<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 0-20842
-------
TRO LEARNING, INC.
------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-3660532
- -------- ----------
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification Number)
1721 Moon Lake Blvd., Suite 555 Hoffman Estates, IL 60194
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 781-7800
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
</TABLE>
Common Stock, Par Value $.01 Per Share
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
----
The number of shares of the Registrant's common stock, par value $.01 per share,
outstanding as of December 15, 1998 was: 6,446,511 shares.
The aggregate market value of common stock (based on the closing price on
December 15, 1998) held by non-affiliates of the Registrant was approximately
$38,640,000.
Index for exhibits is located on page 50.
This document contains 52 pages.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on April 6, 1999 (the "1999 Proxy Statement") is
incorporated herein by reference in Part III of this Form 10-K. Pursuant to
Regulation 14A under the Securities Exchange Act of 1934, the 1999 Proxy
Statement will be filed with the Securities and Exchange Commission within
120 days after the close of the Company's fiscal year.
NOTE REGARDING FORWARD LOOKING INFORMATION
This Form 10-K contains forward-looking statements identified by the use of
"believes", "expects", "anticipates", and similar expressions. Such statements
are subject to risk and uncertainties that could cause actual results to differ
from those contemplated by the forward-looking statement. Such risks and
uncertainties include any change in the market acceptance of the Company's
products and services, the risk of failure of the Company's technology to remain
at market standards, the risk of the Company being able to finance its business
operations, and other similar business and market risks. Readers are cautioned
not to place undue reliance on such forward-looking statements.
2
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1998
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business...................................................................4
Item 2. Facilities................................................................14
Item 3. Legal Proceedings.........................................................14
Item 4. Submission of Matters to Vote of Security Holders.........................15
Item 4A. Executive Officers of the Registrant......................................15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......18
Item 6. Selected Consolidated Financial Data......................................19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................20
Item 8. Financial Statements and Supplementary Data...............................29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................49
PART III
Item 10. Directors and Executive Officers of the Registrant........................49
Item 11. Executive Compensation....................................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management............49
Item 13. Certain Relationships and Related Transactions............................49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........50
Signatures ..........................................................................52
</TABLE>
3
<PAGE>
TRO LEARNING, INC.
FORM 10-K
FISCAL YEAR ENDED OCTOBER 31, 1998
PART I
- -------------------------------------------------------------------------------
ITEM 1. BUSINESS
OVERVIEW:
TRO Learning, Inc. (the Company) is a leading developer and marketer of
PC-based, interactive, self-paced instructional systems. Offering more than
2,000 hours of comprehensive academic and applied skills courseware designed
for adolescents and adults, the Company's PLATO-Registered Trademark-
Learning Systems are marketed to middle schools and high schools, colleges,
job training programs, correctional institutions, military education
programs, and corporations. The PLATO Learning System is delivered via local
area networks, CD-ROM, the Internet and private Intranets.
The Company's wholly-owned operating subsidiary is The Roach Organization,
Inc. (TRO). TRO has two wholly owned subsidiaries, one in Canada, TRO
Learning (Canada), Inc., and one in the United Kingdom, TRO Learning (UK) Ltd.
COMPANY HISTORY:
The Company was incorporated in 1989 when an investor group acquired the
principal business of the Training and Education Group of Control Data
Corporation. In December 1992, the Company became publicly held and is traded
on the NASDAQ-NMS exchange under the symbol TUTR.
During fiscal 1992, the Company discontinued two businesses, the NASD testing
center business and the end user computer training distribution business. In
addition, in September 1993, the Company entered into a Certification and
Testing Services Agreement with Sylvan Learning Systems (SLS), whereby SLS
agreed to assume and perform the Company's rights and obligations under its
Certification and Testing Services contracts.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews, and cabin personnel)
and will focus exclusively on its PLATO-Registered Trademark- brand going
forward.
PRODUCTS AND SERVICES:
The Company's products offer educators and trainers an effective supplement
or alternative to traditional, instructor-led education. PLATO-Registered
Trademark- is a computer-based instructional system designed to enhance the
learning process and help adolescent and adult learners reach their fullest
potential. PLATO provides interactive, individualized instruction in a broad
range of subjects. PLATO courseware has proven effective in a variety of
learning settings, including alternative education programs, graduation
standards prep labs, school-to-work programs, adult basic education, GED
preparation, developmental studies, employment preparation and workplace
training programs.
4
<PAGE>
Whether used for distance learning, as a supplement to a traditional program, or
as an advanced course offering, PLATO's courseware motivates and engages a wide
range of learners.
The PLATO Learning System is comprised of PLATO courseware, the
PLATO-Registered Trademark- Pathways instructional management software,
multiple courseware delivery systems, and PLATO Professional Services. A
variety of third-party courseware can also be incorporated to meet specific
learning objectives.
PLATO COURSEWARE AND SOFTWARE:
The comprehensive PLATO courseware library includes over 2,000 hours of
mastery-based instruction in the subject areas of reading, writing and language
arts, mathematics, science, social studies, life and job skills, technology and
applied skills for the workplace. The consistent instructional strategy and
design, and modular structure of PLATO courseware provides maximum flexibility
to design customized programs to meet both individual learner needs and specific
program objectives.
PLATO courseware can integrate into an educational program as follows:
- as a complement to classroom learning, addressing individual learner needs
through enrichment and remediation;
- as a supplement to classroom learning, providing additional instruction and
practice; and,
- as a primary resource, allowing the instructor to become a coach,
counselor, and manager.
The Company provides state-of-the-art education and training solutions to its
clients. The Company regularly updates its courseware library and develops
new products to extend and enhance it. In October 1998, the Company announced
that it was in the final stages of converting the 2,000-hour PLATO courseware
library to run as a native 32-bit application under the Windows operating
system. Windows-based PLATO problem-solving courses employ sophisticated
interactive simulations, online coaching, and advanced multimedia and
graphics to create an exciting learning environment that fosters
critical-thinking skills. New courses recently released include Math Problem
Solving, The Employment Partnership, Advanced Reading Strategies, Technology
5
<PAGE>
Fundamentals, and the PLATO WordBank Editor. Another course, Practical Problem
Solving, is currently in development and is scheduled for release in the fall of
1999.
Math Problem Solving has been selected for inclusion on the Children's
Software Review (CSR) "All Star Software" list with a rating of 4.5 out of 5
stars. CSR's All Star Software List is an ongoing collection of highly
recommended software titles that is updated on a bimonthly basis. In
addition, WordBank Editor has been selected as a top five finalist for the
1999 Codie Award for Best New Education Software Program sponsored by the
Software Publishers Association. Earning the status of a Codie Award finalist
is significant, particularly since PLATO WordBank Editor was selected from a
pool of more than 900 nominations.
The following table summarizes PLATO courseware and software offerings:
<TABLE>
<S> <C>
PLATO COURSEWARE:
- -----------------
COMMUNICATION SCIENCE/TECHNOLOGY
Reading 1 and 2 Science Fundamentals
Advanced Reading Strategies Chemistry 1 and 2
Reading for Information Physics 1 and 2
Writing Series Technology Fundamentals
Writing in the Workplace
Communication SOCIAL STUDIES
WordBank Editor Social Studies
MATHEMATICS LIFE SKILLS
Math Fundamentals Life and Job Skills
Math Fundamentals (Spanish Edition) Parenting Skills
Math Problem Solving
Data Skills WORKSKILLS/SCHOOL-TO-WORK
Pre-Algebra Quality Fundamentals
Beginning, Intermediate and Advanced Algebra Reading for Information
Beginning and Intermediate Algebra (Spanish Edition) Communication
Geometry and Measurement 1 and 2 Writing in the Workplace
Trigonometry Data Skills
Calculus 1 and 2 The Employment Partnership
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
THIRD PARTY COURSEWARE:
- -----------------------
Reading Horizons Business Software Training Series
Mindplay Writing Series Substances Abuse Series
English Discoveries (ESL) Blueprint Reading
Rediscover Science 6-9 and 9-12 Mastering Geometric Dimensioning and Tolerancing
Toward Algebra Ultrakey Keyboarding
PLATO SOFTWARE PRODUCTS:
- ------------------------
PLATO Curriculum Manager PLATO Records Transfer and Consolidation Utility
PLATO Pathways-Registered Trademark- PCD3 Authoring System
Instructional Management PLATO S.T.A.R.
System for Windows-Registered Trademark- PLATO on the Internet
PLATO Remote Administration
</TABLE>
PLATO courseware is objective-based and can be aligned to help learners meet
specific program, local, state and provincial learning objectives and tests.
PLATO courseware can also be aligned to national standardized tests and
curriculum standards including:
- ABLE (Adult Basic Literacy Exam)
- ACT (American College Test)
- CAT (California Achievement Test)
- CAAT (Canadian Adult Achievement Test)
- CASAS (Comprehensive Adult Student Assessment System)
- GED (General Education Development) Exam
- NCTM (National Council of Teachers of Mathematics) Standards
- SAT (Scholastic Aptitude Test)
- SCAN'S (Secretary's Commission on Achieving Necessary Skills) Competencies
- Standard Achievement Tests
- TABE (Test of Adult Basic Education)
- ACT Work Keys-TM-
INSTRUCTIONAL MANAGEMENT SOFTWARE:
Instructional management is at the core of any learning environment.
PLATO-Registered Trademark- Pathways is an easy to use Windows-based software
program that seamlessly integrates assessment, instruction and management -
giving instructors a versatile educational tool. This instructional
management system diagnoses strengths and weaknesses and adaptively
prescribes individualized learner menus - ensuring targeted, personalized
instruction keyed to program goals. It can incorporate offline, online, and
Web-based resources to enrich the learning experience. It also tracks learner
progress
7
<PAGE>
and offers an extensive array of reports which provide administrators,
teachers, learners, and parents with highly meaningful information that
documents accountability and performance.
PLATO-Registered Trademark- Pathways is compatible with Windows-Registered
Trademark- 95, Windows-Registered Trademark- 98, and NT-Registered
Trademark-Workstation, and can manage both Windows And MS-DOS-Registered
Trademark- applications. Pathways is also compatible with Apple-Registered
Trademark- iMac and G3 workstations running Virtual PC Windows emulation
software.
DELIVERY SYSTEMS:
The PLATO Learning System is configured to use PC's running MS-DOS-Registered
Trademark- or Windows or Apple-Registered Trademark- iMac or G3 with Windows
emulation software. With PLATO's multiple delivery systems, learning is no
longer confined to a lab or classroom.
- Desktop Launch - with the desktop launch, individual PLATO courses can
be delivered directly on a PC without a management system. Individual
student sign-on, bookmarking and recordkeeping are available.
- Local Area Networks (LAN) - with a LAN configuration, all courseware,
management software, student records, and files are centralized and can
be accessed by any learner, at any learning station, using a PLATO
sign-on and private password. The Company offers LAN configurations
utilizing either Microsoft Windows NT or Novell-Registered Trademark-
NetWare.
- CD-ROM Stand Alone - CD-ROM delivery allows a single PC workstation to
deliver PLATO and complementary courseware using PLATO-Registered
Trademark- Pathways.
- Internet/Distance Learning - remote learners with Internet or
Intranet access can study PLATO lessons, test for mastery, and
progress through lesson sequences just as if they were onsite in the
lab or classroom -using PLATO-Registered Trademark- on the Internet.
Records and courseware are kept on an Internet Server and are
accessed by learners on demand, from any location, using a private
PLATO identifier and password. To enhance speed and reliability,
modules are downloaded to the local PC at the time they are
selected, so a continuous connection is not required. Learners can
monitor their progress via menus and a learner progress report. To
create a community of learners, PLATO on the Internet also features
a suite of Web-based tools that facilitate discussion groups and
links to education Web sites that complement and enrich instruction.
8
<PAGE>
PROFESSIONAL SERVICES:
PLATO Professional Services was created to ensure that clients receive the
necessary support services for the success of their PLATO programs and ongoing
personal development.
- Training Services - Customized education and training solutions
include implementation planning, professional development workshops,
and ongoing training, evaluation and support - provided by the
Company's experienced Education Consultants.
- Technical Support - On-site installation and specialized technical
consulting provided by PLATO Field Engineers and Technicians.
- Software Support - Available via the Company's toll-free number,
Internet e-mail or the PLATO Support Web Page, clients can access a
staff of PLATO specialists and software analysts, to answer questions
or solve problems with their PLATO system. PLATO clients also receive
updates and enhancements to PLATO-Registered Trademark- Pathways
management system and to PLATO courseware.
SALES AND MARKETING:
The Company's sales and marketing efforts are designed to increase market
penetration and reinforce the Company's reputation for product quality, customer
satisfaction, and service. The Company targets potentially large and high growth
market niches to which the Company's existing and future products can be
effectively sold. The Company uses a direct sales force in North America and the
United Kingdom. The Company has established exclusive distribution agreements
with distributors experienced in education product distribution in the following
countries: Singapore, Malaysia, Puerto Rico, the United Arab Emirates, and South
Africa.
As of October 31, 1998, fifty-nine account managers are responsible for sales of
PLATO Learning Systems and for maintaining active relationships with both
current and potential clients. Forty-nine education consultants are responsible
for implementing PLATO Learning Systems and providing customized training
solutions for clients.
The Company reaches potential clients and reinforces its market image by
attending and making presentations at national, regional and state educational
conventions and conferences, sponsoring instructional and teaching seminars, and
publicity in trade journals. It conducts extensive direct mail and telemarketing
campaigns to targeted prospects within each market segment to secure leads and
promote increased awareness of the Company and the PLATO Learning System. In
addition,
9
<PAGE>
the Company maintains comprehensive web sites on the Internet's World Wide Web
(www.tro.com and www.plato.com) with news and information about the Company's
products, services, and clients.
The Company has relationships with many industry associations, such as the
American Association of Community Colleges, the National Alliance of Business,
the National Association of Black School Administrators, the American
Association of School Administrators, the League of Innovation, and the
Corrections Education Association. Additional marketing activities to promote
the effectiveness of PLATO products to potential clients include the publication
of formal evaluation data, program and application reports, and the distribution
of press/news releases to appropriate sources.
COMPETITION:
In all of its markets, the Company competes primarily against more traditional
methods of education and training, principally live classroom instruction. The
Company has seen increased acceptance of effective multimedia-based,
computer-aided methods of training and education due to, among other reasons,
their flexibility, cost-efficiency, and demonstrated effectiveness.
The Company competes primarily on the basis of the depth and recognized quality
of its courseware and its ability to deliver a flexible, timely, cost-effective,
and customized solution to a client's education and training needs. Based on
recent competitive situations in which it has participated, the Company believes
that product depth, quality, and effectiveness are more important competitive
factors than price.
Within the academic computer-based education market, the Company competes most
directly with other learning system providers, including divisions within
Pearson PLC and McGraw-Hill McMillan. While these companies are focused
primarily on the elementary school market, they compete to some degree with the
Company in the secondary and post-secondary and young adult market. Although
these companies are significantly larger than the Company, PLATO courseware
offers a comprehensive curriculum developed specifically for adult and young
adult learners. In the post-secondary education and training markets there are
many regional and specialized competitors.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
The Company's product development group develops, enhances, and maintains the
PLATO courseware, instructional management software, and delivery system
platforms. This group
10
<PAGE>
employs a rigorous multi-phased product development methodology and process
management system. Based on both classical instructional design concepts and
models, as well as systems development management techniques, the Company's
product development methodology has been constructed to specifically address the
creation of individualized, learner-controlled, interactive instruction using
the full multimedia capabilities of today's personal computing and other related
technologies. The Company's rigorous instructional design and development
methodology assures the instructional effectiveness and content integrity of the
resulting product. These procedures ensure that the most appropriate and highest
quality production values are achieved in the development of all software
graphics, audio, video, and text. Moreover, the Company's innovative product
architectures and advanced group-based rapid prototyping technologies shorten
time-to-market and development costs.
Central to the courseware development process are four proprietary software
tools: PLATO-Registered Trademark- PATHWAYS - the PLATO instructional
management system designed for system control, tracking and reporting of
student performance, and administration; MICRO PLATO AUTHORING SYSTEM (MPAS) -
software used in the enhancement and maintenance of existing PLATO
courseware; PLATO CURRICULUM DESIGN, DEVELOPMENT AND DELIVERY (PCD3) SYSTEM -
a proprietary, flexible courseware development tool; and WIN PLATO - a
proprietary courseware authoring framework for writing Windows courseware.
The Company's technical support group provides a full range of support services
to ensure client satisfaction. Full-time professionals, with general technical
expertise and extensive operational knowledge of the Company's products, provide
pre-sales technical consultation and support to the Company's field sales
organization and are responsible for the final technical review and approval of
all proposed delivery platforms and installation configurations. These
professionals consult and coordinate with the client, account manager, and
installation team regarding site preparation and system installation. They also
confirm full client acceptance and monitor client satisfaction and support
requirements.
In fiscal 1997, the Company began offering a new service and support program to
new, as well as renewal, clients. As part of this program, the Company started
charging for support services including training, installation and technical
support for the PLATO products.
The Company integrates its products by purchasing component parts from a network
of external suppliers under a just-in-time inventory system. The integration and
distribution function has the responsibility to integrate computer systems and
ship software and courseware to clients. The Company does not use raw materials
and maintains minimal inventory.
11
<PAGE>
All manufacturers' warranties are passed through to the Company's clients. After
the warranty periods are over, the Company offers maintenance contracts through
third-party service organizations. The Company contracts with outside vendors,
primarily BancTec Services Corp., for hardware installation and maintenance
services for its client sites. In addition, the Company distributes a limited
amount of third-party courseware and also purchases off-the-shelf software and
hardware products from Novell, Microsoft, and other vendors.
The Company has supplier relationships with several hardware and software
vendors. Although these relationships are important to the Company, management
believes that, in the event that such products or services were to cease to be
available, alternative sources could be found on terms acceptable to the
Company.
PROPRIETARY RIGHTS:
The Company regards its courseware and software as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark,
trade secret laws, license and distribution agreements, employee and third-party
non-disclosure agreements, and other methods to protect its proprietary rights.
The Company owns the federal registration of the PLATO trademark. In addition,
in 1989 Control Data assigned to the Company federally registered copyrights in
the PLATO courseware. The Company has not recorded the assignment of these
copyrights because it believes the additional statutory rights resulting from
recordation are not necessary for the protection of the Company's rights
therein. The Company has federal copyrights on all PLATO courseware produced
since 1989. The Company has not applied for trademark registration at the state
level, but has instead relied on its federal registrations and state common law
rights to protect its proprietary information. The Company has registered
trademarks in the United States and overseas for PLATO. The Company regards
these registrations as material to its business. The Company licenses some
courseware and software from third-party developers and incorporates them into
the Company's courseware offerings and integrated learning systems.
Pursuant to a settlement agreement entered into in October 1992, the Company has
granted certain limited courseware and software licenses to Drake and Control
Data Systems, Inc. (CDSI). The licenses will permit Drake and CDSI to market
certain earlier versions of portions of the PLATO courseware in certain
specified situations. The Company believes that the limited licenses granted to
Drake and CDSI will have no material adverse impact on its future business.
12
<PAGE>
BACKLOG:
The Company's backlog consists of orders for the delivery of goods and services
in future periods. The backlog for PLATO Education was $6.8 million and $8.5
million, respectively, at October 31, 1998 and 1997. From time to time, the
Company may have longer-term contracts in its backlog for the delivery of PLATO
Learning Systems. At October 31, 1998, approximately $0.6 million of such orders
(included in the foregoing backlog figure) are expected to be delivered
subsequent to fiscal 1999.
CYCLICALITY:
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures, and promotional
programs. In addition, certain of the Company's PLATO Education clients
experience cyclical variations in funding which can impact the Company's revenue
patterns. The Company's quarterly revenues can also fluctuate based upon
spending patterns, budget cycles, and the fiscal year ends of these clients. The
Company historically has experienced higher levels of revenues in its fourth
fiscal quarter.
EMPLOYEES:
As of October 31, 1998, the Company employed 304 people on a full-time basis,
including 170 in sales and marketing, 75 in product development and operations,
35 in support services, and 24 in finance and administration.
13
<PAGE>
ITEM 2. FACILITIES
The Company leases approximately 50,000 square feet of office and warehouse
space in Edina and Bloomington, Minnesota for its corporate headquarters and
5,400 square feet of office space for its executive offices in Hoffman Estates,
Illinois. The Company maintains sales offices in Dallas, Houston, San Antonio
and Texarkana, Texas; Skippack, Pennsylvania; Huntington Beach, California; Ft.
Lauderdale, Florida; Westport, Connecticut; Lenexa, Kansas; Chicago, Illinois;
Nashville, Tennessee; and Cary, North Carolina. The Company's Canadian
subsidiary leases 525 square feet for its principal offices in Vancouver and
maintains sales offices in Don Mills, Ontario; Winnipeg, Manitoba; and Moncton,
New Brunswick. The United Kingdom subsidiary maintains an office in Berkshire,
England.
The leases for the Company's offices in Edina and Bloomington, Minnesota expire
March 31, 2000 and March 31, 2001, respectively and the lease for the executive
offices in Hoffman Estates, Illinois expires August 31, 2000. See Note 7 of
Notes to Consolidated Financial Statements.
The Company's leased facilities are adequate to meet its business requirements.
ITEM 3. LEGAL PROCEEDINGS
On December 15, 1997, a securities fraud class action was filed in the United
States District Court for the Northern District of Illinois against the Company
and two of its current and former executive officers. The purported class action
was filed on behalf of all persons who purchased common stock of the Company
during the period December 7, 1995 through June 10, 1997, seeking damages for
alleged violations of the federal securities laws. On May 19, 1998, the United
States District Court for the Northern District of Illinois dismissed the
complaint with prejudice.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended
October 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are as follows:
<TABLE>
<S> <C>
William R. Roach Chairman of the Board, President and Chief Executive Officer
John Murray Executive Vice President and Chief Financial Officer
G. Thomas Ahern Senior Vice President, PLATO Education Sales and Marketing
Wellesley R. Foshay Vice President, Instructional Design and Cognitive Learning
David H. LePage Vice President, PLATO Support Services and Distribution
Mary Jo Murphy Vice President, Corporate Controller and Chief Accounting Officer
Frank Preese Vice President, Product Development
Steven R. Schuster Vice President and Treasurer
John C. Super Vice President, Marketing
Patricia A. Hlavacek Corporate Secretary
</TABLE>
Executive officers are appointed by, and serve at the discretion of, the Board
of Directors.
William R. Roach, age 58, has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its founding in 1989. Prior to
founding the Company, from 1987 to 1988, Mr. Roach was President and Chief
Executive Officer of Applied Learning International, Inc. (ALI), a training and
education company and successor to Advanced Systems, Inc. (ASI), and a Director
and Senior Vice President of ALI's parent, National Education Corporation (NEC).
From 1981 to 1987, Mr. Roach was the Chief Executive Officer of ASI, a New York
Stock Exchange listed training and education company which was acquired by NEC
in 1987. After leaving ALI in 1988, Mr. Roach led a group of investors in
pursuing an acquisition in the field of training and education.
John Murray, age 43, joined the Company in 1989 as Managing Director of the
United Kingdom subsidiary. In October 1998 he was promoted to his current
position, Executive Vice President and Chief Financial Officer. From October
1997 until October 1998 he served as Senior Vice President, Operations. From
April 1996 to October 1997 he held the position of Vice President,
15
<PAGE>
Product Development. From November 1994 to March 1996, Mr. Murray was Vice
President, Aviation Sales and Operations. He served as Vice President, Eastern
Aviation Sales and Operations, from 1991 to 1994. From 1986 to 1989, Mr. Murray
was Manager of Training Systems Group for Control Data Limited.
G. Thomas Ahern, age 40, was promoted to Senior Vice President, PLATO Education
Sales and Marketing in October 1997. From January to October 1997, he was Vice
President, PLATO Education Sales, North America, and from December 1992 to
October 1997 he served as Vice President, U.S. Sales, PLATO Education.
Previously, he was Regional Vice President, Sales for the Company since its
founding in 1989. From January 1989 to September 1989, Mr. Ahern was National
Sales Manager for the training and education group of Control Data Corporation,
a computer hardware, software and data services company.
Wellesley R. Foshay, Ph.D., age 51, has served as Vice President, Instructional
Design and Cognitive Learning since the Company's founding in 1989. From 1987 to
1989, Dr. Foshay was Senior Director, Quality Assurance, Standards and Training
for ALI.
David H. LePage, age 52, has served in his present capacity, Vice President,
PLATO Support Services and Distribution since 1997. From the Company's founding
in 1989 until 1997, he served as Vice President, Systems Development, Client
Support and Operations. From 1972 to 1989, Mr. LePage was General Manager,
Systems Development and Technical Support for the training and education group
of Control Data Corporation.
Mary Jo Murphy, age 42, joined the Company in August 1993 as Vice President,
Corporate Controller and Chief Accounting Officer. From 1986 to 1992, she was
Corporate Controller for Krelitz Industries, Inc., a drug distribution company.
Ms. Murphy, a Certified Public Accountant, was formerly an Audit Supervisor for
Coopers & Lybrand.
Frank Preese, age 51, joined the Company in 1994 as Director of Curriculum
Development. He has served in his present capacity as Vice President, Product
Development since November 1997. From 1996 through 1997 he served as Assistant
Vice President, Curriculum Development and during 1995 as Senior Director of
Curriculum Development. Prior to joining the Company, Mr. Preese served as Vice
President of Computer Services with Golle & Holmes Corporation, a training
consultancy to Fortune 500 companies.
Steven R. Schuster, age 38, joined the Company in December 1996 as Vice
President and Assistant Treasurer. In October 1998, he was promoted to Vice
President and Treasurer. From 1993 to 1996, he was Vice President for Norwest
Bank, a financial services company. Mr. Schuster was formerly the Assistant
Treasurer of St. Jude Medical, Inc.
16
<PAGE>
John C. Super, age 51, joined the Company in 1990 as a Workplace Account
Manager. He has served in his present capacity as Vice President, Marketing,
since February 1997. From 1992 through 1996 he served as Vice President,
Strategic Sales and during 1991 as Vice President Sales, Eastern Region. Prior
to joining the Company, Mr. Super served in sales and management capacities with
Wicat Systems and Computer Curriculum Corporation.
Patricia A. Hlavacek, age 52, joined the Company in September 1989 as
Administrative Assistant to the Corporate Counsel. From 1993 to the present, she
has served in various capacities including Assistant Secretary, Stock Option
Plan Administrator, and performed the duties of Compliance Officer in matters
involving the Securities and Exchange Commission. In October 1998, she was
appointed as Corporate Secretary. Prior to joining the Company, Ms.
Hlavacek was employed with ALI.
17
<PAGE>
PART II
- -----------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION:
The Company's common stock is publicly traded on the NASDAQ National Market
System under the symbol, TUTR.
The following table presents the high and low closing prices for the Company's
common stock as reported by NASDAQ for each quarter during the years ended
October 31, 1998 and 1997:
<TABLE>
<CAPTION>
FISCAL 1998
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
High $ 7.50 $ 11.38 $ 10.31 $ 9.50
Low 4.88 6.75 8.00 6.63
<CAPTION>
FISCAL 1997
-------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
High $ 21.88 $ 11.50 $ 12.13 $ 11.00
Low 10.00 7.06 7.00 7.25
</TABLE>
HOLDERS:
There were approximately 3,400 stockholders of record as of December 15, 1998
(includes individual participants in security position listings).
DIVIDENDS:
The Company has not declared or paid dividends on its common stock. The
Company's ability to pay dividends is restricted by its revolving loan agreement
(see Note 3 of Notes to Consolidated Financial Statements). While future
dividend payments are at the discretion of the Board of Directors, the Company
is growth-oriented and there is no present intention to pay a cash dividend on
its common stock.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues by product line:
PLATO Education.................. $ 39,385 $ 33,265 $ 36,980 $ 30,613 $ 22,591
Aviation Training................ 3,893 3,694 4,425 6,724 5,774
-------------- -------------- ------------- --------------- ---------------
Total revenues .................. 43,278 36,959 41,405 37,337 28,365
Gross profit......................... 38,269 30,484 35,192 29,669 22,587
Selling, general and administrative
expense.......................... 25,408 36,988 27,537 19,027 15,494
Product development and customer
support.......................... 7,341 8,036 5,307 4,487 7,515
Operating income (loss).............. 5,520 (14,540) 2,348 6,155 (1,222)
Interest expense..................... 2,217 1,480 856 300 344
Provision (credit) for income taxes.. --- 4,061 564 2,157 (533)
Income (loss) from continuing
operations....................... 3,068 (20,217) 982 3,752 (889)
Income (loss) from discontinued
operations....................... --- --- --- --- (1,250)
PER SHARE OF COMMON STOCK (diluted):
Income (loss) from continuing
operations....................... 0.47 (3.24) 0.15 0.60 (0.15)
Loss from discontinued operations.... --- --- --- --- (0.21)
Net income (loss).................... 0.47 (3.24) 0.15 0.60 0.55
BALANCE SHEET DATA:
Total assets......................... 27,407 29,088 42,327 33,660 26,931
Total liabilities.................... 23,738 28,341 21,515 14,158 10,990
Stockholders' equity................. 3,669 747 20,812 19,502 15,941
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
The Company is a leading developer and marketer of microcomputer-based,
interactive, self-paced instructional systems. Offering more than 2,000 hours
of comprehensive academic and applied skills courseware designed for
adolescents and adults, the Company's PLATO-Registered Trademark- Learning
Systems are marketed to middle schools and high schools, colleges, job
training programs, correctional institutions, military education programs and
corporations. The PLATO Learning System is delivered via networks, CD-ROM,
the Internet and private Intranets.
In September 1998, the Company announced the sale of its Aviation Training
business (which marketed PC-based instructional systems to airlines worldwide
for use by commercial airline pilots, maintenance crews and cabin personnel) and
will focus exclusively on its PLATO brand going forward.
FISCAL 1998 COMPARED TO FISCAL 1997:
REVENUES:
Total revenues of $43,278,000 for 1998 increased by $6,319,000 or 17% as
compared to $36,959,000 for 1997. The following table highlights revenues
by product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
----------------------- ---------------------- -----------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Courseware and professional services...... $ 35,694 $ 28,083 $ 3,840 $ 3,390 $ 39,534 $ 31,473
Hardware, third party courseware and other 3,691 5,182 53 304 3,744 5,486
----------- ---------- ----------- ---------- ---------- -----------
Total revenues....................... $ 39,385 $ 33,265 $ 3,893 $ 3,694 $ 43,278 $ 36,959
=========== ========== =========== ========== ========== ===========
</TABLE>
As summarized in the above table, PLATO Education courseware and professional
services revenue of $35,694,000 for 1998 increased by $7,611,000 or 27% as
compared to 1997. The growth was achieved primarily by expanding the Company's
current markets for PLATO products.
Aviation Training revenues of $3,893,000 increased by $199,000 or 5% from the
prior year. In September 1998, the Company announced the sale of its Aviation
Training business and will focus exclusively on its PLATO brand going forward.
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development
20
<PAGE>
expenditures and promotional programs. The Company historically has experienced
higher levels of revenues in its fourth fiscal quarter.
GROSS PROFIT:
Gross profit for 1998 increased by $7,785,000 or 26% to $38,269,000 as compared
to $30,484,000 for 1997. This increase was due to the increase in PLATO
Education courseware and professional services revenue as well as a higher mix
of PLATO courseware revenues. The Company's gross margin was 88% for 1998 as
compared to 82% for 1997.
PLATO Education gross margin for 1998 was 89% compared to 83% for 1997. Aviation
Training gross margin was 81% for both 1998 and 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1998 decreased by $11,580,000
or 31% to $25,408,000 as compared to $36,988,000 for 1997. This decrease was
principally due to the reduction in PLATO Education selling expenses of
$4,468,000, resulting primarily from the restructuring of operations initiated
in late fiscal 1997, and the decrease in the provision for doubtful accounts of
$6,438,000.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1998 decreased by $695,000
or 9% to $7,341,000 as compared to $8,036,000 for 1997. PLATO Education product
development expense decreased $323,000, due primarily to reduced spending and
increased capitalization of costs, slightly offset by increased amortization, as
compared to 1997.
OPERATING INCOME (LOSS):
Operating income for 1998 was $5,520,000 as compared to an operating loss of
$(14,540,000) for 1997. This improvement in operating results is due principally
to the increase in courseware and professional services revenue and the positive
impact of the restructuring of operations initiated in late fiscal 1997.
21
<PAGE>
INTEREST EXPENSE:
Interest expense was $2,217,000 for 1998 as compared to $1,480,000 for 1997.
This increase was due to increased borrowings, resulting in additional expense
of $414,000, as well as one-time settlements of interest totaling $323,000 with
vendors for past due amounts.
PROVISION FOR INCOME TAXES:
In line with the Company's decision to fully reserve its deferred tax asset at
the end of 1997, no income taxes have been recorded in 1998.
FISCAL 1997 COMPARED TO FISCAL 1996:
REVENUES:
Total revenues of $36,959,000 for 1997 decreased by $4,446,000 or 11% as
compared to $41,405,000 for 1996. The following table highlights revenues by
product line (in 000's):
<TABLE>
<CAPTION>
PLATO EDUCATION AVIATION TRAINING TOTAL
----------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Courseware and professional services...... $ 28,083 $ 31,252 $ 3,390 $ 4,183 $ 31,473 $ 35,435
Hardware, third party courseware and other 5,182 5,728 304 242 5,486 5,970
----------- ----------- ------------ ---------- ----------- -----------
Total revenues....................... $ 33,265 $ 36,980 $ 3,694 $ 4,425 $ 36,959 $ 41,405
=========== =========== ============ ========== =========== ===========
</TABLE>
As summarized in the above table, PLATO Education courseware and professional
services revenue of $28,083,000 for 1997 decreased by $3,169,000 or 10% as
compared to 1996. The majority of this decrease occurred in the fourth quarter
of 1997 as compared to 1996.
Aviation Training revenues of $3,694,000 decreased by $731,000 or 17% from the
prior year, reflecting a general weakness in the aviation industry.
The Company's quarterly operating results fluctuate as a result of a number of
factors including the business and sales cycle, the amount and timing of new
product introductions by the Company, product shipments, client funding issues,
marketing expenditures, product development expenditures and promotional
programs. The Company historically has experienced higher levels of revenues in
its fourth fiscal quarter.
22
<PAGE>
GROSS PROFIT:
Gross profit for 1997 decreased by $4,708,000 or 13% to $30,484,000 as compared
to $35,192,000 for 1996. This decrease was due principally to the decline in
PLATO Education courseware revenues. The Company's gross margin was 82% for 1997
as compared to 85% for 1996, reflecting the decline in courseware revenues.
PLATO Education gross margin for 1997 was 83% compared to 86% for 1996. Aviation
Training gross margin was 81% for 1997 compared to 76% for 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE:
Selling, general, and administrative expense for 1997 increased by $9,451,000 or
34% to $36,988,000 as compared to $27,537,000 for 1996. This increase was
principally due to the additional provision for doubtful accounts of
approximately $5,132,000 recorded in 1997, when it was determined that payment
for numerous sales contracts would not be received. The majority of these sales
were to customers, which are dependent upon various government funding sources,
and therefore subject to standard non-appropriation of funds
In addition, PLATO Education selling expense increased by approximately
$2,736,000, primarily for salaries, fringe benefits and travel due to the
expansion of the sales and service organization.
In late fiscal 1997, the Company initiated plans to restructure its operations
to achieve significant cost reductions and improve operating efficiencies.
PRODUCT DEVELOPMENT AND CUSTOMER SUPPORT:
Product development and customer support expense for 1997 increased by
$2,729,000 or 51% to $8,036,000 as compared to $5,307,000 for 1996. While PLATO
Education product development spending was comparable for 1997 as compared to
1996, product development expense increased principally as a result of decreased
capitalization and the increased effect of amortization of previously
capitalized costs.
23
<PAGE>
OPERATING INCOME (LOSS):
Operating loss for 1997 was $(14,540,000) as compared to operating income of
$2,348,000 for 1996. This decline was due primarily to the decrease in PLATO
Education revenues and gross profit, and the increase in PLATO Education
selling, bad debt and product development expenses.
INTEREST EXPENSE:
Interest expense was $1,480,000 for 1997 as compared to $856,000 for 1996.
Interest expense increased due to the Company's long term debt incurred during
1997.
PROVISION FOR INCOME TAXES:
The Company took a non-cash tax charge of $4,061,000 in 1997 to record a
valuation allowance against the deferred tax asset. Such valuation allowance has
been provided based on the inherent uncertainty of predicting the sufficiency of
the future taxable income necessary to realize the benefit of the net deferred
tax asset in light of the Company's recent loss history and the competitive
nature of the industry in which the Company operates.
LIQUIDITY AND CAPITAL RESOURCES:
As of October 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $466,000, net accounts receivable of $16,427,000
and its line of credit. The Company has total installment receivables of
$11,071,000 at October 31, 1998, of which $10,496,000 are due within one year
and are included in net accounts receivable.
Net cash provided by the Company's operating activities was $1,988,000 in 1998
as compared to net cash used in operating activities of $5,873,000 in 1997 and
$4,243,000 in 1996. Cash flows from operations were used principally to fund the
Company's working capital requirements. In addition to cash flows from
operations, the Company has resources available under its revolving loan
agreement to provide borrowings up to a maximum of $18,000,000 through February
28, 1999 (see Note 3 of Notes to Consolidated Financial Statements). At October
31, 1998, borrowings of $6,880,000 were outstanding at a weighted average
interest rate of 9.5%. The agreement provides for financial covenants requiring
a minimum level of operating profit. The Company was in compliance with all
financial covenants for the period ended October 31, 1998.
24
<PAGE>
The Company's net cash provided by investing activities was $632,000 in 1998,
which included proceeds of $1,414,000 from the disposal of the Aviation Training
division offset by capital expenditures. Net cash used in investing activities
was $762,000 in 1997 and $1,020,000 in 1996, principally for capital
expenditures. The Company's capital expenditures totaled $782,000, $762,000 and
$1,033,000 in 1998, 1997 and 1996, respectively. At October 31, 1998, the
Company had no material commitments for capital expenditures.
The Company's net cash used in financing activities was $2,379,000 in 1998,
principally for repayments of debt. Net cash provided by financing activities
was $6,723,000 in 1997, principally from long term debt issued, and $5,449,000
in 1996, principally from borrowings under the line of credit.
The Company took a non-cash tax charge of $4,061,000 in 1997 to record a
valuation allowance against the deferred tax asset. Such valuation allowance has
been provided based on the inherent uncertainty of predicting the sufficiency of
the future taxable income necessary to realize the benefit of the net deferred
tax asset in light of the Company's recent loss history and the competitive
nature of the industry in which the Company operates. In prior years the primary
differences between pretax earnings for financial reporting purposes and taxable
income for income tax purposes included revenue recognition, the capitalization
of product development costs and various reserves. The Company has net operating
loss carryforwards of approximately $33 million which begin to expire in 2004.
From time to time, the Company evaluates making acquisitions of products or
businesses that complement the Company's core business. The Company has no
present understandings, commitments, or agreements with respect to any material
acquisitions of other businesses, products, or technologies. However, the
Company may consider and acquire other complementary businesses, products, or
technologies in the future.
On January 13, 1999, the Company announced the completion of a $5 million
private placement of convertible preferred stock. The preferred stock is
convertible into shares of the Company's common stock, at the option of the
holder, up to two years from the issue date. Conversion is mandatory for
securities still outstanding two years from the issue date. The conversion price
is based on the average market price of the Company's common stock prior to
conversion, as defined, and is adjusted over time to provide an 8% annual return
to the holders. The conversion price is also subject to ceiling and floor
limitations, which may be adjusted based on the Company's financial performance.
Concurrent with this issuance, the Company issued 125,000 warrants to purchase
the Company's common stock at $9.51 per share. These warrants expire five years
from
25
<PAGE>
the issue date. The net proceeds received from the convertible preferred stock
issuance were approximately $4.6 million and were used to pay down existing
borrowings.
In order to maintain adequate cash reserves and credit facilities to meet its
anticipated working capital, capital expenditure, and business investment
requirements, the Company is currently reviewing several new proposals to
replace its existing revolving loan agreement. Completion of this transaction,
which will offer a longer-term banking relationship with more advantageous terms
and conditions, is expected early in the second quarter of 1999.
YEAR 2000:
Many existing computer systems use only the last two digits to identify a year.
Consequently, as the year 2000 approaches, many systems do not yet recognize the
difference between the years 1900 and 2000. This, as well as other date-related
processing issues, may cause systems to fail or malfunction. As a result, the
Year 2000 (Y2K) issue may affect the Company's products and normal business
activities.
The Company began addressing the Y2K issue in early 1998 and has assembled a Y2K
evaluation team that is endorsed by, and includes members of, senior management.
A budget has been prepared for Y2K costs and progress reports are presented to
senior management on a regular basis. The Y2K evaluation team has developed and
implemented a comprehensive Y2K readiness plan for the Company's products and
operations. The objectives of the Y2K evaluation team are as follows:
- Develop a Y2K compliance standard for the Company's PLATO courseware
and software products and determine compliance with that standard;
- Advise on compliance of third party courseware, operating system, and
hardware products based on representations by vendors of these
products;
- Determine compliance for the Company's internal systems (including
information technology (IT) systems, such as financial and order entry
systems, and non-IT systems, such as telephones and other office
equipment);
- Determine the Y2K readiness of key business partners that the Company
relies on for normal business operations.
26
<PAGE>
The Company has developed a compliance standard based on common testing
methodology. Existing PLATO courseware and software products are currently being
reviewed to determine compliance with that standard. The most current compliance
and remediation information is maintained on the Company's Internet web site.
PLATO products currently under development are being designed to be Y2K
compliant.
The Company also sells various third party courseware, operating system, and
hardware products. Y2K compliance information has been received from key vendors
of third party courseware products and this information is maintained on the
Company's Internet web site. Web links to key vendors of third party operating
system and hardware products are also provided.
The Company has been taking, and will continue to take, actions necessary to
resolve Y2K issues with its internal IT and non-IT systems, including planned
replacements and upgrades. Major computers, applications, and related equipment
have been reviewed and are either compliant or software upgrades have been
ordered and will be installed in 1999. The Company's accounting and data
processing system was not Y2K compliant and was recently upgraded to a version
that the vendor has indicated is Y2K compliant.
The Company relies on key business partners for its normal business operations
and has contacted them regarding Y2K readiness. While the Company is confident
these partners are preparing for the year 2000, it has no control over their
preparations and there is no assurance that they will be successful in
addressing all Y2K issues.
While the Company's Y2K costs incurred to date have not been material,
additional costs will be incurred as Y2K readiness is completed in mid-1999.
Based on information currently available, management expects these additional
costs to be immaterial as well.
While the Company is dedicating existing internal resources toward attaining Y2K
readiness, there is no assurance that it will be successful in addressing all
Y2K issues. If the Company does not achieve Y2K readiness, there could be
significant adverse effects on its results of operations, liquidity, and
financial condition. For example:
- If the Company's PLATO products are not Y2K compliant, it could suffer
increased costs, lost sales or other negative consequences resulting
from customer dissatisfaction, including litigation.
27
<PAGE>
- If the Company's internal systems are not Y2K compliant, financial and
customer information, orders and product shipments could be delayed and
customer support could be interrupted.
- If the Company's customers do not achieve Y2K readiness, sales and
cash receipts may be delayed.
- If the Company's key business partners and other third parties do not
achieve Y2K readiness, its ability to receive supplies, ship products,
process cash receipts, and conduct other ongoing business activities
may be affected.
Based on the progress the Company has made to date in addressing Y2K issues,
management does not expect significant risks with its Y2K compliance at this
time. As the Company's plan is to address its major Y2K issues prior to being
affected by them, it has not developed comprehensive Y2K-related contingency
plans. If progress deviates from plan or significant risks are identified, the
Company will consider contingency plans as deemed necessary.
This Y2K discussion is based on the Company's best estimates using the
information that is currently available, and is subject to change. Actual
results may differ materially from these estimates.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(a) (1) Consolidated Financial Statements:
Report of Independent Accountants.......................................30
Consolidated Balance Sheets as of October 31, 1998 and 1997.............31
Consolidated Statements of Income for the years ended
October 31, 1998, 1997 and 1996.........................................32
Consolidated Statements of Stockholders' Equity for the years ended
October 31, 1998, 1997 and 1996.........................................33
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996.........................................34
Notes to Consolidated Financial Statements..............................35
(2) Consolidated Financial Statement Schedule for the years ended
October 31, 1998, 1997 and 1996:
Report of Independent Accountants on Consolidated Financial
Statement Schedule......................................................47
Schedule II. Valuation and Qualifying Accounts and Reserves............48
</TABLE>
All other schedules called for under Regulation S-X are not submitted because
they are not applicable, or because the required information is not material or
is included in the consolidated financial statements or notes thereto.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
TRO Learning, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of TRO
Learning, Inc. and its subsidiaries at October 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended October 31, 1998, in conformity with generally accepted
accounting principles. 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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 3, 1998
30
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 466 $ 537
Accounts receivable, less allowances of $920 and $7,020, respectively............ 16,427 18,305
Inventories...................................................................... 648 990
Prepaid expenses and other current assets........................................ 1,121 688
----------- ------------
Total current assets......................................................... 18,662 20,520
Equipment and leasehold improvements, less accumulated depreciation
of $3,204 and $4,092, respectively............................................... 1,073 1,271
Product development costs, less accumulated amortization of $4,768 and $2,562,
respectively..................................................................... 6,380 5,989
Other assets........................................................................ 1,292 1,308
----------- ------------
$ 27,407 $ 29,088
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,895 $ 3,472
Accrued employee salaries and benefits........................................... 2,647 3,199
Accrued liabilities.............................................................. 2,130 4,072
Revolving loan................................................................... 9,321 11,908
Deferred revenue................................................................. 3,290 1,949
----------- ------------
Total current liabilities.................................................... 20,283 24,600
Long term debt...................................................................... 3,050 3,050
Deferred revenue, less current portion.............................................. 405 519
Other liabilities................................................................... --- 172
Stockholders' equity:
Common stock, $.01 par value, 25,000 shares authorized;
6,535 shares issued and 6,415 shares outstanding in 1998;
6,450 shares issued and 6,405 shares outstanding in 1997....................... 64 64
Paid in capital.................................................................. 22,956 22,074
Treasury stock at cost, 120 and 45 shares, respectively.......................... (1,176) (469)
Accumulated deficit.............................................................. (17,592) (20,660)
Foreign currency translation adjustment.......................................... (583) (262)
----------- ------------
Total stockholders' equity................................................... 3,669 747
----------- ------------
$ 27,407 $ 29,088
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Revenues by product line:
PLATO Education................................................. $ 39,385 $ 33,265 $ 36,980
Aviation Training............................................... 3,893 3,694 4,425
------------ ------------- ------------
Total revenues............................................... 43,278 36,959 41,405
Cost of revenues.................................................. 5,009 6,475 6,213
------------ ------------- ------------
Gross profit................................................. 38,269 30,484 35,192
------------ ------------- ------------
Operating expenses:
Selling, general and administrative expense..................... 25,408 36,988 27,537
Product development and customer support........................ 7,341 8,036 5,307
------------ ------------- ------------
Total operating expenses..................................... 32,749 45,024 32,844
------------ ------------- ------------
Operating income (loss).................................... 5,520 (14,540) 2,348
Interest expense.................................................. 2,217 1,480 856
Interest income and other expense, net............................ 235 136 (54)
------------ ------------- ------------
Income (loss) before income taxes.......................... 3,068 (16,156) 1,546
Provision for income taxes........................................ --- 4,061 564
------------ ------------- ------------
Net income (loss).......................................... $ 3,068 $ (20,217) $ 982
============ ============= ============
Earnings per share:
Basic........................................................ $ 0.48 $ (3.24) $ 0.16
============ ============= ============
Diluted...................................................... 0.47 $ (3.24) $ 0.15
============ ============= ============
Weighted average common shares outstanding:
Basic........................................................ 6,409 6,233 6,120
============ ============= ============
Diluted...................................................... 6,504 6,233 6,643
============ ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------
FOREIGN
CURRENCY TOTAL
PAID IN TREASURY ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCK DEFICIT ADJUSTMENT EQUITY
--------- --------- ---------- --------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, November 1, 1995 .... 6,072 $61 $21,345 $ (183) $ (1,425) $(296) $ 19,502
Net income ............... -- -- -- -- 982 -- 982
Exercise of stock options
and shares issued under
employee stock purchase
plan ..................... 99 1 289 50 -- -- 340
Repurchase of shares ....... (4) -- -- (75) -- -- (75)
Changes in exchange rates .. -- -- -- -- -- 63 63
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, October 31, 1996 ...... 6,167 62 21,634 (208) (443) (233) 20,812
Net loss ................... -- -- -- -- (20,217) -- (20,217)
Exercise of options, stock
grants and shares issued
under employee stock
purchase plan ............ 259 2 440 -- -- -- 442
Repurchase of shares ....... (21) -- -- (261) -- -- (261)
Changes in exchange rates .. -- -- -- -- -- (29) (29)
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, October 31, 1997 ...... 6,405 64 22,074 (469) (20,660) (262) 747
Net income ................. -- -- -- -- 3,068 -- 3,068
Exercise of stock options
and shares issued under
employee stock purchase
plan...................... 85 1 882 -- -- -- 883
Repurchase of shares ....... (75) (1) -- (707) -- -- (708)
Changes in exchange rates .. -- -- -- -- -- (321) (321)
--------- --------- ---------- --------- ------------ ------------ --------------
Balances, October 31, 1998 ...... 6,415 $64 $22,956 $(1,176) $(17,592) $(583) $ 3,669
========= ========= ========== ========= ============ ============ ==============
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION> YEAR ENDED OCTOBER 31,
------------------------------------------
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 3,068 $ (20,217) $ 982
----------- ---------- ------------
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes........................................... --- 4,061 564
Depreciation and amortization................................... 2,928 2,644 1,466
Provision for doubtful accounts................................. 814 7,252 2,120
Loss on disposal of Aviation Training division.................. 266 --- ---
Loss on disposal of fixed assets ............................... 2 2 180
Changes in assets and liabilities:
Increase in accounts receivable............................... (1,488) (1,394) (8,680)
(Increase) decrease in inventories............................ 239 107 (52)
(Increase) decrease in prepaid expenses and other current
and noncurrent assets....................................... (479) 1,794 1,255
Increase in product development costs......................... (2,597) (2,251) (3,356)
Increase (decrease) in accounts payable....................... (415) 884 341
Increase (decrease) in accrued liabilities, accrued employee
Salaries and benefits and other liabilities................. (1,828) 210 722
Increase in deferred revenue.................................. 1,478 1,035 215
----------- ---------- ------------
Total adjustments........................................... (1,080) 14,344 (5,225)
----------- ---------- ------------
Net cash provided by (used in) operating activities......... 1,988 (5,873) (4,243)
----------- ---------- ------------
Cash flows from investing activities:
Capital expenditures............................................ (782) (762) (1,033)
Proceeds from disposal of Aviation Training division............ 1,414 --- ---
Proceeds from disposal of fixed assets.......................... --- --- 13
----------- ---------- ------------
Net cash provided by (used in) investing activities.......... 632 (762) (1,020)
----------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........................ --- 6,050 ---
Net proceeds from (repayments of) short term borrowings......... (2,028) 296 5,164
Repayment of long term debt..................................... (559) --- ---
Net proceeds from the issuance of common stock.................. 208 377 285
----------- ---------- ------------
Net cash provided by (used in) financing activities........... (2,379) 6,723 5,449
----------- ---------- ------------
Effect of foreign currency on cash................................. (312) (26) 58
----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents............... (71) 62 244
Cash and cash equivalents at beginning of year..................... 537 475 231
----------- ---------- ------------
Cash and cash equivalents at end of year........................... $ 466 $ 537 $ 475
=========== ========== ============
Cash paid for interest expense..................................... $ 2,191 $ 1,379 $ 854
=========== ========== ============
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
NATURE OF BUSINESS:
TRO Learning, Inc. and its subsidiaries (the Company) develop and market
microcomputer-based, interactive, self-paced instructional systems. Offering
more than 2,000 hours of comprehensive academic and applied skills courseware
designed for adolescents and adults. The Company's PLATO Learning Systems are
marketed to middle and high schools, colleges, job training programs,
correctional institutions, military education programs, and corporations. The
PLATO Learning System is delivered via networks, CD-ROM, the Internet, and
private intranets.
The Company's fiscal year is from November 1 to October 31. Unless otherwise
stated, references to the years 1998, 1997 and 1996 relate to the fiscal years
ended October 31, 1998, 1997 and 1996, respectively.
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of TRO
Learning, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. Credit risk is minimized
as a result of the large number of the Company's customers. The Company performs
evaluations of its customers' credit worthiness and generally requires no
collateral from its customers. Although many of the Company's educational
customers are dependent upon various government funding sources, and are subject
to non-appropriation of funds, the Company does not believe there is a
significant concentration of risk associated with any specific governmental
program or funding source. As of October 31, 1998, the Company had no
significant concentrations of credit risk.
35
<PAGE>
CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such investments are
carried at cost, which approximates fair value.
INVENTORIES:
Inventories, which consist principally of goods purchased for resale, are stated
at the lower of cost (first in, first out) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Upon retirement or disposition, cost and
related accumulated depreciation are removed from the accounts, and any gain or
loss is included in the results of operations. Maintenance and repairs are
expensed as incurred.
OTHER ASSETS:
Other assets include principally intangible assets and installment receivables
with terms greater than one year.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of the Company's debt is estimated to approximate the carrying
value of these liabilities based upon borrowing rates currently available to the
Company for borrowings with similar terms.
REVENUE RECOGNITION:
Revenue from the sale of education and training courseware licenses, computer
hardware and related support services, is recognized when the courseware,
hardware, and related services are delivered. Upon delivery, future service
costs, if any, are accrued. Future service costs represent the Company's problem
resolution and support "hotline" service for a one-year period. Deferred revenue
represents the portion of billings made or payments received in advance of
services being performed or products being delivered.
36
<PAGE>
PRODUCT DEVELOPMENT, ENHANCEMENT, AND MAINTENANCE COSTS:
The Company develops education and training products, referred to hereafter as
courseware products. Costs incurred in the development of the Company's current
generation courseware products and related enhancements and routine maintenance
thereof are expensed as incurred. All costs incurred by the Company in
establishing the technical feasibility of new courseware products to be sold,
leased, or otherwise marketed are expensed as incurred. Once technical
feasibility has been established, costs incurred in the development of new
generation courseware products are capitalized.
Amortization is provided over the estimated useful life of the new courseware
products, generally three years, using the straight-line method. Amortization
begins when the product is available for general release to customers.
Unamortized capitalized costs determined to be in excess of the net realizable
value of the product are expensed at the date of such determination.
INCOME TAXES:
The Company accounts for income taxes as required using the liability method,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities, and income tax carryforwards,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. In addition, the amount of any future tax benefits are
reduced by a valuation allowance to the extent the realization of such benefits
is unlikely.
EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards 128 (SFAS
128), "Earnings Per Share", as required, effective November 1, 1997. SFAS 128
requires presentation of basic and diluted earnings per share, including a
restatement of all prior periods presented. Basic earnings per share is
calculated based only upon the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated based
upon the weighted average number of common and, where dilutive, potential common
shares outstanding during the period. Potential common shares include options,
warrants and convertible securities.
37
<PAGE>
FOREIGN CURRENCY TRANSLATION:
Results of operations for foreign entities are translated using the average
exchange rates during the period. Assets and liabilities are translated using
the exchange rate in effect at the balance sheet date. Resulting translation
adjustments are recorded as a separate component of stockholders' equity.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified in the consolidated financial
statements to conform to the current year presentation.
NEW ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 130, "Reporting Comprehensive Income" (SFAS
130). Under SFAS 130, companies are required to report comprehensive income as a
measure of overall performance. Comprehensive income includes all changes in
equity during a reporting period, except those resulting from investments by
owners and distributions to owners. The Company will adopt SFAS 130 in 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards 131,
"Disclosure About Segments of an Enterprise and Related Information" (SFAS 131).
SFAS 131 redefines how operating segments are determined and requires expanded
quantitative and qualitative disclosures relating to an entity's operating
segments. The Company will adopt SFAS 131 in 1999.
The American Institute of Certified Public Accountants has issued Statement of
Position (SOP) 97-2 "Software Revenue Recognition". SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The Company does not expect the application of the SOP to
have a material impact on the Company's financial condition or results of
operations. The Company will adopt SOP 97-2 in 1999.
2. ACCOUNTS RECEIVABLE:
Accounts receivable include net installment receivables of $10,496,000 and
$6,264,000 at October 31, 1998 and 1997, respectively. Installment receivables
with terms greater than one year were $575,000 and $565,000 at October 31, 1998
and 1997, respectively, and are included in other assets on the consolidated
balance sheets.
The provision for doubtful accounts, included in selling, general and
administrative expenses on
38
<PAGE>
the consolidated statements of income, was $814,000, $7,252,000 and $2,120,000
for 1998, 1997 and 1996, respectively.
During 1996, the Company sold certain installment receivables, on a non-recourse
basis, to financial institutions. Approximately $735,000 of receivables were
sold at their discounted present value of approximately $599,000 at an effective
rate of 8.6%. The difference between the gross receivable amount and the
proceeds has been recorded as interest expense in the consolidated statements of
income.
3. DEBT:
The components of debt at October 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Current:
Revolving loan............................... $ 6,880 $ 8,908
15% term loan................................ 2,441 3,000
---------------- ---------------
Total current debt......................... $ 9,321 $ 11,908
================ ===============
Long term:
10% subordinated convertible debentures...... $ 3,050 $ 3,050
================ ===============
</TABLE>
The weighted average interest rate of borrowings outstanding under the revolving
loan was 9.5% and 10% at October 31,1998 and 1997, respectively.
The Company's revolving loan agreement, as amended, provides for a maximum $18
million line of credit through February 28, 1999. The agreement also provides
for additional line of credit borrowings up to a maximum $4,500,000 from time to
time during certain periods of the remaining term of the agreement.
Substantially all of the Company's assets are pledged as collateral under the
agreement. Borrowings under the line are limited by the available borrowing
base, as defined, consisting primarily of certain accounts receivable and
inventory, and bear interest at the prime rate plus 1.5% to 2%, as defined. A
commitment fee is payable based on the unused portion of the line of credit. The
agreement provides for restrictions on dividends, investments, additional
indebtedness, and the sale of assets, as defined, and for financial covenants
requiring a minimum level of operating profit.
In addition, the revolving loan agreement provides for a $3 million term loan at
an annual interest rate of 15%. The term loan is subject to monthly prepayments
of $50,000 and a mandatory prepayment of $1,000,000 on or before November 30,
1998.
In March 1997, the Company issued $3,050,000 of 10% subordinated convertible
debentures with interest payable semiannually. At the option of the holder, the
debentures are convertible into the
39
<PAGE>
Company's common stock at $9.60 per share. The Company may redeem the debentures
at 101% of principal, plus interest, subject to certain terms and conditions.
The debentures have a scheduled maturity in 2004 and are subject to mandatory
redemption at 25% of principal annually beginning in 2001.
Scheduled maturities of long term debt are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2001...................................... $ 763
2002...................................... 763
2003...................................... 762
Thereafter................................ 762
----------------
$ 3,050
================
</TABLE>
4. STOCKHOLDERS' EQUITY:
STOCK INCENTIVE AND STOCK OPTION PLANS:
The Company has adopted various stock incentive and stock option plans that
authorize the granting of stock options, stock appreciation rights, and stock
awards to directors, officers and key employees, subject to certain conditions,
including continued employment. Under these plans, 1,953,540 shares are reserved
for granting.
Stock options are granted with an exercise price equal to the fair market value
of the Company's common stock on the date of grant. All options become
exercisable ratably over three years and expire ten years from the grant date.
Information regarding stock option plans is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Options at beginning of year 952 1,016 937
Options granted 305 151 196
Options exercised (100) (148) (96)
Options forfeited (47) (67) (21)
----------------- ----------------- -----------------
Options outstanding at end of year 1,110 952 1,016
================= ================= =================
Options exercisable at end of year 678 646 623
================= ================= =================
Weighted average option prices:
Outstanding at beginning of year $ 8.53 $ 7.77 $ 6.12
Granted 7.48 9.85 13.19
Exercised 7.48 2.68 2.89
Forfeited 11.21 12.88 6.81
Outstanding at end of year 8.22 8.53 7.77
Exercisable at end of year 8.10 7.76 6.25
</TABLE>
40
<PAGE>
Pursuant to the Company's various stock incentive and stock option plans,
participants may elect to exercise stock options through a noncash transaction.
Upon exercise, the Company immediately repurchases shares, at the current market
price, equal to the participants aggregate exercise price and tax liability. The
acquired shares are recorded as treasury stock at cost. The Company acquired
75,000, 21,000 and 4,000 shares totaling $707,000, $261,000 and $75,000 through
noncash exercise transactions in 1998, 1997 and 1996, respectively.
In September 1997, stock awards totaling 101,000 shares of the Company's common
stock were granted to certain key employees for the purchase price of $1.00 per
share. These shares vest over a five-year period and they may not be sold or
transferred.
The Company has adopted the disclosure only provisions of SFAS 123, "Accounting
for Stock-Based Compensation". All stock options are granted at an exercise
price equal to the fair market value on the grant date and, accordingly, no
compensation expense has been recognized in the accompanying consolidated
financial statements. Had compensation expense been recognized based on the fair
value of options granted, consistent with the provisions of SFAS 123, the
Company's net income (loss) and earnings per share would have been changed to
the following pro forma amounts (in thousands, except per share amounts):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------------- ------------------
<S> <C> <C>
Net income (loss):
1998 $ 3,068 $ 1,672
1997 (20,217) (20,816)
1996 982 (40)
Diluted earnings per share:
1998 $ 0.47 $ 0.26
1997 (3.24) (3.34)
1996 0.15 (0.01)
</TABLE>
The fair value of these options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expected life: 5 years Interest rate: 4.7 to 6.7%
Volatility: 69% to 73% Dividend yield: None
</TABLE>
41
<PAGE>
STOCK WARRANTS AND CONVERTIBLE SECURITIES:
In March 1997, the Company issued subordinated debentures which are convertible
into shares of common stock at $9.60 per share (see Note 3). Concurrent with
this issuance, the Company issued approximately 51,000 warrants to purchase
common stock at $9.60 per share. The warrants expire from 2002 to 2007.
5. INCOME TAXES:
The components of income (loss) before provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States............................. $ 2,335 $ (13,432) $ 2,066
Foreign................................... 733 (2,724) (520)
---------------- ---------------- ----------------
$ 3,068 $ (16,156) $ 1,546
================ ================ ================
</TABLE>
The components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal................................... $ -- $ 3,397 $ 703
Foreign................................... -- 408 (178)
State and local........................... -- 256 39
---------------- ---------------- ----------------
$ -- $ 4,061 $ 564
================ ================ ================
</TABLE>
The provision for income taxes differs from the amount computed by applying the
U.S. federal statutory income tax rate to income (loss) before income taxes. The
principal reasons for the differences are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. federal statutory rate at 34%........ $ 1,043 $ (5,493) $ 525
State taxes, net of U.S. federal
Income tax ............................ -- (565) 52
Previously unrecognized benefit from
utilizing tax loss carryforwards....... (1,043) -- --
Other..................................... -- 10,119 (13)
-------------- ---------------- ----------------
$ -- $ 4,061 $ 564
============== ================ ================
</TABLE>
42
<PAGE>
The components of the deferred tax asset at October 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------- -----------------------------
TEMPORARY TEMPORARY
DIFFERENCE TAX EFFECTED DIFFERENCE TAX EFFECTED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Current:
Revenue recognition.................... $ (3,619) $ (1,339) $ (3,793) $ (1,385)
Accrued liabilities and reserves....... 3,130 1,158 7,701 2,811
-------------- -------------- -------------- -------------
Total current deferred tax asset
(liability)........................ (489) (181) 3,908 1,426
-------------- -------------- -------------- -------------
Long-term:
Net operating loss carryforwards....... 28,497 10,544 26,498 9,673
Product development expense
recognition.......................... -- -- (3,133) (1,144)
Discontinued operations reserve........ -- -- 500 183
Equipment basis difference............. 465 172 812 296
Revenue recognition.................... (494) (183) (517) (189)
Other.................................. 38 14 (345) (126)
-------------- -------------- -------------- -------------
Total long-term deferred tax asset... 28,506 10,547 23,815 8,693
-------------- -------------- -------------- -------------
$ 28,017 $ 10,366 $ 27,723 $ 10,119
============== ==============
Less valuation allowance (10,366) (10,119)
-------------- -------------
$ -- $ --
============== =============
</TABLE>
In line with the Company's decision to fully reserve its deferred tax asset at
the end of 1997, no income taxes have been recorded in 1998.
The Company took a non-cash charge of $4,061,000 in 1997 to record a valuation
allowance against the deferred tax asset. Such valuation allowance has been
provided based on the inherent uncertainty of predicting the sufficiency of the
future taxable income necessary to realize the benefit of the net deferred tax
asset in light of the Company's recent loss history and the competitive nature
of the industry in which the Company operates.
At October 31, 1998, the Company had a federal net operating loss carryforward
of approximately $28 million and a foreign net operating loss carryforward of
approximately $5 million. These net operating loss carryforwards begin to expire
in 2004.
43
<PAGE>
6. EARNINGS PER SHARE
The components of the earnings per share calculation are as follows (in
thousands, except per share data:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Numerator:
Net income (loss) for basic earnings per share $ 3,068 $(20,217) $ 982
Effect of convertible debentures -- -- --
----------- -------- --------
Net income (loss) for diluted earnings per share $ 3,068 $(20,217) $ 982
=========== ======== ========
Denominator:
Weighted average common shares for basic earnings
per share 6,409 6,233 6,120
Potential common shares:
Stock options and warrants 95 -- 523
Convertible debentures -- -- --
----------- -------- --------
Weighted average common and potential common
shares outstanding for diluted earnings per share 6,504 6,233 6,643
=========== ======== ========
Basic Earnings Per Share $ 0.48 $ (3.24) $ 0.16
=========== ======== ========
Diluted Earnings Per Share $ 0.47 $ (3.24) $ 0.15
=========== ======== ========
</TABLE>
In 1998, the effect of the convertible debentures is antidilutive and the
related number of shares and interest expense are excluded from the calculation.
Since the Company incurred a net loss in 1997, the effect of all potential
common shares is antidilutive and the related amounts are excluded from the
calculation.
7. COMMITMENTS:
The Company leases its warehouse, sales and administration facilities. Certain
of these leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, insurance and maintenance costs. Commitments for
future minimum rental payments under noncancelable leases for the next five
years ending October 31 are as follows (in thousands):
<TABLE>
<S> <C>
1999....................................$1,286
2000.......................................651
2001.......................................125
2002.........................................8
2003........................................--
</TABLE>
Rent expense was $1,692,000, $1,616,000 and $1,413,000 for 1998, 1997, and 1996,
respectively.
44
<PAGE>
8. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION:
The Company operates in one industry segment, namely education and training.
Information about the Company's operations in different geographic areas is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States............................. $ 35,401 $ 30,779 $ 33,217
Canada.................................... 1,411 1,644 2,955
United Kingdom............................ 6,466 4,536 5,233
-------------- --------------- ---------------
$ 43,278 $ 36,959 $ 41,405
============== =============== ===============
Operating income (loss):
United States............................. $ 4,755 $ (11,856) $ 3,006
Canada.................................... (51) (1,444) (528)
United Kingdom............................ 816 (1,240) (130)
-------------- --------------- ---------------
$ 5,520 $ (14,540) $ 2,348
============== =============== ===============
Total assets:
United States............................. $ 24,945 $ 23,398 $ 35,497
Canada.................................... 1,055 1,026 2,322
United Kingdom............................ 1,407 4,664 4,508
-------------- --------------- ---------------
$ 27,407 $ 29,088 $ 42,327
============== =============== ===============
</TABLE>
Revenues from affiliates, while not significant, are recorded at established
intercompany selling prices which are based upon cost plus mark-up.
45
<PAGE>
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
<TABLE>
<CAPTION>
JAN 31 APR 30 JUL 31 OCT 31 TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1998:
- ----
Revenues by product line:
PLATO Education.......... $ 6,043 $ 8,391 $ 10,601 $ 14,350 $ 39,385
Aviation Training........ 1,160 1,222 1,464 47 3,893
------------- ------------- ------------- ------------- -------------
Total revenues........... 7,203 9,613 12,065 14,397 43,278
Gross profit................ 5,613 8,266 10,650 13,740 38,269
Net income (loss)........... (2,901) (516) 1,586 4,899 3,068
Earnings per share:
Basic.................... (0.45) (0.08) 0.25 0.76 0.48
Diluted.................. (0.45) (0.08) 0.23 0.73 0.47
1997:
- ----
Revenues by product line:
PLATO Education.......... $ 4,265 $ 6,224 $ 10,674 $ 12,102 $ 33,265
Aviation Training........ 822 1,376 669 827 3,694
------------- ------------- ------------- ------------- -------------
Total revenues........... 5,087 7,600 11,343 12,929 36,959
Gross profit................ 4,307 6,249 9,582 10,346 30,484
Net income (loss)........... (2,315) (2,281) (1,080) (14,541) (20,217)
Basic and diluted earnings
per share................ (0.37) (0.37) (0.17) (2.31) (3.24)
</TABLE>
10. SUBSEQUENT EVENT (UNAUDITED):
On January 13, 1999, the Company announced the completion of a $5 million
private placement of convertible preferred stock. The preferred stock is
convertible into shares of the Company's common stock, at the option of the
holder, up to two years from the issue date. Conversion is mandatory for
securities still outstanding two years from the issue date. The conversion price
is based on the average market price of the Company's common stock prior to
conversion, as defined, and is adjusted over time to provide an 8% annual return
to the holders. The conversion price is also subject to ceiling and floor
limitations, which may be adjusted based on the Company's financial performance.
Concurrent with this issuance, the Company issued 125,000 warrants to purchase
the Company's common stock at $9.51 per share. These warrants expire five years
from the issue date. The net proceeds received from the convertible preferred
stock issuance were approximately $4.6 million and were used to pay down
existing borrowings.
46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
TRO Learning, Inc.
Our report on the consolidated financial statements of TRO Learning, Inc. and
Subsidiaries is included on page 30 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 29 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 3, 1998
47
<PAGE>
TRO LEARNING, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) END OF PERIOD
---------------------------- -------------- -------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Deducted in the balance
sheets from the assets to
which they apply:
Allowance for doubtful
accounts:
For the year ended 584 2,120 264 (b) (2,458)(a) 510
October 31, 1996
For the year ended 510 7,252 --- (742)(a) 7,020
October 31, 1997
For the year ended 7,020 814 367 (b) (7,281)(a) 920
October 31, 1998
Allowance for inventory
obsolescence:
For the year ended 491 150 --- (185)(a) 456
October 31, 1996
For the year ended 456 --- --- (140)(a) 316
October 31, 1997
For the year ended 316 --- --- (41)(a) 275
October 31, 1998
</TABLE>
(a) Amounts written off, net of recoveries.
(b) Amounts reclassified.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information with respect to the Directors of the Registrant which is set
forth in the section entitled "Election of Directors" of the Company's 1999
Proxy Statement, which is incorporated herein by reference. See the information
set forth in the section entitled "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the 1999 Proxy Statement, which is
incorporated herein by reference. The 1999 Proxy Statement will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
For information regarding Executive Officers of the Registrant, see Item 4A of
this Report, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the information set forth in the sections entitled "Director Compensation",
"Executive Compensation", and "Compensation Committee Interlocks and Insider
Participation" in the 1999 Proxy Statement, which is incorporated herein by
reference. Such incorporation by reference shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a)(8) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
See the information set forth in the section entitled "Security Ownership of
Certain Beneficial Owners and Management" in the 1999 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain Relationships and
Transactions" in the 1999 Proxy Statement, which is incorporated herein by
reference.
49
<PAGE>
PART IV
- -------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements - see index on page 29.
2. Financial Statement Schedules - see index on page 29.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed for the quarter ended October 31,
1998.
(c) Exhibits:
The following documents are filed herewith or incorporated herein by
reference and made a part of this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
3.01 Certificate of Incorporation of the Company (1)
3.02 Certificate of Designations for Series C Convertible
Preferred Stock
3.03 Bylaws of the Company (1)
4.01 Form of stock certificate of the Company (1)
10.01 Amended and Restated Revolving Loan and Security
Agreement between Sanwa Business Credit Corporation and
The Roach Organization, Inc. and TRO Learning (Canada),
Inc. dated March 5, 1997 (7)
10.04 1993 Outside Director Stock Option Plan+ (3)
10.08 Lease for Edina, Minnesota office (4)
10.14 1993 Stock Option Plan + (2)
10.15 Severance and Non Competition Agreement with William R.
Roach + (3)
10.17 First Amendment to Amended and Restated Revolving Loan
and Security Agreement between Sanwa Business Credit
Corporation and The Roach Organization, Inc. and TRO
Learning (Canada), Inc. dated March 18, 1997 (7)
10.18 Form of Series 1997 10% Subordinated Convertible
Debentures due March 27, 2004 (7)
10.19 Form of Common Stock Warrants dated March 27, 1997 (7)
10.20 Second Amendment to Amended and Restated Revolving Loan
and Security Agreement between Sanwa Business Credit
Corporation and The Roach Organization, Inc. and TRO
Learning (Canada), Inc. dated December 8, 1997 (7)
10.21 1997 Stock Incentive Plan + (5)
10.22 1997 Non-Employee Directors Stock Option Plan + (6)
10.23 Preferred Stock Purchase Agreement
10.24 Form of 1999 Warrants
10.25 Registration Rights Agreement
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
10.26 Form of Series C Convertible Preferred Stock
10.27 First Amendment to Subordinated Convertible Debentures
due March 27, 2004
21.01 Subsidiaries of the Registrant (1)
23.01 Consent of PricewaterhouseCoopers LLP with respect to
Registration Statements on Form S-8
24.01 Powers of Attorney
27.00 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the corresponding exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-54296).
(2) Incorporated by reference to Exhibit A to the Company's 1994 Proxy
Statement (File Number 0-20842).
(3) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1994 (File
Number 0-20842).
(4) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1995 (File
Number 0-20842).
(5) Incorporated by reference to Appendix A to the Company's 1997 Proxy
Statement (File Number 0-20842).
(6) Incorporated by reference to Appendix B to the Company's 1997 Proxy
Statement (File Number 0-20842).
(7) Incorporated by reference to the corresponding exhibit on the Company's
Annual Report on Form 10-K for the year ended October 31, 1997 (File
Number 0-20842).
+ Management contract or compensatory plan, contract or arrangement.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on January 22, 1999.
TRO LEARNING, INC.
By /s/William R. Roach
---------------------------------------
William R. Roach
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on January 22, 1999.
<TABLE>
<CAPTION>
Signature: Title:
<S> <C>
/s/ William R. Roach Chairman of the Board, President and Chief
- --------------------------- Executive Officer (principal executive officer)
William R. Roach
/s/ John Murray Executive Vice President and Chief Financial
- --------------------------- Officer (principal financial officer)
John Murray
/s/ Mary Jo Murphy Vice President, Corporate Controller and Chief
- --------------------------- Accounting Officer (principal accounting officer)
Mary Jo Murphy
*
- ---------------------------
Jack R. Borsting Director
*
- ---------------------------
Tony J. Christianson Director
*
- ---------------------------
John L. Krakauer Director
*
- ---------------------------
Vernon B. Lewis Director
*
- ---------------------------
John Patience Director
* By /s/ Mary Jo Murphy
----------------------
Mary Jo Murphy
Attorney-in Fact
</TABLE>
52
<PAGE>
CERTIFICATE OF DESIGNATIONS OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
TRO LEARNING, INC.
I, Patricia Hlavacek, duly elected Secretary of TRO LEARNING, INC., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, do hereby certify that:
The Board of Directors of said corporation, at a meeting held on
December 10, 1998, duly approved and adopted resolutions providing for the
creation of Five Hundred Forty (540) shares of Series C Convertible Preferred
Stock:
SEE ATTACHED EXHIBIT A
<PAGE>
IN WITNESS WHEREOF, I have signed this Certificate on this 11th day of
January, 1999.
By: /s/ Patricia Hlavacek
------------------------
Patricia Hlavacek
Secretary
<PAGE>
EXHIBIT A
FURTHER RESOLVED, that for purposes of the Offering the Directors
approve and authorize the issuance of Five Hundred Forty (540) shares of
Series C Convertible Preferred Stock in the form approved by the officers of
the Corporation, and approve and authorize the issuance of the Warrants;
APPROVAL OF DOCUMENTS
FURTHER RESOLVED, in furtherance of the foregoing resolutions, that
the officers of the Corporation be, and they hereby are, authorized, empowered
and directed to execute, deliver, and file with the appropriate office, if
necessary, the following agreements in connection with the Offering:
1. Series C Convertible Preferred Stock issued by the Corporation to
the Purchasers;
2. Warrants issued by the Corporation to the Purchasers;
3. Convertible Preferred Stock Purchase Agreement;
4. Registration Rights Agreement;
5. Certificate of Designations providing the terms of the Preferred
Stock as provided in Exhibit A to the Convertible Preferred Stock
Purchase Agreement;
FURTHER RESOLVED, that each of the foregoing documents shall be in
such form as the officers of the Corporation executing such agreements may deem
appropriate or advisable and may approve, such approval to be conclusively
evidenced by the execution and delivery of any such agreement by such officer.
<PAGE>
CERTIFICATE OF DESIGNATIONS
FOR
SERIES C CONVERTIBLE PREFERRED STOCK
OF
TRO LEARNING, INC.
TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of
preferred stock shall be designated as Series C Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 540 (which
shall not be subject to increase without the consent of the holders of the
Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")); Each share
of Preferred Stock shall have a par value of $.01 and a stated value of $10,000
(the "STATED VALUE"). Notwithstanding anything to the contrary in the
Certificate of Incorporation of TRO Learning, Inc. (the "Company"), this
Certificate of Designation for the Series C Preferred Stock of the Company
constitutes the full and complete description of the rights and preferences of
the Series C Preferred Stock of the Company and Section 2 of Article 4 of the
Company's Certificate of Incorporation is inapplicable pursuant to Part 15 of
Section 2 of Article 4.
Section 2. DIVIDENDS. Holders shall not be entitled to receive
any dividends on the Preferred Stock.
Section 3. VOTING RIGHTS. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding,
the Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of the Holders of all of the shares of the Preferred Stock
then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in Section
4) senior to or otherwise pari passu with or senior to the Preferred Stock,
(d) amend its Certificate of Incorporation, bylaws or other charter documents
so as to affect adversely any rights of any Holders, (e) increase the
authorized number of shares of Preferred Stock, or (f) enter into any
agreement with respect to the foregoing.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"LIQUIDATION"), the Holders shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value, before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the Holders shall be distributed among
the Holders ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. A
sale, conveyance or disposition of all or substantially all of the assets of
the Company or the effectuation by the Company of a transaction
<PAGE>
or series of related transactions in which more than 33% of the voting power
of the Company is disposed of, or a consolidation or merger of the Company
with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5.
The Company shall mail written notice of any such Liquidation, not less than
45 days prior to the payment date stated therein, to each record Holder.
Section 5. CONVERSION.
(a)(i) CONVERSIONS AT OPTION OF HOLDER. Each share of Preferred Stock
shall be convertible into shares of Common Stock (subject to the limitations set
forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in
Section 8), at the option of the Holder, at any time and from time to time, from
and after the earlier to occur of (i) the date the Registration Statement is
declared effective by the Commission or (ii) the 90th day following the Original
Issue Date, the ("INITIAL CONVERSION DATE"). Holders shall effect conversions
by surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "CONVERSION DATE"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) AUTOMATIC CONVERSION. Subject to the provisions in this
paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not been
made or required hereunder shall be automatically converted on January 13, 2001
(such date the "AUTOMATIC CONVERSION DATE"), at the Conversion Price on the
Automatic Conversion Date. The conversion contemplated by this paragraph shall
not occur if (a) either (1) an Underlying Securities Registration Statement is
not then effective or (2) the Holder is not permitted to resell Underlying
Shares pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), without volume restrictions; (b) there are not
sufficient shares of Common Stock authorized and reserved for issuance upon such
conversion; or (c) the Company shall have defaulted on its covenants and
obligations hereunder or under the Purchase Agreement or Registration Rights
Agreement. Notwithstanding the foregoing, the period for conversion under this
Section shall be extended (on a day-for-day basis) and therefore the Automatic
Conversion Date shall be deemed to be the date which is the number of Trading
Days that the Purchaser is unable to resell Underlying Shares under an
Underlying Securities Registration Statement due to (a) the Common Stock not
being listed for trading on the Nasdaq National Market ("NASDAQ") or on the New
York Stock Exchange, American Stock Exchange, or the Nasdaq SmallCap Market
(each, a "SUBSEQUENT MARKET"), (b) the failure of an Underlying Securities
Registration Statement to be declared effective by the Securities and Exchange
Commission (the
-2-
<PAGE>
"COMMISSION") by the Effectiveness Date (as defined in the Registration
Rights Agreement), or (c) if an Underlying Securities Registration Statement
shall have been declared effective by the Commission, (x) the failure of such
Underlying Securities Registration Statement to remain effective at all times
thereafter as to all Underlying Shares, or (y) the suspension of the Holder's
ability to resell Underlying Shares thereunder after the Automatic Conversion
Date originally noted above.
(iii) CERTAIN CONVERSION RESTRICTIONS.
(A) The Holder agrees not to convert shares of Preferred Stock
to the extent such conversion would result in the Holder beneficially owning
(as determined in accordance with Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT") and the rules thereunder) in excess of
4.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of the shares of Preferred Stock held by such
Holder after application of this Section. To the extent that the limitation
contained in this Section applies, the determination of whether shares of
Preferred Stock are convertible (in relation to other securities owned by a
Holder) and of which shares of Preferred Stock are convertible shall be in the
sole discretion of the Holder, and the submission of shares of Preferred Stock
for conversion shall be deemed to be the Holder's determination of whether such
shares of Preferred Stock are convertible (in relation to other securities owned
by the Holder) and of which portion of such shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right
of the Holder to convert shares of Preferred Stock at such time as such
conversion will not violate the provisions of this Section. The provisions of
this Section will not apply to any conversion pursuant to Section 5 (a)(ii)
hereof, and may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company (in which
case, the Holder shall make such filings with the Commission as are required by
applicable law), and the provisions of this Section shall continue to apply
until such 75th day (or later, if stated in the notice of waiver). Other
Holders shall be unaffected by any such waiver.
(B) The Holder agrees not to convert shares of Preferred Stock
to the extent such conversion would result in the Holder beneficially owning
(as determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) in excess of 9.999% of the then issued and outstanding shares
of Common Stock, including shares issuable upon conversion of the shares of
Preferred Stock held by such Holder after application of this Section. To the
extent that the limitation contained in this Section applies, the determination
of whether shares of Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Preferred Stock are
convertible shall be in the sole discretion of the Holder, and the submission of
shares of Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred Stock are convertible (in
relation to other securities owned by the Holder) and of which portion of such
shares of Preferred Stock are convertible, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Holder to convert shares of
Preferred Stock at such time as such conversion will not
-3-
<PAGE>
violate the provisions of this Section. The provisions of this Section will
not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may be
waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 75 days prior notice to the Company (in which case, the Holder
shall make such filings with the Commission as are required by applicable
law), and the provisions of this Section shall continue to apply until such
75th day (or later, if stated in the notice of waiver). Other Holders shall
be unaffected by any such waiver.
(C) Notwithstanding anything to the contrary set forth herein,
the Company shall not be obligated to issue in excess of 1,151,525 shares of
Common Stock upon conversion of Preferred Stock (the "MAXIMUM SHARE AMOUNT"),
which number shall be subject to adjustment pursuant to Section 5, PROVIDED,
however that in the event that the 1999 fiscal year end pre-tax earnings are (i)
less than $3,068,000.00, then the Maximum Share Amount shall be 1,703,470 shares
of Common Stock or (ii) equal to or greater than $3,068,000.00 but less than
$4,763,000.00, then the Maximum Share Amount shall be 1,362,776 shares of Common
Stock. In accordance with the Purchase Agreement such number of shares of
Common Stock shall be available on a pro rata basis based upon the pro rata
purchase price for the Preferred Stock paid by the original Holders of Preferred
Stock. Shares of Common Stock issued on the Automatic Conversion Date pursuant
to Section 5(a)(ii) and in respect of penalties and liquidated damages hereunder
shall not count towards the Maximum Share Amount referenced in this paragraph
and penalties and liquidated damages shall be paid in cash unless otherwise
agreed to by the Holder.
(D) If on any Conversion Date (A) the Common Stock is listed for
trading on NASDAQ or the Nasdaq SmallCap Market, (B) the Conversion Price then
in effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion in full of all then outstanding shares of
Preferred Stock, together with any shares of Common Stock previously issued upon
conversion of shares of Preferred Stock, would equal or exceed 20% of the number
of shares of Common Stock outstanding on the Original Issue Date (such number of
shares as would not equal or exceed such 20% limit, the "ISSUABLE MAXIMUM"), and
(C) the Company shall not have previously obtained the vote of shareholders (the
"SHAREHOLDER APPROVAL"), if any, as may be required by the applicable rules and
regulations of The Nasdaq Stock Market (or any successor entity) applicable to
approve the issuance of shares of Common Stock in excess of the Issuable Maximum
in a private placement whereby shares of Common Stock are deemed to have been
issued at a price that is less than the greater of book or fair market value of
the Common Stock, then the Company shall issue to the Holder so requesting a
conversion a number of shares of Common Stock equals such Holder's pro rata
portion of the Issuable Maximum and, with respect to the remainder of the shares
of Preferred Stock then held by such Holder for which a conversion in accordance
with the Conversion Price would result in an issuance of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum (the "EXCESS
PRINCIPAL"), the converting Holder shall have the option to require the Company
to either (1) use its best efforts to obtain the Shareholder Approval applicable
to such issuance as soon as is possible, but in any event not later than the
60th day after such request, or (2)(i) issue and deliver to such Holder a number
of shares of Common Stock as equals (x) the Excess Principal divided by (y) the
Conversion Price, and (ii) cash in an amount equal to the product of (x) the Per
Share Market Value on the Conversion Date and (y) a number of shares of Common
Stock as equals the Excess Principal divided by the Conversion Price (such
amount of
-4-
<PAGE>
cash being hereinafter referred to as the "DISCOUNT EQUIVALENT"), or (3) pay
cash to the converting Holder in an amount equal to the Mandatory Redemption
Amount for the shares of Common Stock otherwise issuable on account of the
Excess Principal. If the Company fails to pay the Discount Equivalent or the
Mandatory Redemption Amount, as the case may be, in full pursuant to this
Section within seven (7) days after the date payable, the Company will pay
interest thereon at a rate of 18% per annum to the converting Holder,
accruing daily from the Conversion Date until such amount, plus all such
interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to the limitations set forth in Section 5(a)(iii)
hereof), and (ii) one or more certificates representing the number of shares of
Preferred Stock not converted, certificates, which shall be free of restrictive
legends and trading restrictions (other than those required by Section 3.1 (b)
of the Purchase Agreement), representing such shares of Common Stock; PROVIDED,
HOWEVER, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares of
Preferred Stock until certificates evidencing such shares of Preferred Stock are
either delivered for conversion to the Company or any transfer agent for the
Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies
the Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, are not delivered to or as directed by the applicable Holder by
the third (3rd) Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its receipt
of such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the certificates representing
the shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), by the third (3rd)
Trading Day after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, $3,500 for each day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Preferred Stock by the third (3rd) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the Company
to issue Underlying Shares pursuant
-5-
<PAGE>
to Section 5(c), except that for such purpose the Conversion Price applicable
thereto shall be the lesser of the Conversion Price on the Conversion Date
and the Conversion Price on the date of such Holder demand. Any such
Underlying Shares will be subject to the provision of this Section.
(iii) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i) by the third (3rd) Trading Day after the Conversion
Date, and if after such third (3rd) Trading Day the Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
pay in cash to the Holder (in addition to any remedies available to or elected
by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the aggregate stated value of the shares of Preferred
Stock for which such conversion was not timely honored. For example, if the
Holder purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
stated value of the shares of Preferred Stock, the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
(c) (i)(A) The conversion price (the "CONVERSION PRICE") in effect
on any Conversion Date shall be the lesser of (1) $9.51 or (2) the Applicable
Percentage (as defined in Section 8) of the average of the lowest three (3) Per
Share Market Values during the thirty (30) Trading Days immediately preceding
such Conversion Date.
(B) If: (a) an Underlying Securities Registration
Statement is not filed on or prior to the Filing Date (as defined in the
Registration Rights Agreement) (if the Company files such Underlying
Securities Registration Statement without affording the Holder the
opportunity to review and comment on the same as required by Section 3(a) of
the Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Exchange Act, within five (5) Trading Days of the date
that the Company is notified (orally or in writing, whichever is earlier) by
the Commission that an Underlying Securities Registration Statement will not
be "reviewed," or not subject to further review, or (c) the Underlying
Securities Registration Statement is not declared effective by the Commission
on or prior to the Effectiveness Date (as defined in the Registration Rights
Agreement), provided, however that the Effectiveness Date shall be extended
for fifteen (15) days in the event that the Company is using its best efforts
to cause the Registration Statement to be declared effective by the
Commission within ninety (90) days of the Original Issue Date, or (d) such
Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as defined in the Registration Rights Agreement) at
any time prior to the expiration of the "Effectiveness Period" (as defined in
the Registration Rights Agreement), without being succeeded within ten (10)
Trading Days by an amendment to such Underlying Securities Registration
Statement or a subsequent Underlying Securities Registration Statement filed
with and declared effective by the Commission, or (e) trading in the Common
Stock shall be suspended from
-6-
<PAGE>
the NASDAQ or a Subsequent Market for more than three (3) Business Days
(which need not be consecutive Business Days), (f) the conversion rights of
the Holders are suspended for any reason or (g) an amendment to the
Underlying Securities Registration Statement is not filed by the Company with
the Commission within ten (10) Trading Days of the Commission's notifying the
Company that such amendment is required in order for the Underlying
Securities Registration Statement to be declared effective (any such failure
or breach being referred to as an "EVENT," and for purposes of clauses (a),
(c), (f) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) Trading Day period is exceeded, or for
purposes of clauses (d) and (g) the date which such 10 Trading Day period is
exceeded, or for purposes of clause (e) the date on which such three (3)
Business Day-period is exceeded, being referred to as "EVENT DATE"), then the
Company shall, on the first day of each monthly anniversary of the Event Date
and until the earlier to occur of the third monthly anniversary of the Event
Date or such time as the applicable Event is cured, pay to the Holder $40,000
in cash, as liquidated damages and not as a penalty. Commencing the third
month anniversary after the Event Date and on each monthly anniversary
thereafter until such time as the applicable Event is cured, the Company
shall pay to the Holder $120,000 in cash, as liquidated damages and not as a
penalty. The provisions of this Section are not exclusive and shall in no
way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari passu
securities payable in shares of Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
5(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to
all holders of Common Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the Per Share Market
Value at the record date mentioned below, then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, warrants or options, plus the number of shares of Common Stock which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value, and the denominator of which shall
be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock offered for
subscription or purchase. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon
-7-
<PAGE>
the expiration of any right, warrant or option to purchase shares of Common
Stock the issuance of which resulted in an adjustment in the Conversion Price
pursuant to this Section 5(c)(iii), if any such right, warrant or option
shall expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it
would have been (but reflecting any other adjustments in the Conversion Price
made pursuant to the provisions of this Section 5 upon the issuance of other
rights or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights, warrants, or options been made on the basis of
offering for subscription or purchase only that number of shares of Common
Stock actually purchased upon the exercise of such rights, warrants or
options actually exercised.
(iv) Except as contemplated by Schedule 2.1(a) to the Purchase
Agreement, if the Company or any subsidiary thereof, as applicable with respect
to Common Stock Equivalents (as defined below), at any time while any shares of
Preferred Stock are outstanding, shall, issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling
any Person to acquire shares of Common Stock at a price per share less than the
Conversion Price, then the Conversion Price shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of shares of Common Stock or such Common Stock
Equivalents plus the number of shares of Common Stock which the offering price
for such shares of Common Stock or Common Stock Equivalents would purchase at
the Conversion Price, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock so issued or issuable, provided, that
for purposes hereof, all shares of Common Stock that are issuable upon exercise
or exchange of Common Stock Equivalents shall be deemed outstanding immediately
after the issuance of such Common Stock Equivalents. Such adjustment shall be
made whenever such shares of Common Stock or Common Stock Equivalents are
issued; provided, however, that no such adjustments shall be made for Common
Stock Equivalents issued pursuant to the Company's Management Stock Incentive
Plan, 1993 Stock Option Plan, 1997 Stock Incentive Plan, 1993 Outside Director
Stock Option Plan, TRO 1994 and 1995 Outside Director Stock Option Plan and 1997
Non-Employee Directors Stock Option Plan.
(v) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
5(c)(ii)-(iv) above), then in each such case the Conversion Price at which each
share of Preferred Stock shall thereafter be convertible shall be determined by
multiplying the Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors in
good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding
-8-
<PAGE>
ten percent (10%) of the net assets of the Company, if the Holders of a
majority in interest of the Preferred Stock dispute such valuation, such fair
market value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants
of recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "APPRAISER") selected in good faith
by the Company, subject to approval by the Holders of a majority in interest
of the shares of Preferred Stock then outstanding whose approval shall not be
unreasonably withheld or delayed. The adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(vi) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to
Section 5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail to each
Holder, a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (other than compulsory share exchanges
which constitute Change of Control Transactions), the Holders of the Preferred
Stock then outstanding shall have the right thereafter to convert such shares
only into the shares of stock and other securities, cash and property receivable
upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such amount of securities, cash or
property as a holder of the number of shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification or share exchange would have been entitled. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted into
other securities, cash or property, or (e) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; then the Company shall cause to be filed at each office or
agency maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders at their last addresses as they shall
-9-
<PAGE>
appear upon the stock books of the Company, at least 20 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein
or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice. Holders are entitled to
convert shares of Preferred Stock during the 20-day period commencing the
date of such notice to the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of Common Stock as
shall (subject to any additional requirements of the Company as to reservation
of such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5(a) and Section 5(c)) upon
the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and
freely tradeable, subject to the legend requirements of Section 3.1 (b) of the
Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
-10-
<PAGE>
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Executive Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (Minnetonka time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (Minnetonka
time) on any date and earlier than 11:59 p.m. (Minnetonka time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. REDEMPTION UPON TRIGGERING EVENTS.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law), has
the right, exercisable at the sole option of such Holder, to require the Company
to redeem all or a portion of the Preferred Stock then held by such Holder for a
redemption price, in cash, equal to the sum of (i) the Mandatory Redemption
Amount plus (ii) the product of (A) the number of Underlying Shares issued in
respect of conversions hereunder and then held by the Holder and (B) the Per
Share Market Value on the date such redemption is demanded or the date the
redemption price hereunder is paid in full, whichever is greater. If the
Company fails to pay the redemption price hereunder in full pursuant to this
Section within seven (7) days after the date of a demand therefor, the Company
will pay interest thereon at a rate of 18% per annum, accruing daily from such
seventh day until the redemption price, plus all such interest thereon, is paid
in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of an Underlying Securities Registration
Statement to be declared effective by the Commission on or prior to the 180th
day after the Original Issue Date;
-11-
<PAGE>
(ii) if, during the Effectiveness Period, the effectiveness of
the Underlying Securities Registration Statement lapses for five (5) consecutive
Trading Days for any reason, or the Holder shall not be permitted to resell
Registrable Securities under the Underlying Securities Registration Statement
for five (5) consecutive Trading Days;
(iii) the failure of the Common Stock to be listed for trading
on NASDAQ or on a Subsequent Market or the suspension of the Common Stock from
trading on NASDAQ or on a Subsequent Market, in either case, for more than five
(5) Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the 12th day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any Preferred Stock in accordance with the terms
hereof;
(v) the Company shall be a party to any Change of Control
Transaction, shall agree to sell (in one or a series of related transactions)
all or substantially all or in excess of 50% of its assets in one or more
transaction (whether or not such sale would constitute a Change of Control
Transaction) or shall redeem more than a de minimis number of shares of Common
Stock or other Junior Securities (other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of
the Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the Commission on
or prior to the Effectiveness Date);
(vii) the Company shall fail for any reason to deliver the
certificate or certificates required pursuant to Section 5(b)(iii) or the cash
pursuant to a Buy-In within ten (10) days after notice is deemed delivered
hereunder; or
(viii) the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue to such
Holder upon a conversion hereunder.
Section 7. OPTIONAL REDEMPTION.
(a) The Company shall have the right, exercisable at any time upon 30
days' notice (an "OPTIONAL REDEMPTION NOTICE") to the Holders of the Preferred
Stock given at any time after the Optional Redemption Date (as defined in
Section 8) to redeem all or any portion of the shares of Preferred Stock which
have not previously been converted or redeemed, at a price equal to the Optional
Redemption Price (as defined below), PROVIDED, that the Company shall not be
entitled to deliver an Optional Redemption Notice to the Holders if: (i) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes is insufficient to
-12-
<PAGE>
satisfy the Company's conversion obligations of all shares of Preferred Stock
then outstanding, (ii) the Underlying Shares then outstanding are not
registered for resale pursuant to an effective Underlying Securities
Registration Statement and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act, (iii) the Common
Stock is not then listed for trading on NASDAQ or a Subsequent Market, or
(iv) the average of the Per Share Market Values for twenty (20) consecutive
Trading Days immediately preceding the date of the Optional Redemption Notice
is not greater than $15.85. The entire Optional Redemption Price shall be
paid in cash. Holders may convert (and the Company shall honor such
conversions in accordance with the terms hereof) any shares of Preferred
Stock, including shares subject to an Optional Redemption Notice, during the
period from the date thereof through the 30th day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be paid
by the Company by the 30th day after the delivery of an Optional Redemption
Notice, interest shall accrue thereon at the rate of 18% per annum until the
Optional Redemption Price plus all such interest is paid in full. In addition,
if any portion of the Optional Redemption Price remains unpaid after the date
due, the Holder of the Preferred Stock subject to such redemption may elect, by
written notice to the Company given at any time thereafter, to either (i) demand
conversion of all or any portion of the shares of Preferred Stock for which such
Optional Redemption Price, plus interest thereof, has not been paid in full (the
"UNPAID REDEMPTION SHARES"), in which event the Per Share Market Value for such
shares shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate AB INITIO
such redemption, notwithstanding anything herein contained to the contrary. If
the Holder elects option (i) above, the Company shall within three (3) Trading
Days of its receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
Holder's notice of such election, return to the Holder all of the Unpaid
Redemption Shares.
(c) The "OPTIONAL REDEMPTION PRICE" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed and (B)
the product of (1) a) at any time prior to the first anniversary of the Original
Issued Date, 125% or b) at any time thereafter, 156%, of the average Per Share
Market Value for the five (5) Trading Days immediately preceding (x) the date of
the Optional Redemption Notice or (y) the date of payment in full by the Company
of the Optional Redemption Price, whichever is greater, and (2) the Conversion
Ratio calculated on the date of the Optional Redemption Notice, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of such
shares of Preferred Stock.
Section 8. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
-13-
<PAGE>
"APPLICABLE PERCENTAGE" means (i) 90% if the Conversion Date or any
redemption or repurchase date, if applicable, occurs on or prior to the 360th
day after the Original Issue Date, (ii) 88% if the Conversion Date or any
redemption or repurchase date, if applicable, occurs on or after the 361st and
before the 450th day after the Original Issue Date, (iii) 86% if the Conversion
Date or any redemption or repurchase date, if applicable, is on or after the
451st and before the 540th day after the Original Issue Date, (iv) 84% if the
Conversion Date or any redemption or repurchase date, if applicable, occurs on
or after the 541st and before the 630th day after the Original Issue Date, and
(v) 82% if the Conversion Date or any redemption or repurchase date, if
applicable, is more than 631 days after the Original Issue Date.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 66% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"COMMON STOCK" means the Company's common stock, par value $.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, the numerator of
which is Stated Value (including any accrued but unpaid late fees thereon), and
the denominator of which is the Conversion Price at such time.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means
the sum of (i) the greater of (A) 115% of the Stated Value, and (B) the product
of (a) the Per Share Market Value on the Trading Day immediately preceding (x)
the date of the Triggering Event or the Conversion Date, as the case may be, or
(y) the date of payment in full by the Company of the applicable redemption
price, whichever is greater, and (b) the Conversion Ratio calculated on the
date of the Triggering Event, or the Conversion Date, as the case may be, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.
"OPTIONAL REDEMPTION DATE" shall mean the date which is thirty (30)
days following the date the Underlying Shares are registered for resale pursuant
to an effective Underlying Securities Registration Statement.
-14-
<PAGE>
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or on such
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on which the Common Stock is then listed or quoted on
the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value of
a share of Common Stock as determined by an Appraiser selected in good faith by
the Holders of a majority of the shares of the Preferred Stock.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as January 13, 1999, between the Company and the original
Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of January 13, 1999, between the Company and the original
Holder of the Preferred Stock.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ or on such Subsequent Market on which the Common Stock is then listed
or quoted, or (b) if the Common Stock is not listed on NASDAQ or on a Subsequent
Market, a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in
the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means a registration
statement that meets the requirement of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the recipient thereof, who
shall be named as a "selling stockholder" thereunder.
-15-
<PAGE>
"UNDERLYING SHARES" means, collectively, the shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof.
Section 9. CANCELLATION. If at any time all of the outstanding
Series C Preferred Stock shall cease to be outstanding for any reason, the
provisions of this Certificate of Designation shall become null and void without
any further action on behalf of the board of directors or stockholders of the
Company.
-16-
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.01 per share (the "COMMON STOCK"), of TRO Learning, Inc. (the
"COMPANY") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably requested
by the Company in accordance therewith. No fee will be charged to the Holder
for any conversion, except for such transfer taxes, if any.
Conversion calculations: _______________________________________________
Date to Effect Conversion
_______________________________________________
Number of shares of Preferred Stock
to be Converted
_______________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________
Applicable Conversion Price
_______________________________________________
Signature
_______________________________________________
Name
_______________________________________________
Address
<PAGE>
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT"), dated
as of January 13, 1999, among TRO Learning, Inc., a Delaware corporation (the
"COMPANY"), KA Investments LDC ("KA"), Gary S. Kohler ("KOHLER"), First Trust
National Association TTEE FBO Gary Kohler IRA ("KOHLER IRA"), Industricorp &
Co., Inc. FBO Twin City Carpenters Pension Plan and ("TWIN CITY"), Stark
International ("STARK", and together with KA, Kohler, Kohler IRA and Twin
City, the "PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers
desire to purchase from the Company, shares of the Company's Series C
Convertible Preferred Stock, par value $.01 per share (the "PREFERRED STOCK"),
which are convertible into shares of the Company's common stock, par value
$.01 per share (the "COMMON STOCK").
IN CONSIDERATION of the mutual covenants contained in this Agreement, and
for other good and valuable consideration the receipt and adequacy are hereby
acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 THE CLOSING.
(a) THE CLOSING. (i) Subject to the terms and conditions set forth
in this Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers shall purchase 540 shares of Preferred Stock (the "SHARES") for an
aggregate purchase price of $5,000,000. The closing of the purchase and sale of
the Shares (the "CLOSING") shall take place at the offices of Robinson Silverman
Pearce Aronsohn & Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of the
Americas, New York, New York 10104, immediately following the execution hereof
or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "CLOSING DATE."
(ii) Prior to the Closing Date, the parties shall deliver or
shall cause to be delivered the following: (A) the Company shall deliver (1) to
KA (a) stock certificates representing 399.6 Shares, registered in the name of
KA, (b) a Common Stock purchase warrant, in the form of EXHIBIT D, registered in
the name of KA, pursuant to which KA shall have the right at any time and from
time to time thereafter through the fifth anniversary of the Closing Date to
acquire 92,500 shares of Common Stock at an exercise price per share (subject to
adjustment as provided therein) of $9.51 (the "KA WARRANT"), (c) the legal
opinion of Winston & Strawn, outside counsel to the Company, substantially in
the form of EXHIBIT C, and (d) all other documents, instruments and writings
required to have been delivered at or prior to the Closing Date by the Company
pursuant to this Agreement, including an executed Registration Rights Agreement,
dated the date hereof, between the Company and the Purchasers, in the form of
EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), and the Irrevocable Transfer
Agent Instructions, in the form of EXHIBIT E, delivered to and acknowledged by
the Company's transfer agent (the "TRANSFER AGENT INSTRUCTIONS"), (2) to
<PAGE>
Kohler (a) stock certificates representing 8.1 Shares, registered in the name
of Kohler, (b) a Common Stock purchase warrant, in the form of EXHIBIT D,
registered in the name of Kohler, pursuant to which Kohler shall have the
right at any time and from time to time thereafter through the fifth
anniversary of the Closing Date to acquire 1,875 shares of Common Stock at an
exercise price per share (subject to adjustment as provided therein) of $9.51
(the "KOHLER WARRANT"), (c) the legal opinion of Winston & Strawn, outside
counsel to the Company, substantially in the form of EXHIBIT C, and (d) all
other documents, instruments and writings required to have been delivered at
or prior to the Closing Date by the Company pursuant to this Agreement,
including an executed Registration Rights Agreement, and the Transfer Agent
Instructions, (3) to Kohler IRA (a) stock certificates representing 8.1
Shares, registered in the name of Kohler IRA, (b) a Common Stock purchase
warrant, in the form of EXHIBIT D, registered in the name of Kohler IRA,
pursuant to which Kohler IRA shall have the right at any time and from time
to time thereafter through the fifth anniversary of the Closing Date to
acquire 1,875 shares of Common Stock at an exercise price per share (subject
to adjustment as provided therein) of $9.51 (the "KOHLER IRA WARRANT"), (c)
the legal opinion of Winston & Strawn, outside counsel to the Company,
substantially in the form of EXHIBIT C, and (d) all other documents,
instruments and writings required to have been delivered at or prior to the
Closing Date by the Company pursuant to this Agreement, including an executed
Registration Rights Agreement, and the Transfer Agent Instructions, (4) to
Twin City (a) stock certificates representing 16.2 Shares, registered in the
name of Twin City, (b) a Common Stock purchase warrant, in the form of
EXHIBIT D, registered in the name of Twin City, pursuant to which Twin City
shall have the right at any time and from time to time thereafter through the
fifth anniversary of the Closing Date to acquire 3,750 shares of Common Stock
at an exercise price per share (subject to adjustment as provided therein) of
$9.51 (the "TWIN CITY WARRANT"), and (5) to Stark (a) stock certificates
representing 108 Shares, registered in the name of Stark, (b) a Common Stock
purchase warrant, in the form of EXHIBIT D, registered in the name of Stark,
pursuant to which Stark shall have the right at any time and from time to
time thereafter through the fifth anniversary of the Closing Date to acquire
25,000 shares of Common Stock at an exercise price per share (subject to
adjustment as provided therein) of $9.51 (the "STARK WARRANT" and
collectively with the KA Warrant, the Kohler Warrant, the Kohler IRA Warrant,
and the Twin City Warrant, the "WARRANTS"), (c) the legal opinion of Winston
& Strawn, outside counsel to the Company, substantially in the form of
EXHIBIT C, and (d) all other documents, instruments and writings required to
have been delivered at or prior to the Closing Date by the Company pursuant
to this Agreement, including an executed Registration Rights Agreement, and
the Transfer Agent Instructions; and (B) the Purchasers shall deliver (1)
$5,000,000 in United States dollars in immediately available funds by wire
transfer to an account designated in writing by the Company for such purpose,
and (2) all documents, instruments and writings required to have been
delivered at or prior to the Closing Date by the Purchasers pursuant to this
Agreement, including, without limitation, an executed Registration Rights
Agreement.
1.2 FORM OF PREFERRED STOCK. The Preferred Stock shall have the
rights preferences and privileges set forth in EXHIBIT A, and shall be
incorporated into a Certificate of Designation (the "CERTIFICATE OF
DESIGNATION"), which shall be filed on or prior to the Closing Date by the
Company with the Secretary of State of the State of Delaware, in form and
substance mutually agreed to by the parties.
-2-
<PAGE>
For purposes of this Agreement, "CONVERSION PRICE," "ORIGINAL ISSUE
DATE" and "TRADING DAY" shall have the meanings set forth in EXHIBIT A;
"BUSINESS DAY" shall mean any day except Saturday, Sunday and any day which
shall be a federal legal holiday or a day on which banking institutions in the
States of New York, Illinois or Minnesota are authorized or required by law or
other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company hereby makes the following representations and warranties to the
Purchasers:
(a) ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in SCHEDULE
2.1(a) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is an
entity, duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the full power and authority to own and use its properties
and assets and to carry on its business as currently conducted. Each of the
Company and the Subsidiaries is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, (x) adversely
affect the legality, validity or enforceability of the Securities (as defined
below) or any of this Agreement, the Certificate of Designation, the
Registration Rights Agreement and the Warrants (collectively, the "TRANSACTION
DOCUMENTS"), (y) have or result in a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (x), (y) or (z), a "MATERIAL ADVERSE
EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents has been duly executed by the Company and, when
delivered (or filed, as the case may be) in accordance with the terms hereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate of incorporation, by-laws or other charter documents.
-3-
<PAGE>
(c) CAPITALIZATION. The number of authorized, issued and outstanding
capital stock of the Company is set forth in SCHEDULE 2.1(c). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any holder of
the Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of any of the Transaction
Documents. Except as a result of the purchase and sale of the Shares and the
Warrants and except as disclosed in SCHEDULE 2.1(c), there are no outstanding
options, warrants, script rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable into shares of Common Stock. To the knowledge of
the Company, except as specifically disclosed in the SEC Documents (as defined
below) or SCHEDULE 2.1(c), no Person or group of related Persons beneficially
owns (as determined pursuant to Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT")), or has the right to
acquire by agreement with or by obligation binding upon the Company, in excess
of 5% of the Common Stock. A "PERSON" means an individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.
(d) ISSUANCE OF THE SHARES AND THE WARRANTS. The Shares and the
Warrants are duly authorized and, when issued and paid for in accordance with
the terms hereof, shall have been duly and validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "LIENS"). The Company has on the date hereof
and will, at all times while the Shares and the Warrants are outstanding,
maintain an adequate reserve of duly authorized shares of Common Stock, reserved
for issuance to the holders of the Shares and the Warrants, to enable it to
perform its conversion, exercise and other obligations under this Agreement, the
Certificate of Designation and the Warrants. Such number of reserved and
available shares of Common Stock is not less than the sum of (i) 1,703,470
shares of Common Stock which would be issuable upon conversion in full of the
Shares, and (ii) the number of shares of Common Stock issuable upon exercise of
the Warrants (such number of shares of Common Stock, the "INITIAL MINIMUM").
All such authorized shares of Common Stock shall be duly reserved for issuance
to the holders of the Shares and the Warrants. The shares of Common Stock
issuable upon conversion of the Shares, and upon exercise of the Warrants are
collectively referred to herein as the "UNDERLYING SHARES." The Shares, the
Warrants and the Underlying Shares are collectively referred to herein as, the
"SECURITIES." When issued in accordance with this Agreement, the Certificate of
Designation and the Warrants, the Underlying Shares shall have been duly
authorized, validly issued, fully paid and nonassessable, free and clear of all
Liens.
(e) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or
-4-
<PAGE>
(ii) subject to obtaining the Required Approvals (as defined below), conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, indenture or
instrument (evidencing a Company debt or otherwise) to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) result in a violation of any
law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company is
subject (including Federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected, except in
the case of each of clauses (ii) and (iii), as could not, individually or in
the aggregate, have or result in a Material Adverse Effect. The business of
the Company is not being conducted in violation of any law, ordinance or
regulation of any governmental authority, except for violations which,
individually or in the aggregate, could not have or result in a Material
Adverse Effect.
(f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filing of the Certificate of
Designation with the Secretary of State of Delaware, (ii) the filings required
pursuant to Section 3.11, (iii) the filing of the Underlying Securities
Registration Statement with the Securities and Exchange Commission (the
"COMMISSION") meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by the Purchasers,
(iv) the application(s) to the Nasdaq National Market ("NASDAQ") for the listing
of the Underlying Shares for trading on the NASDAQ (and with any other national
securities exchange or market on which the Common Stock is then listed for
trading), (v) applicable Blue Sky filings, (vi) the consent of Sanwa Bank Credit
Corporation and (vii) in all other cases where the failure to obtain such
consent, waiver, authorization or order, or to give such notice or make such
filing or registration could not have or result in, individually or in the
aggregate, a Material Adverse Effect (collectively, the "REQUIRED APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in the
SEC Documents, there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (Federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) NO DEFAULT OR VIOLATION. Except as described on Schedule 2.1(h)
hereto, neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred which has not been waived which, with
notice or lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received
-5-
<PAGE>
notice of a claim that it is in default under or that it is in violation of,
any indenture, loan or credit agreement or any other agreement or instrument
to which it is a party or by which it or any of its properties is bound, (ii)
is in violation of any order of any court, arbitrator or governmental body,
or (iii) is in violation of any statute, rule or regulation of any
governmental authority, except as could not individually or in the aggregate,
have or result in a Material Adverse Effect.
(i) PRIVATE OFFERING. Assuming the accuracy of the representations
and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Neither the Company nor any Person acting on
its behalf has taken any action could subject the offering, issuance or sale of
the Securities to the registration requirements of the Securities Act.
(j) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all
reports required to be filed by it under the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the three years preceding the date hereof
(or such shorter period as the Company was required by law to file such
material) (the foregoing materials being collectively referred to herein as the
"SEC DOCUMENTS" and, together with the Schedules to this Agreement the
"DISCLOSURE MATERIALS") on a timely basis or has received a valid extension of
such time of filing and has filed any such SEC Documents prior to the expiration
of any such extension. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder, and none of the SEC Documents, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject have been filed as exhibits to the SEC Documents as
required. The financial statements of the Company included in the SEC Documents
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis ("GAAP")
during the periods involved, except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. Since Ocotber 30, 1997, except as
specifically disclosed in the SEC Documents, (a) there has been no event,
occurrence or development that has had or that could have or result in a
Material Adverse Effect, (b) the Company has not incurred any liabilities
(contingent or otherwise) other than (x) liabilities incurred in the ordinary
course of business consistent with past practice and (y) liabilities not
required to be reflected in the Company's financial statements pursuant to GAAP
or required to be disclosed in filings made with the Commission, (c) the Company
has not altered its method of accounting or the identity of its auditors and (d)
the Company has not declared or made any payment or distribution of cash or
other property to its stockholders or officers or directors (other than in
compliance with existing Company stock option plans) with respect to its capital
stock, or purchased, redeemed (or made any agreements to purchase or redeem) any
shares of its
-6-
<PAGE>
capital stock. The Company last filed audited financial statements with the
Commission on January 15, 1998, and has not received any comments from the
Commission in respect thereof.
(k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for certain fees payable to Miller, Johnson
& Kuehn and Craig Hallum, no fees or commissions will be payable by the Company
to any broker, financial advisor or consultant, finder, placement agent,
investment banker, or bank with respect to the transactions contemplated by this
Agreement. The Purchasers shall have no obligation with respect to any fees or
with respect to any claims made by or on behalf of other Persons for fees of a
type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement. The Company shall indemnify and
hold harmless each of the Purchasers, their employees, officers, directors,
agents, and partners, and their respective Affiliates, from and against all
claims, losses, damages, costs (including the costs of preparation and
attorney's fees) and expenses suffered in respect of any such claimed or
existing fees, as such fees and expenses are incurred.
(m) SOLICITATION MATERIALS. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) FORM S-3 ELIGIBILITY. The Company is eligible to register
securities for resale in transactions involving secondary offerings with the
Commission under Form S-3 promulgated under the Securities Act.
(o) EXCLUSIVITY. As long as the Preferred Stock is outstanding, the
Company shall not issue and sell shares of Preferred Stock to any Person other
than the Purchasers other than with the specific prior written consent of KA.
(p) SENIORITY. Except for the Series 1997 Subordinated Convertible
Debentures (the "1997 DEBENTURES"), no class of equity securities of the Company
is senior to the Shares in right of payment, whether upon liquidation,
dissolution, or otherwise.
(q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. Except as
described on Schedule 2.1(q) hereto, the Company has not, in the two years
preceding the date hereof, received notice (written or oral) from the NASDAQ or
any other stock exchange, market or trading facility on which the Common Stock
is or has been listed (or on which it has been quoted) to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such exchange or market. The Company is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with all such
maintenance requirements.
(r) PATENTS AND TRADEMARKS. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights,
-7-
<PAGE>
licenses and rights (collectively, the "INTELLECTUAL PROPERTY RIGHTS") which
are necessary or material for use in connection with its business, and which
the failure to so have would have a Material Adverse Effect. To the best
knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of any of
the Intellectual Property Rights.
(s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set
forth on SCHEDULE 6(b) to the Registration Rights Agreement, the Company has not
granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) REGULATORY PERMITS. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits could not, individually or in the aggregate, have or result
in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor
any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(u) TITLE. Except for Liens existing on the Closing Date, the
Company and the Subsidiaries have good and marketable title in fee simple to all
real property and personal property owned by them which is material to the
business of the Company and its Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company and its Subsidiaries. Any real property and facilities held
under lease by the Company and its Subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries.
(v) DISCLOSURE. The Company confirms that it has not provided the
Purchasers or their agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchasers shall be relying on the foregoing representations
in effecting transactions in securities of the Company. All disclosure provided
to each of the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company are true and correct and do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the
Purchasers, severally and not jointly, hereby represent and warrant to the
Company as follows:
-8-
<PAGE>
(a) ORGANIZATION; AUTHORITY. Such Purchaser, as applicable, is an
entity duly formed, validly existing and in good standing under the laws of the
jurisdiction of its formation with the requisite power and authority, to enter
into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The purchase
by such Purchaser of the Securities hereunder has been duly authorized by all
necessary action on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement has been duly executed and delivered by such
Purchaser and constitutes the valid and legally binding obligation of such
Purchaser, enforceable against it in accordance with its terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the Securities
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) PURCHASER STATUS. At the time such Purchaser was offered the
Shares and the Warrants, it was, and at the date hereof it is, and at each
exercise date under the Warrants, it will be, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF THE PURCHASER. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser's right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company's representations and
warranties contained in the Transaction Documents.
-9-
<PAGE>
(g) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) RELIANCE. Such Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that such Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act. In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred securities under the
Securities Act. Notwithstanding the foregoing, the Company hereby consents to
and agrees to register on the books of the Company and with any transfer agent
for the securities of the Company any transfer of Securities by any Purchaser to
an Affiliate of such Purchaser or to one or more funds under common management
with such Purchaser, and any transfer among any such Affiliates or one or more
funds, provided that the transferee certifies to the Company that it is an
"accredited investor" as defined in Rule 501(a) under the Securities Act and
that it is acquiring the Securities solely for investment purposes. Any such
transferee shall agree in writing to be bound by the terms of this Agreement and
shall have the rights and obligations of a Purchaser under this Agreement and
the Registration Rights Agreement.
(b) Each Purchaser agrees to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM
-10-
<PAGE>
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor any
other legend if the conversion of Shares and exercise of the Warrants or other
issuances of Underlying Shares as contemplated hereby, by the Certificate of
Designation or the Warrants occurs at any time while an Underlying Securities
Registration Statement is effective under the Securities Act or, in the event
there is not an effective Underlying Securities Registration Statement, at such
time, if in the opinion of counsel to the Company, such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall issue the Transfer Agent Instructions to the Company's transfer
agent on the day that the Underlying Securities Registration Statement is
declared effective by the Commission. The Company agrees that, in the event any
Underlying Shares are issued with a legend in accordance with this Section
3.1(b), it will, within three (3) Trading Days after request therefor by any
such Purchaser, provide such Purchaser with a certificate or certificates
representing such Underlying Shares, free from such legend at such time as such
legend would not have been required under this Section 3.1(b) had such issuance
occurred on the date of such request. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in this Section.
3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Shares in
accordance with the terms of the Certificate of Designation, and (ii) exercise
of the Warrants in accordance with its terms, will result in dilution of the
outstanding shares of Common Stock. The Company further acknowledges that its
obligation to issue Underlying Shares upon (x) conversion of the Shares in
accordance with the terms of the Certificate of Designation, and (y) exercise of
the Warrants in accordance with its terms, is unconditional and absolute,
subject to the limitations set forth herein in the Certificate of Designation or
pursuant to the Warrants, regardless of the effect of any such dilution.
3.3 FURNISHING OF INFORMATION. As long as any Purchaser owns Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to such sections, it will prepare and furnish
to each Purchaser and make publicly available in accordance with Rule 144(c)
promulgated under the Securities Act such information as is required for such
Purchaser to sell the Securities under Rule 144 promulgated under the Securities
Act. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell Underlying Shares without
registration under the Securities Act within the limitation
-11-
<PAGE>
of the exemptions provided by Rule 144 promulgated under the Securities Act.
Upon the request of any such Person, the Company shall deliver to such Person
a written certification of a duly authorized officer as to whether it has
complied with such requirements.
3.4 INTEGRATION. The Company shall not, and shall use its best efforts to
ensure that, no Affiliate shall, sell, offer for sale or solicit offers to buy
or otherwise negotiate in respect of any security (as defined in Section 2 of
the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers.
3.5 INCREASE IN AUTHORIZED SHARES. If on any date the Company would be,
if a notice of conversion or exercise (as the case may be) were to be delivered
on such date, precluded from (a) issuing the number of Underlying Shares as
would then be issuable upon a conversion in full of the Shares then outstanding,
or (b) issuing the number of Underlying Shares upon exercise in full of the
Warrants (the "CURRENT REQUIRED MINIMUM"), in either case, due to the
unavailability of a sufficient number of authorized but unissued or reserved
shares of Common Stock, then the Board of Directors of the Company shall
promptly (and in any case, within 30 Business Days from such date) prepare and
mail to the stockholders of the Company proxy materials requesting authorization
to amend the Company's Certificate of Incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least such
number of shares as reasonably requested by the Purchasers in order to provide
for such number of authorized and unissued shares of Common Stock to enable the
Company to comply with its issuance, conversion exercise and reservation of
shares obligations as set forth in this Agreement, the Certificate of
Designation and the Warrants (the sum of (x) the number of shares of Common
Stock then authorized, (y) the number of shares of Common Stock then outstanding
plus all shares of Common Stock issuable upon exercise of all outstanding
options, warrants and convertible instruments, and (z) the Current Required
Minimum, shall be a reasonable number). In connection therewith, the Board of
Directors shall (a) adopt proper resolutions authorizing such increase, (b)
recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder approval to carry out such resolutions (and hold a special meeting
of the stockholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (c) within five (5) Business Days of
obtaining such stockholder authorization, file an appropriate amendment to the
Company's Certificate of Incorporation to evidence such increase.
3.6 RESERVATION AND LISTING OF UNDERLYING SHARES. (a) The Company shall
(i) not later than the tenth (10th) Business Day following the Closing Date
prepare and file with the NASDAQ (and such other national securities exchange or
market or trading or quotation facility on which the Common Stock is then
listed) an additional shares listing application covering a number of shares of
Common Stock which is not less than the Initial Minimum, (ii) take all steps
necessary to cause such shares of Common Stock to be approved for listing in
the NASDAQ (as well as on any such other national securities exchange or market
or trading or quotation facility on which the Common Stock is then listed) as
soon as possible thereafter, and (iii) provide to the Purchasers evidence of
such listing, and the Company shall maintain the listing of its Common Stock
thereon. If the number of Underlying Shares issuable upon conversion in full of
the then outstanding Shares and upon exercise of the then unexercised portion of
the Warrants exceeds 85% of the number of Underlying
-12-
<PAGE>
Shares previously listed on account thereof with the NASDAQ (as well as on
any such other national securities exchange or market or trading or quotation
facility on which the Common Stock is then listed), then the Company shall
take the necessary actions to immediately list a number of Underlying Shares
as equals no less than the then Current Required Minimum.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon conversion of the Shares and upon exercise in full of the
Warrants in accordance with this Agreement, the Certificate of Designation and
the Warrants, respectively, in such amount as may be required to fulfill its
obligations in full under the Transaction Documents, which reserve shall equal
no less than the then Current Required Minimum.
3.7 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent Instructions,
Conversion Notice (as defined in EXHIBIT A) and Notice of Exercise under the
Warrants set forth the totality of the procedures with respect to the conversion
of the Shares and exercise of the Warrants, including the form of legal opinion,
if necessary, that shall be rendered to the Company's transfer agent and such
other information and instructions as may be reasonably necessary to enable the
Purchasers to convert their Shares and exercise the Warrants as contemplated in
the Certificate of Designation and the Warrants (as applicable).
3.8 NOTICE OF BREACHES. Each of the Company and the Purchasers shall give
prompt written notice to the other of any breach by it of any representation,
warranty or other agreement contained in any Transaction Document, as well as
any events or occurrences arising after the date hereof which would reasonably
be likely to cause any representation or warranty or other agreement of such
party, as the case may be, contained therein to be incorrect or breached as of
the Closing Date. However, no disclosure by either party pursuant to this
Section shall be deemed to cure any breach of any representation, warranty or
other agreement contained in any Transaction Document.
3.9 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company shall
honor conversions of the Shares and exercises of the Warrants and shall deliver
Underlying Shares in accordance with the respective terms, conditions and time
periods set forth in the Certificate of Designation and the Warrants.
3.10 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. (a) The Company
shall not, directly or indirectly, without the prior written consent of KA,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition) any of
its or its Affiliates' equity or equity-equivalent securities or a transaction
intended to be exempt or not subject to registration under the Securities Act (a
"SUBSEQUENT PLACEMENT") for a period of 180 days after the Closing Date, except
(i) the granting of options or warrants to employees, officers and directors,
and the issuance of shares upon exercise of options granted, under any stock
option plan heretofore or hereinafter duly adopted by the Company, (ii) shares
of Common Stock issuable upon exercise of any currently outstanding warrants and
upon conversion of any currently outstanding convertible securities of the
Company, in each case disclosed in Schedule 2.1(c), and (iii) shares of Common
Stock issuable upon conversion of the Shares and upon exercise of the Warrants
in accordance with the Certificate of Designation or the Warrants, respectively,
unless (A) the Company delivers to KA a written notice (the "SUBSEQUENT
-13-
<PAGE>
PLACEMENT NOTICE") of its intention effect such Subsequent Placement, which
Subsequent Placement Notice shall describe in reasonable detail the proposed
terms of such Subsequent Placement, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Placement shall be effected,
and attached to which shall be a term sheet or similar document relating thereto
and (B) KA shall not have notified the Company by 5:00 p.m. (Minnetonka,
Minnesota time) on the tenth (10th) Trading Day after its receipt of the
Subsequent Placement Notice of its willingness to cause KA to provide (or to
cause its sole designee to provide), subject to completion of mutually
acceptable documentation, financing to the Company on substantially the terms
set forth in the Subsequent Placement Notice. If KA shall fail to notify the
Company of its intention to enter into such negotiations within such time
period, the Company may effect the Subsequent Placement substantially upon the
terms and to the Persons (or Affiliates of such Persons) set forth in the
Subsequent Placement Notice; PROVIDED, that the Company shall provide KA with a
second Subsequent Placement Notice, and KA shall again have the right of first
refusal set forth above in this paragraph (a), if the Subsequent Placement
subject to the initial Subsequent Placement Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Placement
Notice within forty (40) Trading Days after the date of the initial Subsequent
Placement Notice with the Person (or an Affiliate of such Person) identified in
the Subsequent Placement Notice.
(b) Except for (w) shares issued or registered in connection with the
1997 Debentures and the warrants issued in connection therewith, (x) Underlying
Shares, (y) other "Registrable Securities" (as such term is defined in the
Registration Rights Agreement) to be registered, and securities of the Company
permitted pursuant to Schedule 6(b) of the Registration's Rights Agreement to be
registered, in the Underlying Securities Registration Statement in accordance
with the Registration Rights Agreement, and (z) Common Stock to be registered
for resale in connection with financings permitted pursuant to paragraph
(a)(i) - (iii) of Section 3.10(a), the Company shall not, without the prior
written consent of KA (i) issue or sell any of its or any of its Affiliates'
equity or equity-equivalent securities pursuant to Regulation S promulgated
under the Securities Act, or (ii) register for resale any securities of the
Company for a period of not less than 90 Trading Days after the date that
the Underlying Securities Registration Statement is declared effective by the
Commission. Any days that a Purchaser is unable to sell Underlying Shares
under the Underlying Securities Registration Statement shall be added to
such 90 Trading Day period for the purposes of (i) and (ii) above.
3.11 CERTAIN SECURITIES LAWS DISCLOSURES; PUBLICITY. The Company shall:
(i) issue a press release reasonably acceptable to KA disclosing the
transactions contemplated hereby on the Closing Date, (ii) file with the
Commission a Report on Form 8-K disclosing the transactions contemplated hereby
within ten (10) Business Days after the Closing Date, and (iii) timely file with
the Commission a Form D promulgated under the Securities Act as required under
Regulation D promulgated under the Securities Act and provide a copy thereof to
the Purchasers promptly after the filing thereof. The Company shall, no less
than two (2) Business Days prior to the filing of any disclosure required by
clauses (ii) and (iii) above, provide a copy thereof to such Purchaser. No
such filing or disclosure may be made that mentions any Purchaser by name
without the prior consent of such Purchaser.
-14-
<PAGE>
3.12 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. Except in connection with
the sale of all or substantially all of the assets of the Company, the Company
shall not transfer, sell or otherwise dispose of any Intellectual Property
Rights, or allow any of the Intellectual Property Rights to become subject to
any Liens, or fail to renew such Intellectual Property Rights (if renewable and
it would otherwise lapse if not renewed), without the prior written consent of
KA.
3.13 USE OF PROCEEDS. The Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and not to redeem any
Company equity or equity-equivalent securities. Pending application of the
proceeds of this placement in the manner permitted hereby, the Company will
invest such proceeds in interest bearing accounts and/or short-term, investment
grade interest bearing securities.
3.14 REIMBURSEMENT. If any Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which such Purchaser is a named party, the Company
will pay such Purchaser the charges, as reasonably determined by such Purchaser,
for the time of any officers or employees of such Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of such Purchaser who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchaser and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Purchasers and any such Affiliate and any such Person. The
Company also agrees that neither the Purchasers nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any Person asserting claims on behalf of or in right
of the Company in connection with or as a result of the consummation of the
Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the Purchasers or entity in connection with the
transactions contemplated by this Agreement.
-15-
<PAGE>
ARTICLE IV
MISCELLANEOUS
4.1 FEES AND EXPENSES. At the Closing the Company shall pay $20,000
to Robinson Silverman in connection with the preparation and negotiation of the
Transaction Documents. Other than the amounts contemplated in the immediately
preceding sentence, and except as otherwise set forth in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Securities.
4.2 ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents,
together with the Exhibits and Schedules thereto, and the Transfer Agent
Instructions contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.
4.3 NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m.
(Minnetonka, Minnesota time) on a Business Day, (ii) the Business Day after the
date of transmission, if such notice or communication is delivered via facsimile
at the facsimile telephone number specified in this Agreement later than 8:00
p.m. (Minnetonka, Minnesota time) on any date and earlier than 11:59 p.m.
(Minnetonka, Minnesota time) on such date, (iii) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as follows:
If to the Company: TRO Learning, Inc.
4660 West 77th Street
Edina, MN 55435
Facsimile No.: (612) 832-1210
Attn: Chief Financial Officer
With copies to: Winston & Strawn
35 West Wacker Drive, 42nd Floor
Chicago, IL 60601
Facsimile No.: (312) 558-5700
Attn: Leland E. Hutchinson
If to KA: KA Investments LDC
c/o Deephaven Capital Management LLC
-16-
<PAGE>
1712 Hopkins Crossroads
Minnetonka, MN 55305
Facsimile No.: (612) 542-4244
Attn: Bruce Lieberman
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson
If to Kohler or Kohler IRA: Gary S. Kohler
c/o Miller, Johnson & Kuehn
5500 Wayzata Blvd., 8th Floor
Minneapolis, MN 55416
If to Twin City: Twin City Carpenters Pension Plan
c/o Perkins Capital Management, Inc.
730 East Lake Street
Wayzata, MN 55391
If to Stark: Stark International
1500 West Market Street
Mequon, WI 53092
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and Purchasers holding in the aggregate at least
66 2/3% of the then outstanding Shares or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
4.5 HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of each of the
Purchasers. Except as set forth in Section 3.1(a), no Purchaser may assign
this Agreement or any
-17-
<PAGE>
of the rights or obligations hereunder (other than to an Affiliate of such
Purchaser) without the consent of the Company. This provision shall not
limit any Purchaser's right to transfer securities or transfer or assign
rights hereunder or under the Registration Rights Agreement, provided that
the Company shall receive notice of any such transfer.
4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.9 SURVIVAL. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Shares and the Warrants.
4.10 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 PUBLICITY. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory
agency or stock market or trading facility with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement, filings or other communications
without the prior written consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such
-18-
<PAGE>
case the disclosing party shall provide the other party with prior notice of
such public statement, filing or other communication. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser
or include the name of any Purchaser in any filing with the Commission, or
any regulatory agency, trading facility or stock market without the prior
written consent of such Purchaser, except to the extent such disclosure (but
not any disclosure as to the controlling Persons thereof) is required by law,
in which case the Company shall provide such Purchaser with prior notice of
such disclosure.
4.12 SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Purchasers
will be entitled to specific performance of the obligations of the Company under
the Transaction Documents. Each of the Company and the Purchasers (severally
and not jointly) agree that monetary damages may not be adequate compensation
for any loss incurred by reason of any breach of its obligations described in
the foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Convertible
Preferred Stock Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
Company:
. TRO LEARNING, INC.
By:
--------------------------------------------
Name:
Title:
Purchasers:
KA INVESTMENTS LDC
By:
--------------------------------------------
Name:
Title:
--------------------------------------------
GARY S. KOHLER
FIRST TRUST NATIONAL ASSOCIATION TTEE
FBO GARY KOHLER IRA
By:
--------------------------------------------
Name:
Title:
INDUSTRICORP & CO., INC.
FBO TWIN CITY CARPENTERS PENSION PLAN
By:
--------------------------------------------
Name:
Title:
<PAGE>
STARK INTERNATIONAL
By:
--------------------------------------------
Name:
Title:
<PAGE>
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
Among
TRO LEARNING, INC.,
KA INVESTMENTS LDC,
GARY S. KOHLER,
FIRST TRUST NATIONAL ASSOCIATION TTEE
FBO GARY KOHLER IRA,
INDUSTRICORP & CO., INC.
FBO TWIN CITY CARPENTERS PENSION PLAN,
and
STARK INTERNATIONAL
January 13, 1999
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT D
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
TRO LEARNING, INC.
WARRANT
Dated: January 13, 1999
TRO Learning, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, [ ], or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of [ ] shares of Common Stock, $.01 par value
per share (the "Common Stock"), of the Company (each such share, a "Warrant
Share" and all such shares, the "Warrant Shares") at an exercise price equal to
$9.51 per share (as adjusted from time to time as provided in Section 9, the
"Exercise Price"), at any time and from time to time from and after the date
hereof and through and including January 13, 2004 (the "Expiration Date"), and
subject to the following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
<PAGE>
(a) The Company shall register the transfer of any portion of
this Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the Transfer
Agent or to the Company at the office specified in or pursuant to Section 3(b).
Upon any such registration or transfer, a new warrant to purchase Common Stock,
in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance of such transferee of all of the rights and obligations of a holder
of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company specified in or pursuant to Section 3(b)
for one or more New Warrants, evidencing in the aggregate the right to purchase
the number of Warrant Shares which may then be purchased hereunder. Any such
New Warrant will be dated the date of such exchange.
3. DURATION AND EXERCISE OF WARRANTS.
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 8:00 P.M., New York City time, at any time and from
time to time on or after the date hereof to and including the Expiration Date.
At 8:00 P.M., New York City time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no value.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 12
and upon payment of the Exercise Price multiplied by the number of Warrant
Shares that the Holder intends to purchase hereunder, in the manner provided
hereunder, all as specified by the Holder in the Form of Election to Purchase,
the Company shall promptly (but in no event later than 3 business days after the
Date of Exercise (as defined herein)) issue or cause to be issued and cause to
be delivered to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate for the Warrant Shares issuable
upon such exercise, free of restrictive legends except (i) either in the event
that a registration statement covering the resale of the Warrant Shares and
naming the Holder as a selling stockholder thereunder is not then effective or
the Warrant Shares are not freely transferable without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant
to a written agreement between the original Holder and the Company, as required
by such agreement. Any person so designated by the Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant Shares as
of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall
have received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase
-2-
<PAGE>
attached hereto (or attached to such New Warrant) appropriately completed and
duly signed, and (ii) payment of the Exercise Price for the number of Warrant
Shares so indicated by the holder hereof to be purchased.
(c) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the number of Warrant Shares. If less
than all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. PIGGYBACK REGISTRATION RIGHTS. During the term of this Warrant,
the Company may not file any registration statement with the Securities and
Exchange Commission (other than registration statements of the Company filed on
Form S-8 or Form S-4, each as promulgated under the Securities Act, pursuant to
which the Company is registering securities pursuant to a Company employee
benefit plan or pursuant to a merger, acquisition or similar transaction
including supplements thereto, but not additionally filed registration
statements in respect of such securities) at any time when there is not an
effective registration statement covering the resale of the Warrant Shares and
naming the Holder as a selling stockholder thereunder, unless the Company
provides the Holder with not less than 20 days notice of its intention to file
such registration statement and provides the Holder the option to include any or
all of the applicable Warrant Shares therein. The piggyback registration rights
granted to the Holder pursuant to this Section shall continue until all of the
Holder's Warrant Shares have been sold in accordance with an effective
registration statement or upon the Expiration Date. The Company will pay all
registration expenses in connection therewith.
5. DEMAND REGISTRATION RIGHTS. At any time during the term of this
Warrant when the Warrant Shares are not registered pursuant to an effective
registration statement, the Holder may make a written request for the
registration under the Securities Act (a "Demand Registration"), of all of the
Warrant Shares (the "Registrable Securities"), and the Company shall use its
best efforts to effect such Demand Registration as promptly as possible, but in
any case within 90 days thereafter. Any request for a Demand Registration shall
specify the aggregate number of Registrable Securities proposed to be sold and
shall also specify the intended method of disposition thereof. The right to
cause a registration of the Registrable Securities under this Section 5 shall be
limited to one such registration. In any registration initiated as a Demand
Registration, the Company will pay all of its registration expenses in
connection therewith. A Demand Registration shall not be counted as a Demand
Registration hereunder until the registration statement filed pursuant to the
Demand Registration has been declared effective by the Securities and Exchange
Commission and maintained continuously effective for a period of at least 360
days or such shorter period when all Registrable Securities included therein
have been sold in accordance with such registration statement, provided, however
that any days on which such registration statement is not effective or on which
the Holder is not permitted by the Company or any governmental authority to sell
Warrant Shares under such registration statement shall not count towards such
360 day period.
-3-
<PAGE>
6. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder. The Holder shall be responsible for all other tax liability that
may arise as a result of holding or transferring this Warrant or receiving
Warrant Shares upon exercise hereof.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. RESERVATION OF WARRANT SHARES. The Company covenants that it
will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 9). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
9. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant
Shares issuable upon exercise of this Warrant are subject to adjustment from
time to time as set forth in this Section 9; provided however that the Exercise
Price shall never be less than $.01 per Warrant Share issuable upon exercise.
Upon each such adjustment of the Exercise Price pursuant to this Section 9, the
Holder shall thereafter prior to the Expiration Date be entitled to purchase, at
the Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares issuable upon exercise of this
Warrant immediately prior to such adjustment and dividing the product thereof by
the Exercise Price resulting from such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
-4-
<PAGE>
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If, at any time while this Warrant is outstanding, the
Company shall issue or cause to be issued rights or warrants to acquire or
otherwise sell or distribute shares of Common Stock for a consideration per
share less than the Exercise Price then in effect, then, forthwith upon such
issue or sale, the Exercise Price shall be reduced to the price (calculated to
the nearest cent) determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of (i) the number of shares of Common Stock outstanding immediately prior to
such issuance, and (ii) the number of shares of Common Stock which the aggregate
consideration received (or to be received, assuming exercise or conversion in
full of such rights, warrants and convertible securities) for the issuance of
such additional shares of
-5-
<PAGE>
Common Stock would purchase at the Exercise Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such adjustment
shall be made successively whenever such an issuance is made.
(e) For the purposes of this Section 9, the following clauses
shall also be applicable:
(i) RECORD DATE. In case the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) TREASURY SHARES. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 9 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant to Section
9(c) above, the Holder, after receipt of the determination by the Appraiser,
shall have the right to select an additional appraiser (which shall be a
nationally recognized accounting firm), in which case the adjustment shall be
equal to the average of the adjustments recommended by each of the Appraiser and
such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(h) If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring
cash dividend on or a redemption of its Common
Stock; or
(iii) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe
-6-
<PAGE>
for or purchase any shares of capital stock of any
class or of any rights; or
(iv) the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the
Company, any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the
affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; PROVIDED, HOWEVER, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise Price
in one of the following manners:
(a) CASH EXERCISE. The Holder shall deliver immediately
available funds; or
(b) CASHLESS EXERCISE. The Holder shall surrender this Warrant
to the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued
to the Holder.
-7-
<PAGE>
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) trading days immediately prior to
(but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
11. FRACTIONAL SHARES. The Company shall not be required to issue or
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 11, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.
12. NOTICES. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 8:00 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company,
to 4660 West 77th Street, Edina, MN 55435, Attention: Chief Financial Officer,
or to facsimile no. (612) 832-1210, or (ii) if to the Holder, to the Holder at
the address or facsimile number appearing on the Warrant Register or such other
address or facsimile number as the Holder may provide to the Company in
accordance with this Section 12.
13. WARRANT AGENT. The Company shall serve as warrant agent under
this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under
-8-
<PAGE>
this Warrant without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by
first class mail, postage prepaid) to the Holder at the Holder's last address
as shown on the Warrant Register.
14. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure to the benefit of
the parties hereto and their respective successors and assigns. This Warrant
may be amended only in writing signed by the Company and the Holder and their
successors and assigns.
(b) Subject to Section 14(a), above, nothing in this Warrant
shall be construed to give to any person or corporation other than the Company
and the Holder any legal or equitable right, remedy or cause under this Warrant.
This Warrant shall inure to the sole and exclusive benefit of the Company and
the Holder.
(c) This Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York without regard to
the principles of conflicts of law thereof. The Company and the Holder hereby
irrevocably submit to the exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, or that such suit,
action or proceeding is improper. Each of the Company and the Holder hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by receiving a copy thereof sent
to the Company at the address in effect for notices to it under this instrument
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect any
of the provisions hereof.
(e) In case any one or more of the provisions of this Warrant
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
-9-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
TRO LEARNING, INC.
By:
---------------------------------------------
Name:
---------------------------------------------
Title:
---------------------------------------------
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To TRO Learning, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), $.01 par value per share, of TRO
Learning, Inc. and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
____________________________________________
_______________________________________________________________________________
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
_______________________________________________________________________________
Dated: ________,___ Name of Holder:
(Print)
-------------------------------------
(By:)
-------------------------------------
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of TRO Learning, Inc.
to which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of TRO Learning, Inc. with full power of
substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of January 13, 1999, among TRO Learning, Inc., a Delaware
corporation (the "COMPANY"), and KA Investments LDC ("KA"), Gary S. Kohler
("KOHLER"), First Trust National Association TTEE FBO Gary Kohler IRA
("KOHLER IRA"), Industricorp & Co., Inc. FBO Twin City Carpenters Pension
Plan and ("TWIN CITY"), Stark International ("STARK", and together with KA,
Kohler, Kohler IRA and Twin City, the "PURCHASERS").
This Agreement is made pursuant to the Convertible Preferred Stock
Purchase Agreement, dated as of the date hereof between the Company and the
Purchasers (the "PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(o).
"AFFILIATE" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL,"
when used with respect to any Person, means the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities,
by contract or otherwise; and the terms of "AFFILIATED," "CONTROLLING" and
"CONTROLLED" have meanings correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"CLOSING DATE" shall have the meaning set forth in the Purchase
Agreement.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's common stock, par value $.01 per
share.
"EFFECTIVENESS DATE" means the 90th day following the Original
Issue Date.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(a).
<PAGE>
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FILING DATE" means the 45th day following the Original Issue Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"PREFERRED STOCK" means the Company's shares of Series C
Convertible Preferred Stock, $.01 par value, to be issued to the Purchaser
pursuant to the Purchase Agreement.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference
in such Prospectus.
"REGISTRABLE SECURITIES" means the shares of Common Stock issuable
(i) upon conversion in full of the Preferred Stock, and (ii) upon exercise of
the Warrants; PROVIDED, HOWEVER, that in order to account for the fact that
the number of shares of Common Stock issuable upon conversion of the shares of
Preferred Stock is determined in part upon the market price of the Common
Stock prior to the time of conversion, Registrable Securities contemplated by
clause (i) above shall include (but not be limited to) a number of shares of
Common Stock equal to 1,703,470 shares of Common Stock into which the shares
of Preferred Stock are convertible, assuming such conversion occurred on the
Closing Date, the Filing Date or the date the Company files an acceleration
request with the Commission relating to the Registration Statement, whichever
yields the lowest Conversion Price (as defined in the Purchase Agreement).
The Company shall be required to file additional Registration Statements to
the extent the sum of (i) the number of the
-2-
<PAGE>
shares of Common Stock into which the shares of Preferred Stock are
convertible, and (ii) the number of shares of Common Stock issuable upon
exercise in full of the Warrants, exceeds the number of shares of Common Stock
then registered (in the case of the first Registration Statement, in
accordance with the immediately prior sentence.) The Company shall have ten
(10) days to file such additional Registration Statements after notice of the
requirement thereof, which the Holders may give at such time when the number
of shares of Common Stock as are issuable upon conversion of shares of
Preferred Stock and upon exercise of the Warrants, exceeds 85% of the number
of shares of Common Stock to be registered in a Registration Statement
hereunder.
"REGISTRATION STATEMENT" means the registration statement and any
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
"RULE 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means one special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"WARRANTS" means the Common Stock purchase warrants issued to the
Purchasers pursuant to the Purchase Agreement.
2. SHELF REGISTRATION
-3-
<PAGE>
(a) On or prior to the Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-3 (or if
the Company is not then eligible to register for resale the Registrable
Securities on Form S-3 such registration shall be on another appropriate form
in accordance herewith, or, in connection with an Underwritten Offering
hereunder, such other form agreed to by the Company and by the Holders of
Registrable Securities). The Company shall use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the date which
is three years after the date that such Registration Statement is declared
effective by the Commission or such earlier date when all Registrable
Securities covered by such Registration Statement have been sold or may be
sold without volume restrictions pursuant to Rule 144(k) (the "EFFECTIVENESS
PERIOD"), PROVIDED, HOWEVER, that the Company shall not be deemed to have used
its best efforts to keep the Registration Statement effective during the
Effectiveness Period if it voluntarily takes any action that would result in
the Holders not being able to sell the Registrable Securities covered by such
Registration Statement during the Effectiveness Period, unless such action is
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not declared it
effective.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and, if the managing underwriters advise the Company and such Holders
in writing that in their opinion the amount of Registrable Securities proposed
to be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such
Holder (i) agrees to sell its Registrable Securities on the basis provided in
any underwriting agreements approved by the Persons entitled hereunder to
approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such arrangements.
3. REGISTRATION PROCEDURES
In connection with the Company's registration obligations hereunder,
the Company shall:
-4-
<PAGE>
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form S-3 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3 such
registration shall be on another appropriate form in accordance herewith, or,
in connection with an Underwritten Offering hereunder, such other form agreed
to by the Company and by the Holders of Registrable Securities) which shall
contain the "Plan of Distribution" attached hereto as ANNEX A (except if
otherwise directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; PROVIDED, HOWEVER,
that not less than five (5) Business Days prior to the filing of the initial
Registration Statement or not less than two (2) Business Days prior to the
filing of any related Prospectus or any amendment or supplement thereto
(including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall, (i) furnish to the
Holders, their Special Counsel and any managing underwriters, copies of all
such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders, their Special Counsel and such managing underwriters,
and (ii) cause its officers and directors, counsel and independent certified
public accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders
of a majority of the Registrable Securities, their Special Counsel, or any
managing underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as reasonably
possible to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and as promptly as reasonably
possible provide the Holders true and complete copies of all correspondence
from and to the Commission relating to the Registration Statement; and (iv)
comply in all material respects with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in
accordance with the intended methods of disposition by the Holders thereof set
forth in the Registration Statement as so amended or in such Prospectus as so
supplemented.
(c) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) days prior
to such filing) and (if requested by any such Person) confirm such notice in
writing no later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a "review" of such
-5-
<PAGE>
Registration Statement and whenever the Commission comments in writing on such
Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders); and (C)
with respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the Commission or
any other Federal or state governmental authority for amendments or
supplements to the Registration Statement or Prospectus or for additional
information; (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement covering any or all
of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement (including any underwriting agreement)
contemplated hereby ceases to be true and correct in all material respects;
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; and (vi) of the occurrence of
any event that makes any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein
by reference untrue in any material respect or that requires any revisions to
the Registration Statement, Prospectus or other documents so that, in the case
of the Registration Statement or the Prospectus, as the case may be, it will
not contain 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, in light of the circumstances under which they were made,
not misleading.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein, and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated
in such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER,
that the Company shall not be required to take any action pursuant to this
Section 3(e) that would, in the opinion of counsel for the Company, violate
applicable law or be materially detrimental to the business prospects of the
Company.
(f) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
-6-
<PAGE>
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto
as such Persons may reasonably request; and the Company hereby consents to the
use of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale
of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky
laws of such jurisdictions within the United States as any Holder or
underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall
not be required to qualify generally to do business in any jurisdiction where
it is not then so qualified or to take any action that would subject it to
general service of process in any such jurisdiction where it is not then so
subject or subject the Company to any material tax in any such jurisdiction
where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such
names as any such managing underwriters or Holders may request at least two
Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as reasonably possible, prepare a supplement or
amendment, including a post-effective amendment, to the Registration Statement
or a supplement to the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Registration Statement
nor such Prospectus will contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq National
Market ("NASDAQ") or on any other stock market or trading facility on which
the shares of Common Stock are traded, listed or quoted (each a "SUBSEQUENT
MARKET") as and when required pursuant to the Purchase Agreement.
(l) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in Underwritten Offerings) and
take all such other actions in connection therewith (including those
reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the
-7-
<PAGE>
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to
such Holders and such underwriters as are customarily made by issuers to
underwriters in underwritten public offerings, and confirm the same if and
when requested; (ii) in the case of an Underwritten Offering obtain and
deliver copies thereof to each Holder and the managing underwriters, if any,
of opinions of counsel to the Company and updates thereof addressed to each
Holder and each such underwriter, in form, scope and substance reasonably
satisfactory to any such managing underwriters and Special Counsel to the
selling Holders covering the matters customarily covered in opinions requested
in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement, and, in the case of an
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, use its best reasonable efforts to obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants
of the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by
the Company for which financial statements and financial data is, or is
required to be, included in the Registration Statement), addressed to the
Company in form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same shall
contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, than those set forth in Section
5 (or such other provisions and procedures acceptable to the managing
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering); and (v) deliver such documents
and certificates as may be reasonably requested by the Holders of a majority
of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the
representations and warranties made pursuant to clause 3(l)(i) above and to
evidence compliance with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant retained
by such selling Holders or underwriters, at the offices where normally kept,
during reasonable business hours, all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, and
cause the officers, directors, agents and employees of the Company and its
subsidiaries to supply all information in each case reasonably requested by
any such Holder, representative, underwriter, attorney or accountant in
connection with the Registration Statement; PROVIDED, HOWEVER, that any
information that is determined in good faith by the Company in writing to be
of a confidential nature at the time of delivery of such information shall be
kept confidential by such Persons, unless (i) disclosure of such information
is required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities; (ii) disclosure of such information, in
the opinion of counsel to such Person, is required by law; (iii) such
information becomes generally available to the public other than as a result
of a disclosure or failure to safeguard by such Person; or (iv) such
information becomes available to such Person from a source other than the
Company and such source is not known by such Person to be bound by a
confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission.
-8-
<PAGE>
(o) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar Federal statute
then in force) the deletion of the reference to such Holder in any amendment
or supplement to the Registration Statement filed or prepared subsequent to
the time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it and its officers, directors or Affiliates, if any,
will comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement contemplated by Section 3(j), or until it is advised in
writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.
4. REGISTRATION EXPENSES
-9-
<PAGE>
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the NASDAQ and any Subsequent Market on which the Common Stock is then
listed for trading, and (B) in compliance with state securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities
may designate)), (ii) printing expenses (including, without limitation,
expenses of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is requested by the managing
underwriters, if any, or by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and delivery expenses, (iv) fees and disbursements of counsel for the Company
and Special Counsel for the Holders, (v) Securities Act liability insurance,
if the Company so desires such insurance, and (vi) fees and expenses of all
other Persons retained by the Company in connection with the consummation of
the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended
to diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and
printing expenses incurred to comply with the requirements hereof.
5. INDEMNIFICATION
-10-
<PAGE>
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform
under a margin call of Common Stock), investment advisors and employees of
each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and attorneys' fees) and expenses (collectively,
"LOSSES"), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in the Registration Statement,
any Prospectus or any form of prospectus or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating to any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein (in the case of any Prospectus or
form of prospectus or supplement thereto, in light of the circumstances under
which they were made) not misleading, except to the extent, but only to the
extent, that such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by such
Holder expressly for use therein, or to the extent that such information
relates to such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in the Registration Statement, such Prospectus
or such form of Prospectus or in any amendment or supplement thereto. The
Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with
the transactions contemplated by this Agreement.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and
the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses
(as determined by a court of competent jurisdiction in a final judgment not
subject to appeal or review) arising solely out of or based solely upon any
untrue statement of a material fact contained in the Registration Statement,
any Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the
statements therein not misleading to the extent, but only to the extent, that
such untrue statement or omission is contained in any information so furnished
in writing by such Holder to the Company specifically for inclusion in the
Registration Statement or such Prospectus or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement,
such Prospectus or such form of Prospectus, or in any amendment or supplement
thereto. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
-11-
<PAGE>
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of counsel reasonably satisfactory to the Indemnified Party and the payment of
all fees and expenses incurred in connection with defense thereof; provided,
that the failure of any Indemnified Party to give such notice shall not
relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay
such fees and expenses; or (2) the Indemnifying Party shall have failed
promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or
(3) the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless
of whether it is ultimately determined that an Indemnified Party is not
entitled to indemnification hereunder; PROVIDED, that the Indemnifying Party
may require such Indemnified Party to undertake to reimburse all such fees and
expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public
policy or otherwise), then each Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in
-12-
<PAGE>
connection with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations. The relative
fault of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include,
subject to the limitations set forth in Section 5(c), any reasonable
attorneys' or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by PRO RATA
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), no Holder
shall be required to contribute, in the aggregate, any amount in excess of the
amount by which the proceeds actually received by such Holder from the sale of
the Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder 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 Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.
The Company and each Holder agree that monetary damages would not provide
adequate compensation for any losses incurred by reason of a breach by it of
any of the provisions of this Agreement and hereby further agrees that, in the
event of any action for specific performance in respect of such breach, it
shall waive the defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Except as and to the extent
specified in SCHEDULE 6(b) hereto, neither the Company nor any of its
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions
hereof. Except as and to the extent specified in SCHEDULE 6(b) hereto, neither
the Company nor any of its subsidiaries has previously
-13-
<PAGE>
entered into any agreement granting any registration rights with respect to
any of its securities to any Person. Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority of the
then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
Company under the Securities Act unless the rights so granted are subject in
all respects to the prior rights in full of the Holders set forth herein, and
are not otherwise in conflict or inconsistent with the provisions of this
Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specified in SCHEDULE 6(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not an
effective Registration Statement covering all of the Registrable Securities
and the Underlying Shares, the Company shall determine to prepare and file
with the Commission a registration statement relating to an offering for its
own account or the account of others (other than pursuant to the registration
rights granted to the holders of the 1997 Subordinated Convertible Notes and
the warrants issued in connection therewith) under the Securities Act of any
of its equity securities, other than on Form S-4 or Form S-8 (each as
promulgated under the Securities Act) or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of
any entity or business or equity securities issuable in connection with stock
option or other employee benefit plans, then the Company shall send to each
holder of Registrable Securities written notice of such determination and, if
within twenty (20) days after receipt of such notice, any such holder shall so
request in writing, the Company shall include in such registration statement
all or any part of such Registrable Securities such holder requests to be
registered; PROVIDED, HOWEVER, that the Company shall not be required to
register any Registrable Securities pursuant to this Section 7(d) that are
eligible for sale pursuant to Rule 144(k) of the Commission.
(e) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the
Company and the Holders of at least two-thirds of the then outstanding
Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this
sentence, Registrable Securities that are owned, directly or indirectly, by
the Company, or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights
of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; PROVIDED,
HOWEVER, that the provisions of this sentence may not be amended, modified, or
supplemented except in accordance with the provisions of the immediately
preceding sentence.
-14-
<PAGE>
(f) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section prior to 8:00 p.m.
(Minnetonka, Minnesota time) on a Business Day, (ii) the Business Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in the Purchase
Agreement later than 8:00 p.m. (Minnetonka, Minnesota time) on any date and
earlier than 11:59 p.m. (Minnetonka, Minnesota time) on such date, (iii) the
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: TRO Learning, Inc.
4660 West 77th Street
Edina, MN 55435
Facsimile No.: (612) 832-1210
Attn: Chief Financial Officer
With copies to: Winston & Strawn
35 West Wacker Drive, 42nd Floor
Chicago, IL 60601
Facsimile No.: (312) 558-5700
Attn: Leland E. Hutchinson
If to the KA: KA Investments LDC
c/o Deephaven Capital Management LLC
1712 Hopkins Crossroads
Minnetonka, MN 55305
Facsimile No.: (612) 542-4244
Attn: Bruce Lieberman
-15-
<PAGE>
With copies to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson
If to Kohler or Kohler IRA: Gary S. Kohler
c/o Miller, Johnson & Kuehn
5500 Wayzata Blvd., 8th Floor
Minneapolis, MN 55416
If to Twin City: Twin City Carpenters Pension Plan
c/o Perkins Capital Management, Inc.
730 East Lake Street
Wayzata, MN 55391
If to Stark: Stark International
1500 West Market Street
Mequon, WI 53092
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(h) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(i) GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive
-16-
<PAGE>
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of the any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.
(j) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would
have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
(l) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(m) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company
or its Affiliates (other than any Holder or transferees or successors or
assigns thereof if such Holder is deemed to be an Affiliate solely by reason
of its holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
Company:
. TRO LEARNING, INC.
By:
------------------------------------
Name:
Title:
Purchasers:
KA INVESTMENTS LDC
By:
------------------------------------
Name:
Title:
------------------------------------
GARY S. KOHLER
FIRST TRUST NATIONAL ASSOCIATION TTEE
FBO GARY KOHLER IRA
By:
------------------------------------
Name:
Title:
INDUSTRICORP & CO., INC.
FBO TWIN CITY CARPENTERS PENSION PLAN
By:
------------------------------------
Name:
Title:
<PAGE>
STARK INTERNATIONAL
By:
------------------------------------
Name:
Title:
<PAGE>
ANNEX A
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
<PAGE>
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
<PAGE>
EXHIBIT E
TRANSFER AGENT INSTRUCTIONS
Ladies and Gentlemen:
Reference is made to that certain Convertible Preferred Stock Purchase
Agreement (the "PURCHASE AGREEMENT") between TRO Learning, Inc., a Delaware
corporation (the "COMPANY"), and the buyers named therein (the "HOLDERS")
pursuant to which the Company is issuing to the Holders its shares of Series C
Convertible Preferred Stock, par value $.01 per share (the "PREFERRED SHARES"),
and a Common Stock purchase warrant (the "WARRANT") which shall be convertible
and exercisable, respectively, into shares of the Company's common stock, $.01
par value per share (the "COMMON STOCK"). The shares of Common Stock issuable
upon conversion of the Preferred Shares and upon exercise of the Warrants are
collectively referred to herein as "UNDERLYING SHARES."
This letter shall serve as our irrevocable authorization and direction to
you (provided that you are the transfer agent for the Company with respect to
its Common Stock at such time) to issue Underlying Shares from time to time upon
notice from the Company to issue such Underlying Shares.
So long as you have previously received (x) a direction letter from the
Company substantially in the form of EXHIBIT I attached hereto stating that a
registration statement covering resales of Underlying Shares has been declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended, and that Underlying Shares may be issued (or reissued if they
have been issued at a time when there was not such an effective registration
statement) or resold without any restrictive legend (the "DIRECTION LETTER") and
(y) a copy of such registration statement, certificates representing Underlying
Shares shall not bear any legend restricting transfer of Underlying Shares
thereby and should not be subject to any stop-transfer restriction. Provided,
however, that if you have not previously received (x) a copy of the Direction
Letter and (y) a copy of such registration statement, then the certificates
representing Underlying Shares shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION
<PAGE>
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
and, provided, further, that the Company may, from time to time, notify you to
place stop-transfer restrictions on the certificates for Underlying Shares in
the event, but only in the event, a registration statement covering Underlying
Shares is subject to amendment for events then current.
Please be advised that the Holders have relied upon this instruction letter
as an inducement to enter into the Purchase Agreement and, accordingly, the
Holders are a third party beneficiary to these instructions.
Please execute this letter in the SPACE indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at (612) 832-1413.
Very truly yours,
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
ACKNOWLEDGED AND AGREED:
- ---------------------------------
By:
-----------------------------
Name:
---------------------------
Title
---------------------------
-2-
<PAGE>
EXHIBIT I
[FORM OF DIRECTION LETTER]
[Addressee]
[Address)
To Whom It May Concern:
The Registration Statement on Form S-3 (File No. 333-_______) of TRO
Learning, Inc. (the "Registration Statement") was declared effective at
___:____.M. Eastern Time on ______, 199_. Upon issuance of the Underlying
Shares referred to in the Company's instruction letter attached hereto,
you are authorized to issue certificates for the Company's common stock without
restrictive legends.
Very truly yours,
TRO Learning, Inc.
By:
---------------------------------
Name:
Title:
<PAGE>
NUMBER SHARES
X XX
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
TRO LEARNING, INC.
THIS CERTIFIES THAT _________________[NAME]_________________ IS THE OWNER OF
____________________XXX________________________FULL PAID AND NON-ASSESSABLE
SHARES OF THE SERIES C CONVERTIBLE PREFERRED STOCK TRANSFERABLE ONLY ON THE
BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON THE SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF
AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND TO BE SEALED WITH THE SEAL OF THE
CORPORATION, THIS 13TH DAY OF JANUARY A.D. 1999.
- ----------------------------- -----------------------------
SECRETARY PRESIDENT
<PAGE>
FIRST AMENDMENT
TO
SUBORDINATED CONVERTIBLE DEBENTURES
DUE MARCH 27, 2004
OF TRO LEARNING, INC.
TRO Learning, Inc., a Delaware corporation (the "Issuer"), hereby
amends its Series 1997 10% Subordinated Convertible Debentures due March 27,
2004, in the aggregate principal amount of $3,050,000, represented by
Debenture Certificates No. 1997/10-1 through No. 1997/10-55 (the
"Debentures") as provided herein.
RECITALS
A. On March 27, 1997, the Issuer issued certificates representing the
Debentures to the purchasers thereof.
B. The Debentures are convertible into shares of the Issuer's Common
Stock at the option of the holder at a conversion price which is subject to
adjustment as provided in the Debentures.
C. Section 4(b)(iv) of the Debentures incorrectly states the formula
for adjusting such conversion price and does not accurately reflect the
agreement between the Issuer and the purchasers of the Debentures with
respect to such adjustment and the Issuer desires to amend the Debenture to
accurately describe the formula for determination of adjustments under such
Section.
NOW, THEREFORE, in consideration of the above recitals and other good
and valuable consideration, the Issuer hereby amends the Debentures as
follows:
1. Section 4(b)(iv) is hereby deleted and restated in its entirety as
follows:
(iv) If the Issuer issues or sells any shares of Common Stock
for a consideration per share less than the Conversion Price then
in effect (other than dividends payable in shares of Common Stock),
or issues any options, warrants, or other rights to purchase Common
Stock at a consideration per share less than the Conversion Price
then in effect, or issues securities convertible into Common Stock
at a conversion price per share of less than the Conversion Price
then in effect, then the Conversion Price in effect immediately
prior to such issuance or sale shall be adjusted so as to equal a
fraction, (a) the numerator of which shall be an amount equal to
the sum of (A) the aggregate number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied
by the applicable Conversion Price in effect immediately prior to
such issuance or sale, and (B) the total consideration payable to
the Issuer upon such issuance or sale of such Common Stock and/or
such purchase rights or convertible securities, plus the
consideration payable to the Issuer upon the exercise of such
purchase rights or upon conversion
<PAGE>
of such convertible securities, and (b) the denominator of which
shall be an amount equal to the aggregate number of shares of
Common Stock outstanding immediately after such issuance or sale
plus the number of shares of Common Stock issuable upon the
exercise of any purchase rights and/or upon the conversion of
convertible securities issued in such issuance. If the Conversion
Price is adjusted as the result of the issuance of any options,
warrants or other purchase rights or upon the issuance of
convertible securities, no further adjustments of such Conversion
Price shall be made at the time of the exercise of such options,
warrants or other purchase rights or convertible securities. If
securities are sold for a consideration other than cash, the amount
of the consideration other than cash received by the Issuer shall
be deemed to be the fair value of such consideration as determined
by the Board of Directors of the Issuer.
2. Except as expressly provided herein, all of the terms, covenants
and conditions of the Debentures remain in full force and effect.
The Issuer has caused this First Amendment to Debenture to be executed
as of November 13, 1997.
TRO LEARNING, INC.
By:
--------------------------------
Its:
--------------------------------
-2-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
TRO Learning, Inc. on Form S-8 (File No. 333-30963 and 333-61721) and on Form
S-3 (File No. 333-44617) of our report dated December 3, 1998, on our audits
of the consolidated financial statements and financial statement schedule of
TRO Learning, Inc., as of October 31, 1998 and 1997, and for the years ended
October 31, 1998, 1997 and 1996, which report is included in this Annual
Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
December 3, 1998
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ William R. Roach
- ----------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ Tony Christianson
- ----------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ John L. Krakauer
- ----------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ Vernon B. Lewis, Jr.
- ----------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ John Patience
- ----------------------------------
<PAGE>
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of TRO Learning, Inc., a Delaware
corporation (the "Company"), does hereby constitute and appoint William R.
Roach, John Murray and Mary Jo Murphy, his or her true and lawful attorneys and
agents, each with full power and authority (acting alone and without the other)
to execute in the name and on behalf of the undersigned as such Director and/or
Officer, the Company's Annual Report on Form 10-K and related amendments, if
any. The undersigned hereby grants unto such attorneys and agents, and each of
them, full power of substitution and revocation in the premises and hereby
ratifies and confirms all that such attorneys and agents may do or cause to be
done by virtue of these presents.
Dated this 22nd day of January, 1999
/s/ Jack R. Borsting
- ----------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND IN THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 466
<SECURITIES> 0
<RECEIVABLES> 16,427
<ALLOWANCES> 920
<INVENTORY> 648
<CURRENT-ASSETS> 18,662
<PP&E> 1,073
<DEPRECIATION> 3,204
<TOTAL-ASSETS> 27,407
<CURRENT-LIABILITIES> 20,283
<BONDS> 3,050
0
0
<COMMON> 64
<OTHER-SE> 3,605
<TOTAL-LIABILITY-AND-EQUITY> 27,407
<SALES> 43,278
<TOTAL-REVENUES> 43,278
<CGS> 5,009
<TOTAL-COSTS> 5,009
<OTHER-EXPENSES> 32,984
<LOSS-PROVISION> 814
<INTEREST-EXPENSE> 2,217
<INCOME-PRETAX> 3,068
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,068
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
