now or in the future by Sony Computer Entertainment America, Sony
Interactive Entertainment Inc., Sony Corporation of America, Sony Computer
Entertainment Inc. or Sony Corporation (Japan) and their affiliates or
licensors.
5.5 RESERVATION OF SONY'S RIGHTS. The licenses granted in this License
Agreement extend only to development, marketing, distribution and sale of
Licensed Products for the School Market for use on the PlayStation Game Console,
in such format as may be designated by Sony. Without limiting the generality of
the foregoing, Licensee shall not have the right to distribute or transmit the
Executable Software or the Licensed Products outside the School Market
(including without limitation to or through retail channels of distribution) or
via electronic means or any other means now known or hereafter devised,
including without limitation, via wireless, cable, fiber optic means, telephone
lines, microwave and/or radio waves, or over a network of interconnected
computers or other devices. This License Agreement does not grant any right or
license, under any Intellectual Property Rights of Sony or otherwise, except as
expressly provided herein, and no other right or license is to be implied by or
inferred from any provision of this License Agreement or the conduct of the
parties hereunder. Licensee shall not make use of any of the Sony Materials and
PlayStation Game Console or any Intellectual Property Rights related to the Sony
Materials and PlayStation Game Console (or any portion thereof) except as
authorized by and in compliance with the provisions of this License Agreement or
as may be otherwise expressly authorized in writing by Sony. No right, license
or privilege has been granted to Licensee hereunder concerning the development
of any collateral product or other use or purpose of any kind whatsoever which
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<PAGE> 7
displays or depicts any of the Licensed Trademarks. The use of the Licensed
Products or PlayStation Hardware as a premium, promotional tie-in or for any
other secondary use is not licensed hereunder.
5.6 RESERVATION OF LICENSEE'S RIGHTS. Licensee retains all rights, title
and interest in and to the Licensee Software, including without limitation,
Licensee's Intellectual Property Rights therein, and nothing in this Agreement
shall be construed to restrict the right of Licensee to develop products
incorporating the Licensee Software (separate and apart from the Sony
Materials) for any hardware platform or service other than the PlayStation Game
Console.
6. QUALITY STANDARDS FOR THE LICENSED PRODUCTS.
6.1 QUALITY ASSURANCE OF PRODUCT PROPOSAL. The Licensed Products,
including, without limitation, the contents and title of each of the Licensed
Products, and/or Licensee's use of any of the Licensed Trademarks, shall be
subject to Sony's prior written approval, which shall be within Sony's sole
discretion as to acceptable standards of quality. Before Licensee commences
programming of the Licensee Software for each of the Licensed Products,
Licensee shall submit to Sony, for Sony's written approval or disapproval, a
written proposal (the "Product Proposal") setting forth (i) the description of
the proposed Licensed Product, including the proposed title and story line,
(ii) a description of any licensed rights of third parties to be used by
Licensee, (iii) a description of the user interface characteristics, (iv) a
description of any multiple PlayStation Game Console options, (v) the
development team profile, (vi) a description of any special hardware/software
requirements, (vii) the scheduled and/or anticipated delivery dates with
respect to any deliverable items and/or release dates with respect to the
proposed Licensed Product, and (viii) any additional information that Sony may
deem to be useful in evaluating the proposed Licensed Product. In the event
that Sony rejects such Product Proposal, Sony shall have the right in its sole
discretion to request Licensee to make revisions or modifications to such
proposal, and any such changes shall be made at Licensee's cost. Licensee shall
notify Sony promptly in writing in the event of any material proposed change in
any portion of the Product Proposal and shall, from time to time at the request
of Sony for quality assurance purposes, submit work-in-progress on the
Licensed Product during the development process, in a medium designated by
Sony, for Sony's approval. Sony shall have the right, from time-to-time with
appropriate notice to Licensee, to limit the number of proposed Licensed
Products that Licensee may submit to Sony for review and approval or
disapproval, during any twelve (12) month period following the effective date of
this Agreement. Licensee agrees that all Licensed Products will be of high
quality and shall be designed (if an original title for the PlayStation Game
Console) or modified (if a pre-existing title) to substantially utilize the
particular capabilities of the Sony Materials and the PlayStation Game Console.
6.2 APPROVAL OF EXECUTABLE SOFTWARE. Following Sony's written approval
of the Product Proposal, Licensee shall on or before the date specified in the
Product Proposal, deliver to Sony for its inspection and evaluation, a
prototype of the Executable Software for the proposed Licensed Product. Such
prototype shall be in the format prescribed by Sony. Sony will evaluate such
prototype Executable Software and notify Licensee in writing of its approval or
disapproval of such Executable Software. If such Executable Software is
disapproved, Sony shall specify the reasons for such disapproval and state what
corrections and/or improvements are necessary. After making the necessary
corrections and/or improvements, Licensee may submit a new prototype for
approval or disapproval by Sony. No approval by Sony of any element of the
Executable Software shall be deemed an approval of any other element of the
Licensed Product, nor shall any such approval be deemed to constitute a waiver
of any of Sony's rights under this Agreement.
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6.3 APPROVAL OF PACKAGING AND ARTWORK. For each proposed Licensed
Product, Licensee shall be responsible, at Licensee's expense, for developing
all artwork and mechanicals ("Artwork") set forth on the Packaging, and all
instructional manuals, liners and other user materials ("Inserts") inserted
into the Packaging (Artwork and Inserts herein collectively referred to as
"Printed Materials"). All Printed Materials shall comply with the requirements
of the Sony Guidelines (hereinafter "Guidelines") to be provided to Licensee
subsequent to the execution of this License Agreement, and as may be amended
from time to time by Sony. At the time prototype Executable Software for a
proposed Licensed Product is submitted to Sony for inspection and evaluation,
Licensee shall also deliver to Sony, for review and evaluation, the proposed
final Printed Materials for such proposed Licensed Product, and a form of
limited warranty for the proposed Licensed Product. Licensee agrees that the
quality of such Printed Materials shall be of the same quality as that
associated with high quality consumer products. If any of the Printed Materials
are disapproved, Sony shall specify the reasons for such disapproval and state
what corrections are necessary. After making the necessary corrections to the
disapproved Printed Materials, Licensee may submit new proposed Printed
Materials for approval by Sony. Sony shall not unreasonably withhold its
approval of the proposed Printed Materials submitted for review by Licensee. No
approval by Sony of any element of the Printed Materials shall be deemed an
approval of any other element of the Licensed Product, nor shall any such
approval be deemed to constitute a waiver of any of Sony's rights under this
Agreement.
6.4 ADVERTISING MATERIALS. Pre-production samples of the advertising,
merchandising, promotional, and display materials of or concerning the Licensed
Products (collectively referred to hereinafter as the "Advertising Materials")
shall be submitted by Licensee to Sony, free of cost, for Sony's evaluation and
approval as to quality, style, appearance, usage of any of the Licensed
Trademarks, and appropriate reference of the notices, prior to any actual
production, use, or distribution of any such items by Licensee or in its
behalf. No such proposed Advertising Materials shall be produced, used, or
distributed directly or indirectly by Licensee without first obtaining the
written approval of Sony. Subject in each instance to the prior written
approval of Sony, Licensee may use such textual and/or pictorial advertising
matter (if any) as may be created by Sony or in its behalf pertaining to the
Sony Materials and/or to the Licensed Trademarks on such promotional and
advertising materials as may, in Licensee's judgment, promote the sale of the
Licensed Products within the Licensed Territory. Sony shall have the right to
use the Licensed Products in any advertising or promotion for PlayStation Game
Console at Sony's expense, subject to giving Licensee reasonable prior notice
of such advertisement or promotion. Sony shall confer with Licensee regarding
the text of any such advertisement. If required by Sony and/or any governmental
entity, Licensee shall include, at Licensee's cost and expense, the required
consumer advisory rating code(s) on any and all marketing and advertising
materials used in connection with the Licensed Product, which shall be procured
in accordance with the provisions of Section 6.5 below.
6.5 LABELING REQUIREMENTS. Sony reserves the right to affix or have
affixed to all units of PlayStation Hardware, Executable Software and all
Printed Materials for each unit of the Licensed Products a conspicuous, legible
and irremovable notice to be specified in a template which will be provided to
Licensee subsequent to the execution of this License Agreement, which template
may be amended from time to time by Sony during the term of this License
Agreement. Such template shall specify that such units of PlayStation Hardware
and Licensed Products are for educational use only and not for resale to the
retail market. Licensee agrees that, if required by Sony or any governmental
entity, it shall submit each Licensed Product to a consumer advisory ratings
system designated by Sony and/or such governmental entity for the purpose of
obtaining rating code(s) for each Licensed Product. Any and all costs and
expenses incurred in connection with obtaining such rating code(s) shall be
borne solely by Licensee. Any required consumer advisory rating code(s)
procured hereby shall be displayed on the Licensed Product and the associated
Printed Materials in accordance with the Guidelines, at Licensee's cost and
expense.
CONFIDENTIAL
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6.6 STANDARDS FOR LICENSED PRODUCTS IN SCHOOL MARKET. Because of the
inherent differences between educational software and game software, Sony and
Licensee acknowledge that different or additional quality standards and
requirements may be necessary for distribution of Licensed Products to the
School Market. Therefore, both Sony and Licensee shall meet to discuss the
standards set forth in this Section 6 and to decide whether any such different
or additional quality standards should apply for Licensed Products distributed
in the School Market. Notwithstanding the foregoing, Sony reserves the right in
its sole discretion to determine, and require Licensee to meet, any and all
standards with respect to the quality and content of the Licensed Products.
7. MANUFACTURE OF THE LICENSED PRODUCTS.
7.1 MANUFACTURE BY SONY.
7.1.1 APPOINTMENT OF SONY AS EXCLUSIVE MANUFACTURER OF DISCS.
Licensee hereby appoints Sony, and Sony hereby accepts such appointment, as the
exclusive manufacturer of all Discs of the Licensed Products. Licensee
acknowledges and agrees that it shall purchase from Sony one hundred (100%)
percent of its requirements for finished Discs of the Licensed Products during
the term of the Agreement. Licensee shall also have the option, in its
discretion, of appointing Sony as the exclusive manufacturer of Packaging and/or
Printed Materials, subject to Section 7.1.3 below. Sony shall provide to
Licensee written specifications setting forth terms relating to the
manufacturing of Licensed Products, Packaging and their component parts
("Specifications") subsequent to execution of this Agreement, which may be
amended from time to time upon reasonable notice to Licensee. Sony shall have
the right, but no obligation, to subcontract any phase of production of any or
all of the Discs, the Packaging or any part thereof.
7.1.2 CREATION OF MASTER CD-ROM. Following approval by Sony of each
Licensed Product pursuant to Section 6.2, Licensee shall provide Sony with two
(2) copies (in the form of CD write-once discs or such other form as may be
requested by Sony in the Specifications) of the pre-production Executable
Software for the original master Disc (the "Master CD-ROM") from which all
other copies of the Disc are to be replicated. Promptly following such receipt
of such samples, Sony shall create the Master CD-ROM from one (1) such sample
of the pre-production Disc in compliance with specifications effective at the
time of replication. Licensee shall be responsible for the costs, as set forth
in the Specifications, of creating such Master CD-ROM. In order to insure
against loss or damage to the copies of the Executable Software furnished to
Sony, Licensee will retain duplicates of all such Executable Software. Sony
shall not be liable for loss of or damage to any copies of the Executable
Software.
7.1.3 DELIVERY OF PRINTED MATERIALS. Licensee may, at its option,
shall deliver the film for all Printed Materials to Sony or at Sony's option to
Sony's designated manufacturing facility in accordance with the Specifications,
at Licensee's sole risk and expense. In the event that Licensee elects to be
responsible for manufacturing the Printed Materials and/or Packaging (at its
sole cost and expense) and subject to Section 7.1.4 with respect to assembly,
Licensee shall deliver such Printed Materials and/or Packaging to Sony, in the
minimum order quantities set forth in Section 7.2.2 below.
7.1.4 MANUFACTURE OF UNITS. Upon approval, pursuant to Section 6, of
such pre-production samples of the Executable Software for the Master CD-ROM
and the associated Printed Materials, Sony will, in accordance with the terms
and conditions set forth in this Section 7, and at Licensee's expense (a)
manufacture Discs of the Licensed Product for Licensee; (b) manufacture
Licensee's Printed Materials (subject to Licensee's right to manufacture its
own Printed Materials at Licensee's sole cost and expense); and (c) package the
Discs with the Printed Materials (subject to Licensee's right to manufacture
its own Packaging at Licensee's sole cost and expense). Licensee shall have the
option of assembling the Discs, Packaging and Printed Materials at its sole
cost and
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expense, in which case it will purchase the Discs and, at its option, the
Packaging and Printed Materials from Sony in accordance with pricing set forth
in the Specifications, subject to the limitations set forth in Section 7.2.1.
7.2 PRICE, PAYMENT AND TERMS FOR MANUFACTURE OF LICENSED PRODUCTS.
7.2.1 PRICE. The applicable price for manufacture of any units of
the Licensed Products ordered hereunder shall be determined by Sony and provided
to Licensee in the Specifications prior to manufacture of the Licensed Products.
Purchase price(s) shall be stated in United States dollars and are subject to
change by Sony at any time upon reasonable notice to Licensee; provided,
however, the applicable price shall not be changed with respect to any units of
the Licensed Products which are the subject of an effective purchase order but
which have not yet been delivered by Sony at the designated F.O.B. point. Prices
for the finished units of the Licensed Products are exclusive of any foreign or
U.S. federal, state, or local sales or value-added tax, use, excise, customs
duties or other similar taxes or duties, which Sony may be required to collect
or pay as a consequence of the sale or delivery of any units of the Licensed
Products to Licensee. Licensee shall be solely responsible for the payment or
reimbursement of any such taxes, fees, and other such charges or assessments
applicable to the sale and/or purchase of any finished units of any of the
Licensed Products.
7.2.2 ORDERS. Licensee shall issue to Sony written purchase order(s)
in accordance with the Specifications. Such orders shall reference this
Agreement, give Licensee authorization number, specify quantities by Licensed
Product, state requested delivery date and all packaging information and be
submitted on or with an order form to be provided in the Specifications. All
purchase orders shall be subject to acceptance by Sony. Licensee shall issue to
Sony, for each of the Licensed Products approved by Sony pursuant to Section
6.1, a non-cancelable Purchase Order for at least [***] units of such Licensed
Product. In the event that Sony manufactures the Printed Materials for the
Licensee pursuant to Section 7.1.3 above, Licensee may, at Licensee's option,
allow Sony to purchase an additional [***] of such Printed Materials at
Licensee's expense in anticipation of reorders. Licensee agrees that such
Printed Materials will be stored by Sony for a period of no more than ninety
(90) days. Licensee may order additional units of any such Licensed Products in
the minimum reorder quantity of [***] units per order, provided that reorder
quantities may be less than [***] in Sony's sole discretion, in the event that
either (i) Sony has additional quantities of Printed Materials in stock with
respect to any such Licensed Product, or (ii) Licensee agrees to provide its own
Printed Materials in accordance with Section 7.1.3 above. Licensee shall have no
right to cancel or reschedule any Purchase Order (or any portion thereof) for
any of the Licensed Products unless the parties shall first have reached mutual
agreement as to Licensee's financial liability with respect to any desired
cancellation or rescheduling of any such Purchase Order (or any portion
thereof).
7.2.3 PAYMENT TERMS. Sony shall use good faith efforts to establish
a line of credit for Licensee. In the event that an order or orders placed by
Licensee exceed Licensee's line of credit or Licensee fails to pay on time or
otherwise fails to meet Sony's credit requirements, Sony shall have the right
to require Licensee, at any time with respect to such purchase order or orders,
to provide Sony with a suitable letter of credit, letter of guarantee or an
equivalent, each of which must be acceptable to Sony. Where credit is extended,
all orders must be entered and cleared by the Credit Department before they are
considered valid orders. Orders will be invoiced upon shipment. Each invoice
will be paid in full within thirty (30) days of the date of the invoice. Upon
notice by Sony, Licensee will furnish Sony such financial information as Sony
may reasonably request for credit approval. If credit is extended, Sony
reserves the right to establish credit limits for Licensee which may be
modified from time to time at Sony's sole discretion. Sony may, in its sole
discretion, cancel any order at any time or delay shipment of Licensed Products
if Customer fails to meet credit requirements established by Sony, or if
Licensee exceeds its line of credit and
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fails to provide Sony with a suitable letter of credit, letter of guarantee or
acceptable equivalent. No other deduction may be made from remittances unless an
approved credit memo has been issued by Sony. No claim for credit due to
shortage or breakage will be allowed unless it is made within seven (7) days
from the date of shipment. Each shipment of Licensed Products to Licensee shall
constitute a separate sale obligating Licensee to pay therefore, whether said
shipment be whole or partial fulfillment of any order. All sums owed or
otherwise payable to Sony under this Section 7 shall bear interest at the rate
of one and one-half (1-1/2%) percent per month, or such lower rate as may be the
maximum rate permitted under applicable law, from the date upon which payment of
the same shall first become due up to and including the date of payment thereof
whether before or after judgment. Licensee shall be additionally liable for all
of Sony's costs and expenses of collection, including, without limitation,
reasonable fees for attorneys and court costs. Notwithstanding the foregoing,
such specified rate of interest shall not excuse or be construed as a waiver of
Licensee's obligation to timely provide any and all payments owed to Sony
hereunder.
7.3 DELIVERY OF LICENSED PRODUCTS. Sony shall have no obligation to store
completed units of Licensed Products. Delivery of Licensed Products shall be in
accordance with the Specifications. Title, risk of loss, or damage in transit to
any and all Licensed Products manufactured by Sony pursuant to Licensee's orders
shall vest in Licensee immediately upon delivery to the carrier.
7.4 TECHNOLOGY EXCHANGE AND QUALITY ASSURANCE. There will be no technology
exchange between Sony and Licensee under this Agreement. Due to the proprietary
nature of the mastering process, Sony will not under any circumstances release
any master discs or other in-process materials to the Licensee. All such
physical master discs, stampers, etc. shall be and remain the sole property of
Sony.
7.5 INSPECTION AND ACCEPTANCE. Licensee may inspect and test any units of
the Licensed Products at Licensee's receiving destination. Any finished units of
the Licensed Products which fail to conform to the Specifications and/or any
descriptions contained in this Agreement may be rejected by Licensee by
providing written notice thereof to Sony within thirty (30) days of receipt of
such units of the Licensed Products at Licensee's receiving destination. In such
event, the provisions of Section 11.4 regarding Sony's warranty of the units
shall apply with respect to any such rejected units of the Licensed Products.
Notwithstanding the provisions of Section 11.4.1 hereto, if Licensee fails to
properly reject any units of the Licensed Products within such thirty (30) day
period, such Licensed Product units shall be deemed accepted by Licensee and may
not be subsequently rejected.
8. MARKETING AND DISTRIBUTION.
8.1 GENERAL. In accordance with the provisions of this License Agreement,
Licensee shall, at no expense to Sony, diligently market, sell and distribute
the Licensed Products in the School Market, and shall use its reasonable best
efforts to stimulate demand for such Licensed Products in such School Market in
the Licensed Territory and to supply any resulting demand. Licensee shall use
its reasonable best efforts to protect the Licensed Products from and against
illegal reproduction and/or copying by end users or by any other persons or
entities. Such methods of protection may include, without limitation, markings
or insignia providing identification of authenticity and packaging seals.
Subject to availability, Licensee shall sell to Sony quantities of the Licensed
Products at as low a price and on terms as favorable as Licensee sells similar
quantities of the Licensed Products to the School Market; provided, however,
Sony shall not directly or indirectly resell any such units of the Licensed
Products within or outside of the Licensed Territory without Licensee's prior
written consent.
8.2 MARKET RESEARCH MODEL. Both parties acknowledge and agree that it is
their intent to review the results of the distribution of PlayStation Hardware
and Licensed Products for market
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research purposes. Sony and Licensee will jointly agree on an acceptable
methodology for any research of the PlayStation Hardware usage in homes and
schools. Licensee will provide Sony with any market information which Sony
reasonably requests and which is not deemed to be confidential or sensitive to
the School Market.
9. REPRESENTATIONS AND WARRANTIES.
9.1 REPRESENTATIONS AND WARRANTIES OF SONY. Sony represents and warrants
solely for the benefit of Licensee that Sony has the right, power and authority
to enter into this License Agreement and to fully perform its obligations
hereunder.
9.2 REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee represents and
warrants that: (i) there is no threatened or pending action, suit, claim or
proceeding alleging that the use by Licensee of all or any part of the Licensee
Software or any underlying work or content embodied therein, or any name,
designation or trademark used in conjunction with the Licensed Products
infringes or otherwise violates any Intellectual Property Right or other right
or interest of any kind whatsoever of any third party, or otherwise contesting
any right, title or interest of Licensee in or to the Licensee Software or any
underlying work or content embodied therein, or any name, designation or
trademark used in conjunction with the Licensed Products; (ii) Licensee has the
right, power and authority to enter into this License Agreement and to fully
perform its obligations hereunder; (iii) the making of this License Agreement by
Licensee does not violate any separate agreement, rights or obligations existing
between Licensee and any other person or entity, and, throughout the term of
this License Agreement, Licensee shall not make any separate agreement with any
person or entity that is inconsistent with any of the provisions of this License
Agreement; (iv) Licensee shall not make any representation or give any warranty
to any person or entity expressly or impliedly on Sony's behalf, or to the
effect that the Licensed Products are connected in any way with Sony (other than
that the Licensed Products have been developed, marketed, manufactured, sold,
and/or distributed under license from Sony), (v) the Executable Software shall
be distributed by Licensee solely in object code form; (vi) each of the Licensed
Products shall be marketed, sold, and distributed solely to the School Market
and in an ethical manner and in accordance with all applicable laws and
regulations; and (vii) Licensee's policies and practices with respect to the
marketing, sale, and/or distribution of the Licensed Products shall in no manner
reflect adversely upon the name, reputation or goodwill of Sony.
10. INDEMNITIES; LIMITED LIABILITY.
10.1 INDEMNIFICATION BY SONY. Sony shall indemnify and hold Licensee
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs incurred
in the settlement or avoidance of any such claim which result from or are in
connection with a breach of any of the warranties provided by Sony herein;
provided, however, that Licensee shall give prompt written notice to Sony of
the assertion of any such claim, and provided, further, that Sony shall have the
right to select counsel and control the defense and/or settlement thereof,
subject to the right of Licensee to participate in any such action or
proceeding at its own expense with counsel of its own choosing. Sony shall have
the exclusive right, at its discretion, to commence and prosecute at its own
expense any lawsuit or to take such other action with respect to such matters
as shall be deemed appropriate by Sony. Licensee agrees to provide Sony, at no
expense to Licensee, reasonable assistance and cooperation concerning any such
matter; and Licensee shall not agree to the settlement of any such claim,
action or proceeding without Sony's prior written consent.
10.2 INDEMNIFICATION BY LICENSEE. Licensee shall indemnify and hold Sony
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs
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<PAGE> 13
incurred in the settlement or avoidance of any such claim, which result from or
are in connection with (i) a breach of any of the representations or warranties
provided by Licensee herein, including without limitation claims resulting from
Licensee's failure to timely pay any withholding taxes or other assessments as
set forth in Section 4 or 7.2 hereto or any breach of Licensee's
confidentiality obligations as set forth in Section 13 hereto; or (ii) any
claim of infringement or alleged infringement of any third party's
Intellectual Property Rights with respect to the Licensee Software; or (iii)
any claims of or in connection with any bodily injury (including death) or
property damage, by whomsoever such claim is made, arising out of, in whole or
in part, the development, manufacture, sale, marketing and/or use of the
Licensed Products manufactured by Sony hereunder or any sale and/or use of any
of the PlayStation Hardware hereunder, unless due to the negligence of Sony in
performing any of the specific duties and/or providing any of the specific
manufacturing services required of it hereunder; provided, however, that Sony
shall give prompt written notice to Licensee of the assertion of any such
claim, and provided, further, that Licensee shall have the right to select
counsel and control the defense and/or settlement thereof, subject to the
right of Sony to participate in any such action or proceeding at its own
expense with counsel of its own choosing. Licensee shall have the exclusive
right, at its discretion, to commence and/or prosecute at its own expense any
lawsuit or to take such other action with respect to such matter as shall be
deemed appropriate by Licensee. Sony shall provide Licensee, at no expense to
Sony, reasonable assistance and cooperation concerning any such matter. If Sony
is joined as a party to any lawsuit initiated by or against Licensee, Licensee
shall indemnify and hold Sony harmless from and against all claims, losses,
liabilities, damages, expenses and costs, including, without limitation,
reasonable fees for attorneys and court costs, incurred in connection with any
such lawsuit. Sony shall not agree to the settlement of any such claim, action
or proceeding without Licensee's prior written consent.
10.3 LIMITATION OF LIABILITY; LICENSEE'S OBLIGATIONS.
10.3.1 LIMITATION OF SONY'S LIABILITY. IN NO EVENT SHALL SONY OR ITS
AFFILIATES, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR
PROSPECTIVE PROFITS, OR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION THE BREACH OF THIS AGREEMENT BY SONY, THE MANUFACTURE OF THE
LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS AND/OR THE PLAYSTATION
HARDWARE BY LICENSEE OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT
(INCLUDING NEGLIGENCE), INDEMNITY, THE ESTABLISHMENT, DEVELOPMENT OR
MAINTENANCE OR BUSINESS REPUTATION OR GOODWILL, COST OF CAPITAL, PRODUCT
LIABILITY OR OTHERWISE. IT IS THE RESPONSIBILITY OF LICENSEE TO REVIEW THE
ACCURACY OF THE DATA ON THE UNITS MANUFACTURED BY SONY FOR LICENSEE. IN NO
EVENT SHALL SONY'S LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT DAMAGES, AND
INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 10.1 AND ANY WARRANTY
IN SECTION 10.4 HERETO, EXCEED THE TOTAL AMOUNT PAID BY LICENSEE TO SONY UNDER
THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SONY, NOR ANY
AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR
AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OF ANY
KIND TO LICENSEE OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY AND/OR
PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS OR THE LICENSED PRODUCTS,
INCLUDING, WITHOUT LIMITATION, THE OPERATION OR PERFORMANCE OF ANY OF THE
LICENSED PRODUCTS.
10.3.2 LIMITATION OF LICENSEE'S LIABILITY. IN NO EVENT SHALL
LICENSEE BE LIABLE TO SONY FOR ANY PROSPECTIVE PROFITS, OR SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH (i) THIS LICENSE
AGREEMENT, (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THIS LICENSE AGREEMENT OF ANY OBJECT CODE PROVIDED BY SONY, IN
WHOLE OR IN PART, OR ANY LICENSEE SOFTWARE BY LICENSEE OR ANY THIRD PARTY, IN
WHOLE OR IN PART, WHETHER
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UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT
LIABILITY OR OTHERWISE, PROVIDED THAT LICENSEE EXPRESSLY AGREES THAT SUCH
LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM LICENSEE'S BREACH OF
SECTIONS 2, 5, 10.2, 11.2, OR 13 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT
SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH LICENSEE MAY BE REQUIRED TO
PAY TO THIRD PARTIES UNDER SECTIONS 10.2 OR 16.9.
10.3.3 LICENSEE'S OBLIGATIONS. If at any time or times subsequent to
the approval of the Executable Software pursuant to Section 6.2, Sony identifies
any bugs with respect to the Licensed Product or any bugs are brought to the
attention of Sony, Licensee shall, at no cost to Sony, promptly correct any such
bugs, to Sony's reasonable satisfaction. In the event any units of any of the
Licensed Products create any risk of loss or damage to any property or injury to
any person, Licensee shall immediately take effective steps, at Licensee's sole
liability and expense, to recall and/or to remove such defective product units
from any affected channels of distribution. Licensee shall provide all end-user
support for the Licensed Products.
10.4 WARRANTIES: DISCLAIMER OF WARRANTIES.
10.4.1 MANUFACTURING WARRANTY. Sony warrants that the units of
Licensed Product that are manufactured by Sony for Licensee pursuant to Section
7 of this Agreement shall, at time to delivery to Licensee, be free from defects
in material. The sole obligation of Sony under this warranty shall be, for a
period of one year from the date of shipment of such discs by Sony to Licensee,
at Sony's election, either to replace, to issue credit, or to refund to Licensee
the purchase price paid to Sony for any such defective discs. Such warranty is
the only warranty applicable to the Licensed Product manufactured by Sony for
Licensee pursuant to Section 7 of this Agreement. This warranty shall not apply
to damage resulting from accident, alteration, negligence or misuse of the
Licensed Products. If, during the aforesaid period, a defective disc is received
by Licensee, Licensee shall notify Sony and, upon request by Sony, provide Sony
with the returned disc(s) and a written description of the defect claimed. Sony
shall not accept the return of any disc(s) except factory defective disc(s)
(i.e., those discs that are not free from defects in material), and all such
returns must be authorized by Sony in writing and in advance. All discs for
which return is authorized will be sent to a place designated by Sony at Sony's
expense. If the defect did not arise from causes placing liability on Sony under
the above warranty, Licensee shall reimburse Sony for expenses incurred in
shipping, processing and analyzing the discs. Sony's judgment as to the origin
of the defect shall be final and binding.
10.4.2 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
ABOVE, NEITHER SONY NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES LICENSEE
RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR STATUTORY REGARDING THE SONY
MATERIALS AND THE PLAYSTATION GAME CONSOLE AND/OR THE UNITS OF THE LICENSED
PRODUCTS MANUFACTURED HEREUNDER. SONY SHALL NOT BE LIABLE FOR ANY INJURY, LOSS
OR DAMAGE, DIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE
THE UNITS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SONY AND ITS
AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER
THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS AND THE PLAYSTATION
GAME CONSOLE AND/OR THE UNITS MANUFACTURED HEREUNDER. ANY WARRANTY AGAINST
INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL
CODE AND/OR IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED.
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11. COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
11.1 LICENSEE RIGHTS. The copyrights with respect to the Licensee
Software (exclusive of the rights licensed from Sony hereunder) and any names
or other designations used as titles for the Licensed Products are and shall be
the exclusive property of Licensee or of any third party from which Licensee
has been granted the license and related rights to develop and otherwise
exploit any such Licensee Software or any such names or other designations.
11.2 SONY RIGHTS.
11.2.1. LICENSED TRADEMARKS. The Licensed Trademarks and the
goodwill associated therewith are and shall be the exclusive property of Sony.
Nothing herein shall give Licensee any right, title or interest in or to any of
the Licensed Trademarks, other than the non-exclusive license and privilege
during the term hereof to display and use the Licensed Trademarks solely in
accordance with the provisions of this License Agreement. Licensee shall not do
or cause to be done any act or thing contesting or in any way impairing or
tending to impair any of Sony's rights, title, or interests in or to any of the
Licensed Trademarks, nor shall Licensee register any trademark in its own name
or in the name of any other person or entity which is similar to or is likely
to be confused with any of the Licensed Trademarks. If, during the term of this
Agreement, any of Sony's rights, title and/or interest in or to any or all of
the Licensed Trademarks (or any portion thereof) should become for any reason
whatsoever vested in Licensee by operation of law or otherwise, Licensee agrees
that it shall immediately upon the earlier of Sony's request or on the
termination or expiration of this Agreement, assign any and all rights,
together with any goodwill associated therewith, to Sony or Sony's designee.
Licensee agrees that upon any termination (for any cause) or the expiration of
this Agreement it shall immediately cease to use any and all Licensed
Trademarks.
11.2.2 LICENSE OF SONY MATERIALS AND PLAYSTATION GAME CONSOLE.
Subject to the rights granted by Sony to Licensee hereunder, all rights with
respect to the Sony Materials and PlayStation Game Console, including without
limitation, all of Sony's Intellectual Property Rights therein, are and shall
be the exclusive property of Sony. Nothing herein shall give Licensee any
right, title or interest in or to the Sony Materials or the PlayStation Game
Console (or any portion thereof), other than the non-exclusive license and
privilege during the term hereof to use the Sony Materials and PlayStation Game
Console for the development of the Executable Software solely in accordance
with the provisions of this License Agreement. Licensee shall not do or cause to
be done any act or thing contesting or in any way impairing or tending to
impair any of Sony's rights, title, and/or interests in or to the Sony
Materials or the PlayStation Game Console (or any portion thereof). If, during
the term of this Agreement, any of Sony's rights, title and/or interest in or
to any or all of the Equipment or Sony Materials (or any portion thereof)
should become for any reason whatsoever vested in Licensee by operation of law
or otherwise, Licensee agrees that it shall immediately upon the earlier of
Sony's request or on the termination or expiration of this Agreement, assign
any and all such rights, together with any good will associated therewith, to
Sony or Sony's designee.
11.3 EFFECT OF TERMINATION. Upon the expiration or earlier termination
of this License Agreement for any reason, Licensee shall immediately cease and
desist from any further use of the Licensed Trademarks and Sony Materials
licensed hereunder, subject to the provisions of Section 15.3, below.
12. COPYRIGHT, TRADEMARK AND TRADE SECRET PROTECTION.
In the event that either Licensee or Sony discovers or otherwise becomes
aware that any of the Intellectual Property Rights of the other embodied in any
of the Licensed Products or the PlayStation Hardware have been or are being
infringed upon by any third party, then the party with
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knowledge of such infringement or apparent infringement shall promptly notify
the other party. Sony shall have the sole right, in its discretion, to institute
and prosecute lawsuits against Third Parties for such infringement of Sony's
Intellectual Property Rights. Licensee shall have the right, in its discretion,
to institute and prosecute lawsuits against third persons for such infringement
of Licensee's Intellectual Property Rights which are distinct from Sony's
Intellectual Property Rights. If Licensee does not institute an infringement
suit within thirty (30) days after Sony's written request that it do so, Sony
may institute and prosecute such lawsuit. Any lawsuit shall be prosecuted solely
at the cost and expense of the party bringing suit and all sums recovered in any
such lawsuits, whether by judgment, settlement or otherwise, in excess of the
amount of reasonable attorneys' fees and other out of pocket expenses of such
suit, shall belong solely to the party bringing the suit. Upon request of the
party bringing the lawsuit, the other party shall execute all papers, testify on
all matters, and otherwise cooperate in every way necessary and desirable for
the prosecution of any such lawsuit. The party bringing suit shall reimburse the
other party for the expenses incurred as a result of such cooperation.
13. CONFIDENTIALITY.
13.1 NONDISCLOSURE AGREEMENT. Licensee hereby acknowledges that the
Nondisclosure Agreement dated September 28, 1995 between Sony and Licensee
("Nondisclosure Agreement") will remain in full force and effect with respect to
the Confidential Information of Sony throughout the term of this Agreement. In
the event of any conflict or inconsistency between the provisions of the
Nondisclosure Agreement and the provisions of this Section 13, the provisions of
the Nondisclosure Agreement shall control with respect to the Confidential
Information of Sony.
13.2 CONFIDENTIAL INFORMATION. For the purposes of this License Agreement,
"Confidential Information" of Sony means (i) the Sony Materials and information
regarding Sony's finances, business, marketing and technical plans, (ii) all
documentation and information relating to the foregoing (other than
documentation and information expressly intended for use by and released to end
users or the general public), and (iii) any and all other information, of
whatever type and in whatever medium (including without limitation all data,
ideas, discoveries, developments, know-how, trade secrets, inventions, creations
and improvements), that is disclosed in writing or in any other form by Sony to
Licensee. "Confidential Information" of Licensee shall mean the Licensee
Software as provided to Sony pursuant to this License Agreement and all
documentation and information relating thereto that is disclosed in writing or
in any other form by Licensee to Sony if the information is designated as (or is
provided under circumstances indicating the information is) confidential or
proprietary.
13.3 PRESERVATION OF CONFIDENTIALITY; NON-DISCLOSURE. Each party
("receiving party") shall hold all Confidential Information of the other party
("disclosing party") in trust and in strict confidence for the sole benefit of
the disclosing party and for the exercise of the limited rights expressly
granted to the receiving party under this License Agreement. The receiving party
shall take all steps necessary to preserve the confidentiality of the
Confidential Information of the disclosing party, and to prevent it from falling
into the public domain or into the possession of persons other than those
persons to whom disclosure is authorized hereunder, including but not limited to
those steps that the receiving party takes to protect the confidentiality of its
own most highly confidential information. Except as may be expressly authorized
by the disclosing party in writing, the receiving party shall not at any time,
either before or after any termination of this License Agreement, directly or
indirectly: (i) disclose any Confidential Information to any person other than
an employee or subcontractor of the receiving party who needs to know or have
access to such Confidential Information for the purposes of this License
Agreement, and only to the extent necessary for such purposes (and with respect
to any subcontractor, only in accordance with Section 16.5 below); (ii) except
as otherwise provided in this License Agreement, duplicate the Confidential
Information for any purpose whatsoever; (iii) use the Confidential Information
for any reason or purpose other than as expressly permitted in this License
Agreement; or (iv) remove any
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<PAGE> 17
copyright notice, trademark notice and/or other proprietary legend set forth on
or contained within any of the Confidential Information.
13.4 OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE.
13.4.1 NOTICE TO DISCLOSING PARTY. If at any time the receiving
party becomes aware of any unauthorized duplication, access, use, possession or
knowledge of any Confidential Information, the receiving party shall
immediately notify the disclosing party. The receiving party shall provide any
and all reasonable assistance to the disclosing party to protect the disclosing
party's proprietary rights in any Confidential Information that the receiving
party or its employees or permitted subcontractors may have directly or
indirectly disclosed or made available and that may be duplicated, accessed,
used, possessed or known in a manner or for a purpose not expressly authorized
by this License Agreement including but not limited to enforcement of
confidentiality agreements, commencement and prosecution in good faith (alone
or with the disclosing party) of legal action, and reimbursement for all
reasonable attorneys' fees (and all related costs), costs and expenses incurred
by the disclosing party to protect its proprietary rights in the Confidential
Information. The receiving party shall take all reasonable steps requested by
the disclosing party to prevent the recurrence of any unauthorized duplication,
access, use, possession or knowledge of the Confidential Information.
13.4.2 ACCOUNTING, ETC. If Licensee violates or fails to comply
with any of the terms or conditions of this Section 13 or Section 5 hereto,
Sony shall be entitled to an accounting and repayment of all forms of
compensation, commissions, remuneration or benefits which Licensee directly or
indirectly realizes as a result of or in connection with any such violation or
failure to comply. Such remedy shall be in addition to and not in limitation of
any injunctive relief or other remedies to which Sony may be entitled under
this Agreement or otherwise, at law or in equity.
13.5 EXCEPTIONS. The foregoing restrictions will not apply to information
to the extent that the receiving party can demonstrate such information: (i)
was known to the receiving party at the time of disclosure to the receiving
party by the disclosing party as shown by the files of the receiving party in
existence at the time of disclosure; (ii) becomes part of information in the
public domain through no fault of the receiving party; (iii) has been
rightfully received from a third party authorized by the disclosing party to
make such disclosure without restriction; (iv) has been approved for release by
prior written authorization of the disclosing party; or (v) has been disclosed
by court order or as otherwise required by law (including without limitation to
the extent that disclosure may be required under Federal or state securities
laws), provided that the receiving party has notified the disclosing party
immediately upon learning of the possibility of any such court order or legal
requirement and has given the disclosing party a reasonable opportunity (and
cooperated with the disclosing party) to contest or limit the scope of such
required disclosure (including application for a protective order). Information
shall not be deemed known to the receiving party or publicly known for purposes
of the above exceptions (A) merely because it is embraced by more general
information in the prior possession of the receiving party or others, or (B)
merely because it is expressed in public material in general terms not
specifically the same as Confidential Information.
13.6 CONFIDENTIALITY OF AGREEMENT. The terms and conditions of this
License Agreement shall be treated as Confidential Information; provided that
each party may disclose the terms and conditions of this License Agreement: (i)
to legal counsel; (ii) in confidence, to accountants, banks and financing
sources and their advisors; and (iii) in confidence, in connection with the
enforcement of this License Agreement or rights under this License Agreement.
Neither party shall disclose any of the terms of this License Agreement without
the prior written permission of the other party. Notwithstanding the foregoing,
Licensee shall not disclose any Confidential Information or any of the terms of
this License Agreement to [***]
CONFIDENTIAL
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in Licensee without Sony's prior written approval.
14. TERM AND TERMINATION
14.1 EFFECTIVE DATE: TERM. This License Agreement shall not be binding
upon the parties until it has been signed by or on behalf of each party, in
which event it shall be effective as of the date first written above (the
"Effective Date") and shall last for the period set forth in the Term Schedule
(the "Term").
14.2 TERMINATION BY SONY. Sony shall have the right to terminate this
License Agreement immediately, by providing written notice of such election to
Licensee, upon the occurrence of any of the following events or circumstances:
(i) if Licensee breaches any of its material obligations provided for in this
License Agreement and such breach is not corrected or cured within thirty (30)
days after receipt of written notice of such breach; (ii) if the Developer
Agreement is terminated for any reason; (iii) Licensee's failure to pay, or a
statement that it is unable to pay, any amount due hereunder, or is unable to
pay its debts generally as they shall become due; (iv) Licensee's filing of an
application for, or consenting to, or directing the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of all or
substantially all of Licensee's property, whether tangible or intangible,
wherever located; (v) The making by Licensee of a general assignment for the
benefit of creditors; (vi) The commencing by Licensee or Licensee's intention to
commence a voluntary case under any applicable bankruptcy laws (as now or
hereafter may be in effect); (vii) The adjudication that Licensee is a bankrupt
or insolvent; (viii) The filing by Licensee or the intent to file by Licensee of
a petition seeking to take advantage of any other law providing for the relief
of debtors; (ix) Licensee's acquiescence to, intention to acquiesce to, or
failure to have dismissed within ninety (90) days, any petition filed against it
in any involuntary case under any such bankruptcy law; (x) if control of more
than fifty percent (50%) of the ownership of Licensee or substantially all of
Licensee's assets are transferred to any person or entity; or (xi) if, directly
or indirectly, control of more than twenty-five percent (25%) of the ownership
of Licensee or substantially all of Licensee's assets are transferred to any one
of [***] known or unknown; (xii) if Licensee agrees to port or deliver its
educational software on any other competing technology, meaning a video game
system with real-time animation, video decompression, and/or 3D rendering
including but not limited to products from [***]; or (xiii) Licensee fails to
order the Minimum Order Quantity during any calendar year.
14.3 PRODUCT-BY-PRODUCT TERMINATION BY SONY. In addition to the events of
termination described in Section 14.2 above, Sony, as its option, shall be
entitled to terminate, on a product-by-product basis, the licenses and related
rights herein granted to Licensee (a) in the event that Licensee fails to
notify Sony promptly in writing of any material change to any of the elements
approved in Section 6.1, above; (b) if Licensee fails to provide Sony in
accordance with the provisions of Section 6.2 above with the prototype
Executable Software for any Licensed Product, in the format required by Sony,
and which meets Sony's specifications; provided, however, Sony shall not be
entitled to exercise such right of termination if Licensee's failure to provide
such final Executable Software for any of the Licensed Products is directly
caused by Sony's failure to timely comply with any of its material obligations
expressly set forth herein.
14.4 PAYMENTS NONREFUNDABLE. In the event of the termination of this
License Agreement in accordance with any of the provisions of Section 14.2 or
14.3, above, no portion of any payments of any kind whatsoever, including
without limitation any and all Nonrefundable Payments and payments of
manufacturing costs, previously provided to Sony hereunder shall be owed or be
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*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 19
repayable to Licensee.
15. EFFECT OF EXPIRATION OR TERMINATION.
15.1 INVENTORY STATEMENT. Within thirty (30) days of the date of
expiration or the effective date of termination with respect to any or all
Licensed Products, Licensee shall provide Sony with an itemized statement,
certified to be accurate by an officer of Licensee, specifying the number of
unsold units of the Licensed Products and PlayStation Hardware as to which such
termination applies, on a title-by-title basis, which remain in its inventory
and/or under its control at the time of expiration or the effective date of
termination. Sony shall be entitled to conduct a physical inspection of
Licensee's inventory and work in process during normal business hours in order
to ascertain or verify such inventory and/or statement.
15.2 REVERSION OF RIGHTS. If this License Agreement is terminated by Sony
as a result of any breach or default by Licensee, the licenses and related
rights herein granted to Licensee shall immediately revert to Sony, and
Licensee shall cease and desist from any further use of the Sony Materials and
any Intellectual Property Rights related to the Sony Materials, and, subject to
the provisions of Section 15.3 below, Licensee shall have no further right to
continue the development, marketing, sale, and/or distribution of any units of
the Licensed Products or PlayStation Hardware, nor to continue to use the
Licensed Trademarks.
15.3 DISPOSAL OF UNSOLD UNITS. Provided this License Agreement is not
terminated due to a breach or default by Licensee, Licensee may, upon
expiration or termination of this License Agreement, sell off existing
inventories of Licensed Products, on a non-exclusive basis, for a period of
ninety (90) days from the date of expiration or termination of this License
Agreement, and provided such inventories have not been manufactured solely or
principally for sale during such period. With respect to existing inventories
of PlayStation Hardware, Sony reserves the right to buy back the inventory at
its then-current fair market value, to allow Licensee to sell off such
inventories subject to the requirements set forth in the first sentence of this
Section, or to require Licensee to destroy such inventories. Subsequent to the
expiration of such ninety (90) day period, or in the event this License
Agreement is terminated as a result of any breach or default by Licensee, any
and all units of the Licensed Products remaining in Licensee's inventory shall
be destroyed by Licensee within five (5) working days of such expiration or
termination. Within five (5) working days after such destruction, Licensee
shall provide Sony with an itemized statement, certified to be accurate by an
officer of Licensee, indicating the number of units of the Licensed Products
which have been destroyed (on a title-by-title basis), the location and date of
such destruction, and the disposition of the remains of such destroyed
materials.
15.4 RETURN OF CONFIDENTIAL INFORMATION. Upon the expiration or earlier
termination of this License Agreement, Licensee and Sony shall immediately
deliver to the other party as the disclosing party, or if and to the extent
requested by the disclosing party destroy, all Confidential Information of the
other party, including any and all copies thereof, which the other party
previously furnished to it in furtherance of this License Agreement, including,
without limitation, any such information, knowledge, or know-how of which
either party, as the receiving party, was apprised and which was reduced to
tangible, machine readable or written form by such party or on its behalf at
any time during the term of this License Agreement. Within five (5) working
days after any such destruction, each receiving party shall provide the
disclosing party with an itemized statement certified to be accurate by an
officer of receiving party, indicating the number of copies of the Confidential
Information which have been destroyed, the location and date of such
destruction and the disposition of the remains of such destroyed materials.
15.5 RENEWAL OR EXTENSION OF LICENSE AGREEMENT. Sony shall be under no
obligation to renew or extend this License Agreement notwithstanding any
actions taken by either of the parties prior to the expiration of this License
Agreement. Upon the expiration of this License Agreement
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neither party shall be liable to the other for any damages (whether direct,
consequential, or incidental, and including, without limitation, any
expenditures, loss of profits, or prospective profits) sustained or arising out
of or alleged to have been sustained or to have arisen out of such expiration.
However, the expiration of this License Agreement shall not excuse either party
from its previous breach of any of the provisions of this License Agreement or
from any obligations surviving the expiration of this License Agreement, and
full legal and equitable remedies shall remain available for any breach or
threatened breach of this License Agreement or any obligations arising
therefrom.
15.6 TERMINATION WITHOUT PREJUDICE. The expiration or termination of this
License Agreement in accordance with the provisions of Section 14, above, shall
be without prejudice to any rights or remedies which one party may otherwise
have against the other party.
16. MISCELLANEOUS PROVISIONS.
16.1 NOTICES. All notices or other communications required or desired to
be sent to either of the parties shall be in writing and shall be sent by
registered or certified mail, postage prepaid, return receipt requested, or
sent by recognized international courier service (e.g., Federal Express, DHL,
etc.) telex, telegram or facsimile, with charges prepaid and subject to
confirmation by letter sent via registered or certified mail, postage prepaid,
return receipt requested. The address for all notices or other communications
required to be sent to Sony or Licensee, respectively, shall be the mailing
address stated in the Term Schedule, or such other address as may be provided
by written notice from one party to the other on at least ten (10) days' prior
written notice. Any such notice shall be effective upon the date of receipt.
16.2 FORCE MAJEURE. Neither Sony nor Licensee shall be liable for any loss
or damage or be deemed to be in breach of this License Agreement if its failure
to perform or failure to cure any of its obligations under this License
Agreement results from any event or circumstance beyond its reasonable control,
including, without limitation, any natural disaster, fire, flood, earthquake, or
other Act of God; shortage of equipment, materials, supplies, or transportation
facilities; strike or other industrial dispute; war or rebellion; or compliance
with any law, regulation, or order (whether valid or invalid) of any
governmental body, other than an order, requirement, or instruction arising out
of Licensee's violation of any applicable law or regulation; provided, however,
that the party interfered with gives the other party written notice thereof
promptly, and, in any event, within fifteen (15) working days of discovery of
any such Force Majeure condition. If notice of the existence of any Force
Majeure event or circumstance described in such notice, except that any such
cause shall not excuse the payment of any sums owed to Sony prior to, during, or
after any such Force Majeure condition. If any of these acts or events of force
majeure exceed sixty (60) continuous or cumulative days, then either party may,
as its sole remedy, cancel outstanding orders to the extent not previously
fulfilled by giving the other notice, and neither party will be liable to the
other for damages resulting from such cancellation.
16.3 NO PARTNERSHIP OR JOINT VENTURE. The relationship between Sony and
Licensee, respectively, is that of licensee and licensor. Licensee is an
independent contractor and is not the legal representative, agent, joint
venturer, partner, or employee of Sony for any purpose whatsoever. Neither
party has any right or authority to assume or create any obligations of any
kind or to make any representation or warranty on behalf of the other party,
whether express or implied, or to bind the other party in any respect
whatsoever.
16.4 ASSIGNMENT. Sony has entered into this License Agreement based upon
the particular reputation, capabilities and experience of Licensee and its
officers, directors and employees. Accordingly, Licensee may not assign this
License Agreement or any of its rights
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<PAGE> 21
hereunder, nor delegate or otherwise transfer any of its obligations hereunder,
to any third party unless the prior written consent of Sony shall first be
obtained. Any attempted or purported assignment, delegation or other such
transfer without the required consent of Sony shall be void and a material
breach of this License Agreement. Subject to the foregoing, this License
Agreement shall inure to the benefit of the parties and their respective
successors and permitted assigns. Sony shall have the right to assign any and
all of its rights and obligations hereunder to any affiliate(s), including,
without limitation, its obligations under Section 7 hereof.
16.5 SUBCONTRACTORS. Licensee shall not sell, lease, assign, delegate,
subcontract, sublicense or otherwise transfer or encumber all or any portion of
the rights herein granted. Licensee shall have the right to employ suitable
subcontractors for the purposes of assisting Licensee with the development of
the Licensed Products, provided that Licensee must obtain the prior written
consent of Sony. Licensee shall not disclose to any subcontractor any
Confidential information of Sony (as defined herein and in the Nondisclosure
Agreement), including, without limitation, any Sony Materials, unless and until
Licensee shall have such subcontractor sign a written agreement containing
substantially identical terms to the Nondisclosure Agreement, and the
confidentiality provisions of this Agreement and shall submit a copy of such
agreement to Sony. Any and all agreements between Licensee and its permitted
subcontractors shall provide that Sony is a third party beneficiary of such
agreements and has the full right to bring any actions against such
subcontractors to comply in all respects with the terms and conditions of this
License Agreement. Notwithstanding any consent which may be granted by Sony for
Licensee to employ any such permitted subcontractor(s), or any such separate
agreement(s) that may be entered into by Licensee with any such permitted
subcontractor, Licensee shall remain fully liable for its compliance with all of
the provisions of this License Agreement and for the compliance of any and all
permitted subcontractors with the provisions of any agreements entered into by
such subcontractors in accordance with this Section 16.5 Licensee shall cause
its subcontractors to comply in all respects with the terms and conditions of
this License Agreement, and hereby unconditionally guarantees all obligations of
its subcontractors. Notwithstanding the foregoing, Licensee shall not
subcontract any rights under this agreement to TCI (Telecommunications Inc.) or
Microsoft without Sony's prior written approval.
16.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times
comply with all applicable regulations and orders of their respective countries
and all conventions and treaties to which their countries are a party or
relating to or in any way affecting this License Agreement and the performance
by the parties of this License Agreement. Each party, at its own expense, shall
negotiate and obtain any approval, license or permit required in the performance
of its obligations, and shall declare, record or take such steps to render this
License Agreement binding, including, without limitation, the recording of this
License Agreement with any appropriate governmental authorities (if required).
16.7 GOVERNING LAW: CONSENT TO JURISDICTION. This License Agreement shall
be governed by and interpreted in accordance with the laws of the State of New
York, excluding that body of law related to choice of laws, and of the United
States of America. Any action or proceeding brought to enforce the terms of this
License Agreement or to adjudicate any dispute arising hereunder shall be
brought in the courts of the County of New York, State of New York (if under
State law) or the Southern District of New York (if under Federal law). Each of
the parties hereby submits itself to the exclusive jurisdiction and venue of
such courts for purposes of any such action and agrees that any service of
process may be effected by delivery of the summons in the manner provided in the
delivery of notices set forth in Section 16.1 above.
16.8 LEGAL COSTS AND EXPENSES. In the event it is necessary for either
party to retain the services of an attorney or attorneys to enforce the terms of
this License Agreement or to file or defend any action arising out of this
Agreement, then the prevailing party in any such action shall be entitled, in
addition to any other rights and remedies available to it at law or in equity to
recover.
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from the other party its reasonable fees for attorneys and expert witnesses,
plus such court costs and expenses as may be fixed by any court of competent
jurisdiction. The term "prevailing party" for the purposes of this Section
shall include a defendant who has by motion, judgment, verdict or dismissal by
the court, successfully defended against any claim that has been asserted
against it.
16.9 REMEDIES. Unless expressly set forth to the contrary, either party's
election of any remedies provided for in this License Agreement shall not be
exclusive of any other remedies available hereunder or otherwise at law or in
equity, and all such remedies shall be deemed to be cumulative. Any breach of
Sections 2, 3, 5, 6, 7.1.1, 11, and 13 of this Agreement would cause
irreparable harm to Sony, the extent of which would be difficult to ascertain.
Accordingly, Licensee agrees that, in addition to any other remedies to which
Sony may be entitled, in the event of a breach by Licensee or any of its
employees or permitted subcontractors of any such sections of this Agreement,
Sony shall be entitled to the immediate issuance without bond of exparte
injunctive relief enjoining any breach or threatened breach of any or all of
such provisions. In addition, Licensee shall indemnify Sony for all losses,
damages, liabilities, costs and expenses (including actual attorneys' fees and
all related costs) which Sony may sustain or incur as a result of such breach.
16.10 SEVERABILITY. In the event that any provision of this License
Agreement (or portion thereof) is determined by a court of competent
jurisdiction to be invalid or otherwise unenforceable, such provision (or part
thereof) shall be enforced to the extent possible consistent with the stated
intention of the parties, or, if incapable of such enforcement, shall be deemed
to be deleted from this License Agreement, while the remainder of this License
Agreement shall continue in full force and remain in effect according to its
stated terms and conditions.
16.11 SECTIONS SURVIVING EXPIRATION OR TERMINATION. The following sections
shall survive the expiration or earlier termination of this License Agreement
for any reason: 4, 5, 7.2, 9.2, 10, 11, 12, 13, 14.4, 15, 16.4, 16.5, 16.7,
16.8, 16.9, and 16.10 and Exhibits A-C.
16.12. WAIVER. No failure or delay by either party in exercising any right,
power, or remedy under this License Agreement shall operate as a waiver of any
such right, power, or remedy. No waiver of any provision of this License
Agreement shall be effective unless in writing and signed by the party against
whom such waiver is sought to be enforced. Any waiver by either party of any
provision of this License Agreement shall not be construed as a waiver of any
other provision of this License Agreement, nor shall such waiver operate as or
be construed as a waiver of such provision respecting any future event or
circumstance.
16.13 MODIFICATION. No modification of any provision of this License
Agreement shall be effective unless in writing and signed by both of the
parties.
16.14 HEADINGS. The section headings used in this License Agreement are
intended primarily for reference and shall not by themselves determine the
construction or interpretation of this License Agreement or any portion hereof.
16.15 INTEGRATION. This License Agreement (together with the Term Schedule
and Exhibits attached hereto) constitutes the entire agreement between Sony and
Licensee and supersedes all prior or contemporaneous agreements, proposals,
understandings, and communications between Sony and Licensee, whether oral or
written, with respect to the subject matter hereof; provided, however, that
notwithstanding anything to the contrary in the foregoing, the Nondisclosure
Agreement referred to in Section 13 hereto shall remain in full force and
effect.
16.16 COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, and both of which together shall
constitute one and the same instrument.
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16.17 CONSTRUCTION. This License Agreement shall be fairly interpreted in
accordance with its terms and without any strict construction in favor of or
against either of the parties.
16.18 EXPORT CONTROLS. Licensee certifies that it shall not reexport,
directly or indirectly, any PlayStation Hardware or Sony Materials in violation
of U.S. law and regulations. Licensee shall be solely responsible for the
obtaining of the compliance with any required export licenses. Licensee
certifies that the Equipment and any Sony Materials will not be resold or
delivered, directly or indirectly, to entities located in destinations
prohibited under U.S. laws and regulations or resold or delivered, directly or
indirectly, to nationals from those destinations. The prohibited destinations
include Cuba, Iraq, Libya, North Korea, Yugoslavia (Serbia and Montenegro) or
any other countries that are subsequently declared prohibited destinations under
such laws or regulations. Prohibited sales may subject Licensee to fines and
imprisonment under applicable U.S. law. Violation of this Certification will
result in the termination for cause of this Agreement and all licenses granted
hereunder from Sony to Licensee. In addition, Licensee shall, at its own
expense, obtain and arrange for the maintenance in full force and effect of all
governmental approvals, consents, licenses, authorizations, declarations,
filings and registrations as may be necessary or advisable for performance of
all of the terms and conditions of this Agreement, including, but not limited
to, foreign exchange approvals, import and offer agent licenses, fair trade
approvals and all approvals which may be required to realize the purposes of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be duly
executed as of the day and year first written above.
SONY COMPUTER THE LIGHTSPAN PARTNERSHIP, INC.
ENTERTAINMENT AMERICA
By: /s/ Bernard Stolar By: /s/ J. T. Kernan
Title: V.P. Bus. Dev. Title: Chairman & CEO
Date: 02-22-96 Date: 6/30/96
NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES
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EXHIBIT A
TERMS AND CONDITIONS
Sony Computer Entertainment America ("Sony"), a division of Sony Interactive
Entertainment Inc., does business with its Customers under the terms and
conditions set forth herein. These Terms and Conditions supersede those
contained in any Customer purchase order, request for quotation, acceptance or
other purchasing documents concerning any PlayStation Hardware which are
inconsistent with, different from or in addition to the terms and conditions
stated herein.
1. APPROVAL OF ORDERS: All orders must be in writing or sent via EDI. No
verbal orders will be accepted. All Customer purchase orders for PlayStation
Hardware are subject to acceptance by Sony, including, if appropriate, approval
by Sony's Credit Department. Any statement in a purchase order document that is
not expressly approved or acknowledged in writing by Sony will not be
considered a part of the agreement between the parties.
Please send orders to: Sony Computer Entertainment America
Sales Service Department
919 East Hillsdale Boulevard, 2nd Floor
Foster City, CA 94404
Phone: (415) 655-5600
Fax: (415) 655-5500
2. CREDIT: Sony shall use good faith efforts to establish a line of credit
for Licensee. In the event that an order or orders placed by Licensee exceed
Licensee's line of credit or Licensee fails to pay on time or otherwise fails
to meet Sony's credit requirements, Sony shall have the right to require
Licensee, at any time with respect to such purchase order or orders, to provide
Sony with a suitable letter of credit, letter of guarantee or an equivalent,
each of which must be acceptable to Sony. Where credit is extended, all orders
must be entered and cleared by the Credit Department before they are considered
valid orders. (Orders which require shipment to different locations shall be
considered individual orders.) Upon notice by Sony, Customer will furnish Sony
such financial information as Sony may reasonably request for credit approval.
If credit is extended, Sony reserves the right to establish credit limits for
Customer which may be modified from time to time at Sony's sole discretion.
Sony may, in its sole discretion, cancel any order at any time or delay
shipment of Products if Customer fails to meet credit requirements established
by Sony, or if Licensee exceeds its line of credit and fails to provide Sony
with a suitable letter of credit, letter of guarantee or acceptable equivalent.
While special sales programs may be offered from time to time which
include purchase discounts and/or timing extensions, only Customers that are in
good standing shall be eligible to participate. The amount of credit made
available and the manner in which it has been handled will affect eligibility.
3. TERMS OF SALE: Invoices will be issued and dated as of the merchandise
shipment date. Although prepared daily, invoices are generally batched and
mailed during the week following the week of shipment. Customers to whom Sony
extends credit must pay for Products in full within forty-five (45) days from
date of invoice. No Customers may make deductions or offsets of any kind from
payments due Sony unless such Customer has received a written credit memorandum
or other backup documentation from Sony authorizing such deduction or offset or
Customer has strictly complied with all of the terms of a Sony authorized sales
program. In the event that a check is returned because of insufficient funds or
for any other reason, additional handling charges and fees will be assessed if
the replacement payment is not received in accordance with our stipulated terms.
4. ORDER QUANTITY: All sales orders will be subject to stock availability.
Only master case orders will be accepted for shipment to distribution centers.
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Customer prepacks/stickering will not be accepted as a standard business
practice. However, if an exception is made at Sony's sole discretion, such
prepacks/stickering will require fifteen business days to process and will be
subject to additional minimum quantities and handling charges.
5. FINANCE CHARGE/COSTS OF COLLECTION: A condition of credit is payment of
all purchases in accordance with the terms of sale. If Customer fails to pay
Sony for PlayStation Hardware when due, then, in addition to any other remedies
available to Sony allowed by law for that default, Customer will pay Sony an
additional monthly financing charge equal to the lesser of (a) one and one-half
percent (1.5%) or (b) the maximum monthly interest rate allowed by law, of any
portion of Customer's account not paid within terms stated on invoice,
chargeable during each month that payment remains outstanding and Sony's
reasonable expenses of collection, including but not limited to attorneys' and
experts' fees and court costs. The obligation is considered past due after
forty-five days (45) or in accordance with other terms stated on the invoice.
Notwithstanding the foregoing, such specified rate of interest shall not excuse
or be construed as a waiver of Licensee's obligation to timely provide any and
all payments owed to Sony hereunder.
6. TAXES: Prices for PlayStation Hardware exclude all taxes, including but
not limited to, sales, excise or use taxes. Customer shall pay all sales, use,
ad valorem, excise and/or any other taxes imposed on either party by virtue of
Customer's order, except for taxes based on Sony's net income. Sony will invoice
Customer for any of the taxes that Sony is legally obligated to collect from
Customer.
7. PRICES AND PAYMENT: Payments should be remitted to our lock box at:
Sony Computer Entertainment America
P.O. Box 91102
Chicago, Illinois 60693
Current prices are available on the Sony published price sheet for all active
catalog products. Sony shall have the right to change prices to Customer on any
product at any time, except with respect to orders which have been accepted by
Sony prior to such price modifications. Licensee shall be notified of any such
price change. Sony may change the prices for PlayStation Hardware included in a
previously accepted order by giving Customer prior notice. If Customer does not
wish to purchase PlayStation Hardware previously ordered and accepted by Sony
because of any price increase, then Customer may, as its sole remedy, cancel its
purchase, to the extent not previously fulfilled, by giving Sony notice within
ten (10) days of its receipt of a price change notice from Sony.
8. RESCHEDULING AND CANCELLATIONS: Requests for order rescheduling and
cancellations must be in writing and received by Sony according to the following
schedule:
<TABLE>
<CAPTION>
Time Frame Result
<S> <C>
Within 30 days of delivery date Purchase order may not be canceled or rescheduled
30-60 days from delivery date Purchase order may not be canceled but may be rescheduled
60-90 days from delivery date Purchase orders may be canceled and rescheduled
</TABLE>
Orders put on hold may be canceled at the discretion of Sony.
9. DELIVERY: Requests for specific shipping dates will be honored whenever
possible subject to existing circumstance, and Sony will use reasonable efforts
to meet them. Regardless of the date of actual shipment, Customer will not be
excused from its obligation to pay for PlayStation Hardware when shipped or from
any of its other obligations hereunder. SONY SHALL NOT BE LIABLE FOR ANY
DAMAGES, WHETHER INCIDENTAL, CONSEQUENTIAL OR OTHERWISE, FOR FAILURE TO FILL
ORDERS, DELAYS IN DELIVERY OR ANY ERROR IN THE FILLING OF ORDERS.
-25- CONFIDENTIAL
<PAGE> 26
10. METHODS AND POINT OF DELIVERY: Unless otherwise provided by the parties,
Sony will choose the carrier for shipping PlayStation Hardware. Sony's
responsibility for delivery will cease when carrier signs for shipment to
destination as specified. Sony may make partial shipments on Customer orders,
which shipments shall constitute separate sales and may be separately invoiced
and shall be paid for when due, without regards to subsequent shipments. Delay
on shipment or delivery of any particular installment shall not relieve
Customer of its obligation to accept the remaining installments. Regardless of
the party paying freight charges, all risk of loss or damage in transit will be
borne by Customer. All claims for damage to, or loss of, PlayStation Hardware
must be made by Customer directly to the carrier or the insurance company (as
the case my be).
11. TRANSPORTATION COSTS: Unless otherwise provided by the parties, the prices
for PlayStation Hardware will include the payment by Sony of ground
transportation costs but will exclude all other charges including, but not
limited to, charges for insurance, customs and special packaging. Orders
calling for drop shipments or other special handling will be assessed a 3%
handling charge. Charges for the difference between the cost of ground
transportation and the cost of any shipping method other than ground
transportation will be borne by Customer.
12. CLAIMS AND ADJUSTMENT: Claims for adjustments on short or otherwise
unsatisfactory merchandise due to fault of Sony must be made to Sony within
fourteen (14) days of receipt of shipment. In such situations, Sony shall have
the right to examine the applicable merchandise and shipping records at
Customer's location. If the prices for PlayStation Hardware sold to Customer
are prices which have been reduced based on Customer's representation that
Customer has complied with the terms of a Sony authorized sales program and
Customer fails to adequately comply with the terms thereof then, in addition to
any other remedies available to Sony under this Agreement or allowed by law for
that default, Sony may retroactively increase those prices to make them equal
to those prevailing for the quantities of PlayStation Hardware actually
purchased by Customer and Sony will invoice Customer for any resulting increase
in prices.
13. RETURNS AND REPLACEMENTS: Sony will accept returns of mis-shipped or
defective PlayStation Hardware for credit only with prior authorization from
Sony's corporate office and receipt of a Sony Return Authorization form. The
Customer should contact Sony Return Representative to obtain any additional
handling instructions. Customer should request return authorization in writing
or via facsimile to the address listed in the invoice. Any returns which are
received by Sony without a Sony Return Authorization form will be refused and
returned to Customer at Customer's expense. PlayStation Hardware returned is not
to exceed quantity authorized. All returns must have freight prepaid and no
C.O.D.'s will be accepted. Credit will be issued only after PlayStation Hardware
is inspected and approved and will be based on Customer's cost, less a fee for
repair, refurbishment, repackaging and restocking equal to 3%. Returns missing
original components will be charged back on a prorated basis.
Unauthorized Product Returns consist of PlayStation Hardware inadvertently
returned or returned in error to Sony. This category also includes cut-outs
which are no longer returnable, and PlayStation Hardware not originally
distributed by Sony. All Unauthorized Product Returns will be scrapped and no
credit will be issued unless Sony has prior written authorization to return it
freight collect. Unsaleable product, including counterfeit, promotional, used or
illegally imported PlayStation Hardware or empty jewel boxes and/or inserts
returned to Sony will be scrapped and no credit will be issued. All opened
video game software will be returned freight collect. Sony reserves the right
to charge a processing fee on any of the above products received by our returns
center.
From time to time, Sony may delete certain elements of the PlayStation
Hardware from its active catalog. Any such lists are printed on the Sony
current price sheet within the discontinued product section. No credit will be
issued for deleted product which is returned after the date specified in the
heading of each list.
14. CHANGES IN PRODUCTS AND POLICIES. Sony may at any time add, change or
cease
-26- CONFIDENTIAL
<PAGE> 27
making available any PlayStation Hardware without notice to Customer, and
Customer shall have no claim against Sony for failure to furnish PlayStation
Hardware of the model, design or type previously sold or for failure to install
modification in PlayStation Hardware previously sold. In addition, Sony may at
any time change its financial requirements or its warranty or service policies
without incurring any liability to Customer.
15. DEFAULTS: If Customer becomes delinquent in payment obligations or other
credit or financial requirements established by Sony, or if Customer is in
default of any of the terms or conditions hereof or of any agreement with Sony,
or if in the opinion of Sony, Customer's credit becomes impaired, Sony shall
have the following rights and remedies as well as those provided by applicable
law:
(a) Sony may declare all sums immediately due and payable, notwithstanding any
credit terms previously in effect.
(b) Sony may refuse any order placed by Customer.
(c) Sony may cancel any accepted orders or delay shipment of any order.
(d) Sony may require as a condition of continuing to do business with Customer,
that Customer execute a letter of credit, promissory note(s), security
agreement(s), financial statement(s) and such other Instruments as Sony,
in its sole discretion, deems necessary for its protection.
(e) If credit has been previously extended by Sony to Customer, and Sony elects
to make additional sales to Customer, Sony may require payment on a
cash-in-advance basis.
(f) In the event collection of sums due from Customer to Sony is referred to an
attorney or if suit is brought to collect such sums or to enforce rights of
Sony, Customer agrees to pay all costs and reasonable collection or
attorney's fees incurred in any collection suit or appellate proceeding and
in executing on any judgment based on Customer's obligations.
16. NON-EXCLUSIVE SALES: All sales are made to Customers on a non-exclusive
basis. Further, Sony shall have the right, from time to time at its option, to
supply PlayStation Hardware directly to consumers for promotional purposes.
17. LIMITED WARRANTY: The warranty cards enclosed with PlayStation Hardware
state Sony's limited warranty to end users applicable to those elements of the
PlayStation Hardware. If PlayStation Hardware is not accompanied by warranty
cards, Sony's then current warranty applicable to those elements of the
PlayStation Hardware will apply. All repairs to or replacements of PlayStation
Hardware after the expiration of the applicable warranty period will be
Customer's responsibility.
EXCEPT FOR THE FOREGOING WARRANTIES, SONY HEREBY DISCLAIMS AND EXCLUDES ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ANY WARRANTY
WITH REGARD TO ANY CLAIM OF INFRINGEMENT THAT MAY BE PROVIDED IN SECTION
2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATE
STATUTE RESPECTING PLAYSTATION HARDWARE IS EXPRESSLY EXCLUDED, SONY HEREBY
DISCLAIMS ANY REPRESENTATION OR WARRANTY THAT PLAYSTATION HARDWARE IS COMPATIBLE
WITH ANY COMBINATION OF NON-SONY PRODUCTS USED IN CONNECTION WITH THE
PLAYSTATION HARDWARE.
18. SPECIAL CONDITIONS OF SALE: Sony reserves the right to refuse to sell
PlayStation Hardware to any Customer that has sold, or is currently selling
promotional, bootleg, or counterfeit PlayStation Hardware or software.
-27- CONFIDENTIAL
<PAGE> 28
19. PROOF OF DELIVERY: Sony will accept requests for a proof of delivery (a
"P.O.D.") request up to sixty (60) days after the invoice date. Sony reserves
the right to charge Customers a service charge or handling fee for each P.O.D.
requested by Customer.
20. CERTIFICATION: Customer certifies that it has read the sections entitled
Limited Warranty and Limitation of Liability contained in the License Agreement
and these Terms and Conditions, that they have been explicitly negotiated and
that they have become part of the basis of its bargain with Sony.
-28- CONFIDENTIAL
<PAGE> 29
EXHIBIT B
COMPENSATION
1. NONREFUNDABLE PAYMENT - The Nonrefundable Payment [***] shall be [***].
[2. ***
a.
b.
3. ***]
* CONFIDENTIAL TREATMENT REQUESTED
-29- CONFIDENTIAL
<PAGE> 30
EXHIBIT C
GUIDELINES FOR THIRD PARTY USE OF PLAYSTATION(TM) TRADEMARK & LOGOS
These guidelines are meant to assist third parties in complying with legal
requirements regarding the use of the PlayStation trademark and logos. ALL
PRINTED MATERIALS USING THE PLAYSTATION TRADEMARK AND LOGOS MUST BE SUBMITTED
FOR PRIOR WRITTEN APPROVAL. THE FOLLOWING IS PROVIDED FOR GUIDANCE ONLY.
1. SONY COMPUTER ENTERTAINMENT TRADEMARKS AND LOGOS
a. Third Parties may use the PlayStation and PS logos on compatible
products, documentation and advertising materials.
b. Third Parties may not use the Sony logo or trademark in any
circumstance.
2. TRADEMARK USE
a. Trademarks must always be legible.
b. Trademarks must always be used as adjectives in conjunction with the
product, e.g., for use on your PlayStation game console.
c. Trademarks must not be used in plural (e.g., PlayStations) or
possessive form (e.g., PlayStation's) or as a noun (e.g., the
PlayStation).
d. Trademarks must always be given correct logo treatment, or in text,
the "P" and "S" in PlayStation must be capitalized.
3. TRADEMARK NOTICE SYMBOLS AND CREDIT LINES
a. Use the trademark symbol (TM) unless instructed to use (R). A
trademark symbol should follow all headline and prominent use of
trademarks and logos, and should appear at least once, preferable the
first time used, in any long copy.
Place the trademark symbol on the right shoulder or at the foot of
the trademark or logo.
Example: PlayStation(TM)
b. Credits should state that the product is Licensed by Sony Computer
Entertainment America and that PlayStation and the PlayStation logos
belong to Sony Computer Entertainment Inc.
Example: Licensed by Sony Computer Entertainment America for use
with the PlayStation game console. PlayStation and the
PlayStation logos are trademarks of Sony Computer
Entertainment Inc.
4. MISUSE OF THE PLAYSTATION TRADEMARK AND LOGOS
The PlayStation trademark and logos are valuable property rights. If you
misuse them, you may be in breach of your License Agreement or you may be
liable for trademark infringement, unfair competition or passing off.
Please treat them properly. If you have any questions please contact the
Sony Interactive Entertainment Inc. Legal and Business Affairs department.
-30-
CONFIDENTIAL
<PAGE> 31
AMENDMENT #1 TO
SALE AND LICENSE AGREEMENT
Amendment, dated as of February 6, 1997 between Sony Computer Entertainment
America, a division of Sony Computer Entertainment America Inc. (formerly known
as Sony Interactive Entertainment Inc.), with offices at 919 E. Hillsdale
Boulevard, 2nd Floor, Foster City, CA 94404 ("Sony") and The Lightspan
Partnership, Inc., with offices at 2382 Farsday Avenue, Suite 300, Carlsbad, CA
92008-7218 ("Licensee") to the Agreement dated as of January 26, 1996 between
Sony and Licensee (the "Agreement").
1. Section 3.4 of the Agreement is hereby amended and restated in its entirety
to read as follows:
"3.4 DEMONSTRATION UNITS OF PLAYSTATION HARDWARE. Sony may, from time to
time at the request of Licensee and subject to Sony's approval, supply Licensee
with units of PlayStation Hardware for demonstration purposes. Any
demonstration units of PlayStation Hardware provided to Licensee by Sony shall
be used by Licensee for demonstration purposes only in order for Licensee to
demonstrate the Licensed Products and PlayStation Hardware to the School Market
on a limited trial basis. Licensee will provide to Sony a written accounting of
the use of these demonstration systems in order to substantiate the
effectiveness of the demonstration units in obtaining sales. All terms and
conditions of this Agreement, including without limitation the terms and
conditions set forth in Exhibit A, shall apply with respect to any
demonstration units."
2. Section 16.7 of the Agreement is hereby amended and restated in its
entirety to read as follows:
"16.7 GOVERNING LAW; CONSENT TO JURISDICTION. This License Agreement shall
be governed by and interpreted in accordance with the laws of the State of
California, excluding that body of law related to choice of laws, and of the
United States of America. Any action or proceeding brought to enforce the terms
of this License Agreement or to adjudicate any dispute arising hereunder shall
be brought in the courts of the County of San Mateo, State of California (if
under State law) or the Northern District of California (if under Federal law).
Each of the parties hereby submits itself to the exclusive jurisdiction and
venue of such courts for purposes of any such action and agrees that any
service of process may be effected by delivery of the summons in the manner
provided in the delivery of notices set forth in Section 16.1 above."
3. Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects. This
Amendment all be governed by and construed in accordance with the laws of the
State of California.
SONY COMPUTER ENTERTAINMENT AMERICA THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ P. Harrisen By: /s/ Robert Greene
------------------------------- ----------------------------
Name: P. Harrisen Name: Robert Greene
------------------------------ --------------------------
Title: VP Title: SVP
----------------------------- -------------------------
Date: 5/8/97 Date: 5/1/97
------------------------------ --------------------------
CONFIDENTIAL
<PAGE> 32
AMENDMENT #2 TO
SALE AND LICENSE AGREEMENT
Amendment, dated as of May 28, 1997 between Sony Computer Entertainment America,
a division of Sony Computer Entertainment America Inc. (formerly known as Sony
Interactive Entertainment Inc.), with offices at 919 E. Hillsdale Boulevard,
2nd Floor, Foster City, CA 94404 ("Sony") and The Lightspan Partnership, Inc.,
with offices at 2382 Faraday Avenue, Suite 300, Carlsbad, CA 92008-7218
("Licensee") to the Sale and License Agreement dated as of January 26, 1996
between Sony and Licensee (the "Agreement").
WHEREAS, Sony has licensed to Licensee the right to acquire and distribute
units of the PlayStation Game Console to the School Market pursuant to the
Agreement;
WHEREAS, [***]
WHEREAS, [***]
WHEREAS, [***]
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sony
hereby agree as follows:
1. CREDIT ON UNITS PURCHASED. Upon full execution of this Amendment, Sony
agrees to credit the amount of [***] to Licensee, [***] Licensee shall use best
efforts to purchase the Forty Thousand (40,000) units of the PlayStation Game
Console subject to the increase set forth above by no later than the end of
this fiscal year, which shall end on March 31, 1998. [***]
[2. ***]
-1-
CONFIDENTIAL
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 33
3. Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects. This
Amendment shall be governed by and construed in accordance with the laws of the
State of California.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed
as of the day and year first written above.
SONY COMPUTER ENTERTAINMENT AMERICA THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ Kazuo Hirai By: /s/ Robert Greene
------------------------------- ---------------------------
Name: Kazuo Hirai Name: Robert Greene
------------------------------ --------------------------
Title: EVP/COO Title: SVP
----------------------------- -------------------------
Date: 7/21/97 Date: 7/10/97
------------------------------ --------------------------
NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES
-2-
CONFIDENTIAL
<PAGE> 34
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
This Third Amendment ("Third Amendment") to the Sale and License Agreement
dated January 26, 1996, as twice amended (the "License Agreement") is entered
into this twenty first day of December, 1998, by and between Sony Computer
Entertainment America Inc. ("Sony") and The Lightspan Partnership, Inc.
("Licensee").
1. All definitions contained in the License Agreement shall be
incorporated herein.
2. Section 1.10 shall be deleted and replaced with:
1.10 "PlayStation Hardware" means the finished hardware components to
be provided to Licensee by Sony, including (i) the PlayStation Game
Console and all peripherals and accessories customarily packaged
therewith (the "PlayStation Console"), (ii) the [***] and (iii) the
Peripherals.
3. Section 1.12 shall be added as follows:
1.12 [***]
4. Section 1.13 shall be added as follows:
1.13 "Peripherals" shall mean those PlayStation console accessories
(e.g. memory cards) that are customarily sold separately by Sony.
5. Section 1.14 shall be added as follows:
1.14 "Lightspan PlayStation Licenses" shall mean the PlayStation
software licenses that have been and are currently marketed and
distributed by Licensee to the School Market.
6. Section 3.1 shall be amended to exclude any [***]
7. Section 3.1.1 shall be added as follows:
3.1.1 Sony may sell the [***] to Licensee; Licensee's purchase of
the [***] shall be governed by Exhibit A and the terms and conditions of this
Agreement. Licensee acknowledges and agrees that (i) Sony's development and
manufacturing of the [***] is experimental, (ii) notwithstanding anything else
contained in this Agreement, Sony makes no representations or warranties with
respect to the [***] and (iii) Sony may discontinue the manufacture and sale to
Licensee of [***] at any time, without notice, in Sony's sole discretion.
8. Sections 3.3 and 3.4 shall be amended to exclude the [***]
9. Section 4.1 shall be amended to exclude the [***]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 35
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
DECEMBER 21, 1998
PAGE 2
10. Section 4.1.1 shall be added as follows:
4.1.1 The purchase price for the Communications Devices and
Peripherals shall be determined by Sony and are subject to change
without notice. All payments to Sony for the Communications Devices
and Peripherals shall be made in United States currency drawn on a
United States bank, unless otherwise specified between the parties.
11. Each reference to "PLAYSTATION GAME CONSOLE" in section 10.4.2 of the
License Agreement shall be hereby amended to read "PLAYSTATION HARDWARE."
12. Exhibit B shall be amended as follows:
1. The Nonrefundable Payment for units [***] shall be calculated
per the method of calculation set forth in this Exhibit B
and the Second Amendment to the License Agreement--less [***]
2. Not amended.
3. Not amended.
[4. ***]
[The remainder of this page left intentionally blank]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 36
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
DECEMBER 21, 1998
PAGE 3
13. Except as are expressly amended herein, all terms and conditions of
the License Agreement shall remain in full force and effect, and are hereby
ratified by the parties hereto.
THE LIGHTSPAN PARTNERSHIP INC. SONY COMPUTER ENTERTAINMENT AMERICA INC.
By: /s/ Bob Greene By: /s/ Kazuo Hirai
------------------------ -----------------------
(Name) Bob Greene (Name) Kazuo Hirai
(Title) Senior VP (Title) EVP/COO
(Date) 1/4/99 (Date) 1/14/99
[Neither an offer nor an agreement until executed by both parties hereto]
<PAGE> 37
FOURTH AMENDMENT TO SALE AND LICENSE AGREEMENT
This Fourth Amendment (the "Fourth Amendment") to Sale and License
Agreement, as previously amended, (the "Agreement") is entered into this twenty
fifth day of May, 1999, to be effective the 26th day of January, 2000 (the
"Effective Date"), by and between Sony Computer Entertainment America, Inc.
(hereinafter "SCEA"), and The Lightspan Partnership, Inc. ("Licensee").
RECITALS
WHEREAS, SCEA and Licensee entered into the Agreement dated January 26,
1996, as subsequently amended; and
WHEREAS, SCEA and Licensee wish to extend the Agreement, as modified below.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and for good and valuable consideration received, beginning on the Effective
Date the parties hereto agree as follows:
1. REFERENCES. All references in the Agreement to Sony Computer
Entertainment America as "Sony" shall be changed to "SCEA".
2. EXTENSION OF TERM. The Term of the Agreement is hereby extended for a
term of two (2) years until January 26, 2002 and shall renew automatically for
one (1) year periods unless and until terminated by either party upon ninety
(90) days written notice.
3. NOTICES. Section 2 of the Term Schedule shall be revised as follows:
Sony Computer Entertainment America The Lightspan Partnership, Inc.
919 East Hillsdale Blvd., 2nd Fl. 10140 Campus Point Drive
Foster City, CA 94404 San Diego, CA 92121
Attn: Anne Chen Attn: Carl Zeiger
Fax: (650) 655-8001 Fax: (619) 824-8001
With a copy to: With a copy to:
Sony Computer Entertainment America Etsuko Adelman
919 East Hillsdale Blvd., 2nd Fl. Fax: (650) 631-9427
Foster City, CA 94404
Attn: Legal & Business Affairs
Fax: (650) 655-5901
4. RATIFICATION. Except as is expressly modified or supplemented herein,
SCEA and Licensee hereby confirm and ratify the Agreement as though fully set
forth herein.
SONY COMPUTER ENTERTAINMENT AMERICA, INC. THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ Masayuki Chatani By: /s/ Carl Zeiger
------------------------------------- -------------------------------
(Name) Masayuki Chatani (Name) Carl Zeiger
(Title) VP of Business & Technology (Title) President
(Date) 6/14/99 (Date) 6/10/99
[Neither an offer nor an agreement until executed by both parties hereto]
<PAGE> 38
[SONY COMPUTER ENTERTAINMENT LETTERHEAD]
August 10, 1999
VIA FACSIMILE ONLY
Robert Greene
Lightspan Partnership, Inc., The
10140 Campus Point Drive,
San Diego, CA 92121
Re: Modification of Territory in License Agreement
Dear Mr. Greene:
SCEA is pleased to advise you that, effective immediately, your Licensed
Territory per the License Agreement shall be expanded to include the Republic
of Mexico, under the express condition that all Licensed Products -- whether
sold in the US, Canada or, now, in Mexico -- comply with all applicable laws
and regulations (see, License Agreement).
SCEA will review and approve all printed materials for Mexico per our
normal procedures, however the Licensed Publisher is responsible for the
accuracy of any text translation. In the event that SCEA makes any changes to
our standard packaging guidelines to reflect local language issues it will be
communicated through an amendment to the Source Book in due course.
We regret that we cannot, at this time, expand your territory to include
any other countries in Central or South America. When we can do so, we will
advise you promptly in writing.
Please contact John Miller if you have any questions regarding this.
Very truly yours,
/s/ Phil Harrison
Phil Harrison
VP 3rd Party
cc: John Miller
Joanna Krouskup
<PAGE> 1
EXHIBIT 10.32
*Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
Omitted portions have been filed
separately with the Securities and
Exchange Commission
October 29, 1999
By Telecopy
Daniel Tierney
Vice President, Business Development
CINAR Corporation
1055, boul. Rene-Levesque Est.
Montreal, Quebec H2L 4S5
Canada
RE: STRATEGIC INITIATIVES
- --------------------------------------------------------------------------------
Dear Dan:
In accordance with our discussions, this letter describes the understandings and
commitments that have been reached between CINAR Corporation, a corporation
organized under the laws of Canada ("CINAR"), and The Lightspan Partnership,
Inc., a California corporation ("Lightspan") with respect to the development and
execution of several potential strategic initiative projects (each, a "Strategic
Initiative") between CINAR and Lightspan (the "Letter of Understanding").
The parties acknowledge and agree that it is their good faith intention to
pursue each of the first, second and third Strategic Initiatives described below
to completion. Following the execution of this Letter of Understanding, the
parties agree to negotiate in good faith a detailed agreement for each of the
first, second and third Strategic Initiatives described below and for any other
Strategic Initiatives the parties may hereafter agree upon as described below.
The parties will not move forward with the production phase of any Strategic
Initiative unless and until they have both executed and delivered a detailed
agreement with respect to the Strategic Initiative.
Pursuant to a separate stock purchase agreement ("Stock Purchase Agreement") to
be entered into between CINAR and Lightspan concurrently with the execution of
this Letter of Understanding, Lightspan has agreed to sell and CINAR has agreed
to purchase certain shares of certain Lightspan stock. Pursuant to a warrant
issued by Lightspan to CINAR (the "Warrant") concurrently with the execution of
this Letter of Understanding, as described more fully below, Lightspan will
grant to CINAR warrants to purchase 500,000 shares of its Series E Preferred
Stock at an exercise price per share of five dollars ($5.00) so that, in the
event that all of the warrants are exercised by CINAR, Lightspan will receive
two million five hundred thousand dollars ($2,500,000) in gross proceeds. The
warrants shall be exercisable by CINAR only upon the occurrence of certain
conditions with respect to the Strategic Initiatives as described in sections
1.1.8 and 1.2.8 and 1.3 below and in the Warrant and shall be subject to the
terms and conditions set forth in the Warrant .
<PAGE> 2
1. Strategic Initiatives
1.1. First Strategic Initiative--"Convergence" TV Series for Traditional
TV and "Broadband" Cable Deployment
1.1.1. Project Name: [***]
1.1.2. Project Description
CINAR and Lightspan will work together to create two versions of a
state of the art "convergence" television series that is specifically
designed to combine Internet (i.e. interactive) content and
activities with a linear animated television show (the "Series"). One
version of the Series will be designed and produced for "broadband"
distribution via cable operator set top boxes. The other version of
the Series will be designed and produced for standard television
distribution and narrow band Internet connectivity. The parties will
produce a minimum of twenty-six (26) episodes of each version of the
Series. The internet content for the Series will be located
exclusively at Lightspan.com. Notwithstanding the above, the parties
acknowledge that they may, subject to their mutual agreement, allow a
third party broadcaster or other entity to develop and host a limited
character internet site for the purpose of marketing the Series. The
Series hopefully will, but will not necessarily, feature characters
developed by Lightspan for use in its "Achieve Now" educational
software products or characters from other similar Lightspan
products.
All material decisions with respect to the development and production
of the Series--including, but not limited to, the decision as to
whether the Series will feature characters used in Lightspan's
"Achieve Now" educational software products, or characters from other
similar Lightspan products --will be subject to the mutual agreement
of the parties.
1.1.3. Division of Production Responsibilities
CINAR will take primary responsibility for: (i) the selection and
development of a property on which to base the Series (possibly a
Lightspan character property, as mentioned above); (ii) the creation
of a bible for the Series, describing, in considerable detail,
characters, principal story lines, art direction and other creative
elements of the Series (the "Bible"); (iii) the development of
scripts for all episodes in the Series; and (iv) the development and
production of all linear content intended for viewing on broadcast or
cable television or via set top cable boxes and all animated
character sequences required for Internet or "interactive" content
for the Series. Lightspan will have approval rights with respect to
the same.
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the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE> 3
Lightspan will take primary responsibility for the development of all
interactive portions of the Bible for the Series and for the
production of all Internet or "interactive" content for the Series
other than that which CINAR is principally responsible for. CINAR
will have approval rights with respect to the same. It is
contemplated that a portion of the interactive production may,
subject to the mutual agreement of the parties, occur at
CINAR-Online's offices in Montreal under the supervision of Lightspan
in order to benefit from institutional financial incentives.
Neither party will have any obligation with respect to the
development or financing of the Series beyond the development and
financing of the Bible for the Series as provided herein unless the
parties have executed a more detailed agreement for the Series [***].
The parties agree to put a team of company representatives together
for at least two days during the month of [***] to commence
negotiation of the more detailed agreement and to use their best
efforts to pursue completion of negotiations of the agreement
expeditiously thereafter.
1.1.4. Division of Sales and Marketing Responsibilities
CINAR will take primary responsibility for all narrow band television
sales, (domestic and international), including, but not limited to,
all network, cable and syndication sales. CINAR will also take
primary responsibility for all international broadband distribution
sales and will seek out international broadband media partners to act
as investors in the broadband version of the Series. If the Series is
not based on characters used in Lightspan's "Achieve Now" educational
software products, or characters from other similar Lightspan
products CINAR will further take primary responsibility for the
exploitation of merchandise and all other ancillary rights related to
the Series.
Lightspan will take primary responsibility for all domestic (i.e.
United States) broadband distribution sales and will seek out
domestic broadband media partners to act as investors in the
broadband version of the Series.
1.1.5. Ownership
CINAR and Lightspan [***] underlying property rights as well as
rights to the Series [***].
1.1.6. Production Financing
The detailed agreement for the Series will include a production
budget of estimated expenses with respect to the development and
production of all aspects of linear TV and Internet or "interactive"
elements for both versions of the Series (the "Production Budget").
CINAR and Lightspan will be responsible for [***] of the Production
Budget for the Series. The
*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE> 4
Production Budget will be subject to the mutual approval of the
parties. Unless the parties otherwise agree, they will not "green
light" production of the Series until such time as they have achieved
total financial commitments of at least [***] of the agreed upon
Production Budget in form and substance satisfactory to the parties,
thereby effectively reducing each party's maximum financial
responsibility with respect to the series to [***] of the Production
Budget. The Production Budget shall include a development budget for
the Bible, the maximum amount of which shall be [***], and the
parties shall share in the financing of the same [***].
1.1.7. Division of Revenues
Distribution fees, commissions and cost recoupment arrangements shall
be subject to further negotiations and shall be set forth in the
detailed agreement for the Series. All net profits from the Series
shall [***]. CINAR will not share in advertising, sponsorship or any
other revenues from Lightspan.com but will be entitled to share in
[***].
1.1.8. Timeline/ Next Steps
CINAR and LIGHTSPAN agree that time is of the essence with respect to
the development and production of the Series and agree that they work
together in good faith with the goal of completing, no later than
[***].
[***]
[***]
[***]
[***]
The parties further agree that it is their mutual goal that the first
episode of the traditional television version of the Series shall be
complete and ready for broadcast no later than [***]. The parties
shall set forth a
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the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE> 5
detailed schedule for production and distribution of the Series in
the detailed agreement for the Series.
1.1.9. Lightspan Warrants
CINAR's right to exercise 200,000 of the shares (or 150,000 as the
case may be) subject to the Warrant shall be subject to and vest only
upon the occurrence of the following with respect to the Series:
(i) Upon completion of [***] the Series - 50,000 shares;
(ii) Upon [***] the Series [***] - 75,000;
(iii) Upon [***] the Series - 75,000 shares.
It is noted that if the character properties used as basis for the
Series are not characters developed by Lightspan for use in its
"Achieve Now" educational software products, or other similar
Lightspan products the number of shares for each of Section 1.1.9(ii)
and 1.19(iii) will be 50,000 instead of 75,000 respectively.
1.2. Second Strategic Initiative--CINAR and HighReach Content [***]. Pre-K
Portal
1.2.1. Project Name: [***]
1.2.2. Project Description
Lightspan with the assistance of HighReach Learning ("HRL"), a
wholly-owned subsidiary of CINAR, shall work together to create [***]
a Pre-K educational portal ("Portal"), which will prominently feature
HRL as the premier daycare curriculum company brand featured on the
site. The Portal will include Lightspan Internet tools and content
appropriate for use by pre-K caregivers, parents and parents of pre-K
children and appropriate for pre-K caregivers and parents to engage
in. The portal may also include age appropriate CINAR animated and
live action character properties (subject to existing and future
agreements) and HRL content. HRL will continue to maintain and
further develop its own Internet site which will be primarily for the
distribution of the HRL curriculum products and content, e-commerce,
as well as for the presentation of general corporate and promotional
materials. The Portal will otherwise serve as the principal pre-K
educational portal entry for HRL.
CINAR and HRL will be entitled to consult with respect to and approve
all material decisions with respect to the use and depiction of CINAR
properties and HRL content in the Portal.
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the Securities and Exchange Commission. Confidential treatment has been
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<PAGE> 6
Neither party will have any obligation with respect to the
development of the Portal unless the parties have executed a more
detailed agreement with respect to the development of the Portal by
[***]. The parties agree to put a team of company representatives
together for at least two days during the month of [***] to commence
negotiation of the more detailed agreement and to use their best
efforts to pursue completion of negotiations of the agreement
expeditiously thereafter.
The detailed agreement with respect to the Portal will include
certain exclusivity provisions addressing: [***], provided, however,
that CINAR will not in any event be restricted from licensing the
CINAR properties [***].
1.2.3. Division of Production Responsibilities
Lightspan will have principal responsibility for all aspects of the
development of the Portal other than the development of HRL content
for the Portal. HRL will actively consult with Lightspan on the
design and development of the Portal and will take primary
responsibility for the contribution of such HRL content for the
Portal as the parties agree is desirable, from time to time. The
detailed agreement for the Portal will include a schedule detailing
the key representatives from CINAR, HRL and Lightspan who will work
together with respect to the development and production of the Portal
and the HRL Portal content as well as the minimum level of
contribution anticipated to be required of CINAR and HRL
representatives
1.2.4. Division of Marketing Responsibilities
Lightspan shall be responsible for all general marketing with respect
to the Portal. CINAR will actively assist in the marketing of the
Portal by promoting the Portal through the inclusion of certain CINAR
animation and live action properties on the site and through its HRL
subsidiary and its products, all on terms to be more fully described
in a marketing plan to be included in the long form agreement with
respect to the Portal. Lightspan will have access to the HRL database
and HRL will have access to Lightspan's Portal database for
co-marketing purposes.
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the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE> 7
1.2.5. Ownership
CINAR and HRL properties and content used in the Portal will be owned
by [***] but licensed to [***] in accordance with terms to be
included in the detailed agreement for the Portal. As between the
parties, Lightspan will otherwise own all other intellectual property
rights with respect to the Portal.
1.2.6. Production Financing
Unless the parties otherwise agree, CINAR, HRL and Lightspan will
each bear the costs they incur in the fulfillment of their own
responsibilities with respect to the development and production of
the Portal, as described above. Notwithstanding the above, it is
understood that HRL will not be obligated to dedicate more than the
equivalent of one full-time position to work with Lightspan on the
Portal. Out of pocket costs to be incurred by HRL in connection with
the Portal shall be subject to negotiation by the parties.
1.2.7. Division of Revenues
To the extent to which Lightspan and CINAR agree that they will make
HRL products (or an Internet version of them) available for sale on
the Portal, they will also agree upon a mutually acceptable way of
dividing revenues from the sale of such products. Lightspan will
otherwise be entitled to [***] derived from the [***], including, but
not limited to any advertising or sponsorship revenues derived in
connection with [***] and HRL will be entitled [***] derived from
[***].
1.2.8. Timeline/ Next Steps
The parties shall set forth in the detailed agreement for the Portal
a detailed schedule for the initial work the parties will need to
work on together in connection with the development of the Portal.
The parties acknowledge that their mutual goal is to launch the
Portal by the end of [***]. The parties further agree that the
following steps shall take place in sequential order:
i) Step One. Negotiation and execution of a detailed agreement
for the Portal by [***];
ii) Step Two. After the completion of step one, the commencement
of joint production efforts by the parties for the Portal
and
iii) Step Three. After the completion of Step One and Step Two,
all other efforts required of the parties for the official,
advertised launch of the Portal.
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the Securities and Exchange Commission. Confidential treatment has been
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<PAGE> 8
1.2.9. Lightspan Warrants
CINAR's right to exercise the warrants to purchase [***] of the
shares subject to the Warrant shall be subject to and vest only upon
the occurrence of the following with respect to the Portal:
(i) Upon the [***] the Portal -- 100,000 shares.
(ii) Upon the [***] the Portal -- 100,000 shares.
1.2.10. Term
The initial term of the detailed agreement with respect to the Portal
shall be [***]. Provided that Lightspan meets certain success
criteria with respect to the Portal to be specified in the detailed
agreement for the Portal, Lightspan will have an option to extend the
initial term for an additional period of [***]. Other extensions of
the term shall be subject to performance criteria to be described in
the detailed agreement.
1.3. Third Strategic Initiative
The parties agree that the third Strategic Initiative shall be either
[***] Within months of the date of this Letter of Understanding, the
parties shall negotiate and conclude a more detailed Agreement
setting forth the rights and responsibilities of the parties with
respect to the development and exploitation of the third Strategic
Initiative. CINAR's rights to exercise the remaining [150,000] shares
of Lightspan stock (or [100,000] shares as the case may be pursuant
to Section 1.1.9) subject to the Warrant and shall be tied to the
signature of such agreement and the completion of certain development
milestones with respect to the third Strategic Initiative, all on
terms to be included in the detailed agreement for the third
Strategic Initiative. The parties agree to put a team of company
representatives together for at least two days during the month of
[December 1999] to commence negotiation of the more detailed
agreement for the Third Strategic Initiative and to use their best
efforts to pursue completion of negotiations of the agreement
expeditiously thereafter.
2. Other Strategic Initiatives -
The parties have agreed, to negotiate in good faith a distribution
arrangement whereby CINAR's Edusoft subsidiary would distribute in
international markets (other than Japan) Lightspan's "Achieve Now"
software products (Edusoft would be responsible for the localization
of "Achieve Now" for those markets). The parties
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<PAGE> 9
further agree to put a team of company representatives together for
at least two days within [***] months of signature of the Letter of
Understanding to commence negotiation of a more detailed agreement
regarding the distribution of Lightspan's Achieve Now software
products by Edusoft and to use their best efforts to pursue
completion of negotiations of the agreement expeditiously thereafter.
Furthermore the parties will work together to develop other Strategic
Initiatives and have agreed, in principal, to enter into one or more
other Strategic Initiatives which may include the following:
o Strategic co-marketing arrangements between the parties;
o The distribution in the U.S. of certain EduSoft ESL products
for the K-8 school market.
3. Warrant
The execution and delivery of the Warrant by CINAR and Lightspan is a
condition to the execution and delivery of this Letter of
Understanding by CINAR and Lightspan and a condition precedent to
each of CINAR and Lightspan performing its obligations hereunder.
Each of CINAR and Lightspan understands and agrees that the warrants
shall vest and become exercisable pursuant to the terms and
conditions set forth in the Warrant.
4. Prohibition on Other Discussions
CINAR agrees that it will not enter into negotiation with any third
party with respect to an initiative that would be similar to or
competitive with the first and/or second Strategic Initiatives set
forth above until the earlier [***] with respect to such initiatives
or the date [***] from the date of this letter of understanding.
5. Press Releases
The parties shall work together to develop and release an initial
joint press release with respect to the matters described in this
Letter of Understanding and such additional press releases with
respect to Strategic Initiatives as the parties hereafter deem
appropriate. All releases with respect to the Strategic Initiatives
shall be subject to the approval of parties.
6. Letter of Understanding
It is agreed and understood that the parties shall in good faith
negotiate a detailed agreement for the above-mentioned strategic
initiatives, which will set out further the business arrangements
between CINAR and Lightspan with regards to the Strategic
Initiatives. In the meantime, this Letter of Understanding shall be
binding
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the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE> 10
upon the parties; provided, however, that this Letter of
Understanding shall not be binding on either party and shall in all
respects be deemed null and void unless this Letter of Understanding,
the Stock Purchase Agreement, the Warrant and all documentation
related thereto are all fully executed and delivered by both CINAR
and Lightspan by close of business, Thursday October 28, 1999.
7. Assignment
The rights of CINAR and of Lightspan pursuant to this Letter of
Understanding and the detailed agreements referred to in Sections
1.1.3, 1.2.2 and 1.3 shall be assignable, without the other party's
consent to wholly owned affiliates of CINAR or wholly owned
affiliates of Lightspan as the case may be.
8. Venue/ Applicable Law
This Letter of Understanding shall be deemed entered into in San
Diego, California and its terms shall be subject to and interpreted
under the laws of California.
If the foregoing accurately represents our mutual agreement, please so indicate
by signing a copy of this Letter of Understanding where indicated below and
returning it to us for our signature. When signed by both parties, this Letter
of Understanding will be effective as of the date first set forth above.
We're excited by the prospect of working with you on these terrific initiatives.
Very truly yours,
Merritt Farren
ACCEPTED AND AGREED:
CINAR LIGHTSPAN
By: By:
--------------------------------- ---------------------------------
Its: Its:
-------------------------------- --------------------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 28, 2000, with respect to the financial
statements of The Lightspan Partnership, Inc., and October 28, 1999, with
respect to the financial statements of Academic Systems Corporation, in
Amendment No. 4 to the Registration Statement (Form S-1 No. 333-90103) and the
related prospectus of The Lightspan Partnership, Inc. for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
San Diego, California
February 6, 2000
