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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 1999
REGISTRATION NO. 333-82039
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
7372
(Primary Standard Industrial Classification Code Number)
75-2480669
(I.R.S. Employer Identification No.)
925 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
(914) 682-4300
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
MARC E. LANDY
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
925 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
(914) 682-4300
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
Gerald Adler, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
(212) 758-9500
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective and the
satisfaction or waiver of all other conditions to the merger described in the
Agreement and Plan of Merger, dated as of June 1, 1999, by and among Learn2.com,
Inc., 7th Level Merger Corporation and ViaGrafix Corporation.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share.................................. 10,686,246 -- $40,521,934(2) $11,265.10(3)
</TABLE>
(1) Based upon the maximum number of shares of common stock, par value $.01 per
share, of Learn2.com, Inc., that may be issued pursuant to the merger.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended. This fee
has been computed pursuant to Rule 457(f)(1) and (c) thereof and is based on
(i) $7.00 and $6.8125, the average of the bid and asked sales price per
share of common stock, par value $.01 per share, of ViaGrafix Corporation on
The Nasdaq Stock Market on June 28, 1999 with respect to 5,788,184 shares
and July 14, 1999 with respect to 682 shares, and (ii) the maximum number of
shares of common stock of ViaGrafix Corporation to be acquired by
Learn2.com, Inc. pursuant to the merger.
(3) Of this amount, $11,263.81 was paid on July 1, 1999. The additional $1.29 is
due as a result of the 682 additional shares of ViaGrafix Corporation common
stock which have been issued since July 1, 1999.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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LEARN2.COM, INC.
VIAGRAFIX CORPORATION
MERGER PROPOSED -- YOUR VOTE IS IMPORTANT
The Boards of Directors of Learn2.com, Inc., formerly known as 7th Level,
Inc., and ViaGrafix Corporation have approved a merger agreement which provides
for the combination of the two companies. We believe the combined company will
become the comprehensive source for learning across many platforms and subjects,
expand our presence and access to content and generate cash flow and revenues.
As a result of the merger, ViaGrafix will become a wholly-owned subsidiary of
Learn2.com.
If the merger is completed, holders of ViaGrafix common stock will receive
1.846 shares of Learn2.com common stock for each share of ViaGrafix common stock
held. Learn2.com stockholders will continue to own their existing shares after
the merger.
Learn2.com will issue approximately 10.7 million shares of Learn2.com common
stock to ViaGrafix stockholders in the merger, based on the number of
outstanding shares of ViaGrafix common stock on March 31, 1999. These shares
will represent approximately 21% of the outstanding Learn2.com common stock
after the merger. Learn2.com shares held by Learn2.com stockholders before the
merger will represent approximately 79% of the outstanding Learn2.com shares
after the merger.
We are asking stockholders of Learn2.com and ViaGrafix to approve the merger
agreement and the merger including the related issuance of shares of Learn2.com
common stock.
We cannot complete the merger unless stockholders of both companies approve
it.
The dates, times and places of the meetings are:
For LEARN2.COM stockholders:
August 23, 1999
10:00 a.m., Eastern Time
Le Parker Meridien
118 West 57th Street
New York, New York 10019
For VIAGRAFIX stockholders:
August 23, 1999
10:00 a.m., Central Time
One American Way
Pryor, Oklahoma 74361
IN PARTICULAR, YOU SHOULD REVIEW THE MATTERS REFERRED TO UNDER "RISK
FACTORS" STARTING ON PAGE 15.
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<S> <C> <C>
/s/ Donald Schupak /s/ Stephen P. Gott /s/ Michael A. Webster
Donald Schupak Stephen P. Gott Michael A. Webster
Chairman of the Board President and Chief Chairman of the Board, President and
Learn2.com, Inc. Executive Officer Chief Executive Officer
Learn2.com, Inc. ViaGrafix Corporation
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED OF THE MERGER DESCRIBED IN THE JOINT
PROXY STATEMENT/PROSPECTUS OR THE LEARN2.COM COMMON STOCK TO BE ISSUED IN
CONNECTION WITH THE MERGER, OR DETERMINED IF THE PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The proxy statement/prospectus is dated July , 1999,
and is first being mailed to stockholders on or about July , 1999.
<PAGE>
LEARN2.COM, INC.
925 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Time:
10:00 a.m., Eastern Time
Date:
August 23, 1999
Place:
Le Parker Meridien
118 West 57th Street
New York, New York 10019
Purpose:
- Vote on the proposed merger of Learn2.com and ViaGrafix, including the
related issuance of shares of Learn2.com common stock.
Only stockholders of record on July 16, 1999 may vote at the special
meeting. Only stockholders or their proxies and Learn2.com guests may attend the
meeting.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY
CARD IN THE ENCLOSED ENVELOPE PROMPTLY.
Marc E. Landy
Vice President, Chief Financial Officer
and Secretary
July 22, 1999
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VIAGRAFIX CORPORATION
ONE AMERICAN WAY
PRYOR, OKLAHOMA 74361
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Time:
10:00 a.m., Central Time
Date:
August 23, 1999
Place:
One American Way
Pryor, Oklahoma 74361
Purpose:
- Vote on the proposed merger of Learn2.com and ViaGrafix.
Only stockholders of record on July 16, 1999 may vote at the special
meeting. Only stockholders or their proxies and ViaGrafix guests may attend the
meeting.
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY
CARD IN THE ENCLOSED ENVELOPE PROMPTLY.
Robert E. Webster
Executive Vice President
and Secretary
July 22, 1999
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TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER.................................................................... 1
SUMMARY................................................................................................... 3
The Companies........................................................................................... 3
Matters to be Considered at the Special Meetings........................................................ 3
Reasons for the Merger.................................................................................. 3
Recommendations to Stockholders......................................................................... 4
Opinions of Financial Advisors.......................................................................... 4
The Merger.............................................................................................. 4
What ViaGrafix Stockholders Will Receive................................................................ 4
Ownership of Learn2.com after the Merger................................................................ 4
Stockholder Vote Required to Approve the Merger......................................................... 4
Appraisal Rights........................................................................................ 4
Board of Directors of Learn2.com after the Merger....................................................... 4
Accounting Treatment.................................................................................... 4
Material Federal Income Tax Consequences of the Merger.................................................. 5
Conditions to the Completion of the Merger.............................................................. 5
Termination of the Merger Agreement..................................................................... 5
Termination Fees........................................................................................ 6
Interest of Officers and Directors in the Merger........................................................ 6
SELECTED SUPPLEMENTARY HISTORICAL FINANCIAL DATA OF LEARN2.COM............................................ 7
SELECTED HISTORICAL FINANCIAL DATA OF VIAGRAFIX........................................................... 9
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA...................................................... 11
COMPARATIVE PER SHARE DATA................................................................................ 13
RECENT DEVELOPMENTS....................................................................................... 14
RISK FACTORS.............................................................................................. 15
CAUTIONARY STATEMENT CONCERNING FORWARD--LOOKING STATEMENTS............................................... 27
THE MERGER................................................................................................ 28
Background of the Merger................................................................................ 28
Factors Considered by, and Recommendations of, the Learn2.com Board..................................... 30
Factors Considered by, and Recommendations of, the ViaGrafix Board...................................... 32
Accounting Treatment.................................................................................... 34
Material Federal Income Tax Consequences of the Merger.................................................. 34
Appraisal Rights........................................................................................ 35
Federal Securities Law Consequences..................................................................... 35
Delisting and Deregistration of ViaGrafix Common Stock After the Merger................................. 35
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION............................................... 36
OPINIONS OF FINANCIAL ADVISORS............................................................................ 38
THE MERGER AGREEMENT...................................................................................... 43
Structure of the Merger................................................................................. 43
Timing of the Closing................................................................................... 43
Merger Consideration.................................................................................... 43
No Fractional Shares.................................................................................... 43
</TABLE>
i
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PAGE
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The Learn2.com Board.................................................................................... 43
Covenants Relating to Conduct of Business Pending the Merger............................................ 43
Representations and Warranties.......................................................................... 44
Conditions to the Completion of the Merger.............................................................. 45
Termination of the Merger Agreement..................................................................... 46
No Solicitation......................................................................................... 47
Expenses................................................................................................ 47
Amendments; Waivers..................................................................................... 48
Treatment of ViaGrafix Stock Options Under the 1995 ViaGrafix Stock Option Plan......................... 48
Learn2.com Voting Agreement............................................................................. 48
ViaGrafix Voting Agreement.............................................................................. 48
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................................................ 49
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING.......................................................... 52
COMPARISON OF STOCKHOLDER RIGHTS.......................................................................... 56
DESCRIPTION OF LEARN2.COM CAPITAL STOCK................................................................... 57
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............................................... 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 68
LEARN2.COM
Overview................................................................................................ 68
Results of Operations................................................................................... 69
Revenues................................................................................................ 69
Cost of Revenues........................................................................................ 69
Research Development and Expenses....................................................................... 70
Sales and Marketing Expenses............................................................................ 70
General and Administrative Expenses..................................................................... 71
Restructuring Charges................................................................................... 71
Depreciation and Amortization........................................................................... 71
Interest and other Income............................................................................... 72
Liquidity and Capital Resources......................................................................... 73
Learn2.com-Supplementary Historical Financial Data...................................................... 73
Results of Operations................................................................................... 74
Revenues................................................................................................ 74
Cost of Revenues........................................................................................ 74
Research Development and Expenses....................................................................... 75
Sales and Marketing Expenses............................................................................ 75
General and Administrative Expenses..................................................................... 76
Depreciation and Amortization........................................................................... 76
Interest and Other Income............................................................................... 77
Liquidity and Capital Resources......................................................................... 77
Year 2000 Impact........................................................................................ 77
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................... 79
VIAGRAFIX
Overview................................................................................................ 81
Results of Operations................................................................................... 82
Cost of Sales........................................................................................... 82
</TABLE>
ii
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<TABLE>
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PAGE
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Selling, General and Administrative Expense............................................................. 83
Advertising Expense..................................................................................... 83
Research and Development Expense........................................................................ 84
Depreciation and Amortization Expense................................................................... 85
Net Interest Income (Expense)........................................................................... 85
Provision (Benefit) for Income Taxes.................................................................... 85
Liquidity and Capital Resources......................................................................... 86
Year 2000 Impact........................................................................................ 87
ViaGrafix Quantitative and Qualitative Disclosures about Market Risk.................................... 87
THE COMPANIES............................................................................................. 88
LEARN2.COM
General................................................................................................. 88
Business Strategy and Strategic Direction............................................................... 88
Marketplace............................................................................................. 88
Products and Services................................................................................... 89
The Total Solution...................................................................................... 90
Competition............................................................................................. 91
Intellectual Property and Licenses...................................................................... 92
Employees............................................................................................... 92
Properties.............................................................................................. 93
Legal Proceedings....................................................................................... 93
VIAGRAFIX
General................................................................................................. 94
Industry Background..................................................................................... 94
The ViaGrafix Solution.................................................................................. 95
Growth Strategy......................................................................................... 96
Products................................................................................................ 97
Product Development..................................................................................... 98
Sales and Marketing..................................................................................... 98
Customers (End-Users)................................................................................... 98
Customer Support........................................................................................ 99
Production and Suppliers................................................................................ 99
Backlog and Seasonality................................................................................. 99
Employees............................................................................................... 99
Properties.............................................................................................. 99
Intellectual Property Rights............................................................................ 100
Competition............................................................................................. 100
Legal Proceedings....................................................................................... 101
CERTAIN TRANSACTIONS...................................................................................... 102
Learn2.com.............................................................................................. 102
ViaGrafix............................................................................................... 103
Transactions Between Learn2.com and ViaGrafix........................................................... 104
VOTING AND MANAGEMENT INFORMATION......................................................................... 105
Principal Stockholders of Learn2.com.................................................................... 105
Directors of Learn2.com................................................................................. 106
Executive Officers of Learn2.com........................................................................ 108
Learn2.com Executive Compensation....................................................................... 108
</TABLE>
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PAGE
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Learn2.com Summary Compensation Table................................................................... 108
Learn2.com Option Grants and Exercises.................................................................. 109
Learn2.com Option Exercises and Fiscal Year-End Values.................................................. 109
Learn2.com Ten-Year Option Repricings................................................................... 109
Learn2.com Compensation of Directors.................................................................... 110
Learn2.com Employment Contracts and Termination and Change-in-Control Arrangements...................... 111
Principal Stockholders of ViaGrafix..................................................................... 112
Executive Officers and Directors of ViaGrafix........................................................... 112
ViaGrafix Executive Compensation........................................................................ 113
Viagrafix Summary Compensation Table.................................................................... 113
ViaGrafix Option Grants and Exercises................................................................... 113
ViaGrafix Option Exercises and Fiscal Year-End Values................................................... 113
ViaGrafix Compensation of Directors..................................................................... 113
ViaGrafix Employment Contracts and Termination and Change-in-Control Arrangements....................... 113
LEGAL MATTERS............................................................................................. 113
EXPERTS................................................................................................... 113
FUTURE STOCKHOLDER PROPOSALS.............................................................................. 115
WHERE YOU CAN FIND MORE INFORMATION....................................................................... 115
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................ F-1
</TABLE>
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<S> <C> <C>
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Opinion of Ladenburg Thalmann & Co. Inc.
APPENDIX C -- Opinion of Point West Securities, LLC
APPENDIX D -- Michael A. Webster Employment Agreement
APPENDIX E -- Robert E. Webster Employment Agreement
APPENDIX F -- Michael A. Webster Non-Competition Agreement
APPENDIX G -- Robert E. Webster Non-Competition Agreement
APPENDIX H -- Indemnity Agreement
APPENDIX I -- ViaGrafix Voting Agreement
APPENDIX J -- Learn2.com Voting Agreement
</TABLE>
iv
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are the two companies proposing the merger? How will I benefit?
A: The merger of the two companies is a natural extension of our businesses.
By combining Learn2.com's online presence and technologies with ViaGrafix's
content, production capabilities and customer base, we believe we can become the
comprehensive source for learning across many platforms and subjects. Both
Learn2.com and ViaGrafix believe that the merger will provide added value to
their respective stockholders. However, both Learn2.com and ViaGrafix note that
their goals in the merger are subject to the risks discussed in this joint proxy
statement/prospectus in the section labeled "Risk Factors" on page 15.
Q: I own stock in ViaGrafix. What will I receive in the merger?
A: For each share of common stock of ViaGrafix you will receive 1.846 shares
of Learn2.com common stock. For example, if you own 100 shares of ViaGrafix
common stock, you will receive 184 shares of Learn2.com common stock in exchange
for your shares.
Learn2.com will not issue fractional shares of common stock. You will
receive cash in an amount equal to the fractional share of Learn2.com common
stock multiplied by the average of the closing prices of Learn2.com common stock
for each of twenty consecutive trading days immediately preceding the third
trading day before the mailing of this joint proxy statement/prospectus.
The number of shares of Learn2.com common stock to be issued for each share
of ViaGrafix common stock is fixed and will not be adjusted based upon changes
in the value of Learn2.com common stock or ViaGrafix common stock.
Q: When and where are the stockholder meetings?
A: Each company's meeting will take place on August 23, 1999. The address of
each meeting is on page 52.
Q: What do I need to do now?
A: Just mail your signed proxy card in the enclosed return envelope, as soon
as possible, so that your shares may be represented at your meeting. In order to
assure that your vote is obtained, please give your proxy as instructed on your
proxy card even if you currently plan to attend a meeting in person. The board
of directors of each of Learn2.com and ViaGrafix recommends that its
stockholders vote in favor of the merger.
Q: What do I do if I want to change my vote?
A: Just send in a later-dated, signed proxy card to your company's Secretary
before your meeting. Or you can attend your meeting in person and vote. You may
also revoke your proxy by sending a notice of revocation to your company's
Secretary at the address under "Summary--The Companies" on page 3.
Q: If my shares are held in "street name" by my broker, will my broker vote
my shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them. You should
therefore be sure to provide your broker with instructions on how to vote your
shares. Please check the voting form used by your broker to see if it offers
telephone or Internet voting. If you are a Learn2.com stockholder and do not
give voting instructions to your broker, you will not be counted as voting for
purposes of the merger vote unless you appear in person at the Learn2.com
special meeting. If you are a ViaGrafix stockholder and do not give voting
instructions to your broker, you will, in effect, be voting against the merger
unless you appear in person at the ViaGrafix special meeting and vote in favor
of the merger.
Q: Should I send in my ViaGrafix stock certificates now?
A: No. If the merger is completed, we will send ViaGrafix stockholders
written instructions for exchanging their share certificates.
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Learn2.com stockholders will keep their existing certificates.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible. We
hope to complete the merger during the third quarter of 1999.
Q: Who do I call if I have questions about the meetings or the merger?
A: Learn2.com and ViaGrafix stockholders may call 1-800-322-2885.
2
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SUMMARY
WE HAVE PREPARED THIS SUMMARY TO ASSIST YOU IN YOUR REVIEW OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. WE HAVE HIGHLIGHTED IN THIS SUMMARY INFORMATION
WHICH WE BELIEVE IS IMPORTANT FOR YOUR REVIEW. HOWEVER, WE HAVE NOT INCLUDED ALL
OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THIS
ENTIRE DOCUMENT, INCLUDING THE SPECIFIC RISKS DESCRIBED IN THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 15.
THE COMPANIES
LEARN2.COM, INC.
925 Westchester Avenue
White Plains, New York 10604
(914) 682-4300
Learn2.com develops and distributes online learning and training products and
technologies.
Learn2.com was incorporated in Delaware on April 28, 1993.
VIAGRAFIX CORPORATION
One American Way
Pryor, Oklahoma 74361
(918) 825-6700
ViaGrafix develops, produces and markets technology-based information technology
training products and graphics software products and, through its subsidiary,
eTracks.com, Inc., provides interactive email broadcast services for businesses
that rely on web-based commerce.
ViaGrafix was incorporated in Oklahoma on January 2, 1990.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
LEARN2.COM
The proposed merger of Learn2.com and ViaGrafix, including the related issuance
of shares of Learn2.com common stock.
VIAGRAFIX
The proposed merger of Learn2.com and ViaGrafix.
REASONS FOR THE MERGER (SEE PAGES 30 THROUGH 33)
LEARN2.COM
The Learn2.com Board and management believe that the merger will benefit
Learn2.com and its stockholders for the following reasons:
- Ownership of ViaGrafix's original content.
- Expand our production capability.
- ViaGrafix provides access to a new customer base.
- ViaGrafix is expected to increase our cash flow and revenue.
- ViaGrafix has a proven management team.
- Combination of direct sales marketing teams.
- Reduction or elimination of duplicative costs and expenses.
VIAGRAFIX
The ViaGrafix Board and management believe that the merger will benefit
ViaGrafix and its stockholders for the following reasons:
- Access to Learn2.com's Internet presence and relationships.
- Learn2.com has a proven management team.
- Learn2.com has a larger capitalization and higher trading liquidity.
- Combination of direct sales marketing teams.
- Reduction or elimination of duplicative costs and expenses.
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RECOMMENDATIONS TO STOCKHOLDERS:
TO LEARN2.COM STOCKHOLDERS:
The Learn2.com Board believes that the merger is fair to you and in your best
interest and recommends that you vote FOR the merger agreement and the merger,
including the related issuance of common stock.
TO VIAGRAFIX STOCKHOLDERS:
The ViaGrafix Board believes that the merger is fair to you and in your best
interest and recommends that you vote FOR the approval of the merger.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 38 THROUGH 42)
In deciding to approve the merger, each board of directors considered the
opinion of its financial advisor. Learn2.com received an opinion from Ladenburg
Thalmann & Co. Inc. as to the fairness from a financial point of view of the
consideration to be paid by Learn2.com in the merger, and ViaGrafix received an
opinion from Point West Securities, LLC as to the fairness from a financial
point of view of the consideration to be received by the ViaGrafix stockholders.
These opinions are attached as Appendix B and Appendix C. We encourage you to
read these opinions.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. WE ENCOURAGE YOU TO READ IT AS IT IS THE LEGAL DOCUMENT
THAT GOVERNS THE MERGER.
WHAT VIAGRAFIX STOCKHOLDERS WILL RECEIVE (SEE PAGE 43)
As a result of the merger, ViaGrafix stockholders will receive 1.846 shares of
Learn2.com common stock for each share of ViaGrafix common stock held.
Learn2.com will not issue any fractional shares. ViaGrafix stockholders will
receive cash in an amount equal to the fractional share of Learn2.com common
stock multiplied by the average of the closing prices of Learn2.com common stock
for each of twenty consecutive trading days immediately preceding the third
trading day before the mailing of this joint proxy statement/prospectus.
OWNERSHIP OF LEARN2.COM AFTER THE MERGER
Learn2.com will issue approximately 10.7 million shares of Learn2.com common
stock to ViaGrafix stockholders in the merger. The shares of Learn2.com common
stock to be issued to ViaGrafix stockholders in the merger will represent
approximately 21% of the outstanding Learn2.com common stock after the merger.
This information is based on the number of Learn2.com and ViaGrafix shares
outstanding on July 15, 1999 and June 30, 1999, respectively, and does not take
into account stock options or other common stock equivalents, except for
Learn2.com's Series D Preferred Stock.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER (SEE PAGE 53)
FOR LEARN2.COM STOCKHOLDERS: Approval of the merger requires the affirmative
vote of a majority of the votes cast at the special meeting by the holders of
Learn2.com common stock and preferred stock.
FOR VIAGRAFIX STOCKHOLDERS: Approval of the merger requires the affirmative vote
of a majority of the outstanding shares of ViaGrafix common stock.
APPRAISAL RIGHTS (SEE PAGE 35)
The holders of Learn2.com and ViaGrafix common stock do not have any right to an
appraisal of the value of their shares in connection with the merger.
BOARD OF DIRECTORS OF LEARN2.COM AFTER THE MERGER
Upon completion of the merger, Michael A. Webster, Chairman of the Board,
President and Chief Executive Officer of ViaGrafix, has agreed to join the
Learn2.com Board, increasing the number of Learn2.com directors to seven.
ACCOUNTING TREATMENT (SEE PAGE 34)
We have accounted for the merger as a pooling of interests, which means that we
will treat our
4
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companies as if they had always been combined for accounting and financial
reporting purposes. We will receive letters from our independent accounting
firms upon the closing of the merger concurring with our conclusion that the
merger should be accounted for as a pooling of interests if the merger is
consummated in accordance with the merger agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 34)
The merger has been structured as a "tax-free reorganization" for federal
income tax purposes. Accordingly, holders of ViaGrafix common stock generally
will not recognize any gain or loss for federal income tax purposes on the
exchange of their ViaGrafix common stock for Learn2.com common stock in the
merger, except for any gain or loss recognized in connection with the receipt of
cash instead of a fractional share of Learn2.com common stock. The companies
themselves, as well as holders of Learn2.com stock, will not recognize gain or
loss as a result of the merger.
The federal income tax consequences described above may not apply to some
holders of ViaGrafix common stock, including some types of holders specifically
referred to on page 34. Your tax consequences will depend upon your personal
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGE 45)
The obligations of Learn2.com and ViaGrafix to complete the merger are subject
to the satisfaction or, to the extent legally permissible, waiver of the
following:
- approval by the stockholders of Learn2.com and ViaGrafix.
- absence of any statute, rule, regulation, decree, injunction or order,
whether temporary, preliminary or permanent, which is in effect and which
materially restricts, prevents or prohibits the consummation of the
merger.
- Learn2.com's registration statement on Form S-4, which includes this proxy
statement/prospectus, being effective and not subject to any stop order by
the Securities and Exchange Commission.
- representations and warranties of the other party shall be true and
correct in all material respects.
- each party shall have performed in all material respects all conditions,
covenants, agreements and obligations required to be performed.
- no event shall have occurred which would have a material adverse effect on
the other party.
- each party shall have obtained all required consents and approvals from
third parties or governmental and regulatory authorities.
- Learn2.com shall have entered into employment agreements with Michael A.
Webster and Robert E. Webster.
- Learn2.com shall have entered into non-competition agreements with Michael
A. Webster and Robert E. Webster.
In addition, ViaGrafix's obligation to complete the merger is subject to the
following conditions:
- the shares of Learn2.com common stock to be issued to ViaGrafix
stockholders in the merger shall be listed on The Nasdaq Stock Market and
subject to no restrictions on transfer other than Rule 145 promulgated by
the SEC.
- Learn2.com shall have entered into an indemnity agreement with Michael A.
Webster, Robert E. Webster and Robert C. Moore, Jr.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 46)
The merger agreement may be terminated at any time prior to the closing in any
of the following ways:
By mutual consent of the boards of directors of Learn2.com and ViaGrafix.
5
<PAGE>
By either Learn2.com or ViaGrafix if:
- the merger is not consummated by December 31, 1999.
- Learn2.com or ViaGrafix stockholders do not approve the merger.
- Learn2.com's or ViaGrafix's board of directors fails to make or withdraws
or modifies or changes its recommendation to approve the merger.
- Learn2.com's or ViaGrafix's board of directors determines in good faith,
based upon the written opinion of its outside legal counsel, that the
failure to terminate the merger would constitute a breach of the fiduciary
duties of the board of directors to its stockholders under applicable law.
By Learn2.com if the board of directors of ViaGrafix recommends to the ViaGrafix
stockholders, or takes no position with respect to, another takeover proposal.
TERMINATION FEES (SEE PAGES 46 AND 47)
ViaGrafix has agreed to pay Learn2.com the following cash amount in the
following circumstances:
- $5,000,000 if the ViaGrafix Board recommends to the ViaGrafix
stockholders, or takes no position with respect to, another takeover
proposal prior to the closing of the merger.
- $5,000,000 if the ViaGrafix Board fails to make or withdraws or modifies
or changes its recommendation to approve the merger prior to the closing
of the merger.
- $1,000,000 if the ViaGrafix stockholders do not approve the merger. See
"The Merger Agreement--ViaGrafix Voting Agreement" on page 48.
Learn2.com has agreed to pay ViaGrafix the following cash amount in the
following circumstances:
- $5,000,000 if the Learn2.com Board fails to make or withdraws or modifies
or changes its recommendation to approve the merger prior to the closing
of the merger.
- $1,000,000 if the Learn2.com stockholders do not approve the merger. See
"The Merger Agreement--Learn2.com Voting Agreement" on page 48.
INTEREST OF OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGES 49 THROUGH 51)
When you consider the Learn2.com and the ViaGrafix Boards' recommendations that
their respective stockholders vote in favor of the merger, you should be aware
that a number of officers and directors may have interests in the merger that
may be different from, or in addition to, yours.
6
<PAGE>
SELECTED SUPPLEMENTARY HISTORICAL FINANCIAL DATA OF LEARN2.COM
The following selected supplementary historical consolidated financial data
should be read in conjunction with Learn2.com's supplementary historical
consolidated financial statements and related notes thereto. The supplementary
historical consolidated financial statements result from combining the
historical financial statements of Learn2.com and Panmedia Corporation, which
was acquired by Learn2.com on May 13, 1999. This acquisition was accounted for
as a pooling of interests and therefore reflects the consolidation of Panmedia
from its inception. In addition, the following selected supplementary historical
consolidated financial data should be read in conjunction with Learn2.com's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1998, and the consolidated balance sheet data at December 31, 1998 and 1997, are
derived from the supplementary historical consolidated financial statements of
Learn2.com, and are included elsewhere in this document. The results of
operations for Panmedia Corporation for the year ended December 31, 1996 are not
included in the supplementary historical financial statements as they were
immaterial to the consolidated results of Learn2.com for the respective period.
The consolidated statement of operations data for the years ended December 31,
1995 and 1994, and the consolidated balance sheet data at December 31, 1996,
1995 and 1994, are derived from the historical consolidated financial statements
of Learn2.com which are not included or incorporated by reference in this
document.
The supplementary consolidated statement of operations data for the three
months ended March 31, 1999 and 1998, and the supplementary consolidated balance
sheet data at March 31, 1999 are derived from the unaudited supplementary
consolidated financial statements included elsewhere in this document. In the
opinion of Learn2.com's management, these quarterly statements have been
prepared on the same basis as the audited supplementary consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these quarters.
Historical results are not necessarily indicative of the results to be expected
in the future.
7
<PAGE>
Certain amounts in the supplementary historical consolidated financial
statements have been reclassified to conform to the presentation of Learn2.com.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
-------------------- ------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ------------------------
COMBINED (2)
ACTUAL -------------
---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................ $ 1,025 $ 598 $ 2,674 $ 10,807 $ 20,549 $ 12,161 $ 4,103 $ 4,708
Cost of revenues.................... 186 109 472 4,650 8,299 2,251 911 1,019
--------- --------- --------- --------- --------- --------- --------- -------------
Gross profit........................ 839 489 2,202 6,157 12,250 9,910 3,192 3,689
Operating expenses:
Research and product development.. 592 825 2,396 14,470 19,641 11,225 4,136 4,281
Sales and marketing............... 515 295 595 5,885 11,262 6,698 1,708 1,782
General and administrative........ 747 1,127 5,326 5,366 4,290 3,024 1,877 1,959
Depreciation and amortization..... 379 568 1,822 4,181 2,565 2,262 1,731 1,731
Restructuring charges............. 2,493 -- -- -- -- -- -- --
Acquired in-process technology.... 9,677 -- -- -- -- 2,282 -- --
--------- --------- --------- --------- --------- --------- --------- -------------
Total operating expenses........ 14,403 2,815 10,139 29,902 37,758 25,491 9,452 9,753
Other income (expense).............. (41) (157) (2,674) 1,333 1,255 978 (193) (237)
--------- --------- --------- --------- --------- --------- --------- -------------
Net loss from operations............ (13,605) (2,483) (10,611) (22,412) (24,253) (14,603) (6,453) (6,301)
Dividends on preferred stock........ -- -- 338 -- -- -- -- --
Beneficial conversion feature in
association with preferred
stock............................. -- -- 5,479 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- -------------
Net loss available to common
stockholders...................... $ (13,605) $ (2,483) $ (16,428) $ (22,412) $ (24,253) $ (14,603) $ (6,453) $ (6,301)
--------- --------- --------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- --------- --------- -------------
Basic and diluted loss per share
available to common stockholders
(1)............................... $ (0.47) $ (0.16) $ (0.92) $ (1.47) $ (1.80) $ (1.33) $ (0.85)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted weighted average
shares outstanding................ 28,708 15,328 17,899 15,241 13,442 10,961 7,888
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 10,875 $ 11,313 $ 2,479 $ 15,284 $ 39,646
Working capital............................... 6,114 8,606 (2,137) 15,751 42,821
Total assets.................................. 41,779 13,419 9,946 38,933 54,562
Long-term debt (including current portion).... 34 637 742 6,309 700
Total stockholders' equity.................... 34,018 10,123 2,525 24,652 48,265
<CAPTION>
<S> <C>
1994
---------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 10
Working capital............................... 19,269
Total assets.................................. 26,403
Long-term debt (including current portion).... 5,738
Total stockholders' equity.................... 19,184
</TABLE>
- ------------------------------
(1) Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon the conversion
of convertible preferred stock (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants. Common equivalent
shares for 1998, 1997, 1996 and the three months ended March 31, 1999 and
March 31, 1998 were excluded from the computation as their effect was
anti-dilutive. (See Note 2 of notes to the Learn2.com supplementary
historical consolidated financial statements included herein).
(2) Gives effect to the results from Learn2.com, Inc. (formerly known as 7th
Level, Inc.) and the 7th Level Sole Proprietorship on a combined basis.
8
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF VIAGRAFIX
The following selected historical consolidated financial data should be read
in conjunction with ViaGrafix's consolidated financial statements and related
notes thereto and ViaGrafix's "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this document. The
consolidated statement of operations data for each of the three years ended
December 31, 1998, and the consolidated balance sheet data at December 31, 1998
and 1997, are derived from the consolidated financial statements of ViaGrafix
which have been audited and reported on by Ernst & Young LLP, independent
accountants, and are included elsewhere in this document. The consolidated
statement of operations data for the years ended December 31, 1995 and 1994, and
the consolidated balance sheet data at December 31, 1996, 1995 and 1994, are
derived from audited consolidated financial statements of ViaGrafix not included
in this document.
The consolidated statement of operations data for the three months ended
March 31, 1999 and 1998, and the consolidated balance sheet data at March 31,
1999 are derived from the unaudited consolidated financial statements of
ViaGrafix included elsewhere in this document. In the opinion of ViaGrafix's
management, these quarterly statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results of
these quarters. Historical results are not necessarily indicative of the results
to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996 1995 (1)
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 7,345 $ 4,077 $ 18,750 $ 13,694 $ 10,077 $ 7,230
Cost of sales............................................... 1,863 974 4,545 3,042 2,614 2,246
--------- --------- --------- --------- --------- -----------
Gross profit................................................ 5,482 3,103 14,205 10,652 7,463 4,984
Operating expenses:
Selling, general and administrative....................... 2,291 1,119 6,212 4,120 3,704 2,828
Research and development.................................. 530 372 1,697 1,162 467 320
Depreciation and amortization............................. 336 86 734 319 685 433
Advertising............................................... 3,377 820 4,443 1,961 1,207 1,062
Purchased research and development (2).................... -- -- -- -- -- 1,397
--------- --------- --------- --------- --------- -----------
Total operating expenses................................ 6,534 2,397 13,086 7,562 6,063 6,040
--------- --------- --------- --------- --------- -----------
Income (loss) from operations............................... (1,052) 706 1,119 3,090 1,400 (1,056)
Interest income (expense), net.............................. 114 2 481 (251) (262) (109)
--------- --------- --------- --------- --------- -----------
Income (loss) before income taxes........................... (938) 708 1,600 2,839 1,138 (1,165)
Net income (loss)........................................... $ (551) $ 537 $ 1,246 $ 2,023 $ 675 $ (707)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic income (loss) per share (3)........................... $ (0.09) $ 0.12 $ 0.22 $ 0.51 $ 0.18 $ (0.21)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Diluted income (loss) per share (3)......................... $ (0.09) $ 0.11 $ 0.21 $ 0.45 $ 0.15 $ (0.21)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Basic weighted average shares outstanding (3)............... 5,839 4,400 5,640 3,859 3,831 3,503
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Diluted weighted average shares outstanding (3)............. 5,839 4,923 5,842 4,498 4,405 3,503
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
<CAPTION>
<S> <C>
1994
---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $ 4,884
Cost of sales............................................... 1,680
---------
Gross profit................................................ 3,204
Operating expenses:
Selling, general and administrative....................... 1,462
Research and development.................................. 207
Depreciation and amortization............................. 54
Advertising............................................... 208
Purchased research and development (2).................... --
---------
Total operating expenses................................ 1,931
---------
Income (loss) from operations............................... 1,273
Interest income (expense), net.............................. 3
---------
Income (loss) before income taxes........................... 1,276
Net income (loss)........................................... $ 1,039
---------
---------
Basic income (loss) per share (3)........................... 0.27
---------
---------
Diluted income (loss) per share (3)......................... $ 0.24
---------
---------
Basic weighted average shares outstanding (3)............... 3,919
---------
---------
Diluted weighted average shares outstanding (3)............. 4,286
---------
---------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
MARCH 31,
1999
---------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments...................................... $ 11,468 $ 13,046 $ 218 $ 1,009 $ 35 $ 389
Working capital.................................... 16,973 18,066 2,324 1,637 676 872
Total assets....................................... 23,625 25,216 7,419 6,112 5,283 1,302
Long-term debt..................................... -- -- 2,827 3,482 3,478 --
Total stockholders' equity......................... 21,539 22,834 2,513 937 243 979
</TABLE>
- ------------------------------
(1) The operating results of American Small Business Computers, Inc. are
included in the statements of operations from the August 15, 1995
acquisition date forward.
(2) ViaGrafix incurred a one-time charge in 1995 to write-off the acquired
in-process research and development related to the acqusition of ASBC.
(3) Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon the conversion
of convertible preferred stock (using the if-converted method) and shares
issuable upon the exercise of stock options. Common equilavent shares in
1999 and 1995 were excluded from the computations as their effect was
anti-dilutive.
10
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data give effect to the
proposed merger of Learn2.com and ViaGrafix as a pooling of interests. The
unaudited pro forma combined financial data are based on the historical
supplementary consolidated financial statements of Learn2.com, described in
greater detail below, and the historical consolidated financial statements of
ViaGrafix, which are included elsewhere in this document. The unaudited pro
forma combined balance sheet data assume that the merger of Learn2.com and
ViaGrafix took place on March 31, 1999, and combines Learn2.com's historical
supplementary consolidated balance sheet with ViaGrafix's historical
consolidated balance sheet as of each respective date. The unaudited pro forma
combined statements of operations data assume that the merger of Learn2.com and
ViaGrafix took place as of the beginning of each of the periods presented and
combines Learn2.com's historical supplementary consolidated statements of
operations data with ViaGrafix's historical consolidated statements of
operations data for the three months ended March 31, 1999 and 1998, and the
years ended December 31, 1998 and 1997. The unaudited pro forma combined
statement of operations data for the year ended December 31, 1996 assumes that
the merger of Learn2.com and ViaGrafix took place at the beginning of this
period and combines Learn2.com's historical operations data with ViaGrafix
historical consolidated statement of operations data for the same period. This
presentation is consistent with the periods expected to be combined after the
date of the closing of the merger.
During May 1999, Learn2.com completed the acquisition of Panmedia
Corporation. This acquisition, accounted for as a pooling of interests, is
reflected in the Learn2.com historical supplementary consolidated financial
statements, included elsewhere as if Panmedia was a wholly-owned subsidiary
since its inception.
During February 1999, Learn2.com completed the acquisition of Street
Technologies, Inc. This acquisition has been accounted for using purchase
accounting. The pro forma combined condensed balance sheet has been prepared as
if such acquisition had been effective as of December 31, 1998, while the pro
forma combined condensed statement of operations for the year ended December 31,
1998 and the three months ended March 31, 1999 and 1998 have been prepared as if
such acquisition had been effective as of January 1, 1998.
The unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had the entities been a single entity
during these periods. The unaudited pro forma combined financial data as of
March 31, 1999 and for each of the three years in the period ended December 31,
1998, and for the three months ended March 31, 1999 and 1998, are derived from
the unaudited pro forma condensed combined financial statements included
elsewhere and should be read in conjunction with those statements and notes
thereto. See "Unaudited Pro Forma Condensed Combined Financial Statements."
11
<PAGE>
LEARN2.COM AND VIAGRAFIX
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues....................................................... $ 8,543 $ 4,952 $ 25,241 $ 24,501 $ 30,626
Cost of revenues................................................... 2,041 1,105 5,082 7,692 10,913
--------- --------- --------- --------- ---------
Gross profit....................................................... 6,502 3,847 20,159 16,809 19,713
Operating expenses:
Research and product development................................. 1,421 1,665 5,815 15,632 21,869
Sales and marketing.............................................. 5,586 2,109 9,808 10,759 15,115
General and administrative....................................... 1,762 1,651 8,575 6,573 6,033
Depreciation and amortization.................................... 936 1,081 4,491 4,500 804
Acquired in-process technology................................... 9,677 -- -- -- --
Restructuring charges............................................ 2,493 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses........................................... 21,875 6,506 28,689 37,464 43,821
Other income (expense)............................................. 80 (143) (2,107) 1,082 994
Provision (benefit) for taxes...................................... (387) 171 354 816 463
--------- --------- --------- --------- ---------
Net loss from operations........................................... $ (14,906) $ (2,973) $ (10,991) $ (20,389) $ (23,577)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Dividends on preferred stock....................................... -- -- 338 -- --
Beneficial conversion feature in association with preferred
stock............................................................ -- -- 5,479 -- --
--------- --------- --------- --------- ---------
$ (14,906) $ (2,973) $ (16,808) $ (20,389) $ (23,577)
Net loss per share, basic and diluted.............................. $ (0.38) $ (0.10) $ (0.51) $ (0.91) $ (1.15)
Weighted average common shares outstanding, basic and diluted...... 39,487 28,398 33,258 22,365 20,514
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1999
---------------
<S> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short--term investments................................................ $ 22,343
Working capital................................................................................... 22,761
Total assets...................................................................................... 64,056
Long--term debt................................................................................... 34
Total stockholders' equity........................................................................ 54,374
</TABLE>
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following tables reflect (a) the supplementary historical net loss and
book value per share of Learn2.com common stock and the historical net income or
loss and book value per share of ViaGrafix common stock in comparison with the
unaudited pro forma net loss and book value per share after giving effect to the
proposed merger of Learn2.com with ViaGrafix on a "pooling of interests" basis
and (b) the equivalent historical net income or loss and book value per share
attributable to 1.846 shares of Learn2.com common stock which will be received
for each share of ViaGrafix common stock. The information presented in the
following tables should be read in conjunction with the unaudited pro forma
condensed combined financial statements included in this document, the
supplementary historical consolidated financial statements and related notes of
Learn2.com and the historical consolidated financial statements of ViaGrafix.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
LEARN2.COM PER SHARE DATA (SUPPLEMENTARY HISTORICAL) 1999 1998 1998 1997 1996
- --------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per common share--basic and diluted (1)................... $ (0.50) $ (0.18) $ (1.03) $ (1.64) $ (1.80)
Book value per share (2)........................................... $ 1.08 $ (0.31)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
VIAGRAFIX PER SHARE DATA (HISTORICAL) 1999 1998 1998 1997 1996
- --------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share--basic (1)...................... $ (0.09) $ 0.12 $ 0.22 $ 0.51 $ 0.18
Net income (loss) per common share--diluted (1).................... $ (0.09) $ 0.11 $ 0.21 $ 0.45 $ 0.15
Cash dividends..................................................... -- -- -- $ 0.12 --
Book value per share (2)........................................... $ 3.72 $ 3.89
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
LEARN2.COM AND VIAGRAFIX -------------------- -------------------------------
PRO FORMA COMBINED PER SHARE DATA 1999 1998 1998 1997 1996
- --------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED PER COMMON SHARE:
Net loss per Learn2.com share--basic and diluted................... $ (0.38) $ (0.10) $ (0.51) $ (0.91) $ (1.15)
Net loss per equivalent ViaGrafix share--basic and diluted (3)..... $ (0.70) $ (0.18) $ (0.94) $ (1.68) $ (2.12)
Book value per Learn2.com share (2)................................ $ 1.30
Book value per equivalent ViaGrafix share (3)...................... $ 2.40
</TABLE>
- --------------------------
(1) Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon the conversion
of the convertible preferred stock (using the if-converted method) and
shares issuable upon the excerise of stock options and warrants using the
treasury stock method). Common equivalent shares are excluded from the
computations if their effect is antidulitive.
(2) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at each
applicable date. The pro forma combined book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares of
Learn2.com common stock outstanding as of March 31, 1999 assuming the merger
had occurred as of that date.
(3) The pro forma combined per equivalent ViaGrafix share data is calculated by
multiplying the pro forma combined per share amounts by the exchange ratio
of 1.846 shares of Learn2.com common stock for each share of ViaGrafix
common stock.
13
<PAGE>
RECENT DEVELOPMENTS
On July 15, 1999, Learn2.com reported net revenues for the three months
ended June 30, 1999 of $1.8 million, an increase of 257%, compared to net
revenues of $502,000 reported for the three months ended June 30, 1998. Net loss
for the three months ended June 30, 1999 was $2.6 million, or $0.08 per share,
compared to a net loss of $4.8 million, or $0.29 per share, for the three months
ended June 30, 1998. Learn2.com reported net revenues for the six months ended
June 30, 1999 of $2.8 million, an increase of 156%, compared to net revenues of
$1.1 million reported for the six months ended June 30, 1998. Net loss for the
six months ended June 30, 1999 was $16.2 million, or $0.53 per share, compared
to a net loss of $7.3 million, or $0.45 per share, for the six months ended June
30, 1998. These financial results include the results of operations for Street
Technologies, Inc. subsequent to February 16, 1999. In addition, these results
have been restated for all periods to reflect the acquisition of Panmedia
Corporation on May 13, 1999, which has been accounted for as a pooling of
interests.
On July 16, 1999, ViaGrafix reported that its net sales for the quarter
ended June 30, 1999 increased 42% to $6.0 million from $4.2 million in the
second quarter of 1998. Its subsidiary, eTracks.com, Inc., acquired in July
1998, reported sales of over $1.0 million in the second quarter, a 51% increase
over the first quarter of 1999. ViaGrafix incurred a net loss of $710,000 or
$0.12 per share compared to net income of $502,000 or $0.08 per share in 1998's
second quarter. ViaGrafix's net sales for the six months ended June 30, 1999
increased 61% to $13.3 million from $8.3 million in the first half of 1998.
ViaGrafix incurred a net loss of $1.3 million or $0.22 per share in the six
months ended June 30, 1999 compared to net income of $1.0 million or $0.19 per
share in 1998's first half.
14
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS DOCUMENT BEFORE YOU MAKE YOUR DECISION WHETHER TO APPROVE THE MERGER. THESE
FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION CONTAINED
IN THIS DOCUMENT, THE APPENDICES AND EXHIBITS. IF ANY OF THE EVENTS DESCRIBED IN
THE FOLLOWING RISK FACTORS WERE TO OCCUR, THE BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS OF EITHER OR BOTH OF LEARN2.COM AND VIAGRAFIX MAY BE
SERIOUSLY HARMED.
<TABLE>
<S> <C>
THE EXCHANGE RATIO FOR Learn2.com is issuing a fixed number of shares of Learn2.com
LEARN2.COM COMMON STOCK IS common stock in the merger to ViaGrafix stockholders and
FIXED AND WILL NOT BE will not adjust the number of shares to reflect changes in
ADJUSTED...................... the market value of Learn2.com common stock and ViaGrafix
common stock between the date of the merger agreement and
the closing of the merger. The market value of your shares
of Learn2.com common stock at the time that the merger
becomes effective may be higher or lower than the market
price of those shares on the date the merger was negotiated,
the date of the merger agreement or the date of this
document.
THE FAILURE OF THE MERGER TO The failure of the merger to qualify as a pooling of
QUALIFY AS A POOLING OF interests for any reason could materially and adversely
INTERESTS WOULD NEGATIVELY affect our combined reported earnings and could also
AFFECT OUR COMBINED FINANCIAL adversely affect the market price of our common stock. The
RESULTS....................... ability to qualify as a pooling of interests depends upon
circumstances and events occurring after the effective time
of the merger, some of which are outside of our control.
THE EXPECTED BENEFITS OF THE If we are not able to effectively integrate our operations
MERGER MAY NOT BE REALIZED and personnel in a timely and efficient manner, then the
WHICH MAY ADVERSELY AFFECT OUR benefits of the merger may not be realized. In particular,
STOCK PRICE................... if the integration is not successful:
- our operating results may be adversely affected.
- we may lose key personnel.
In addition, the market price of Learn2.com common stock may
decline as a result of the merger if:
- we do not achieve the perceived benefits of the merger
as rapidly or to the extent we anticipate.
- the effect of the merger on our financial results is
not consistent with the expectations of securities
analysts.
- the dilution of Learn2.com common stock negatively
affects our stock price.
- the attention and effort devoted to the integration of
the two companies diverts management's attention from
other important issues.
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WE MAY NOT BE ABLE TO Successfully achieving our growth plan depends on our
IMPLEMENT OUR GROWTH ability to:
STRATEGY......................
- continue to develop and market our products and
services.
- maintain and increase our customer base.
- effectively integrate businesses and technologies.
- continue to identify, attract, retain and motivate
qualified personnel.
WE CANNOT ACCURATELY FORECAST We base our current and future expense levels on our
OUR REVENUES.................. investment plans and estimates of future revenues. Our
expenses are to a large extent fixed. We may not be able to
adjust our spending quickly if our revenues fall short of
our expectations. Further, we may make pricing, purchasing,
service, marketing, acquisition or financing decisions that
could adversely affect our business results.
OUR QUARTERLY OPERATING Our quarterly operating results may fluctuate for many
RESULTS MAY FLUCTUATE......... reasons, including:
- seasonal buying patterns by our customers.
- our ability to retain existing customers, attract new
customers and satisfy our customers' demands.
- changes in gross margins of our current and future
products and services.
- introduction of our new web sites, services and
products or those of our competitors.
- changes in usage of the Internet and online services
and consumer acceptance of the Internet and electronic
commerce.
- timing of upgrades and developments in our systems and
infrastructure.
- the level of traffic on our web sites.
- the effects of acquisitions and other business
combinations, and related integration.
- technical difficulties, system downtime or Internet
brownouts.
You should not rely on period-to-period comparisons of our
financial results to forecast our future performance. Our
future operating results may fall below the expectations of
securities analysts or investors, which could cause the
market price of our common stock to decline.
A LARGE PORTION OF At present, a relatively small group of Learn2.com's
LEARN2.COM'S REVENUES COMES customers are responsible for a significant percentage of
FROM A SMALL NUMBER OF its revenue. For example, for the year ended December 31,
CUSTOMERS..................... 1998, royalties and
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production fees from Learn2.com's largest customer accounted
for approximately 34% of its net revenues. Although
Learn2.com believes that its current relationships with its
customers are generally good, the loss of one or more of its
major customers could affect the performance of its
business.
A SIGNIFICANT PORTION OF Historically, ViaGrafix has relied upon sales to Ingram
VIAGRAFIX'S PRODUCTS ARE SOLD Micro, Inc., a distributor that supplies resellers,
TO MAJOR DISTRIBUTORS......... including major retailers. Sales to Ingram accounted for
approximately 29% of ViaGrafix's 1998 revenues,
approximately 17% of ViaGrafix's 1997 revenues and less than
10% of ViaGrafix's 1996 revenues. Recently, ViaGrafix has
begun to rely on sales to both Ingram and Tech Data
Corporation, another major distributor. ViaGrafix does not
have a written agreement with Ingram, and neither Ingram nor
Tech Data are required to make any minimum purchases. If
either or both of these distributors do not actively market
ViaGrafix's products or if they fail to maintain their
relationships with major retailers, ViaGrafix's sales could
be materially adversely impacted. Also, both Ingram and Tech
Data do and may continue to sell competitors' products.
VIAGRAFIX ALSO DEPENDS ON ViaGrafix relies on certain retailers to market its products
MAJOR RETAILERS TO MARKET ITS to end- users. The major retailers selling ViaGrafix's
PRODUCTS...................... products are:
- Best Buy Company, Inc.
- CompUSA Inc.
- Fry's Electronics, Inc.
- Hastings Entertainment, Inc.
- Micro Center, trade name of Micro Electronics, Inc.
- Office Max, Inc.
- Staples, Inc.
ViaGrafix's direct and indirect sales to its six top
retailers accounted for approximately 33% of its 1998
revenues. Indirect sales of products are supplied to certain
retailers through distributors including Ingram and Tech
Data.
ViaGrafix will continue to invest significant resources to
expand its relationships with these retailers and to develop
relationships with new retailers. However, these retailers
or other retailers may not continue to provide shelf space
and marketing for ViaGrafix's products. The failure of
retailers to effectively market ViaGrafix's products could
have a material adverse effect on our business and financial
condition.
WE ANTICIPATE INCREASED We expect our operating expenses to continue to increase
OPERATING EXPENSES AND MAY significantly as we expand our sales and marketing
EXPERIENCE operations, continue to develop and extend our products and
LOSSES........................ services, and
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develop and acquire complementary businesses and
technologies. As a result, we may experience significant
losses on a quarterly and annual basis.
WE HAVE A SUBSTANTIAL Both ViaGrafix and Learn2.com recently began major efforts
INVESTMENT IN PURSUING to sell directly to corporate customers, and have incurred
CORPORATE SALES............... costs and made investments in a direct corporate sales force
and the infrastructure to support this sales force. We
expect to incur significant additional costs as we continue
to pursue corporate sales. Direct sales to corporate
customers have long sales cycles which can be in excess of
one year. The sales and timing of licensing agreements to
corporate customers could cause volatility in, and
materially adversely affect, our quarterly operating
results. If this strategy is unsuccessful, we may not be
able to recover the significant costs of pursuing this
strategy. Further, we could be at a competitive disadvantage
by not having allocated our resources to other sales
opportunities.
WE WILL CONTINUE TO EXPAND A key part of our strategy is to develop international
INTO INTERNATIONAL MARKETS IN markets. ViaGrafix has entered into distribution
WHICH WE HAVE LIMITED arrangements in the United Kingdom, France, Germany, Japan,
EXPERIENCE.................... Australia and Turkey. Learn2.com has entered into reseller
agreements in Canada. We or our partners may not be able to
successfully market our products and services in foreign
markets.
We have limited experience in developing localized versions
of our products and marketing our products and services
internationally. We rely on the efforts and abilities of our
international business partners in those activities.
In addition to uncertainty about our ability to continue to
generate revenues and expand our international presence,
there are certain risks inherent in doing business
internationally, including:
- local economic and market conditions.
- difficulties in enforcing intellectual property and
contractual rights.
- the need for compliance with a variety of
international and United States export regulations.
- unexpected changes in regulatory requirements.
- trade barriers.
- difficulties in staffing and managing international
operations because of distance, language and cultural
differences.
- longer payment cycles.
- currency exchange rate fluctuations.
- problems in collecting accounts receivable.
- political and economic instability.
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- export restrictions.
- seasonal fluctuations in business activity.
- potentially adverse tax consequences.
One or more of these factors could have a material adverse
effect on our future international presence and,
consequently, on our business, operating results and
financial condition.
OUR FUTURE CAPITAL NEEDS MAY We anticipate that currently available funds, including
BE GREATER THAN OUR AVAILABLE funds we may receive from selling additional shares of
FUNDS......................... common stock to Fletcher International Limited under its
subscription agreement with Learn2.com, and cash flow
generated from business operations, will be sufficient to
meet our anticipated needs for working capital and capital
expenditures for at least the next twelve months. We expect
to raise additional funds in order to develop, acquire
and/or market products, businesses or technologies. If
additional funds are raised through the issuance of equity
or convertible securities, your percentage ownership in
Learn2.com will be reduced. Also, these securities may have
rights, preferences or privileges senior to common stock.
However, it is possible that additional financing may not be
available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable
terms, we may not be able to fund expansion, take advantage
of unanticipated acquisition opportunities, develop or
enhance services or products, or respond to competitive
pressures.
LEARN2.COM HAS A LIMITED As an early-stage Internet company, Learn2.com has an
OPERATING HISTORY............. evolving and unpredictable business model. In addition,
Learn2.com faces intense competition and must effectively
manage growth and respond quickly to rapid changes in
customer demands and industry standards. Learn2.com may not
succeed in addressing these challenges and risks.
LEARN2.COM HAS A HISTORY OF From inception in April 1993, Learn2.com never earned an
LOSSES AND AN ACCUMULATED annual profit. As of December 31, 1998, Learn2.com had an
DEFICIT....................... accumulated deficit of approximately $85 million. Learn2.com
expects to incur net losses through at least the end of 2000
and may continue to incur net losses thereafter.
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WE MUST MANAGE OUR RECENT As part of our business strategies, Learn2.com and ViaGrafix
GROWTH AND SUCCESSFULLY have completed several acquisitions including Learn2.com's
INTEGRATE RECENTLY ACQUIRED recent acquisitions of Street Technologies and Panmedia, and
COMPANIES IN ORDER TO ACHIEVE ViaGrafix's recent acquisition of eTracks.com. We expect to
DESIRED RESULTS............... enter into additional business combinations and
acquisitions. However, each acquisition brings challenges
associated with integrating acquired businesses, services,
product lines or technologies. Among risks associated even
with successful acquisitions are:
- the difficulty of assimilating the operations and
personnel of the acquired companies.
- the potential disruption of the ongoing business and
distraction of management.
- the difficulty of incorporating acquired or licensed
technology or content into our products and services.
- the impairment of relationships with employees and
customers as a result of integration of new management
personnel.
- the potential unknown liabilities associated with
acquired businesses.
THE FAILURE OF LEARN2.COM'S The failure of Learn2.com's merger with Panmedia to qualify
MERGER WITH PANMEDIA TO as a pooling of interests could materially and adversely
QUALIFY AS A POOLING OF affect our reported earnings and could also adversely affect
INTERESTS COULD NEGATIVELY the market price of our common stock. The eligibility to
AFFECT OUR COMBINED FINANCIAL qualify as a pooling of interests depends upon circumstances
RESULTS....................... and events occurring after the effective time of the
Panmedia merger, some of which are outside of our control.
LEARN2.COM'S STOCK PRICE HAS The trading price of our common stock can fluctuate
HISTORICALLY BEEN VOLATILE, significantly. For example, during the 52-week period ended
WHICH MAY MAKE IT MORE June 30, 1999, the market price of our common stock ranged
DIFFICULT FOR YOU TO RESELL from $1.75 to $10.00. The stock price may fluctuate in
SHARES WHEN YOU WANT AT PRICES response to a number of events and factors, including
YOU FIND ATTRACTIVE...........
- quarterly variations in operating results.
- announcements of technological innovations or new
products and services by us or our competitors.
- changes in financial estimates and recommendations by
securities analysts.
- the operating and stock price performance of other
companies that investors may deem comparable.
- news reports relating to trends in our markets.
In addition, the stock market in general, and the market
prices for Internet-related companies in particular, have
experienced extreme volatility that often has been unrelated
to the operating performance of those companies. These broad
market and industry
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fluctuations may adversely affect the price of Learn2.com's
common stock, regardless of operating performance. A drop in
the market price of our common stock may adversely affect
our business and financing opportunities.
CERTAIN EVENTS COULD RESULT IN As of July 15, 1999, we had 32,642,902 shares of common
A DILUTION OF YOUR OWNERSHIP stock outstanding and as of May 14, 1999 we had 8,984,801
OF OUR COMMON STOCK........... common stock equivalents including convertible preferred
stock, warrants and stock options. The exercise and
conversion prices of the common stock equivalents range from
$.01 to $11.50 per share. These securities also provide for
antidilution protection upon the occurrence of stock splits,
redemptions, mergers and other similar transactions. If one
or more of these events occurs the number of shares of our
common stock that may be acquired upon conversion or
exercise would increase. If converted or exercised, these
securities will result in a dilution to your percentage
ownership of our common stock. In addition to the issuance
of approximately 10.7 million shares of Learn2.com common
stock in the merger, the following transactions could dilute
your ownership of our common stock:
- Under the terms of a subscription agreement with
Fletcher International Limited, at our election and as
long as the market price of our common stock is
greater than $3.00 per share, Fletcher is obligated to
purchase up to an additional $5,000,000 of common
stock at market prices prevailing when we elect to
exercise our right to sell shares to Fletcher. The
shares we issue pursuant to our right must be
registered prior to our election. In addition,
Fletcher may receive additional shares of common stock
if our common stock does not meet certain price
targets or if we do not have an effective registration
statement for the resale of Fletcher's shares of our
common stock. Any additional issuances to Fletcher
would further dilute your percentage ownership of our
common stock.
- In connection with our acquisition of Street, we
issued shares and options to purchase shares of our
Series D Preferred Stock. There are currently 21,661
shares of Series D Preferred Stock outstanding, which
will automatically convert into 7,220,323 shares of
our common stock if approved by our stockholders. In
addition, options and warrants to purchase 4,907
shares of Series D Preferred Stock are currently
outstanding which will be exercisable for 1,635,355
shares of our common stock if approved by our
stockholders. The conversion of Series D Preferred
Stock would further dilute your percentage ownership
of our common stock.
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WE WILL DEPEND ON CONTINUED Our future success will depend upon, among other factors,
GROWTH IN THE USE OF THE the extent to which individuals and companies continue to
INTERNET AND WEB-BASED adopt web- based training programs, the proliferation of
TRAINING TO SUPPORT OUR multimedia PCs inside corporations and the acceptance of the
REVENUE MODEL................. Internet as a viable commerce and distribution medium. If
our solutions do not become widespread or we do not achieve
market acceptance, or are unable to anticipate technological
change or evolving industry standards and successfully
introduce new products, our business, results of operations
and financial condition could be materially and adversely
affected. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including
the lack of acceptable security technologies, potentially
inadequate development of the necessary infrastructure, or
the lack of timely development and commercialization of
performance improvements. If the market develops more slowly
than expected or becomes saturated with competitors, or if
our products and services do not sustain market acceptance,
our business, operating results and financial condition
could be materially and adversely affected.
THE MARKET FOR OUR PRODUCTS IS The market for our products and services is affected by
AFFECTED BY RAPID rapid technological developments, evolving industry
TECHNOLOGICAL CHANGES AND standards, customer demands and frequent new product
FREQUENT NEW PRODUCT introductions and enhancements. For example, to the extent
INTRODUCTIONS, AND WE MUST that higher bandwidth Internet access becomes more widely
ADAPT QUICKLY TO THESE CHANGES available, we may be required to make significant changes to
TO COMPETE EFFECTIVELY........ the design and content of our products and services. We
believe that our future success depends upon our ability to
develop and market products and services that incorporate
and apply new technologies and standards, and our ability to
enhance and expand our existing product lines and services.
Failure to effectively adapt to these or any other
technological developments could adversely affect our
business, operating results and financial condition.
We may not be:
- able to develop or market new products or services
successfully.
- able to respond effectively to technological changes,
new industry standards, or new products or services
offered by our competitors.
- able to raise sufficient capital when required to
implement our strategies.
WE EXPECT TO RELY ON Our resellers may not devote the resources necessary to
RESELLERS, INCLUDING INTERNET provide effective sales and marketing to support us. A
MERCHANTS, TO ENHANCE significant portion of our growth strategy is to increase
SALES......................... sales of our products and services over the Internet. We
currently have relationships with online services and
Internet content providers. Additionally, we have
relationships with authorized resellers. Our distribution
agreements are not exclusive and may be terminated upon
certain
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conditions. Many of our agreements with our distribution
partners do not require minimum purchase commitments or have
payment terms for periods up to one year. These contracts
may not result in revenues. We may not be successful in
either expanding our current relationships, or attracting
new Internet merchants. The failure to do so could
significantly impact our ability to increase sales.
Some of our resellers are small organizations with limited
capital. Accordingly, if a significant number of these
resellers were to experience financial difficulties, or
otherwise become unable or unwilling to promote, sell or pay
for our products, our results of operations could be
adversely affected.
OUR PRODUCTS ARE DESIGNED FOR Our products are designed primarily for Microsoft
MICROSOFT TECHNOLOGIES........ technologies. We believe that Microsoft technologies are,
and will continue to be, widely utilized by our customers.
However, if these customers do not actually adopt and
continue to utilize these technologies as anticipated or in
the future migrate to other computing technologies that we
do not support, we may have to spend significant capital and
other resources including personnel to adapt our products to
these alternative technologies.
WE DEPEND ON OUR ABILITY TO We are substantially dependent on the continued services of
RETAIN KEY PERSONNEL AND Stephen P. Gott, President, Chief Executive Officer of
ATTRACT NEW QUALIFIED Learn2.com and a Director, and Michael A. Webster, Chairman
PERSONNEL..................... of the Board, President and Chief Executive Officer of
ViaGrafix. If Mr. Gott or Mr. Webster were to leave our
employ, we could face substantial difficulty in hiring
qualified successors and could experience a loss in
productivity while any successor obtains the necessary
training and experience.
We expect that we will need to hire additional personnel in
all areas. The competition for qualified personnel is
intense. At times, we have experienced difficulties in
hiring personnel with the right training or experience. If
we do not succeed in attracting new personnel, or retaining
and motivating existing personnel, our business may be
adversely affected.
WE MAY BE SUBJECT TO Many parties are actively developing and improving
INTELLECTUAL PROPERTY technologies which compete with our proprietary technologies
INFRINGEMENT CLAIMS, WHICH ARE and patents. We believe that these parties will continue to
COSTLY TO DEFEND AND COULD take steps to protect these technologies, including seeking
LIMIT OUR ABILITY TO USE patent protection. As a result, we believe that disputes
CERTAIN TECHNOLOGIES IN THE regarding the ownership of these technologies could arise in
FUTURE........................ the future.
Third parties may assert claims against us alleging
infringement of patents, copyrights, trademark rights, trade
secret rights or other proprietary rights or alleging unfair
competition. In the event that we determine that licensing
patents or other proprietary rights is appropriate, we may
not be able to license proprietary rights on
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reasonable terms or at all. As the number of products in our
target markets increase and the functionality of these
products further overlap, we may become increasingly subject
to infringement claims. We may incur substantial expenses in
defending against third-party infringement claims regardless
of the merit of those claims. In the event that there is a
determination that we have infringed third-party proprietary
rights, we could incur substantial monetary liability and be
prevented from using the rights in the future.
OUR INTELLECTUAL PROPERTY We rely on a combination of the following to protect our
RIGHTS ARE COSTLY AND intellectual property rights:
DIFFICULT TO PROTECT..........
- patents.
- trade secrets.
- copyright and trademark laws.
- nondisclosure agreements.
- other contractual provisions and technical measures.
None of these protections may be adequate to prevent our
competitors from copying or reverse-engineering our
products. Further, none of these protections prohibit our
competitors from independently developing technologies that
are substantially equivalent or superior to our
technologies.
We license certain products under shrink-wrap licenses that
are not signed by our licensees. These shrink-wrap licenses
may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of certain countries in
which our products are or may be licensed do not protect us
to the same extent as the laws of the United States.
WE MAY BE EXPOSED TO PRODUCT Our license agreements with customers typically contain
LIABILITY CLAIMS.............. provisions designed to limit our exposure to potential
product liability claims. It is possible, however, that the
limitation of liability provisions contained in our license
agreements may not be effective under the laws of certain
state and foreign jurisdictions.
THE SUCCESSFUL OPERATION OF Our inability in the future to obtain content from third
OUR BUSINESS DEPENDS UPON THE parties or to develop our own content could result in delays
SUPPLY OF CONTENT OTHER THAN in product introductions or shipments. We depend on the
RELATED TO OUR CURRENT quality and reliability of the content licensed and timely
LIBRARY....................... delivery of this content by our sources. Although we have
agreements specifying the terms of the licenses, these
agreements may not be enforceable. We believe that we can
arrange alternate sources for some or all of our content,
but the inability of any of these content providers to
provide content to us on a timely basis could affect the
performance of our business.
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NET OPERATING LOSS Learn2.com's carryforwards were approximately $70 million as
CARRYFORWARDS OF LEARN2.COM of December 31, 1998. These net operating loss carryforwards
MAY BE SEVERELY LIMITED....... expire at various dates through 2018 and under Section 382
of the Internal Revenue Code may be limited due to ownership
changes. Learn2.com expects that the merger will not result
in an ownership change of Learn2.com under Section 382 of
the Internal Revenue Code. However, future stock issuances
may result in an ownership change of Learn2.com under
Section 382. Section 382 contains rules that limit the
ability of a company to offset pre-ownership change net
operating losses and credit carryovers against post-
ownership change taxable income. As a result, Learn2.com's
net operating loss carryforwards could be severely limited
in the future for use to offset any income of Learn2.com in
any particular year.
WE FACE A RISK OF SYSTEM Our operations depend to a significant extent on our ability
FAILURE....................... to maintain our computer and telecommunications systems. We
must also protect our systems against damage from fire,
natural disaster, power loss, telecommunications failure or
similar events. Although we have arranged for back-up for
our network control, this measure does not eliminate the
risk to our operations from a natural disaster or system
failure. In addition, growth of our customer base may strain
the capacity of our computer operations center and
telecommunications systems and/or lead to degradations in
performance or system failure. Any damage to or loss of our
computer and telecommunications networks including our
operations center could adversely affect the performance of
our business.
CLASS ACTION.................. On May 22, 1998, a lawsuit was filed in the United States
District Court for the Northern District of Texas by
Jonathan L. Gordon, brought as a putative class action
against ViaGrafix and certain of its officers and directors
claiming violations of the Securities Act for alleged
misrepresentations and omissions in ViaGrafix's prospectus
issued in connection with its initial public offering made
in March 1998. Mr. Gordon and certain others have sought
designation as lead plaintiffs in the action. ViaGrafix
believes the lawsuit is without merit. ViaGrafix's response
is not yet due.
THE DEVELOPMENT OF OUR The development of our graphics software products and
GRAPHICS SOFTWARE PRODUCTS AND streaming technologies is a complex process. This can result
STREAMING TECHNOLOGIES IS in lengthy development cycles, extended testing periods and
COMPLEX....................... undetected errors or bugs in the software programs. These
factors can result in loss of market acceptance, loss of
reputation, and loss of market share if products of
competitors either are available on the market first, or are
viewed as more reliable than our products.
THE YEAR 2000 PROBLEM COULD Many currently installed computer systems and software
CAUSE OUR SOFTWARE PRODUCTS products are coded to accept only two-digit entries in the
AND THOSE OF OUR SUPPLIERS TO date code field and cannot distinguish twenty-first century
MALFUNCTION................... dates from twentieth century dates. To function properly,
these date-code fields must distinguish twenty-first century
dates from twentieth century dates
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and, as a result, many companies' software and computer
systems may need to be upgraded or replaced in order to
comply with those "Year 2000" requirements.
We are dependent on the operation of numerous systems that
may be adversely affected by the Year 2000 problem,
including:
- our internal systems.
- equipment, software and content supplied to us by
third-party vendors including outside providers of
web-hosting services.
In addition, our future business depends on the successful
operation of the Internet following the commencement of the
Year 2000. If the Internet is inaccessible for an
appreciable period of time, or if customers and users are
unable to access our web sites, our business and revenues
could be materially and adversely affected. We are also
subject to external factors that might generally affect
industry and commerce, including Year 2000 compliance
failures in the telecommunications, banking, utilities and
transportation industries.
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CAUTIONARY STATEMENT CONCERNING
FORWARD--LOOKING STATEMENTS
We have made forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, in this document that are subject to risks and
uncertainties. These statements relate to expectations concerning matters that
are not historical facts. Words such as "projects," "believes," "anticipates,"
"plans," "expects," "intends," and similar words and expressions are intended to
identify forward-looking statements.
The sections of this document which contain forward-looking statements
include:
- "Questions and Answers About the Merger"
- "Summary"
- "Selected Historical and Pro Forma Combined Financial Data"
- "The Merger--Background of the Merger"
- "The Merger--Factors Considered by, and Recommendations of, the Learn2.com
Board"
- "The Merger--Factors Considered by, and Recommendations of, the ViaGrafix
Board"
- "Opinions of Financial Advisors"
- "Unaudited Pro Forma Condensed Combined Financial Statements"
- "Management's Discussion and Analysis of Financial Condition and Results
of Operations"
- "The Companies"
Although we believe that these forward-looking statements are reasonable,
our expectations may not actually be realized. Important information regarding
factors that could cause actual results to differ materially from these
expectations are disclosed in the "Risk Factors" section beginning on page 15
and elsewhere in this document. All forward-looking statements attributable to
Learn2.com and ViaGrafix are expressly qualified in their entirety by that
language. Neither Learn2.com nor ViaGrafix undertakes any obligation to update
any forward-looking statements.
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THE MERGER
Learn2.com's Board is using this joint proxy statement/prospectus to solicit
proxies from the holders of Learn2.com common stock and preferred stock for use
at the Learn2.com special meeting. ViaGrafix's Board is also using this document
to solicit proxies from the holders of ViaGrafix common stock for use at the
ViaGrafix special meeting.
LEARN2.COM PROPOSALS
At the Learn2.com special meeting, holders of Learn2.com common stock and
preferred stock will be asked to approve the proposed merger pursuant to the
Agreement and Plan of Merger, dated as of June 1, 1999, by and among Learn2.com,
ViaGrafix and a wholly-owned subsidiary of Learn2.com, including the related
issuance of Learn2.com common stock.
VIAGRAFIX PROPOSAL
At the ViaGrafix special meeting, holders of ViaGrafix common stock will be
asked to approve the merger agreement and the merger.
BACKGROUND OF THE MERGER
The terms of the merger agreement are the result of arm's length
negotiations between representatives of Learn2.com and ViaGrafix. The following
is a brief discussion of the events that led to the negotiation and execution of
the merger agreement.
Stephen P. Gott, President, Chief Executive Officer and a Director of
Learn2.com, has been a member of the ViaGrafix Board since March 4, 1998. In
addition, ViaGrafix is an important content supplier of Learn2.com.
Consequently, Mr. Gott and Michael A. Webster, Chairman of the Board, President
and Chief Executive Officer of ViaGrafix, have known each other for several
years.
In April 1999, Mr. Gott approached Mr. Webster regarding a possible business
combination between Learn2.com and ViaGrafix.
At a meeting of the Learn2.com Board held on April 20, 1999, Mr. Gott
presented to the Learn2.com Board Michael A. Webster's interest in pursuing a
business combination with Learn2.com. The Learn2.com Board agreed to explore the
viability of entering into a business combination with ViaGrafix.
In May 1999, Learn2.com and ViaGrafix entered into a confidentiality
agreement covering the confidentiality of information exchanged by Learn2.com
and ViaGrafix in the course of the parties' conduct of due diligence.
In early May 1999, Donald Schupak, Chairman of the Board of Learn2.com, and
Mr. Gott met with Mr. Webster to continue discussions regarding combining the
companies. At the same time, Robert C. Moore, Jr., Chief Financial Officer and
Treasurer of ViaGrafix, met with Marc E. Landy, Vice President, Chief Financial
Officer and Secretary of Learn2.com, to commence the due diligence process.
Shortly thereafter, the parties discussed the terms of the merger. During
the conversation, the parties discussed, among other things, Learn2.com issuing
1.846 shares of its common stock in exchange for each share of ViaGrafix.
On May 8, 1999, the first draft of the merger agreement and other ancillary
documents were circulated by Learn2.com's counsel to members of the working
group, which included the executive officers of Learn2.com and ViaGrafix and
Learn2.com's and ViaGrafix's respective counsel and accountants.
Between May 12, 1999 and May 29, 1999, representatives of Learn2.com and
Learn2.com's counsel telephonically discussed certain issues relating to the
merger agreement and the ancillary documents with ViaGrafix's representatives
and ViaGrafix's counsel.
28
<PAGE>
In May 1999, Learn2.com engaged Ladenburg Thalmann & Co. Inc. to assist in
evaluating the potential merger with ViaGrafix and provide, when requested, a
fairness opinion to Learn2.com regarding the consideration to be paid to the
ViaGrafix stockholders in connection with the proposed merger.
In May 1999, ViaGrafix engaged Point West Securities, LLC to assist in
evaluating the potential merger with Learn2.com and provide, when requested, a
fairness opinion to ViaGrafix and its stockholders regarding the merger
consideration to be paid to the ViaGrafix stockholders in connection with the
proposed merger.
During the week of May 24, 1999, Learn2.com and its legal advisors and
representatives of Ladenburg held a series of conference calls to discuss the
terms of a merger between Learn2.com and ViaGrafix.
During the week of May 24, 1999, ViaGrafix and its legal advisors and
representatives of Point West held a series of conference calls to discuss the
terms of a merger between Learn2.com and ViaGrafix.
During the week of May 24, 1999, a meeting was held between officers of
Learn2.com and representatives of Ladenburg to perform due diligence analysis of
the assets, liabilities, business and prospects of Learn2.com. Additionally, the
purpose of the meeting was to discuss the business, positioning of Learn2.com
and ViaGrafix in the Internet learning industry and the potential benefits and
operation and financial synergies that could be derived from a merger of
Learn2.com and ViaGrafix.
During the week of May 24, 1999, representatives of Ladenburg held a similar
due diligence meeting at ViaGrafix's offices.
During the week of May 24, 1999, representatives of Point West attended a
due diligence meeting at ViaGrafix's offices.
During the week of May 24, 1999, representatives of Point West attended a
similar meeting at Learn2.com's offices.
Each of the boards of directors of Learn2.com and ViaGrafix was kept
apprised of material developments related to a possible business combination
between Learn2.com and ViaGrafix during the course of the negotiations.
On May 20, 1999, the ViaGrafix Board met with legal counsel to review a
possible business combination with Learn2.com. On May 28, 1999, the ViaGrafix
Board met with representatives of Point West. At this meeting, Point West
rendered an oral opinion that, as of that date and based solely on the terms of
the business combination as discussed at the meeting, the acquisition of each
share of ViaGrafix common stock for a purchase price of 1.846 shares of
Learn2.com common stock was fair, from a financial point of view, to ViaGrafix
and its stockholders. At this meeting, the ViaGrafix Board, with Roy L. Bliss
being absent from the meeting, approved the merger the form of the merger
agreement relating to the merger and the form of voting agreement with certain
Learn2.com stockholders. Stephen Gott did not participate in either meeting of
the ViaGrafix Board due to his position with Learn2.com.
On May 28, 1999, the Learn2.com Board met with legal counsel to review the
merger. At this meeting, Ladenburg rendered an oral opinion that, as of that
date, the consideration of 1.846 shares of Learn2.com common stock for each
share of ViaGrafix common stock was fair, from a financial point of view, to
Learn2.com. Based upon its review of the form of an agreement and plan of merger
and the presentations of Ladenburg, the Learn2.com Board unanimously approved
the form of merger agreement, the form of Learn2.com voting agreement, the form
of indemnity agreement and the form of employment agreement and non-competition
agreement for each of Michael A. Webster and Robert E. Webster. Stephen Gott did
not participate in this vote due to his position with ViaGrafix.
29
<PAGE>
Between May 28 and June 1, 1999, revised drafts of the merger agreement,
Learn2.com voting agreement, ViaGrafix voting agreement, Michael A. Webster and
Robert E. Webster employment agreements, Michael A. Webster and Robert E.
Webster non-competition agreements and indemnity agreement were circulated by
Learn2.com's counsel to members of the working group.
On June 1, 1999, a merger agreement, a voting agreement with certain
Learn2.com stockholders and a voting agreement with certain ViaGrafix
stockholders were executed and, on June 7, 1999, Learn2.com and ViaGrafix issued
a news release regarding the merger.
FACTORS CONSIDERED BY, AND RECOMMENDATIONS OF, THE LEARN2.COM BOARD
The Learn2.com Board and management believe that the merger will benefit
Learn2.com and its stockholders for the following reasons:
OWNERSHIP OF VIAGRAFIX'S ORIGINAL CONTENT. Our ownership of training and
learning content is a valuable asset. By owning content, we are less reliant on
suppliers of content and can increase our profit margins on products sold. This
acquisition will accelerate the wide array of content and services available for
Learn2.com's users by immediately expanding our offerings in online training and
learning.
EXPANDING OUR PRODUCTION CAPABILITY. The addition of ViaGrafix will expand our
ability to produce multimedia content to respond to the marketplace in an
efficient manner. Consequently, we will be in a position to increase the amount
of content we own in a short time period.
VIAGRAFIX PROVIDES ACCESS TO A NEW CUSTOMER BASE. ViaGrafix is a leader in the
software training products business. We believe we will be able to expand each
other's distribution relationships through the sale of each other's products and
or services. We intend to market products and services over the Internet to
ViaGrafix's existing and future CD-ROM customer base. We believe that improved
distribution and additional sales channels will provide additional revenue
opportunities from end-users.
VIAGRAFIX IS EXPECTED TO INCREASE OUR CASH FLOW AND REVENUE. We expect the
addition of ViaGrafix to improve our cash flow and revenue.
VIAGRAFIX HAS A PROVEN MANAGEMENT TEAM. We anticipate that the current senior
executive officers of ViaGrafix will continue to hold management positions at
ViaGrafix following the consummation of merger. This group of executive officers
has a proven record in establishing and building a successful business and
retaining and supporting teams of talented employees. Michael A. Webster,
President, Chief Executive Officer and Chairman of the Board of ViaGrafix, will
join Learn2.com as a Director and will be the President of the ViaGrafix
subsidiary. Given the intense competition for qualified personnel, the ability
to add key managers such as Mr. Webster is an important benefit of the
transaction.
COMBINATION OF DIRECT SALES MARKETING TEAMS. Learn2.com and ViaGrafix will
benefit from the merger because of our ability to combine our respective direct
sales marketing teams. The combination of our marketing efforts will increase
our ability to target potential customers in an efficient manner. Increased
marketing is a key factor for the success of Internet related companies.
REDUCTION OR ELIMINATION OF DUPLICATIVE COSTS AND EXPENSES. By combining our
resources, we anticipate that we will be able to reduce or eliminate certain
costs and expenses including administrative and production. By reducing
expenses, we will have greater resources to operate our business.
At a meeting of the Learn2.com Board held on May 28, 1999, after due
consideration, the Learn2.com Board, with the exception of Stephen P. Gott who
did not participate because he is a member of the board of directors of both
Learn2.com and ViaGrafix, unanimously:
- determined that the merger agreement and the merger are fair to, and in
the best interests of, Learn2.com.
- approved the merger agreement and the merger.
- determined to recommend that the stockholders of Learn2.com approve the
merger, including the issuance of Learn2.com common stock in the merger.
Accordingly, the Learn2.com Board
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<PAGE>
recommends that the Learn2.com stockholders vote FOR the approval of the
merger, including the issuance of common stock in the merger.
In approving the transaction and making these recommendations, the
Learn2.com Board consulted with Learn2.com's management as well as its outside
legal counsel and financial advisor, and considered the following material
factors:
- all the reasons described above.
- comparisons of historical financial measures for Learn2.com and ViaGrafix,
including earnings, return on capital employed and cash flow.
- the intended accounting of the merger as a pooling of interests which
results in combined financial statements prepared on a basis consistent
with the underlying view that stockholders interests in the two companies
have simply been combined; as well as the ramifications of accounting for
the merger as a purchase where the assets of ViaGrafix must be revalued
and goodwill recorded and amortized if the pooling of interests method of
accounting cannot be used.
- the ability to complete the merger as a tax-free reorganization for U.S.
federal income tax purposes.
- the terms and conditions of the merger agreement, including the conditions
to closing and the termination fees payable under certain circumstances.
See "The Merger Agreement--Conditions to the Completion of the Merger" and
"The Merger Agreement--Termination of the Merger Agreement" on pages 45
and 46.
- the analyses and presentations of Ladenburg Thalmann & Co. Inc., and
Ladenburg's written opinion to the effect that, as of May 28, 1999, and
based upon and subject to various considerations set forth in its opinion,
the consideration proposed to be paid by Learn2.com in the merger was
fair, from a financial point of view, to Learn2.com.
- that while the merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and as a result of certain
conditions to the completion of the merger, it is possible that the merger
may not be completed even if approved by the stockholders of both
companies. See "The Merger Agreement--Conditions to the Completion of the
Merger" on page 45.
- the interests that Stephen P. Gott may have with respect to the merger as
a director and stockholder of ViaGrafix, as more fully described under
"Interests of Certain Persons in the Merger" on page 49.
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the Learn2.com
Board did not find it useful to and did not attempt to quantify, rank or
otherwise assign relative weights to these factors. The Learn2.com Board relied
on the experience and expertise of Ladenburg, its financial advisor, for
quantitative analysis of the financial terms of the merger. See "Opinions of
Financial Advisors--Opinion of Learn2.com Financial Advisor" on page 38. In
addition, the Learn2.com Board did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather it conducted an overall analysis of the factors described above,
including thorough discussions with and questioning of Learn2.com management and
legal and financial advisors. In considering the factors described above,
individual members of the Learn2.com Board may have given different weight to
different factors.
The Learn2.com Board considered all these factors as a whole, and overall
considered the factors to be favorable to and support its determination.
31
<PAGE>
FACTORS CONSIDERED BY, AND RECOMMENDATIONS OF, THE VIAGRAFIX BOARD
The ViaGrafix Board and management believe that the merger will benefit
ViaGrafix and its stockholders for the following reasons:
ACCESS TO LEARN2.COM'S INTERNET PRESENCE AND RELATIONSHIPS. A natural
progression of the distribution of ViaGrafix's training and learning products is
from CD-ROM to the Internet. Learn2.com has established a substantial presence
on the Internet through its web sites including LEARN2.COM, TUTORIALS.COM and
LEARNINGUNIVERSITY.COM. ViaGrafix will also have access to Learn2.com's
relationships with online services and Internet content providers including AOL,
GeoCities and Linkshare. ViaGrafix believes that distribution and sales over the
Internet will enjoy robust growth in the near future and will provide additional
revenue opportunities.
LEARN2.COM HAS A PROVEN MANAGEMENT TEAM. It is anticipated that the current
senior executive officers of Learn2.com will continue to manage the combined
company. Stephen P. Gott, President, Chief Executive Officer and a Director of
Learn2.com, will continue to serve in those capacities after the merger. Given
the intense competition for qualified senior management, the ability to add
senior managers such as Mr. Gott to ViaGrafix is an important benefit of the
transaction.
LEARN2.COM HAS A LARGER CAPITALIZATION AND HIGHER TRADING LIQUIDITY. Based on
the closing prices of Learn2.com common stock and ViaGrafix common stock on June
4, 1999, the day prior to the public announcement of the merger, Learn2.com had
a market capitalization of approximately $163 million, compared to ViaGrafix's
market capitalization of approximately $41 million. In 1999, the average daily
volume of the Learn2.com common stock and ViaGrafix common stock was
approximately 874,000 shares and 47,000 shares, respectively. Accordingly, by
combining with Learn2.com, ViaGrafix stockholders should be afforded increased
trading liquidity for their investment.
COMBINATION OF DIRECT SALES MARKETING TEAMS. Learn2.com and ViaGrafix will
benefit from the merger because of our ability to combine our respective direct
sales marketing teams. The combination of our marketing efforts will increase
our ability to target potential customers in an efficient manner. Increased
marketing is a key factor for the success of Internet related companies.
REDUCTION OR ELIMINATION OF DUPLICATIVE COSTS AND EXPENSES. By combining our
resources, we anticipate that we will be able to reduce or eliminate certain
costs and expenses including administrative and production. By reducing
expenses, we will have greater resources to operate our business.
At a meeting of the ViaGrafix Board held on May 28, 1999, the ViaGrafix
Board, other than Mr. Bliss who was absent and Stephen P. Gott who did not
participate because he is a member of the board of directors of both ViaGrafix
and Learn2.com, determined that the merger agreement and the related
transactions, including the merger, are fair to and in the best interests of
ViaGrafix and ViaGrafix's stockholders. Accordingly, the ViaGrafix Board has
adopted the merger agreement and the ViaGrafix Board recommends that ViaGrafix's
stockholders vote FOR approval of the merger agreement and the merger.
In the course of reaching its decision to adopt the merger agreement, the
ViaGrafix Board consulted with ViaGrafix's management, as well as its outside
legal counsel and its financial advisor, and considered the following material
factors:
- all the reasons described above.
- the risks and potential rewards associated with, as an alternative to the
merger, continuing to execute ViaGrafix's strategic plan as an independent
entity.
- the consideration to be paid in the merger relative to the then-current
market prices and historical trading prices of ViaGrafix and Learn2.com
and stock price premiums paid in mergers of comparable size as discussed
in the Point West Securities, LLC selected transaction analysis, that the
premium offered in the merger was within the range of premiums paid in
comparable transactions.
32
<PAGE>
- comparisons of historical financial measures for ViaGrafix and Learn2.com,
including earnings, return on capital employed and cash flow.
- the intended accounting of the merger as a pooling of interests which
results in combined financial statements prepared on a basis consistent
with the underlying view that stockholders interests in the two companies
have simply been combined; as well as the ramifications of accounting for
the merger as a purchase where the assets of ViaGrafix must be revalued
and goodwill may be recognized if the pooling of interests method of
accounting cannot be used.
- the ability to complete the merger as a tax-free reorganization for U.S.
federal income tax purposes.
- the analyses and presentations of Point West and its written opinion to
the effect that, as of May 28, 1999, and based on and subject to various
considerations set forth in its opinion, the consideration to be paid was
fair, from a financial point of view, to ViaGrafix's stockholders.
- that while the merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and as a result of certain
conditions to the completion of the merger, it is possible that the merger
may not be completed even if approved by the stockholders of both
companies. See "The Merger Agreement--Conditions to the Completion of the
Merger" on page 45.
- the terms and conditions of the merger agreement, which include
restrictions on the conduct of ViaGrafix's business pending closing which
permit ViaGrafix generally to conduct its business in the ordinary course
during that period See "The Merger Agreement--Covenants Relating to
Conduct of Business Pending the Merger" on page 43.
- the potential effect of the terms of the merger agreement with respect to
possible third-party proposals to acquire ViaGrafix after execution of the
merger agreement, including that if any third party made a superior
proposal (as described under "The Merger Agreement--Termination of the
Merger Agreement"), the ViaGrafix Board could provide information to and
engage in negotiations with such third party, subject to the terms and
conditions of the merger agreement.
- that while the termination payment provision of the merger agreement could
have the effect of discouraging alternative proposals for a business
combination with ViaGrafix this provision would not preclude bona fide
alternative proposals, and that the size of the termination fee was
reasonable in light of the size and benefits of the transaction.
- the interests that certain executive officers and directors of ViaGrafix
may have with respect to the merger in addition to their interests as
stockholders of ViaGrafix generally, as more fully described under
"Interests of Certain Persons in the Merger" on page 49.
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the ViaGrafix
Board did not find it useful to and did not attempt to quantify, rank or
otherwise assign relative weights to these factors. The ViaGrafix Board relied
on the experience and expertise of Point West, its financial advisor, for
quantitative analysis of the financial terms of the merger. See "Opinions of
Financial Advisors--Opinion of ViaGrafix Financial Advisor" on pages 41 and 42.
In addition, the ViaGrafix Board did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather the overall analysis of the factors described above, including
thorough discussions with and questioning of ViaGrafix's management and legal
and financial advisors. In considering the factors described above, individual
members of the ViaGrafix Board may have given different weight to different
factors.
The ViaGrafix Board considered all these factors as a whole, and overall
considered the factors to be favorable to and support its determination.
33
<PAGE>
ACCOUNTING TREATMENT
Learn2.com and ViaGrafix are accounting for the merger under the "pooling of
interests" method under the requirement of Opinion No. 16, Business
Combinations, of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board and the
rules and regulations of the SEC. Upon the closing of the merger, Learn2.com and
ViaGrafix will receive letters from their independent accountants, Arthur
Andersen LLP and Ernst & Young LLP, respectively, regarding those firms'
concurrence with Learn2.com management's and ViaGrafix management's conclusions
as to the appropriateness of accounting for the merger as a pooling of
interests.
In a pooling of interests, the reported balance sheet amounts and results of
operations of the separate companies for prior periods will be combined,
reclassified and conformed, as appropriate, to reflect the combined financial
position and results of operations for Learn2.com and ViaGrafix. See "Unaudited
Pro Forma Condensed Combined Financial Statements" on page 59.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material federal income tax
consequences of the merger. This discussion is based upon the Internal Revenue
Code of 1986, as amended, the regulations promulgated under the Code, Internal
Revenue Service rulings, and judicial and administrative rulings in effect as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. This discussion does not address all aspects of federal income taxation
that may be relevant to a stockholder in light of the stockholder's particular
circumstances or to those ViaGrafix stockholders subject to special rules, such
as stockholders who are not citizens or residents of the United States,
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, stockholders who acquired their ViaGrafix stock pursuant to the
exercise of options or similar derivative securities or otherwise as
compensation or stockholders who hold their ViaGrafix stock as part of a
straddle or conversion transaction. This discussion assumes that ViaGrafix
stockholders hold their respective shares of ViaGrafix stock as capital assets
within the meaning of Section 1221 of the Code, which is generally for
investment.
FEDERAL INCOME TAX CONSEQUENCES TO LEARN2.COM STOCKHOLDERS. Holders of
Learn2.com stock will not recognize any gain or loss for federal income tax
purposes as a result of the merger.
FEDERAL INCOME TAX CONSEQUENCES TO VIAGRAFIX STOCKHOLDERS. Except as
provided below, ViaGrafix stockholders will (1) not recognize any gain or loss
for federal income tax purposes as a result of the exchange of their shares of
ViaGrafix common stock for Learn2.com common stock in the merger except with
respect to cash received instead of a fractional share of Learn2.com common
stock and (2) have a tax basis in the Learn2.com common stock received in the
merger equal to the tax basis of the ViaGrafix common stock surrendered in the
merger less any tax basis of the ViaGrafix stock that is allocable to a
fractional share of Learn2.com common stock for which cash is received and not
taxed as a dividend, as described below. The ViaGrafix stockholders' holding
period for purposes of determining capital gains treatment with respect to the
Learn2.com common stock received in the merger will include the holding period
of the ViaGrafix common stock surrendered in the merger.
To the extent that a holder of shares of ViaGrafix common stock receives
cash instead of a fractional share of Learn2.com common stock, the holder
generally will be treated as having received such fractional share and having it
redeemed by Learn2.com. If that constructive redemption results in a "material
reduction" in the stockholder's interest in Learn2.com, the stockholder will be
required to recognize gain or loss for federal income tax purposes, measured by
the difference between the amount of cash received and the portion of the tax
basis of the holder's shares of ViaGrafix common stock allocable to that
fractional share of Learn2.com common stock. This gain or loss will be a capital
gain or loss and will be a long-term capital gain or loss if the share of
ViaGrafix common stock exchanged for the fractional share of Learn2.com common
stock was held for more than one year at the effective time of the merger. If,
however, the constructive redemption is not considered to result in a material
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<PAGE>
reduction in the stockholder's interest in Learn2.com, any cash received in lieu
of a fractional share of Learn2.com common stock generally will be taxed as a
dividend. The Internal Revenue Service has ruled that even small reductions in a
stockholder's interest will be treated as material if the stockholder is a small
minority stockholder. For example, a reduction from 0.0001118% to 0.0001081% was
held to be meaningful.
FEDERAL INCOME TAX CONSEQUENCES TO VIAGRAFIX, LEARN2.COM AND THE MERGER
SUBSIDIARY. None of ViaGrafix, Learn2.com or the merger subsidiary will
recognize gain or loss for federal income tax purposes as a result of the
merger.
NO RULINGS. Neither ViaGrafix nor Learn2.com intends to obtain a ruling
from the Internal Revenue Service with respect to the tax consequences of the
merger. If it were determined that the merger did not qualify as a
reorganization:
- ViaGrafix would recognize taxable gain or loss upon the transfer of assets
to the merger subsidiary.
- any tax liability arising would become an obligation of the merger
subsidiary as a result of the merger.
- ViaGrafix stockholders generally would recognize taxable gain or loss upon
the receipt of the Learn2.com common stock in exchange for ViaGrafix
common stock in connection with the merger.
WE INTEND THE PRECEDING DISCUSSION TO PROVIDE ONLY A SUMMARY OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. WE DO NOT INTEND THAT IT BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. IN ADDITION, WE DO NOT ADDRESS TAX CONSEQUENCES
WHICH MAY VARY WITH, OR ARE CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER,
WE ONLY ADDRESS TAXES BASED ON INCOME. WE DO NOT ADDRESS ANY FOREIGN, STATE OR
LOCAL TAX CONSEQUENCES OF THE MERGER. ACCORDINGLY, WE STRONGLY URGE YOU TO
CONSULT YOUR TAX ADVISOR TO DETERMINE YOUR PARTICULAR UNTIED STATES FEDERAL,
STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES RESULTING FROM THE
MERGER WITH RESPECT TO YOUR INDIVIDUAL CIRCUMSTANCES.
APPRAISAL RIGHTS
Holders of Learn2.com common stock are not entitled to dissenters' appraisal
rights under Delaware law in connection with the merger. Holders of ViaGrafix
common stock are not entitled to dissenters' appraisal rights under Oklahoma law
in connection with the merger because the shares of Learn2.com common stock that
such holders will be entitled to receive in the merger will be listed on The
Nasdaq Stock Market.
FEDERAL SECURITIES LAW CONSEQUENCES
This joint proxy statement/prospectus does not cover any resales of the
Learn2.com common stock to be received by the stockholders of ViaGrafix upon
completion of the merger, and no person is authorized to make any use of this
joint proxy statement/prospectus in connection with any such resale.
All shares of Learn2.com common stock received by ViaGrafix stockholders in
the merger will be freely transferable, except that shares of Learn2.com common
stock received by persons who are deemed to be "affiliates" of ViaGrafix under
the Securities Act at the time of the ViaGrafix meeting may be resold by them
only in transactions permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of ViaGrafix for such purposes generally include individuals or
entities that control, are controlled by or are under common control with
ViaGrafix and include directors and executive officers of ViaGrafix.
DELISTING AND DEREGISTRATION OF VIAGRAFIX COMMON STOCK AFTER THE MERGER
If the merger is consummated, ViaGrafix common stock will be delisted from
The Nasdaq Stock Market and will be deregistered under the Exchange Act.
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<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
LEARN2.COM
The Learn2.com common stock is traded over-the-counter and is quoted on The
Nasdaq Stock Market under the symbol "LTWO" and was previously quoted under the
symbol "SEVL". The table below sets forth the range of the high and low bid and
asked sales prices for Learn2.com common stock as reported by The Nasdaq Stock
Market for the periods indicated.
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First fiscal quarter........................................................ $ 5.00 $ 2.88
Second fiscal quarter....................................................... 4.00 1.50
Third fiscal quarter........................................................ 3.94 1.63
Fourth fiscal quarter....................................................... 3.44 1.38
<CAPTION>
1998
- ----------------------------------------------------------------------------
<S> <C> <C>
First fiscal quarter........................................................ $ 2.13 $ 1.25
Second fiscal quarter....................................................... 12.63 1.38
Third fiscal quarter........................................................ 5.75 1.75
Fourth fiscal quarter....................................................... 5.00 1.94
<CAPTION>
1999
- ----------------------------------------------------------------------------
<S> <C> <C>
First fiscal quarter........................................................ $ 10.00 $ 2.50
Second fiscal quarter....................................................... 8.94 3.88
Third fiscal quarter (through July 15)...................................... 4.81 4.25
</TABLE>
Learn2.com has never paid cash dividends on the Learn2.com common stock.
Learn2.com expects that for the foreseeable future it will follow a policy of
retaining any earnings to finance the development of its business, including for
working capital and to fund capital expenditures.
VIAGRAFIX
The ViaGrafix common stock is traded over-the-counter and has been quoted on
The Nasdaq Stock Market under the symbol "VIAX" since March 4, 1998, the date of
ViaGrafix's initial public offering. The table below sets forth the range of the
high and low bid and asked sales prices for ViaGrafix common stock as reported
by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
1998 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First fiscal quarter....................................................... $ 15.25 $ 11.75
Second fiscal quarter...................................................... 16.00 5.25
Third fiscal quarter....................................................... 8.13 4.63
Fourth fiscal quarter...................................................... 7.50 2.53
<CAPTION>
1999
- ---------------------------------------------------------------------------
<S> <C> <C>
First fiscal quarter....................................................... $ 13.00 $ 4.75
Second fiscal quarter...................................................... 8.63 5.50
Third fiscal quarter (through July 15)..................................... 7.13 6.63
</TABLE>
ViaGrafix has not paid dividends since its initial public offering.
RECENT SHARE PRICES
The following table sets forth the closing sales prices per share of
Learn2.com common stock on The Nasdaq Stock Market and the closing sales prices
per share of ViaGrafix common stock on The Nasdaq Stock Market on (1) May 28,
1999, the last full trading day prior to the execution of the merger agreement,
(2) June 4, 1999, the last full trading date prior to the public announcement of
the
36
<PAGE>
merger, and (3) July 15, 1999, the latest practicable trading day before the
printing of this joint proxy statement/prospectus. The equivalent ViaGrafix per
share price as of any given date, including the dates indicated, is determined
by multiplying the price of one share of Learn2.com common stock as of such date
by 1.846, the exchange ratio set forth in the merger agreement, and represents
what the market value of one share of ViaGrafix's common stock would have been
if the merger had been consummated on or prior to such day.
<TABLE>
<CAPTION>
EQUIVALENT
LEARN2.COM VIAGRAFIX VIAGRAFIX
COMMON STOCK COMMON STOCK PER SHARE PRICE
--------------- --------------- -------------------
<S> <C> <C> <C>
May 28, 1999............................ $ 5.94 $ 6.31 $ 10.97
June 4, 1999............................ $ 5.00 $ 7.00 $ 9.23
July 15, 1999........................... $ 4.63 $ 7.00 $ 8.55
</TABLE>
The exchange ratio of 1.846 to 1 is fixed and will not be adjusted to
compensate ViaGrafix stockholders for decreases in the market price of
Learn2.com common stock which could occur before the merger becomes effective.
If the market price of Learn2.com common stock decreases or increases prior to
the effective time of the merger, the market value of Learn2.com common stock to
be received in the merger in exchange for ViaGrafix common stock will
correspondingly decrease or increase. STOCKHOLDERS OF VIAGRAFIX ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS OF VIAGRAFIX COMMON STOCK AND LEARN2.COM COMMON
STOCK.
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OPINIONS OF FINANCIAL ADVISORS
We each retained our own financial advisor to assist in our consideration of
valuation, financial and other matters relating to the merger. Learn2.com
retained Ladenburg Thalmann & Co. Inc. as its financial advisor and ViaGrafix
retained Point West Securities, LLC as its financial advisor.
OPINION OF LEARN2.COM FINANCIAL ADVISOR
At the May 28, 1999 meeting of the Learn2.com Board, Ladenburg gave its
opinion to the Learn2.com Board that, as of such date and based upon and subject
to the various considerations set forth in its opinion, the consideration to be
paid by Learn2.com in connection with the merger was fair from a financial point
of view to Learn2.com.
The full text of the opinion of Ladenburg, which sets forth among other
things the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Ladenburg in rendering its
opinion, is attached as Appendix B and is incorporated by reference with the
consent of Ladenburg. This opinion should be read carefully and in its entirety.
Ladenburg's opinion is addressed to the Learn2.com Board, is directed only to
the fairness of the consideration to be paid in the merger, from a financial
point of view, does not address any other aspect of the merger and does not
constitute a recommendation to any Learn2.com or ViaGrafix stockholder as to how
to vote with respect to the merger. The summary of the opinion of Ladenburg set
forth in this joint proxy statement/prospectus is qualified in its entirety by
reference to the full text of such opinion.
In rendering its opinion, Ladenburg reviewed:
- the merger agreement.
- the Annual Reports on Form 10-K for Learn2.com for the two fiscal years
ended December 31, 1996 and December 31, 1997 and Form 10-K/A for December
31, 1998.
- the Quarterly Report on Form 10-Q/A for Learn2.com for the three months
ended March 31, 1999.
- the Form 8-K/A for the Street Technologies, Inc. acquisition dated
February 16, 1999.
- projected financial statements for Learn2.com, prepared by management, for
the years ended December 31, 1999, December 31, 2000, December 31, 2001,
December 31, 2002, December 31, 2003 and December 31, 2004.
- certain information, including selected historical financial information,
pro forma financial information, financial forecasts and pro forma
financial forecasts relating to the business, earnings, cash flow, assets,
liabilities and prospects of Learn2.com furnished by management.
- certain publicly available analysts' earnings' forecasts with respect to
Learn2.com.
- the Annual Report on Form 10-K for ViaGrafix for the fiscal year ended
December 31, 1998.
- the Quarterly Report on Form 10-Q for ViaGrafix for the three months ended
March 31, 1999.
- the ViaGrafix Initial Public Offering prospectus dated March 4, 1998.
- projected financial statements reviewed and found reasonable by ViaGrafix
for the years ended December 31, 1999, December 31, 2000, December 31,
2001, December 31, 2002, December 31, 2003 and December 31, 2004.
- certain information, including selected historical financial information,
operating data and sales information relating to the business, earnings,
cash flow, assets, liabilities and prospects of ViaGrafix furnished by
ViaGrafix.
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- publicly available information regarding the industry, Learn2.com,
ViaGrafix and their competitors.
In addition, Ladenburg participated in discussions with certain members of
the senior management of Learn2.com and ViaGrafix to discuss the historical and
prospective industry environment, business strategies and operating results for
Learn2.com and ViaGrafix, respectively.
Ladenburg assumed and relied upon the accuracy and completeness of all
financial and other material furnished to it by Learn2.com regarding Learn2.com,
ViaGrafix, the merger, the industries in which Learn2.com and ViaGrafix operate
and their competition. Ladenburg did not attempt to independently verify the
information provided to it by Learn2.com. Ladenburg was not made or provided
with an independent evaluation or appraisal of the assets or liabilities,
contingent or otherwise, of Learn2.com or ViaGrafix. Ladenburg's opinions are
necessarily based upon information available, and financial, stock market and
other conditions and circumstances existing and disclosed, as of May 28, 1999.
Ladenburg expressed no opinion as to the relative merits of the merger as
compared to any alternative business strategies that might exist for Learn2.com
or the effect of any other transaction in which Learn2.com might engage.
For Ladenburg's analysis of the consideration to be paid to ViaGrafix in the
transaction, Ladenburg calculated a range of values for ViaGrafix using four
approaches.
The elements of Ladenburg's analyses included:
- a Comparable Public Company Analysis based upon comparable publicly-traded
companies.
- a Comparable Acquisition Analysis based upon acquisitions of comparable
companies over the previous three years.
- a Discounted Cash Flow Analysis.
- a Premium Paid Analysis.
1. Comparable Public Company Analysis. The Comparable Public Company Analysis
determines the implied public market value of the entity being valued based
on the multiples derived by dividing comparable public company valuations by
certain measures of operating performance such as revenues, earnings before
interest, taxes, depreciation and amortization, earnings before interest and
taxes, net income and the median projected earnings per share as developed
by certain research analysts. Ladenburg based ViaGrafix's valuation
principally on revenue multiples as comparable companies in the sector are
for the most part, not currently profitable on an EBITDA basis. Comparable
public company multiples provide a proxy for perceived market value, since
they are based on the market's valuation of comparable companies and
industry prospects.
For all the comparable public companies, Ladenburg derived various mean and
median common stock trading multiples. Revenue, EBITDA and EBIT multiples are
based on total enterprise value divided by each financial measure, respectively.
Total enterprise value is defined as the market value of common stock, plus
total debt, plus preferred stock, less cash and cash equivalents. Total
enterprise value is essentially the value of a company assuming an unleveraged
capital structure. The remaining multiples are derived by dividing the market
value of the common stock in aggregate, or per share as appropriate, by net
income and projected net income.
Unleveraged implied equity valuations for ViaGrafix are based upon revenues
and are calculated by multiplying ViaGrafix's revenues by the valuation
multiples of revenues derived from the comparable company analysis. From this
product, the total debt was subtracted and excess cash and cash equivalents, if
any, were added to derive the unlevered equity value.
In choosing comparable companies for ViaGrafix in this valuation, Ladenburg
examined companies that provide on-line training and education software packages
in the United States. Specifically,
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Ladenburg examined Advantage Learning Systems, Asymetrix Learning Systems, CBT
Group PLC, ITC Learning Corporation, SVI Holdings and UOL Publishing.
2. Comparable Acquisition Analysis. The Comparable Acquisition Analysis applies
a similar methodology as the Comparable Public Company Analysis, but relies
upon multiples derived from merger and acquisition transactions involving
comparable companies. For all of the comparable merger and acquisition
transactions, Ladenburg derived various median multiples. Ladenburg based
ViaGrafix's valuation principally on revenue multiples as comparable
acquisition target companies in the sector are for the most part, not
currently profitable.
3. Discounted Cash Flow Analysis. The Discounted Cash Flow Analysis derives
implied equity values based on the present value of future net cash flows,
less current total debt, plus current total cash. Ladenburg analyzed cash
flows derived from projections that were reviewed and found reasonable by
ViaGrafix. Ladenburg applied discount rates ranging from 20% to 25% to
calculate the present value of projected ViaGrafix unleveraged free cash
flows by calculating the mean weighted average cost of capital for the
comparable public companies identified in the Comparable Public Company
Analysis. The discount rates for ViaGrafix were increased over the median
weighted average cost of capital for the comparable companies because of
various qualitative reasons including, but not limited to, (i) ViaGrafix's
emerging growth industry which is characterized by rapid technological
change, dependence on new products and product development risk; (ii)
ViaGrafix's current market position and intensity of competition; and (iii)
reliance on major distributors, retailers and resellers to sell its
products. For purposes of this analysis, annual free cash flow equals
de-levered net income, plus depreciation and amortization, less capital
expenditures, less the change in working capital. In the last year of the
analysis, a hypothetical value or terminal value is derived for the business
on an unleveraged basis by applying a range of exit multiples that center
around the Comparable Acquisition Analysis median EBITDA multiple.
4. Takeover Premium Analysis. The Takeover Premium Analysis examines recent
premiums paid in the acquisition of public companies. Premiums are defined,
in percentage terms, as the excess (or shortfall) of the per share purchase
price relative to the target's stock price prior to the announcement of the
transaction. The percentage premiums are applied to ViaGrafix's closing
stock price on May 25, 1999 to derive a range of per share values for
ViaGrafix.
The summary set forth above is not a complete description of the analyses or
data presented by Ladenburg. The preparation of a fairness opinion is a complex
process which should not be examined on the basis of a partial analysis or
summary description. Ladenburg believes that selecting any portion of its
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion. Ranges of valuation resulting from any
particular analysis described should not be taken as Ladenburg's view of the
actual value of Learn2.com or ViaGrafix. In performing its analyses, Ladenburg
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of Learn2.com and ViaGrafix. Any estimates contained in Ladenburg's analyses are
not necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such estimates.
As a part of its investment banking business, Ladenburg and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. Ladenburg was selected to advise Learn2.com and to deliver a
fairness opinion with respect to the merger on the basis of such experience and
its familiarity with Learn2.com. Ladenburg also provides equity research on
Learn2.com.
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Pursuant to a letter agreement dated May 28, 1999, Learn2.com engaged
Ladenburg as its exclusive financial advisor in connection with the merger.
Pursuant to the terms of the Ladenburg engagement letter, Learn2.com has agreed
to pay Ladenburg a fee of $175,000. In addition, Learn2.com has agreed to
reimburse Ladenburg for its reasonable out-of-pocket expenses incurred in
connection with its services, including the fees and disbursements of counsel,
and will indemnify Ladenburg against certain liabilities arising out of
Ladenburg's engagement, including liabilities under the federal securities laws.
In February 1999, Learn2.com engaged Ladenburg to provide financial
consulting services through December 31, 1999. Pursuant to an engagement letter
dated February 28, 1999, Learn2.com agreed to issue warrants to Ladenburg for
the purchase of 150,000 shares of Learn2.com common stock at a per share
exercise price of $5.00 and 100,000 shares of Learn2.com common stock at a per
share exercise price of $7.50.
OPINION OF VIAGRAFIX FINANCIAL ADVISOR
At the May 28, 1999 meeting of the ViaGrafix Board, Point West Securities,
LLC gave its opinion to the ViaGrafix Board that, based upon and subject to the
various considerations set forth in its opinion, the consideration to be
received by the holders of ViaGrafix common stock in the merger was fair from a
financial point of view.
The full text of the opinion of Point West, which sets forth among other
things the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Point West in rendering its
opinion, is attached as Appendix C. This opinion should be read carefully and in
its entirety. Point West's opinion is addressed to the ViaGrafix Board, is
directed only to the fairness of the consideration to be received in the merger,
does not address any other aspect of the merger and does not constitute a
recommendation to any ViaGrafix stockholder as to how to vote with respect to
the merger. The summary of the opinion of Point West set forth in this joint
proxy statement/prospectus is qualified in its entirety by reference to the full
text of such opinion.
In rendering its opinion, Point West:
- held detailed discussions with the management of ViaGrafix and certain
members of the management of Learn2.com concerning historical and
projected financial information and their respective financial and
business prospects.
- reviewed the most recent draft of the merger agreement in the form
provided to it by ViaGrafix, which has been represented to it as the final
version to be executed by the parties.
- reviewed certain publicly available documents for ViaGrafix and
Learn2.com, including Annual Reports, Forms 10-K and related financial
information, for the three fiscal years ended December 31, 1998, and Forms
10-Q and related unaudited financial information for the three months
ended March 31, 1999.
- reviewed marketing materials and press releases provided by ViaGrafix and
Learn2.com.
- reviewed publicly available data and information for companies which Point
West determined to be comparable to ViaGrafix and Learn2.com.
- reviewed the historical stock prices for ViaGrafix and Learn2.com and
other companies which Point West determined to be comparable to ViaGrafix
and Learn2.com.
- reviewed publicly available research reports for ViaGrafix and Learn2.com
and other companies which Point West determined to be comparable to
ViaGrafix and Learn2.com.
- reviewed the financial terms of other recent business combinations of
comparable companies.
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<PAGE>
- conducted such other financial analysis as Point West determined, based
upon its judgement as investment bankers, to be appropriate for purposes
of its opinion.
Point West relied, without independent verification, on the accuracy and
completeness of all of the financial and other information that was publicly
available or furnished or otherwise communicated by ViaGrafix and Learn2.com.
With respect to information provided to Point West used to formulate financial
projections, Point West reviewed that information and made certain adjustments
where it determined it was appropriate to do so. Independent of the foregoing,
Point West assumed that the information was reasonably prepared, based upon
assumptions reflecting the best currently available estimates and good faith
judgments of managements of ViaGrafix and Learn2.com as to the future
performance and that neither the management of ViaGrafix, nor the management of
Learn2.com, has any information or beliefs that would make the information or
projections misleading. Point West's opinion is based upon analysis of the
foregoing factors in light of its assessment of general economic, financial and
market conditions as they exist and as they can be evaluated by it as of May 28,
1999. Point West did not express an opinion as to what the value of Learn2.com
common stock to be issued to ViaGrafix common stockholders pursuant to the
merger agreement will actually trade at any time following May 28, 1999. Point
West noted that, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization under the provisions of Section 368
of the Internal Revenue Code of 1986, as amended.
ViaGrafix has agreed to pay Point West a fee of $125,000. In addition,
ViaGrafix has agreed to reimburse Point West for its reasonable out-of-pocket
expenses incurred in connection with preparing its fairness opinion.
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THE MERGER AGREEMENT
The following summary of the merger agreement is qualified by reference to
the complete text of the merger agreement, which is incorporated by reference
and attached as Appendix A.
STRUCTURE OF THE MERGER
Under the merger agreement, a Learn2.com subsidiary will merge with and into
ViaGrafix so that ViaGrafix becomes a wholly-owned subsidiary of Learn2.com.
TIMING OF CLOSING
The closing will occur as soon as possible after all of the conditions to
the completion of the merger are satisfied, or to the extent permitted, waived.
We expect that, immediately upon the closing of the merger, we will file a
merger certificate with the Secretary of State of the State of Delaware and the
Secretary of State of the State of Oklahoma, at which time the merger will be
effective.
MERGER CONSIDERATION
The merger agreement provides that 1.846 shares of Learn2.com common stock
will be exchanged for each share of ViaGrafix common stock outstanding
immediately prior to the effective time. However, any shares of ViaGrafix common
stock held by ViaGrafix as treasury stock will be canceled without any payment
for those shares.
NO FRACTIONAL SHARES
No fractional shares of Learn2.com common stock will be issued in the
merger. Instead, each ViaGrafix stockholder who would be entitled to a
fractional share of Learn2.com common stock will receive cash. The amount of
cash to be received by a ViaGrafix stockholder will be determined by multiplying
the fraction of each share of Learn2.com common stock that a ViaGrafix
stockholder would have received by the average of the closing prices of the
Learn2.com common stock, as reported in The Wall Street Journal, Eastern
Edition, for each of the twenty consecutive trading days immediately preceding
the third trading day prior to the date of the mailing of this joint proxy
statement/prospectus.
THE LEARN2.COM BOARD
Learn2.com has agreed to take the necessary corporate action so that
simultaneous with the closing of the merger Michael A. Webster will become a
director of Learn2.com. Mr. Webster has agreed to become a director of
Learn2.com upon the closing of the merger.
COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE MERGER
Learn2.com and ViaGrafix have each agreed that, without the written consent
of the other party, during the period from the date of the merger agreement
until the earlier of the termination of the merger agreement or the effective
time, it will:
- carry on its business in the usual, regular and ordinary course.
- not cause, permit or propose any amendments to its certificate of
incorporation, bylaws or other charter documents or similar governing
instruments of any of its subsidiaries.
- not issue, deliver, sell, authorize, pledge or otherwise encumber any
shares of capital stock or any securities convertible into shares of
capital stock other than pursuant to the exercise of stock options or
pursuant to employee stock purchase plans.
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- not declare, set aside or pay any dividends on or make any other
distributions in respect of any capital stock or split, combine or
reclassify any capital stock or issue or authorize the issuance of any
other securities.
- report on operational matters and promptly advise of any change in the
condition, financial or otherwise, operations or properties, businesses or
business prospects.
- not take or agree or commit to take any action that is reasonably likely
to make any representations, warranties or covenants inaccurate.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains substantially reciprocal representations and
warranties made by Learn2.com and ViaGrafix to each other. The most significant
of these relate to:
- due organization and authority.
- capital structure and rights or obligations relating to capital stock.
- absence of conflict with or violation of any agreement, law, or charter or
bylaw provisions and the absence of the need for filings, consents,
approvals or actions in order to consummate the merger.
- accuracy of documents filed with the SEC.
- accuracy of information supplied.
- absence of certain changes or events.
- absence of undisclosed liabilities.
- ownership of or right to use, and non-infringement of others' right to,
intellectual property.
- absence of undisclosed litigation.
- employee benefit plans.
- filing of tax returns and the payment of taxes.
- disclosure of material contracts and commitments.
- compliance with laws.
- insurance.
- labor relations.
- environmental issues.
- transactions with affiliates.
- payment of broker's or advisor's fees.
- change of control payments to directors, officers and employees.
- absence of certain commercial practices.
- Year 2000 compliance.
- complete and correct books and records.
- receipt of fairness opinions from Ladenburg and Point West.
- absence of the applicability of certain takeover statutes.
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The representations and warranties in the merger agreement do not survive
the closing or termination of the merger agreement.
CONDITIONS TO THE COMPLETION OF THE MERGER
MUTUAL CLOSING CONDITIONS. The obligations of Learn2.com and ViaGrafix to
complete the merger are subject to the satisfaction or, to the extent legally
permissible, waiver of the following:
- approval by the stockholders of Learn2.com and ViaGrafix.
- absence of any statute, rule, regulation, execution, decree, injunction or
other order, whether temporary, preliminary or permanent, which is in
effect and which materially restricts, prevents or prohibits the
consummation of the merger.
- Learn2.com's registration statement on Form S-4, which includes this joint
proxy statement/ prospectus, being effective and not subject to any stop
order by the SEC.
ADDITIONAL CLOSING CONDITIONS OF LEARN2.COM. Learn2.com's obligation to
complete the merger is subject to the following additional conditions:
- the representations and warranties in the merger agreement of ViaGrafix
shall be true and correct in all material respects.
- ViaGrafix shall have performed in all material respects all conditions,
covenants, agreements and obligations required to be performed by it under
the merger agreement.
- no event shall have occurred which would have a material adverse effect on
ViaGrafix.
- ViaGrafix shall have delivered to Learn2.com a certificate signed on
behalf of ViaGrafix by the Chairman of the Board, President or any Vice
President of ViaGrafix, certifying as to the fulfillment of certain
conditions including appropriate certification of ViaGrafix's certificate
of incorporation, bylaws and corporate resolutions.
- ViaGrafix shall have obtained all consents and approvals from third
parties or governmental and regulatory authorities in connection with the
execution, delivery and performance by ViaGrafix of the merger agreement
and the consummation of the transactions contemplated thereby.
- Learn2.com shall have been furnished with an opinion of counsel to
ViaGrafix mutually acceptable to the parties.
- Learn2.com shall have entered into employment agreements with Michael A.
Webster and Robert E. Webster in the forms attached as Appendices D and E
respectively.
- Learn2.com shall have entered into non-competition agreements with Michael
A. Webster and Robert E. Webster in the forms attached as Appendices F and
G respectively.
ADDITIONAL CLOSING CONDITIONS OF VIAGRAFIX. ViaGrafix's obligation to
complete the merger is subject to the following additional conditions:
- the representations and warranties in the merger agreement of Learn2.com
shall be true and correct in all material respects.
- Learn2.com shall have performed in all material respects all conditions,
covenants, agreements and obligations required to be performed by it under
the merger agreement.
- no event shall have occurred which would have a material adverse effect on
Learn2.com.
- Learn2.com shall have delivered to ViaGrafix a certificate signed on
behalf of Learn2.com by the Chairman of the Board, President or any Vice
President of Learn2.com, certifying as to the
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fulfillment of certain conditions including appropriate certification of
Learn2.com's certificate of incorporation, bylaws and corporate
resolutions.
- Learn2.com shall have obtained all consents and approvals from third
parties or governmental and regulatory authorities in connection with the
execution, delivery and performance by Learn2.com of the merger agreement
and the consummation of the transactions contemplated thereby.
- ViaGrafix shall have been furnished with an opinion of counsel to
Learn2.com mutually acceptable to the parties.
- the shares of Learn2.com common stock to be issued to ViaGrafix
stockholders in the merger shall be listed on The Nasdaq Stock Market and
subject to no restrictions on transfer other than Rule 145 of the
Securities Act promulgated by the SEC.
- Michael A. Webster and Robert E. Webster shall have entered into
employment agreements in the forms attached as Appendices D and E
respectively.
- Michael A. Webster and Robert E. Webster shall have entered into
non-competition agreements in the forms attached as Appendices F and G
respectively.
- Learn2.com shall have entered into an indemnity agreement in the form
attached as Appendix H.
TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE. The merger agreement may be terminated at any time
prior to the closing in any of the following ways:
The merger agreement may be terminated by mutual consent of the boards of
directors of Learn2.com and ViaGrafix.
The merger agreement may be terminated by either Learn2.com or ViaGrafix if:
- the merger is not consummated by December 31, 1999.
- the stockholders of Learn2.com or ViaGrafix do not approve the merger.
- Learn2.com's or ViaGrafix's board of directors fails to make or withdraws
or modifies or changes its recommendation to approve the merger.
- Learn2.com's or ViaGrafix's board of directors determines in good faith,
based upon the written opinion of its outside legal counsel, that the
failure to terminate the merger would constitute a breach of the fiduciary
duties of the board of directors to their respective stockholders under
applicable law.
The merger agreement may be terminated by Learn2.com if the ViaGrafix Board
recommends to the ViaGrafix stockholders, or takes no position with respect to,
a takeover proposal as defined in the merger agreement.
TERMINATION FEES PAYABLE BY VIAGRAFIX. ViaGrafix has agreed to pay
Learn2.com the following cash amount in the following circumstances:
- $5,000,000 if the ViaGrafix Board recommends to the ViaGrafix
stockholders, or takes no position with respect to, a takeover proposal,
as defined in the merger agreement, prior to the closing of the merger.
- $5,000,000 if the ViaGrafix Board fails to make or withdraws or modifies
or changes its recommendation to approve the merger, prior to the closing
of the merger.
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- $1,000,000 if the ViaGrafix stockholders do not approve the merger. (See
"Merger Agreement-- ViaGrafix Voting Agreement").
TERMINATION FEES PAYABLE BY LEARN2.COM. Learn2.com has agreed to pay
ViaGrafix the following cash amount in the following circumstances:
- $5,000,000 if the Learn2.com Board fails to make or withdraws or modifies
or changes its recommendation to approve the merger, prior to the closing
of the merger.
- $1,000,000 if the Learn2.com stockholders do not approve the merger. (See
"Merger Agreement--Learn2.com Voting Agreement").
NO SOLICITATION
ViaGrafix has agreed not to initiate or engage in discussions with another
party regarding a business combination with that party while the merger is
pending. The merger agreement provides that ViaGrafix will not authorize or
permit any of its officers, directors or employees, or any investment banker,
financial advisor, attorney, accountant or other representative retained by it
or any of its subsidiaries to:
- solicit, initiate or encourage, or take any other action to facilitate,
any inquiries or the making of any proposal which constitutes, or may
reasonably be expected to lead to, any takeover proposal, as defined in
the merger agreement.
- negotiate with respect to, agree to or endorse any takeover proposal.
However, prior to the approval of the merger agreement by the ViaGrafix
stockholders, the merger agreement does not prohibit the ViaGrafix Board from
taking and disclosing to its stockholders a position with respect to a tender
offer pursuant to Rules 14d-9 and 14e-2 of the Exchange Act. The merger
agreement also does not prohibit ViaGrafix, upon receipt of an unsolicited bona
fide written takeover proposal, from furnishing information, entering into
discussions and negotiations, recommending a proposal to ViaGrafix stockholders
and taking other actions consistent with the fiduciary obligations of the
ViaGrafix Board if:
- ViaGrafix has not violated any of the restrictions set forth above.
- the ViaGrafix Board, with the exception of Stephen P. Gott, determines in
good faith, after consultation with a nationally recognized investment
banking firm, that the action would result in a more favorable transaction
to the ViaGrafix stockholders.
- the ViaGrafix Board, with the exception of Stephen P. Gott, determines in
good faith, upon advice of outside counsel, that the action is required to
comply with its fiduciary obligations to the ViaGrafix stockholders.
- ViaGrafix promptly advises Learn2.com orally and in writing of any
inquires or proposals and any developments or changes regarding those
inquiries or proposals.
EXPENSES
All costs and expenses incurred in connection with the merger will be paid
by the party incurring the expense, whether or not the merger is consummated.
Expenses incurred in connection with printing and mailing this joint proxy
statement/prospectus will be shared equally by Learn2.com and ViaGrafix.
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AMENDMENTS; WAIVERS
The merger agreement may be amended by the parties at any time by execution
of a written instrument signed on behalf of Learn2.com and ViaGrafix. At any
time prior to the effective time of the merger, any party may, to the extent
legally permitted:
- extend the time for the performance of any of the obligations or other
acts of the other parties to the merger agreement.
- waive any inaccuracies in the representations and warranties made to the
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement.
- waive compliance with any of the agreements or conditions for the benefit
of the party contained in the merger agreement.
TREATMENT OF VIAGRAFIX STOCK OPTIONS UNDER THE 1995 VIAGRAFIX STOCK OPTION PLAN
At the effective time, each outstanding option granted by ViaGrafix to
purchase shares of ViaGrafix common stock shall be exercisable for a number of
shares of Learn2.com common stock determined with reference to the exchange
ratio. The exercise price of the options will also be adjusted to reflect the
exchange ratio in the merger.
LEARN2.COM VOTING AGREEMENT
Concurrently with the execution of the merger agreement, Stephen P. Gott,
President, Chief Executive Officer and Director of Learn2.com, Donald Schupak,
Chairman of the Board of Directors and Director of Learn2.com, Robert Alan
Ezrin, Vice Chairman of the Board of Directors and Director of Learn2.com, Merv
Adelson, Director of Learn2.com, James A. Cannavino, Director of Learn2.com,
Jason R. Roberts, Executive Vice President and Director of Learn2.com, Safa
Alai, Vice President of Engineering of Learn2.com, and Scott Near, Senior Vice
President-Development of Learn2.com, currently the beneficial owners in the
aggregate of 12,911,480 shares of Learn2.com common stock, representing
approximately 32% of the total number of shares of common stock, and 21,061
shares of Series D Preferred Stock, representing approximtely 97% of the total
number of shares of Series D Preferred Stock, entitled to vote at the special
meeting, entered into a voting agreement whereby each agreed to vote the shares
of common stock and Series D Preferred Stock owned by them on the record date
and listed in the voting agreement in favor of the merger agreement. Appendix J
contains the complete terms of the Learn2.com voting agreement.
VIAGRAFIX VOTING AGREEMENT
Concurrently with the execution of the merger agreement, Michael A. Webster,
Chairman of the Board, President and Chief Executive Officer of ViaGrafix, and
Robert E. Webster, Executive Vice President and Secretary of ViaGrafix, the
beneficial owners in the aggregate of 3,045,185 shares of ViaGrafix common
stock, representing approximately 53% of the total number of shares of common
stock entitled to vote at the special meeting, entered into a voting agreement
whereby each agreed to vote their shares of common stock in favor of the merger
agreement. Appendix I contains the complete terms of the ViaGrafix voting
agreement.
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<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Learn2.com Board and the ViaGrafix
Board with respect to the merger, stockholders should be aware that certain
members of the Learn2.com Board, the management of ViaGrafix and certain members
of the ViaGrafix Board may have interests in the merger that may be different
from, or in addition to, the interests of the other stockholders of Learn2.com
and ViaGrafix generally.
STEPHEN P. GOTT
Stephen P. Gott, President, Chief Executive Officer and Director of
Learn2.com, is a Director of ViaGrafix and a holder of 28,500 shares of
ViaGrafix common stock and 17,969 shares of Learn2.com preferred stock which are
convertible into 5,989,786 shares of Learn2.com common stock if approved by the
Learn2.com stockholders. Mr. Gott will retain his current positions at
Learn2.com with the combined company. Mr. Gott abstained from the Learn2.com
Board's and the ViaGrafix Board's vote as to the approval of the merger
agreement.
MICHAEL A. WEBSTER
Michael A. Webster, Chairman of the Board, President and Chief Executive
Officer of ViaGrafix, will enter into an employment agreement with Learn2.com
upon the closing of the merger. Under the agreement, Mr. Webster will be
employed as President of ViaGrafix under the following terms:
- A period of five (5) years, subject to earlier termination for death,
disability, resignation or removal.
- A base salary of $185,000.
- Participation in any company-wide bonus plan that may be adopted by
Learn2.com.
- The grant of an option to purchase 900,000 shares of Learn2.com common
stock at an exercise price equal to the closing sales price of the
Learn2.com common stock on the closing date of the merger.
- The option will vest as to 300,000 shares on each of the second, third and
fourth anniversaries of the closing date of the merger.
- The option will vest immediately upon a change of control, as defined in
Mr. Webster's employment agreement.
- If Mr. Webster resigns his employment for good reason, as defined in Mr.
Webster's employment agreement, or if Learn2.com terminates his employment
without cause, as defined in Mr. Webster's employment agreement, Mr.
Webster will receive nine month's base salary and pro rata vesting of his
option.
- Confidentiality provisions.
- Mr. Webster has agreed to serve as a member of the Learn2.com Board.
A copy of Mr. Webster's employment agreement is attached as Appendix D.
Michael A. Webster will also enter into a non-competition agreement with
Learn2.com on the closing date of the merger. Under the agreement, Mr. Webster
will not compete with Learn2.com for three (3) years from the closing date of
the merger or for two (2) years after the date of termination of his employment
with Learn2.com, whichever is later. During Mr. Webster's non-competition
period, he will not solicit any of the employees or customers of the combined
company. A copy of Mr. Webster's non-competition agreement is attached as
Appendix F.
Michael A. Webster is the brother of Robert E. Webster.
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<PAGE>
ROBERT E. WEBSTER
Robert E. Webster, Executive Vice President and Secretary of ViaGrafix, will
enter into an employment agreement with Learn2.com upon the closing of the
merger. Under the agreement Mr. Webster will be employed as a Vice President of
ViaGrafix under the following terms:
- A period of five (5) years, subject to earlier termination for death,
disability, resignation or removal.
- A base salary of $125,000.
- Participation in any company-wide bonus plan that may be adopted by
Learn2.com.
- The grant of an option to purchase 750,000 shares of Learn2.com common
stock at an exercise price equal to the closing sales price of the
Learn2.com common stock on the closing date of the merger.
- The option will vest as to 250,000 shares on each of the second, third and
fourth anniversaries of the closing date of the merger.
- The option will vest immediately upon a change of control, as defined in
Mr. Webster's employment agreement.
- If Mr. Webster resigns his employment for good reason, as defined in Mr.
Webster's employment agreement, or if Learn2.com terminates his employment
without cause, as defined in Mr. Webster's employment agreement, Mr.
Webster will receive nine month's base salary and pro rata vesting of his
option.
- Confidentiality provisions.
A copy of Mr. Webster's employment agreement is attached as Appendix E.
Robert E. Webster will also enter into a non-competition agreement with
Learn2.com on the closing date of the merger. Under the agreement, Mr. Webster
will not compete with Learn2.com for three (3) years from the closing date of
the merger or for two (2) years after the date of termination of his employment
with Learn2.com, whichever is later. During Mr. Webster's non-competition
period, he will not solicit any of the employees or customers of the combined
company. A copy of Mr. Webster's non-competition agreement is attached as
Appendix G.
Robert E. Webster is the brother of Michael A. Webster.
Austin E. Acuff, Vice President and Retail Sales Manager of ViaGrafix and
Robert C. Moore, Jr., Chief Financial Officer and Treasurer of ViaGrafix, have
been offered continued employment with ViaGrafix after the merger with the
Learn2.com subsidiary.
BOARD OF DIRECTORS
Learn2.com has agreed that, as of the closing, it will cause Michael A.
Webster to be elected to the Learn2.com Board. Mr. Webster has agreed to serve
as a director of Learn2.com.
INDEMNIFICATION ARRANGEMENTS
Under the merger agreement, for a period of six (6) years after the
effective time, Learn2.com agreed that it would not permit any amendment to the
articles of incorporation or bylaws of ViaGrafix which would in any way limit
the indemnification provisions for the ViaGrafix officers and directors as in
effect immediately prior to the effective time of the merger.
Learn2.com has agreed to indemnify, to the extent provided in the form of
indemnity agreement attached hereto as Appendix H, Michael A. Webster, Chairman
of the Board, President and Chief Executive Officer of ViaGrafix, Robert E.
Webster, Executive Vice President and Secretary of
50
<PAGE>
ViaGrafix, and Robert C. Moore, Jr., Treasurer and Chief Financial Officer of
ViaGrafix, with respect to any losses from the action entitled GORDON V.
VIAGRAFIX, ET AL. See "Risk Factors--Class Action" on page 25.
1995 VIAGRAFIX STOCK OPTION PLAN
At the effective time, each outstanding option granted by ViaGrafix to
purchase shares of ViaGrafix common stock will be assumed by Learn2.com and
will, after the effective time, constitute an option to acquire, on the same
terms and conditions as applied to the ViaGrafix stock option prior to the
effective time, the number, rounded down to the nearest whole number, of shares
of Learn2.com common stock determined by multiplying:
- the number of shares of ViaGrafix common stock subject to the option
immediately before the effective time, by
- the exchange ratio.
The exercise price of each of these options will be a price per share of
Learn2.com common stock, rounded up to the nearest cent, equal to:
- the per share exercise price for ViaGrafix common stock that otherwise
could have been purchased under the ViaGrafix stock option divided, by
- the exchange ratio.
51
<PAGE>
INFORMATION ABOUT THE SPECIAL MEETING AND VOTING
The Learn2.com Board is using this joint proxy statement/prospectus to
solicit proxies from the holders of Learn2.com common stock for use at the
Learn2.com special meeting. The ViaGrafix Board is also using this document to
solicit proxies from the holders of ViaGrafix common stock for use at the
ViaGrafix special meeting. We are first mailing this joint proxy
statement/prospectus and accompanying form of proxy to the stockholders of
Learn2.com and ViaGrafix on or about July 22, 1999.
MATTERS RELATING TO THE MEETINGS
<TABLE>
<CAPTION>
LEARN2.COM MEETING VIAGRAFIX MEETING
<S> <C> <C>
TIME, PLACE AND August 23, 1999 August 23, 1999
DATE: 10:00 a.m., Eastern Time 10:00 a.m., Central Time
Le Parker Meridien One American Way
118 West 57th Street Pryor, Oklahoma 74361
New York, New York 10019
PURPOSES OF THE To approve the proposed merger To approve the merger agreement and
SPECIAL MEETING: pursuant to the Agreement and Plan the merger.
of Merger, dated as of June 1,
1999, by and among Learn2.com,
formerly known as 7th Level,
ViaGrafix and a wholly-owned
subsidiary of Learn2.com, including
the related issuance of Learn2.com
common stock.
RECORD DATE: The record date for shares entitled The record date for shares entitled
to vote is July 16, 1999. to vote is July 16, 1999.
OUTSTANDING SHARES As of July 15, 1999, there were As of July 15, 1999, there were
HELD ON RECORD 33,040,864 shares of Learn2.com 5,788,866 shares of ViaGrafix
DATE: common stock and 21,661 shares of common stock outstanding.
Series D Preferred Stock
outstanding.
SHARES ENTITLED TO Shares of Learn2.com common stock Shares of ViaGrafix common stock
VOTE: and Series D Preferred Stock held held at the close of business on
at the close of business on the the record date, July 16, 1999, are
record date, July 16, 1999, are entitled to vote.
entitled to vote.
Each share of Learn2.com common Each share of ViaGrafix common
stock that you own entitles you to stock that you own entitles you to
one vote. one vote.
Each share of Series D Preferred
Stock that you own entitles you to
333.33 votes voting together as a
class with the common stockholders
and as a separate class.
Shares held by Learn2.com in its Shares held by ViaGrafix in its
treasury are not voted. treasury are not voted.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
QUORUM A quorum of stockholders is A quorum of stockholders is
REQUIREMENT: necessary to hold a valid meeting. necessary to hold a valid meeting.
The presence in person or by proxy The presence in person or by proxy
at the meeting of holders of shares at the meeting of holders of shares
representing a majority of the representing one-third of the votes
votes of the Learn2.com common of the ViaGrafix common stock
stock entitled to vote at the entitled to vote at the special
special meeting is a quorum. meeting is a quorum. Abstentions
Abstentions count as present for count as present for establishing a
establishing a quorum. Shares held quorum. Shares held by ViaGrafix in
by Learn2.com in its treasury do its treasury do not count toward a
not count toward a quorum. quorum.
VOTING AGREEMENTS: Holders of approximately 32% of the Holders of approximately 53% of the
voting power of the outstanding outstanding shares of ViaGrafix
shares of Learn2.com common stock common stock have agreed to vote
and approximately 97% of the voting their shares in favor of the merger
power of the outstanding shares of and related transactions under the
Series D Preferred Stock have terms of a voting agreement.
agreed to vote shares owned by them
on the record date in favor of the
merger and related transactions
under the terms of a voting
agreement.
VOTE NECESSARY TO Approval of the merger and the Approval of the merger and the
APPROVE THE merger agreement and related merger agreement requires the
LEARN2.COM AND issuance of stock requires a affirmative vote of a majority of
VIAGRAFIX MERGER: majority of the votes cast at the the outstanding shares of ViaGrafix
special meeting by holders of the common stock. Withheld votes and
Learn2.com common stock and holders abstentions have the same effect as
of the Series D Preferred Stock a vote against.
voting on an as-converted basis
with the common stockholders and as
a separate class. Abstentions have
no effect on the vote.
</TABLE>
PROXIES
VOTING YOUR PROXY. You may vote in person at your special meeting or by
proxy. We recommend you vote by proxy even if you plan to attend your special
meeting. You can always change your vote at the special meeting. Voting
instructions are included on your proxy card. If you properly give your proxy
and submit it to us in time to vote, one of the individuals named as your proxy
will vote your shares as you have directed. You may abstain from voting.
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<PAGE>
HOW TO VOTE BY PROXY
IF YOU SUBMIT YOUR PROXY BUT DO NOT MAKE SPECIFIC CHOICES, YOUR PROXY WILL
FOLLOW THE BOARD OF DIRECTOR'S RECOMMENDATIONS AND VOTE YOUR SHARES:
<TABLE>
<CAPTION>
LEARN2.COM VIAGRAFIX
<S> <C>
"FOR" the Learn2.com merger proposal, "FOR" the ViaGrafix merger proposal
including the related issuance of shares of "FOR" any proposal by the ViaGrafix Board to
Learn2.com common stock adjourn the special meeting
"FOR" any proposal by the Learn2.com Board to
adjourn the special meeting
</TABLE>
54
<PAGE>
REVOKING YOUR PROXY. You may revoke your proxy before it is voted by:
- submitting a new proxy with a later date.
- notifying your company's Secretary in writing before the meeting that you
have revoked your proxy.
- voting in person at the special meeting.
VOTING IN PERSON. If you plan to attend a meeting and wish to vote in
person, we will give you a ballot at the meeting. However, if your shares are
held in the name of your broker, bank or other nominee, you must bring an
account statement or letter from the nominee indicating that you are the
beneficial owner of the shares on July 16, 1999, the record date for voting.
PROXY SOLICITATION FOR LEARN2.COM AND VIAGRAFIX. The cost of soliciting
proxies for Learn2.com and ViaGrafix has been or will be borne by Learn2.com.
Learn2.com and ViaGrafix has engaged the firm of MacKenzie Partners, Inc. as
proxy solicitors. The fee to such firm for solicitation services is estimated to
be $15,000 plus reimbursement of out-of-pocket expenses. In addition, directors,
officers and employees of Learn2.com may solicit proxies personally or by
telephone or other means of communication. Although there is no formal agreement
to do so, arrangements may be made with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy material to their principals,
and Learn2.com may reimburse them for any attendant expenses.
The extent to which these proxy soliciting efforts will be necessary depends
entirely upon how promptly proxies are submitted. You should send in your proxy
by mail without delay. We also reimburse brokers and other nominees for their
expenses in sending these materials to you and getting your voting instructions.
ViaGrafix stockholders should not send in any stock certificates now.
Learn2.com will mail transmittal forms with instructions for the surrender of
stock certificates for ViaGrafix common stock to former ViaGrafix stockholders
as soon as practicable after the completion of the merger.
ADJOURNMENTS
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the special meeting. Neither of us
currently intends to seek an adjournment of our special meeting.
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<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The rights of ViaGrafix stockholders under Oklahoma law, the ViaGrafix
charter and the ViaGrafix bylaws prior to the merger are substantially the same
as the rights Learn2.com stockholders will have following the merger under
Delaware law, the Learn2.com charter and the Learn2.com bylaws, with certain
principal exceptions summarized in the chart below. Copies of the ViaGrafix
charter, the ViaGrafix bylaws, the Learn2.com charter and the Learn2.com bylaws
are publicly available and will be sent to holders of shares of ViaGrafix common
stock upon request. See "Where You Can Find More Information" on page 115. The
summary contained in the following chart is not intended to be complete and is
qualified by reference to Oklahoma law, Delaware law, the ViaGrafix charter, the
ViaGrafix bylaws, the Learn2.com charter and the Learn2.com bylaws.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF VIAGRAFIX STOCKHOLDERS
AND RIGHTS THOSE STOCKHOLDERS WILL HAVE AS LEARN2.COM STOCKHOLDERS FOLLOWING
THE MERGER
<TABLE>
<CAPTION>
LEARN2.COM STOCKHOLDER RIGHTS VIAGRAFIX STOCKHOLDER RIGHTS
-------------------------------------------- --------------------------------------------
<S> <C> <C>
CORPORATE The rights of Learn2.com stockholders are The rights of ViaGrafix stockholders are
GOVERNANCE: currently governed by Delaware law and the currently governed by Oklahoma law and the
charter and bylaws of Learn2.com. charter and bylaws of ViaGrafix.
Upon completion of the merger, the rights of Upon completion of the merger, the rights of
Learn2.com stockholders will continue to be ViaGrafix stockholders who become Learn2.com
governed by Delaware law, the Learn2.com stockholders will be governed by Delaware
charter and the Learn2.com bylaws. law, the Learn2.com charter and the
Learn2.com bylaws.
AUTHORIZED CAPITAL The authorized capital stock of Learn2.com The authorized capital stock of ViaGrafix
STOCK: consists of 100 million shares of common consists of 40 million shares of common
stock and 100,000 shares of preferred stock. stock and 10 million shares of preferred
stock.
NUMBER OF Learn2.com's bylaws provide that the ViaGrafix's bylaws provide that the
DIRECTORS: Learn2.com Board consist of not more than 7 ViaGrafix Board consist of not less than 3
directors. The Learn2.com Board currently and not more than 9 directors. The ViaGrafix
consists of 6 directors. Michael A. Webster Board currently consists of 5 directors.
will join the Learn2.com Board following the
merger.
ABILITY TO CALL Special meetings of Learn2.com may be called Special meetings of ViaGrafix may be called
STOCKHOLDERS' by the Chief Executive Officer, the by the President, a majority of the
SPECIAL MEETINGS: President, the Learn2.com Board, or the ViaGrafix Board or by stockholders owning a
stockholders entitled to cast at least majority of the outstanding shares of
one-fifth of the votes which all ViaGrafix common stock.
stockholders are entitled to cast.
</TABLE>
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<PAGE>
DESCRIPTION OF LEARN2.COM CAPITAL STOCK
The following summary of the terms of the capital stock of Learn2.com is not
intended to be complete and is qualified by reference to the Learn2.com charter
and Learn2.com bylaws. Copies of the Learn2.com charter and Learn2.com bylaws
will be sent to holders of shares of Learn2.com common stock upon request. See
"Where You Can Find More Information" on page 115.
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Learn2.com presently consists of 100 million
shares of common stock and 100,000 shares of preferred stock.
LEARN2.COM COMMON STOCK
Each outstanding share of Learn2.com common stock entitles the holder to one
vote, either in person or by proxy, on each matter presented to the Learn2.com
stockholders for a vote. Holders of Learn2.com common stock are entitled to
receive ratably such distributions as may be declared on the Learn2.com common
stock by the Learn2.com Board in its discretion from funds legally available
therefor. In the event of the liquidation, dissolution or winding up of
Learn2.com, holders of Learn2.com common stock are entitled to share ratably in
all assets remaining after payment of all debts and other liabilities subject to
the rights of holders of Learn2.com preferred stock. Holders of Learn2.com
common stock have no subscription, redemption, conversion or preemptive rights.
Matters submitted for stockholder approval generally require authorization by a
majority of the votes cast by the holders of shares entitled to vote thereon,
unless a greater vote is required by Learn2.com's charter or other provisions of
Delaware law. Holders of Learn2.com common stock have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding
Learn2.com common stock have the ability to elect all of the directors. The
outstanding shares of Learn2.com common stock are, and the Learn2.com common
stock to be issued in the merger will be, validly issued, fully paid and
nonassessable.
LEARN2.COM PREFERRED STOCK
Learn2.com's charter authorizes the Learn2.com Board, without stockholder
approval, to cause Learn2.com to issue from time to time, in one or more series,
Learn2.com preferred stock with such designations, preferences and relative
rights as shall be prescribed by resolution of the Learn2.com Board. The
Learn2.com Board is authorized to determine the privileges and restrictions
granted to, and imposed upon, each series of Learn2.com preferred stock and to
fix the number of shares of any series of Learn2.com preferred stock. The
Learn2.com Board, by its approval of certain series of Learn2.com preferred
stock, could adversely affect the voting power or other rights of the holders of
Learn2.com common stock, and, by issuing Learn2.com preferred stock with certain
voting, conversion, redemption rights or other terms, could delay, discourage or
make more difficult changes of control or management of Learn2.com, without any
action of the holders of the Learn2.com common stock.
SERIES D PREFERRED STOCK. In connection with the Street Technologies
merger, Learn2.com issued 21,611 shares of Learn2.com Series D Preferred Stock.
Each share of Series D Preferred Stock has a liquidation preference of $1,000.00
and, upon approval by the Learn2.com stockholders, will automatically be
converted into shares of Learn2.com common stock at a conversion price of $3.00
per share.
Holders of Series D Preferred Stock are entitled to vote, together with the
common stockholders, as one class and their own separate class on all matters
submitted to a stockholder vote, except with regard to the conversion of the
Series D Preferred Stock. Each share of Series D Preferred Stock entitles the
holder to 333.33 votes.
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<PAGE>
Learn2.com agreed to recommend to the Learn2.com stockholders the approval
of the conversion of the Series D Preferred Stock at Learn2.com's Annual Meeting
of Stockholders on July 28, 1999 and at each meeting of Learn2.com stockholders
thereafter until the conversion is approved. As of June 21, 1999, there were
21,661 shares of Series D Preferred Stock which would be converted into
7,220,323 shares of Learn2.com common stock and options and warrants to purchase
4,907 shares of Series D Preferred Stock which would be exercisable for
1,635,355 shares of Learn2.com common stock.
If the proposal to approve the conversion of the Series D Preferred Stock is
not approved, then the Series D Preferred Stock would remain duly authorized and
outstanding and those stock options and warrants exercisable for Series D
Preferred Stock will remain. As a result, the current holders of the Series D
Preferred Stock and holders of stock options and warrants who exercise their
options for shares of Series D Preferred Stock would be entitled to:
- a special participation right, whereby holders would be paid an aggregate
amount equal to 22% of all dividends and distributions payable with
respect to the Learn2.com common stock.
- a right to nominate one-third of the Learn2.com Board commencing February
19, 2000 and a majority of the Learn2.com Board commencing February 19,
2001.
In addition, if the proposed conversion and issuance of common stock is not
approved, dividends on the Series D Preferred Stock, which accrue at a rate of
8% per annum, will accrue from February 19, 1999 instead of July 31, 1999. The
Learn2.com Board believes that the Learn2.com stockholders will approve the
conversion of the Series D Preferred Stock on July 28, 1999 which would result
in the elimination of the Series D Preferred Stock and the foregoing rights.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Learn2.com common stock is Securities
Transfer Corporation.
58
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
present the effects of the proposed merger between Learn2.com and ViaGrafix as a
pooling of interests. The unaudited pro forma condensed combined balance sheet
presents the combined financial position of Learn2.com and ViaGrafix as of March
31, 1999 assuming that the proposed merger had occurred as of that date. Such
pro forma information is based upon the supplementary historical consolidated
balance sheet data of Learn2.com and the historical consolidated balance sheet
data of ViaGrafix as of that date. The unaudited pro forma condensed combined
statements of operations give effect to the proposed merger of Learn2.com and
ViaGrafix by combining the supplementary results of operations of Learn2.com for
the three months ended March 31, 1999 and 1998 and for each of the two years
ended December 31, 1998 and 1997 with the results of operations of ViaGrafix for
the same respective periods, on a pooling of interests basis. The unaudited pro
forma condensed combined statement of operations for the year ended December 31,
1996 gives effect to the proposed merger by combining the results of operations
of Learn2.com with ViaGrafix for that year, as a pooling of interests. Certain
amounts in the historical consolidated financial statements of ViaGrafix,
included in these pro formas, have been reclassified to conform to the
presentation of Learn2.com. Additionally, the unaudited pro forma condensed
combined statements of operations reflect the acquisition by Learn2.com of
Street Technologies and Panmedia as if such acquisitions had occurred on January
1, 1998 and January 1, 1997 respectively. The results of operations for Panmedia
for the year ended December 31, 1996 are not included in the pro forma condensed
combined financial statements as they were immaterial to the consolidated
results of Learn2.com for the respective period.
During May 1999, Learn2.com completed the acquisition of Panmedia in a
transaction accounted for as a pooling of interests. Under the terms of that
agreement Learn2.com issued approximately 1.5 million shares of Learn2.com
common stock for the outstanding shares of Panmedia. The supplementary
historical consolidated financial statements reflect the acquisition, on a
pooling of interests basis, as if Panmedia was a wholly-owned subsidiary of
Learn2.com since its inception. During February 1999, Learn2.com acquired Street
Technologies in a transaction accounted for as a purchase. The aggregate
purchase price of Street was approximately $40.3 million.
The unaudited pro forma condensed combined financial statements are based on
the estimates and assumptions set forth in the notes to such statements, which
are preliminary and have been made solely for purposes of developing such pro
forma information. The information has been prepared in accordance with the
rules and regulations of the SEC and is provided for comparative purposes only.
The pro forma information does not purport to be indicative of the results that
actually would have occurred had the merger been effected on January 1 of the
years presented.
Learn2.com and ViaGrafix estimate that they will incur direct transaction
costs of approximately $1.2 million in connection with the proposed merger of
Learn2.com with ViaGrafix which will be charged to operations in the quarter in
which the merger is consummated. These amounts are preliminary estimates and are
therefore subject to change. Learn2.com may incur additional charges in
subsequent quarters to reflect costs associated with the proposed merger.
These unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical supplementary consolidated financial
statements and notes thereto of Learn2.com and the audited historical
consolidated financial statements of ViaGrafix and other financial information
pertaining to Learn2.com and ViaGrafix including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors"
included herein.
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LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
UNAUDITED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SUPPLEMENTARY
HISTORICAL HISTORICAL PRO FORMA
LEARN2.COM VIAGRAFIX ADJUSTMENTS COMBINED
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 10,875 $ 8,468 $ -- $ 19,343
Short--term investments............... -- 3,000 -- 3,000
Accounts receivable, net.............. 1,391 4,215 (36)(a) 5,570
Inventories........................... -- 2,047 -- 2,047
Prepaid expenses and other current
assets.............................. 525 1,300 (412)(d) 1,413
------------- ---------- ----------- ---------
Total current assets................ 12,791 19,030 (448) 31,373
Fixed assets, net..................... 480 3,177 -- 3,657
Capitalized software, net............. 15,132 131 -- 15,263
Intangible assets, net................ 3,491 118 -- 3,609
Goodwill, net......................... 9,763 84 -- 9,847
Deferred income taxes................. -- 435 (435)(d) --
Note receivable -- officer............ -- 185 -- 185
Other assets.......................... 122 465 (465)(a) 122
------------- ---------- ----------- ---------
Total assets........................ $ 41,779 $23,625 $(1,348) $ 64,056
------------- ---------- ----------- ---------
------------- ---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..... $ 29 $ -- $ -- $ 29
Current portion of deferred revenue... 2,109 -- (86)(a) 2,023
Accounts payable...................... 558 1,611 (36)(a) 2,133
Notes payable......................... -- 105 -- 105
Accrued expenses and other current
liabilities......................... 3,981 341 -- 4,322
------------- ---------- ----------- ---------
Total current liabilities........... 6,677 2,057 (122) 8,612
Deferrred revenue..................... 1,050 -- (43)(a) 1,007
Minority interest in subsidiary....... -- 29 -- 29
Other................................. 34 -- -- 34
Stockholders' equity
Series D Preferred Stock.............. -- -- -- --
Common stock.......................... 326 58 107(c) 491
Additional paid-in capital............ 134,030 19,755 (107)(c) 153,678
Notes and accounts receivable from
directors........................... (1,934) -- -- (1,934)
Unearned compensation................. -- (96) -- (96)
Retained earnings..................... (98,404) 1,822 (1,183)(a)(d) (97,765)
------------- ---------- ----------- ---------
Total stockholders' equity............ 34,018 21,539 (1,183) 54,374
------------- ---------- ----------- ---------
Total liabilities and stockholders'
equity............................ $ 41,779 $23,625 $(1,348) $ 64,056
------------- ---------- ----------- ---------
------------- ---------- ----------- ---------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTARY
HISTORICAL HISTORICAL HISTORICAL PRO FORMA
LEARN2.COM STREET VIAGRAFIX ADJUSTMENTS COMBINED
------------- ---------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net revenues.......................... $ 1,025 $ 245 $ 7,345 $ (72)(a) 8,543
Cost of revenues...................... 186 42 1,863 (50)(a) 2,041
------------- ---------- ---------- ------- ---------
Gross profit............................ 839 203 5,482 (22) 6,502
OPERATING EXPENSES:
Research and product development...... 592 299 530 -- 1,421
Sales and marketing................... 515 257 4,814 -- 5,586
General and administrative............ 747 161 854 -- 1,762
Depreciation and amortization......... 379 83 336 138(a)(b) 936
Acquired in-process technology........ 9,677 -- -- -- 9,677
Restructuring charges................. 2,493 -- -- -- 2,493
------------- ---------- ---------- ------- ---------
Total operating expenses................ 14,403 800 6,534 138 21,875
Interest (expense) income............... (41) 7 114 -- 80
Provision (benefit) for taxes........... -- -- (387) -- (387)
------------- ---------- ---------- ------- ---------
Net loss................................ $ (13,605) $ (590) $ (551) $ (160) $ (14,906)
------------- ---------- ---------- ------- ---------
------------- ---------- ---------- ------- ---------
Net loss per share basic and diluted.... $ (0.47) $ (0.38)
------------- ---------
------------- ---------
Weighted average common shares
outstanding, basic and diluted........ 28,708 39,487
------------- ---------
------------- ---------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
61
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------
SUPPLEMENTARY
HISTORICAL STREET VIAGRAFIX PRO FORMA
LEARN2.COM HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net revenues................ $ 2,674 $4,683 $ 18,750 $ (866)(a) $ 25,241
Cost of revenues............ 472 312 4,545 (247)(a) 5,082
------------- ---------- ---------- ------- ----------
Gross profit.................. 2,202 4,371 14,205 (619) 20,159
OPERATING EXPENSES:
Research and product
development............... 2,396 1,722 1,697 -- 5,815
Sales and marketing......... 595 852 8,361 -- 9,808
General and
administrative............ 5,326 955 2,294 -- 8,575
Depreciation and
amortization.............. 1,822 574 734 1,361(a)(b) 4,491
------------- ---------- ---------- ------- ----------
Total operating expenses...... 10,139 4,103 13,086 1,361 28,689
Other (expense) income........ (2,674) 86 481 -- (2,107)
------------- ---------- ---------- ------- ----------
Income before income taxes.... (10,611) 354 1,600 (1,980) (10,637)
Provision for income taxes.... -- -- 354 -- 354
------------- ---------- ---------- ------- ----------
Net (loss) income............. (10,611) 354 1,246 (1,980) (10,991)
Dividends on preferred
stock....................... 338 -- -- -- 338
Beneficial conversion feature
in association with
Preferred Stock............. 5,479 -- -- -- 5,479
------------- ---------- ---------- ------- ----------
Net (loss) income available to
common shareholders......... $ (16,428) $ 354 $ 1,246 $ (1,980) $ (16,808)
------------- ---------- ---------- ------- ----------
------------- ---------- ---------- ------- ----------
Net loss per share, basic and
diluted..................... $ (0.92) $ (0.51)
------------- ----------
------------- ----------
Weighted average common shares
outstanding, basic and
diluted..................... 17,899 33,258
------------- ----------
------------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
62
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDING MARCH 31, 1998
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTARY
HISTORICAL HISTORICAL HISTORICAL PRO FORMA
LEARN2.COM STREET VIAGRAFIX ADJUSTMENTS COMBINED
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net revenues.................... $ 598 $ 277 $ 4,077 $ -- $ 4,952
Cost of revenues................ 109 22 974 -- 1,105
----------- ----------- ---------- ----------- ----------
Gross Profit...................... 489 255 3,103 3,847
OPERATING EXPENSES:
Research and product
development................... 825 468 372 -- 1,665
Sales and marketing............. 295 191 1,623 -- 2,109
General and administrative...... 1,127 208 316 -- 1,651
Depreciation and amortization... 568 -- 86 427(b) 1,081
----------- ----------- ---------- ----------- ----------
Total operating expenses.......... 2,815 867 2,397 427 6,506
Other (expense) income............ (157) 12 2 -- (143)
Provision (benefit) for income
taxes........................... -- -- 171 -- 171
----------- ----------- ---------- ----------- ----------
Net (loss) income................. $ (2,483) $ (600) $ 537 $ (427) $ (2,973)
----------- ----------- ---------- ----------- ----------
----------- ----------- ---------- ----------- ----------
Net loss per share, basic and
diluted......................... $ (0.16) $ (0.10)
----------- ----------
----------- ----------
Weighted average common shares
outstanding, basic and
diluted......................... 15,328 28,398
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
63
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTARY
HISTORICAL VIAGRAFIX PRO FORMA
LEARN2.COM HISTORICAL COMBINED
----------- --------- ----------
<S> <C> <C> <C>
REVENUES:
Net revenues......................................... $ 10,807 $ 13,694 $ 24,501
Cost of revenues..................................... 4,650 3,042 7,692
----------- --------- ----------
Gross profit........................................... 6,157 10,652 16,809
OPERATING EXPENSES:
Research and product development..................... 14,470 1,162 15,632
Sales and marketing.................................. 5,885 4,874 10,759
General and administrative........................... 5,366 1,207 6,573
Depreciation and amortization........................ 4,181 319 4,500
----------- --------- ----------
Total operating expenses............................... 29,902 7,562 37,464
Other (expense) income................................. 1,333 (251) 1,082
----------- --------- ----------
Net loss before provision for income taxes............. (22,412) 2,839 (19,573)
Provision for income taxes............................. -- 816 816
----------- --------- ----------
Net (loss) income...................................... $ (22,412) $ 2,023 $ (20,389)
----------- --------- ----------
----------- --------- ----------
Net loss per share, basic and diluted.................. $ (1.47) $ (0.91)
----------- ----------
----------- ----------
Weighted average common shares, basic and diluted...... 15,241 22,365
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
64
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1996
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL VIAGRAFIX PRO FORMA
LEARN2.COM HISTORICAL COMBINED
----------- --------- ----------
<S> <C> <C> <C>
REVENUES:
Net revenues......................................... $ 20,549 $ 10,077 $ 30,626
Cost of revenues..................................... 8,299 2,614 10,913
----------- --------- ----------
Gross profit........................................... 12,250 7,463 19,713
OPERATING EXPENSES:
Research and product development..................... 21,402 467 21,869
Sales and marketing.................................. 11,409 3,706 15,115
General and administrative........................... 4,828 1,205 6,033
Depreciation and amortization........................ 119 685 804
----------- --------- ----------
Total operating expenses............................... 37,758 6,063 43,821
Other (expense) income................................. 1,256 (262) 994
----------- --------- ----------
Net loss before provision for income taxes............. (24,252) 1,138 (23,114)
Provision for income taxes............................. -- 463 463
----------- --------- ----------
Net (loss) income...................................... $ (24,252) $ 675 $ (23,577)
----------- --------- ----------
----------- --------- ----------
Net loss per share, basic and diluted.................. $ (1.80) $ (1.15)
----------- ----------
----------- ----------
Weighted average common shares, basic and diluted...... 13,442 20,514
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
65
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1
The unaudited pro forma condensed combined financial statements of
Learn2.com and ViaGrafix give retroactive effect to the proposed merger of
Learn2.com and ViaGrafix, which is being accounted for as a pooling of interests
and, as a result, the unaudited pro forma condensed combined balance sheet and
statements of operations are presented as if Learn2.com and ViaGrafix had been
combined for all periods presented. The accompanying unaudited pro forma
condensed combined statements of operations give effect to the acquisition by
Learn2.com on February 16, 1999 of Street Technologies as of January 1, 1998
because the acquisition has been accounted for as a purchase. During May 1999,
Learn2.com completed the acquisition of Panmedia. As such the Learn2.com
historical financial information reflects the combined financial position and
results of operations as if Learn2.com and Panmedia were combined since
inception because this acquisition has been accounted for as a pooling of
interests.
The unaudited pro forma condensed combined financial statements, including
the notes thereto, should be read in conjunction with the historical
supplementary consolidated financial statements and related notes of Learn2.com
and the historical consolidated financial statements of ViaGrafix included
elsewhere in this document. Certain amounts from the ViaGrafix historical
consolidated financial statements have been reclassified to conform with
Learn2.com's historical classifications.
NOTE 2
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of the incremental common shares issuable upon
conversion of the convertible preferred stock (using the if-converted method)
and shares issuable upon exercise of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computations as their effect for the periods presented is anti-dilutive. For the
year ended December 31, 1998 and the three months ended March 31, 1998 the pro
forma loss per share is computed by adding Learn2.com supplementary historical
weighted average shares outstanding and the shares issued by Learn2.com for the
acquisition of Street Technologies to ViaGrafix historical weighted average
shares outstanding converted to give effect to the exchange ratio of 1.846 to 1.
For the year ended December 31, 1997 and 1996 the pro forma loss per share is
computed by adding Learn2.com supplementary historical weighted average shares
outstanding to ViaGrafix historical weighted average shares outstanding
converted to give effect to the exchange ratio of 1.846 to 1.
NOTE 3
The following pro forma adjustments have been made to the historical
financial statements of Learn2.com and ViaGrafix. These adjustments are based
upon preliminary estimates and assumptions made by management for purposes of
preparing the unaudited pro forma condensed combined financial statements:
(a) To record the elimination of the effects of transactions during 1998 and the
three months ended March 31, 1999 and March 31, 1998 between Learn2.com and
ViaGrafix pursuant to certain agreements.
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<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 (CONTINUED)
(b) Street Technologies was acquired in February 1999 and the transaction was
accounted for using purchase accounting. As a result, the pro forma combined
condensed statement of operations for the year ended December 31, 1998 and
for the three months ended March 31, 1999 (unaudited) and 1998 have been
prepared as if such transaction had been effective as of the beginning of
each of these three periods. These adjustments record additional
amortization expenses of approximately $1,708,000, $218,000 and $427,000,
respectively related to assets acquired and goodwill recorded in that
transaction.
(c) Gives effect to the issuance of approximately 10,700,000 shares of common
stock in connection with the proposed merger.
(d) To record a full valuation allowance against ViaGrafix's deferred tax asset.
67
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Learn2.com and ViaGrafix should be read in conjunction with the
Learn2.com and ViaGrafix consolidated financial statements and the related notes
to those financial statements included elsewhere in this joint proxy
statement/prospectus. This document contains forward-looking statements that
involve risks and uncertainties. Learn2.com's and ViaGrafix's actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" beginning on page 15 and elsewhere in this joint proxy
statement/ prospectus.
On July 14, 1999, we changed our Company's name to Learn2.com, Inc. We made
the change in order to create a single brand and to more closely align our
corporate identity with our product offerings.
LEARN2.COM
OVERVIEW
Learn2.com, Inc. was founded in 1993 with the goal of becoming a leading
developer and publisher of interactive entertainment and educational products as
well as a creator of state of the art tools and technologies. In 1998, our
research and development activities were focused primarily on developing and
enhancing our Agent7-TM- technology. Learn2.com recognized that appropriate
applications of this technology were in the delivery of learning, education and
enhanced communications. To strengthen Learn2.com's position in the marketplace,
it searched for a viable and complementary partner with the appropriate
technological assets, distribution channel and management expertise and
abandoned its interactive entertainment business.
On February 16, 1999, Learn2.com acquired all of the outstanding stock of
Street Technologies, Inc, a privately held company, and changed the name of
Street Technologies to 7th Street.com, Inc. 7th Street.com markets and develops
technology based training solutions delivered over intranets and the Internet.
The total value of the transaction was approximately $40.3 million including
$3.3 million of assumed liabilities which were primarily deferred revenue and
was accounted for using the purchase method of accounting, and accordingly, the
assets and liabilities were recorded based upon their fair values at the date of
acquisition. Learn2.com recorded approximately $13.4 million in goodwill and
other intangible assets, which are being amortized on a straight-line basis over
periods of seven to twenty years and wrote-off approximately $9.7 million of
acquired in-process technology.
On May 13, 1999, Learn2.com acquired all of the outstanding stock of
Panmedia Corporation, a privately held company. Panmedia produces a website
which offers a wide spectrum of step-by-step instructions on skills, activities
and tasks. The total value of the transaction was approximately $9.7 million and
was accounted for as a pooling of interests.
Learn2.com's reported results of operations for all periods prior to
February 16, 1999, do not reflect the results of Street Technologies.
Consequently, the results prior to February 16, 1999 and Learn2.com's balance
sheet at December 31, 1998 are not reflective of the operations and financial
position of Learn2.com as presently constituted.
Learn2.com plans to significantly increase its operating expenses to
increase its research and product development and sales and marketing
operations, to help attain its goal of being the world's leading provider of
Internet and network delivered learning, training and education. Learn2.com may
be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. If Learn2.com has a shortfall in revenues in relation to expenses, or
if Learn2.com's expenses exceed its revenues, then Learn2.com's business,
results of operations and financial condition could be materially and
68
<PAGE>
adversely affected. As a result of these factors, Learn2.com may incur losses on
a quarterly and annual basis for the foreseeable future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED DECEMBER 31, 1998,
DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES
Revenues increased $294,000 from $462,000 to $756,000 for the three months
ended March 31, 1999 primarily resulting from the addition of 7th Street.com's
revenues to Learn2.com's revenues from the period subsequent to the merger date.
In 1999, approximately 69% of total revenues were related to 7th Street.com and
the remaining 31% was attributed to the operations of Learn2.com. The revenues
in 1998 were primarily from royalties while the revenues in 1999 were primarily
from technology licenses and content sales.
In August 1997, Learn2.com announced a new strategy to leverage its existing
core technology and to transition from being a self-funded content developer and
publisher to position itself as a supplier of custom solutions and services,
tools and technology. Learn2.com's strategy change in 1997 impacted its
operations in 1998. Net revenues decreased 85% to $1.6 million for the year
ended December 31, 1998 compared to $10.5 million for the year ended December
31, 1997. The 85% decrease in net revenues reflects the shift in business
strategy. In 1998, product sales related to Agent7 were approximately 12% of net
revenues. The remaining 88% was from various sources including royalty streams
from the discontinued game business and reversals of prior period returns and
price protection allowances in excess of actual returns and price protections.
In contrast, during 1997, all of the revenue was associated with the game
business. In 1997, product sales constituted approximately 40% of net revenue.
The remaining 60% was from other sources, including the sale of a title in the
final stages of development, Dominion, for $1.8 million, non-refundable advance
royalties of $1.5 million for Python titles, and approximately $1.2 million from
Microsoft for development and initial royalties on the Barney Actimates titles.
Sales to customers outside of the United States were 25% and 20% of net revenue
in 1998 and 1997, respectively.
Learn2.com's strategy change in 1997 impacted its operations. Net revenues
decreased 49% to $10.5 million for the year ended December 31, 1997 compared to
$20.6 million for the year ended December 31, 1996. In 1997, product sales
constituted approximately 40% of net revenue. The remaining 60% was from other
sources, including the sale of a title in the final stages of development,
Dominion, for $1.8 million, non-refundable advance royalties of $1.5 million for
Python titles, and approximately $1.2 million from Microsoft for development and
initial royalties on the Barney Actimates titles. In contrast, approximately 50%
of 1996 net revenues came from product sales and the remaining 50% was from
licensing, OEM or Original Equipment Manufacturer, and development contracts.
Sales to customers outside of the United States in 1997 were similar to 1996 and
approximated 23% of net revenue.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 1999 was $119,000 or
16% of net revenues compared to $85,000 or 18% of net revenues for the three
months ended March 31, 1998. The decrease in 1999 as a percentage of net
revenues is primarily due to the change in the composition of revenues.
For the year ended December 31, 1998, cost of revenues was $233,000 or 15%
of net revenues. During 1998 cost of revenues consisted primarily of royalties
and development. Cost of revenues for the year ended December 31, 1997 was $4.5
million or 43% of net revenue, including product
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<PAGE>
development, manufacturing, and royalties and licensing. The total cost of
revenues as a percentage of net revenues fluctuated from year to year as a
result of significant differences in the make up of the revenue. We expect
fluctuations in gross margin in the future as changes occur in the composition
of the revenues and the associated cost of revenues.
Cost of revenues for the year ended December 31, 1997 was $4.5 million or
43% of net revenue, including product development, manufacturing, and royalty
and licensing costs of $1.6 million, $1.2 million and $1.7 million,
respectively. For the year ended December 31, 1996, cost of revenues was $8.3
million or 40% of net revenues. Although the total cost of revenues as a
percentage of net revenues was comparable between years, the 1997 revenues from
the sale of Dominion and advance royalties for Python referred to above had a
very low associated cost which was offset by a much higher relative cost of
revenues associated with the development contracts.
RESEARCH DEVELOPMENT AND EXPENSES
Research and product development expenses were $559,000 and $817,000 for the
three months ended March 31, 1999 and 1998, respectively. Research and product
development costs decreased 32% in 1999 due primarily to lower headcount and
related cost structure at Learn2.com.
Research and product development expenses were $2.3 million and $14.4
million for the years ended December 31, 1998 and 1997, respectively. Research
and product development costs decreased in 1998 as Learn2.com continued to
reduce headcount and related expenditures. Approximately $700,000 related to the
closing of the international localization studios is included in the 1997
amount. During 1998, Learn2.com completed this process and reversed $250,000 in
over accruals. Research and production development expenses decreased 84% in
1998, excluding the one-time closing expenses recorded in 1997. In 1998,
research and product development expenses included $1.4 million for production
expenses and $900,000 for software research and development expenses. Research
and product development expenses for 1997 included $5.2 million of production
expenses, $4.0 million for software research and development and $5.2 million
for expenses of the companies acquired in 1995 and 1996 and closed or sold
during 1997. Because a large portion of the 1997 staffing cuts in connection
with the change in the strategic direction of Learn2.com was implemented late in
the year and continued into 1998, the benefit was not fully realized until 1998.
Research and product development expenses were $14.4 million and $19.6
million for the years ended December 31, 1997 and 1996, respectively. Research
and product development costs decreased in 1997 as we reduced headcount and
related expenditures. Approximately $700,000 related to the closing of the
international localization studios is included in the 1997 amount. Research and
production development expenses decreased 27% in 1997, excluding the one-time
closing expenses, compared to 1996. Research and product development expenses
for 1997 included $5.2 million of production expenses, $4.0 million for software
research and development and $5.2 million for expenses of the companies acquired
in 1995 and 1996 to provide expertise in the development of 3D technology and
graphics design and to provide the capabilities needed to expand into the Asia
Pacific market.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $442,000 and $272,000 for the three months
ended March 31, 1999 and 1998, respectively. Sales and marketing expenses
increased $170,000 or 63% for the three months ended March 31, 1999 primarily
due to the addition of 7th Street.com's sales and marketing staff.
Sales and marketing expenses were $420,000 and $5.8 million for the years
ended December 31, 1998 and 1997, respectively. Sales and marketing expenses for
1998 included $7,000 of expenses for advertising, marketing and public relations
and $413,000 of expenses related to internal staffing. Included in the 1997
amount is approximately $965,000 related to the closing of our international
sales
70
<PAGE>
offices. The 1997 expenses included $2.1 million of expenses for advertising,
marketing and public relations and $3.7 million of expenses related to internal
staffing. Excluding costs for closing Learn2.com's international sales offices,
sales and marketing expenses decreased approximately $5.4 million or 93% in 1998
compared to 1997. As a percentage of net revenues, sales and marketing expenses
related to internal staffing decreased to 27% in 1998 from 56% in 1997.
Sales and marketing expenses were $5.8 million and $11.3 million for the
years ended December 31, 1997 and 1996, respectively. Included in the 1997
amount is approximately $965,000 related to the closing of our international
sales offices. Sales and marketing expenses for 1997 included $2.1 million of
expenses for advertising, marketing and public relations and $3.7 million of
expenses related to internal staffing. For 1996, expenses of $6.3 million for
advertising, marketing and public relations and $5.0 million related to internal
staffing were incurred. Sales and marketing expenses decreased approximately
$5.4 million or 48% in 1997 compared to 1996. As a percentage of net revenues,
sales and marketing expenses related to internal staffing increased to 35% in
1997 from 25% in 1996. However, the advertising, marketing and public relations
expenses decreased to 23% from 31% as a percentage of net revenues in 1997
compared to 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $701,000 and $1.1 million for the
three months ended March 31, 1999 and 1998, respectively. General and
Administrative expenses decreased $399,000 or 37% for the three months ended
March 31, 1999 primarily due to lower headcount and related cost structure at
the newly merged company.
General and administrative expenses for the year ended December 31 , 1998
were $5.1 million compared with $5.3 million for the year ended December 31,
1997. Approximately $1.4 million of the 1998 total is attributable to stock
grants to two of Learn2.com's directors. Additionally, Learn2.com incurred
higher legal and professional fees in 1998 that also contributed to the general
and administrative fees continuing to remain almost unchanged compared to the
1997 amounts.
General and administrative expenses for the year ended December 31, 1997
were $5.3 million compared with $4.3 million for the year ended December 31,
1996. Approximately $400,000 of the increase of $1.0 million is associated with
expenses related to employee resignations in the first quarter of 1997.
Additionally, Learn2.com incurred higher legal and professional fees in 1997
which contributed to the increase in general and administrative expenses
compared to 1996.
RESTRUCTURING CHARGES
Restructuring charges related to the acquisition of 7thStreet.com were $2.5
million for the three months ended March 31, 1999. The charges were comprised of
the following: $1.4 million to the write-off of redundant assets, $493,000
excess office space and other costs, and $600,000 in employee severance costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $374,000 and $565,000 for the
three months ended March 31, 1999 and 1998, respectively. Depreciation and
amortization expenses decreased $191,000 or 34% for the three months ended March
31, 1999 primarily due to lower fixed assets in 1999 as a result of the
write-off of approximately $1.4 million of fixed assets. The 1999 expenses
included $135,000 of depreciation on fixed assets, $35,000 of amortization of
computer software and $204,000 of amortization on goodwill and intangible assets
related to the acquisition of 7thStreet.com. The 1998 expenses related primarily
to depreciation and amortization on fixed assets.
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<PAGE>
In connection with the acquisition of 7thStreet.com, Learn2.com allocated
$9.7 million of the purchase price to acquired in-process technology.
Accordingly, these costs were expensed as of the acquisition date. The amount
allocated to acquired in-process technology relates to projects that had not yet
reached technological feasibility and that, until completion of development, had
no alternative future use. The technologies acquired in the acquisition of
7thStreet.com will continue to require substantial additional development by
Learn2.com.
Depreciation and amortization expenses were $1.8 million for the year ended
December 31, 1998 compared to $4.2 million for the year ended December 31, 1997.
Of the 1997 amount, approximately $450,000 represents the early write off of the
amortization of intangible assets acquired in the 1995 acquisition of Lanpro
Corporation and Lanpro Localization Center, Inc. These assets were acquired on
December 29, 1995 and were being amortized over periods up to seven years;
however, the assets were written off when we closed our offices in San Francisco
and Tokyo.
Depreciation and amortization expenses were $4.2 million for the year ended
December 31, 1997 compared to $2.6 million for the year ended December 31, 1996.
INTEREST AND OTHER INCOME
Interest and other expenses were $42,000 and $157,000 for the three months
ended March 31, 1999 and 1998, respectively. Interest and other expenses
decreased $115,000 or 73%. Interest expense for the three months ended March 31,
1999 consisted primarily of a $62,000 obligation due to Fletcher International
Limited and $114,000 of interest expense related to the conversion of the 7%
Convertible Notes. This decrease was partially offset by interest income of
$141,000. For the three months ended March 31, 1998, interest and other expenses
included the sale of surplus equipment that resulted in a loss of $161,000.
Interest income was $333,000 for the year ended December 31, 1998 compared
to $340,000 for the year ended December 31, 1997. Interest expense was $1.7
million and $121,000 for the years ended December 31, 1998 and 1997,
respectively. Approximately $1.6 million related to amortization of debt
issuance costs and accretion of debt discount was included in the amount for
1998.
Other expenses were $1.3 million for the year ended December 31, 1998
compared to other income of $1.1 million for the year ended December 31, 1997.
During 1998, we disposed of assets at a net loss of approximately $1.5 million
that was offset by reversals of accrued royalty expense in excess of actual
liabilities in the amount of $237,000.
Interest income was $340,000 for the year ended December 31, 1997 compared
with $1.3 million in the year ended December 31, 1996. This change was due to
lower average cash balances available for investment during 1997. Interest
expense was $121,000 and $77,000 for the years ended December 31, 1997 and 1996,
respectively. Approximately $188,000 of interest expense was capitalized as a
cost of financing the acquisition of a tract of land and office building
construction during 1996.
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Other income was $1.1 million for the year ended December 31, 1997. In
November 1997, Learn2.com sold its PyroTechnix subsidiary which included the
sale of the Return to Krondor game title and a license to its TopGun technology
and recognized a gain of approximately $1,033,000 which resulted in the
significant increase over the 1996 amount. For the year ended December 31, 1997,
our PyroTechnix subsidiary recognized revenues of approximately $320,000, cost
of revenues of approximately $317,000 and operating expenses of approximately
$1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $581,000 during the first three months
of the year to $10.6 million at March 31, 1999. Operating activities used
$647,000 of cash in the first three months of 1999. The primary factor related
to the use of cash from operating activities was the net loss of $13.7 million.
The net loss was substantially offset by non-cash charges of $12.8 million,
principally $374,000 of depreciation and amortization, $185,000 non-cash warrant
expense, $2.5 million of restructuring charges, and $9.7 million for the
write-off of acquired in-process technology.
The principal factors in the cash used in investing activities of $135,000
were the expenditures for fixed assets of $200,000 which was offset by the cash
acquired in the acquisition of 7th Street.com of $774,000 reduced by acquisition
costs of $709,000.
Financing activities provided $201,000 of cash. This was primarily due to
the issuances of common stock under the stock option and purchase plans, as well
as the exercise of common stock options and warrants totaling $252,000. This was
offset by repayments on existing capital leases totaling $51,000.
In the normal course of business, we evaluate potential acquisitions, joint
ventures and strategic alliances that may complement our business. While we have
no present commitments or agreements with respect to any material business
combinations other than the merger agreement with ViaGrafix, we may in the
future consummate transactions which may require us to issue additional capital
and such issuances may be significant.
To date, we continue to use cash and operate at a loss. Our ability to
achieve positive cash flow depends upon a variety of factors, including the
timely introduction and market success of its products, the costs of developing,
producing and marketing such products, adoption of the Internet as a medium of
commerce and communications and various other factors, some of which may be
beyond our control. If we require additional capital, we would seek such funding
through additional public or private financing although we may not be able to
obtain such financing.
On June 1, 1999, we reached an agreement to acquire ViaGrafix Corporation.
Under the terms of the agreement, ViaGrafix shareholders will receive 1.846
shares of our common stock for each share of ViaGrafix common stock. Assuming
satisfaction of certain conditions, including receipt of the requisite
stockholder approval, the merger is expected to be consummated in the third
quarter of 1999. Completion of the merger is expected to enhance our ability to
finance our growth as cash flow and capital markets access of the combined
companies will be greater than prior to the merger. In the event that the
proposed merger with ViaGrafix is not consummated, we believe we will have
sufficient resources for our operating requirements but may not have sufficient
resources to fund our planned growth.
LEARN2.COM--SUPPLEMENTARY HISTORICAL FINANCIAL DATA
The following additional discussion of the financial condition and results
of operations of Learn2.com should be read in conjunction with the Learn2.com
supplementary historical consolidated financial statements and the related notes
to those financial statements included in this joint proxy statement/prospectus.
This discussion has been updated to reflect the acquisition of Panmedia which
was acquired by Learn2.com on May 13, 1999. This acquisition was accounted for
as a pooling of
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interests and therefore reflects the consolidation of Panmedia from its
inception. This document contains forward-looking statements that involve risks
and uncertainties. Learn2.com's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this joint proxy statement/prospectus.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED DECEMBER 31, 1998,
DECEMBER 31, 1997 AND DECEMBER 31, 1996
REVENUES
Revenues increased $402,000 from $598,000 to $1.0 million for the three
months ended March 31, 1999 primarily resulting from the addition of 7th
Street.com's revenues from the period subsequent to the merger date to
Learn2.com's revenues. In 1999, approximately 51% of total revenues were related
to 7th Street.com, 23% was attributed to the operations of Learn2.com and 26% to
the operations of Panmedia. The revenues in 1998 were primarily from royalties
while the revenues in 1999 were primarily from technology licenses and content
sales.
In August 1997, Learn2.com announced a new strategy to leverage its existing
core technology and to transition from being a self-funded content developer and
publisher to position itself as a supplier of custom solutions and services,
tools and technology. Learn2.com's strategy change in 1997 impacted its
operations in 1998. Net revenues decreased 75% to $2.7 million for the year
ended December 31, 1998 compared to $10.8 million for the year ended December
31, 1997. The 75% decrease in net revenues reflects the shift in business
strategy as the first of the new products on the Agent7 platform was formally
released late in the third quarter of 1998 and accordingly, no significant
revenues have been realized. In 1998, product sales related to Agent7 were
approximately 7% of net revenues. The remaining 93% was from various sources
including royalty streams from our discontinued game business and reversals of
prior period returns and price protection allowances in excess of actual
returns, price protections and revenues related to Panmedia. In contrast, during
1997, the majority of our revenue was associated with the game business. In
1997, product sales constituted approximately 39% of net revenue. The remaining
61% was from other sources, including the sale of a title in the final stages of
development, Dominion, for $1.8 million, non-refundable advance royalties of
$1.5 million for Python titles, and approximately $1.2 million from Microsoft
for development and initial royalties on the Barney Actimates titles. Sales to
customers outside of the United States were 15% and 19% of net revenue in 1998
and 1997, respectively.
Learn2.com's strategy change in 1997 impacted its operations. Net revenues
decreased 47% to $10.8 million for the year ended December 31, 1997 compared to
$20.5 million for the year ended December 31, 1996. In 1997, product sales
constituted approximately 39% of net revenue. The remaining 61% was from other
sources, including the sale of a title in the final stages of development,
Dominion, for $1.8 million, non-refundable advance royalties of $1.5 million for
Python titles, and approximately $1.2 million from Microsoft for development and
initial royalties on the Barney Actimates titles. In contrast, approximately 50%
of 1996 net revenues came from product sales and the remaining 50% was from
licensing, OEM or Original Equipment Manufacturer, and development contracts.
Sales to customers outside of the United States in 1997 were similar to 1996 and
approximated 23% of net revenue.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 1999 was $186,000 or
18% of net revenues compared to $109,000 or 18% of net revenues for the three
months ended March 31, 1998.
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For the year ended December 31, 1998, cost of revenues was $472,000 or 18%
of net revenues. During 1998 cost of revenues consisted primarily of royalties
and development. Cost of revenues for the year ended December 31, 1997 was $4.7
million or 43% of net revenue, including product development, manufacturing, and
royalties and licensing. The total cost of revenues as a percentage of net
revenues fluctuated from year to year as a result of significant differences in
the make up of the revenue. We expect fluctuations in gross margin in the future
as changes occur in the composition of the revenues and the associated cost of
revenues.
Cost of revenues for the year ended December 31, 1997 was $4.7 million or
43% of net revenue, including product development, manufacturing, and royalty
and licensing costs of $1.8 million, $1.2 million and $1.7 million,
respectively. For the year ended December 31, 1996, cost of revenues was $8.3
million or 40% of net revenues. Although the total cost of revenues as a
percentage of net revenues was comparable between years, the 1997 revenues from
the sale of Dominion and advance royalties for Python referred to above had a
very low cost associated therewith which was offset by a much higher relative
cost of revenues associated with the development contracts.
RESEARCH DEVELOPMENT AND EXPENSES
Research and product development expenses were $592,000 and $825,000 for the
three months ended March 31, 1999 and 1998, respectively. Research and product
development costs decreased 28% in 1999 due primarily to lower headcount and
related cost structure at Learn2.com.
Research and product development expenses were $2.4 million and $14.5
million for the years ended December 31, 1998 and 1997, respectively. Research
and product development costs decreased in 1998 as Learn2.com continued to
reduce headcount and related expenditures. Approximately $700,000 related to the
closing of the international localization studios is included in the 1997
amount. During 1998 Learn2.com completed this process and reversed $250,000 in
over accruals. Research and production development expenses decreased 83% in
1998, excluding the one-time closing expenses recorded in 1997. In 1998,
research and product development expenses included $1.5 million for production
expenses and $900,000 for software research and development expenses. Research
and product development expenses for 1997 included $5.3 million of production
expenses, $4.0 million for software research and development and $5.2 million
for expenses of the companies acquired in 1995 and 1996 and closed or sold
during 1997. Because a large portion of the 1997 staffing cuts in connection
with the change in the strategic direction of Learn2.com, was implemented late
in the year and continued into 1998 the benefit was not fully realized until
1998.
Research and product development expenses were $14.5 million and $19.7
million for the years ended December 31, 1997 and 1996, respectively. Research
and product development costs decreased in 1997 as we reduced headcount and
related expenditures. Approximately $700,000 related to the closing of the
international localization studios is included in the 1997 amount. Research and
production development expenses decreased 26% in 1997, excluding the one-time
closing expenses, compared to 1996. Research and product development expenses
for 1997 included $5.3 million of production expenses, $4.0 million for software
research and development and $5.2 million for expenses of the companies acquired
in 1995 and 1996 to provide expertise in the development of 3D technology and
graphics design and to provide the capabilities needed to expand into the Asia
Pacific market.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $515,000 and $295,000 for the three months
ended March 31, 1999 and 1998, respectively. Sales and marketing expenses
increased $220,000 or 75% for the three months ended March 31, 1999 primarily
due to the addition of 7th Street.com's sales and marketing staff.
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Sales and marketing expenses were $595,000 and $5.9 million for the years
ended December 31, 1998 and 1997, respectively. Sales and marketing expenses for
1998 included $142,000 of expenses for advertising, marketing and public
relations and $453,000 of expenses related to internal staffing. Included in the
1997 amount is approximately $965,000 related to the closing of our
international sales offices. The 1997 expenses included $2.4 million of expenses
for advertising, marketing and public relations and $3.5 million of expenses
related to internal staffing. Excluding costs for closing Learn2.com's
international sales offices, sales and marketing expenses decreased
approximately $4.6 million or 89% in 1998 compared to 1997. As a percentage of
net revenues, sales and marketing expenses related to internal staffing
decreased to 26% in 1998 from 35% in 1997. Likewise, the advertising, marketing
and public relations expenses decreased to 9% from 24% as a percentage of net
revenues in 1998 compared to 1997.
Sales and marketing expenses were $5.9 million and $11.3 million for the
years ended December 31, 1997 and 1996, respectively. Included in the 1997
amount is approximately $965,000 related to the closing of our international
sales offices. Sales and marketing expenses for 1997 included $2.2 million of
expenses for advertising, marketing and public relations and $3.7 million of
expenses related to internal staffing. For 1996, expenses of $6.3 million for
advertising, marketing and public relations and $5.0 million related to internal
staffing were incurred. Excluding costs for closing our international sales
offices, sales and marketing expenses decreased approximately $6.3 million or
55% in 1997 compared to 1996. As a percentage of net revenues, sales and
marketing expenses related to internal staffing increased to 35% in 1997 from
24% in 1996. However, the advertising, marketing and public relations expenses
decreased to 21% from 31% as a percentage of net revenues in 1997 compared to
1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $745,000 and $1.1 million for the
three months ended March 31, 1999 and 1998, respectively. General and
Administrative expenses decreased $380,000 or 35% for the three months ended
March 31, 1999 primarily due to lower headcount and related cost structure at
the newly merged company.
General and administrative expenses for the year ended December 31, 1998
were $5.3 million compared with $5.4 million for the year ended December 31,
1997. Approximately $1.4 million of the 1998 total is attributable to stock
grants to two of Learn2.com's directors. Additionally, Learn2.com incurred
higher legal and professional fees in 1998 that also contributed to the general
and administrative fees continuing to remain almost unchanged compared to the
1997 amounts.
General and administrative expenses for the year ended December 31, 1997
were $5.4 million compared with $4.3 million for the year ended December 31,
1996. Approximately $400,000 of the increase of $1.1 million is associated with
expenses related to employee resignations in the first quarter of 1997.
Additionally, Learn2.com incurred higher legal and professional fees in 1997
which contributed to the increase in general and administrative expenses
compared to 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $380,000 and $568,000 for the
three months ended March 31, 1999 and 1998, respectively. Depreciation and
amortization expenses decreased $188,000 or 33% for the three months ended March
31, 1999 primarily due to lower fixed assets in 1999 as a result of the
write-off of approximately $1.4 million of fixed assets. The 1999 expenses
included $141,000 of depreciation on fixed assets, $35,000 of amortization of
computer software and $204,000 of amortization on goodwill and intangible assets
related to the acquisition of 7th Street.com. The 1998 expenses related
primarily to depreciation and amortization of fixed assets.
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INTEREST AND OTHER INCOME
Interest and other expenses were $41,000 and $157,000 for the three months
ended March 31, 1999 and 1998, respectively. Interest and other expenses
decreased $116,000 or 74%. Interest expense for the three months ended March 31,
1999 consisted primarily of a $62,000 obligation due to Fletcher International
Limited and $114,000 of interest expense related to the conversion of the 7%
Convertible Notes. This decrease was partially offset by interest income of
$141,000. For the three months ended March 31, 1998, interest and other expenses
included the sale of surplus equipment that resulted in a loss of $161,000.
Interest income was $335,000 for the year ended December 31, 1998 compared
to $340,000 for the year ended December 31, 1997. Interest expense was $1.7
million and $121,000 for the years ended December 31, 1998 and 1997,
respectively. Approximately $1.7 million related to amortization of debt
issuance costs and accretion of debt discount was included in the amount for
1998.
Other expenses were $1.3 million for the year ended December 31, 1998
compared to other income of $1.1 million for the year ended December 31, 1997.
During 1998, we disposed of assets at a net loss of approximately $1.5 million
that was offset by reversals of accrued royalty expense in excess of actual
liabilities in the amount of $238,000.
Interest income was $340,000 for the year ended December 31, 1997 compared
with $1.3 million in the year ended December 31, 1996. This change was due to
lower average cash balances available for investment during 1997. Interest
expense was $121,000 and $77,000 for the years ended December 31, 1997 and 1996,
respectively. Approximately $188,000 of interest expense was capitalized as a
cost of financing the acquisition of a tract of land and office building
construction during 1996.
Other income was $1.1 million for the year ended December 31, 1997. In
November 1997, Learn2.com sold its PyroTechnix subsidiary which included the
sale of the Return to Krondor game title and a license to its TopGun technology
and recognized a gain of approximately $1.0 million which resulted in the
significant increase over the 1996 amount. For the year ended December 31, 1997,
our PyroTechnix subsidiary recognized revenues of approximately $320,000, cost
of revenues of approximately $317,000 and operating expenses of approximately
$1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $438,000 during the first three months
of the year to $10.9 million at March 31,1999. Operating activities used
$495,000 of cash in the first three months of 1999. The primary factor related
to the use of cash from operating activities was the net loss of $13.6 million.
The net loss was substantially offset by non-cash charges of $12.8 million,
principally $379,000 of depreciation and amortization, $185,000 non-cash warrant
expense, $2.5 million of restructuring charges, and $9.7 million for the
write-off of acquired in-process technology.
The principal factors in the cash used in investing activities of $139,000
were the expenditures for fixed assets of $204,000 which was offset by the cash
acquired in the acquisition of Street Technologies of $774,000 reduced by
acquisition costs of $709,000.
Financing activities provided $196,000 of cash. This was primarily due to
the issuances of common stock under the stock option and purchase plans, as well
as the exercise of common stock options and warrants totaling $252,000. This was
offset primarily by repayments on existing capital leases totaling $51,000.
YEAR 2000 IMPACT
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish
twenty-first century dates from twentieth
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century dates. To function properly, these date-code fields must distinguish
twenty-first century dates from twentieth century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
STATE OF READINESS. We are dependent on the operation of numerous systems
that may be adversely affected by the Year 2000 problem, including:
- internal systems.
- equipment, software and content supplied to us by third-party vendors that
may not be Year 2000 compliant, including outside providers of web-hosting
and Internet access services on which we are currently dependent.
In addition, our future business depends on the successful operation of the
Internet following the commencement of the Year 2000. If the Internet is
inaccessible for an appreciable period of time, or if customers and users are
unable to access our site, our business and revenues could be materially
adversely affected. We are also subject to external forces that might generally
affect industry and commerce, such as telecommunications, utility or
transportation company Year 2000 compliance failures, related service
interruptions and the economic impact that such failures have on our customers
and advertisers.
YEAR 2000 COMPLIANCE ASSESSMENT PLANS. Unlike other businesses, we do not
have an installed base of legacy systems dating back many years. Nonetheless, in
order to reduce the risks of the Year 2000 compliance problem, we have
undertaken a two-phase process of analyzing the impact of the Year 2000 problem.
First, we have completed an informal assessment of our primary internal
systems and, based on such assessment and its knowledge of the specific software
and systems, we currently believe that our systems are Year 2000 compliant in
all material respects or can readily be brought into compliance with the
application of corrective software modifications. In many cases, we expect these
modifications to be provided by the vendors of the computer and software
products we have installed. We have not incurred material costs to date in this
informal phase of the assessment process, and currently do not believe that the
cost of additional actions will have a material effect on our results of
operations or financial condition.
Second, we are in the process of performing a formal assessment of both our
internal systems and the vendor-supplied items and services it employs to
determine how the Year 2000 problem will affect all aspects of our operations.
We expect to complete this second phase of our assessment by mid-1999. The
formal process involves assessment of the following systems:
- hardware systems, including servers and systems used for data storage.
- software systems, including applications, development tools and
proprietary code.
- infrastructure systems, including routers, hubs and networks.
- facility systems, including general building functions, security, HVAC and
related operations.
- the systems of our business partners, including content providers and
ISPs.
We are going to conduct our formal assessment of Year 2000 compliance by
gathering information on each aspect of our systems, reviewing each component or
application for date usage, and examining date representations. As to our
systems, the preliminary results of this formal assessment are consistent with
the results of our informal assessment. With respect to vendor-supplied items
and services, we are conducting a review of product compliance information on
such items and services available online, in vendor literature and through trade
group information resources, contacting our vendors for
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compliance information, and maintaining documentation of assessments that have
been performed by such vendors or outside sources.
Each department is involved in this formal assessment process. Once
complete, the formal assessment will lead to the creation of a formal
remediation and contingency plan for achieving Year 2000 compliance. We do not
anticipate, however, undertaking a formal assessment of the Year 2000 compliance
of the Internet or our underlying telecommunications infrastructure, and will
therefore be unable to predict the impact of Year 2000 issues that might affect
the broader Internet business community, including ours.
RESULTS OF COMPLIANCE EFFORTS TO DATE. Based on the completed informal
assessment and progress on the formal assessment, we currently believe that our
internal systems are or can readily be made Year 2000 compliant in all material
respects. However, it is possible that these current internal systems contain
undetected errors or defects with Year 2000 date functions. In addition,
although we do not anticipate problems, vendor-supplied items and services could
contain undetected errors or defects which, if not corrected, could result in
serious unanticipated negative consequences, including significant downtime for
one or more of our media properties.
COSTS OF YEAR 2000 COMPLIANCE. Although we are not aware of any material
operational issues or costs associated with preparing our internal systems for
the Year 2000, and although we have not incurred material costs to date with
respect to the Year 2000 compliance of these internal systems, the occurrence of
any of the following events could materially and adversely affect our business,
results of operations and financial condition:
- errors and defects are detected after the formal assessment process is
complete.
- third-party equipment, software or content fails to operate properly with
regard to the Year 2000.
- Web advertisers expend significant resources to correct their current
systems for Year 2000 compliance, resulting in reduced funds available for
web advertising or sponsorship of web services.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
As of January 15, 1999, we replaced our principal accountant KPMG LLP with
Arthur Andersen LLP. Our decision to change accountants was recommended by our
Board.
KPMG LLP's report on our consolidated financial statements as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997 contained a separate paragraph stating that "the Company has
suffered recurring losses since inception and does not currently have sufficient
resources to meet its anticipated operating requirements during 1998, which
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3 [in the notes to our 1997 financial statements]. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of these uncertainties."
On April 20, 1998, we received commitments for an aggregate $10 million
financing which was comprised of $4.5 million principal amount of senior secured
promissory notes and $5.5 million liquidation preference of non-convertible
preferred stock. The terms of the financing provided that upon stockholder
approval the non-convertible preferred stock would be automatically exchanged
into convertible preferred stock and the holders of the senior secured
promissory notes would have the option of exchanging their notes into
convertible preferred stock. On July 13, 1998, an aggregate of $10 million
liquidation preference of our Series B Convertible Preferred Stock was issued to
the holders of the senior secured promissory notes and non-convertible preferred
stock. Between April 20,
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1998 and July 13, 1998, the market price of our common stock increased such that
the conversion price of the Series B Convertible Preferred Stock was greater
than the market price of our common stock on April 20, 1998 but less than the
market price of its common stock on July 13, 1998. Due to the beneficial
conversion feature of the Series B Convertible Preferred Stock, we were required
to increase the loss attributable to common stockholders for the quarter ended
September 30, 1998. The one-time occurrence was accounted for similar to a
non-cash dividend and had no effect on our net loss or aggregate stockholders'
equity.
KPMG LLP informed us about the accounting treatment of the beneficial
conversion feature. Management then requested KPMG LLP to look into alternative
accounting treatments. Management believes that its inquiries and discussions
regarding this matter did not constitute a disagreement. However, KPMG LLP has
informed us that in view of all the circumstances surrounding the discussions
about this issue this matter constitutes a disagreement as contemplated by Item
4 of Form 8-K and Item 304(a)(1) of Regulation S-K. Upon KPMG LLP informing us
that in KPMG's opinion there was no alternative accounting treatment, we
followed the advice of KPMG LLP and accounted for the Series B Convertible
Preferred Stock as described above to the satisfaction of KPMG LLP.
We have authorized KPMG LLP to respond fully to the inquiries of Arthur
Andersen LLP concerning the subject matter of the beneficial conversion feature.
The following is the response submitted to the SEC by KPMG LLP:
"We were previously principal accountants for 7th Level, Inc. and under the
date of January 30, 1998, we reported on the consolidated financial statements
of 7th Level, Inc. and subsidiaries as of December 31, 1997 and 1996 and for
each of the years in the three-year period ended December 31, 1997. On January
15, 1999, our appointment as principal accountants was terminated. We have read
7th Level, Inc.'s statements included under Item 4 of its Form 8-K dated January
15, 1999, and agree with such statements, except that we are not in a position
to agree or disagree with 7th Level, Inc.'s statement that the change in
principal accountants was recommended by the Company's Board of Directors."
After the change in accountants took place it came to our attention that at
the November 18, 1998 meeting of the Emerging Issues Task Force, the staff of
the SEC issued a statement regarding how issuers should account for convertible
securities. The minutes dealt with, among other things, the observation, by the
Task Force, that in certain circumstances, the intrinsic value of the beneficial
conversion feature may be greater than the proceeds received from the sale of
the convertible instrument. In those situations, the Task Force reached a
tentative conclusion that the amount of the discount assigned to the beneficial
conversion feature should be limited to the amount of proceeds received.
As a result of the foregoing, we have restated the financial statements
contained in the Quarterly Report on Form 10-Q/A for the three and nine month
periods ended September 30, 1998. We have reduced the beneficial conversion
feature originally recorded in the amount of approximately
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$15,000,000 to approximately $5,500,000. The impact of such restatement on our
Condensed Consolidated Statement of Operations and Balance Sheet was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
AS ORIGINALLY AS ORIGINALLY
AS RESTATED REPORTED AS RESTATED REPORTED
------------- -------------- -------------- --------------
Net loss available to common stockholders......... $ (7,922,802) $ (17,414,526) $ (15,474,901) $ (24,966,625)
Loss per common share............................. $ (0.45) $ (1.00) $ (1.00) $ (1.62)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------
<S> <C> <C>
AS ORIGINALLY
AS RESTATED REPORTED
-------------- --------------
Additional capital................................................................ $ 83,990,864 $ 93,482,588
Accumulated deficit............................................................... $ (83,635,328) $ (93,127,052)
</TABLE>
VIAGRAFIX
OVERVIEW
ViaGrafix develops, produces and markets technology-based information
technology training products and graphics software products. ViaGrafix's
information technology training courses include interactive multimedia training
courses delivered on CD-ROM, LANs, intranets and the Internet, and video
tutorials for a variety of computer software. ViaGrafix has developed and
markets more than 1,000 training courses for most major PC software packages.
These products provide an audio-visual environment that is designed to allow
users to learn faster and increase retention and productivity. Organizations
that purchase ViaGrafix's multimedia training products can offer them across a
network to all employees. ViaGrafix's principal graphics software product,
DesignCAD, is a computer-aided design, or CAD, package sold worldwide. ViaGrafix
also produces several other CAD-related software packages, and a line of
graphics software products for the retail market. The primary platform for both
the training and software products is Microsoft Windows. ViaGrafix's subsidiary,
eTracks.com, Inc., formerly Make It So, Inc., provides interactive email
broadcast services for businesses that rely on web-based commerce and
transactions and operates eTracks.com, an online community of more than 500,000
members.
The following table sets forth, for the periods indicated, certain financial
data expressed in percentages:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 25.4 23.9 24.2 22.2 25.9
Gross Profit..................................................... 74.6 76.1 75.8 77.8 74.1
Selling, general and administrative.............................. 31.2 27.4 33.1 30.1 36.8
Advertising...................................................... 46.0 20.1 23.7 14.3 12.0
Research & development........................................... 7.2 9.1 9.1 8.5 4.6
Depreciation & amortization...................................... 4.6 2.1 3.9 2.3 6.8
Operating profit (loss).......................................... (14.3) 17.3 6.0 22.6 13.9
Net interest income (expense).................................... 1.6 -- 2.6 (1.8) (2.6)
Income (loss) before income taxes................................ (12.7) 17.3 8.5 20.7 11.3
Net income (loss)................................................ (7.5) 13.2 6.6 14.8 6.7
</TABLE>
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND YEARS ENDED DECEMBER 31, 1998,
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NET SALES
Net sales increased 80% to $7.3 million in the three months ended March 31,
1999 from $4.1 million in the three months ended March 31, 1998. This increase
reflects an increase in sales from existing and new information technology
training titles, and was primarily attributable to increases in the number of
units of products sold rather than increases in prices. A significant portion of
the increase in net sales was from sales to Internet resellers. In addition,
eTracks.com, which was purchased in July 1998, contributed approximately
$690,000 in sales for the 1999 quarter.
Net sales increased 37% to $18.8 million for the year ended December 31,
1998, compared to $13.7 million for the year ended December 31, 1997. This
increase in sales results primarily from existing and additional training
products, along with sales of approximately $826,000 or 4% of total 1998 sales,
from eTracks.com, for the last five months of 1998. Information technology
training product sales for the year ended December 31, 1998 increased 40% to
approximately $15.5 million, or 83% of total sales, compared to approximately
$11.1 million, or 81% of total sales, in 1997. This increase was primarily
attributable to increases in the number of units of products sold rather than
increases in prices. Graphics software sales for the year ended December 31,
1998, decreased 8.5% to approximately $2.4 million, or 13% of total sales,
compared to approximately $2.6 million, or 19% of total sales, in 1997. This
decrease was primarily due to lower than expected sales of ViaGrafix's DesignCAD
upgrade, DesignCAD Pro 2000, that was introduced in late August 1998.
Net sales increased 36% to $13.7 million for the year ended December 31,
1997, compared to $10.1 million for the year ended December 31, 1996. This
increase reflects an increase in sales primarily from existing and additional
training products. Information technology training product sales for the year
ended December 31, 1997 increased 60% to approximately $11.1 million, or 81% of
total sales, compared to approximately $7.0 million, or 69% of total sales, in
1996. This increase was primarily attributable to increases in the number of
units sold rather than increases in prices. Graphics software sales for the year
ended December 31, 1997 decreased 17% to approximately $2.6 million, or 19% of
total sales, compared to approximately $3.1 million, or 31% of total sales, in
1996. This decrease was primarily due to stronger sales of DesignCAD upgrades
for Windows 95 in 1996.
COST OF SALES
Cost of sales increased 91% to $1.9 million in the three months ended March
31, 1999 from approximately $974,000 for the three months ended March 31, 1998.
Cost of sales as a percentage of net sales increased to 25.4% for the quarter
ended March 31, 1999, from 23.9% for the same period in 1998. The increase in
the cost of sales as a percentage of net sales for 1999's first quarter was
primarily due to a higher cost of sales percentage realized by eTracks.com on
sales to its online community members.
Cost of sales increased 49% to $4.5 million for the year ended December 31,
1998, compared to $3.0 million in 1997. Cost of sales as a percentage of total
sales increased to 24.2% for the year ended December 31, 1998, from 22.2% for
1997. The increase in cost of sales as a percent of sales was partially a result
of a change in sales mix as ViaGrafix sales to major retailers in 1998 were
significantly higher than in 1997. ViaGrafix's "Teach Yourself" product line
makes up the majority of sales to major retailers and it generally has a higher
cost of sales percentage. In addition, there was a higher cost of sales
percentage (43.2%) from eTracks.com that affected ViaGrafix's sales mix during
the last five months of 1998.
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Cost of sales increased 16% to $3.0 million for the year ended December 31,
1997, compared to $2.6 million in 1996. Cost of sales as a percentage of total
sales decreased to 22.2% for the year ended December 31, 1997, from 25.9% for
1996. The decline in cost of sales as a percent of sales was a result of
productivity improvements due to economies of scale as sales increases were
covered with a minimal increase in duplicating and packaging personnel.
The classification of certain expenses on ViaGrafix's consolidated
statements of income was changed in 1998. Cooperative advertising expense and
certain staff expenses previously reported in cost of sales were reclassified to
advertising expense and to selling, general, and administrative expense. Prior
periods have been reclassified for consistency.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased 105% to approximately
$2.3 million in the three months ended March 31, 1999 from approximately $1.1
million for the same period in 1998. Selling, general and administrative expense
as a percentage of net sales increased to 31.2% for the quarter ended March 31,
1999, from 27.4% during the same period in 1998. The increase was primarily a
result of increased staffing and commission expenditures, which increased 110%
to $1.7 million in the first quarter of 1999 compared to approximately $822,000
in 1998's first quarter. Increased commission expenditures were a result of
increased sales. ViaGrafix believes its staff additions will provide support for
increased future sales. The largest employee increases were in marketing and
sales teams. ViaGrafix is building an infrastucture to support its direct
licensing and sales of training courses to corporations, and has increased its
corporate sales staff from two people at the end of the first quarter of 1998 to
15 people on March 31, 1999. The balance of the increased selling, general and
administrative expenditures was primarily to service the planned increased
staffing and facilities.
Selling, general and administrative expense increased 51% to $6.2 million
for the year ended December 31, 1998, compared to $4.1 million in 1997. Selling,
general and administrative expenses as a percentage of total sales increased to
33.1% for the year ended December 31, 1998, from 30.1% for 1997. The increase
was primarily a result of increased staffing and commission expenditures.
Staffing and commission expenditures increased 53% to $4.2 million in the year
ended December 31, 1998 from $2.7 million in 1997. Increased commission
expenditures were a result of increased sales. Staffing increased during the
year to 216 employees, of which 154 were not related to research and
development, as of December 31, 1998 compared to 145 employees, of which 101
were not related to research and development, on December 31, 1997. ViaGrafix
believes these staff additions will provide support for increased future sales.
The largest employee increases were in marketing and sales teams. ViaGrafix is
building an infrastructure to support its corporate sales efforts, and increased
its corporate sales staff from two people to 14 people during 1998. The balance
of the increased selling, general and administrative expenditures during 1998
were primarily to service the planned increased staffing and facilities.
Selling, general and administrative expense increased 11% to $4.1 million
during the year ended December 31, 1997, compared to $3.7 million in 1996.
Selling, general and administrative expense as a percentage of total sales
decreased to 30.1% for the year ended December 31, 1997, from 36.8% in 1996, due
largely to our ability to control payroll and trade show expenses as our sales
were increasing.
ADVERTISING EXPENSE
Advertising expense increased 312% to approximately $3.4 million in the
three months ended March 31, 1999 compared to approximately $820,000 during the
first quarter of 1998. Advertising expense as a percent of net sales increased
to 46.0% during the first quarter of 1999 from 20.1% in 1998's first quarter.
Advertising expenditures are for cooperative advertising, advertising through
the channels of distribution, direct advertising and print media advertising.
The majority of the increase in advertising is due to additional cooperative
advertising necessary to expand into Internet commerce. In
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addition, ViaGrafix expanded its print media advertising and special product
promotions during the quarter. ViaGrafix expects advertising expense to remain
high from ViaGrafix's effort to achieve rapid growth in sales through Internet
resellers.
Advertising expense increased 127% to $4.4 million in the year ended
December 31, 1998 from $2.0 million in 1997. Advertising expense as a percentage
of total sales increased to 23.7% for the year ended December 31, 1998, from
14.3% in 1997. Advertising expenses are for cooperative advertising, advertising
through the channels of distribution, direct advertising and print media
advertising.
Advertising expense increased 62% to $2.0 million during the year ended
December 31, 1997, compared to $1.2 million in 1996. Advertising expense as a
percentage of total sales increased to 14.3% for the year ended December 31,
1997, from 12.0% in 1996. Advertising expenses are for cooperative advertising,
advertising through the channels of distribution, direct advertising and print
media advertising.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased 42% to approximately $530,000 in
the three months ended March 31, 1999 compared to approximately $372,000 during
the first quarter of 1998. Research and development expense as a percentage of
net sales decreased to 7.2% during the quarter ended March 31, 1999 from 9.1%
during the same period in 1998. The increase in research and development dollars
expended reflects ViaGrafix's commitment to expand the number of information
technology training courses offered. In addition, the increase reflects costs
associated with development of training libraries in Spanish, French and German.
Research and development expenditures also included development efforts on
Internet online delivery of training. ViaGrafix believes that a significant
investment in research and development is required to remain competitive in
ViaGrafix's markets and, therefore, ViaGrafix expects research and development
expense to continue to increase in future periods.
Research and development expense increased 46% to $1.7 million for the year
ended December 31, 1998 compared to $1.2 million in 1997. Research and
development expense as a percentage of net sales increased to 9.1% for the year
ended December 31, 1998, from 8.5% in 1997. This increase reflects ViaGrafix's
commitment to expand the number of information technology training courses
offered, as it released 280 new computer-training titles in 1998. Included in
the research and development expense for 1998 are costs associated with the
initiation of the development of training libraries in Spanish, French and
German. ViaGrafix expects to have completed a library of core titles in Spanish
to market through international distributors by the third quarter of 1999. A
library of core titles in German and French is expected later in 1999. ViaGrafix
released DesignCAD Pro 2000 during the third quarter and DesignCAD LT 2000 in
the fourth quarter of 1998. ViaDraw, ViaGrafix's first entry in a line of
graphics software products for the consumer market, was released in late
November 1998. Two additional graphics software products for the consumer
market, ViaCAD, a low cost CAD package, was released in the first quarter of
1999, and ViaPage, a web-page editor, was released in the second quarter of
1999. Research and development expenditures also included development efforts on
ViaGrafix's web site and on Internet online delivery of training. ViaGrafix
continued to increase its research and development staff during 1998 and as of
December 31, 1998 had 62 employees in research and development compared to 44 on
December 31, 1997.
Research and development expense increased 149% to $1.2 million during the
year ended December 31, 1997, compared to approximately $467,000 in 1996.
Research and development expenses as a percentage of total sales increased to
8.5% for the year ended December 31, 1997, from 4.6% in 1996. This higher level
of research and development expense reflects an overall increase in personnel
for product development.
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DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense was approximately $336,000 during the
first quarter of 1999 representing 4.6% of net sales, compared to approximately
$86,000 representing 2.1% of net sales during the first quarter of 1998.
Depreciation and amortization related to eTracks.com was approximately $134,000
during the quarter and amortization of prepaid royalties pursuant to a
development and licensing agreement with 7th Street.com was approximately
$78,000. The majority of the assets purchased from eTracks.com in July 1998 have
depreciable lives of 12 to 18 months. As a result, amortization related to
eTracks.com will be reduced significantly beginning in the third quarter of
1999. The remainder of the increase in depreciation and amortization expense was
primarily attributable to asset additions during the past year for expansion of
facilities, production and duplication equipment and computer hardware.
Depreciation and amortization expense increased 130% to approximately
$734,000 during the year ended December 31, 1998 from approximately $319,000
during 1997. Depreciation and amortization expense as a percentage of sales
increased to 3.9% for the year ended December 31, 1998 compared to 2.3% in 1997.
In 1998, depreciation and amortization of approximately $219,000 was
attributable to the assets purchased on July 31, 1998 from eTracks.com. The
majority of the assets purchased from eTracks.com have depreciable lives of 12
to 18 months. The remainder of the increase in depreciation and amortization
expenses in 1998 was primarily attributable to asset additions during the year
for expansion of facilities, production and duplication equipment and computer
hardware. During the fourth quarter, ViaGrafix recognized approximately $78,000
in amortization of prepaid royalties to 7th Street.com.
Depreciation and amortization expense decreased from approximately $685,000
during the year ended December 31, 1996, to approximately $319,000 in 1997.
Depreciation and amortization as a percentage of sales decreased from 6.8% for
the year ended December 31, 1996, to 2.3% in 1997. This reduction was due mostly
to the conclusion of the amortization period for the software purchased from
American Small Business Computers in August 1995, which was only $5,500 in the
year ended December 31, 1997, versus approximately $322,000 during 1996.
NET INTEREST INCOME (EXPENSE)
Net interest income was approximately $114,000 or 1.6% of net sales in the
three months ended March 31, 1999 compared to approximately $2,000 during the
first quarter of 1998. A portion of the net proceeds from ViaGrafix's initial
public offering on March 4, 1998 were used to retire all outstanding long-term
debt, which lowered interest expense to approximately $54,000 in the first
quarter of 1998. Interest income in the first quarter of 1998 was approximately
$56,000.
Net interest income was approximately $481,000 or 2.6% of sales for the year
ended December 31, 1998 compared to net interest expense of approximately
$252,000 or 1.8% of sales in 1997. A portion of the net proceeds from
ViaGrafix's initial public offering on March 4, 1998 was used to retire all
outstanding long-term debt, which lowered interest expense to approximately
$54,000 for the year ended December 31, 1998 compared to approximately $272,000
in interest expense in 1997. A significant portion of the net proceeds from the
initial public offering was invested in highly liquid investments with
maturities of six months or less. These investments generated interest income of
approximately $535,000 for the year ended December 31, 1998 compared to interest
income of approximately $21,000 in 1997.
PROVISION (BENEFIT) FOR INCOME TAXES
During the three months ended March 31, 1999 ViaGrafix's effective tax rate
was 41.3% compared to 24.2% for the same period in 1998. In the first quarter of
1998 the effective tax rate was reduced due to the realization of tax credits
for 1995 through 1997 resulting from credits for increasing research
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activities. The amount of available credits was quantified and the benefit
recorded in the first quarter of 1998.
In the year ended December 31, 1998, ViaGrafix's effective tax rate was
reduced to 22% compared to 29% in 1997. The reduction in the effective tax rate
was due to several factors, including the realization of research and
development tax credits for 1995 through 1998. The amount of available credits
for 1995 through 1997 was quantified and the benefit recorded in the first
quarter of 1998. During 1998 approximately $383,000 of the $535,000 of interest
income was derived from federal tax exempt investments, while there was no
interest income in 1997 derived from federal tax exempt investments.
In the year ended December 31, 1997, ViaGrafix's effective income tax rate
was reduced to 29% compared to 41% in 1996. The reduction in ViaGrafix's
effective tax rate was due to the realization of tax credits from 1994 through
1997 resulting from the passage of the Taxpayer Relief Act of 1997 in August
1997, which clarified that companies employing enrolled members of Indian Tribes
within specified portions of the State of Oklahoma are eligible to receive a tax
credit. The credits are based upon a percentage of the increase in qualified
wages paid to qualified members of Indian Tribes. The amount of available
credits was quantified and the benefit recorded in the fourth quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
ViaGrafix's cash, cash equivalents and short-term investments totaled
approximately $11.5 million at March 31, 1999. ViaGrafix announced on September
1, 1998 that its board of directors authorized the repurchase of up to $3
million of its common stock. During the first quarter of 1999 ViaGrafix
repurchased 124,200 shares of its common stock for approximately $808,000. Since
September 1, 1998 ViaGrafix has repurchased 403,100 shares for approximately
$2.3 million. In the first quarter of 1999 and 1998, employees exercised
approximately 46,000 and 44,000 options for ViaGrafix common stock for
approximately $56,000 and $53,000, respectively.
ViaGrafix believes that its cash, cash equivalents and short-term investment
balances at March 31, 1999 and cash generated from future operations will
satisfy its anticipated working capital requirements for at least the
foreseeable future. However, ViaGrafix could need additional funds in order to
fund business expansion, develop new or enhanced products, respond to
competitive pressures or acquire complementary products, businesses or
technologies. In the normal course of business, ViaGrafix evaluates acquisitions
of businesses, product lines and technologies that complement its business, like
the eTracks.com acquisition in July 1998.
ViaGrafix's operating activities during the period ending March 31, 1999
used net cash of approximately $618,000. Operating activities generated cash
flows through a decrease in accounts receivable of approximately $488,000 and
depreciation and amortization of approximately $336,000. During the quarter,
operating activities used cash from a net loss of approximately $551,000, a
deferred income tax benefit of $281,000, and increases in inventories and income
taxes receivable of approximately $303,000 and decreases in accounts payable and
accrued liabilities of approximately $326,000.
ViaGrafix's capital expenditures during the first three months of 1999 were
approximately $240,000. Capital expenditures were primarily for expansion of
facilities, production and duplication equipment and computer hardware.
During the first quarter of 1999 ViaGrafix broke ground for a new 21,000
square-foot building to expand its packaging, inventory handling and shipping
operations. ViaGrafix does not currently have any other significant commitments
for capital expenditures, and anticipates that it will continue to expand its
facilities and purchase equipment as needed to support its product research and
development, production of its products, sales and marketing, product support
and administrative staff.
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YEAR 2000 IMPACT
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. ViaGrafix's computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
ViaGrafix uses up-to-date, PC-based software for internal accounting and
other applications. ViaGrafix has completed testing of its internal accounting
and other significant applications and has found no Year 2000 defects. ViaGrafix
has checked its training products and graphics software products for Year 2000
defects and has found none.
ViaGrafix may encounter some Year 2000 defects in the software it uses
internally, but it believes that these can be resolved as they are encountered.
ViaGrafix does not intend to do further testing of its internal systems for Year
2000 defects. ViaGrafix intends to continue to evaluate its products and
services to ensure they perform correctly in the Year 2000. ViaGrafix has no
contingency plans related to the Year 2000 issue.
ViaGrafix could encounter some Year 2000 defects in the products and
services it produces and markets. If Year 2000 defects are encountered,
ViaGrafix could be liable for substantial legal claims and litigation, and the
adverse publicity could have a material adverse effect on the future sales of
its products and services, even after any Year 2000 defects are resolved.
However, any material adverse effect on its financial position and results of
operations and cash flows cannot be currently estimated.
ViaGrafix relies on outside suppliers for raw materials, outside
distributors for its finished products, financial institutions for its banking,
and a number of other third parties in its normal business operations. If these
third-party suppliers and service providers have substantial Year 2000 problems,
it could have a material adverse effect on ViaGrafix's business. ViaGrafix is
not requiring its suppliers and service providers to provide Year 2000 readiness
information.
ViaGrafix has not incurred and does not anticipate incurring material costs
in addressing Year 2000 issues.
ViaGrafix believes its largest risk regarding the Year 2000 issue is from
legal claims and litigation. ViaGrafix expects that there will be a large number
of lawsuits filed over Year 2000 issues in the United States because of the
great publicity of the Year 2000 issue. Even small Year 2000 problems
encountered by ViaGrafix could result in substantial legal claims, lawsuits, and
class action lawsuits against it, which in turn could have a material adverse
effect on its financial position
VIAGRAFIX QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ViaGrafix is exposed to the impact of interest rate and foreign currency
fluctuations. ViaGrafix's objective in managing its exposure to interest rate
changes is to maximize its potential interest income without sacrificing cash
equivalent and short-term investment quality. ViaGrafix will invest in
instruments which are exempt from Federal income taxes if the taxable equivalent
yield is more attractive than alternative fully-taxed investments. ViaGrafix
does not currently have interest rate exposure from borrowing as it does not
have a line of credit, and its short-term loan was at a fixed 5% rate and
matured on June 1, 1999.
In 1998 and 1997 revenues from sales in countries other than the United
States and Canada accounted for 6% and 7%, respectively, of total revenues.
These international revenues are primarily denominated in foreign currencies.
Consequently, a decrease in the value of a relevant foreign currency in relation
to the U.S. dollar could adversely affect ViaGrafix's net revenues. ViaGrafix's
foreign currency transactional exposures exist primarily with the U.K. pound,
the French franc, the German mark and the Japanese yen.
ViaGrafix does not utilize interest rate swaps or hedge exposures with
foreign currency forward contracts.
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THE COMPANIES
LEARN2.COM
GENERAL
We develop and distribute online learning and training products and
technologies. To strengthen our position in the marketplace, we acquired two
companies and have entered into an agreement to acquire a third. 7th Street.com,
Inc., formerly known as Street Technologies, Inc., which we acquired in February
1999, markets and distributes multimedia tutorials over the Internet and
corporate intranets utilizing its internally developed technologies. Panmedia
Corporation, which we acquired in May 1999, offers a wide spectrum of
step-by-step instructions on skills, activities and tasks through LEARN2.COM.
ViaGrafix, which we agreed to acquire in June 1999, is a leading provider of
multimedia tutorials on a wide variety of computer software topics.
BUSINESS STRATEGY AND STRATEGIC DIRECTION
Our goal is to become the world's leading provider of Internet and network
delivered learning and education products and services. Our mission is to
provide our customers, including consumers, corporations, government agencies
and educational organizations, with a complete solution for learning and
education. To accomplish our goal, we have initiated the following:
- Content Acquisition--We license or purchase effective and engaging content
by building and maintaining relationships with a variety of high quality
publishers including ViaGrafix and content providers covering a wide range
of subjects.
- Content Integration--We integrate our technologies with the content to
provide our customers and users with enhanced content. We refer to this
enhanced content as "7th Street Enabled-TM-".
- Marketing and Distribution--Our marketing efforts consist of direct sales
through our own sales force, indirect sales through our authorized
resellers, sales of advertising on the Internet and e-commerce sales on
the Internet. We distribute 7th Street Enabled content over computer
networks and the Internet to provide easy access to our customers.
- Research and Development--We are continuing to enhance the sophistication
of our products including improving our patented proprietary technologies
which produce multimedia streams and StreamAgents, our proprietary
animated characters.
MARKETPLACE
For many years, organizations have fulfilled their requirements for
education and training primarily through instructor-led training, computer based
training and CD-ROM multimedia training. Instructor-led training typically
requires employees to attend classes at off-site locations. Computer based
training generally consists of text and graphics that are downloaded over
computer networks to a user's PC or accessed through client server applications.
Computer based training is limiting because there is no audio and the entire
training program must be downloaded before a user can begin. In addition, there
are significant costs from computer network congestion and a high degree of
internal technical support. Currently, CD-ROM distribution of multimedia
training is an important factor in today's market. However, we believe that the
popularity of Internet and network delivered multimedia training will increase
at a faster rate than the popularity of CD-ROM multimedia training.
We seek to fulfill the needs of the education and training marketplace
through diverse content delivered in various media. Our target customers include
both the individual consumer and organizations. We market tutorials utilizing
our streaming technology. In addition, we deliver text based tutorials through
our websites. We believe that the addition of ViaGrafix will broaden our
customer base and enable us to deliver CD-ROM based tutorials, increase
ownership of content and increase our production capabilities.
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We have created or licensed over 200 multimedia tutorial titles. The subject
matter of the tutorials includes the following:
- Desktop applications including Windows and Microsoft Office.
- Courses to prepare for Microsoft Certification.
- Programming courses including Visual Basic and HTML.
- Business skills including time management and interviewing skills.
PRODUCTS AND SERVICES
CONSUMER
We offer a wide spectrum of step-by-step instructions on skills, activities
and tasks; an extensive set of discussion forums where consumers can find and
share information; and hundreds of helpful tips through our website, LEARN2.COM.
Approximately 200 comprehensive tutorials and 1,000 learnlets, abbreviated
tutorials, are currently available online, and another 200 tutorials are in the
editorial development process.
In addition, we market interactive multimedia tutorials to consumers on the
Internet through our TUTORIALS.COM website. Users of TUTORIALS.COM can choose
from a variety of titles covering a wide range of subjects including desktop
application software, computer programming and English as a second language.
This online library is targeted to both the mass consumer audience who
frequently use the Internet as well as the large and growing segment of work at
home professionals and students who demand instantaneous results. Our goal is to
be universal so that TUTORIALS.COM is linked to numerous websites and web
searches for "tutorials" will always link to TUTORIALS.COM.
CORPORATIONS AND OTHER ORGANIZATIONS--LEARNING UNIVERSITY AND STREAMMAKER
Our solutions for corporations and other organizations consist primarily of
the following products and services:
- Learning University-TM-.
- StreamMaker-TM-.
- Custom tutorial creation and conversion.
- Custom StreamAgent creation.
LEARNING UNIVERSITY--Learning University-TM- or LU is an interactive
education and learning website that we maintain for our customers. LU includes
tutorials, administration, reporting and e-commerce capabilities. LU provides a
cost effective, value added service that we believe is superior to that which an
organization can deliver on its own. Our customers can offer training to their
employees across a computer network, corporate intranet or the Internet. LU
allows each customer and its employees to tailor training to their individual
needs. LU enables users to practice and test skills as they learn, utilizing
simulation technologies that allow users to practice many of the concepts
introduced. After the completion of each course, users can print a completion
certificate indicating that they have successfully met all of the requirements
of the course. Users of LU can choose from a variety of titles covering a wide
range of subjects, including desktop application software, computer programming
and business skills.
STREAMMAKER--StreamMaker-TM-, our authoring tool, utilizes patented
technologies to produce fully synchronized, interactive, CD-ROM quality
multimedia streams that can be delivered through computer network connections,
including a 28.8 modem connection, without download; and streams of data to
enable animated characters to automatically speak and gesture based on
speaker-independent voice
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recognition and text-to-speech synthesis. StreamMaker produces multimedia
streams and StreamAgents. The benefits of multimedia streams include:
- A proprietary method for graphics compression.
- A patented technology which ensures that the elements of a multimedia
production including audio, graphics, animation, video and text are
synchronized.
- The ability to develop interactive streams.
- A design which facilitates integration with other technologies.
- To date, we have licensed StreamMaker to several companies including IBM
and Intuit.
The benefits of StreamAgents include:
- The ability to reuse animation gestures with different dialogs. This saves
production costs and allows the modification of gestures and dialogs in
only minutes instead of days or weeks.
- The quality and impact of the animation experience exceeds the typical
quality experienced at normal Internet modem speeds by streaming animation
data and then assembling it on the PC.
- No special programming skills are necessary.
- Users can program interactivity to link the characters to web pages and
applications.
CUSTOM TUTORIAL CREATION AND CONVERSION--We use StreamMaker to stream or
create "7th Street-Enabled" tutorials for our customers' web-based applications
or proprietary software. We market these services to companies that have active
web sites. Our services are intended to help our customers educate their
customers on the use of, navigation of, content of, and products on their web
sites. We also use StreamMaker to convert existing content so that it can be
streamed. In certain cases we may recommend authorized consultants to our
customers to create original or convert existing content for them.
CUSTOM STREAMAGENT CREATION--We create custom StreamAgents that represent a
company's mascot or logo. StreamAgents can deliver virtually any kind of
information and provide interactivity to assist and instruct the average
Internet user. StreamAgents can be delivered over the Internet in a variety of
ways including embedded into web pages.
THE TOTAL SOLUTION
We believe that there is a significant market opportunity for our flexible,
engaging and cost-effective education and training solutions. We believe that
the combination of our off the shelf and custom products and services will
attract customers who desire the convenience of one stop shopping. In addition,
we believe that once customers have purchased our products and services, we will
have significant opportunities to sell additional products and services.
PRODUCT DISTRIBUTION--CORPORATIONS AND OTHER ORGANIZATIONS
We market our products through direct and indirect sales channels.
Direct sales channel--On March 1, 1999 we began to market our products and
services directly to Fortune 1000 companies and government agencies. We market a
total learning solution through our combined offering of LU, technologies and
custom services. We generally license our tutorials through one year agreements.
Indirect sales channel--We have entered and continue to enter into reseller
agreements with value added resellers. These resellers sell LU to corporations,
school systems and governmental agencies either under their own branded websites
or with co-branded websites. The resellers generally license the tutorials
through one-year agreements. Our success is not contingent upon any single
reseller.
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SUPPLIERS
We currently have relationships with approximately ten content providers. We
believe that we have assembled a critical mass of titles for market acceptance.
However we intend to broaden the scope of the subject matter and increase the
number of content providers. Some of the new subjects may include home
improvement, foreign languages and K-12 courseware.
E-COMMERCE AND INFRASTRUCTURE TECHNOLOGY
We have implemented website management tools, search engines, transaction
processing and fulfillment services using a combination of our own proprietary
technologies and commercially available, licensed technologies. Our current
strategy is to create and enhance our proprietary technologies and to license or
acquire commercially developed technologies for other applications where
available and appropriate.
Our systems administrators and network managers monitor and operate our
websites, network operations and transaction processing systems. The continued
uninterrupted operation of our web sites and transaction processing systems is
essential to our business. We use the services of an Internet service providers
to obtain connectivity to the Internet.
COMPETITION
INTERNET AND WEB-BASED TRAINING
The Internet and web-based training market is new, rapidly evolving and
intensely competitive. Our current and potential competitors include:
- Other web-based training companies including ZD, Inc.
- Traditional computer based training companies including CBT Group PLC and
NETg.
- Instructor led training companies.
- CD-ROM companies and video companies.
- Publishers of instructional books.
- Companies that provide help desk services.
Currently, computer based training is more common than web-based training
and may continue to be widely accepted. Furthermore, the web-based training
market requires its customers to have Internet access. The computer based
training industry has several dominant, more financially secure players
including CBT Group and NETg both of which have entered the web-based training
market.
MULTIMEDIA STREAMING AND AGENT TECHNOLOGIES
The two major providers of streaming technology are Microsoft and
RealNetworks Inc. We believe that StreamMaker is different than other streaming
technologies because we engineered it specifically for use in training and
distance learning applications. However, both Microsoft and RealNetworks have
substantial resources. In addition Macromedia, Inc. has strong CD-ROM authoring
technologies which it has been converting into Internet capable technologies.
The digital animation and "intelligent agent" products and services industry
is intensely competitive, rapidly changing and significantly affected by new
product introductions and other market activities of industry participants. We
are aware of numerous competitors that provide products and services similar to
those offered by us including the following:
- Animated character software vendors including Microsoft, Macromedia,
Extempo, ToggleThis, 3D Planet, Atomic 3D, Pulse and Parable.
- Recommendation and agent software vendors, including Net Perceptions,
Autonomy and Aptex.
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- Q&A natural language response systems vendors, including Teknimedia, Big
Science, Inference and c-serv.
In addition, with the rapid expansion of the Internet, it is likely that
additional competitors will enter the digital animation and "intelligent agent"
market. Increased competition may result in the development of products which
are superior to ours, or are perceived by the market to be superior, which could
cause price reductions, reduced gross margins and loss of market share for us.
INTELLECTUAL PROPERTY AND LICENSES
Our success and ability to compete effectively will depend, in part, on our
ability to protect our intellectual property. We rely primarily on a combination
of statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third-party nondisclosure agreements and
other methods to protect our proprietary rights. We have received patents that
are important in the operation of our business. These patents may not be
sufficiently broad to protect our rights.
We have limited mechanisms to prevent or inhibit unauthorized use, but we
generally require the execution of a license agreement that restricts copying
and use of our products. In addition, we have agreements with resellers and
customers which require the other party to pay us royalties based on sales or
use of our products. We may not be compensated properly if those sales or uses
are not reported to us. If unauthorized copying or misuse of our products were
to occur to any substantial degree, then our business could be materially
adversely affected. It may be possible for a third-party to copy or otherwise
obtain and use our tutorials or technologies without authorization, or to
develop similar tutorials or technologies independently.
We use employee and third-party confidentiality and non-disclosure
agreements to protect our trade secrets and unpatented know-how. We require our
employees to assign to us all rights in any proprietary information or
technology made or contributed by the employee during his or her employment with
us. In addition, we regularly enter into non-disclosure agreements with third
parties including consultants, potential strategic partners and customers.
Unfortunately, these agreements cannot guarantee the confidentiality of our
trade secrets or unpatented know-how, nor can they prevent third parties from
independently developing substantially equivalent proprietary information or
copying, developing, or otherwise obtaining and using our proprietary
information without authorization.
We may resort to litigation to enforce our intellectual property rights,
determine the validity and scope of the proprietary rights of others, or defend
ourselves against claims of infringement or invalidity by others. While we are
not currently engaged in any intellectual property litigation or proceedings, we
may be in the future. An adverse outcome in a litigation or similar proceeding
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from others, or require us to cease marketing or using
certain products or services. The cost of addressing any intellectual property
litigation, both in legal fees and the diversion of management resources,
regardless of whether the claim is valid, could be significant.
Third parties may claim that our current or future products infringe on
their proprietary rights. We may be increasingly subject to these claims as the
number of products and competitors in the education and training industry grows
and the functionality of products in the marketplace overlaps. Any of these
claims, with or without merit, could result in costly litigation or might
require us to enter into royalty or licensing agreements. These royalty or
license agreements, if required, may not be available on terms acceptable to us,
if at all.
EMPLOYEES
As of June 1, 1999 we had a total of 89 full-time employees, of whom 30 were
engaged in sales and marketing, 51 in product development, production and
customer support, and 8 in management,
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administration and finance. Substantially all of the employees work in our
offices in Richardson, Texas, Golden, Colorado or White Plains, New York. None
of our employees are subject to a collective bargaining agreement and we have
not experienced any work stoppages. We believe that our relationship with our
employees is good.
We may not be able to retain our key executives and engineers. As an
organization that is currently integrating the business plans and technologies
of various companies, we heavily rely on certain employees of the companies. We
expect to continue to hire additional product development, sales and marketing,
production and accounting staff. We may not be successful in attracting,
retaining or motivating key personnel. Our inability to hire and retain
qualified personnel or the loss of the services of key personnel could have a
material adverse effect upon our business.
PROPERTIES
Learn2.com leases the following facilities:
<TABLE>
<CAPTION>
EXPIRATION RENEWAL
LOCATION USE SQ. FEET DATE OPTION NOTES
- ------------------------------ ------------------------------------ ----------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C>
White Plains, New York........ Current Headquarters Office 3,965 9/30/99 None
White Plains, New York........ Future Headquarters Office 12,000 12/31/04 One 5 year
term
Golden, Colorado.............. Research & Development and 5,900 3/06/00 None
Production
Richardson, Texas............. Research & Development 6,170 3/31/02 None (1)
Richardson, Texas............. Sub-Leased 23,500 7/31/99 None (2)
Glendale, California.......... Office/Sub-Leased 37,680 9/30/02 None (3)
</TABLE>
- ------------------------
(1) This was our headquarters until February 16, 1999. We plan to sublet most of
this facility as soon as a suitable sublessee can be found and the necessary
approvals are obtained from the landlord.
(2) This was our headquarters until August 1998. Since that time the entire
facility has been subleased.
(3) This facility was our production studio until early 1998. Beginning December
1, 1998 we subleased 75% of this facility to a third party for approximately
100% of the rent it pays to the landlord. The sublease expires on September
30, 2002. We plan to use the balance of the space for meetings with
potential and existing West Coast customers.
LEGAL PROCEEDINGS
We are involved in certain claims and lawsuits that are generally incidental
to our business. We are vigorously contesting all such matters and believe that
their ultimate resolution will not have a material adverse effect on our
financial position, results of operations or cash flows.
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VIAGRAFIX
GENERAL
ViaGrafix was founded in 1990 to create training products for the PC user.
ViaGrafix developed a library of computer training videos for computer software
including word processors, spreadsheets and operating systems. The business was
expanded to include both business and home computer software training products.
With the acquisition of American Small Business Computers in August 1995,
ViaGrafix again expanded its line of business to include the development and
marketing of PC graphics software.
Following the acquisition of eTracks.com in July of 1998, ViaGrafix's
product offerings were further expanded to include Internet direct marketing
with interactive broadcast email for businesses, and an online community of more
than 500,000 members, as of March 31, 1999, that enables members to purchase
products at a discount from advertised retail prices.
ViaGrafix's training courses and interactive multimedia training courses are
delivered on CD-ROM, LANs, intranets and the Internet for a variety of computer
software and video tutorials. ViaGrafix has developed and markets more than
1,000 training courses for most major PC software packages. These products
provide an audio-visual environment that is designed to allow users to learn
faster and increase retention and productivity. Organizations that purchase
ViaGrafix's multimedia training products can offer them across a network to all
employees.
ViaGrafix's principal graphics software product, DesignCAD, is a
computer-aided design package sold worldwide. ViaGrafix also produces several
other CAD-related software packages. In 1998, ViaGrafix introduced ViaDraw, its
initial entry into a new line of graphics software products for the retail
market. The primary platforms for both the training and software products are
Windows.
Potential training customers include anyone who has a need to learn to use
computer software including individuals, small businesses, corporations and
government agencies. Graphics software customers include architects, engineers,
designers and hobbyists. Potential customers for eTracks.com include any
individuals and businesses that are Internet-active.
ViaGrafix's products are sold through distributors and resellers and
directly to end-users. ViaGrafix uses its own catalog, promotion of its 800
number and its Internet website to sell training and software products directly
to end-users. Direct sales are also achieved by direct-mail advertising to
ViaGrafix's database of existing customers and exhibition at approximately 100
trade shows including COMDEX, throughout the United States annually.
ViaGrafix has experienced growth in revenues since its inception primarily
as a result of internal product development. ViaGrafix's sales have grown from
$4.9 million in 1994 to $18.8 million in 1998.
INDUSTRY BACKGROUND
TRAINING MARKET. With the proliferation of computers, there has been a
continually increasing need for training and educational products for computers
and software, and for better, easier-to-use software products, or what the
industry refers to as information technology products. Businesses and
organizations are becoming increasingly dependent upon computer systems in order
to remain competitive in their marketplace. This has resulted in significant
growth in the information technology training market. According to International
Data Corporation, the U.S. market for computer education and training grew to
$8.3 billion in 1997 and is expected to reach $14 billion by the year 2002.
The information technology training market is diverse, consisting of a
variety of product and service providers. Technology-based training products for
software programs and other information technology products include CD-ROM based
training, video-based training and Internet-delivered training.
Non-technology-based training products for information technology include books
and other
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written materials. Service providers include technology manufacturers,
commercial trainers, consulting firms, value-added resellers, computer dealers,
system integrators, network integrators, colleges, universities and independent
service organizations.
The majority of information technology training is still delivered by
instructor-led training. International Data Corporation estimates that this
segment of the industry accounted for $6.5 billion, or 78% of the total market,
in 1997. However, for several years instructor-led training has grown at a
slower rate and is expected to continue to grow at a slower rate than
information technology training as a whole. Technology-based training is quickly
gaining acceptance as a competent and efficient method for software education.
International Data Corporation estimates that technology-based training for
information technology products will grow from $1.5 billion in 1997 to $7.7
billion in 2002, representing an annual growth rate of 40%. The methods for
delivering this training include:
- computer based training.
- CD-ROM/multimedia.
- video-based training.
- electronic performance support systems.
GRAPHICS SOFTWARE MARKET. Graphics software for Windows includes CAD
software, three-dimensional modeling software, general drawing and design
software. With the increase in the use of Windows, computers are increasingly
being used for design and other graphics intensive tasks. New users of Windows
graphics software will be looking for easy-to-learn, easy-to-use software that
is affordable.
THE VIAGRAFIX SOLUTION
ViaGrafix designs, develops, markets, sells and supports its
technology-based information technology training products and graphics software
products based on the following principles:
- LEVERAGE INTERNET TECHNOLOGIES. ViaGrafix's products employ Internet
technologies for delivery and communication. ViaGrafix's multimedia
information technology training products are available via corporate
intranets and the Internet. ViaGrafix's software products utilize Internet
technologies by offering Internet file compatibility and direct e-mail
support.
- OPTIMIZE TRAINING PRODUCTS FOR PRODUCTIVITY. ViaGrafix develops and
markets training courses that teach people how to use popular software
packages such as Microsoft Excel, Microsoft Word, Microsoft Windows, Lotus
1-2-3 and WordPerfect. These educational courses offer many advantages
over traditional instructor-led training. These courses allow users to fit
training to their work schedules, begin training at a level that is
appropriate for them, train only on the topics that are relevant to their
needs and practice and test their skills as they learn.
- OFFER A BROAD RANGE OF TRAINING PRODUCTS. ViaGrafix also develops and
markets training courses that teach people how to use a diverse selection
of software applications including PageMaker, DesignCAD, CorelDraw, ACT!
and FrontPage. ViaGrafix further develops and markets training courses
that teach more technical topics including MCSE certification, Visual C++
programming, Visual Basic and HTML programming.
- OFFER EASY-TO-USE GRAPHICS SOFTWARE PRODUCTS. ViaGrafix designs graphic
software products including DesignCAD and ViaDraw to be fully functional,
easy-to-learn and easy-to-use. These products are used by architects,
engineers, inventors, designers, home hobbyists and others needing
computer-aided drafting and computer drawings.
- OFFER PRODUCTS WITH SUPERIOR VALUE. ViaGrafix attempts to develop
products that can be marketed at a lower price than similar competing
products.
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- RELEASE PRODUCTS TO THE MARKET QUICKLY. ViaGrafix attempts to develop its
products and release them to the market in a relatively short time frame.
GROWTH STRATEGY
ViaGrafix's objective is to become a leading provider of technology-based
information technology training products and graphics software products to the
computer market. The following are the key elements of ViaGrafix's strategy to
achieve that objective:
- EXPAND INTERNET SALES AND DELIVERY. ViaGrafix believes that its products
are well positioned for Internet commerce. The price points of the
products, which typically fall between $20 and $100, are affordable, and
the products can appeal to virtually any Internet user. ViaGrafix has
developed its training products to be deliverable via the Internet in real
time, using audio and video streaming. ViaGrafix intends to enter into
strategic relationships with major Internet companies regarding the sales
and delivery of its products on the Internet. The content of ViaGrafix's
training courses is a valuable asset in the Internet marketplace.
- INCREASE DIRECT CORPORATE SALES. ViaGrafix has created an internal
corporate sales force to increase direct sales to the corporate market.
Corporate sales currently account for a nominal portion of ViaGrafix's
sales and represent an area of potential sales growth for existing product
lines. In addition to expanding its direct sales force, ViaGrafix is also
adding additional features to its training products focused on the
corporate client. ViaGrafix's subscription licensing model offers
customers access to its courses using video, CD-ROM, client-server,
intranet or Internet delivery.
- INCREASE SALES THROUGH MAJOR RETAILERS. ViaGrafix's sales to major
retailers have grown significantly in the past year and it expects to be
able to continue growth of those sales. ViaGrafix still sells to a
relatively small number of major retailers, which leaves ViaGrafix with a
natural path for growth by adding more retail accounts.
- EXPAND TRAINING PRODUCT OFFERINGS. ViaGrafix has created a product
development system that utilizes development technologies and a
streamlined development process to reduce development time and cost.
ViaGrafix increased its development staff in 1998 to increase the size of
its product offering and introduce new training products earlier in the
software product sales cycle. This increase in development staff will
continue in 1999. ViaGrafix began adding courses on more technical
material in 1998. A training library containing comprehensive training for
MCSE, Oracle, SQL and technical Internet topics is appealing to many
consumer and corporate clients.
- EXPAND SOFTWARE PRODUCT DEVELOPMENT. ViaGrafix expects to successfully
market new easy-to-use graphics software utilizing its established
customer base and sales channels. ViaGrafix has the ability to use its
core DesignCAD technology to produce these new products at a lower
incremental cost. Graphics software products are also currently under
development. These products will expand ViaGrafix's software line into
broader, less technical areas. ViaGrafix also plans to create industry
specific applications using the DesignCAD engine.
- INCREASE INTERNATIONAL SALES. ViaGrafix intends to boost international
sales and continue a long-term effort to translate its products into other
languages, beginning with translations of its products into Spanish,
German and French. International sales account for more than 50% of many
major software companies' sales, but account for less than 10% of
ViaGrafix's sales.
- EXPAND THROUGH ACQUISITION. ViaGrafix may engage from time to time in
discussions with respect to potential acquisitions. ViaGrafix will look
primarily for acquisitions that can offer additional content, sales
channels or technology, and ViaGrafix will consider an acquisition's
long-term prospects the most important criteria.
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PRODUCTS
TECHNOLOGY-BASED INFORMATION TECHNOLOGY TRAINING PRODUCTS. ViaGrafix has
developed and marketed more than 1,000 training courses. ViaGrafix's principal
educational products are multimedia courses and training videos teaching today's
most popular software including Microsoft Windows, Microsoft Office, the
Internet, Visual C++, Visual Basic, ACT!, Quicken, PageMaker, CorelDraw, Lotus
Notes, DesignCAD and more.
Each software application may have from one to thirteen courses associated
with it. For example, the DesignCAD Pro 2000 training series consists of
Learning DesignCAD Pro 2000, Introduction, Learning DesignCAD Pro 2000,
Advanced, and Learning DesignCAD Pro 2000, Solid Modeling. There are six courses
for Microsoft Excel 97, 12 courses for Windows NT 4 Microsoft Certified
Professional (Core), and five courses for Programming in Visual C++.
Corporate training departments and training companies commonly incorporate
multimedia courses and video tutorials into their existing training programs as
a supplemental way to meet varying learning preferences of individuals.
Multimedia courses and video tutorials can also reduce training time and costs
otherwise incurred through seminars and personal or classroom instruction and
enable training to take place anytime or anywhere. ViaGrafix believes that these
tutorials are an excellent way to increase employee productivity at a minimal
cost.
Since 1996, ViaGrafix has developed its multimedia-based interactive
software tutorials to be networkable, which allow them to be accessible
simultaneously by multiple users through LANs, corporate intranets and the
Internet. Beginning with Microsoft Office 97 tutorials, an optional Skill
Development Quiz concludes each chapter and a comprehensive test is offered
optionally at the end of each tutorial.
ViaGrafix's training products are offered in three configurations:
- MULTIMEDIA COURSES. These courses are sold on CD-ROM in a durable clear
plastic case with printed graphics. These courses include the full range
of instructional titles from beginners to advanced users, and typically
have a suggested retail price of $49.95. Multimedia courses generally
contain two to four hours of training. Multimedia courses are also offered
on LANs, intranets and the Internet. Pricing for these delivery methods is
based on the number of titles and length of license period.
- VIDEO TUTORIALS. These tutorials usually run from 60 to 90 minutes in
length and are packaged in a black plastic binder with printed graphics.
Most have a suggested retail price of $49.95. This line includes tutorials
for beginners, intermediate and advanced users.
- TEACH YOURSELF VIDEO TUTORIALS. These tutorials are designed for
beginners, are 60 minutes or shorter in length, have less instructional
detail than the regular video tutorials, are packaged in a printed
cardboard case and have a suggested retail price of $19.95.
GRAPHICS SOFTWARE PRODUCTS. ViaGrafix develops and markets several graphics
software packages. DesignCAD Pro 2000 is the latest CAD product offered by
ViaGrafix. DesignCAD Pro 2000, with a retail price of $299, offers true solid
modeling, extensive dimensioning, animation, Internet capability, file
compatibility with all the major file types and object linking and embedding.
ViaGrafix introduced a line of graphics software products for the consumer
market in late 1998. ViaDraw, a general-purpose graphics package released in
November 1998, is its first entry in this line. ViaCAD, a low cost CAD package,
was released in the first quarter of 1999. ViaPage, a web page editor, was
released in the second quarter of 1999. All of these new products are targeting
the consumer marketplace via retail stores and Internet commerce at a price
point of $40-60.
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INTERNET MARKETING PRODUCTS AND SERVICES. ViaGrafix's subsidiary,
eTracks.com, provides Internet direct marketing services with interactive
broadcast email services for businesses that rely on web-based commerce and
transactions, and operates eTracks.com, an online community of over 500,000
members, as of March 31, 1999. eTracks.com members can purchase products at a
discount from advertised retail prices.
PRODUCT DEVELOPMENT
Since inception, ViaGrafix has made substantial investments in product
research and development. During 1998, 1997 and 1996, research and development
expenses were approximately $1.7 million, $1.2 million and $467,000,
respectively. As of June 1, 1999, ViaGrafix had 73 employees engaged in research
and development. Substantially all of ViaGrafix's product research and
development activities take place in its Pryor, Oklahoma facility.
SALES AND MARKETING
ViaGrafix sells and markets its technology-based information technology
training products and graphics software products directly and through resellers
and distributors. During 1998, ViaGrafix generated approximately 29% of its
revenues through direct sales and approximately 71% of its revenues through
resellers and distributors. ViaGrafix relies upon sales to Ingram Micro and,
more recently, Tech Data, which are major distributors that supply
computer-related products to other resellers including major retailers. Sales to
Ingram accounted for approximately 29% of ViaGrafix's 1998 revenues. ViaGrafix
also relies upon sales to certain major retailers including Best Buy Company,
Inc., CompUSA Inc., Fry's Electronics, Inc., Hastings Entertainment, Inc., Micro
Center, Office Max, Inc. and Staples, Inc. Direct and indirect sales to
ViaGrafix's six top retailers accounted for 33% of ViaGrafix's 1998 revenues.
Indirect sales of ViaGrafix's products are supplied to these retailers through
distributors including Ingram and Tech Data. ViaGrafix is currently investing,
and intends to continue to invest, significant resources to develop these
channels.
ViaGrafix expects to utilize the increasing influence of the Internet by
relying upon sales to certain Internet merchants. Subsequent to December 31,
1998, some of ViaGrafix's training products have been made available by AOL to
its subscribers on the AOL service and to Beyond.com, Buy.com and Netmarket.
Of ViaGrafix's sales in 1998, 1997 and 1996, 83%, 81% and 69%, respectively,
were of its training products and 13%, 19% and 31%, respectively, were of its
software products. ViaGrafix acquired the assets of eTracks.com on July 31,
1998, and for the last five months of the year this subsidiary generated
approximately 4% of ViaGrafix's total 1998 sales.
CUSTOMERS (END-USERS)
ViaGrafix training products are used to educate people in the use of
software. ViaGrafix estimates that approximately two-thirds of its training
customers use the products for work-related activities and approximately
one-third use the products for personal improvement.
ViaGrafix estimates that approximately one-third of DesignCAD users are
professional engineers and approximately one-third use DesignCAD for
architectural and building applications. The remaining customers use DesignCAD
for a wide variety of purposes including facilities management, technical
illustration and casual drawing.
ViaGrafix has an extensive and diverse list of end-users including thousands
of users from the telecommunications, technology, oil and gas, healthcare,
insurance, government, finance and education industries, among others.
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CUSTOMER SUPPORT
ViaGrafix believes that its ability to provide quality customer service and
support to its distributors and end-user customers is essential to the continued
acceptance of its products. ViaGrafix has a 60-day return policy on all products
and offers extended terms and return policies to some major retailers and
distributors. ViaGrafix's customer support services are as follows:
- TECHNICAL SUPPORT. ViaGrafix's technical staff provides telephone, fax,
mail and email support to the entire customer base. In addition, qualified
developers and partners who work closely with ViaGrafix's products have
extended access to its Internet support site, which contains technical
updates and maintenance files.
- CUSTOMER SERVICE. ViaGrafix's customer service staff provides processing
and shipping information on current and future orders. These personnel
also handle customer inquiries involving delivery, availability, priority
handling and replacement products.
PRODUCTION AND SUPPLIERS
The majority of the production of ViaGrafix's products takes place at its
Pryor, Oklahoma facility. This primarily includes duplicating and packaging.
Inventories of finished goods are generally kept at levels equal to one to
six weeks of orders. The principal physical components of ViaGrafix's products
are diskettes, CD-ROMs, videotapes, printed material and manuals. ViaGrafix
keeps significant inventories of these raw materials in order to meet rapid
delivery requirements of its customers. The materials that make up these
principal physical components of ViaGrafix's products are available from a
number of suppliers. ViaGrafix has not experienced any material difficulties or
delays in the manufacture and assembly of its products or material returns due
to product defects or availability.
BACKLOG AND SEASONALITY
ViaGrafix typically ships products within a short period after acceptance of
orders from distributors and other customers. Accordingly, ViaGrafix typically
does not have a material backlog of unfilled orders and net sales in any quarter
are substantially dependent on orders booked in that quarter.
ViaGrafix's business has been affected somewhat by seasonal trends including
higher net revenues in the fiscal quarter ended December 31 as a result of
strong calendar year-end holiday purchases by end-users of its products. As a
result, ViaGrafix may experience lower net revenues in the fiscal quarters ended
March 31, June 30 and September 30. These seasonal patterns may be overshadowed
in particular quarters by the timing of new product introductions, expansion
into new markets and other factors affecting ViaGrafix's business.
EMPLOYEES
As of June 1, 1999, ViaGrafix had a total of 252 employees, including 78
employees in sales, marketing, technical support and customer service, 73
employees in research and development, 56 employees in production and product
handling and 45 employees in administration and support roles. ViaGrafix has
allocated approximately 8,000 square feet of its facilities to recreational,
physical fitness and child-care facilities for, and offer flexible work
schedules to, many of our employees. None of ViaGrafix's employees are
represented by a labor union. Management believes that relations with
ViaGrafix's employees are good.
PROPERTIES
ViaGrafix's administrative, marketing, production and product development
facilities consist of approximately 68,000 square feet at one location in Pryor,
Oklahoma. ViaGrafix owns and occupies this
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facility and the five acres of land on which it is located. In December 1998,
ViaGrafix purchased an additional ten acres of land in Pryor, Oklahoma for
expansion of its facilities and began construction of a 21,000 square foot
facility in the first quarter of 1999.
INTELLECTUAL PROPERTY RIGHTS
ViaGrafix regards certain features of its internal operations, software and
documentation as its intellectual property. ViaGrafix believes that, because of
the rapid pace of technological change in the computer software industry, trade
secret and copyright protection are less significant than factors including the
knowledge, ability and experience of its employees, frequent product
enhancements and the timeliness and quality of support services. ViaGrafix
relies on a combination of contract, copyright, trademark and trade secret laws
and other measures to protect its intellectual property. ViaGrafix has no
patents. ViaGrafix licenses its software products primarily under "shrink-wrap"
licenses that are not signed by its licensees. These shrink-wrap licenses may be
unenforceable under the laws of certain jurisdictions.
ViaGrafix provides its products to customers on a right-to-use basis under
non-exclusive licenses, which generally are nontransferable and have a perpetual
term. ViaGrafix typically licenses its products solely for the customer's
internal operations.
COMPETITION
The market for technology-based information technology training products and
graphics software products is highly competitive and is characterized by rapid
changes in technology and frequent introductions of new platforms and features.
ViaGrafix expects competition to increase as other companies introduce
additional and more competitive products in these markets. In the video training
business, ViaGrafix competes primarily with a number of small private companies.
In the multimedia training business, ViaGrafix competes directly against a
number of small private companies and indirectly with a number of large
computer-based training vendors, most of whom are expected to enter the
multimedia training business. Some of these computer-based training vendors
including CBT Group, and NETg have larger technical staffs, greater brand
recognition and market presence, more established and larger marketing and sales
organizations, and substantially greater financial resources than ViaGrafix.
Some of ViaGrafix's competitors in the graphics software business such as
AutoDesk, Inc., Visio Corporation and International Microcomputer Software, Inc.
have larger technical staffs, greater brand recognition and market presence,
more established and larger marketing and sales organizations, and substantially
greater financial resources than ViaGrafix.
ViaGrafix believes that the competitive factors affecting the market for its
products include:
- product performance.
- price and quality.
- product functionality and features.
- the availability of products for existing and future platforms.
- the ease of use and ease of integration of the products with other
hardware and software components.
- the quality of customer support services.
ViaGrafix's present or future competitors may be able to deliver products
comparable or superior to those offered by it or adapt more quickly than it to
new technologies or evolving customer requirements. In order to remain
successful in the software products market, ViaGrafix must respond to
technological change, customer requirements and competitors' current products,
and product
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enhancements and innovations. In particular, in an effort to respond to customer
feedback and new technological advances, ViaGrafix is currently developing
additional products and enhancements for its multimedia training product line
that is deliverable via CD-ROM, LAN, intranet or the Internet.
LEGAL PROCEEDINGS
From time to time, ViaGrafix is involved in litigation arising out of
operations in the normal course of business, none of which is expected to have a
material adverse effect on ViaGrafix's results of operations or financial
position. See "Risk Factors--Class Action" on page 25 for a discussion of a
pending lawsuit.
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<PAGE>
CERTAIN TRANSACTIONS
LEARN2.COM
On May 6, 1998, we completed a private placement of senior secured
promissory notes in the aggregate principal amount of $4,500,000 and warrants
exercisable for 675,000 shares of common stock, at an exercise price of $.01 per
share. In the private placement, East-West Capital Associates, Inc. purchased
senior notes in the aggregate principal amount of $1,500,000 and warrants
exercisable for 225,000 shares of common stock, at an exercise price of $.01 per
share. Merv Adelson, one of our directors, is the trustee of the sole
stockholder of East-West Capital and currently serves as its Chairman of the
Board and Chief Executive Officer.
In May 1998, our Board approved the grant of a warrant to purchase 200
shares of Series C Preferred Stock or, upon the filing of a certificate of
amendment to the certificate of incorporation increasing our authorized common
stock, 200,000 shares of common stock, to East-West Capital in connection with a
consulting agreement. The exercise price of the warrant is as follows: 50 shares
of Series C Preferred Stock at $2.00 per one one-thousandth of a share, 50
shares at $3.00 per one one-thousandth of a share, 50 shares at $4.00 per one
one-thousandth of a share and 50 shares at $5.00 per one one-thousandth of a
share, or 50,000 shares of common stock at $2.00 per share, 50,000 shares at
$3.00 per share, 50,000 shares at $4.00 per share and 50,000 shares at $5.00 per
share.
In February 1999, Donald Schupak, our Chairman of the Board, exercised
options to purchase an aggregate of 600,000 shares of common stock for an
aggregate exercise price of $1,200,000. Mr. Schupak paid us $6,000 which
represented the par value of the shares of common stock purchased. Mr. Schupak
borrowed the remaining $1,194,000 which accrues interest at 6% payable quarterly
or, at the option of Mr. Schupak, accrues at the rate of 7% payable upon
maturity of the loan in February 2004. As collateral for the loan, Mr. Schupak
pledged the 600,000 shares of common stock purchased plus an additional 213,000
shares of common stock. If the market value of the pledged shares of common
stock is equal to more than 200% of the principal amount of the loan, then Mr.
Schupak may request that we release a number of shares which have a market value
in excess of that amount. If the market value of the pledged shares of common
stock is equal to less than 125% of the principal amount of the loan, then Mr.
Schupak must pledge additional shares of common stock to bring the market value
of the pledged shares to that amount.
In March 1999, Robert Alan Ezrin, our Vice Chairman of the Board, exercised
options to purchase an aggregate of 145,000 shares of common stock for an
aggregate exercise price of $310,000. Mr. Ezrin paid us $103,333 and borrowed
the remaining $206,667. The loan accrues interest at 6% payable quarterly or, at
the option of Mr. Ezrin, accrues at the rate of 7% payable upon maturity of the
loan in March 2004. As collateral for the loan, Mr. Ezrin pledged the 145,000
shares of common stock purchased plus an additional 1,964 shares of common
stock. If the market value of the pledged shares of common stock is equal to
more than 200% of the principal amount of the loan, then Mr. Ezrin may request
that we release a number of shares which have a market value in excess of that
amount. If the market value of the pledged shares of common stock is equal to
less than 125% of the principal amount of the loan, then Mr. Ezrin must pledge
additional shares of common stock to bring the market value of the pledged
shares to that amount.
In March 1999, James A. Cannavino, one of our directors, exercised options
to purchase an aggregate of 215,000 shares of common stock for an aggregate of
$430,000. Mr. Cannavino paid us $143,333 and borrowed the remaining $286,667.
The loan accrues at 6% payable quarterly or, at the option of Mr. Cannavino,
accrues at the rate of 7% payable upon maturity of the loan in March 2004. As
collateral for the loan, Mr. Cannavino pledged the 215,000 shares of common
stock purchased. If the market value of the pledged shares of common stock is
equal to more than 200% of the principal amount of the loan, then Mr. Cannavino
may request that we release a number of shares which have a market value in
excess of that amount. If the market value of the pledged shares of common stock
is
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equal to less than 125% of the principal amount of the loan, then Mr. Cannavino
must pledge additional shares of common stock to bring the market value of the
pledged shares to that amount.
On February 10, 1999, our Board approved, by unanimous written consent, the
reduction of the conversion price of our 7% Convertible Subordinated Notes due
February 11, 1999. Our Board reduced the conversion price of the 7% convertible
notes from $3.53 to $2.45, which represented 80% of the closing market price of
the common stock on February 10, 1999. This reduction was made to induce the
holders of the 7% convertible notes to convert in lieu of receiving cash from
us. Mr. Adelson owned an aggregate principal amount of $108,108 of the 7%
convertible notes which he converted into 44,125 shares of common stock instead
of 30,654 shares of common stock due to the reduction of the conversion price.
On February 16, 1999, we acquired all of the outstanding common stock and
preferred stock of Street Technologies. Pursuant to the agreement and plan of
merger, we issued 4,948,182 shares of common stock and 21,661 shares of Series D
Preferred Stock to the stockholders of Street Technologies. Stephen P. Gott, our
President, Chief Executive Officer and a Director, received 557,846 shares of
common stock and 17,969 shares of Series D Preferred Stock which will be
converted into 5,989,786 shares of common stock if approved by our stockholders.
Each of Scott Near, the Senior Vice President-Development of Learn2.com, and
Safa Alai, the Vice President of Engineering of Learn2.com, received 47,987
shares of common stock and 1,546 shares of Series D Preferred Stock which will
be converted into 515,344 shares of common stock if approved by our
stockholders. In addition, each stock option and warrant for Street
Technologies' common stock became exercisable for .00169 shares of Series D
Preferred Stock. As of June 21, 1999, there were outstanding options and
warrants to purchase 4,907 shares of Series D Preferred Stock which will be
exercisable for 1,635,355 shares of our common stock if approved by our
stockholders.
On May 13, 1999, we acquired all of the outstanding common stock of
Panmedia. Pursuant to the agreement and plan of merger, we issued 1,543,860
shares of common stock to Jason and Patricia Roberts, the stockholders of
Panmedia. Jason Roberts is our Executive Vice President and a Director.
VIAGRAFIX
ASBC ACQUISITION. On August 15, 1995, ViaGrafix acquired land, a building
and all of the 2,500 outstanding shares of American Small Business Computers for
$300,002 in cash and two 7.5% promissory notes due August 15, 2000 in the
aggregate principal amount of $4,300,000. Prior to the acquisition, ViaGrafix
engaged in various business transactions with ASBC.
ViaGrafix purchased 1,078 shares of ASBC common stock from Geocapital III,
L.P., the holder of ViaGrafix's then outstanding preferred stock for $1,500,000,
for $97,826 in cash and an unsecured $1,402,174 7.5% promissory note.
ViaGrafix also purchased from Robert E. Webster, a Director and officer of
ViaGrafix, the remaining 1,422 shares of ASBC common stock for $1,978,670 and
the property now owned and operated by ViaGrafix at One American Way, Pryor,
Oklahoma for $1,121,332. Of the total purchase price of $3,100,002 due to Robert
E. Webster, we paid $202,175 in cash and a $2,897,826 7.5% promissory note
secured by a mortgage on the property at One American Way. Mr. Webster purchased
50% of the ASBC stock and the One American Way real estate from a party not
affiliated with ViaGrafix approximately six months prior to the acquisition. The
purchase price for the acquisition of the ASBC stock and real estate by
ViaGrafix was determined based upon Mr. Webster's prior purchase price and
without any third party valuation or fairness opinion.
ViaGrafix repaid the outstanding principal and accrued interest on both 7.5%
promissory notes from the proceeds of its initial public offering in March of
1998.
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TRANSACTIONS BETWEEN LEARN2.COM AND VIAGRAFIX
On September 30, 1998, ViaGrafix paid $620,000 to amend a January 1997
"Development and Licensing Agreement" with 7th Street.com, which was acquired by
Learn2.com on February 16, 1999, whereby the royalty paid to 7th Street.com on
networkable licenses sold for multimedia training products developed using 7th
Street.com's products was reduced through September 30, 2000. At that time,
ViaGrafix will have the option to pay an additional $250,000 to reduce the
royalty paid on 7th Street.com's products for the life of 7th Street.com's
products. Under the agreement, 7th Street.com pays ViaGrafix royalties from its
sales of multimedia training products containing ViaGrafix content. During 1998
7th Street.com paid net royalties to ViaGrafix of $292,000. For the year ended
December 31, 1997, 7th Street.com paid royalties of $315,000 to ViaGrafix.
ViaGrafix did not pay any royalties to 7th Street.com for the year ended
December 31, 1997.
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VOTING AND MANAGEMENT INFORMATION
PRINCIPAL STOCKHOLDERS OF LEARN2.COM
The following table sets forth certain information as of May 14, 1999,
except as otherwise noted, with respect to the beneficial ownership of
Learn2.com common stock and Series D Preferred Stock by each person known by
Learn2.com to be the beneficial owner of more than 5% of the outstanding shares
of common stock or Series D Preferred Stock, each director of Learn2.com, each
named officer of Learn2.com listed in the Summary Compensation Table and all
officers and directors of Learn2.com as a group. Unless otherwise noted,
Learn2.com believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock and Series D
Preferred Stock beneficially owned by them. As of May 14, 1999, there were
32,642,902 shares of common stock and 21,661 shares of Series D Preferred Stock
outstanding. For purposes of this table, we have assumed that the shares of
Series D Preferred Stock have already been converted into 7,220,323 shares of
common stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OF APPROXIMATE SHARES OF APPROXIMATE
NAME OF PERSON COMMON PERCENTAGE OF SERIES D PERCENTAGE OF
OR IDENTITY OF GROUP STOCK CLASS PREFERRED STOCK CLASS
- ------------------------------------------------------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Charterhouse Equity Partners II, LP................... 4,267,965 10.71% -- --
535 Madison Avenue
New York, New York 10022
Fletcher International Limited (1).................... 2,551,028 6.26% -- --
c/o Fletcher Asset Management
22 E. 67th Street
New York, New York 10021
Stephen P. Gott (2)................................... 6,547,632 16.43% 17,969 83.0%
Safa Alai (3)......................................... 563,331 1.41% 1,546 7.1%
Scott Near (4)........................................ 563,331 1.41% 1,546 7.1%
Merv Adelson (5)...................................... 1,571,861 3.92% -- --
Donald Schupak........................................ 1,315,092 3.30% -- --
Jason R. Roberts (6).................................. 1,543,860 3.87% -- --
James A. Cannavino.................................... 215,000 * -- --
Robert Alan Ezrin (7)................................. 777,391 1.95% -- --
All current directors and executive officers as a 12,336,942 30.53% 17,969 83.0%
group (7 persons) (8) (9)...........................
</TABLE>
- ------------------------
(1) Shares shown as beneficially owned include (i) 34,361 shares of common stock
issuable at the option of Fletcher, in either $208,333.33 cash, 34,361
shares of common stock or a combination thereof, (ii) 650,000 shares of
common stock issuable on the exercise of warrants at an exercise price of
$4.50 per share and (iii) 200,000 shares of common stock issuable on the
exercise of warrants at an exercise price of $0.01 per share. Learn2.com has
been informed by Fletcher that Alphonse Fletcher, Jr. will exercise the
voting and investment authority over the common stock owned by Fletcher.
(2) Shares shown as beneficially owned include 5,989,786 shares of common stock
issuable on the conversion of Series D Preferred Stock.
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(3) Shares shown as beneficially owned include 515,344 shares of common stock
issuable on the conversion of Series D Preferred Stock.
(4) Shares shown as beneficially owned include 513,344 shares of common stock
issuable on the conversion of Series D Preferred Stock.
(5) Includes all shares beneficially owned by East-West Capital which is owned
by The Mervyn Adelson Trust U/T/A dated September 29, 1992, of which Mr.
Adelson is the trustee. Shares shown as beneficially owned by Mr. Adelson
also include 53,241 shares issuable upon the exercise of vested warrants,
which are exercisable at $7.50 per share. Shares shown as beneficially owned
include (i) 55,000 shares of common stock issuable upon the exercise of
vested stock options with an exercise price of $2.00 per share for common
stock and (ii) 77,777 vested shares of a warrant for 200,000 shares of
common stock issuable upon exercise, which vests ratably each month over a
36-month period commencing May 6, 1998. Of the 200,000 shares of common
stock 50,000 shares are issuable at an exercise price of $2.00 per share,
50,000 shares are issuable at an exercise price of $3.00 per share, 50,000
shares are issuable at an exercise price of $4.00 per share and 50,000
shares are issuable at an exercise price of $5.00 per share.
(6) Shares shown as beneficially owned include 231,579 shares of common stock
contributed to the Roberts-Shefts LLC, of which Jason Roberts, Patricia
Roberts and Brian Shefts, the Vice President of Business Development of
Panmedia, are the only members.
(7) Shares shown as beneficially owned include 8,915 shares which may be
purchased by Learn2.com pursuant to the Learn2.com Option Share Repurchase
Agreement at $0.003 per share upon the exercise of certain options granted
or to be granted under the Learn2.com Incentive Stock Option Plan.
(8) Shares shown as beneficially owned include (i) 55,000 shares issuable upon
exercise of vested stock options with an exercise price of $2.00 per share,
(ii) 131,018 shares issuable upon exercise of vested warrants at exercise
prices from $2.00 to $7.50 per share and (iii) 5,989,786 shares of common
stock issuable on conversion of Series D Preferred Stock.
(9) Includes Marc E. Landy, Learn2.com's Vice President, Chief Financial Officer
and Secretary, who beneficially owns vested options exercisable for 366,106
shares of common stock issuable upon conversion of the Series D Preferred
Stock.
* Represents beneficial ownership of less than 1% of Learn2.com's common
stock.
DIRECTORS OF LEARN2.COM
The following information is supplied with respect to the directors of
Learn2.com:
<TABLE>
<CAPTION>
DIRECTOR OF THE
CORPORATION
NAME OF DIRECTOR AGE SINCE
- ---------------------------------------------------------------------- --- ----------------
<S> <C> <C>
Donald Schupak........................................................ 56 1997
Stephen P. Gott....................................................... 50 1999
Merv Adelson.......................................................... 69 1994
James A. Cannavino.................................................... 55 1997
Robert Alan Ezrin..................................................... 50 1993
Jason R. Roberts...................................................... 36 1999
</TABLE>
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<PAGE>
DONALD SCHUPAK currently serves as Chairman of the Board and Director of
Learn2.com. He has been a member of the Learn2.com Board since January 1997 and
has been Chairman since March 1997. Mr. Schupak is the President and Chief
Executive Officer of the Schupak Group, Inc., an organization that provides
strategic planning, management consulting and corporate services to corporations
worldwide. Mr. Schupak has been with the Schupak Group, Inc. since 1990. Mr.
Schupak is also Chairman of the Board for Danskin, Inc. He previously served as
Chairman and Chief Executive Officer at Horn & Hardart Company from 1988 to
1990. Mr. Schupak is also a member of the Advisory Board of the Maxwell School
of Citizenship and Public Affairs at Syracuse University.
STEPHEN P. GOTT has served as President, Chief Executive Officer and
Director of Learn2.com since February 1999. From November 1994 to February 1999,
Mr. Gott served as the President, Chief Executive Officer and Chairman of the
Board of Street Technologies which Learn2.com acquired in February 1999. From
June 1986 to November 1994, Mr. Gott served as the Chief Technology and
Operations Officer at Lehman Brothers. Mr. Gott is a Director of ViaGrafix.
MERV ADELSON has served as a Director of Learn2.com since February 1994.
Since 1989, Mr. Adelson has been the trustee of the sole stockholder of
East-West Capital, a merchant banking and venture capital company, and currently
serves as its Chairman of the Board and Chief Executive Officer. Mr. Adelson
co-founded the predecessor of Lorimar Telepictures in 1969, which was sold to
Warner Bros. in 1989. Mr. Adelson is also a director of Time Warner, Inc. and
Faroudja, Inc.
JAMES A. CANNAVINO has served as a Director of Learn2.com since January
1997. Since April 1, 1998, Mr. Cannavino has been the Chairman and Chief
Executive Officer of CyberSafe Corporation, a company that makes corporate
network security products, and Chairman of Softworks, a systems software tools
company. Mr. Cannavino was a private investor from July 1997 to March 1998. Mr.
Cannavino served as President, Chief Executive Officer and Director of Perot
Systems Corporation from September 1996 to July 1997 and he served as President,
Chief Operating Officer and Director of Perot Systems from September 1995 to
September 1996. Mr. Cannavino has more than 30 years of experience in the
computer and information technology industries. Prior to joining Perot Systems
in September 1995, he was a private investor from April 1995 to September 1995.
Previously, Mr. Cannavino was at IBM Corporation, where he was Senior Vice
President of Strategy and Development from 1993 to April 1995, and prior to
that, he served as Senior Vice President and General Manager of the Personal
Systems Group at IBM Corporation from 1991 to 1993.
ROBERT ALAN EZRIN currently serves as Vice Chairman of the Board and
Director of Learn2.com. Mr. Ezrin is a founder of Learn2.com and has served as a
Director since its inception in April 1993 and has served as Vice Chairman of
the Board since April 1998. Mr. Ezrin served as President from November 1995
until April 1998 and Chief Executive Officer from March 1997 until April 1998.
Mr. Ezrin served as Co-Chairman of the Board of Learn2.com from its inception in
April 1993 until November 1995. Mr. Ezrin served as Executive Vice President of
Production from April 1994 to November 1995 and served as Vice President from
April 1993 to April 1994. From 1984 through 1994, Mr. Ezrin was a Producer with
Lozem Productions, Inc. Mr. Ezrin has more than 25 years of experience in the
international entertainment business, producing music, video and television
projects for numerous internationally known stars including Pink Floyd, Rod
Stewart, KISS, Peter Gabriel and Roger Daltry. Mr. Ezrin is Chairman of the
Board of Directors of Metropolitan Los Angeles Communities in Schools.
JASON R. ROBERTS has served as an Executive Vice President and Director of
Learn2.com since May 1999. From January 1998 to May 1999, Mr. Roberts served as
the President and Chief Executive Officer of Panmedia which Learn2.com acquired
in May 1999. From 1994 to January 1998, Mr. Roberts was the sole proprietor of
Panmedia.
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EXECUTIVE OFFICERS OF LEARN2.COM
The following table sets forth the names, ages and all positions and offices
with Learn2.com held by Learn2.com's present executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Donald Schupak....................................... 56 Chairman of the Board of Directors
Robert Alan Ezrin.................................... 50 Vice Chairman of the Board of Directors
Stephen P. Gott...................................... 50 President, Chief Executive Officer and Director
Marc E. Landy........................................ 38 Vice President, Chief Financial Officer and Secretary
</TABLE>
MARC E. LANDY currently serves as Vice President, Chief Financial Officer
and Secretary of Learn2.com. From November 1996 to February 1999, Mr. Landy
served as the Vice President and Chief Financial Officer of Street Technologies
which Learn2.com acquired in February 1999. From April 1993 to November 1996,
Mr. Landy served in several management capacities including Controller and
Director of Consulting for Flexi International. Mr. Landy is a CPA and from 1990
to 1992 he was a Senior Audit Manager at Ernst & Young LLP.
LEARN2.COM EXECUTIVE COMPENSATION
The following table summarizes the compensation paid during 1998, 1997 and
1996 to Robert Alan Ezrin, the only individual who served as an executive
officer during 1998 and will also serve as a director of Learn2.com after the
merger. Mr. Ezrin resigned as President and Chief Executive Officer of
Learn2.com on April 20, 1998 and was elected Vice Chairman of the Board.
LEARN2.COM SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES
FISCAL ----------------------- UNDERLYING
YEAR SALARY BONUS OPTIONS (1) OTHER (2)
- ----------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
1998 $ 192,840 $ -- 125,000 $ 206,963
1997 275,000 -- -- 17,331
1996 263,083 -- 60,000(3) 17,378
</TABLE>
- ------------------------
(1) Represents the number of options, each to acquire one share of common stock,
granted pursuant to the Learn2.com Incentive Stock Option Plan or
Learn2.com's broad based plan.
(2) Includes auto allowance, corporation match contributions to Learn2.com's
401(k) Plan and dollar value of life insurance premiums paid by Learn2.com.
(3) Stock options exchanged with Learn2.com for shares of common stock issued in
1998.
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LEARN2.COM OPTION GRANTS AND EXERCISES
The following stock options were granted to Mr. Ezrin during 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM (1)
UNDERLYING EMPLOYEES EXERCISE EXPIRATION ----------------------
OPTIONS IN 1998 PRICE DATE 5% 10%
- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
125,000 5.6% $ 2.00 4/20/2008 $ 157,224 $ 398,436
</TABLE>
- ------------------------
(1) Calculated on the assumption that the market value of the underlying common
stock increases at the stated values compounded annually for the ten-year
term of the option.
LEARN2.COM OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information about stock options held by Mr.
Ezrin. During 1998, Mr. Ezrin did not exercise any stock options granted by
Learn2.com.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT DECEMBER 31, THE-MONEY OPTIONS AT
1998 DECEMBER 31, 1998(1)
SHARES VALUE -------------------------- --------------------------
EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
-- $ -- 30,000 95,000 $ 19,680 $ 62,320
</TABLE>
- ------------------------
(1) Value based on the December 31, 1998 closing price of common stock on The
Nasdaq Stock Market of $2.66 per share.
Underlying options that are not in-the-money are not valued in this table.
LEARN2.COM TEN-YEAR OPTION REPRICINGS
In the second quarter of 1998, following a restructuring plan that reduced
the number of employees, Learn2.com repriced stock options of all remaining
employees, including Mr. Ezrin, to an amount which exceeded slightly the then
current market price. The Learn2.com Board and the compensation committee took
this action to maintain morale across Learn2.com, to help maintain momentum in
the projects under development and to retain key contributors in all areas of
Learn2.com including Mr. Ezrin. There was no separate analysis of the impact of
the repricing on the overall compensation of the executive officers or any other
employee.
The following stock options granted to Mr. Ezrin on October 22, 1996 were
repriced during 1998:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE LENGTH OF
SECURITIES PRICE ORIGINAL OPTION
UNDERLYING MARKET PRICE OF AT THE TIME NEW TERM REMAINING
OPTIONS STOCK AT TIME OF EXERCISE AT DATE OF
REPRICED OF REPRICING REPRICING PRICE REPRICING
- ----------- --------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
10,000(1) $ 5.375 $ 8.250 $ 6.050 8.49 years
19,696(1) 5.375 18.150 6.050 9.08 years
30,304(1) 5.375 16.000 6.050 9.08 years
</TABLE>
- ------------------------
(1) Options exchanged for grant of shares of common stock in 1998.
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<PAGE>
LEARN2.COM COMPENSATION OF DIRECTORS
None of Messrs. Gott, Roberts or Schupak receives any compensation for his
services as director. Learn2.com's outside directors earn $10,000 per annum,
plus $2,000 per annum for each committee membership, and they are reimbursed for
their out-of-pocket expenses incurred in attending Learn2.com Board meetings.
On April 20, 1998, due to employee turnover, employee morale and the
challenges and opportunities facing Learn2.com, the Learn2.com Board determined
to reprice options of a significant number of its employees, consultants and
directors as well as grant additional options. As part of this repricing,
options for 75,000 shares of common stock held by James A. Cannavino, a Director
of Learn2.com, were repriced to an exercise price equal to $2.00 per share. On
the date of the repricing of those options, the closing price of the common
stock on The Nasdaq Stock Market was $1.8125.
In April 1998, the Learn2.com Board adopted a broad based plan that, due to
the limited number of authorized shares of common stock available, granted
options exercisable for approximately 2,967 shares of series C preferred stock,
par value $.01 per share. On July 9, 1998, the stockholders of Learn2.com
approved an amendment to the certificate of incorporation to increase the number
of authorized shares of common stock from 20,000,000 to 100,000,000, and the
options exercisable under the broad based plan became exercisable for
approximately 2,967,000 shares of common stock. All of the options granted on
that date are exercisable at an exercise price equal to $2.00 per share. On the
date of the grant of those options, the closing price of the common stock on The
Nasdaq Stock Market was $1.8125. Messrs. Schupak and Ezrin received options
exercisable for 600 and 125 shares of series C preferred stock, respectively, or
600,000 and 125,000 shares of common stock, respectively. Mr. Adelson received
options exercisable for 55 shares of series C preferred stock, or 55,000 shares
of common stock, in exchange for the surrender of options exercisable for 25,000
shares of common stock. Mr. Cannavino received options exercisable for 140
shares of series C preferred stock, or 140,000 shares of common stock, in
exchange for the surrender of options exercisable for 20,000 shares of common
stock.
As part of the broad based plan, each director of Learn2.com, Messrs.
Schupak, Ezrin, Adelson and Cannavino, received options exercisable for 30
shares of series C preferred stock, or 30,000 shares of common stock, which are
included in the option grants described above. In addition, Messrs. Schupak and
Ezrin surrendered their options exercisable for 655,000 and 60,000 shares,
respectively, in exchange for the issuance of 655,000 and 110,000 shares of
common stock. Mr. Schupak also waived his right to be considered for a cash
bonus for 1997 and 1998. In April 1998, Learn2.com terminated the Non-Employee
Directors' Stock Option Plan.
In March 1997, Learn2.com and the Schupak Group, Inc. entered into an
agreement whereby Learn2.com pays $12,000 per month to Schupak West, Inc., an
affiliate of the Schupak Group, Inc., for the consulting services of Donald
Schupak and other employees of the Schupak Group, Inc. Additionally, Mr. Schupak
is entitled to the reimbursement of reasonable travel and other expenses
incidental to the performance of his consulting duties. Mr. Schupak is entitled
to have the Learn2.com Board consider a bonus at the end of each fiscal year.
In February 1999, Learn2.com paid to Mr. Ezrin $40,000 and issued to him an
option to purchase 20,000 shares of common stock exercisable at a price equal to
$3.00 per share as full payment for Learn2.com's obligations regarding Mr.
Ezrin's severance entitlement as the former President and Chief Executive
Officer of Learn2.com. Those options vested immediately.
In February 1999, in connection with the acquisition of Street Technologies
and as an inducement to Mr. Schupak to act as Chairman of the Board of the
combined company, Mr. Schupak was granted options to purchase 500,000 shares of
common stock exercisable at a price equal to $3.25 per share; of which an option
to purchase 250,000 shares was granted subject to stockholder approval of an
amendment to the Learn2.com Incentive Stock Option Plan.
110
<PAGE>
LEARN2.COM EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE-IN-CONTROL
ARRANGEMENTS
Learn2.com entered into an Employment Agreement, as of February 16, 1999,
employing Stephen P. Gott as Chief Executive Officer of Learn2.com for a two
year term, subject to earlier termination for death, disability, resignation or
removal. Mr. Gott's annual base salary is $200,000 and he is entitled to receive
an annual performance bonus of not less than $50,000. Mr. Gott is eligible to
participate in any company-wide bonus plan that may be adopted by Learn2.com. In
addition, Mr. Gott was granted options to purchase 1,000,000 shares of common
stock exercisable at a price equal to $3.25 per share. The options vest ratably
over three years on the anniversaries of February 16, 1999. In the event of a
"change of control", as defined in the employment agreement, the stock options
vest immediately. If Mr. Gott resigns his employment for "good reason", as
defined in the employment agreement, if Learn2.com terminates his employment
without "cause", as defined in the employment agreement, or if Learn2.com elects
not to extend the term of Mr. Gott's employment, Mr. Gott will be entitled to
receive, in a lump sum, an amount equal to one year's base salary and
performance bonus and vesting of all stock options. Mr. Gott's employment
agreement also contains confidentiality, non-competition and indemnification
provisions.
Learn2.com entered into an Employment Agreement, as of May 13, 1999,
employing Jason R. Roberts as Executive Vice President of Learn2.com for a two
year term, subject to earlier termination for death, disability, resignation or
removal. Mr. Roberts' annual base salary is $125,000 and he is entitled to
receive an annual performance bonus which shall not be less than $15,000 in his
first year of employment. Mr. Roberts will be eligible to participate in any
company-wide bonus plan that may be adopted by Learn2.com. In addition, Mr.
Roberts was granted options to purchase 300,000 shares of common stock
exercisable at a price equal to $6.25 per share. The options vest as to 150,000
shares of common stock on each of the second and third anniversary of May 13,
1999. In the event of a "change of control", as defined in the employment
agreement, the stock options vest immediately. If Mr. Roberts resigns his
employment for "good reason", as defined in the employment agreement, if
Learn2.com terminates his employment without "cause", as defined in the
employment agreement, or if Learn2.com elects not to extend the term of Mr.
Roberts' employment, Mr. Roberts will be entitled to receive, in a lump sum, an
amount equal to nine month's base salary and vesting of all stock options. Mr.
Roberts' employment agreement also contains confidentiality, non-competition and
indemnification provisions.
111
<PAGE>
PRINCIPAL STOCKHOLDERS OF VIAGRAFIX
As of March 31, 1999, ViaGrafix had outstanding a total of 5,788,184 shares
of $.01 par value common stock, its only class of stock outstanding. Each share
is entitled to one vote on all matters submitted to a vote by stockholders.
The following table sets forth, as of March 31, 1999, the aggregate number
of shares of common stock of ViaGrafix beneficially owned by each person known
by ViaGrafix to be the beneficial owner of more than 5% of ViaGrafix's common
stock, each officer whose 1998 salary and bonus exceed $100,000, each director
and such officers and all directors as a group. Management knows of no person,
except as listed below who owned more than 5% of ViaGrafix's outstanding shares
of the common stock as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF THE 5% STOCKHOLDERS AND EACH NUMBER OF SHARES
EXECUTIVE OFFICER AND NAMES OF OTHER DIRECTORS OWNED(1) PERCENT OF CLASS
- ------------------------------------------------------------------ ---------------- -----------------
<S> <C> <C>
Michael A. Webster 1,867,213(2) 32.3%
One American Way
Pryor, Oklahoma 74361
Robert E. Webster 1,177,972(3) 20.4%
One American Way
Pryor, Oklahoma 74361
Robert C. Moore, Jr. 11,908(4) 0.2%
One American Way
Pryor, Oklahoma 74361
Austin E. Acuff 16,395(4) 0.3%
One American Way
Pryor, Oklahoma 74361
Roy L. Bliss 38,500(5) 0.7%
Stephen P. Gott 28,500(5) 0.5%
Gerald R. Harris 800(5) 0.0%
Executive officers and all directors as a group (7 persons) 3,141,288(1) 54.3%
</TABLE>
- ------------------------
(1) All shares are beneficially owned and the owner has sole voting and
investment power with respect thereto.
(2) Includes 114,285 shares held by Michael A. Webster as trustee for trusts for
the benefit of his children.
(3) Includes 100 shares held by a son of Robert E. Webster.
(4) Robert Moore and Austin Acuff are executive officers of ViaGrafix.
(5) Roy Bliss, Stephen Gott and Gerald Harris are directors of ViaGrafix.
EXECUTIVE OFFICERS AND DIRECTORS OF VIAGRAFIX
The following information is provided with respect to the executive officer
and director of ViaGrafix who will continue as a director of Learn2.com:
Michael A. Webster, age 40, has served as Chairman of the Board, President
and Chief Executive Officer since ViaGrafix's inception in 1990. Mr. Webster
served as General Manager of Champion
112
<PAGE>
Electronics, Inc., a company operating Radio Shack dealership outlets involved
in computer retailing, from October 1984 to December 1989. Michael A. Webster is
the brother of Robert E. Webster.
VIAGRAFIX EXECUTIVE COMPENSATION
The following table sets forth information as to Michael A. Webster, the
only individual who served as an executive officer during 1998 and will also
serve as a director of Learn2.com after the merger.
VIAGRAFIX SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ---------------------------- -----------
<CAPTION>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK AWARD UNDERLYING LTIP
YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS PAYOUTS ($)
--------- ---------- --------- --------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $ 184,964 $ 0 N/A N/A N/A N/A
<CAPTION>
<S> <C>
ALL OTHER
COMPENSATION
($)(1)
-------------
<S> <C>
$ 6,587
</TABLE>
- ------------------------
(1) Amounts stated reflect contributions made by ViaGrafix to Mr. Webster's
account under ViaGrafix's 401(k) Plan and directors' fees paid to Mr.
Webster.
ViaGrafix has no Long-Term Incentive Plan or "defined benefit" (pension)
plan.
VIAGRAFIX OPTION GRANTS AND EXERCISES
There were no grants during 1998 of stock options to Michael A. Webster.
VIAGRAFIX OPTION EXERCISES AND FISCAL YEAR-END VALUES
Michael A. Webster did not exercise any stock options during the fiscal year
ended December 31, 1998 and held no options at fiscal year-end which were
in-the-money.
VIAGRAFIX COMPENSATION OF DIRECTORS
ViaGrafix pays directors' fees of $500 per director (plus reimbursement of
expenses) for attendance at each ViaGrafix Board meeting, scheduled to be held
on a quarterly basis, but not limited to four meetings per year.
VIAGRAFIX EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE-IN-CONTROL
ARRANGEMENTS
Michael A. Webster does not have an employment agreement with ViaGrafix.
LEGAL MATTERS
The validity of the issuance of the Learn2.com common stock offered pursuant
to this document and certain legal matters in connection with the merger have
been passed upon by Swidler Berlin Shereff Friedman, LLP, New York, New York,
special counsel to Learn2.com.
EXPERTS
The consolidated financial statements and financial statement schedule of
Learn2.com, included elsewhere in this joint proxy statement/prospectus, have
been audited by Arthur Andersen LLP, independent public accountants, as of
December 31, 1998 and for the year ended December 31, 1998,
113
<PAGE>
as indicated in their report with respect thereto, and are included in this
document in reliance upon the authority of said firm as experts in accounting
and auditing in giving said report.
The supplementary historical financial statements of Learn2.com Inc., as of
December 31, 1998 and for the years ended December 31, 1998, and the adjustments
that were applied to restate the 1997 consolidated financial statements,
included elsewhere in this joint proxy statement/prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included in this document in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
report.
The consolidated financial statements of Learn2.com, Inc. as of December 31,
1997 and for the year then ended, before restatement for the pooling of
interests transaction discussed in note 1 to the supplementary consolidated
financial statements, and the consolidated financial statements of Learn2.com,
Inc. for the year ended December 31, 1996 included herein and in the
registration statement have been included herein and in the registration
statement in reliance upon the reports of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The reports of KPMG LLP contain explanatory paragraphs that state that
Learn2.com, Inc. has suffered recurring losses since inception and does not
currently have sufficient cash resources to meet its anticipated operating
requirements during 1998, which conditions raise substantial doubt about
Learn2.com, Inc.'s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The consolidated financial statements (including the related financial
statement schedule) of ViaGrafix Corporation at December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, appearing in
this joint proxy statement/prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
114
<PAGE>
FUTURE STOCKHOLDER PROPOSALS
LEARN2.COM
Any stockholder proposal for Learn2.com's annual meeting in 2000 must be
sent to the Secretary at the address of Learn2.com's principal executive office
given under "Summary--The Companies" on page 3. The deadline for receipt of a
proposal to be considered for inclusion in Learn2.com's proxy statement is
December 31, 1999.
VIAGRAFIX
ViaGrafix will hold an annual meeting in the year 2000 only if the merger
has not already been completed. If such meeting is held, stockholders' proposals
must be sent to the address of ViaGrafix's principal executive office given
under "Summary--The Companies" on page 3. The deadline for receipt of a proposal
to be considered for inclusion in ViaGrafix's proxy statement is December 16,
1999.
WHERE YOU CAN FIND MORE INFORMATION
Learn2.com (Commission file no. 000-24936) and ViaGrafix (Commission file
no. 000-23839) are subject to the informational reporting requirements of the
Exchange Act, and, in accordance therewith, file reports (including annual
reports on form 10-K, quarterly reports on form 10-Q and current reports on form
8-K), proxy statements and other information with the SEC. You may read and copy
any materials filed by Learn2.com and ViaGrafix with the SEC at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's website is
http://www.sec.gov.
This document does not contain all the information set forth in the
Registration Statement on Form S-4 and the exhibits thereto, including any
amendments thereto, and which Learn2.com has filed with the SEC under the
Securities Act. Reference is made to the Registration Statement for further
information with respect to Learn2.com and the Learn2.com common stock offered
hereby.
Statements contained herein or incorporated herein by reference concerning
the provisions of documents are summaries of such documents and each statement
is qualified in its entirety by reference to the copy of the applicable document
if filed with the SEC or attached as an appendix hereto.
No person is authorized to give any information or to make any
representation with respect to the matters described in this document other than
those contained herein or in the documents incorporated by reference herein and,
if given or made, such information or representation must not be relied upon as
having been authorized by Learn2.com or ViaGrafix. This document does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered hereby, nor does it constitute the solicitation of a proxy,
in any jurisdiction in which, or to any person to whom, it is unlawful to make
such offer or solicitation. Neither the delivery of this document nor any sale
made hereby, under any circumstances, shall create any implication that there
has been no change in the affairs of Learn2.com or ViaGrafix since the date
hereof, or that the information herein is correct as of any time subsequent to
its date.
115
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants.................................................................... F-2
Independent Auditors' Report................................................................................ F-3
Consolidated Balance Sheets as of March 31, 1999, December 31, 1998 and 1997................................ F-4
Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996.......................................................................... F-5
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1999 and the years
ended December 31, 1998, 1997 and 1996.................................................................... F-6
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 and the years ended
December 31, 1998, 1997 and 1996.......................................................................... F-7
Notes to Consolidated Financial Statements.................................................................. F-8
Not Covered by Report of the Independent Auditors: Quarterly Financial Information (unaudited).............. F-23
</TABLE>
All schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in respective
financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Learn2.com, Inc. (formerly known as 7th Level, Inc.):
We have audited the accompanying consolidated balance sheet of Learn2.com,
Inc., (formerly known as 7th Level, Inc.) (a Delaware corporation) as of
December 31, 1998, and the related consolidated statement of operations,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion .
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Learn2.com,
Inc. (formerly known as 7th Level, Inc.) as of December 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
New York, New York
March 17, 1999
Arthur Andersen LLP
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Learn2.com, Inc. (formerly known as 7th Level, Inc.):
We have audited the accompanying consolidated balance sheet of Learn2.com,
Inc. (formerly known as 7th Level, Inc.) as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Learn2.com,
Inc. (formerly known as 7th Level, Inc.) as of December 31, 1997 and the results
of their operations and their cash flows for each of the years in the two year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
3 to the consolidated financial statements, the Company has suffered recurring
losses since inception and does not currently have sufficient resources to meet
its anticipated operating requirements during 1998, which conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
KPMG LLP
Dallas, Texas
January 30, 1998
F-3
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
MARCH 31, ----------- ---------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 10,635 $ 11,216 $ 2,465
Accounts receivable, net of allowances of $13 (unaudited) $1 and $1,127.... 1,296 42 1,112
Inventories................................................................ -- -- 18
Other current assets....................................................... 520 286 753
----------- ----------- ---------
Total current assets..................................................... 12,451 11,544 4,348
Fixed assets, net............................................................ 403 1,400 4,961
Capitalized software, net.................................................... 15,132 -- --
Intangible assets, net....................................................... 3,491 7 13
Goodwill..................................................................... 9,763 -- --
Other assets................................................................. 107 65 533
----------- ----------- ---------
Total assets............................................................. $ 41,347 $ 13,016 $ 9,855
----------- ----------- ---------
----------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 536 $ 198 $ 1,112
Accrued expenses........................................................... 3,870 2,173 4,550
Current portion of deferred revenue........................................ 2,084 -- --
Current portion of notes payable........................................... 27 485 79
Current portion of capital lease obligations............................... -- 148 172
Other current liabilities.................................................. 111 183 631
----------- ----------- ---------
Total current liabilities................................................ 6,628 3,187 6,544
Notes payable................................................................ -- -- 377
Notes payable to related parties............................................. -- -- 108
Deferred revenue............................................................. 1,050
Other........................................................................ 32 46 366
----------- ----------- ---------
Total liabilities........................................................ 7,710 3,233 7,395
Commitments and contingencies (Note 11)
Stockholders' equity:
Series B Convertible Preferred Stock, par value $0.01 per share, 15,000
shares authorized; 0 (unaudited) 1,395 and 0 shares issued and
outstanding, in 1999, 1998 and 1997, respectively ($1,395,000 liquidation
value)................................................................... -- 629 --
Series D Convertible Preferred Stock, par value $0.01 per share, 35,000
shares authorized; 1,095 and 21,644 (unaudited) and 0 shares issued and
outstanding, in 1999, 1998 and 1997, respectively ($21,644,000
liquidation value)....................................................... -- -- --
Common Stock, par value $0.01 per share,100,000,000 shares authorized;
31,090,042 (unaudited), 23,763,622 and 13,783,736 shares issued and
outstanding in 1999, 1998 and 1997, respectively......................... 311 237 138
Additional capital......................................................... 134,033 93,966 70,643
Notes and accounts receivable from directors (Note 7 and 13)............... (1,934) -- --
Accumulated deficit........................................................ (98,773) (85,049) (68,334)
Cumulative translation adjustment.......................................... -- -- 13
----------- ----------- ---------
Total stockholders' equity............................................... 33,637 9,783 2,460
----------- ----------- ---------
Total liabilities and stockholders' equity............................... $ 41,347 $ 13,016 $ 9,855
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Net revenues............................... $ 756 $ 462 $ 1,571 $ 10,499 $ 20,549
Cost of revenues........................... 119 85 233 4,542 8,299
------------ ------------ ------------ ------------ ------------
Gross profit............................. 637 377 1,338 5,957 12,250
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and product development......... 559 817 2,311 14,416 19,641
Sales and marketing...................... 442 272 420 5,843 11,262
General and administrative............... 701 1,107 5,083 5,310 4,290
Depreciation and amortization............ 374 565 1,806 4,178 2,565
Restructuring charges.................... 2,493 -- -- -- --
Acquired in-process technology........... 9,677 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses............... 14,246 2,761 9,620 29,747 37,758
------------ ------------ ------------ ------------ ------------
Operating loss......................... (13,609) (2,384) (8,282) (23,790) (25,508)
Interest expense........................... (69) (17) (1,732) (121) (77)
Interest income............................ 141 22 333 340 1,332
Other (expense) income..................... (114) (162) (1,277) 1,113 --
------------ ------------ ------------ ------------ ------------
Net loss............................... $ (13,651) $ (2,541) $ (10,958) $ (22,458) $ (24,253)
Dividends on Preferred Stock............... -- -- 338 -- --
Beneficial conversion feature in
association with Preferred Stock (Note
3)....................................... -- -- 5,479 -- --
------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders............................. $ (13,651) $ (2,541) $ (16,775) $ (22,458) $ (24,253)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic and diluted loss per common share.... $ (0.50) $ (0.18) $ (1.03) $ (1.64) $ (1.80)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average basic and diluted shares
outstanding.............................. 27,163,775 13,783,736 16,355,158 13,696,730 13,442,101
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE CONVERTIBLE
---------------------- PREFERRED PREFERRED
SHARES AMOUNT SERIES A SERIES B
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................................ 13,078 $ 131 $ -- $ --
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 185 2 -- --
Common Stock issued for acquisitions...................................... 281 3 -- --
Common Stock issued for conversion of debt................................ 23 -- -- --
Common stock issued on exercise of warrants............................... 13 -- -- --
Foreign currency translation adjustment................................... -- -- -- --
Unrealized loss on investments............................................ -- -- -- --
Net loss.................................................................. -- -- -- --
--------- ----- ----------- -----------
Balance at December 31, 1996................................................ 13,580 136 -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 198 2 -- --
Common stock issued on exercise of warrants............................... 6 -- -- --
Common stock issued for consulting services............................... 40 -- -- --
Cancellation of unearned Common Stock issued as contingent purchase
consideration........................................................... (40) -- -- --
Foreign currency translation adjustment................................... -- -- -- --
Unrealized gain on investments............................................ -- -- -- --
Net loss.................................................................. -- -- -- --
--------- ----- ----------- -----------
Balance at December 31, 1997................................................ 13,784 138 -- --
Issuance of Series A Preferred Stock (net of issuance costs of
$3,020,862)............................................................. -- -- 2,479 --
Issuance costs in connection with Notes................................... -- -- -- --
Beneficial Conversion Feature............................................. -- -- -- --
Conversion of Series A Preferred Stock to Series B Preferred Stock........ -- -- (2,479) 2,479
Conversion of Notes to Series B Preferred Stock........................... -- -- -- 3,000
Common Stock issued on conversion of Series B Preferred Stock............. 4,303 43 -- (4,850)
Common Stock dividends.................................................... 107 1 -- --
Common Stock issued in private placement.................................. 1,667 17 -- --
Warrants issued to Non-employees.......................................... -- -- -- --
Common Stock issued upon exercise of warrants............................. 2,813 28 -- --
Common Stock Granted to Officers.......................................... 765 7 -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 325 3 -- --
Compensation expense on options issued to non-employees................... -- -- -- --
Foreign currency translation adjustment................................... -- -- -- --
Net loss.................................................................. -- -- -- --
--------- ----- ----------- -----------
Balance at December 31, 1998................................................ 23,764 237 -- 629
Common stock issued on conversion of Series B Preferred Stock
(unaudited)............................................................. 698 7 -- (629)
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited)............................................................. 4,948 49 -- --
Series B dividends paid in common stock (unaudited)....................... 24 1 -- --
Common stock issued upon exercise of warrants (unaudited)................. 375 4 -- --
Common stock issued upon conversion of notes payable (unaudited).......... 187 2 -- --
Warrants and options issued to non-employees (unaudited).................. -- -- -- --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)..................................................... -- -- -- --
Common stock issued under stock option plan and stock purchase plan
(unaudited)............................................................. 1,094 11 -- --
Net loss (unaudited)...................................................... -- -- -- --
--------- ----- ----------- -----------
Balance at March 31, 1999 (unaudited)....................................... 31,090 $ 311 $ -- $ --
--------- ----- ----------- -----------
--------- ----- ----------- -----------
<CAPTION>
CONVERTIBLE CUMULATIVE
PREFERRED ADDITIONAL TRANSLATION
SERIES D CAPITAL ADJUSTMENT
------------- ----------- ---------------
<S> <C>
Balance at December 31, 1995................................................ $ -- $ 69,168 $ (15)
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- 765 --
Common Stock issued for acquisitions...................................... -- 331 --
Common Stock issued for conversion of debt................................ -- 80 --
Common stock issued on exercise of warrants............................... -- 3 --
Foreign currency translation adjustment................................... -- -- 66
Unrealized loss on investments............................................ -- -- --
Net loss.................................................................. -- -- --
------ ----------- ---
Balance at December 31, 1996................................................ -- 70,347 51
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- 327 --
Common stock issued on exercise of warrants............................... -- 1 --
Common stock issued for consulting services............................... -- 75 --
Cancellation of unearned Common Stock issued as contingent purchase
consideration........................................................... -- (107) --
Foreign currency translation adjustment................................... -- -- (38)
Unrealized gain on investments............................................ -- -- --
Net loss.................................................................. -- -- --
------ ----------- ---
Balance at December 31, 1997................................................ -- 70,643 13
Issuance of Series A Preferred Stock (net of issuance costs of
$3,020,862)............................................................. -- 2,790 --
Issuance costs in connection with Notes................................... -- 1,467 --
Beneficial Conversion Feature............................................. -- 5,479 --
Conversion of Series A Preferred Stock to Series B Preferred Stock........ -- -- --
Conversion of Notes to Series B Preferred Stock........................... -- 1,500 --
Common Stock issued on conversion of Series B Preferred Stock............. -- 4,807 --
Common Stock dividends.................................................... -- 278 --
Common Stock issued in private placement.................................. -- 4,683 --
Warrants issued to Non-employees.......................................... -- 32 --
Common Stock issued upon exercise of warrants............................. -- -- --
Common Stock Granted to Officers.......................................... -- 1,379 --
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- 867 --
Compensation expense on options issued to non-employees................... -- 41 --
Foreign currency translation adjustment................................... -- -- (13)
Net loss.................................................................. -- -- --
------ ----------- ---
Balance at December 31, 1998................................................ -- 93,966 --
Common stock issued on conversion of Series B Preferred Stock
(unaudited)............................................................. -- 622 --
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited)............................................................. -- 36,439 --
Series B dividends paid in common stock (unaudited)....................... -- 73 --
Common stock issued upon exercise of warrants (unaudited)................. -- -- --
Common stock issued upon conversion of notes payable (unaudited).......... -- 571 --
Warrants and options issued to non-employees (unaudited).................. -- 185 --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)..................................................... -- -- --
Common stock issued under stock option plan and stock purchase plan
(unaudited)............................................................. -- 2,177 --
Net loss (unaudited)...................................................... -- -- --
------ ----------- ---
Balance at March 31, 1999 (unaudited)....................................... $ -- $ 134,033 $ --
------ ----------- ---
------ ----------- ---
<CAPTION>
NOTES AND
ACCOUNTS
RECEIVABLE
UNREALIZED FROM
GAIN (LOSS) ON DIRECTORS ACCUMULATED
INVESTMENTS (NOTE 5) DEFICIT
--------------- ----------- ------------
Balance at December 31, 1995................................................ $ 22 $ -- $ (21,040)
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- -- --
Common Stock issued for acquisitions...................................... -- -- (583)
Common Stock issued for conversion of debt................................ -- -- --
Common stock issued on exercise of warrants............................... -- -- --
Foreign currency translation adjustment................................... -- -- --
Unrealized loss on investments............................................ (28) -- --
Net loss.................................................................. -- -- (24,253)
------- ----------- ------------
Balance at December 31, 1996................................................ (6) -- (45,876)
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- -- --
Common stock issued on exercise of warrants............................... -- -- --
Common stock issued for consulting services............................... -- -- --
Cancellation of unearned Common Stock issued as contingent purchase
consideration........................................................... -- -- --
Foreign currency translation adjustment................................... -- -- --
Unrealized gain on investments............................................ 6 -- --
Net loss.................................................................. -- -- (22,458)
------- ----------- ------------
Balance at December 31, 1997................................................ -- (68,334)
Issuance of Series A Preferred Stock (net of issuance costs of
$3,020,862)............................................................. -- -- --
Issuance costs in connection with Notes................................... -- -- --
Beneficial Conversion Feature............................................. -- -- (5,479)
Conversion of Series A Preferred Stock to Series B Preferred Stock........ -- -- --
Conversion of Notes to Series B Preferred Stock........................... -- -- --
Common Stock issued on conversion of Series B Preferred Stock............. -- -- --
Common Stock dividends.................................................... -- -- (279)
Common Stock issued in private placement.................................. -- -- --
Warrants issued to Non-employees.......................................... -- -- --
Common Stock issued upon exercise of warrants............................. -- -- --
Common Stock Granted to Officers.......................................... -- -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... -- -- --
Compensation expense on options issued to non-employees................... -- -- --
Foreign currency translation adjustment................................... -- -- --
Net loss.................................................................. -- -- (10,958)
------- ----------- ------------
Balance at December 31, 1998................................................ -- -- (85,049)
Common stock issued on conversion of Series B Preferred Stock
(unaudited)............................................................. -- -- --
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited)............................................................. -- -- --
Series B dividends paid in common stock (unaudited)....................... -- -- (73)
Common stock issued upon exercise of warrants (unaudited)................. -- -- --
Common stock issued upon conversion of notes payable (unaudited).......... -- -- --
Warrants and options issued to non-employees (unaudited).................. -- -- --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)..................................................... -- (1,934) --
Common stock issued under stock option plan and stock purchase plan
(unaudited)............................................................. -- -- --
Net loss (unaudited)...................................................... -- -- (13,651)
------- ----------- ------------
Balance at March 31, 1999 (unaudited)....................................... $ -- $ (1,934) $ (98,773)
------- ----------- ------------
------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31, 1995................................................ $ 48,266
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 767
Common Stock issued for acquisitions...................................... (249)
Common Stock issued for conversion of debt................................ 80
Common stock issued on exercise of warrants............................... 3
Foreign currency translation adjustment................................... 66
Unrealized loss on investments............................................ (28)
Net loss.................................................................. (24,253)
-------------
Balance at December 31, 1996................................................ 24,652
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 329
Common stock issued on exercise of warrants............................... 1
Common stock issued for consulting services............................... 75
Cancellation of unearned Common Stock issued as contingent purchase
consideration........................................................... (107)
Foreign currency translation adjustment................................... (38)
Unrealized gain on investments............................................ 6
Net loss.................................................................. (22,458)
-------------
Balance at December 31, 1997................................................ 2,460
Issuance of Series A Preferred Stock (net of issuance costs of
$3,020,862)............................................................. 5,269
Issuance costs in connection with Notes................................... 1,467
Beneficial Conversion Feature............................................. --
Conversion of Series A Preferred Stock to Series B Preferred Stock........ --
Conversion of Notes to Series B Preferred Stock........................... 4,500
Common Stock issued on conversion of Series B Preferred Stock............. --
Common Stock dividends.................................................... --
Common Stock issued in private placement.................................. 4,700
Warrants issued to Non-employees.......................................... 32
Common Stock issued upon exercise of warrants............................. 28
Common Stock Granted to Officers.......................................... 1,386
Common Stock issued under Stock Option Plan and Stock Purchase Plan....... 870
Compensation expense on options issued to non-employees................... 41
Foreign currency translation adjustment................................... (13)
Net loss.................................................................. (10,958)
-------------
Balance at December 31, 1998................................................ 9,783
Common stock issued on conversion of Series B Preferred Stock
(unaudited)............................................................. --
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited)............................................................. 36,488
Series B dividends paid in common stock (unaudited)....................... 1
Common stock issued upon exercise of warrants (unaudited)................. 4
Common stock issued upon conversion of notes payable (unaudited).......... 573
Warrants and options issued to non-employees (unaudited).................. 185
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)..................................................... (1,934)
Common stock issued under stock option plan and stock purchase plan
(unaudited)............................................................. 2,188
Net loss (unaudited)...................................................... (13,651)
-------------
Balance at March 31, 1999 (unaudited)....................................... $ 33,637
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1998
----------- 1998 1997 1996
-------- -------- --------
1999 (UNAUDITED)
-----------
(UNAUDITED)
Cash flows from operating activities:
Net loss.............................. $(13,651) $(2,541) $(10,958) $(22,458) $(24,253)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Non-cash compensation and
interest.......................... -- -- 3,108 -- --
Depreciation and amortization....... 374 565 1,806 4,180 2,565
Non-cash common stock warrant and
option expense.................... 185
Loss (gain) on sale of assets....... -- 161 1,519 (1,116) --
Gain on early retirement of debt.... -- -- -- (10) --
Restructuring charges............... 2,493
Acquired in-process technology...... 9,677
Other............................... 115 -- 188 75 --
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable............... (540) 963 1,070 5,150 651
Inventories....................... -- 18 18 552 (181)
Other current assets.............. 79 37 467 865 (593)
Other assets...................... (8) -- 467 533 (367)
Accounts payable.................. 81 (174) (914) (1,059) 884
Other current liabilities......... 548 (673) (3,074) (66) 1,554
----------- ----------- -------- -------- --------
Net cash used in operating
activities.................... (647) (1,644) (6,303) (13,354) (19,740)
----------- ----------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of assets.......... -- 39 98 6,593 --
Purchase of short-term investments.... -- -- -- -- (7,965)
Proceeds from sales of short-term
investments......................... -- -- -- 4,491 13,158
Equity investment..................... -- -- -- -- (400)
Acquisitions, net of cash acquired
(paid).............................. 65 -- -- -- (772)
Capital expenditures.................. (200) (22) (43) (435) (9,643)
----------- ----------- -------- -------- --------
Net cash (used in) provided by
investing activities.......... (135) 17 55 10,649 (5,622)
----------- ----------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from private placement of
common stock........................ -- -- 4,700 -- --
Net proceeds from issuance of
Preferred Stock..................... -- -- 5,269 -- --
Net proceeds from debt issuance....... -- -- 4,311 -- --
Proceeds from bank line of credit..... -- -- -- -- 6,000
Repayment of bank line of credit...... -- (58) -- (5,625) (375)
Repayment of notes payable to related
parties............................. -- -- -- (125) --
Principal payments under capital lease
obligations......................... (51) -- (187) (233) (163)
Proceeds from exercise of warrants.... 4 --
Issuance of common stock under stock
option and stock purchase plan...... 248 -- 870 330 767
Other................................. -- -- 36 -- 3
----------- ----------- -------- -------- --------
Net cash provided by (used in)
financing activities.......... 201 (58) 14,999 (5,653) 6,232
----------- ----------- -------- -------- --------
Effect of exchange rate changes
on cash and cash
equivalents................... -- -- -- 25 (12)
----------- ----------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents.......... (581) (1,685) 8,751 (8,333) (19,142)
Cash and cash equivalents, beginning of
period................................ 11,216 2,465 2,465 10,798 29,940
----------- ----------- -------- -------- --------
Cash and cash equivalents, end of
period................................ $ 10,635 $ 780 $ 11,216 $ 2,465 $ 10,798
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Supplemental disclosure of cash flow
information--
Cash paid for interest................ $ 5 $ -- $ 75 $ 205 $ 353
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Schedule of noncash financing
activities:
Conversion of notes payable into
common stock........................ 573 -- -- -- --
Notes and accounts receivable received
upon excerise of stock options...... 1,934 -- -- -- --
Detail of acqusition:
Fair value of assets acquired....... 39,557 -- -- -- --
Liabilities assumed................. (3,133) -- -- -- --
common stock issued................. (14,845) -- -- -- --
Preferred stock issued.............. (21,644) -- -- -- --
-----------
Acquisition costs, net of cash
acquired.......................... (65) -- -- -- --
Cash acquired in acquisition........ 774 -- -- -- --
----------- ----------- -------- -------- --------
Total acqusition costs............ $ 709 $ -- $ -- $ -- $ --
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. INCORPORATION AND NATURE OF BUSINESS
Learn2.com, Inc. (formerly known as 7th Level, Inc.) (the "Company") was
incorporated under the laws of the State of Delaware on April 28, 1993. The
Company has been engaged in the business of developing entertainment and
educational software. In April 1998, the Company announced a strategy to become
a leading developer of Internet media preparation tools and technologies. In
February 1999, 7th Level Merger Corporation, a wholly-owned subsidiary of the
Company, merged with Street Technologies, Inc. (the "Merger"). (See Note 12)
The Company has incurred significant losses since inception including
operating losses of approximately $8.3 million, $23.8 million and $25.5 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
In August 1997 the Company announced a new strategy, by leveraging its
existing core technology, to transition from being a self-funded content
developer and publisher to position itself as a supplier of custom solutions and
services, tools and technologies. As part of that shift in strategy, the Company
divested itself of its games development groups and new titles under
development. The Company also closed its international localization and sales
offices including those in San Francisco, Tokyo and Munich and sold its
PyroTechnix, Inc. subsidiary during 1997. In fourth quarter 1998 the production
facilities located in Glendale, California were closed. Research and product
development and sales and marketing expenses include approximately, $700,000 and
$965,000, respectively, related to the closing of the international localization
and sales offices. In the year ended December 31, 1998, the Company was able to
reverse into income certain reserves established in 1997 as it was able to
settle certain liabilities and commitments for approximately $523,000 less than
anticipated.
During fiscal 1998, the Company raised over $14.3 million, net of offering
expenses, in connection with private placements (See Note 3) to fund operations.
Furthermore, at the Company's election, as defined, the Company has the right to
sell shares of Common Stock under a Subscription Agreement in exchange for an
additional $5,000,000, as defined (See Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of consolidated 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.
The Company's estimates and future results could be affected adversely by a
number of uncertainties related to its new software products. Such factors
include, but are not limited to market acceptance; ability to obtain sales
volumes and adequate prices; the Company's sustained commitment
F-8
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of resources to further develop and market the technology; and the technological
competitive advantage of these new products.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, "Software Revenue Recognition". The Company
generates revenue primarily from interactive software product sales, licensing
agreements and product development agreements. Software product sales are
recognized as revenue upon shipment of the products to customers, provided that
there are no significant vendor obligations and collection of the related
receivable is probable. The Company accounts for insignificant vendor
obligations and post-contract support at the time of product delivery by
accruing such estimated costs or recognizing them ratably as the obligations are
fulfilled. Provision for estimated returns including distributors' stock
balancing rights and allowances is recorded at the time of sale.
Revenues from development contracts are recognized as the services are
performed under the terms of the respective contracts. The Company had deferred
revenues of approximately $3,000 and $385,000 included in other current
liabilities associated with development and licensing contracts at December 31,
1998 and 1997, respectively.
Revenues from products licensed to original equipment manufacturers ("OEMs")
consisting of one-time license fees and contracts for minimum advances against
future unit licenses are recognized when the criteria for revenue recognition
under Statement of Position No. 97-2 are met, as discussed above. Additional
royalty use or unit copy royalty fees are recognized when they are earned
pursuant to the license agreements and upon notification of shipment from the
OEMs.
RESEARCH AND PRODUCT DEVELOPMENT EXPENDITURES
The Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
provides for the capitalization of certain software development costs once
technological feasibility has been established. In addition, the Company
evaluates the recoverability of any capitalized costs as provided by generally
accepted accounting principles. To date, no such costs have been capitalized as
the impact on the consolidated financial statements for all periods presented
would be immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short maturities.
ADVERTISING COSTS
Advertising costs, included in sales and marketing expenses, are charged as
an expense when they are incurred. Advertising costs were $178,000, $1,542,000
and $4,816,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-9
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents
consist of money market funds, commercial paper, U.S. Treasury securities and
other debt securities. The Company had cash equivalents of approximately
$11,200,000 and $2,300,000 at December 31, 1998 and 1997, respectively.
OTHER CURRENT ASSETS
Other current assets include prepaid insurance, prepaid royalties, interest
receivable, other receivables, and other miscellaneous prepaid expenses.
INVENTORIES
Inventories, which are comprised of software product components and finished
goods, are carried at the lower of cost, determined on a first-in first-out
basis, or market.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated over three to five
years depending upon the estimated useful life of the asset. Leasehold
improvements and assets under capital leases are amortized over the shorter of
the estimated useful life of the asset or the term of the lease.
INTANGIBLE ASSETS
At December 31, 1998 intangible assets consisted of various patents,
copyrights, and trademarks, technological know-how, assembled workforce and
goodwill acquired in acquisitions. Intangible assets are being amortized on a
straight line basis over estimated useful lives of three to seven years. The
Company assesses the recoverability of intangible assets in accordance with SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," by determining whether the amortization of the
intangible assets over their remaining lives can be recovered through projected
undiscounted future cash flows. During 1997, in connection with the sale of a 3D
game and the closure of its Asia Pacific localization and sales offices, the
Company wrote off the remaining intangible assets and the related accumulated
amortization acquired in certain prior business combinations. Combined, these
totaled approximately $610,000.
OTHER ASSETS
At December 31, 1997 other assets consisted primarily of restricted cash
placed in escrow for a planned merger that was not completed and restricted cash
which collateralized a letter of credit and other miscellaneous balances.
FOREIGN CURRENCY TRANSLATION
For the Company's subsidiaries outside the United States, the functional
currency is the local currency of the country in which the subsidiary is
domiciled. The Company applies SFAS No. 52
F-10
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"Accounting for the Translation of Foreign Currency Transactions and Foreign
Currency Financial Statements". Accordingly, assets and liabilities of the
subsidiaries outside of the United States are translated into U.S. dollars at
year end exchange rates. Income and expense items are translated at average
rates of exchange prevailing during the year. The adjustments resulting from
translating the financial statements of these subsidiaries are reflected as
cumulative translation adjustments and included in stockholders' equity. Foreign
currency transaction gains and losses are recognized when they occur. Such
amounts are not material in any of the periods presented. During 1998 the
Company closed down its foreign operations and accordingly the adjustment was
removed from the separate component of equity and reported as a part of the loss
on cessation of these operations.
ROYALTIES
Royalties are accrued based on net revenues, pursuant to contractual
agreements with talent for various products published by the Company. Royalty
expense is included in the cost of revenues.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). This statement established standards
for computing and presenting earnings per share. This statement is effective for
periods ending after December 15, 1997. In February 1998, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 98.
This bulletin revised the SEC's guidance for calculating earnings per share with
respect to equity security issuances before an initial public offering ("IPO")
and is effective for fiscal years ending after December 15, 1997. The prior
years' earnings per share have been retroactively restated to reflect the
adoption of SFAS No. 128 and SAB No. 98.
Basic earnings per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted earnings per share
was determined by dividing net loss by diluted weighted average shares
outstanding. Diluted weighted average shares reflects the dilutive effect, if
any, of common equivalent shares and nominal issuances. Common equivalent shares
include common stock options and warrants to the extent their effect is
dilutive, based on the treasury stock method. Nominal issuances arise when a
company issues common stock, options or warrants to purchase common stock or
other potentially dilutive instruments for nominal consideration, as defined by
SAB No. 98, in the periods preceding an IPO. During the period preceding the
Company's IPO, the Company did not have any nominal issuances.
The calculations of basic and dilutive weighted average shares outstanding
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Basic weighted average Common shares outstanding........................ 16,355,158 13,696,730 13,442,101
Weighted average Common equivalent shares............................... -- -- --
------------ ------------ ------------
Diluted weighted average shares outstanding............................. 16,355,158 13,696,730 13,442,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Diluted weighted average shares outstanding do not include 3,903,679 and
1,405,109 common equivalent shares at December 31, 1998 and 1997, respectively,
as their effect would be anti-dilutive.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires recognition of deferred tax assets and liabilities
for the future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
At December 31, 1998 and 1997, the Company had operating loss carryforwards
available to offset future federal taxable income of approximately $70 million
and $60 million, respectively. Deferred tax assets relating to the operating
losses have been fully offset by a valuation allowance. Accordingly, no income
tax benefit has been recorded. These operating loss carryforwards expire at
various dates through 2018 and under Section 382 of the Internal Revenue Code
may be limited due to ownership changes.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The
adoption had no impact on the Company's consolidated financial position, results
of operations or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
certain financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No.131 is
effective for fiscal years beginning after December 15, 1997. Comparative
information for earlier years presented is to be restated. The adoption had no
impact on the Company's consolidated financial position, results of operations
or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company does not expect adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
F-12
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. BUSINESS COMBINATIONS AND PRIVATE PLACEMENTS
PYROTECHNIX ACQUISITION
On March 1, 1996, the Company acquired all of the outstanding capital stock
of PyroTechnix, Inc. ("PyroTechnix") for 300,000 shares of the Company's Common
Stock. The acquisition was accounted for as a pooling of interests. The
operating results for PyroTechnix were not material to the combined results of
the two companies for all periods prior to the acquisition and therefore results
for those periods have not been restated.
The Company sold its PyroTechnix subsidiary in November 1997 and recognized
a gain of approximately $1,033,000, which is included as non-operating income in
the accompanying consolidated statement of operations for the year ended
December 31, 1997. Included in the consolidated statements of operations are
losses from operations of PyroTechnix of approximately $1,524,000 and $307,000,
respectively, for the years ended December 31, 1997 and 1996.
PRIVATE PLACEMENT
In May 1998, the Company sold, pursuant to a private placement, Secured
Promissory Notes ("Notes") in the aggregate principal amount of $4,500,000 and
warrants for 675,000 shares of Common Stock at an exercise price of $0.01 per
share. The Company allocated approximately $1,200,000 of the proceeds from the
Notes to the warrants based on the relative fair values of the Notes and the
warrants. Accordingly, the Company amortized the related debt discount to
interest expense over the period from May 6, 1998 (date of issuance) to July 13,
1998 (date of exchange--see below). All of such warrants were exercised in June
1998. On July 9, 1998, the Company obtained stockholder approval for, among
other things, an increase in its authorized Common Stock (the "Certificate of
Amendment") at its 1998 Annual Meeting of Stockholders. The Certificate of
Amendment was filed on July 10, 1998. On July 13, 1998, the holders of the Notes
exchanged the Notes for 4,500 shares of the Company's Series B Convertible
Preferred Stock, $0.01 par value per share and warrants to purchase 1,125,000
shares of Common Stock at an exercise price of $0.01 per share. The Company
allocated $3,000,000 to Series B Convertible Preferred Stock and $1,500,000 to
warrants in accounting for the exchange.
In May 1998, the Company also sold, pursuant to a private placement, shares
of Series A Preferred Stock in the aggregate amount of $5,500,000 and warrants
for 1,375,000 shares of Common Stock at an exercise price of $0.01 per share.
The Company allocated approximately $2,500,000 of the proceeds from the Series A
Preferred Stock to the warrants based on the relative fair values of the Series
A Preferred Stock and the warrants. All of such warrants were exercised in June
1998. On July 13, 1998, after the Certificate of Amendment was approved by the
Company's stockholders and was filed with the Secretary of State of the State of
Delaware, the exchange of 5,500 shares of Series A Preferred Stock for 5,500
shares of Series B Convertible Preferred Stock was effected.
The Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock (the "Certificate of Designations") provides that on
the original issue date of the Series B Convertible Preferred Stock, the holders
of the Series B Convertible Preferred Stock will have the right to nominate two
members of the Board of Directors of the Company. The Series B Convertible
Preferred Stock ranks senior and prior to the Common Stock and to all other
classes or series of stock issued by the Company. Dividends accrue on the shares
of Series B Convertible Preferred Stock at the rate of 8% per annum; provided,
however, that in the event the Company fails to redeem the Series B Convertible
Preferred Stock on or before April 30, 2005 (the "Anniversary Redemption Date"),
F-13
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. BUSINESS COMBINATIONS AND PRIVATE PLACEMENTS (CONTINUED)
pursuant to the Certificate of Designations, the dividend rate on the Series B
Convertible Preferred Stock shall increase 2% per annum on each anniversary of
the Anniversary Redemption Date. Annual dividends are cumulative and are payable
quarterly in arrears when and as declared by the Company's Board of Directors.
These shares have a liquidation preference of $1,000 per share. The Series B
Convertible Preferred Stock is convertible immediately into Common Stock,
initially at a conversion price of $2.00 per share, subject to adjustment. The
shares of Series B Convertible Preferred Stock may be redeemed, at the option of
the Company, at $1,000 per share on or after the Anniversary Redemption Date.
Upon a change of control, the Company may offer to redeem such shares at $2,000
per share or the Company may issue to each holder of Series B Convertible
Preferred Stock warrants exercisable for 250,000 shares of Common Stock for each
1,000 shares of Series B Convertible Preferred Stock owned by such holder at an
exercise price of $0.01 per share. The Company also has optional redemption
rights at any time after i) completion of an underwritten public offering by the
Company with gross proceeds to the Company of at least $20,000,000 and a price
per share of Common Stock of at least $4.00 per share, subject to adjustment, or
ii) after the Company's Common Stock shall have traded at an average price in
excess of $4.00 per share, subject to adjustment, for 20 consecutive trading
days and the aggregate market value of the Common Stock held by non-Affiliates
of the Company is at least $35,000,000. The holders of Series B Convertible
Preferred Stock also are entitled to certain preemptive rights, co-sale rights
and registration rights.
For the year ended December 31, 1998, the Company was required to increase
the loss attributable to common stockholders, as a result of the beneficial
conversion feature which arose due to the increase in the market price of the
Company's Common Stock from the date the Company received commitments with
respect to the $10,000,000 financing (April 20, 1998) to the date of issuance of
the Series B Convertible Preferred Stock (July 13, 1998). The beneficial
conversion feature is based upon the difference between the market price of the
5,000,000 shares of Common Stock into which the Series B Convertible Preferred
Stock is convertible and the carrying value of the Series B Convertible
Preferred Stock on the date of authorized issuance, but is limited (as discussed
above) to the proceeds received with respect to each security issued. As the
Company allocated $3,000,000 of proceeds to the Series B Convertible Preferred
Stock, and approximately $2,500,000 of proceeds to the Series A Preferred Stock,
the amount of the beneficial conversion feature is approximately $5,500,000. The
one-time occurrence was accounted for similar to a non-cash dividend and had no
effect on the Company's net loss or aggregate stockholders' equity.
In December 1998, the Company sold, pursuant to a subscription agreement,
1,666,667 shares of Common Stock for $5,000,000, or $3.00 per share, and rights
to purchase an additional 100,000 and 650,000 shares of Common Stock for $.01
and $4.50, respectively, to Fletcher International Limited ("Fletcher"). The
Subscription Agreement provides that, at the Company's election, and as long as
the market price of the Company's Common Stock is greater than $3.00 per share
and the Company has an effective registration statement for the resale of
Fletcher's shares, Fletcher is obligated to purchase up to an additional
$5,000,000 of Common Stock at market prices when the Company elects to exercise
its right to sell shares to Fletcher. In addition, Fletcher may receive
additional shares of Common Stock if the Company's Common Stock does not meet
certain price targets or if the Company does not register the resale of
Fletcher's shares by certain dates, as defined.
F-14
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. FIXED ASSETS, NET
Fixed assets, at cost, as of December 31, 1998 and 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Equipment.................................................................................... $ 3,878 $ 6,962
Leasehold improvements....................................................................... 335 2,903
Furniture and fixtures....................................................................... 243 410
--------- ---------
4,456 10,275
Less: accumulated depreciation and amortization.............................................. (3,056) (5,314)
--------- ---------
$ 1,400 $ 4,961
--------- ---------
--------- ---------
</TABLE>
The Company leases certain office equipment under capital lease agreements.
At December 31, 1998 and 1997, respectively, the carrying value of capital
assets was $193,000 and $389,000, net of accumulated amortization of $317,000
and $209,000.
During 1998 the Company disposed of approximately $1.8 million of net
capital assets as a result of a reduction in capacity and recognized a loss in
the December 31, 1998 consolidated financial statements related to this
disposition of these assets of approximately $1.5 million.
In April 1997 the Company sold its office building, which was under
construction, for $5.6 million, and as a result, recognized a gain of
approximately $95,000.
5. ACCRUED EXPENSES
Accrued liabilities consist of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accrued office closing costs................................................................... $ 265 $ 1,065
Accrued royalties.............................................................................. 346 859
Accrued discounts and allowances............................................................... 678 807
Accrued legal and corporate expenses........................................................... 295 361
Accrued compensation........................................................................... 120 565
Accrued interest and taxes..................................................................... 31 169
Other.......................................................................................... 438 724
--------- ---------
$ 2,173 $ 4,550
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. DEBT
As of December 31, 1998 and 1997 the Company's debt was as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
7% Convertible Notes Payable, dated February 11, 1994; annual interest payments; notes are
convertible, in whole but not in part, at the option of the holder at approximately 283
shares of Common Stock for each $1,000 principal amount outstanding. Remaining principal
balance due February 11, 1999 and satisfied (See Note 12 b). Included in this amount is
$108,108 due to related parties........................................................... $ 485 $ 485
Other..................................................................................... -- 79
---------- ----------
Total................................................................................. $ 485 $ 564
Less current portion...................................................................... 485 79
---------- ----------
Long term payables........................................................................ $ -- $ 485
---------- ----------
---------- ----------
</TABLE>
Interest expense to related parties on the above debt was $7,568 for each of
the years ended December 31, 1998 and 1997.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 9, 1998 the shareholders of the Company authorized an increase in
the number of shares of Common Stock from 20,000,000 to 100,000,000, par value
$0.01 per share (the "Common Stock").
PREFERRED STOCK
There are 100,000 shares of Preferred Stock, par value of $0.01 per share,
authorized and 1,395 shares were outstanding as of December 31, 1998. The Board
of Directors is authorized to provide for the issuance of the shares of
Preferred Stock in one or more series and to establish the number of shares
included in any such series and to fix the designation, powers, preferences and
rights of the shares of any such series.
In May 1998, the Company sold, pursuant to a private placement, 5,500 shares
of Series A Preferred Stock. On July 13, 1998 the Notes were exchanged for 4,500
shares of the Series B Convertible Preferred Stock (See Note 3). In a separate
transaction the Series A Preferred Stock was exchanged for 5,500 shares of
Series B Convertible Preferred Stock. During the fourth quarter of 1998, 8,605
shares of the Series B Convertible Preferred Stock were converted into 4,302,500
shares of Common Stock.
STOCK COMPENSATION PLANS
The Company has granted options to certain employees, directors and outside
consultants to purchase Common Stock outside of any defined plans and under an
incentive stock option plan. The option price represents estimated fair value at
the date of grant.
F-16
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Under the Learn2.com, Inc. Amended and Restated Incentive Stock Option Plan
(the "Incentive Stock Option Plan"), the Company may grant options to its
employees for up to 3,200,000 shares of Common Stock. As of December 31, 1998
the Incentive Stock Option Plan had 228,275 option shares outstanding and
1,790,435 shares available to grant. Of the 228,275 shares outstanding 45,500
shares are subject to the Option Share Repurchase Agreement with certain
stockholders and no new shares will be issued upon the exercise of grants.
Pursuant to the Option Share Repurchase Agreement, the Company had the right
to purchase up to 948,000 shares of Common Stock from certain stockholders at
$0.003 per share. The Company may invoke this right in the event certain
outstanding options (exercisable for an identical number of shares) are
exercised. The Company intends to satisfy its obligations to issue shares of
Common Stock upon any exercise of such associated options by delivering to the
exercising optionee(s) shares of treasury stock, thereby resulting in no change
in the number of outstanding shares of Common Stock. At December 31, 1998,
545,500 options associated with the Option Share Repurchase Agreement had been
exercised at a weighted average exercise price of $0.163 per share (and an
identical number of shares of Common Stock had been purchased by the Company
pursuant to the Option Share Repurchase Agreement).
At December 31, 1998, 469,500 options subject to the Option Share Repurchase
Agreement with a weighted average exercise price of $0.253 per share had been
canceled. Notwithstanding the cancellation of certain options, the stockholders
who are party to the Option Share Repurchase Agreement agreed that 112,500
shares of Common Stock underlying such canceled options would remain subject to
the agreement. During 1998, 69,000 shares were assigned to outstanding options.
Accordingly, all the 45,500 shares remaining under the Option Share Repurchase
Agreement have corresponding option grants.
F-17
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Transactions in stock options under the Incentive Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
OPTION SHARE WEIGHTED AVERAGE WEIGHTED
REPURCHASE EXERCISE AVERAGE
AGREEMENT PRICE STOCK OPTIONS EXERCISE PRICE
------------ ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995...................... 222,000 $ 0.715 1,485,250 $ 8.61
Granted........................................... -- -- 2,662,750 7.27
Exercised......................................... (85,250) 0.450 (102,800) 2.14
Canceled.......................................... (15,000) 0.003 (1,832,374) 11.08
------------ ------ ------------- -----
Balance at December 31, 1996...................... 121,750 $ 0.990 2,212,826 $ 5.26
Granted........................................... -- -- 267,500 3.12
Exercised......................................... (69,250) 0.083 (95,625) 1.11
Canceled.......................................... (1,500) 0.003 (1,343,436) 5.36
------------ ------ ------------- -----
Balance at December 31, 1997...................... 51,000 $ 2.244 1,041,265 $ 4.96
Granted........................................... -- -- 516,825 1.72
Exercised......................................... (41,500) 0.634 (308,115) 2.65
Reassigned........................................ 69,000 1.250 (69,000) 1.25
Canceled.......................................... (33,000) 3.561 (998,200) 4.90
------------ ------ ------------- -----
Balance at December 31, 1998...................... 45,500 $ 1.250 182,775 $ 1.44
------------ ------ ------------- -----
------------ ------ ------------- -----
</TABLE>
Transactions in stock options to employees, directors and consultants
outside either of the formal plans mentioned above are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
STOCK OPTIONS PRICE
------------- -----------------
<S> <C> <C>
Balance at December 31, 1996..................................................... -- $ --
Granted.......................................................................... 737,500 3.76
Exercised........................................................................ -- --
Canceled......................................................................... -- --
------------- -----
Balance at December 31, 1997..................................................... 737,500 $ 3.76
Granted.......................................................................... 3,056,500 1.98
Exercised........................................................................ (11,000) 1.32
Canceled......................................................................... (956,000) 3.26
------------- -----
------------- -----
Balance at December 31, 1998..................................................... 2,827,000 $ 2.02
------------- -----
------------- -----
</TABLE>
The Company has granted to directors options to purchase Common Stock under
a non-employee directors' stock option plan with vesting over four years. Under
the Learn2.com Inc. Amended and Restated 1994 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), the Company may grant options to its
non-employee directors for up to 125,000 shares of Common Stock. In 1998, 65,000
shares outstanding under the Directors' Plan were cancelled in exchange for new
options granted
F-18
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
outside this plan. All of the 125,000 shares authorized under the Directors'
Plan were deregistered. At December 31, 1998, no options were outstanding.
In May 1998, the Company exchanged with two board members their options to
purchase 715,000 shares of Common Stock for 765,000 shares of Common Stock for
$0.01 per share. The Company recognized a compensation charge of $1,377,000
related to this stock issuance.
Subsequent to year end, three members of the Board of Directors exercised
options to purchase 960,000 shares of Common Stock for the aggregate amount of
approximately $1.9 million. In connection with these exercises, the Company
received promissory notes from these individuals in the approximate amount of
$1.7 million.
The following table summarizes information about Incentive Stock Option Plan
and non-plan stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL OPTIONS OUTSTANDING TOTAL OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------- ----------- ----------- --------------- ----------- ---------------
$.003-- 1.99................................. 214,750 8.72 years $ 1.25 190,125 $ 1.25
2.00-- 4.99................................. 2,830,525 9.25 years 2.01 490,775 2.00
5.00--11.50................................. 10,000 7.38 years 11.50 5,000 11.50
----------- -----------
3,055,275 685,900
----------- -----------
----------- -----------
</TABLE>
Options vest over varying time periods ranging from zero to four years.
During 1998 and 1996 respectively, 527,500 and 1,217,250 outstanding options
were repriced at the then current market value. Such options are included in
both the granted and canceled options reported in the above schedule.
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1% to 10% of gross earnings to purchase
shares of the Company's Common Stock. Shares are purchased by participants at
the lower of 85% of fair market value at either the beginning or purchase date
of each 24 month offering period. Purchase dates are every six months. As of
December 31, 1998, 300,000 shares were authorized for purchase pursuant to the
plan and 223,436 shares had been issued.
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation",
during 1996 and elected to continue to apply the intrinsic value method provided
under Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its stock based compensation plans described
above. If compensation costs for the Company's stock-based compensation plans
had been determined under the fair value method the Company's net loss available
F-19
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
to common shareholders per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss (in thousands)...................................... As Reported $ (16,775) $ (22,458) $ (24,253)
Pro forma (19,524) (25,467) (29,004)
Basic and diluted loss per Common share...................... As Reported $ (1.03) $ (1.64) $ (1.80)
Pro forma (1.19) (1.86) (2.16)
</TABLE>
The fair value of each option grant and employee purchase rights are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: no dividend yield; expected
volatility of 67 to 211 percent; risk free interest rates of 5.2 to 6.5 percent;
and variable expected lives of zero, two and one-half and five years, depending
on the characteristics of the individual grants. The pro forma amounts are based
upon assumptions that the Company's management believes are reasonable; however,
the Company has a relatively short history on which to base these estimates. The
assumptions used in option pricing models significantly affect the estimated
value of stock benefits and, accordingly, the pro forma amounts do not purport
to represent the Company's results of operations for any future period.
WARRANTS
In connection with a $2,000,000 bridge loan agreement entered into in 1994
between the Company and certain existing stockholders prior to the initial
public offering, the Company issued warrants to purchase 350,000 shares of
Common Stock at $7.50 per share. The warrants expire October 11, 1999. At
December 31, 1998, 278,195 of these warrants were outstanding.
In connection with the acquisition of PyroTechnix, the Company assumed the
liability for outstanding warrants of PyroTechnix. There were warrants for 5,000
shares of PyroTechnix common stock and as of December 31, 1997, 19,268 shares of
the Company's Common Stock had been issued to cover the exercise of all of these
warrants.
In May 1998, in connection with the private placements (See Note 3), the
Company issued warrants to purchase 675,000 and 1,375,000 shares of Common Stock
at an exercise price of $0.01 per share. The Company allocated approximately
$1,200,000 and $2,500,000, respectively, of the total proceeds of $10,000,000 to
these warrants. All of the warrants were exercised in June 1998. In connection
with the exchange of the Notes issued in the above mentioned private placement
the Company issued additional warrants to purchase 1,125,000 shares of Common
Stock at an exercise price of $0.01 per share. During 1998, 750,000 shares of
Common Stock were issued upon the exercise of the warrants and warrants for
375,000 shares remained outstanding at December 31, 1998. Subsequent to year end
all of these warrants were exercised.
In December 1998, as part of the stock subscription agreement between the
Company and Fletcher, the Company issued rights to purchase an additional
100,000 and 650,000 shares of Common Stock for $.01 and $4.50, respectively (See
Note 3). As of December 31, 1998, all of these rights remain outstanding.
F-20
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. LEASES
The Company leases office facilities in California and Texas and certain
office equipment under operating leases that expire at various dates through
2002. Rental expense for operating leases amounted to $462,000, $911,000 and
$905,000 for 1998, 1997 and 1996, respectively.
Minimum payments under leases expiring subsequent to December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 161 $ 450
2000..................................................................... 48 320
2001..................................................................... 3 331
2002..................................................................... -- 206
----- -----------
Total................................................................ $ 212 $ 1,307
-----------
Less amount representing interest........................................ (18)
-----
Present value of minimum lease payments................................ $ 194
-----
</TABLE>
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosure of any significant off balance sheet and credit risk
concentration. The Company has no significant off-balance-sheet concentration of
credit risk such as foreign currency exchange contracts or other hedging
arrangements. Financial instruments that subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. The Company places
its temporary cash in financial institutions. For the years ended December 31,
1998 and 1997, two and five customers represented approximately 47% and 50% of
the Company's total net revenues, respectively. Sales to customers located
outside the United States represent approximately 25% and 20% of the Company's
total sales for the years ended December 31, 1998 and 1997, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan for its employees whereby employees that
qualify for participation under the plan can contribute up to 15% of their
salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matched participant
contributions 50% up to a maximum of 6% of a participant's salary. For the years
ended December 31, 1998, 1997 and 1996, the Company made contributions to the
plan of approximately $48,000, $220,000 and $280,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in other claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will
F-21
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
12. SUBSEQUENT EVENTS
A. STREET TECHNOLOGIES, INC. ACQUISITION
In February 1999, the Company acquired Street Technologies, Inc., a company
that uses streaming technology to market and sale its extensive catalog of
online training course products. Effective as of the date of the merger, Street
Technologies, Inc. changed its name to 7th Street.com, Inc. To consummate the
transaction, the Company issued 4,948,182 shares of Common Stock and 21,644
shares of Series D 8% Preferred Stock (the "Series D Stock") with an aggregate
liquidation preference of $21,643,970. Upon the receipt of Common Stockholders
approval to convert, the Series D Stock will convert into Common Stock at $3.00
per share. The Series D 8% Preferred Stockholders are entitled to participate
with the Common Stockholders in dividends and distributions and to vote on most
matters on an "as converted" basis with the Common stockholders and as a
separate class, except for the vote on whether to convert the Series D Stock.
The total value of the transaction is approximately $36 million and will be
accounted for using the purchase method of accounting.
B. CONVERSION OF 7% CONVERTIBLE NOTES PAYABLE
The 7% Convertible Notes Payable were due and payable on February 11, 1999
(See Note 6). To induce the holders to convert the note into Common Stock the
Company on February 10, 1999, offered the holders the right to convert at a
price equal to 85% of the then current market rate of the stock. During February
1999, the Company issued 186,982 shares of Common Stock in exchange for $458,108
of current notes payable. Accordingly, the Company recognized interest expense
in the amount of $114,618. As of March 17, 1999 the remaining balance of $27,027
has not been paid to the one remaining holder.
F-22
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
13. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999
A) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Learn2.com, Inc. (formerly known as 7th Level,
Inc.) and subsidiaries (the "Company") as of March 31, 1999 and the results of
operations and cash flows for the three month periods ended March 31, 1999 and
March 31, 1998. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements of the Company
contained in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998.
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
disclosures 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. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
B) BUSINESS COMBINATIONS
STREET TECHNOLOGIES, INC. ACQUISITION
On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc., a privately held company, and began doing business as
7th Street.com, Inc. The Company began marketing and developing training
solutions delivered over intranets and the Internet. To consummate the
transaction, the Company issued 4,948,182 shares of common stock, par value $.01
per share (the "Common Stock"), of the Company and 21,644 shares of Series D 8%
Preferred Stock (the "Series D Stock") with an aggregate liquidation preference
of $21,644,000. Upon the receipt of the common stockholders' approval, the
Series D Stock will automatically convert into 7,214,666 shares of Common Stock.
The Series D stockholders are entitled to participate with the common
stockholders in dividends and distributions and to vote on most matters on an
"as converted" basis with the common stockholders and as a separate class,
except for the vote on whether to convert the Series D Stock. The total value of
the transaction was approximately $40,331,000 including $3,133,000 of assumed
liabilities which consisted primarily of deferred revenue. The transaction was
accounted for using the purchase method of accounting. The results of Street
Technologies, Inc. subsequent to February 16, 1999 are included in the Company's
condensed consolidated statement of operations.
F-23
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
13. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (CONTINUED)
The aggregate purchase price of $40,331,000 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Common stock................................................................... $ 14,845,000
Preferred stock................................................................ 21,644,000
-------------
Subtotal................................................................. 36,489,000
Assumed liabilities............................................................ 3,133,000
Acquisition costs.............................................................. 709,000
-------------
Total.................................................................... $ 40,331,000
-------------
-------------
</TABLE>
The purchase price was allocated to the net assets acquired based upon their
fair values. The fair values were determined by an independent appraisal. The
appraisal incorporated proven valuation procedures and techniques. The purchase
price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Current assets................................................................. $ 1,763,000
Fixed assets................................................................... 343,000
Other assets................................................................... 490,000
Capitalized software........................................................... 14,717,000
Intangible assets.............................................................. 3,519,000
Acquired in-process technology (written-off)................................... 9,677,000
Goodwill....................................................................... 9,822,000
-------------
Total.................................................................... $ 40,331,000
-------------
-------------
</TABLE>
The acquired in-process technology has been expensed as a charge against
operations and is included in the accompanying condensed consolidated statement
of operations for the three months ended March 31, 1999. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility. However, there can be no
assurance that these projects will reach technological feasibility or develop
into products that may be sold by the Company. The acquired in-process
technology has required, and may require substantial development by the Company.
The intangible assets are being amortized over seven to twenty years. The
Company recorded approximately $204,000 of amortization expense relating to
these intangible assets during the three months ended March 31, 1999.
The operations of 7th Street.com have been included in the Company's
condensed consolidated financial statements since the date of acquisition. The
accompanying condensed consolidated statement of operations for the three months
ended March 31, 1999 includes charges of approximately $9,677,000 associated
with the write-off of acquired in-process technology and approximately
$2,493,000 associated with a restructuring charge which includes the write-off
of redundant assets, excess office space and
F-24
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
13. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (CONTINUED)
employee severance. The following unaudited pro forma information has been
prepared assuming that this acquisition had taken place at the beginning of the
period; it is not necessarily indicative of results that may occur in the
future.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
<S> <C> <C>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------- -------------------
Revenue............................................. $ 1,000,000 $ 739,000
Loss from operations................................ (14,276,000) (3,153,000)
Net loss............................................ (14,240,000) (3,141,000)
Loss per share...................................... $ (0.48) $ (.17)
</TABLE>
C) LOSS PER COMMON SHARE
Basic and diluted loss per share was determined by dividing the net loss by
the weighted average common shares outstanding during the period. Common stock
equivalents are excluded from the loss per share calculation as their effect
would be antidilutive.
D) STOCKHOLDERS' EQUITY
In the first quarter of 1999, three members of the Board of Directors
exercised their options to purchase an aggregate of 960,000 shares of Common
Stock for an aggregate exercise of $1,940,000. In connection with these
exercises, approximately $247,000 is currently due and the Company received
promissory notes from these directors in the approximate amount of $1,687,000.
The outstanding balance of $1,934,000 is included as notes and accounts
receivable from directors in the stockholders' equity section of the condensed
consolidated balance sheet. Under the terms of the promissory notes, interest
accrues at a rate of 6% payable quarterly, or at the option of the holders, will
accrue at a rate of 7% payable upon the maturity of the loan. The notes mature
at various dates in 2004.
As of March 31, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of Common Stock.
F-25
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-27
Independent Auditors' Report......................................................... F-28
Consolidated Financial Statements
Supplementary Consolidated Balance Sheets as of March 31, 1999, December 31, 1998 and
1997............................................................................... F-29
Supplementary Consolidated Statements of Operations for the three months ended March
31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996............. F-30
Supplementary Consolidated Statements of Stockholders' Equity for the three months
ended March 31, 1999 and the years ended December 31, 1998, 1997, and 1996......... F-31
Supplementary Consolidated Statements of Cash Flows for the three months ended March
31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996............. F-32
Notes to Supplementary Consolidated Financial Statements............................. F-33
Not Covered by Report of the Independent Auditors: Quarterly Financial Information
(unaudited)........................................................................ F-49
</TABLE>
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Learn2.com, Inc. (Formerly Known as 7th Level, Inc.)
We have audited the accompanying supplementary consolidated balance sheet of
Learn2.com, Inc. (formerly known as 7th Level Inc.) (a Delaware corporation) as
of December 31, 1998, and the related supplementary consolidated statement of
operations, stockholders' equity and cash flows for the year then ended as
restated for the pooling of interest transaction discussed in Note 3. These
supplementary consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The consolidated financial statements
of the Company for the year ended December 31, 1997, were audited by other
auditors whose report dated January 30, 1998, expressed an unqualified opinion
on those statements. The opinion of such auditors, however, does not cover the
restatement for the pooling of interest transaction as discussed in Note 1.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
We have also audited the adjustments described in Note 1 that were applied
to restate the 1997 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
In our opinion, the supplementary consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Learn2.com, Inc. (formerly known as 7th Level Inc.) as of December 31, 1998, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
June 30, 1999
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Learn2.com, Inc. (Formerly Known as 7th Level, Inc.:
We have audited the supplementary consolidated balance sheet of Learn2.com,
Inc. (formerly known as 7th Level, Inc.) as of December 31, 1997, and the
related supplementary consolidated statements of operations, stockholders'
equity and cash flows for the year then ended before restatement for the pooling
of interests transaction discussed in note 1 to the supplementary financial
statements. We have also audited the supplementary consolidated statements of
operations, stockholders' equity and cash flows of Learn2.com, Inc. (formerly
known as 7th Level, Inc.) for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplementary
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplementary consolidated financial statements referred
to above present fairly, in all material respects, (a) the financial position of
Learn2.com, Inc. (formerly known as 7th Level, Inc.) as of December 31, 1997 and
the results of their operations and their cash flows for the year then ended
before restatement for the pooling of interests transaction discussed in note 1
to the financial statements and (b) the results of their operations and their
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying supplementary consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in note 3 to the supplementary consolidated financial statements, the
Company has suffered recurring losses since inception and does not currently
have sufficient resources to meet its anticipated operating requirements during
1998, which conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 3. The supplementary consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
KPMG LLP
Dallas, Texas
January 30, 1998
F-28
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
MARCH 31, ----------- ---------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 10,875 $ 11,313 $ 2,479
Accounts receivable, net of allowances of $0 (unaudited) $1 and $1,127..... 1,391 174 1,178
Inventories................................................................ -- -- 18
Other current assets....................................................... 525 367 755
----------- ----------- ---------
Total current assets..................................................... 12,791 11,854 4,430
Fixed assets, net............................................................ 480 1,478 4,970
Capitalized software, net.................................................... 15,132 -- --
Intangible assets, net....................................................... 3,491 7 13
Goodwill..................................................................... 9,763 -- --
Other assets................................................................. 122 80 533
----------- ----------- ---------
Total assets............................................................. $ 41,779 $ 13,419 $ 9,946
----------- ----------- ---------
----------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 558 $ 198 $ 1,112
Accrued expenses........................................................... 3,824 2,182 4,570
Current portion of deferred revenue........................................ 2,109 50 --
Current portion of notes payable........................................... 29 487 82
Current portion of capital lease obligations............................... 157 148 172
Other current liabilities.................................................. -- 183 631
----------- ----------- ---------
Total current liabilities................................................ 6,677 3,248 6,567
Notes payable................................................................ 2 2 381
Notes payable to related parties............................................. -- -- 108
Deferred revenue............................................................. 1,050 -- --
Other........................................................................ 32 46 365
----------- ----------- ---------
Total liabilities........................................................ 7,761 3,296 7,421
Commitments and contingencies (Note 11)
Stockholders' equity:
Series B Convertible Preferred Stock, par value $0.01 per share, 15,000
shares authorized; 0 (unaudited), 1,395 and 0 shares issued and
outstanding, in 1999, 1998 and 1997, respectively ($1,395 liquidation
value)................................................................... -- 629 --
Series D Convertible Preferred Stock, par value $0.01 per share, 35,000
shares authorized; 1,095 and 21,644 and 0 shares issued and outstanding,
in 1999, 1998 and 1997, respectively ($21,644 liquidation value)......... -- -- --
Common stock, par value $0.01 per share, 100,000,000 shares authorized;
32,633,902 (unaudited), 25,307,482 and 15,327,596 shares issued and
outstanding in 1999, 1998 and 1997, respectively......................... 326 252 153
Additional capital......................................................... 134,030 93,963 70,640
Notes and accounts receivable from directors (Note 7 and 13)............... (1,934) -- --
Accumulated deficit........................................................ (98,404) (84,721) (68,281)
Cumulative translation adjustment.......................................... -- -- 13
----------- ----------- ---------
Total stockholders' equity............................................... 34,018 10,123 2,525
----------- ----------- ---------
Total liabilities and stockholders' equity............................... $ 41,779 $ 13,419 $ 9,946
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
F-29
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Net revenues............................... $ 1,025 $ 598 $ 2,674 $ 10,807 $ 20,549
Cost of revenues........................... 186 109 472 4,650 8,299
------------ ------------ ------------ ------------ ------------
Gross profit............................. 839 489 2,202 6,157 12,250
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and product development......... 592 825 2,396 14,470 19,641
Sales and marketing...................... 515 295 595 5,885 11,262
General and administrative............... 747 1,127 5,326 5,366 4,290
Depreciation and amortization............ 379 568 1,822 4,181 2,565
Restructuring charges.................... 2,493 -- -- -- --
Acquired in-process technology........... 9,677 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses............... 14,403 2,815 10,139 29,902 37,758
------------ ------------ ------------ ------------ ------------
Operating loss......................... (13,564) (2,326) (7,937) (23,745) (25,508)
Interest expense........................... (69) (18) (1,732) (121) (77)
Interest income............................ 142 22 335 340 1,332
Other (expense) income..................... (114) (161) (1,277) 1,114 --
------------ ------------ ------------ ------------ ------------
Net loss............................... (13,605) (2,483) (10,611) (22,412) (24,253)
Dividends on Preferred Stock............... -- -- 338 -- --
Beneficial conversion feature in
association with preferred stock (Note
3)....................................... -- -- 5,479 -- --
------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders............................. $ (13,605) $ (2,483) $ (16,428) $ (22,412) $ (24,253)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic and diluted loss per common share.... $ (0.47) $ (0.16) $ (0.92) $ (1.47) $ (1.80)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average basic and diluted shares
outstanding.............................. 28,707,635 15,327,596 17,899,018 15,240,590 13,442,101
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
F-30
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE CONVERTIBLE
------------------------ PREFERRED PREFERRED
SHARES AMOUNT SERIES A SERIES B
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................................. 14,622 $ 146 $ -- $ --
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 185 2 -- --
Common Stock issued for acquisitions....................................... 281 3 -- --
Common Stock issued for conversion of debt................................. 23 -- -- --
Common stock issued on exercise of warrants................................ 13 -- -- --
Foreign currency translation adjustment.................................... -- -- -- --
Unrealized loss on investments............................................. -- -- -- --
Accumulated earnings--Panmedia............................................. -- -- -- --
Net loss................................................................... -- -- -- --
----------- ----- ----------- -----------
Balance at December 31, 1996................................................. 15,124 151 -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 198 2 -- --
Common stock issued on exercise of warrants................................ 6 -- -- --
Common stock issued for consulting services................................ 40 -- -- --
Cancellation of unearned Common Stock issued as contingent purchase
consideration............................................................ (40) -- -- --
Foreign currency translation adjustment.................................... -- -- -- --
Unrealized gain on investments............................................. -- -- -- --
Accumulated earnings--Panmedia............................................. -- -- -- --
Dividend distribution...................................................... -- -- -- --
Net loss................................................................... -- -- -- --
----------- ----- ----------- -----------
Balance at December 31, 1997................................................. 15,328 153 -- --
Issuance of Series A Preferred Stock (net of issuance costs of $3,021)..... -- -- 2,479 --
Issuance costs in connection with Notes.................................... -- -- -- --
Beneficial Conversion Feature.............................................. -- -- -- --
Conversion of Series A Preferred Stock to Series B Preferred Stock......... -- -- (2,479) 2,479
Conversion of Notes to Series B Preferred Stock............................ -- -- -- 3,000
Common Stock issued on conversion of Series B Preferred Stock.............. 4,303 43 -- (4,850)
Common Stock dividends..................................................... 107 1 -- --
Common Stock issued in private placement................................... 1,667 17 -- --
Warrants issued to Non-employees........................................... -- -- -- --
Common Stock issued upon exercise of warrants.............................. 2,813 28 -- --
Common Stock Granted to Officers........................................... 765 7 -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 325 3 -- --
Compensation expense on options issued to non-employees.................... -- -- -- --
Foreign currency translation adjustment.................................... -- -- -- --
Accumulated earnings--Panmedia............................................. -- -- -- --
Dividend distribution...................................................... -- -- -- --
Net loss................................................................... -- -- -- --
----------- ----- ----------- -----------
Balance at December 31, 1998................................................. 25,308 252 -- 629
Common stock issued on conversion of Series B Preferred Stock
(unaudited).............................................................. 698 7 -- (629)
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited).............................................................. 4,948 49 -- --
Series B dividends paid in common stock (unaudited)........................ 24 1 -- --
Common stock issued upon exercise of warrants (unaudited).................. 375 4 -- --
Common stock issued upon conversion of notes payable (unaudited)........... 187 2 -- --
Warrants and options issued to non-employees............................... -- -- -- --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)...................................................... -- -- -- --
Common stock issued under stock option plan and stock purchase plan
(unaudited).............................................................. 1,094 11 -- --
Accumulated earnings--Panmedia............................................. -- -- -- --
Dividend distribution...................................................... -- -- -- --
Net loss (unaudited)....................................................... -- -- -- --
----------- ----- ----------- -----------
Balance at March 31, 1999 (unaudited)........................................ 32,634 $ 326 $ -- $ --
----------- ----- ----------- -----------
----------- ----- ----------- -----------
<CAPTION>
CONVERTIBLE CUMULATIVE
PREFERRED ADDITIONAL TRANSLATION
SERIES D CAPITAL ADJUSTMENT
------------- ----------- ---------------
<S> <C>
Balance at December 31, 1995................................................. $ -- $ 69,165 (15)
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- 765 --
Common Stock issued for acquisitions....................................... -- 331 --
Common Stock issued for conversion of debt................................. -- 80 --
Common stock issued on exercise of warrants................................ -- 3 --
Foreign currency translation adjustment.................................... -- -- 66
Unrealized loss on investments............................................. -- -- --
Accumulated earnings--Panmedia............................................. -- -- --
Net loss................................................................... -- -- --
------ ----------- ---
Balance at December 31, 1996................................................. -- 70,344 51
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- 327 --
Common stock issued on exercise of warrants................................ -- 1 --
Common stock issued for consulting services................................ -- 75 --
Cancellation of unearned Common Stock issued as contingent purchase
consideration............................................................ -- (107) --
Foreign currency translation adjustment.................................... -- -- (38)
Unrealized gain on investments............................................. -- -- --
Accumulated earnings--Panmedia............................................. -- -- --
Dividend distribution...................................................... -- -- --
Net loss................................................................... -- -- --
------ ----------- ---
Balance at December 31, 1997................................................. -- 70,640 13
Issuance of Series A Preferred Stock (net of issuance costs of $3,021)..... -- 2,790 --
Issuance costs in connection with Notes.................................... -- 1,467 --
Beneficial Conversion Feature.............................................. -- 5,479 --
Conversion of Series A Preferred Stock to Series B Preferred Stock......... -- -- --
Conversion of Notes to Series B Preferred Stock............................ -- 1,500 --
Common Stock issued on conversion of Series B Preferred Stock.............. -- 4,807 --
Common Stock dividends..................................................... -- 278 --
Common Stock issued in private placement................................... -- 4,683 --
Warrants issued to Non-employees........................................... -- 32 --
Common Stock issued upon exercise of warrants.............................. -- -- --
Common Stock Granted to Officers........................................... -- 1,379 --
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- 867 --
Compensation expense on options issued to non-employees.................... -- 41 --
Foreign currency translation adjustment.................................... -- -- (13)
Accumulated earnings--Panmedia............................................. -- -- --
Dividend distribution...................................................... -- -- --
Net loss................................................................... -- -- --
------ ----------- ---
Balance at December 31, 1998................................................. -- 93,963 --
Common stock issued on conversion of Series B Preferred Stock
(unaudited).............................................................. 622 --
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited).............................................................. 36,439 --
Series B dividends paid in common stock (unaudited)........................ -- 73 --
Common stock issued upon exercise of warrants (unaudited).................. -- -- --
Common stock issued upon conversion of notes payable (unaudited)........... -- 571 --
Warrants and options issued to non-employees............................... -- 185 --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)...................................................... -- -- --
Common stock issued under stock option plan and stock purchase plan
(unaudited).............................................................. -- 2,177 --
Accumulated earnings--Panmedia............................................. -- -- --
Dividend distribution...................................................... -- -- --
Net loss (unaudited)....................................................... -- -- --
------ ----------- ---
Balance at March 31, 1999 (unaudited)........................................ $ -- $ 134,030 $ --
------ ----------- ---
------ ----------- ---
<CAPTION>
NOTES AND
ACCOUNTS
RECEIVABLE
UNREALIZED FROM ACCUMULATED
GAIN (LOSS) ON DIRECTORS (DEFICIT)
INVESTMENTS (NOTE 7) EARNINGS
--------------- ----------- ------------
Balance at December 31, 1995................................................. 22 -- (21,040)
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- -- --
Common Stock issued for acquisitions....................................... -- -- (583)
Common Stock issued for conversion of debt................................. -- -- --
Common stock issued on exercise of warrants................................ -- -- --
Foreign currency translation adjustment.................................... -- -- --
Unrealized loss on investments............................................. (28) -- --
Accumulated earnings--Panmedia............................................. -- -- 14
Net loss................................................................... -- -- (24,253)
------- ----------- ------------
Balance at December 31, 1996................................................. (6) -- (45,862)
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- -- --
Common stock issued on exercise of warrants................................ -- -- --
Common stock issued for consulting services................................ -- -- --
Cancellation of unearned Common Stock issued as contingent purchase
consideration............................................................ -- -- --
Foreign currency translation adjustment.................................... -- -- --
Unrealized gain on investments............................................. 6 -- --
Accumulated earnings--Panmedia............................................. -- -- 46
Dividend distribution...................................................... -- -- (7)
Net loss................................................................... -- -- (22,458)
------- ----------- ------------
Balance at December 31, 1997................................................. -- -- (68,281)
Issuance of Series A Preferred Stock (net of issuance costs of $3,021)..... -- -- --
Issuance costs in connection with Notes.................................... -- -- --
Beneficial Conversion Feature.............................................. -- -- (5,479)
Conversion of Series A Preferred Stock to Series B Preferred Stock......... -- -- --
Conversion of Notes to Series B Preferred Stock............................ -- -- --
Common Stock issued on conversion of Series B Preferred Stock.............. -- -- --
Common Stock dividends..................................................... -- -- (279)
Common Stock issued in private placement................................... -- -- --
Warrants issued to Non-employees........................................... -- -- --
Common Stock issued upon exercise of warrants.............................. -- -- --
Common Stock Granted to Officers........................................... -- -- --
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ -- -- --
Compensation expense on options issued to non-employees.................... -- -- --
Foreign currency translation adjustment.................................... -- -- --
Accumulated earnings--Panmedia............................................. -- -- 347
Dividend distribution...................................................... -- -- (71)
Net loss................................................................... -- -- (10,958)
------- ----------- ------------
Balance at December 31, 1998................................................. -- -- (84,721)
Common stock issued on conversion of Series B Preferred Stock
(unaudited).............................................................. -- -- --
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited).............................................................. -- -- --
Series B dividends paid in common stock (unaudited)........................ -- -- (73)
Common stock issued upon exercise of warrants (unaudited).................. -- -- --
Common stock issued upon conversion of notes payable (unaudited)........... -- -- --
Warrants and options issued to non-employees............................... -- -- --
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)...................................................... -- (1,934) --
Common stock issued under stock option plan and stock purchase plan
(unaudited).............................................................. -- -- --
Accumulated earnings--Panmedia............................................. -- -- 46
Dividend distribution...................................................... -- -- (5)
Net loss (unaudited)....................................................... -- -- (13,651)
------- ----------- ------------
Balance at March 31, 1999 (unaudited)........................................ $ -- $ (1,934) $ (98,404)
------- ----------- ------------
------- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at December 31, 1995................................................. $ 48,278
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 767
Common Stock issued for acquisitions....................................... (249)
Common Stock issued for conversion of debt................................. 80
Common stock issued on exercise of warrants................................ 3
Foreign currency translation adjustment.................................... 66
Unrealized loss on investments............................................. (28)
Accumulated earnings--Panmedia............................................. 14
Net loss................................................................... (24,253)
-------------
Balance at December 31, 1996................................................. 24,678
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 329
Common stock issued on exercise of warrants................................ 1
Common stock issued for consulting services................................ 75
Cancellation of unearned Common Stock issued as contingent purchase
consideration............................................................ (107)
Foreign currency translation adjustment.................................... (38)
Unrealized gain on investments............................................. 6
Accumulated earnings--Panmedia............................................. 46
Dividend distribution...................................................... (7)
Net loss................................................................... (22,458)
-------------
Balance at December 31, 1997................................................. 2,525
Issuance of Series A Preferred Stock (net of issuance costs of $3,021)..... 5,269
Issuance costs in connection with Notes.................................... 1,467
Beneficial Conversion Feature.............................................. --
Conversion of Series A Preferred Stock to Series B Preferred Stock......... --
Conversion of Notes to Series B Preferred Stock............................ 4,500
Common Stock issued on conversion of Series B Preferred Stock.............. --
Common Stock dividends..................................................... --
Common Stock issued in private placement................................... 4,700
Warrants issued to Non-employees........................................... 32
Common Stock issued upon exercise of warrants.............................. 28
Common Stock Granted to Officers........................................... 1,386
Common Stock issued under Stock Option Plan and Stock Purchase Plan........ 870
Compensation expense on options issued to non-employees.................... 41
Foreign currency translation adjustment.................................... (13)
Accumulated earnings--Panmedia............................................. 347
Dividend distribution...................................................... (71)
Net loss................................................................... (10,958)
-------------
Balance at December 31, 1998................................................. 10,123
Common stock issued on conversion of Series B Preferred Stock
(unaudited)..............................................................
Stock issued in connection with Street Technologies, Inc. acqusition
(unaudited).............................................................. 36,488
Series B dividends paid in common stock (unaudited)........................ 1
Common stock issued upon exercise of warrants (unaudited).................. 4
Common stock issued upon conversion of notes payable (unaudited)........... 573
Warrants and options issued to non-employees............................... 185
Notes and accounts receivable from directors from the exercise of stock
options (unaudited)...................................................... (1,934)
Common stock issued under stock option plan and stock purchase plan
(unaudited).............................................................. 2,188
Accumulated earnings--Panmedia............................................. 46
Dividend distribution...................................................... (5)
Net loss (unaudited)....................................................... (13,651)
-------------
Balance at March 31, 1999 (unaudited)........................................ $ 34,018
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
----------- ----------- -------- -------- --------
(UNAUDITED)
Cash flows from operating activities:
Net loss.............................. $(13,605) $(2,483) $(10,611) $(22,412) $(24,253)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Non-cash compensation and
interest.......................... -- -- 3,108 -- --
Depreciation and amortization....... 379 568 1,821 4,181 2,565
Non-cash common stock warrant and
option expense.................... 185
Loss (gain) on sale of assets....... -- 161 1,519 (1,116) --
Gain on early retirement of debt.... -- -- -- (10) --
Restructuring charges............... 2,493 -- -- -- --
Acquired in-process technology...... 9,677 -- -- -- --
Other............................... 115 -- 188 75 --
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable............... (503) 1,027 1,004 5,102 651
Inventories....................... -- 18 18 552 (181)
Other current assets.............. 139 40 388 862 (593)
Other assets...................... 7 -- 452 533 (367)
Accounts payable.................. 95 (174) (925) (1,045) 884
Other current liabilities......... 523 (673) (3,024) (66) 1,554
----------- ----------- -------- -------- --------
Net cash used in operating
activities.................... (495) (1,516) (6,062) (13,344) (19,740)
----------- ----------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of assets.......... -- 39 98 6,593 --
Purchase of short-term investments.... -- -- -- -- (7,965)
Proceeds from sales of short-term
investments......................... -- -- -- 4,491 13,158
Equity investment..................... -- -- -- -- (400)
Acquisitions, net of cash acquired
(paid).............................. 65 -- -- -- (772)
Capital expenditures.................. (204) (36) (130) (439) (9,643)
----------- ----------- -------- -------- --------
Net cash (used in) provided by
investing activities.......... (139) 3 (32) 10,645 (5,622)
----------- ----------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from private placement of
common stock........................ -- -- 4,700 -- --
Net proceeds from issuance of
preferred stock..................... -- -- 5,269 -- --
Net proceeds from debt issuance....... -- -- 4,311 -- --
Proceeds from bank line of credit..... -- -- -- -- 6,000
Repayment of bank line of credit...... -- -- -- (5,625) (375)
Repayment of notes payable to related
parties............................. -- -- -- (125) --
Principal payments under capital lease
obligations......................... (51) -- (187) (233) (163)
Proceeds from exercise of warrants.... 4 -- -- -- --
Issuance of common stock under stock
option and stock purchase plan...... 248 -- 870 330 767
Other................................. (5) (11) (35) 5 3
----------- ----------- -------- -------- --------
Net cash provided by (used in)
financing activities.......... 196 (11) 14,928 (5,648) 6,232
----------- ----------- -------- -------- --------
Effect of exchange rate changes
on cash and cash
equivalents................... -- -- -- 25 (12)
----------- ----------- -------- -------- --------
Net (decrease) increase in cash
and cash equivalents.......... (438) (1,524) 8,834 (8,322) (19,142)
Cash and cash equivalents, beginning of
period................................ 11,313 2,479 2,479 10,801 29,943
----------- ----------- -------- -------- --------
Cash and cash equivalents, end of
period................................ $ 10,875 $ 955 $ 11,313 $ 2,479 $ 10,801
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Supplemental disclosure of cash flow
information--
Cash paid for interest................ $ 5 $ -- $ 75 $ 205 $ 353
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Schedule of noncash financing
activities:
Conversion of notes payable into
common stock........................ 573 -- -- -- --
Notes and accounts receivable received
upon excerise of stock options...... -- -- -- -- --
1,934
Detail of acqusition:
Fair value of assets acquired....... 39,557 -- -- -- --
Liabilities assumed................. (3,133) -- -- -- --
Common stock issued................. (14,845) -- -- -- --
Preferred stock issued.............. (21,644) -- -- -- --
-----------
Acquisition costs, net of cash
acquired.......................... (65) -- -- -- --
Cash acquired in acquisition........ 774 -- -- -- --
----------- ----------- -------- -------- --------
Total acqusition costs............ $ 709 $ -- $ -- $ -- $ --
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. INCORPORATION AND NATURE OF BUSINESS
Learn2.com, Inc. (formerly known as 7th Level, Inc.) (the "Company") was
incorporated under the laws of the State of Delaware on April 28, 1993. The
Company has been engaged in the business of developing entertainment and
educational software. In April 1998, the Company announced a strategy to become
a leading developer of Internet media preparation tools and technologies. In
February 1999, 7th Level.com Merger Corporation, a wholly-owned subsidiary of
the Company, merged with Street Technologies, Inc. (the "Merger"). (See Note 12)
PANMEDIA ACQUISITION
In May 1999, 7th Level, Inc. Acquisition Corporation, a wholly owned
subsidiary of the Company, merged with Panmedia Corporation ("Panmedia") in
which Panmedia became a wholly-owned subsidiary of the Company. The Company
exchanged 1,543,860 shares of common stock for all the outstanding common stock
of Panmedia. The merger was accounted for as a pooling-of-interests and,
accordingly, the accompanying financial statements and footnotes have been
restated to include the operations of Panmedia for 1998 and 1997. Panmedia's
results of operations for 1996 are not material and have therefore not been
included. For the years ended December 31, 1998 and 1997, Panmedia's revenues
were approximately $1,100,000 and $308,000, respectively. For the years ended
December 31, 1998 and 1997, Panmedia's net income was approximately $347,000 and
$46,000, respectively.
The Company has incurred significant losses since inception including
operating losses of approximately $7.9 million, $23.7 million and $25.5 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
In August 1997 the Company announced a new strategy, by leveraging its
existing core technology, to transition from being a self-funded content
developer and publisher to position itself as a supplier of custom solutions and
services, tools and technologies. As part of that shift in strategy, the Company
divested itself of its games development groups and new titles under
development. The Company also closed its international localization and sales
offices including those in San Francisco, Tokyo and Munich and sold its
PyroTechnix, Inc. subsidiary during 1997. In fourth quarter 1998 the production
facilities located in Glendale, California were closed. Research and product
development and sales and marketing expenses include approximately, $700,000 and
$965,000, respectively, related to the closing of the international localization
and sales offices. In the year ended December 31, 1998, the Company was able to
reverse into income certain reserves established in 1997 as it was able to
settle certain liabilities and commitments for approximately $523,000 less than
anticipated.
During fiscal 1998, the Company raised over $14.3 million, net of offering
expenses, in connection with private placements (See Note 3) to fund operations.
Furthermore, at the Company's election, as defined, the Company has the right to
sell shares of Common Stock under a Subscription Agreement in exchange for an
additional $5,000,000, as defined (See Note 3).
F-33
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of consolidated 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.
The Company's estimates and future results could be affected adversely by a
number of uncertainties related to its new software products. Such factors
include, but are not limited to market acceptance; ability to obtain sales
volumes and adequate prices; the Company's sustained commitment of resources to
further develop and market the technology; and the technological competitive
advantage of these new products.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, "Software Revenue Recognition". The Company
generates revenue primarily from interactive software product sales, licensing
agreements and product development agreements. Software product sales are
recognized as revenue upon shipment of the products to customers, provided that
there are no significant vendor obligations and collection of the related
receivable is probable. The Company accounts for insignificant vendor
obligations and post-contract support at the time of product delivery by
accruing such estimated costs or recognizing them ratably as the obligations are
fulfilled. Provision for estimated returns including distributors' stock
balancing rights and allowances is recorded at the time of sale.
Revenues from development contracts are recognized as the services are
performed under the terms of the respective contracts. The Company had deferred
revenues of approximately $3,000 and $385,000 included in other current
liabilities associated with development and licensing contracts at December 31,
1998 and 1997, respectively.
Revenue from web site design and implementation services for corporate
clients is recognized based on either time and materials charges incurred during
the period, the achievement of project milestones as defined by customer
contracts or percentage of completion for fixed fee contracts. The Company also
derives revenue from website advertisements. The Company offers numerous sizes
and types of advertising placement, including banner advertisements, text links
and sponsorship programs. Revenues from advertising sales are recognized ratably
in the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. Payments received from advertisers prior to displaying
their website
F-34
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
advertisements are recorded as deferred revenue and are recognized as revenue
ratably as the advertisements are displayed.
RESEARCH AND PRODUCT DEVELOPMENT EXPENDITURES
The Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
provides for the capitalization of certain software development costs once
technological feasibility has been established. In addition, the Company
evaluates the recoverability of any capitalized costs as provided by generally
accepted accounting principles. To date, no such costs have been capitalized as
the impact on the consolidated financial statements for all periods presented
would be immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short maturities.
ADVERTISING COSTS
Advertising costs, included in sales and marketing expenses, are charged as
an expense when they are incurred. Advertising costs were $178,000, $1,542,000
and $4,816,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents
consist of money market funds, commercial paper, U.S. Treasury securities and
other debt securities. The Company had cash equivalents of approximately $11.3
million and $2.5 million at December 31, 1998 and 1997, respectively.
OTHER CURRENT ASSETS
Other current assets include prepaid insurance, prepaid royalties, interest
receivable, other receivables, and other miscellaneous prepaid expenses.
INVENTORIES
Inventories, which are comprised of software product components and finished
goods, are carried at the lower of cost, determined on a first-in first-out
basis, or market.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated over three to five
years depending upon the estimated useful life of the asset. Leasehold
improvements and assets under capital leases are amortized over the shorter of
the estimated useful life of the asset or the term of the lease.
F-35
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
At December 31, 1998 intangible assets consisted of various patents,
copyrights, and trademarks, technological know-how, assembled workforce and
goodwill acquired in acquisitions. Intangible assets are being amortized on a
straight line basis over estimated useful lives of three to seven years. The
Company assesses the recoverability of intangible assets in accordance with SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," by determining whether the amortization of the
intangible assets over their remaining lives can be recovered through projected
undiscounted future cash flows. During 1997, in connection with the sale of a 3D
game and the closure of its Asia Pacific localization and sales offices, the
Company wrote off the remaining intangible assets and the related accumulated
amortization acquired in certain prior business combinations. Combined, these
totaled approximately $610,000.
OTHER ASSETS
At December 31, 1997 other assets consisted primarily of restricted cash
placed in escrow for a planned merger that was not completed and restricted cash
which collateralized a letter of credit and other miscellaneous balances.
FOREIGN CURRENCY TRANSLATION
For the Company's subsidiaries outside the United States, the functional
currency is the local currency of the country in which the subsidiary is
domiciled. The Company applies SFAS No. 52 "Accounting for the Translation of
Foreign Currency Transactions and Foreign Currency Financial Statements".
Accordingly, assets and liabilities of the subsidiaries outside of the United
States are translated into U.S. dollars at year end exchange rates. Income and
expense items are translated at average rates of exchange prevailing during the
year. The adjustments resulting from translating the financial statements of
these subsidiaries are reflected as cumulative translation adjustments and
included in stockholders' equity. Foreign currency transaction gains and losses
are recognized when they occur. Such amounts are not material in any of the
periods presented. During 1998 the Company closed down its foreign operations
and accordingly the adjustment was removed from the separate component of equity
and reported as a part of the loss on cessation of these operations.
ROYALTIES
Royalties are accrued based on net revenues, pursuant to contractual
agreements with talent for various products published by the Company. Royalty
expense is included in the cost of revenues.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). This statement established standards
for computing and presenting earnings per share. This statement is effective for
periods ending after December 15, 1997. In February 1998, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 98.
This bulletin revised the SEC's guidance for calculating earnings per share with
respect to equity
F-36
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
security issuances before an initial public offering ("IPO") and is effective
for fiscal years ending after December 15, 1997. The prior years' earnings per
share have been retroactively restated to reflect the adoption of SFAS No. 128
and SAB No. 98.
Basic earnings per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted earnings per share
was determined by dividing net loss by diluted weighted average shares
outstanding. Diluted weighted average shares reflects the dilutive effect, if
any, of common equivalent shares and nominal issuances. Common equivalent shares
include common stock options and warrants to the extent their effect is
dilutive, based on the treasury stock method. Nominal issuances arise when a
company issues common stock, options or warrants to purchase common stock or
other potentially dilutive instruments for nominal consideration, as defined by
SAB No. 98, in the periods preceding an IPO. During the period preceding the
Company's IPO, the Company did not have any nominal issuances.
The calculations of basic and dilutive weighted average shares outstanding
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Basic weighted average Common shares outstanding........................ 17,899,018 15,240,590 13,442,101
Weighted average Common equivalent shares............................... -- -- --
------------ ------------ ------------
Diluted weighted average shares outstanding............................. 17,899,018 15,240,590 13,442,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Diluted weighted average shares outstanding do not include 3,903,679 and
1,405,109 common equivalent shares at December 31, 1998 and 1997, respectively,
as their effect would be anti-dilutive.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires recognition of deferred tax assets and liabilities
for the future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
At December 31, 1998 and 1997, the Company had operating loss carryforwards
available to offset future federal taxable income of approximately $70 million
and $60 million, respectively. Deferred tax assets relating to the operating
losses have been fully offset by a valuation allowance. Accordingly, no income
tax benefit has been recorded. These operating loss carryforwards expire at
various dates through 2018 and under Section 382 of the Internal Revenue Code
may be limited due to ownership changes.
Prior to being acquired by the Company, Panmedia elected S Corporation
status for federal and state income tax reporting purposes. As a result, the
Company's earnings are taxable directly to the shareholder. Panmedia remains
liable, however, for the State of California taxes. Pro forma income tax
information is not material.
F-37
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The
adoption had no impact on the Company's consolidated financial position, results
of operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company does not expect adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
3. BUSINESS COMBINATIONS AND PRIVATE PLACEMENTS
PYROTECHNIX ACQUISITION
On March 1, 1996, the Company acquired all of the outstanding capital stock
of PyroTechnix, Inc. ("PyroTechnix") for 300,000 shares of the Company's Common
Stock. The acquisition was accounted for as a pooling of interests. The
operating results for PyroTechnix were not material to the combined results of
the two companies for all periods prior to the acquisition and therefore results
for those periods have not been restated.
The Company sold its PyroTechnix subsidiary in November 1997 and recognized
a gain of approximately $1,033,000, which is included as non-operating income in
the accompanying consolidated statement of operations for the year ended
December 31, 1997. Included in the consolidated statements of operations are
losses from operations of PyroTechnix of approximately $1,524,000 and $307,000,
respectively, for the years ended December 31, 1997 and 1996.
PRIVATE PLACEMENT
In May 1998, the Company sold, pursuant to a private placement, Secured
Promissory Notes ("Notes") in the aggregate principal amount of $4,500,000 and
warrants for 675,000 shares of Common Stock at an exercise price of $0.01 per
share. The Company allocated approximately $1,200,000 of the proceeds from the
Notes to the warrants based on the relative fair values of the Notes and the
warrants. Accordingly, the Company amortized the related debt discount to
interest expense over the period from May 6, 1998 (date of issuance) to July 13,
1998 (date of exchange--see below). All of such warrants were exercised in June
1998. On July 9, 1998, the Company obtained stockholder approval for,
F-38
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. BUSINESS COMBINATIONS AND PRIVATE PLACEMENTS (CONTINUED)
among other things, an increase in its authorized Common Stock (the "Certificate
of Amendment") at its 1998 Annual Meeting of Stockholders. The Certificate of
Amendment was filed on July 10, 1998. On July 13, 1998, the holders of the Notes
exchanged the Notes for 4,500 shares of the Company's Series B Convertible
Preferred Stock, $0.01 par value per share and warrants to purchase 1,125,000
shares of Common Stock at an exercise price of $0.01 per share. The Company
allocated $3,000,000 to Series B Convertible Preferred Stock and $1,500,000 to
warrants in accounting for the exchange.
In May 1998, the Company also sold, pursuant to a private placement, shares
of Series A Preferred Stock in the aggregate amount of $5,500,000 and warrants
for 1,375,000 shares of Common Stock at an exercise price of $0.01 per share.
The Company allocated approximately $2,500,000 of the proceeds from the Series A
Preferred Stock to the warrants based on the relative fair values of the Series
A Preferred Stock and the warrants. All of such warrants were exercised in June
1998. On July 13, 1998, after the Certificate of Amendment was approved by the
Company's stockholders and was filed with the Secretary of State of the State of
Delaware, the exchange of 5,500 shares of Series A Preferred Stock for 5,500
shares of Series B Convertible Preferred Stock was effected.
The Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock (the "Certificate of Designations") provides that on
the original issue date of the Series B Convertible Preferred Stock, the holders
of the Series B Convertible Preferred Stock will have the right to nominate two
members of the Board of Directors of the Company. The Series B Convertible
Preferred Stock ranks senior and prior to the Common Stock and to all other
classes or series of stock issued by the Company. Dividends accrue on the shares
of Series B Convertible Preferred Stock at the rate of 8% per annum; provided,
however, that in the event the Company fails to redeem the Series B Convertible
Preferred Stock on or before April 30, 2005 (the "Anniversary Redemption Date"),
pursuant to the Certificate of Designations, the dividend rate on the Series B
Convertible Preferred Stock shall increase 2% per annum on each anniversary of
the Anniversary Redemption Date. Annual dividends are cumulative and are payable
quarterly in arrears when and as declared by the Company's Board of Directors.
These shares have a liquidation preference of $1,000 per share. The Series B
Convertible Preferred Stock is convertible immediately into Common Stock,
initially at a conversion price of $2.00 per share, subject to adjustment. The
shares of Series B Convertible Preferred Stock may be redeemed, at the option of
the Company, at $1,000 per share on or after the Anniversary Redemption Date.
Upon a change of control, the Company may offer to redeem such shares at $2,000
per share or the Company may issue to each holder of Series B Convertible
Preferred Stock warrants exercisable for 250,000 shares of Common Stock for each
1,000 shares of Series B Convertible Preferred Stock owned by such holder at an
exercise price of $0.01 per share. The Company also has optional redemption
rights at any time after i) completion of an underwritten public offering by the
Company with gross proceeds to the Company of at least $20,000,000 and a price
per share of Common Stock of at least $4.00 per share, subject to adjustment, or
ii) after the Company's Common Stock shall have traded at an average price in
excess of $4.00 per share, subject to adjustment, for 20 consecutive trading
days and the aggregate market value of the Common Stock held by non-Affiliates
of the Company is at least $35,000,000. The holders of Series B Convertible
Preferred Stock also are entitled to certain preemptive rights, co-sale rights
and registration rights.
F-39
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. BUSINESS COMBINATIONS AND PRIVATE PLACEMENTS (CONTINUED)
For the year ended December 31, 1998, the Company was required to increase
the loss attributable to common stockholders, as a result of the beneficial
conversion feature which arose due to the increase in the market price of the
Company's Common Stock from the date the Company received commitments with
respect to the $10,000,000 financing (April 20, 1998) to the date of issuance of
the Series B Convertible Preferred Stock (July 13, 1998). The beneficial
conversion feature is based upon the difference between the market price of the
5,000,000 shares of Common Stock into which the Series B Convertible Preferred
Stock is convertible and the carrying value of the Series B Convertible
Preferred Stock on the date of authorized issuance, but is limited (as discussed
above) to the proceeds received with respect to each security issued. As the
Company allocated $3,000,000 of proceeds to the Series B Convertible Preferred
Stock, and approximately $2,500,000 of proceeds to the Series A Preferred Stock,
the amount of the beneficial conversion feature is approximately $5,500,000. The
one-time occurrence was accounted for similar to a non-cash dividend and had no
effect on the Company's net loss or aggregate stockholders' equity.
In December 1998, the Company sold, pursuant to a subscription agreement,
1,666,667 shares of Common Stock for $5,000,000, or $3.00 per share, and rights
to purchase an additional 100,000 and 650,000 shares of Common Stock for $.01
and $4.50, respectively, to Fletcher International Limited ("Fletcher"). The
Subscription Agreement provides that, at the Company's election, and as long as
the market price of the Company's Common Stock is greater than $3.00 per share
and the Company has an effective registration statement for the resale of
Fletcher's shares, Fletcher is obligated to purchase up to an additional
$5,000,000 of Common Stock at market prices when the Company elects to exercise
its right to sell shares to Fletcher. In addition, Fletcher may receive
additional shares of Common Stock if the Company's Common Stock does not meet
certain price targets or if the Company does not register the resale of
Fletcher's shares by certain dates, as defined.
F-40
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. FIXED ASSETS, NET
Fixed assets, at cost, as of December 31, 1998 and 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Equipment.................................................................................... $ 3,955 $ 6,972
Leasehold improvements....................................................................... 350 2,903
Furniture and fixtures....................................................................... 246 410
--------- ---------
4,551 10,285
Less: accumulated depreciation and amortization.............................................. 3,073 5,315
--------- ---------
$ 1,478 $ 4,970
--------- ---------
--------- ---------
</TABLE>
The Company leases certain office equipment under capital lease agreements.
At December 31, 1998 and 1997, respectively, the carrying value of capital
assets was $193,000 and $389,000, net of accumulated amortization of $317,000
and $209,000.
During 1998 the Company disposed of approximately $1.8 million of net
capital assets as a result of a reduction in capacity and recognized a loss in
the December 31, 1998 consolidated financial statements related to this
disposition of these assets of approximately $1.5 million.
In April 1997 the Company sold its office building, which was under
construction, for $5.6 million, and as a result, recognized a gain of
approximately $95,000.
5. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accrued office closing costs................................................................... $ 265 $ 1,065
Accrued royalties.............................................................................. 346 859
Accrued discounts and allowances............................................................... 678 807
Accrued legal and corporate expenses........................................................... 296 361
Accrued compensation........................................................................... 120 565
Accrued interest and taxes..................................................................... 31 169
Other.......................................................................................... 446 744
--------- ---------
$ 2,182 $ 4,570
--------- ---------
--------- ---------
</TABLE>
F-41
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. DEBT
As of December 31, 1998 and 1997 the Company's debt was as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
7% Convertible Notes Payable, dated February 11, 1994; annual interest payments; notes are
convertible, in whole but not in part, at the option of the holder at approximately 283
shares of Common Stock for each $1,000 principal amount outstanding. Remaining principal
balance due February 11, 1999 and satisfied (See Note 12 b). Included in this amount is
$108,000 due to related parties........................................................... $ 485 $ 485
Other..................................................................................... 4 86
---------- ----------
Total................................................................................. $ 489 $ 571
Less current portion...................................................................... 487 82
---------- ----------
Long term payables........................................................................ $ 2 $ 489
---------- ----------
---------- ----------
</TABLE>
Interest expense to related parties on the above debt was $7,000 for each of
the years ended December 31, 1998 and 1997.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 9, 1998 the shareholders of the Company authorized an increase in
the number of shares of Common Stock from 20,000,000 to 100,000,000, par value
$0.01 per share (the "Common Stock").
PREFERRED STOCK
There are 100,000 shares of Preferred Stock, par value of $0.01 per share,
authorized and 1,395 shares were outstanding as of December 31, 1998. The Board
of Directors is authorized to provide for the issuance of the shares of
Preferred Stock in one or more series and to establish the number of shares
included in any such series and to fix the designation, powers, preferences and
rights of the shares of any such series.
In May 1998, the Company sold, pursuant to a private placement, 5,500 shares
of Series A Preferred Stock. On July 13, 1998 the Notes were exchanged for 4,500
shares of the Series B Convertible Preferred Stock (See Note 3). In a separate
transaction the Series A Preferred Stock was exchanged for 5,500 shares of
Series B Convertible Preferred Stock. During the fourth quarter of 1998, 8,605
shares of the Series B Convertible Preferred Stock were converted into 4,302,500
shares of Common Stock.
STOCK COMPENSATION PLANS
The Company has granted options to certain employees, directors and outside
consultants to purchase Common Stock outside of any defined plans and under an
incentive stock option plan. The option price represents estimated fair value at
the date of grant.
F-42
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Under the Learn2.com, Inc. Amended and Restated Incentive Stock Option Plan
(the "Incentive Stock Option Plan"), the Company may grant options to its
employees for up to 3,200,000 shares of Common Stock. As of December 31, 1998
the Incentive Stock Option Plan had 228,275 option shares outstanding and
1,790,435 shares available to grant. Of the 228,275 shares outstanding 45,500
shares are subject to the Option Share Repurchase Agreement with certain
stockholders and no new shares will be issued upon the exercise of grants.
Pursuant to the Option Share Repurchase Agreement, the Company had the right
to purchase up to 948,000 shares of Common Stock from certain stockholders at
$0.003 per share. The Company may invoke this right in the event certain
outstanding options (exercisable for an identical number of shares) are
exercised. The Company intends to satisfy its obligations to issue shares of
Common Stock upon any exercise of such associated options by delivering to the
exercising optionee(s) shares of treasury stock, thereby resulting in no change
in the number of outstanding shares of Common Stock. At December 31, 1998,
545,500 options associated with the Option Share Repurchase Agreement had been
exercised at a weighted average exercise price of $0.163 per share (and an
identical number of shares of Common Stock had been purchased by the Company
pursuant to the Option Share Repurchase Agreement).
At December 31, 1998, 469,500 options subject to the Option Share Repurchase
Agreement with a weighted average exercise price of $0.253 per share had been
canceled. Notwithstanding the cancellation of certain options, the stockholders
who are party to the Option Share Repurchase Agreement agreed that 112,500
shares of Common Stock underlying such canceled options would remain subject to
the agreement. During 1998, 69,000 shares were assigned to outstanding options.
Accordingly, all the 45,500 shares remaining under the Option Share Repurchase
Agreement have corresponding option grants.
F-43
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
Transactions in stock options under the Incentive Stock Option Plan are
summarized as follows:
<TABLE>
<CAPTION>
OPTION SHARE WEIGHTED AVERAGE WEIGHTED
REPURCHASE EXERCISE AVERAGE
AGREEMENT PRICE STOCK OPTIONS EXERCISE PRICE
------------ ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995...................... 222,000 $ 0.715 1,485,250 $ 8.61
Granted........................................... -- -- 2,662,750 7.27
Exercised......................................... (85,250) 0.450 (102,800) 2.14
Canceled.......................................... (15,000) 0.003 (1,832,374) 11.08
------------ ------ ------------- -----
Balance at December 31, 1996...................... 121,750 $ 0.990 2,212,826 $ 5.26
Granted........................................... -- -- 267,500 3.12
Exercised......................................... (69,250) 0.083 (95,625) 1.11
Canceled.......................................... (1,500) 0.003 (1,343,436) 5.36
------------ ------ ------------- -----
Balance at December 31, 1997...................... 51,000 $ 2.244 1,041,265 $ 4.96
Granted........................................... -- -- 516,825 1.72
Exercised......................................... (41,500) 0.634 (308,115) 2.65
Reassigned........................................ 69,000 1.250 (69,000) 1.25
Canceled.......................................... (33,000) 3.561 (998,200) 4.90
------------ ------ ------------- -----
Balance at December 31, 1998...................... 45,500 $ 1.250 182,775 $ 1.44
------------ ------ ------------- -----
------------ ------ ------------- -----
</TABLE>
Transactions in stock options to employees, directors and consultants
outside either of the formal plans mentioned above are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
STOCK OPTIONS PRICE
------------- -----------------
<S> <C> <C>
Balance at December 31, 1996..................................................... -- $ --
Granted.......................................................................... 737,500 3.76
Exercised........................................................................ -- --
Canceled......................................................................... -- --
------------- -----
Balance at December 31, 1997..................................................... 737,500 $ 3.76
Granted.......................................................................... 3,056,500 1.98
Exercised........................................................................ (11,000) 1.32
Canceled......................................................................... (956,000) 3.26
------------- -----
------------- -----
Balance at December 31, 1998..................................................... 2,827,000 $ 2.02
------------- -----
------------- -----
</TABLE>
The Company has granted to directors options to purchase Common Stock under
a non-employee directors' stock option plan with vesting over four years. Under
the Learn2.com Inc. Amended and Restated 1994 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), the Company may grant options to its
non-employee directors for up to 125,000 shares of Common Stock. In 1998, 65,000
shares outstanding under the Directors' Plan were cancelled in exchange for new
options granted
F-44
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
outside this plan. All of the 125,000 shares authorized under the Directors'
Plan were deregistered. At December 31, 1998, no options were outstanding.
In May 1998, the Company exchanged with two board members their options to
purchase 715,000 shares of Common Stock for 765,000 shares of Common Stock for
$0.01 per share. The Company recognized a compensation charge of $1,377,000
related to this stock issuance.
On May 13, 1999, options to purchase 600,000 shares of the Company's common
stock were granted to certain employees of Panmedia as an inducement to retain
the services of these employees. These options were all granted at fair market
value on the date of grant and vest over a period of three to four years.
Subsequent to year end, three members of the Board of Directors exercised
options to purchase 960,000 shares of Common Stock for the aggregate amount of
approximately $1.9 million. In connection with these exercises, the Company
received promissory notes from these individuals in the approximate amount of
$1.7 million.
The following table summarizes information about Incentive Stock Option Plan
and non-plan stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL OPTIONS OUTSTANDING TOTAL OPTIONS EXERCISABLE
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------------- ----------- ----------- --------------- ----------- ---------------
$.003-- 1.99................................. 214,750 8.72 years $ 1.25 190,125 $ 1.25
2.00-- 4.99................................. 2,830,525 9.25 years 2.01 490,775 2.00
5.00--11.50................................. 10,000 7.38 years 11.50 5,000 11.50
----------- -----------
3,055,275 685,900
----------- -----------
----------- -----------
</TABLE>
Options vest over varying time periods ranging from zero to four years.
During 1998 and 1996 respectively, 527,500 and 1,217,250 outstanding options
were repriced at the then current market value. Such options are included in
both the granted and canceled options reported in the above schedule.
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1% to 10% of gross earnings to purchase
shares of the Company's Common Stock. Shares are purchased by participants at
the lower of 85% of fair market value at either the beginning or purchase date
of each 24 month offering period. Purchase dates are every six months. As of
December 31, 1998, 300,000 shares were authorized for purchase pursuant to the
plan and 223,436 shares had been issued.
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation",
during 1996 and elected to continue to apply the intrinsic value method provided
under Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its stock based compensation plans described
above. If compensation costs for the Company's stock-based compensation plans
had been determined under the fair value method the Company's net loss available
F-45
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
7. STOCKHOLDERS' EQUITY (CONTINUED)
to common shareholders per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss (in thousands)...................................... As Reported $ (16,428) $ (22,412) $ (24,253)
Pro forma (19,177) (25,421) (29,004)
Basic and diluted loss per Common share...................... As Reported $ (0.92) $ (1.47) $ (1.80)
Pro forma (1.07) (1.67) (2.16)
</TABLE>
The fair value of each option grant and employee purchase rights are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: no dividend yield; expected
volatility of 67 to 211 percent; risk free interest rates of 5.2 to 6.5 percent;
and variable expected lives of zero, two and one-half and five years, depending
on the characteristics of the individual grants. The pro forma amounts are based
upon assumptions that the Company's management believes are reasonable; however,
the Company has a relatively short history on which to base these estimates. The
assumptions used in option pricing models significantly affect the estimated
value of stock benefits and, accordingly, the pro forma amounts do not purport
to represent the Company's results of operations for any future period.
WARRANTS
In connection with a $2,000,000 bridge loan agreement entered into in 1994
between the Company and certain existing stockholders prior to the initial
public offering, the Company issued warrants to purchase 350,000 shares of
Common Stock at $7.50 per share. The warrants expire October 11, 1999. At
December 31, 1998, 278,195 of these warrants were outstanding.
In connection with the acquisition of PyroTechnix, the Company assumed the
liability for outstanding warrants of PyroTechnix. There were warrants for 5,000
shares of PyroTechnix common stock and as of December 31, 1997, 19,268 shares of
the Company's Common Stock had been issued to cover the exercise of all of these
warrants.
In May 1998, in connection with the private placements (See Note 3), the
Company issued warrants to purchase 675,000 and 1,375,000 shares of Common Stock
at an exercise price of $0.01 per share. The Company allocated approximately
$1,200,000 and $2,500,000, respectively, of the total proceeds of $10,000,000 to
these warrants. All of the warrants were exercised in June 1998. In connection
with the exchange of the Notes issued in the above mentioned private placement
the Company issued additional warrants to purchase 1,125,000 shares of Common
Stock at an exercise price of $0.01 per share. During 1998, 750,000 shares of
Common Stock were issued upon the exercise of the warrants and warrants for
375,000 shares remained outstanding at December 31, 1998. Subsequent to year end
all of these warrants were exercised.
In December 1998, as part of the stock subscription agreement between the
Company and Fletcher, the Company issued rights to purchase an additional
100,000 and 650,000 shares of Common Stock for $.01 and $4.50, respectively (See
Note 3). As of December 31, 1998, all of these rights remain outstanding.
F-46
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. LEASES
The Company leases office facilities in California and Texas and certain
office equipment under operating leases that expire at various dates through
2002. Rental expense for operating leases amounted to $512,000, $911,000 and
$905,000 for 1998, 1997 and 1996, respectively.
Minimum payments under leases expiring subsequent to December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- -------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
1999................................................................ $ 161 $ 509
2000................................................................ 48 379
2001................................................................ 3 391
2002................................................................ -- 265
---------- ------------
Total........................................................... $ 212 $ 1,544
------------
Less amount representing interest................................... (18)
----------
Present value of minimum lease payments........................... $ 194
----------
</TABLE>
9. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosure of any significant off balance sheet and credit risk
concentration. The Company has no significant off-balance-sheet concentration of
credit risk such as foreign currency exchange contracts or other hedging
arrangements. Financial instruments that subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. The Company places
its temporary cash in financial institutions. For the years ended December 31,
1998 and 1997, two and five customers represented approximately 47% and 50% of
the Company's total net revenues, respectively. Sales to customers located
outside the United States represent approximately 25% and 20% of the Company's
total sales for the years ended December 31, 1998 and 1997, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan for its employees whereby employees that
qualify for participation under the plan can contribute up to 15% of their
salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matched participant
contributions 50% up to a maximum of 6% of a participant's salary. For the years
ended December 31, 1998, 1997 and 1996, the Company made contributions to the
plan of approximately $48,000, $220,000 and $280,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in other claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will
F-47
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
12. INDUSTRY SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS NO. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In the initial year of application, comparative information for earlier years
must be restated. Management has determined that it does not have any separately
reportable business segments.
13. SUBSEQUENT EVENTS
A. STREET TECHNOLOGIES, INC. ACQUISITION
In February 1999, the Company acquired Street Technologies, Inc., a company
that uses streaming technology to market and sale its extensive catalog of
online training course products. Effective as of the date of the merger, Street
Technologies, Inc. changed its name to 7th Street.com, Inc. To consummate the
transaction, the Company issued 4,948,182 shares of Common Stock and 21,644
shares of Series D 8% Preferred Stock (the "Series D Stock") with an aggregate
liquidation preference of $21,643,970. Upon the receipt of Common Stockholders
approval to convert, the Series D Stock will convert into Common Stock at $3.00
per share. The Series D 8% Preferred Stockholders are entitled to participate
with the Common Stockholders in dividends and distributions and to vote on most
matters on an "as converted" basis with the Common stockholders and as a
separate class, except for the vote on whether to convert the Series D Stock.
The total value of the transaction is approximately $36 million and will be
accounted for using the purchase method of accounting.
B. CONVERSION OF 7% CONVERTIBLE NOTES PAYABLE
The 7% Convertible Notes Payable were due and payable on February 11, 1999
(See Note 6). To induce the holders to convert the note into Common Stock the
Company on February 10, 1999, offered the holders the right to convert at a
price equal to 85% of the then current market rate of the stock. During February
1999, the Company issued 186,982 shares of Common Stock in exchange for $458,000
of current notes payable. Accordingly, the Company recognized interest expense
in the amount of $115,000. As of March 17, 1999 the remaining balance of $27,000
has not been paid to the one remaining holder.
C. VIAGRAFIX CORPORATION ACQUISITION
On June 1, 1999, the Company announced that it would acquire ViaGrafix
Corporation. Under the terms of the agreement, the Company will issue
approximately 10.7 million shares of common stock. This represents 1.846 shares
for each share of ViaGrafix common stock outstanding. The acquisition is
expected to be accounted for as a pooling-of-interests and is expected to close
in the second half of 1999, subject to various conditions.
F-48
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
A) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
supplementary consolidated financial statements contain all adjustments
necessary to present fairly the financial position of Learn2.com, Inc. (formerly
known as 7th Level, Inc.) and subsidiaries (the "Company") as of March 31, 1999
and the results of operations and cash flows for the three month periods ended
March 31, 1999 and March 31, 1998. These condensed supplementary consolidated
financial statements should be read in conjunction with the consolidated
financial statements of the Company contained in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1998.
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
disclosures 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. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
B) BUSINESS COMBINATIONS
PANMEDIA CORPORATION ACQUISITION
On May 13, 1999, the Company merged with Panmedia Corporation ("Panmedia"),
in which Panmedia became a wholly-owned subsidiary of the Company. The Company
exchanged 1,543,860 shares of common stock for all the outstanding common shares
of Panmedia. The merger was accounted for as a pooling-of-interests and,
accordingly, the accompanying financial statements and footnotes have been
restated to include the operations of Panmedia for all periods presented. For
the three months ended March 31, 1999 and 1998, Panmedia's revenues were
$269,000 and $136,000, respectively. For the three months ended March 31, 1999
and 1998, Panmedia's net income was approximately $46,000 and $58,000,
respectively.
STREET TECHNOLOGIES, INC. ACQUISITION
On February 16, 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc., a privately held company, and changed the name to 7th
Street.com, Inc. The Company began marketing and developing training solutions
delivered over intranets and the Internet. To consummate the transaction, the
Company issued 4,948,182 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company and 21,644 shares of Series D 8% Preferred Stock
(the "Series D Stock") with an aggregate liquidation preference of $21,644,000.
Upon the receipt of the common stockholders' approval, the Series D Stock will
automatically convert into 7,214,666 shares of Common Stock. The Series D
stockholders are entitled to participate with the common stockholders in
dividends and distributions and to vote on most matters on an "as converted"
basis with the common stockholders and as a separate class, except for the vote
on whether to convert the Series D Stock. The
F-49
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 (CONTINUED)
total value of the transaction was approximately $40,331,000 including
$3,133,000 of assumed liabilities which consisted primarily of deferred revenue.
The transaction was accounted for using the purchase method of accounting. The
results of Street Technologies, Inc. subsequent to February 16, 1999 are
included in the Company's condensed consolidated supplementary statement of
operations.
The aggregate purchase price of $40,331,000 consisted of the following:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Common stock................................................................... $ 14,845,000
Preferred stock................................................................ 21,644,000
-------------
Subtotal................................................................. 36,489,000
Assumed liabilities............................................................ 3,133,000
Acquisition costs.............................................................. 709,000
-------------
Total.................................................................... $ 40,331,000
-------------
-------------
</TABLE>
The purchase price was allocated to the net assets acquired based upon their
fair values. The fair values were determined by an independent appraisal. The
appraisal incorporated proven valuation procedures and techniques. The purchase
price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Current assets................................................................. $ 1,763,000
Fixed assets................................................................... 343,000
Other assets................................................................... 490,000
Capitalized software........................................................... 14,717,000
Intangible assets.............................................................. 3,519,000
Acquired in-process technology (written-off)................................... 9,677,000
Goodwill....................................................................... 9,822,000
-------------
Total.................................................................... $ 40,331,000
-------------
-------------
</TABLE>
The acquired in-process technology has been expensed as a charge against
operations and is included in the accompanying condensed consolidated statement
of operations for the three months ended March 31, 1999. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility. However, there can be no
assurance that these projects will reach technological feasibility or develop
into products that may be sold by the Company. The acquired in-process
technology has required, and may require substantial development by the Company.
The intangible assets are being amortized over seven to twenty years. The
Company recorded approximately $204,000 amortization expense relating to these
intangible assets during the three months ended March 31, 1999.
The operations of 7th Street.com have been included in the Company's
condensed consolidated financial statements since the date of acquisition. The
accompanying condensed consolidated statement of operations for the three months
ended March 31, 1999 includes charges of approximately $9,677,000
F-50
<PAGE>
LEARN2.COM, INC.
(FORMERLY KNOWN AS 7TH LEVEL, INC.)
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 (CONTINUED)
associated with the write-off of acquired in-process technology and
approximately $2,493,000 associated with a restructuring charge which includes
the write-off of redundant assets, excess office space and employee severance.
The following unaudited pro forma information has been prepared assuming that
this acquisition had taken place at the beginning of the period; it is not
necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
<S> <C> <C>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------- -------------------
Revenue............................................. $ 1,000,000 $ 739,000
Loss from operations................................ (14,276,000) (3,153,000)
Net loss............................................ (14,240,000) (3,141,000)
Loss per share...................................... $ (0.48) $ (.17)
</TABLE>
C) LOSS PER COMMON SHARE
Basic and diluted loss per share was determined by dividing the net loss by
the weighted average common shares outstanding during the period. Common stock
equivalents are excluded from the loss per share calculation as their effect
would be antidilutive.
D) STOCKHOLDERS' EQUITY
In the first quarter of 1999, three members of the Board of Directors
exercised their options to purchase an aggregate of 960,000 shares of Common
Stock for an aggregate exercise of $1,940,000. In connection with these
exercises, approximately $247,000 is currently due and the Company received
promissory notes from these directors in the approximate amount of $1,687,000.
The outstanding balance of $1,934,000 is included as notes and accounts
receivable from directors in the stockholders' equity section of the condensed
consolidated balance sheet. Under the terms of the promissory notes, interest
accrues at a rate of 6% payable quarterly, or at the option of the holders, will
accrue at a rate of 7% payable upon the maturity of the loan. The notes mature
at various dates in 2004.
As of March 31, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of Common Stock.
F-51
<PAGE>
VIAGRAFIX CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
Report of Independent Auditors................................................ F-53
Consolidated Financial Statements
Consolidated Balance Sheets................................................... F-54
Consolidated Statements of Operations......................................... F-55
Consolidated Statements of Changes in Shareholders' Equity.................... F-56
Consolidated Statements of Cash Flows......................................... F-57
Notes to Consolidated Financial Statements.................................... F-58
Not Covered by Report of the Independent Auditors: Quarterly Financial F-54 to
Information (unaudited)..................................................... F-71
Schedule II--Valuation and Qualifying Accounts for the years ended December
31, 1998, 1997 and 1996..................................................... F-72
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in respective
financial statements or notes thereto.
F-52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ViaGrafix Corporation
We have audited the accompanying consolidated balance sheets of ViaGrafix
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule included in the Index to Consolidated
Financial Statements. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ViaGrafix Corporation at December 31, 1998 and 1997, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
(Original Manually Signed)
Tulsa, Oklahoma
March 19, 1999
F-53
<PAGE>
VIAGRAFIX CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
MARCH 31, --------- ---------
1999
---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 8,468 $ 10,046 $ 218
Short-term investments........................................................ 3,000 3,000 --
Trade accounts receivable (net of allowance for doubtful accounts of $157
(unaudited), $148 and $60 in 1999, 1998 and 1997, respectively)............. 4,215 4,713 2,455
Income tax receivable......................................................... 312 205 --
Inventories................................................................... 2,047 1,909 1,411
Prepaid expenses.............................................................. 576 518 315
Deferred income taxes......................................................... 412 57 4
------- --------- ---------
Total current assets............................................................ 19,030 20,448 4,403
Property, plant and equipment................................................... 4,620 4,380 3,263
Accumulated depreciation........................................................ (1,443) (1,316) (959)
------- --------- ---------
3,177 3,064 2,304
Capitalized customer lists (net of accumulated amortization of $236 (unaudited)
and $148 in 1999 and 1998, respectively)...................................... 118 207 --
Capitalized software (net of accumulated amortization of $103 (unaudited) and
$64 in 1999 and 1998, respectively)........................................... 131 169 --
Prepaid royalties and licenses (net of accumulated amortization of $155
(unaudited) and $78 in 1999 and 1998, respectively)........................... 465 543 --
Goodwill (net of accumulated amortization of $48 (unaudited) and $45, and $31 in
1999, 1998 and 1997, respectively)............................................ 84 88 101
Note receivable--officer........................................................ 185 188 --
Deferred income taxes........................................................... 435 509 611
------- --------- ---------
Total assets.................................................................... $ 23,625 $ 25,216 $ 7,419
------- --------- ---------
------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................................ $ 1,611 $ 1,767 $ 848
Notes payable................................................................. 105 103 --
Accrued liabilities........................................................... 341 512 233
Income taxes payable.......................................................... -- -- 209
Current portion of long-term debt............................................. -- -- 789
------- --------- ---------
Total current liabilities....................................................... 2,057 2,382 2,079
Long-term debt.................................................................. -- -- 2,827
Minority interest in subsidiary................................................. 29 -- --
Shareholders' equity:
Common stock, $.01 par value, authorized 40,000,000 shares; 5,788,184 issued
(unaudited), 5,866,340, 3,861,881 shares in 1999, 1998 and 1997,
respectively................................................................ 58 59 39
Series A convertible preferred stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 855,000 shares in 1997....................... -- 9
Additional paid-in capital.................................................... 19,755 20,506 1,487
Unearned compensation......................................................... (96) (104) (149)
Retained earnings............................................................. 1,822 2,373 1,127
------- --------- ---------
Total shareholders' equity...................................................... 21,539 22,834 2,513
------- --------- ---------
Total liabilities and shareholders' equity...................................... $ 23,625 $ 25,216 $ 7,419
------- --------- ---------
------- --------- ---------
</TABLE>
See accompanying notes.
F-54
<PAGE>
VIAGRAFIX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
THREE MONTHS ENDED --------- --------- ---------
MARCH 31,
-------------------------------
1999 1998
-------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 7,345 $ 4,077 $ 18,750 $ 13,694 $ 10,077
Cost of sales................................... 1,863 974 4,545 3,042 2,614
------- ------ --------- --------- ---------
Gross profit.................................... 5,482 3,103 14,205 10,652 7,463
Selling, general and administrative expense..... 2,291 1,119 6,212 4,120 3,704
Research and development expense................ 530 372 1,697 1,162 467
Depreciation and amortization................... 336 86 734 319 685
Advertising expense............................. 3,377 820 4,443 1,961 1,207
------- ------ --------- --------- ---------
Operating (loss) income......................... (1,052) 706 1,119 3,090 1,400
Other income (expense):
Interest income and other....................... 115 56 535 21 63
Interest expense................................ (1) (54) (54) (272) (325)
------- ------ --------- --------- ---------
Income (loss) before income taxes............... (938) 708 1,600 2,839 1,138
Provision (benefit) for income taxes............ (387) 171 354 816 463
------- ------ --------- --------- ---------
Net income (loss)............................... $ (551) $ 537 $ 1,246 $ 2,023 $ 675
------- ------ --------- --------- ---------
------- ------ --------- --------- ---------
Basic earnings per common share................. $ (0.09) $ 0.12 $ 0.22 $ 0.51 $ 0.18
------- ------ --------- --------- ---------
------- ------ --------- --------- ---------
Weighted average common shares used in computing
basic earnings per share...................... 5,839 4,400 5,640 3,859 3,831
------- ------ --------- --------- ---------
------- ------ --------- --------- ---------
Diluted earnings per common and common
equivalent share.............................. $ (0.09) $ 0.11 $ 0.21 $ 0.45 $ 0.15
------- ------ --------- --------- ---------
------- ------ --------- --------- ---------
Weighted average common and common equivalent
shares used in computing diluted earnings per
share......................................... 5,839 4,923 5,842 4,498 4,405
------- ------ --------- --------- ---------
------- ------ --------- --------- ---------
</TABLE>
See accompanying notes.
F-55
<PAGE>
VIAGRAFIX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN UNEARNED RETAINED COMMON SHARES
STOCK STOCK CAPITAL COMPENSATION EARNINGS IN TREASURY TOTAL
------------- ----------- -------------- ------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995...................... $ 57 $ 9 $ 1,492 $ -- $ 681 $ (1,996) $ 243
Purchase of 4,886 treasury
common shares, at cost.... -- -- -- -- -- (5) (5)
Exercise of 28,943 stock
options................... -- -- 14 -- -- 10 24
Net income.................. -- -- -- -- 675 -- 675
--- ----------- -------------- ------------- ---------- --------------- ----------
Balance at December 31,
1996...................... 57 9 1,506 -- 1,356 (1,991) 937
Purchase of 1,143 treasury
common shares, at cost.... -- -- -- -- -- (2) (2)
Exercise of 29,252 stock
options................... -- -- 19 -- -- 10 29
Stock options granted at
less than estimated fair
market value.............. -- -- 181 (181) -- -- --
Amortization of unearned
compensation.............. -- -- -- 32 -- -- 32
Declared and paid $.117
dividend per common share
equivalent on common and
preferred shares
outstanding............... -- -- -- -- (506) -- (506)
Cancellation of 1,852,405
treasury common shares, at
cost...................... (18) -- (219) -- (1,746) 1,983 --
Net income.................. -- -- -- -- 2,023 -- 2,023
--- ----------- -------------- ------------- ---------- --------------- ----------
Balance at December 31,
1997...................... 39 9 1,487 (149) 1,127 -- 2,513
Exercise of 44,783 stock
options................... -- -- 55 -- -- -- 55
Cancellation of 6,114 stock
options granted at less
than estimated fair market
value..................... -- -- (13) 13 -- -- --
Amortization of unearned
compensation.............. -- -- -- 32 -- -- 32
Conversion of preferred
stock to 488,571 shares of
common stock.............. 5 (9) 4 -- -- -- --
Initial public offering of
1,750,000 common shares... 18 -- 20,464 -- -- -- 20,482
Purchase and cancellation of
278,900 common shares..... (3) -- (1,491) -- -- -- (1,494)
Net income.................. -- -- -- -- 1,246 -- 1,246
--- ----------- -------------- ------------- ---------- --------------- ----------
Balance at December 31,
1998...................... $ 59 $ -- $ 20,506 $ (104) $ 2,373 $ -- $ 22,834
--- ----------- -------------- ------------- ---------- --------------- ----------
Exercise of 46,000 options
(unaudited)............... -- -- 56 -- -- -- 56
Amortization of unearned
compensation
(unaudited)............... -- -- -- 8 -- -- 8
Purchase and cancellation of
124,200 common shares..... (1) -- (807) -- -- (808)
Net loss (unaudited)........ -- -- -- -- (551) -- (551)
--- ----------- -------------- ------------- ---------- --------------- ----------
Balance at March 31, 1999
(unaudited)............... $ 58 $ -- $ 19,755 $ (96) $ 1,822 $ -- $ 21,539
--- ----------- -------------- ------------- ---------- --------------- ----------
--- ----------- -------------- ------------- ---------- --------------- ----------
</TABLE>
See accompanying notes.
F-56
<PAGE>
VIAGRAFIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------
-------------------------------- 1998 1997 1996
1998 --------- --------- ---------
---------------
1999 (UNAUDITED)
---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ (551) $ 537 $ 1,246 $ 2,023 $ 675
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization expense............. 336 86 734 319 685
Deferred income tax provision (benefit)........... (281) 107 48 186 (138)
Non-cash compensation expense for sale of minority
Interest in subsidiary.......................... 34 --
Minority interest in loss of subsidiary........... (5) -- -- -- --
Non-cash interest expense......................... 1 45 45 -- 142
Loss on disposal of assets........................ -- -- 79 9 --
Bad debt expense.................................. 9 71 119 107 --
Write-off of purchased research and development... -- -- 37 -- --
Amortization of unearned compensation............. 9 10 32 32 --
Cash provided by (used in) changes in operating
assets and liabilities:
Trade accounts receivable....................... 488 (599) (2,366) (1,364) 3
Inventories..................................... (138) (127) (497) (580) (6)
Income tax receivable........................... (107) -- (205) -- --
Prepaid expenses................................ (58) 34 (203) (32) (113)
Trade accounts payable.......................... (156) 120 919 519 (401)
Accrued liabilities............................. (170) (69) 279 84 102
Income taxes payable............................ -- (196) (209) (250) 428
------- ------- --------- --------- ---------
Net cash provided by (used in) operating activities... (589) 19 58 1,053 1,377
INVESTING ACTIVITIES
Purchases of property, plant and equipment............ (240) (364) (1,149) (744) (285)
Purchase of Make It So, Inc. assets................... -- -- (682) -- --
Proceeds from disposal of equipment................... -- -- 28 -- --
Purchase of short-term investments.................... -- -- (3,000) -- --
Issuance of note receivable--officer.................. 3 -- (188) -- --
Prepaid royalties and licenses........................ -- -- (620) -- --
------- ------- --------- --------- ---------
Net cash used in investing activities................. (237) (364) (5,611) (744) (285)
FINANCING ACTIVITIES
Initial public offering of common stock............... -- 20,491 20,482 -- --
Purchase and cancellation of common stock............. (808) -- (1,494) -- --
Repayment of debt..................................... -- (3,661) (3,661) (622) (138)
Dividend to common and preferred shareholders......... -- -- -- (506) --
Purchase of treasury common stock..................... -- -- -- (2) (5)
Exercise of stock options............................. 56 53 54 30 25
------- ------- --------- --------- ---------
Net cash provided by (used in) financing activities... (752) 16,883 15,381 (1,100) (118)
------- ------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (1,578) 16,538 9,828 (791) 974
Cash and cash equivalents at beginning of year........ 10,046 217 218 1,009 35
------- ------- --------- --------- ---------
Cash and cash equivalents at end of year.............. $ 8,468 $ 16,755 $ 10,046 $ 218 $ 1,009
------- ------- --------- --------- ---------
------- ------- --------- --------- ---------
Supplemental cash flow information:
Interest paid....................................... $ -- $ 9 $ 9 $ 301 $ 169
------- ------- --------- --------- ---------
------- ------- --------- --------- ---------
Income taxes paid................................... $ -- $ 259 $ 720 $ 479 $ 173
------- ------- --------- --------- ---------
------- ------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-57
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
ViaGrafix Corporation is engaged primarily in the business of developing,
producing and selling, directly to end-users and through resellers and
distributors, a wide range of computer software training videos and interactive
CD-ROM software training products ("training products") as well as Computer-
Aided Design ("CAD") software, which is primarily used in the engineering and
architectural fields. Beginning in August 1998, the Company entered the business
of providing e-mail list management and Internet marketing services through its
new wholly-owned subsidiary, Make-It-So, Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ViaGrafix
Corporation and its wholly-owned subsidiary, Make-It-So, Inc. (collectively, the
"Company"). All intercompany 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents. Cash equivalents
consist of money market and investor accounts of $9,653,000 and $166,000 at
December 31, 1998 and 1997, respectively.
REVENUE RECOGNITION
Revenue is recognized on all products at the time of delivery. Computer
software training videos and interactive CD-ROM software training products can
be returned within 30 days or, for certain retailers, under a stock return
policy. The Company records an estimate of the amount, when significant, of
returns expected in the next 30 days or under each stock return policy at the
time of the initial delivery of the products. The Company sells its CAD software
with no obligations beyond the delivery date of the software. The Company's
price for its products is fixed at the date of sale, and the sale is not
contingent upon resale of the products or affected by damage or theft of the
products.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of an investment in a municipal
security with an original maturity of six months. The security matures June 28,
1999.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method.
F-58
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID EXPENSES
Throughout the year the Company participates in numerous trade shows. The
Company is required to prepay registration and booth fees for the trade shows.
These prepayments, which totaled $167,000 and $111,000 at December 31, 1998 and
1997, respectively, are included in prepaid expenses.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using
accelerated methods over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Building and building improvements.................................................... 10-39
Production equipment.................................................................. 5-7
Automobiles........................................................................... 5-7
Furniture and fixtures................................................................ 5-7
</TABLE>
Interest is capitalized on borrowed funds used to finance building and
building improvement projects during construction. Approximately $28,000 of
interest was capitalized for the year ended December 31, 1997. Depreciation
expense for the years ended December 31, 1998, 1997 and 1996 was $431,000,
$301,000 and $350,000, respectively.
GOODWILL
Goodwill, which represents the excess of the purchase price and liabilities
assumed over the fair value of tangible and specifically identified intangible
assets acquired, is being amortized over 10 years.
Amortization of goodwill was $13,000 in 1998, 1997 and 1996, respectively.
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
The Company's policy is to capitalize any significant software development
costs subsequent to the establishment of technological feasibility until such
time as the product is available for general release. All costs incurred prior
to technological feasibility are expensed as research and development costs when
incurred. Due to the method employed by the Company to develop software, an
insignificant amount of costs are incurred between the date technological
feasibility is established, and when the products are ready for general release.
As described in Note 2, the Company allocates a portion of the cost of
acquired enterprises to intangible assets based upon the estimated fair value of
the intangibles, including software in various stages of development. The fair
value of software development projects which have not yet reached technological
feasibility and which have no alternative use are expensed as research and
development in the period acquired. The fair values of all other developed
software products are included in capitalized software and amortized over the
expected remaining life of the specific software products. Capitalized software
amortization expense was $64,000, $6,000 and $322,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-59
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are computed using the liability method and are
provided on all temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities.
TREASURY STOCK
Treasury stock purchases were accounted for under the cost method whereby
the entire cost of the acquired stock was recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares were credited or charged to
additional paid-in capital or retained earnings, respectively, using the
specific identification method. All treasury stock was canceled in December
1997.
INCENTIVE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," ("APB No. 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
ADVERTISING COSTS
Costs incurred for advertising are expensed when incurred.
EARNINGS PER SHARE
Basic earnings per share are based on the average number of common shares
outstanding. Diluted earnings per share for 1998, 1997 and 1996 assumes
conversion of the Company's Series A convertible preferred stock and exercise of
stock options outstanding using the treasury stock method.
STOCK SPLIT
Effective December 12, 1997, the Company executed a 1 for 1.75 reverse stock
split and also changed the par value of the common and preferred shares from
$.001 to $.01. All prior share and per share amounts have been restated to
reflect the reverse stock split and change in par value.
FAIR VALUE DISCLOSURE
The financial assets and other liabilities approximate their fair values
because of the short maturity of those instruments.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130 "REPORTING COMPREHENSIVE INCOME,"
which requires that a company report, by major components and as a single total,
the change in its net assets during
F-60
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the period from nonowner sources; and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION," which establishes annual and interim
reporting standards for a company's operating segments and related disclosures
about its products, services, geographic areas, and major customers. Adoption of
these statements was required in 1998 but did not impact the Company's financial
position, results of operations or cash flows, and had no impact on the form and
content of the Company's disclosures.
In November 1997, Statement of Position ("SOP") No. 97-2, "SOFTWARE REVENUE
RECOGNITION," was issued which supersedes SOP No. 91-1, "SOFTWARE REVENUE
RECOGNITION." The Company was required to adopt SOP No. 97-2 for transactions
entered into in 1998. The adoption of this SOP had no impact on the Company's
financial position, results of operations or cash flows.
In 1998, SOP No. 98-1, "ACCOUNTING FOR THE COSTS OF SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE," was issued. This SOP requires capitalization of
certain costs incurred in connection with an internal-use software project. SOP
No. 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," was also issued in
1998. This SOP requires costs related to start-up activities, including
organization costs, to be expensed as incurred. Adoption of these SOPs is not
required until 1999. Neither the Company's financial position, results of
operations nor cash flows are expected to be significantly impacted by these
SOPs when they are adopted in 1999.
In 1998, SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," was issued which requires that all derivative instruments be
recorded as assets or liabilities on the balance sheet at fair value. SFAS No.
133 is not required to be adopted by the Company until 2000. The Company's
financial position, results of operations or cash flows are not expected to be
significantly impacted by this SFAS when adopted in 2000.
RECLASSIFICATION
Certain 1997 and 1996 amounts have been reclassified to be consistent with
the 1998 presentation.
2. ACQUISITIONS
On July 31, 1998, the Company acquired certain assets of Make-It-So, Inc., a
privately held company based in San Mateo, California, that provides e-mail list
management and Internet marketing services. The purchase consideration totaled
$682,000 and was financed with existing cash balances and was accounted for as a
purchase, in accordance with APB No. 16, "ACCOUNTING FOR BUSINESS COMBINATIONS."
In accordance with APB No. 16, the purchase price was allocated to the
tangible and specifically identified intangible assets acquired based upon the
estimated fair value of such assets. The fair value of software development
projects and customer lists was computed based upon the future cash flows
expected to be generated by such projects. The costs assigned to software
development projects related to products that had not yet reached technological
feasibility and for which the technology had no future alternative uses were
expensed immediately as in-process research and development. The costs assigned
to projects for which technological feasibility had been achieved is being
amortized over the remaining life of the respective product, which was estimated
at 18 months. Customer lists are being amortized over their estimated life of 12
months.
F-61
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. ACQUISITIONS (CONTINUED)
The following table presents the allocation of the purchase price to the
assets acquired (in thousands):
<TABLE>
<S> <C>
Customer lists....................................................... $ 354
Software development................................................. 230
Property, plant and equipment........................................ 44
In-process research and development.................................. 37
Accounts receivable.................................................. 16
Prepaid expenses..................................................... 1
---------
$ 682
---------
---------
</TABLE>
The operating results of Make-It-So, Inc. are included in the statements of
operations from the acquisition date forward. The capitalized customer lists
amortization expense was $148,000 for the year ended December 31, 1998. Research
and development expense includes $37,000 of acquired in-process research and
development which was expensed as the associated products were not
technologically feasible. The pro forma effect of the transaction on the
Company's revenues and net income if the transaction had occurred on January 1,
1996 is not significant.
3. INVENTORIES
Inventories as of December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Finished goods............................................................. $ 996 $ 721
Raw materials.............................................................. 913 690
--------- ---------
$ 1,909 $ 1,411
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land....................................................................... $ 215 $ 100
Building and building improvements......................................... 1,797 1,615
Production equipment....................................................... 2,012 1,309
Automobiles................................................................ 221 183
Furniture and fixtures..................................................... 135 56
--------- ---------
$ 4,380 $ 3,263
--------- ---------
--------- ---------
</TABLE>
F-62
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
5. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................. $ 202 $ 492 $ 535
State............................................................... 104 137 66
--------- --------- ---------
306 629 601
Deferred:
Federal............................................................. 43 166 (123)
State............................................................... 5 21 (15)
--------- --------- ---------
48 187 (138)
--------- --------- ---------
$ 354 $ 816 $ 463
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the statutory federal income tax rate to the provision
for income taxes for the year ended December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected provision for federal income taxes at the statutory rate.... $ 544 $ 965 $ 387
State income taxes--net of federal benefit........................... 63 113 45
Income tax credits................................................... (153) (283) --
Interest from tax-exempt municipal securities........................ (130) -- --
Other................................................................ 30 21 31
--------- --------- ---------
Provision for income taxes........................................... $ 354 $ 816 $ 463
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Accrued vacation........................................................... $ -- $ 4
Capitalized software....................................................... 593 632
Related party interest..................................................... -- 78
Accrued liabilities not deductible for tax................................. 66 --
Goodwill................................................................... 27 27
Allowance for doubtful accounts............................................ 57 --
--------- ---------
Total deferred income tax assets............................................. 743 741
Deferred income tax liabilities:
Tax over book depreciation................................................. (177) (126)
--------- ---------
Net deferred income tax assets............................................. $ 566 $ 615
--------- ---------
--------- ---------
</TABLE>
F-63
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
6. LONG-TERM DEBT AND NOTES PAYABLE
At December 31, 1997, the Company had two 7.5% promissory notes with
principal of $3,616,000 outstanding at December 31, 1997. This amount included
$142,000 of interest that was reclassified as additional principal in 1996. The
notes were payable in equal monthly installments over the term of the notes with
all unpaid principal and interest due August 15, 2000. All interest not paid
when due was considered additional principal. The notes were equal in priority
with no discrimination in favor of either holder as to payments or any other
actions under the promissory notes. The notes were repaid with proceeds from the
Company's initial public offering in March 1998. An additional $45,000 of
interest was reclassified as additional principal in 1998 prior to the repayment
of the notes.
In December 1998, the Company issued a 5.0% promissory note for $103,000 to
purchase land. The note and unpaid interest is payable in June 1999. This
transaction has been accounted for as a noncash transaction in the 1998
statement of cash flows.
7. SERIES A CONVERTIBLE PREFERRED STOCK
Prior to March 1998, there were 855,000 shares of Series A convertible
preferred stock outstanding. The holders of preferred stock were entitled to
receive a preferred dividend at the discretion of the Board of Directors, and
were also entitled to a dividend equal to that of a common stock equivalent
dividend, if and when declared by the Board of Directors. The holders of each
share of preferred stock were entitled to the number of votes per share equal to
the number of shares of common stock into which each share was convertible. In
March 1998, all 855,000 shares of preferred stock outstanding were converted to
488,571 shares of common stock in accordance with the Series A Convertible
Preferred Stock Purchase Agreement as a result of the Company's initial public
offering.
8. STOCK OPTION PLAN
The Company has an incentive stock option plan (the "Plan") under Section
422(b) of the Internal Revenue Code. The Plan provides for the issuance of
qualified and nonqualified options to purchase shares of common stock of the
Company at "fair market value," as determined by the Board of Directors prior to
the Company's initial public offering in March 1998 and market price subsequent
to March 1998, to selected qualified employees and contractors, respectively, of
the Company. Options may be granted under the Plan at any time prior to January
1, 2005. Options vest and are exercisable as determined by the Board of
Directors on a grant-by-grant basis. In 1997, the Board of Directors increased
the number of shares of common stock which is reserved under the Plan from
285,714 shares to 1,000,000 shares. The exercise price per share is specified
separately in the Plan agreement relating to each option granted but can not be
less than the fair market value per share of common stock on the date of the
grant.
F-64
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
8. STOCK OPTION PLAN (CONTINUED)
Options transactions are as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING
AND EXERCISABLE
-----------------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE
SHARES EXERCISABLE PRICE
--------- ----------- -----------
<S> <C> <C> <C>
Shares under option:
Balance at December 31, 1995............................. 179,572 $ 1.10
Canceled................................................. (30,114) 1.05
Exercised................................................ (28,943) 1.05
--------- ----------- -----
Balance at December 31, 1996............................. 120,515 94,206 1.12
Granted.................................................. 527,857 11.13
Canceled................................................. (7,143) 1.33
Exercised................................................ (29,252) 1.12
--------- ----------- -----
Balance at December 31, 1997............................. 611,977 94,239 9.75
Granted.................................................. 320,000 6.64
Canceled................................................. (29,537) 8.67
Exercised................................................ (44,783) 1.22
--------- ----------- -----
Balance at December 31, 1998............................. 857,657 144,290 $ 9.07
--------- ----------- -----
--------- ----------- -----
</TABLE>
Further information concerning the options outstanding at December 31, 1998
is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING LIFE WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OF OPTIONS (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ .20 to $4.75 170,657 8.25 $ 2.44 59,890 $ .99
$ 7.06 to $7.25 265,000 10.00 $ 7.09 -- --
$13.00 422,000 10.00 $ 13.00 84,400 $ 13.00
</TABLE>
At December 31, 1998, 27,000 common shares were reserved by the Company for
future option grants under the Plan.
Prior to March 1998, each stock option exercise price was set by management
based on its best estimate of market value as of the date of grant. As a result
of negotiations with underwriters in connection with its initial public stock
offering in March 1998, management, for financial statement purposes, reassessed
the fair value of its common stock as of each grant date prior to March 1998 for
the purpose of determining the amount of unearned compensation expense, if any,
under APB No. 25. Based upon management's revised estimates, unearned
compensation of $181,000 related to the January 1997 stock option grants was
recognized in 1997 and is being amortized over the five-year vesting period of
the stock options granted in 1997. The weighted average estimated fair market
value of the common stock at the grant date for the January 1997 stock options
was $3.78.
F-65
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
8. STOCK OPTION PLAN (CONTINUED)
SFAS No. 123 requires pro forma information regarding net income and
earnings per share to be determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1995 under the fair
value method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using a "minimum value" option pricing model prior to the
initial public offering in March 1998 and the Black-Scholes option pricing model
subsequent to March 1998. The following weighted-average assumptions for 1998
and 1997 were used: risk-free interest rate of 6%; a dividend yield of zero;
volatility of the expected market price of the Company's common stock of 104%
(1998 only) and a weighted-average expected life of each option of five years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Using the Black-Scholes
option valuation model, the weighted average grant date value of options granted
during the year ended December 31, 1998 was $4.77 per option.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
Pro forma net income (in thousands).................... $ 506,000 $ 1,961,000 $ 660,000
---------- ------------ ----------
---------- ------------ ----------
Pro forma basic earnings per common share (in
thousands)........................................... $ .09 $ .49 $ .17
---------- ------------ ----------
---------- ------------ ----------
Pro forma diluted earnings per common and common
equivalent share..................................... $ .09 $ .44 $ .15
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
F-66
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
9. EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings per
share for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Numerator:
Net income (in thousands).......................... $ 1,246,000 $ 2,023,000 $ 675,000
Preferred stock dividend........................... -- (57,000) --
------------ ------------ ----------
Numerator for basic earnings per share-- income
available to common shareholders................... 1,246,000 1,966,000 675,000
Effect of dilutive securities preferred stock
dividend........................................... -- 57,000 --
------------ ------------ ----------
Numerator for diluted earnings per share-- income
available to common shareholders after assumed
conversions........................................ $ 1,246,000 $ 2,023,000 $ 675,000
------------ ------------ ----------
------------ ------------ ----------
Denominator:
Denominator for basic earnings per share-- weighted
average shares *................................. 5,640,000 3,859,000 3,831,000
Effect of dilutive securities:
Employee stock options........................... 202,000 150,000 85,000
Series A convertible preferred stock............. -- 489,000 489,000
------------ ------------ ----------
Dilutive potential common shares..................... 202,000 639,000 574,000
------------ ------------ ----------
Denominator for diluted earnings per share-- adjusted
weighted-average conversions....................... 5,842,000 4,498,000 4,405,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
- ------------------------
* Adjusted for the 1 for 1.75 reverse stock split. See Note 1.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic earnings per share................................................ $ .22 $ .51 $ .18
--- --- ---
--- --- ---
Diluted earnings per share.............................................. $ .21 $ .45 $ .15
--- --- ---
--- --- ---
</TABLE>
10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company sells and markets, primarily in the United States and Canada,
its training products and software directly and through resellers and
distributors. Training product sales for the years ended December 31, 1998,
1997, and 1996 were 83%, 81% and 69%, respectively, of total net sales. During
the year ended December 31, 1998, approximately 29% of the Company's net sales
were through direct sales and 71% through resellers, major retailers and
distributors. Approximately 29% and 17% of total net sales were with one
customer for the years ended December 31, 1998 and 1997, respectively. The
Company did not have any customers which individually accounted for more than
10% of total sales for the year ended December 31, 1996.
F-67
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company does not require collateral from its customers. Its credit
policy is in accordance with normal industry trade and credit terms. Credit
losses relating to the Company's customers have not been significant.
11. RELATED PARTY TRANSACTIONS
The 7.5% promissory notes described in Note 6 were payable to two
shareholders of the Company. The Company incurred $54,000, $301,000 and $325,000
of interest expense during the years ended December 31, 1998, 1997 and 1996,
respectively, related to these promissory notes.
In January 1997, the Company entered into a developing and licensing
agreement with Street Technologies, Inc., now known as 7th Street.com, Inc.
("Street") pursuant to which Street agreed to pay royalties for networkable
sales of the Company's multimedia products and the Company agreed to pay
royalties to Street on networkable licenses sold for multimedia training
products developed using Street products. For the years ended December 31, 1998
and 1997, Street paid net royalties excluding the $620,000 prepayment discussed
below of $292,000 and $315,000, respectively, to the Company. The president and
chief executive officer of Street is a director of the Company.
In 1998, the Company rented an airplane from an affiliate for use in
traveling to trade shows and other marketing activities. Total costs charged by
the affiliate during the year ended December 31, 1998 was $37,000.
In September 1998, the Company paid $620,000 to amend the developing and
licensing agreement with Street whereby the royalty paid to Street on
networkable licenses sold for multimedia training products developed using
Street products was reduced through September 30, 2000. At that time, the
Company has the option to pay an additional $250,000 to reduce the royalty paid
on Street's products for the life of Street's products. The $620,000 payment was
capitalized as prepaid royalty and license and is being amortized over 24
months. Prepaid royalty and license amortization expense was $78,000 for the
year ended December 31, 1998.
In July 1998, the Company issued a $188,000 note receivable to an officer as
part of an employment agreement. The note receivable is secured by a first
mortgage on his residence, earns interest at 8% per annum and is payable monthly
with a balloon payment in July 2000.
12. LEASE COMMITMENTS
The Company has noncancellable lease commitments relating to computer
equipment. The future minimum lease payments for all leases are as follows (in
thousands):
<TABLE>
<S> <C>
1999.................................................................. $ 13
2000.................................................................. 5
---
$ 18
---
---
</TABLE>
The Company incurred $10,000, $55,000 and $31,000 of rental expense during
the years ended December 31, 1998, 1997 and 1996, respectively.
F-68
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
13. EMPLOYEE BENEFIT PLAN
In November 1997, the Company began a 401(k) plan into which participating
employees can defer up to 15% of their annual compensation up to a specified
limit. The Company matches 50% of each participating employee's deferrals, not
to exceed 6% of each participating employee's annual compensation. The Company
contributions to the Plan for the years ended December 31, 1998 and 1997 were
$83,000 and $11,000, respectively. The Company does not provide any
post-retirement benefits other than the 401(k) plan.
14. LEGAL CONTINGENCIES
On May 22, 1998, a lawsuit was filed as a putative class action against the
Company and certain of its officers and directors claiming violations of the
Securities Act of 1933 for alleged misrepresentations and omissions in the
Company's prospectus issued in connection with its initial public offering made
in March 1998. The Company believes the lawsuit is without merit.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. Management does not believe that the ultimate
resolution of these matters will have a material effect on the Company's
financial position, results of operations or cash flows.
15. SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Company settled a lawsuit filed in
December 1998, arising out of operations. The amount of the settlement was
$172,000 and it is reflected in 1998 selling, general and administrative
expenses.
F-69
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly financial information is as follows (in thousands, except for
earnings per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Sales.................................................................... $ 4,077 $ 4,187 $ 4,017 $ 6,469
Gross profit............................................................. 3,103 3,197 3,216 4,689
Income (loss) before taxes............................................... 708 729 171 (8)
Net income............................................................... 537 502 157 50
Basic earnings per share................................................... $.12 $.08 $.03 $.01
Diluted earnings per share................................................. $.11 $.08 $.03 $.01
Year ended December 31, 1997:
Sales.................................................................... 2,866 3,280 3,656 3,892
Gross profit............................................................. 2,129 2,468 3,060 2,995
Income before taxes...................................................... 642 646 1,132 419
Net income............................................................... 395 398 689 541 *
Basic earnings per share................................................... .09 .10 .18 .14
Diluted earnings per share................................................. .09 .09 .15 .12
</TABLE>
- ------------------------
* Net income is higher than income before taxes in the fourth quarter of 1997
due to the realization of tax credits for 1994-1997 as a result of the
passage of the Taxpayer Relief Act of 1997 in August 1997. The amount of the
credit was quantified and recorded in the fourth quarter of 1997.
17. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows reflect all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation in conformity with generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. Actual results may differ from these estimates. Interim results
are not necessarily indicative of results for a full year. The quarterly
financial information should be read in conjunction with the consolidated annual
financial statements and notes thereto included herein.
F-70
<PAGE>
VIAGRAFIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
17. NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (CONTINUED)
B. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods................................................... $ 978,000 $ 996,000
Raw materials.................................................... 1,069,000 913,000
------------ ------------
$ 2,047,000 $1,909,000
------------ ------------
------------ ------------
</TABLE>
C. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are based on the average number of common
shares outstanding during each period. Diluted earnings (loss) per share assumes
conversion of preferred stock to common stock and exercise of stock options
outstanding using the treasury stock method unless the effect of such conversion
is antidilutive.
D. STOCK OPTION PLAN
In the first quarter of 1999 and 1998 employees exercised approximately
46,000 and 44,000 options for common stock of the Company for approximately
$56,000 and $53,000, respectively. Also in the first quarter of 1999, four
employees were granted 70,000 options at a weighted average exercise price of
$7.20 per option to purchase shares of the common stock. The market price of the
common stock of the Company and the option price were the same at the dates of
grant. No options were granted in the first quarter of 1998. In addition, in the
first quarter of 1999, the Company's subsidiary, eTracks.com (formerly Make It
So, Inc.) granted an option for 3,450,000 shares to the 5% owner and President
of eTracks.com at 12.5 cents per share to purchase shares of the common stock of
eTracks.com.
E. EFFECTIVE TAX RATE
During the three months ended March 31, 1999 the effective tax rate was
41.3% compared to 24.2% for the same period in 1998. In the first quarter of
1998 the effective tax rate was reduced due to the realization of tax credits
for 1995 through 1997 resulting from credits for increasing research activities.
The amount of available credits was quantified and the benefit recorded in the
first quarter of 1998.
F-71
<PAGE>
VIAGRAFIX CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS BALANCE AT
BEGINNING CHARGED END OF
DESCRIPTION OF PERIOD TO EXPENSE DEDUCTIONS PERIOD
- ------------------------------------------------------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts............................ $ 60,000 $ 119,000 $ (31,000)(1) $ 148,000
Reserve for sales returns.................................. -- 533,000 -- 533,000
Year ended December 31, 1997:
Allowance for doubtful accounts............................ -- 107,000 (47,000)(1) 60,000
Year ended December 31, 1996:
Allowance for doubtful accounts............................ -- -- -- --
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
F-72
<PAGE>
\
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 1, 1999
BY AND AMONG
7TH LEVEL, INC.,
7TH LEVEL MERGER CORPORATION
AND
VIAGRAFIX CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE I
THE MERGER.......................................................................................... 2
SECTION 1.01. Filing of Certificate of Merger; Effective Time....................................... 2
SECTION 1.02. Effects of the Merger................................................................. 2
SECTION 1.03. Conversion of Securities.............................................................. 2
SECTION 1.04. Exchange Procedures................................................................... 3
SECTION 1.05. Dividends and Distributions........................................................... 4
SECTION 1.06. No Fractional Shares.................................................................. 5
SECTION 1.07. No Liability.......................................................................... 5
ARTICLE II
THE CLOSING......................................................................................... 5
SECTION 2.01. Closing............................................................................... 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF 7TH LEVEL......................................................... 6
SECTION 3.01. Organization of 7th Level; Authority.................................................. 6
SECTION 3.02. Capitalization........................................................................ 6
SECTION 3.03. Subsidiaries.......................................................................... 7
SECTION 3.04. No Violation; Consents and Approvals.................................................. 8
SECTION 3.05. 7th Level SEC Documents............................................................... 8
SECTION 3.06. Financial Statements.................................................................. 9
SECTION 3.07. Absence of Certain Changes or Events.................................................. 9
SECTION 3.08. Absence of Undisclosed Liabilities.................................................... 11
SECTION 3.09. Personal Property..................................................................... 11
SECTION 3.10. Real Property......................................................................... 12
SECTION 3.11. Intellectual Property................................................................. 13
SECTION 3.12. Litigation............................................................................ 14
SECTION 3.13. Employee Benefit Plans................................................................ 14
SECTION 3.14. Taxes................................................................................. 17
SECTION 3.15. Contracts and Commitments............................................................. 20
SECTION 3.16. Compliance with Laws.................................................................. 22
SECTION 3.17. Insurance............................................................................. 22
SECTION 3.18. Labor Matters......................................................................... 22
SECTION 3.19. Environmental Matters................................................................. 23
SECTION 3.20. Transactions with Affiliates.......................................................... 24
SECTION 3.21. Brokers............................................................................... 24
SECTION 3.22. Certain Agreements.................................................................... 24
SECTION 3.23. Absence of Certain Commercial Practices............................................... 25
SECTION 3.24. Year 2000 Issues...................................................................... 25
SECTION 3.25. Books and Records..................................................................... 26
SECTION 3.26. Opinion of Financial Advisor.......................................................... 26
SECTION 3.27. Takeover Statutes..................................................................... 26
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VIAGRAFIX......................................................... 26
SECTION 4.01. Organization of ViaGrafix; Authority.................................................. 26
SECTION 4.02. Capitalization........................................................................ 27
SECTION 4.03. Subsidiaries.......................................................................... 27
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SECTION 4.04. No Violation; Consents and Approvals.................................................. 28
SECTION 4.05. ViaGrafix SEC Documents............................................................... 28
SECTION 4.06. Financial Statements.................................................................. 29
SECTION 4.07. Absence of Certain Changes or Events.................................................. 29
SECTION 4.08. Absence of Undisclosed Liabilities.................................................... 31
SECTION 4.09. Personal Property..................................................................... 31
SECTION 4.10. Real Property......................................................................... 31
SECTION 4.11. Intellectual Property................................................................. 33
SECTION 4.12. Litigation............................................................................ 34
SECTION 4.13. Employee Benefit Plans................................................................ 34
SECTION 4.14. Taxes................................................................................. 37
SECTION 4.15. Contracts and Commitments............................................................. 39
SECTION 4.16. Compliance with Laws.................................................................. 41
SECTION 4.17. Insurance............................................................................. 41
SECTION 4.18. Labor Matters......................................................................... 41
SECTION 4.19. Environmental Matters................................................................. 42
SECTION 4.20. Transactions with Affiliates.......................................................... 43
SECTION 4.21. Brokers............................................................................... 43
SECTION 4.22. Certain Agreements.................................................................... 43
SECTION 4.23. Absence of Certain Commercial Practices............................................... 44
SECTION 4.24. Year 2000 Issues...................................................................... 44
SECTION 4.25. Books and Records..................................................................... 44
SECTION 4.26. Opinion of Financial Advisor.......................................................... 45
SECTION 4.27. Takeover Statutes..................................................................... 45
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS PENDING THE MERGER........................................ 45
SECTION 5.01. Ordinary Course....................................................................... 45
SECTION 5.02. Governing Documents................................................................... 45
SECTION 5.03. Issuance of Securities................................................................ 45
SECTION 5.04. Dividends; Changes in Stock........................................................... 46
SECTION 5.05. No Dispositions....................................................................... 46
SECTION 5.06. Change in Condition................................................................... 46
SECTION 5.07. No Action............................................................................. 46
ARTICLE VI
ADDITIONAL AGREEMENTS............................................................................... 47
SECTION 6.01. Preparation of Registration Statement on Form S-4 including Joint Proxy Statement..... 47
SECTION 6.02. 7th Level Stockholders Meeting........................................................ 47
SECTION 6.03. ViaGrafix Stockholders Meeting........................................................ 47
SECTION 6.04. Voting Agreements..................................................................... 48
SECTION 6.05. Access to Information................................................................. 48
SECTION 6.06. No Shop; Acquisition Proposals........................................................ 48
SECTION 6.07. Legal Conditions to Merger; Reasonable Efforts........................................ 49
SECTION 6.08. Certain Filings....................................................................... 50
SECTION 6.09. Public Announcements and Filings...................................................... 50
SECTION 6.10. Tax Treatment......................................................................... 51
SECTION 6.11. ViaGrafix's Articles of Incorporation and By-Laws..................................... 51
SECTION 6.12. Tax Returns........................................................................... 51
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SECTION 6.13. Employment Agreements................................................................. 51
SECTION 6.14. Options............................................................................... 51
ARTICLE VII
CONDITIONS OF THE MERGER............................................................................ 52
SECTION 7.01. Conditions to Each Party's Obligation to Effect the Merger............................ 52
SECTION 7.02. Additional Conditions of Obligations of 7th Level..................................... 52
SECTION 7.03. Additional Conditions of Obligations of ViaGrafix..................................... 53
ARTICLE VIII
TERMINATION......................................................................................... 55
SECTION 8.01. Termination........................................................................... 55
SECTION 8.02. Fees and Expenses..................................................................... 55
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION......................................... 56
SECTION 9.01. Survival; Knowledge................................................................... 56
SECTION 9.02. Indemnification....................................................................... 57
ARTICLE X
MISCELLANEOUS....................................................................................... 59
SECTION 10.01. Notices.............................................................................. 59
SECTION 10.02. Amendment; Waiver.................................................................... 60
SECTION 10.03. Successors and Assigns............................................................... 60
SECTION 10.04. Governing Law........................................................................ 60
SECTION 10.05. Counterparts; Effectiveness.......................................................... 60
SECTION 10.06. Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.................. 61
SECTION 10.07. Headings............................................................................. 61
SECTION 10.08. Severability......................................................................... 61
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Certificate of Merger
Exhibit B [Intentionally omitted]
Exhibit C [Intentionally omitted]
Exhibit D Voting Agreement
Exhibit E 7th Level Voting Agreement
</TABLE>
SCHEDULES
7th Level Disclosure Schedule
ViaGrafix Disclosure Schedule
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 1, 1999 (this "Agreement"),
by and among 7th Level, Inc., a Delaware corporation ("7th Level"), 7th Level
Merger Corporation, a Delaware corporation and wholly-owned subsidiary of 7th
Level ("Merger Corporation") and ViaGrafix Corporation, an Oklahoma corporation
("ViaGrafix").
WHEREAS, the boards of directors (and special committees thereof) of 7th
Level, Merger Corporation and ViaGrafix, respectively, and 7th Level as the sole
stockholder of Merger Corporation, have each approved, as being in the best
interests of the respective corporations and their stockholders, the merger (the
"Merger") of Merger Corporation with and into ViaGrafix, in accordance with the
applicable provisions of the Oklahoma General Corporation Act (the "OGCA");
WHEREAS, pursuant to the Merger, each outstanding share of common stock,
$0.01 par value per share, of ViaGrafix ("ViaGrafix Common Stock") (except for
shares of ViaGrafix Common Stock held by ViaGrafix, 7th Level, Merger
Corporation and any other subsidiary of ViaGrafix or 7th Level), shall, in
accordance with the provisions of this Agreement, be converted into 1.846 shares
of 7th Level's common stock, $.01 par value per share ("7th Level Common
Stock");
WHEREAS, it is intended that the Merger shall be accounted for under the
pooling method of accounting;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization under the provisions of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, 7th Level, Merger Corporation and ViaGrafix desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, this Agreement is intended to set forth the terms upon which Merger
Corporation will merge with and into ViaGrafix;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and for
other good and valuable consideration the receipt and adequacy of which is
hereby acknowledged, and intending to be legally bound hereby, the parties do
hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. FILING OF CERTIFICATE OF MERGER; EFFECTIVE TIME.
Subject to the provisions of this Agreement, a certificate of merger in the
form attached as EXHIBIT A hereto (the "Certificate of Merger") shall be duly
prepared, executed and acknowledged by ViaGrafix and thereafter delivered to the
Secretary of State of the State of Oklahoma for filing as provided in the OGCA
simultaneously with the Closing (as defined in Section 2.01). The Merger shall
become effective upon the filing of the Certificate of Merger with the Secretary
of State of the State of Oklahoma (the "Effective Time").
SECTION 1.02. EFFECTS OF THE MERGER.
(a) At the Effective Time and by virtue of the Merger, (i) the separate
corporate existence of Merger Corporation shall cease and Merger Corporation
shall be merged with and into ViaGrafix, and ViaGrafix shall be the surviving
corporation (the "Surviving Corporation"); (ii) all of the issued and
outstanding ViaGrafix Common Stock shall be converted as provided in Section
1.03; (iii) the articles
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of incorporation of ViaGrafix as in effect immediately prior to the Effective
Time shall be the articles of incorporation of the Surviving Corporation; and
(iv) the by-laws of ViaGrafix as in effect immediately prior to the Effective
Time shall be the by-laws of the Surviving Corporation.
(b) At and after the Effective Time, the corporate existence of ViaGrafix,
with all its rights, privileges, powers and franchises of a public as well as of
a private nature, shall continue unaffected and unimpaired by the Merger. The
Merger shall have the effects specified in Section 1088 of the OGCA.
SECTION 1.03. CONVERSION OF SECURITIES.
As of the Effective Time, by virtue of the Merger and without any action on
the part of any holder thereof:
(a) each outstanding share of ViaGrafix Common Stock held by ViaGrafix or
any ViaGrafix Subsidiary (as defined in Section 4.03), or that is owned by 7th
Level or Merger Corporation or any other 7th Level Subsidiary (as defined in
Section 3.03), shall be canceled without payment of any consideration therefor;
(b) each remaining outstanding share of ViaGrafix Common Stock shall be
converted into 1.846 shares of 7th Level Common Stock (the "Conversion Ratio").
All such shares of ViaGrafix Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing such shares of ViaGrafix Common Stock shall
cease to have any rights with respect thereto, except the right to receive the
number of shares of 7th Level Common Stock to be issued in consideration
therefor upon surrender of such certificate in accordance with Section 1.04,
without interest.
(c) each share of capital stock of Merger Corporation that is issued and
outstanding immediately prior to the Effective Time shall be canceled and be
converted into one share of common stock of the Surviving Corporation, and each
certificate evidencing ownership of any such shares of Merger Corporation shall
thereupon evidence ownership of the same number of shares of the Surviving
Corporation; and
(d) each stock option ("ViaGrafix Option") for ViaGrafix Common Stock that
is outstanding prior to the Effective Time shall be exercisable for the number
of shares of 7th Level Common Stock at the Conversion Ratio in accordance with
the terms of ViaGrafix's stock option plan.
SECTION 1.04. EXCHANGE PROCEDURES.
(a) As soon as practicable after the Effective Time, 7th Level shall mail to
each ViaGrafix stockholder a letter of transmittal and instructions for use in
effecting the surrender of certificates representing shares of ViaGrafix Common
Stock outstanding immediately prior to the Effective Time (the "Certificates")
in appropriate and customary form with such provisions as the board of directors
of 7th Level after the Merger may reasonably specify. Upon surrender of a
Certificate for cancellation to 7th Level, together with such letter of
transmittal, duly and properly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing that number
of whole shares of 7th Level Common Stock that such holder has a right to
receive pursuant to the provisions of this Article I, together with any
dividends and other distributions payable as provided in Section 1.05 hereof,
but subject to the payment of cash in lieu of fractional shares as provided in
Section 1.06 hereof, and the Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.04, each Certificate shall, at and
after the Effective Time, be deemed to represent only the right to receive, upon
surrender of such Certificate, 7th Level Common Stock as contemplated by this
Section 1.04, together with any dividends and other distributions payable as
provided in Section 1.05 hereof, but subject to the payment of cash in lieu of
fractional shares as
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provided in Section 1.06 hereof, and the holders thereof shall have no rights
whatsoever as stockholders of 7th Level. Shares of 7th Level Common Stock issued
in the Merger shall be issued, and be deemed to be outstanding, as of the
Effective Time. 7th Level shall cause all such shares of 7th Level Common Stock
issued pursuant to the Merger to be duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights.
(b) If any certificate representing shares of 7th Level Common Stock is to
be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered or any payment in lieu of fractional shares
pursuant to Section 1.06 hereof is to be paid other than to the registered
holder of the Certificate so surrendered, it shall be a condition of such
exchange and/or payment, as the case may be, that the Certificate so surrendered
shall be properly endorsed and otherwise in proper form for transfer and that
the person requesting such exchange and/or payment, as the case may be, shall
pay any transfer or other taxes required by reason of the issuance of
certificates for such shares of 7th Level Common Stock in a name other than that
of, and/or payment to a person other than, as the case may be, the registered
holder of the Certificate so surrendered.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and upon the posting by such person
of a bond in such amount as 7th Level may reasonably direct as an indemnity
against any claim that may be made against it with respect to such Certificate,
7th Level will issue in respect of such lost, stolen or destroyed Certificate
one or more certificates representing shares of 7th Level Common Stock as
contemplated by this Section 1.04 (subject to the payment of cash in lieu of
fractional shares in accordance with Section 1.06 hereof) and such person shall
be entitled to the dividend and other distribution rights provided in Section
1.05 hereof.
(d) If any Certificates shall not have been surrendered prior to three years
after the Effective Time (or immediately prior to such earlier date on which any
payment in respect hereof would otherwise escheat or become the property of any
governmental unit or agency), the payment in respect of such Certificates shall,
to the extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interests of any person previously
entitled thereto.
(e) 7th Level shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of a
Certificate surrendered for shares of 7th Level Common Stock (and dividends or
distributions with respect to 7th Level Common Stock as contemplated by Section
1.05 hereof and cash in lieu of fractional shares in accordance with Section
1.06 hereof) such amount as 7th Level is required to deduct and withhold with
respect to the making of such payment under the Code, or provisions of any
state, local or foreign tax law. To the extent that amounts are so deducted and
withheld, such amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of such Certificate.
SECTION 1.05. DIVIDENDS AND DISTRIBUTIONS.
No dividends or other distributions declared or made with respect to 7th
Level Common Stock with a record date on or after the Effective Time shall be
paid to the holder of a Certificate entitled by reason of the Merger to receive
certificates representing 7th Level Common Stock until such holder surrenders
such Certificate as provided in Section 1.04 hereof. Upon such surrender, there
shall be paid by 7th Level to the person in whose name certificates representing
shares of 7th Level Common Stock shall be issued pursuant to the terms of this
Article I (i) at the time of the surrender of such Certificate, the amount of
any dividends and other distributions theretofore paid with respect to that
number of whole shares of such 7th Level Common Stock represented by such
surrendered Certificate pursuant to the terms of this Article I, which dividends
or other distributions had a record date on or after the Effective Time and a
payment date prior to such surrender and (ii) at the appropriate payment date,
the amount of dividends and other distributions payable with respect to that
number of
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whole shares of 7th Level Common Stock represented by such surrendered
Certificate pursuant to the terms of this Article I, which dividends or other
distributions have a record date on or after the Effective Time and a payment
date subsequent to such surrender.
SECTION 1.06. NO FRACTIONAL SHARES.
(a) No certificate or scrip representing fractional shares of 7th Level
Common Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a stockholder of 7th Level.
(b) On surrender of the Certificates, 7th Level shall pay to holders of
ViaGrafix Common Stock in lieu of any fractional share interests, cash in an
amount equal to such fraction of a share of 7th Level Common Stock multiplied by
the Closing Price. "Closing Price" means the average of the closing prices of
the 7th Level Common Stock, as reported in The Wall Street Journal, Eastern
Edition, for each of the twenty consecutive Trading Days immediately preceding
the third Trading Day prior to the date of the mailing of the Proxy Statement
(as hereinafter defined). "Trading Day" means a day on which trading is
conducted on the Nasdaq Stock Market ("Nasdaq").
SECTION 1.07. NO LIABILITY.
Neither 7th Level nor ViaGrafix shall be liable to any holder of shares of
ViaGrafix Common Stock or 7th Level Common Stock, as the case may be, for such
shares (or dividends or distributions with respect thereto) or cash delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
ARTICLE II
THE CLOSING
SECTION 2.01. CLOSING.
Unless this Agreement shall have been terminated and the transactions herein
contemplated shall have been abandoned pursuant to Article VIII, and subject to
the satisfaction or waiver of the conditions set forth in Article VII, the
closing of the Merger (the "Closing") shall take place as soon as possible after
all of the conditions set forth in Article VII are satisfied or, to the extent
permitted thereunder, waived, at the offices of Swidler Berlin Shereff Friedman,
LLP, located at 919 Third Avenue, New York, New York, or at such other time and
place as may be agreed to in writing by the parties hereto (the date of such
Closing being referred to herein as the "Closing Date").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF 7TH LEVEL
Except as set forth in the applicable section of the disclosure schedule
delivered by 7th Level to ViaGrafix prior to the execution of this Agreement
(the "7th Level Disclosure Schedule"), 7th Level represents and warrants to
ViaGrafix as follows:
SECTION 3.01. ORGANIZATION OF 7TH LEVEL; AUTHORITY.
7th Level is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all requisite
corporate power and corporate authority to enter into this Agreement and the
Employment Agreements (as hereinafter defined) (collectively, the "Transaction
Documents"), to consummate the transactions contemplated hereby and thereby, to
own, lease and operate its properties and to conduct its business. Subject to
the receipt of stockholder approval, the execution, delivery and performance by
7th Level of the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
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corporate action on the part of 7th Level, including, without limitation the
approval of the board of directors of 7th Level (other than Stephen Gott). The
Transaction Documents have been duly executed and delivered by 7th Level and,
assuming that the Transaction Documents constitute a valid and binding
obligation of ViaGrafix, constitutes a valid and binding obligation of 7th
Level, enforceable against 7th Level in accordance with its terms, except as may
be limited by (i) bankruptcy, reorganization, moratorium, fraudulent conveyance
and insolvency laws and by other laws affecting the rights of creditors
generally and (ii) the availability of equitable remedies. 7th Level is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to obtain such qualification or license
would not, individually or in the aggregate, have a 7th Level Material Adverse
Effect (as defined in Section 3.07). 7th Level has heretofore delivered or made
available to ViaGrafix complete and correct copies of the certificate of
incorporation and by-laws of 7th Level, the minute books and stock transfer
records of 7th Level, as in effect as of the date of this Agreement.
SECTION 3.02. CAPITALIZATION.
The authorized capital stock of 7th Level consists of 100,000,000 shares of
7th Level Common Stock and 100,000 shares of preferred stock, $.01 par value per
share (the "7th Level Preferred Stock," and together with the 7th Level Common
Stock, the "7th Level Capital Stock"), of which 32,554,859 shares of 7th Level
Common Stock (as reported by 7th Level's transfer agent) and 21,661 shares of
7th Level Preferred Stock (as reported by 7th Level's transfer agent) are
outstanding on the date hereof. Except as set forth in Section 3.02 of the 7th
Level Disclosure Schedule, no other shares of any other class or series of 7th
Level Capital Stock or securities exercisable or convertible into or
exchangeable for 7th Level Capital Stock ("7th Level Capital Stock Equivalents")
are authorized, issued or outstanding. The outstanding shares of 7th Level
Capital Stock have been duly authorized and validly issued and are fully paid
and nonassessable and were not issued in violation of, and are not subject to,
any preemptive, subscription or similar rights. Except as set forth in Section
3.02 of the 7th Level Disclosure Schedule, there are no outstanding warrants,
options, subscriptions, calls, rights, agreements, convertible or exchangeable
securities or other commitments or arrangements relating to the issuance, sale,
purchase, return or redemption, and, to 7th Level's knowledge, voting or
transfer of any shares, whether issued or unissued, of 7th Level Capital Stock,
7th Level Capital Stock Equivalents or other securities of 7th Level. On the
Closing Date, the shares of 7th Level Common Stock for which shares of ViaGrafix
Common Stock shall be exchanged in the Merger will have been duly authorized
and, when issued and delivered in accordance with this Agreement, such shares of
7th Level Common Stock, will be validly issued, fully paid and nonassessable.
7th Level will file a Nasdaq Notification Form for listing of Additional Shares
with respect to all of the shares of 7th Level Common Stock issuable in the
Merger before the Closing.
SECTION 3.03. SUBSIDIARIES.
Section 3.03 of the 7th Level Disclosure Schedule contains a list of the
name of each subsidiary of 7th Level (each such corporation, partnership or
other entity being referred to herein as a "7th Level Subsidiary"). Section 3.03
of the 7th Level Disclosure Schedule sets forth, with respect to each 7th Level
Subsidiary, its type of entity, the jurisdiction of its organization, its
authorized and outstanding capital stock, partnership interests or equivalent
ownership interests and 7th Level's current ownership of such shares or
interests. Except as set forth in Section 3.03 of the 7th Level Disclosure
Schedule, each of the outstanding shares of capital stock of each of the 7th
Level Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by 7th Level or another 7th Level Subsidiary free and
clear of all liens, claims, encumbrances, options, pledges and security
interests ("Liens") and were not issued in violation of, nor subject to, any
preemptive, subscription or similar rights. Except as set forth in Section 3.03
of the 7th Level Disclosure Schedule, there are no
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outstanding warrants, options, subscriptions, calls, rights, agreements,
convertible or exchangeable securities or other commitments or arrangements
relating to the issuance, sale, purchase, return or redemption, to 7th Level's
knowledge, voting or transfer of any shares, whether issued or unissued, of any
7th Level Subsidiary. Except as set forth in Section 3.03 of the 7th Level
Disclosure Schedule, 7th Level and the 7th Level Subsidiaries do not own any
equity interests in any person. Each 7th Level Subsidiary is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite power and authority to own, lease and operate
its properties and to conduct its business. Merger Corporation was formed solely
for the purpose of engaging in the transactions contemplated hereby, has engaged
in no other business activities and has conducted its operations only as
contemplated hereby.
SECTION 3.04. NO VIOLATION; CONSENTS AND APPROVALS.
Except as set forth in Section 3.04 of the 7th Level Disclosure Schedule,
the execution and delivery by 7th Level of the Transaction Documents does not,
and the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (or an event which, with notice or lapse of time
or both, would constitute a default) under, (a) any provision of the certificate
of incorporation or by-laws of 7th Level, (b) any judgment, order, injunction or
decree (an "Order"), or statute, law, ordinance, rule or regulation ("Applicable
Law") applicable to 7th Level or any 7th Level Subsidiary or the property or
assets of 7th Level or any 7th Level Subsidiary, or (c) give rise to any right
of termination, cancellation or acceleration under, or result in the creation of
any Lien upon any of the properties of 7th Level or any 7th Level Subsidiary
under, any note, bond, mortgage, indenture, license, agreement, lease or other
instrument or obligation ("Contracts") to which 7th Level or any 7th Level
Subsidiary is a party or by which 7th Level or any 7th Level Subsidiary or any
assets of 7th Level or any 7th Level Subsidiary may be bound, except in the case
of clauses (b) and (c), for such conflicts, violations or defaults as to which
requisite waivers or consents will have been obtained prior to the Closing or
which, individually or in the aggregate, would not have a 7th Level Material
Adverse Effect. Except as set forth in Section 3.04 of the 7th Level Disclosure
Schedule, and except for filings, permits, authorizations and approvals as may
be required under the Securities Act of 1933, as amended (the "Securities Act"),
and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), no consent, approval, order or authorization of, or registration,
declaration or filing with ("Governmental Approval"), any court, administrative
agency or commission or other governmental entity, authority or instrumentality,
domestic or foreign ("Governmental Authority"), is required to be obtained or
made by or with respect to 7th Level or any 7th Level Subsidiary in connection
with the execution and delivery of this Agreement or the consummation by 7th
Level of the transactions contemplated hereby, except where the failure to
obtain such Governmental Approval would not, individually or in the aggregate,
have a 7th Level Material Adverse Effect.
SECTION 3.05. 7TH LEVEL SEC DOCUMENTS.
7th Level has filed with the Securities and Exchange Commission (the "SEC"),
and has heretofore made available to ViaGrafix, true and complete copies of,
each report, schedule, registration statement, definitive proxy statement and
other document required to be filed by it since January 1, 1996 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the
Securities Act (as such documents have been amended since the time of their
filing, collectively, the "7th Level SEC Documents"). As of their respective
dates, the 7th Level SEC Documents, (i) conformed, in all material respects,
with the applicable requirements of the Securities Act, the Exchange Act and the
rules and regulations thereunder and (ii) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
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SECTION 3.06. FINANCIAL STATEMENTS.
Except as set forth in Section 3.06 of the 7th Level Disclosure Schedule,
the financial statements of 7th Level included or incorporated by reference in
the 7th Level SEC Documents (collectively, the "7th Level Financial
Statements"), (a) fairly present in all material respects (subject, in the case
of the unaudited statements, to normal recurring audit adjustments), the
consolidated financial condition and the results of operations and cash flows of
7th Level and the 7th Level Subsidiaries as of the dates and for the periods
indicated (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and other adjustments described therein) and (b)
have been prepared in accordance with the rules and regulations of the SEC and
generally accepted accounting principles ("GAAP") applied consistently
throughout the periods involved, except as disclosed therein and in the notes
thereto and, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC.
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth in Section 3.07 of the 7th Level Disclosure Schedule or
for the transactions contemplated by this Agreement, since March 31, 1999, (i)
7th Level and the 7th Level Subsidiaries have operated their businesses solely
in the ordinary course of business consistent with past practices, and (ii)
without limiting the generality of clause (i), neither 7th Level nor any 7th
Level Subsidiary has:
(a) created, incurred, assumed or guaranteed any indebtedness for
borrowed money (including, without limitation, obligations in respect of
capital leases), other than borrowings and issuances of letters of credit in
the ordinary course of business and consistent with past practice;
(b) issued, sold or delivered, redeemed or purchased, any shares of 7th
Level Capital Stock or any 7th Level Capital Stock Equivalents, or granted
or entered into any options, warrants, rights, agreements or commitments
with respect to the issuance of 7th Level Capital Stock or 7th Level Capital
Stock Equivalents, or amended any terms of any such securities or
agreements;
(c) declared, set aside or paid any dividends or other distributions in
respect of 7th Level Capital Stock;
(d) increased the rate of compensation or benefits of, or paid or agreed
to be paid any benefit to (including, but not limited to severance or
termination pay), present or former directors, officers or employees, except
as may be required by any existing 7th Level Plan (as defined in Section
3.13), agreement or arrangement disclosed to ViaGrafix prior to the date
hereof or to employees who are not officers in accordance with 7th Level's
ordinary course of business consistent with past practice;
(e) entered into, adopted, terminated or amended any 7th Level Plan,
employment or severance agreement or any plan, agreement, program, policy,
trust, fund or other arrangement that would be a 7th Level Plan if it were
in existence as of the date of this Agreement, except as required by law;
(f) sold, leased, transferred, or otherwise disposed of any properties
or assets, real, personal or mixed, which have an aggregate book value in
excess of $100,000 or mortgaged or encumbered any properties or assets,
whether real or personal, which have an aggregate book value in excess of
$100,000;
(g) acquired or agreed to acquire by merging or consolidating with, or
by purchasing the stock or a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquired or
agreed to acquire any assets which are material, individually or in the
aggregate, to 7th Level and the 7th Level Subsidiaries;
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(h) entered into, modified, amended or terminated any lease of 7th Level
Real Property (as defined in Section 3.10) (except modifications or
amendments in connection with renewals of leases in the ordinary course of
business) or any other 7th Level Material Contract (as defined in Section
3.15);
(i) waived or released any rights of material value, or canceled,
compromised, released or assigned any material indebtedness owed to it or
any material claims held by it;
(j) canceled or terminated any insurance policy naming it as a
beneficiary or a loss payable payee without obtaining comparable substitute
insurance coverage;
(k) effectuated a "plant closing" or "mass layoff" (as those terms are
defined under the Worker Adjustment and Retraining Notification Act of 1988
(the "WARN Act")) affecting in whole or in part any site of employment,
facility, operating unit or employees of 7th Level or any 7th Level
Subsidiary;
(l) amended its certificate of incorporation or by-laws;
(m) changed any of its accounting principles, methods or practices; or
(n) agreed, whether in writing or otherwise, to do any of the foregoing;
and
(iii) there have occurred no changes, events or effects which, individually or
in the aggregate, would have a 7th Level Material Adverse Effect. As used in
this Agreement, any reference to any event, change or effect having a "7th Level
Material Adverse Effect" means an event, change or effect, individually or in
the aggregate with other events, changes or effects, is materially adverse to
(a) the business, properties, prospects, financial condition or results of
operations of 7th Level and the 7th Level Subsidiaries taken as a whole (other
than those events, changes or effects resulting from general economic conditions
or the industry in which 7th Level is engaged generally) or (b) the ability of
7th Level to consummate the transactions contemplated hereby.
SECTION 3.08. ABSENCE OF UNDISCLOSED LIABILITIES.
Since March 31, 1999, neither 7th Level nor any of the 7th Level
Subsidiaries has incurred any liabilities of any nature, whether or not accrued,
absolute, contingent or otherwise that would be reasonably likely to cause a 7th
Level Material Adverse Effect, or be required to be reflected on, or disclosed
or reserved against in, a consolidated balance sheet of 7th Level or in the
notes thereto prepared in accordance with GAAP consistently applied other than
liabilities and obligations that were (i) so reserved on, or disclosed or
reflected in the consolidated balance sheet of 7th Level as of (x) December 31,
1998 and the notes thereto, included in the Annual Report on Form 10-K for the
year then ended, or (y) March 31, 1999, included in the Quarterly Report on Form
10-Q for the three months then ended, (ii) incurred in connection with this
Agreement, or (iii) incurred in the ordinary course of business.
SECTION 3.09. PERSONAL PROPERTY.
(a) Except as set forth in Section 3.09(a) of the 7th Level Disclosure
Schedule, 7th Level and the 7th Level Subsidiaries have good and valid title to
all of their personal property, whether tangible or intangible, owned by them,
and a valid and enforceable right to use all personal property leased by or
licensed to them (the "Personal Property"), in each case, free and clear of all
Liens, imperfections of title or encumbrances of any nature whatsoever, other
than (i) mechanics', carriers', workmen's, repairmen's or similar Liens arising
or incurred in the ordinary course of business, (ii) Liens for taxes,
assessments and other governmental charges which are not due and payable or
which may hereafter be paid without penalty or which are being contested in good
faith and (iii) other imperfections of title or encumbrances, if any, which
imperfections of title or other encumbrances, individually or in the
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aggregate, do not materially impair the use or value of the property to which
they relate (the Liens, imperfections of title and encumbrances described in
clauses (i), (ii) and (iii) above are hereinafter referred to collectively as
the "Permitted Liens").
(b) Except as set forth in Section 3.09(b) of the 7th Level Disclosure
Schedule, all material tangible items of Personal Property necessary for the
operation or conduct of the businesses of 7th Level and the 7th Level
Subsidiaries as currently conducted are in reasonably good maintenance,
operating condition and repair, normal wear and tear excepted, other than
machinery and equipment under repair or out of service in the ordinary course of
business.
(c) Except as set forth in Section 3.09(c) of the 7th Level Disclosure
Schedule, the accounts receivable reflected on the 7th Level Financial
Statements are valid receivables arising in the ordinary course of business and
not subject to any valid counterclaims or setoffs, except for products returned
or exchanged in 7th Level's ordinary course of business for which there has been
or will have been a reserve established consistently with past practice.
SECTION 3.10. REAL PROPERTY.
(a) As used in this Agreement, the term "7th Level Real Property" shall mean
all real property and interests in real property leased by 7th Level or any 7th
Level Subsidiary. Section 3.10(a) of the 7th Level Disclosure Schedule lists all
7th Level Real Property. 7th Level owns no real property. Except as set forth in
Section 3.10(a) of the 7th Level Disclosure Schedule, the 7th Level Real
Property constitutes all of the real property and interests in real property
used in the conduct of the businesses of 7th Level and the 7th Level
Subsidiaries.
(b) As used in this Agreement, the term "7th Level Real Estate Permitted
Liens" shall mean:
(i) All building codes and zoning ordinances and other laws, ordinances,
regulations, rules, orders or determinations of any federal, state, county,
municipal or other governmental authority heretofore, now or hereafter
enacted, made or issued by any such governmental authority affecting the 7th
Level Real Property;
(ii) All easements, rights-of-way, covenants, conditions, restrictions,
reservations, licenses, agreements and other similar matters which do not
materially impair the use of the 7th Level Real Property to which they
relate;
(iii) All electric power, telephone, gas, sanitary sewer, storm sewer,
water, steam, compressed air and other utility lines, pipelines, service
lines and similar facilities now located on, over or under the 7th Level
Real Property, and all licenses, easements, flowage rights, rights-of-way
and other similar agreements relating thereto granted in the ordinary course
of business; and
(iv) All existing public and private roads and streets (whether
dedicated or undedicated), and all railroad lines and rights-of-way
affecting the 7th Level Real Property.
(c) Except as set forth in Section 3.10(c) of the 7th Level Disclosure
Schedule, 7th Level and the 7th Level Subsidiaries have, to 7th Level's
knowledge, valid leasehold interests in all 7th Level Real Property leased by
them, in each case, free and clear of all mortgages, Liens, security interests,
easements, covenants, rights-of-way and other encumbrances or restrictions of
any nature created by 7th Level, except for Permitted Liens and 7th Level Real
Estate Permitted Liens which, individually or in the aggregate, would not have a
7th Level Material Adverse Effect.
(d) To 7th Level's knowledge and except as set forth in Section 3.10(d) of
the 7th Level Disclosure Schedule, there are no condemnation proceedings or
eminent domain proceedings of any kind pending or threatened against the 7th
Level Real Property.
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(e) To 7th Level's knowledge and except as set forth in Section 3.10(e) of
the 7th Level Disclosure Schedule, all of the 7th Level Real Property is
occupied under a valid and current certificate of occupancy or similar permit,
the transactions contemplated by this Agreement will not require the issuance of
any new or amended certificate of occupancy and there are no facts which would
prevent the 7th Level Real Property from being occupied after the Closing Date
in the same manner as before.
(f) To 7th Level's knowledge and except as set forth in Section 3.10(f) of
the 7th Level Disclosure Schedule, all improvements on the 7th Level Real
Property were constructed in compliance with all applicable federal, state,
local or foreign statutes, laws, ordinances, regulations, rules, codes, orders
or requirements (including, but not limited to, any building, zoning or
environmental laws or codes) affecting such property, except where the failure
to be in compliance would not, individually or in the aggregate, impair the
value or interfere with the present use of such 7th Level Real Property or
otherwise impair business operations.
(g) To 7th Level's knowledge and except as set forth in Section 3.10(g) of
the 7th Level Disclosure Schedule, all improvements on the 7th Level Real
Property and the present use and conditions thereof do not violate any
applicable deed restrictions or other applicable covenants, restrictions,
agreements, existing site plan approvals, zoning or subdivision regulations or
urban redevelopment plans as modified by any duly issued variances, and no
permits, licenses or certificates pertaining to the ownership or operation of
all improvements on the 7th Level Real Property, other than those which are
transferable with the 7th Level Real Property, are required by any governmental
agency having jurisdiction over the 7th Level Real Property.
(h) To 7th Level's knowledge and except as set forth in Section 3.10(h) of
the 7th Level Disclosure Schedule, all improvements on the 7th Level Real
Property are structurally sound in all material respects and in reasonably good
maintenance and repair, normal wear and tear excepted.
SECTION 3.11. INTELLECTUAL PROPERTY.
(a) Section 3.11(a) of the 7th Level Disclosure Schedule sets forth a
complete list of all material registered patents, trademarks, trade names,
service marks, assumed names, copyrights and all applications therefor
(collectively, the "Industrial Property") owned, filed or licensed by 7th Level
or any 7th Level Subsidiary and, with respect to registered trademarks, all
jurisdictions in which such trademarks are registered.
(b) As used in this Agreement, "Intellectual Property" shall mean Industrial
Property and inventions, invention studies (whether patentable or unpatentable),
designs, copyrights, mask works, trade dress, secret formulae, trade secrets,
secret processes, computer programs and know-how. Except as set forth in Section
3.11(b) of the 7th Level Disclosure Schedule, (i) to 7th Level's knowledge, the
consummation of the transactions contemplated by this Agreement will not
materially impair any right to use any of its Intellectual Property, (ii) except
as would not have a 7th Level Material Adverse Effect, all Intellectual Property
owned by 7th Level or any 7th Level Subsidiary is owned by 7th Level or such 7th
Level Subsidiary free and clear of all Liens, (iii) except as would not have a
7th Level Material Adverse Effect, 7th Level and the 7th Level Subsidiaries own
or have the right to use all of the Intellectual Property used in the conduct of
their businesses, and (iv) no claims have been asserted of which 7th Level or
any 7th Level Subsidiary has been given written notice by any person with
respect to the ownership or use by 7th Level or any 7th Level Subsidiary of the
Intellectual Property, except those claims (if any) which, if adversely
determined, would not have a 7th Level Material Adverse Effect.
SECTION 3.12. LITIGATION.
Except as set forth in Section 3.12 of the 7th Level Disclosure Schedule,
there are no claims, actions, suits, investigations or proceedings pending, or,
to the knowledge of 7th Level, threatened in
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writing against or affecting 7th Level, any 7th Level Subsidiary or their
respective assets, at law or in equity, by or before any Governmental Authority,
or by or on behalf of any third party, which, if adversely determined, would
have a 7th Level Material Adverse Effect. Except as set forth in Section 3.12 of
the 7th Level Disclosure Schedule, 7th Level has not received any notice that
7th Level, any 7th Level Subsidiary or any of their respective assets is subject
to any material decree, order or judgment.
SECTION 3.13. EMPLOYEE BENEFIT PLANS.
(a) Section 3.13(a) of the 7th Level Disclosure Schedule sets forth an
accurate and complete list of each bonus or incentive compensation arrangement
involving payment of $10,000 or more per annum to one person, deferred
compensation, excess benefit, pension, retirement, profit sharing, stock bonus,
thrift, stock option, stock ownership, stock appreciation right, stock purchase,
foreign employee benefit, cafeteria, life insurance, survivor or death benefit,
sickness or accident, business travel accident, health, medical, dental, vision,
hospitalization, savings, holiday, vacation, salary continuation, severance pay,
change of control payments, sick pay, leave of absence, disability, tuition
reimbursement, service award, dependent care assistance, legal assistance,
fringe benefit (cash and non-cash) or any other employee or executive benefit
plan, contract, agreement, practice, policy or arrangement, including, without
limitation, any such plan, contract, agreement, practice, policy or arrangement
which is an "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), which benefits,
covers or relates to any current or former employee, director, consultant,
independent contractor, or officer of 7th Level or any 7th Level Subsidiary
(each such plan, contract, agreement, practice, policy or arrangement is
hereinafter referred to individually as a "7th Level Plan" and collectively as
the "7th Level Plans").
(b) With respect to each 7th Level Plan, 7th Level has delivered to
ViaGrafix a current, accurate and complete copy of such plan (or, to the extent
no such copy exists, an accurate description thereof) and, to the extent
applicable to each such plan, a copy of: (i) any trust agreement or other
funding instrument; (ii) the most recent determination letter; (iii) any summary
plan description and other written communications (or a description of any oral
communications) by 7th Level or the applicable 7th Level Subsidiary to its
employees concerning the extent of the benefits provided under such plan; and
(iv) for the most recent plan year of such plan (A) the Form 5500 and attached
schedules, (B) audited financial statements and (C) actuarial valuation reports.
(c) Neither 7th Level nor any 7th Level Subsidiary is contributing, or has
in the past contributed to, nor has incurred any liability in respect of, any
multiemployer plan within the meaning of Section 3(3) of ERISA, any multiple
employer plan described in Section 413(c) of the Code or any multiple employer
welfare plan within the meaning of Section 3(40) of ERISA.
(d) Except as set forth in Section 3.13(d) of the 7th Level Disclosure
Schedule, (i) for each 7th Level Plan that is intended to be qualified within
the meaning of Section 401(a) of the Code, (A) the plan is so qualified, (B) 7th
Level, or the applicable 7th Level Subsidiary, has obtained a favorable
determination letter from the Internal Revenue Service (the "IRS") to such
effect, and such plan has been timely amended to reflect any provisions which
the IRS required to be included in such plan as a condition to issuing such
determination letter, (C) nothing has occurred, whether by action or inaction,
that could reasonably be expected to cause the loss of such qualification, and
(D) to the knowledge of 7th Level, or the applicable 7th Level Subsidiary, such
determination letter has not been revoked by the IRS nor has the IRS given any
written notice to 7th Level, or the applicable 7th Level Subsidiary, that it
intends to revoke such determination letter, (ii) each 7th Level Plan, other
than a plan described in (i), that is intended to qualify for special tax
treatment under any provision of the Code is, and at all times since its
inception has been, in compliance with all conditions necessary for such plan to
so qualify, (iii) all returns, reports, notices and other documents required to
be filed with the IRS, the Department of Labor, the Pension Benefit Guaranty
Corporation or any other governmental agency, or distributed to plan
participants or beneficiaries (including, but not limited to, annual reports in
the
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5500 series, summary annual reports and tax returns) with respect to each 7th
Level Plan have been timely filed or distributed, (iv) each 7th Level Plan is in
compliance in all material respects with (a) the terms and the applicable
governing document thereof and (b) the applicable requirements prescribed by all
statues, orders or governmental rules or regulations currently in effect with
respect to such plan, including, but not limited to, ERISA and the Code, (v) all
contributions to each 7th Level Plan (including both employee and employer
contributions) which are required to have been made, whether by virtue of the
terms of the particular plan or by operation of law, have been made by the due
date thereof (including all applicable extensions), and all contributions to the
7th Level Plans which are not yet due but which relate to periods which began
prior to the Closing Date have either been paid or have been appropriately
reflected by 7th Level as an accrued liability in its Financial Statements, (vi)
no 7th Level Plan that is a funded pension plan and no trust established
thereunder has any accumulated funding deficiency within the meaning of Section
302(a) of ERISA or Section 412 of the Code (whether or not waived), (vii) no
reportable event within the meaning of Section 4043 of ERISA (other than any
such event for which the notice requirement has been waived by the regulations
under Section 4043 of ERISA) or "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code has occurred, and no material
tax has been imposed pursuant to Section 4975 or Section 4976 of the Code, with
respect to any 7th Level Plan, (viii) no governmental agency, including the IRS,
the Department of Labor or the Pension Benefit Guaranty Corporation (the
"PBGC"), has initiated an examination or audit, or, to the knowledge of 7th
Level or any 7th Level Subsidiary, an investigation of a 7th Level Plan which
has not been completed, (ix) neither 7th Level nor any 7th Level Subsidiary has
incurred any liability to the PBGC, or has had any penalty or Lien imposed on it
in favor of the PBGC, with respect to any 7th Level Plan which is subject to
Title IV of ERISA other than liability for routine premiums for which adequate
provision has been made in the 7th Level Financial Statements in accordance with
GAAP and (x) neither 7th Level or any 7th Level Subsidiary has any knowledge as
to the existence of any state of facts, or as to the occurrence of any event or
transaction, pertaining to or involving a 7th Level Plan that might reasonably
be anticipated to result in any liability, or the imposition of a penalty or
Lien, of or on 7th Level or any 7th Level Subsidiary to the PBGC under any
provision of Title IV of ERISA.
(e) Except as set forth in Section 3.13(e) of the 7th Level Disclosure
Schedule, there are no claims, suits or actions pending or, to the knowledge of
7th Level or any 7th Level Subsidiary, threatened against any of the 7th Level
Plans, by any employee or beneficiary covered under any such 7th Level Plan, or
otherwise involving any such 7th Level Plan (other than routine claims for
benefits).
(f) With respect to each 7th Level Plan that is subject to Title IV of
ERISA, as of the Closing Date, the assets of each such 7th Level Plan are at
least equal in value to the present value of the accrued benefits (vested and
unvested) of the participants in such 7th Level Plan on a termination basis,
based on the actuarial methods and assumptions indicated in the most recent
actuarial valuation reports for such plan.
(g) Except as disclosed in Section 3.13(g) of the 7th Level Disclosure
Schedule, the execution and delivery of the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby will not cause
any payment (whether of severance pay or otherwise) not otherwise due to become
due from any of the 7th Level Plans, or from 7th Level or any 7th Level
Subsidiary with respect to any of the 7th Level Plans, to any individual, or
cause the vesting, acceleration of payment, or increase in the amount of any
benefit payable under any of the 7th Level Plans to any individual.
(h) Except as disclosed in Section 3.13(h) of the 7th Level Disclosure
Schedule, any hospital, medical, dental, vision, sickness or accident, survivor
or death benefit, disability or similar benefit coverage provided under any 7th
Level Plan is provided solely through insurance policies, and in addition (i) no
7th Level Plan provides for hospital, medical, death, survivor or any other
welfare benefit for retired or former employees, officers, directors,
consultants or independent contractors,
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except as required by Section 4980B of the Code or Sections 601 to 608 of ERISA,
and (ii) no 7th Level Plan is an unfunded plan of deferred compensation.
(i) Except as disclosed in Section 3.13 (i) of the 7th Level Disclosure
Schedule, neither 7th Level or any 7th Level Subsidiary is under any obligation
(express or implied) to modify any 7th Level Plan or to establish any additional
employee benefit plan.
(j) 7th Level's Financial Statements reflect the approximate total pension,
medical and other benefit liability and expense for all 7th Level Plans, and no
material funding changes or irregularities are reflected thereon which would
cause such financial statements to be not representative of any prior period.
(k) No entity (other than 7th Level or any 7th Level Subsidiary), which is
treated as a single employer with 7th Level or any 7th Level Subsidiary under
Section 414(b), (c), (m), or (o) of the Code, sponsors, maintains or contributes
to any employee benefit plan with respect to which any material liability (other
than for routine contributions or benefit payments), penalty or tax has been
incurred, or with respect to which any Lien has been imposed.
SECTION 3.14. TAXES.
(a) Except as set forth in Section 3.14 of the 7th Level Disclosure
Schedule:
(i) 7th Level or one of its affiliates has accurately prepared and
timely filed (after giving effect to applicable extensions) with the
appropriate taxing authorities all material Tax Returns (as hereinafter
defined) required to be filed by or with respect to 7th Level under all
applicable laws and the 7th Level Subsidiaries and such Tax Returns are
true, correct and complete in all material respects;
(ii) 7th Level or one of its affiliates has properly and fully paid to
the extent due and payable, or made adequate provision in the case of Taxes
not yet due and payable in the 7th Level Financial Statements in accordance
with GAAP for the payment of all Taxes (as hereinafter defined) of 7th Level
and the 7th Level Subsidiaries shown to be due on such Tax Returns or that
are otherwise required to be paid by 7th Level or any 7th Level Subsidiary
in the case of Taxes payable or anticipated to be payable on account of the
operations, acts or omissions of 7th Level and all 7th Level Subsidiaries
for any and all periods through the date of reference;
(iii) no waivers of statutes of limitation have been given or requested
with respect to 7th Level or any 7th Level Subsidiary which are currently in
force in connection with any Tax Returns covering 7th Level or any 7th Level
Subsidiary with respect to any Taxes payable by them;
(iv) 7th Level has or has caused to be duly and timely withheld and has
paid over or deposited in a proper and timely manner to the appropriate
taxing authorities all Taxes required to be so withheld and paid over in
connection with amounts paid or owing to any employee, independent
contractor, stockholder, claimant or other party for all periods under all
Applicable Laws;
(v) neither 7th Level nor any 7th Level Subsidiary is a party to any tax
sharing or similar agreement or arrangement pursuant to which it will have
any obligation to make any payments after the Closing other than to 7th
Level or any 7th Level Subsidiary and neither 7th Level nor any 7th Level
Subsidiary could be liable for the Taxes of any other person (other than 7th
Level or a 7th Level Subsidiary) as a "transferee" within the meaning of
Section 6901 of the Code, by reason of Treasury Regulation Section 1.1502-6
or any provision of state, local or foreign law, as a successor, by contract
or otherwise;
(vi) there are no Liens with respect to Taxes (except for Liens for
Taxes which are not yet delinquent) upon any assets of 7th Level or any 7th
Level Subsidiary;
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(vii) all material Tax Returns filed by or on behalf of 7th Level or any
7th Level Subsidiary have been examined by the relevant taxing authorities
or the statute of limitations with respect to such Tax Returns has expired,
all deficiencies asserted or assessments made as a result of any examination
by the IRS or any other taxing authority of the Tax Returns of or covering
7th Level or any 7th Level Subsidiary have been fully paid, and there are no
unpaid deficiencies asserted or assessments made by any taxing authority for
which 7th Level or any 7th Level Subsidiary may be liable, and no issue has
been asserted by the IRS or other taxing authority in any such examination
in writing which, by application of the same or similar principles,
reasonably could be expected to result in a Tax deficiency for any other
taxable period not so examined, and any adjustment in Taxes made by one tax
authority and required to be reported to any other taxing authority has been
so reported;
(viii) neither 7th Level nor any 7th Level Subsidiary has received any
written notice of deficiency or assessment or has any actual knowledge of
any proposed deficiency or assessment from any federal, state, local or
other taxing authority with respect to liabilities for which 7th Level or
any 7th Level Subsidiary may be liable nor is any examination of any Tax
Return of 7th Level or any 7th Level Subsidiary being conducted by any such
taxing authority and no notification of intention to examine any Tax Return
has been received from any such tax authority;
(ix) neither 7th Level, any 7th Level Subsidiary nor any person on their
respective behalf has (A) executed or entered into a closing agreement
pursuant to Section 7121 of the Code or any predecessor provision thereof or
any similar provision of state, local or foreign law, (B) agreed to or is
required to make any adjustment pursuant to Section 481(a) of the Code or
any similar provision of state, local or foreign law by reason of a change
in accounting method initiated by 7th Level or any 7th Level Subsidiary or
has any actual knowledge that the IRS has proposed any such adjustment or
change in accounting method, or has an application pending with any taxing
authority requesting permission for any changes in accounting methods that
relate to the subject business or operations of 7th Level or any 7th Level
Subsidiary or (C) granted any power of attorney with respect to any matter
involving Taxes which is currently in force;
(x) no claim has been made by any taxing jurisdiction where 7th Level
does not file Tax Returns that 7th Level or any 7th Level Subsidiary is or
may be subject to taxation by that jurisdiction;
(xi) no indebtedness of 7th Level or any 7th Level Subsidiary consists
of "corporate acquisition indebtedness" within the meaning of Section 279 of
the Code;
(xii) neither 7th Level nor any 7th Level Subsidiary has filed an
election, consent or agreement under Section 341(f) of the Code;
(xiii) neither 7th Level nor any 7th Level Subsidiary is a "loss
corporation" within the meaning of Section 382(k)(1) of the Code;
(xiv) no property of 7th Level or any 7th Level Subsidiary is
"tax-exempt use property" within the meaning of Section 168(h) of the Code;
(xv) neither 7th Level nor any 7th Level Subsidiary is a "United States
real property holding corporation" within the meaning of Section 897(c)(2)
of the Code;
(xvi) neither 7th Level nor any 7th Level Subsidiary is a party to any
agreement which would require 7th Level or any 7th Level Subsidiary, as a
result of the change in ownership of effective control of 7th Level or any
7th Level Subsidiary resulting from transactions contemplated by this
Agreement, to make any payment which would constitute a "parachute payment"
for purposes of Sections 280G and 4999 of the Code; and
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(xvii) neither 7th Level nor any 7th Level Subsidiary have ever
participated in, or cooperated with, an international boycott within the
meaning of Section 999 of the Code.
(b) 7th Level has provided ViaGrafix with copies of: (i) all Tax Returns of
7th Level and the 7th Level Subsidiaries for all periods (including periods for
which 7th Level or any 7th Level Subsidiary is or may have been a member of
another consolidated, combined or unitary group) with respect to which the
statute of limitations on assessment has not expired; (ii) any notices, protests
or closing agreements relating to issues arising, or potentially arising, in any
audit, litigation or similar proceeding with respect to the liability for Taxes
of 7th Level or any 7th Level Subsidiary; (iii) any elections or disclosure of
any controversial position filed by or on behalf of 7th Level or any 7th Level
Subsidiary with any taxing authority (whether or not filed with any Tax Return);
(iv) any letter rulings, determination letters or similar documents issued by
any taxing authority with respect to 7th Level or any 7th Level Subsidiary; and
(v) any Tax sharing or similar agreement or arrangement (whether or not written)
to which 7th Level or any 7th Level Subsidiary is or has been a party.
(c) As used in this Agreement:
(i) "Taxes" means all taxes, levies or other like assessments, charges
or fees (including estimated taxes, charges and fees), including, without
limitation, net income, gross income, corporation, advance corporation,
gross receipts, premium, estimated, customs, duties, transfer, excise,
property, sales, use, value-added, license, payroll, pay as you earn,
withholding, social security and franchise or other governmental taxes or
charges, imposed by the United States or any state, county, local or foreign
government or subdivision or agency thereof and any interest, penalties or
additions to tax with respect thereto.
(ii) "Tax Return" means any report, return, statement, estimate,
informational return, declaration or other written information required to
be supplied to a taxing authority in connection with Taxes.
SECTION 3.15. CONTRACTS AND COMMITMENTS.
Section 3.15 of the 7th Level Disclosure Schedule sets forth a list of all
material agreements, Contracts and commitments to which 7th Level or any 7th
Level Subsidiary is a party or by which 7th Level, any 7th Level Subsidiary or
their respective assets are bound (each, a "7th Level Material Contract"),
including, without limitation:
(a) agreements, contracts, commitments or arrangements involving 7th
Level's Intellectual Property;
(b) employment agreements or severance agreements or employee
termination arrangements that are not terminable at will by 7th Level or a
7th Level Subsidiary without penalty;
(c) any change of control agreements with employees of 7th Level or any
7th Level Subsidiary;
(d) agreements, contracts, commitments or arrangements containing any
covenant limiting the ability of 7th Level or any 7th Level Subsidiary to
engage in any line of business or to compete with any business or person;
(e) agreements or contracts with any officer, director or employee of
(i) 7th Level or (ii) any 7th Level Subsidiary (other than employment,
severance and change of control agreements covered by clause (b) or (c)
above);
(f) agreements or contracts under which 7th Level or any 7th Level
Subsidiary has borrowed or loaned money, or any note, bond, indenture,
mortgage, installment obligation or other evidence
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of indebtedness for borrowed or loaned money or any guarantee of such
indebtedness, in each case, relating to amounts in excess of $25,000;
(g) joint venture agreements or other agreements involving the sharing
of profits;
(h) leases pursuant to which personal or real property is leased to or
from 7th Level or any 7th Level Subsidiary;
(i) powers of attorney from 7th Level or any 7th Level Subsidiary;
(j) guaranties, suretyships or other contingent agreements of 7th Level
or any 7th Level Subsidiary;
(k) any agreement, contract, commitment or arrangement relating to
capital expenditures with respect to 7th Level or any 7th Level Subsidiary
and involving future payments which exceed $100,000 in any 12-month period;
(l) any agreement, contract, commitment or arrangement relating to the
acquisition of assets (other than in the ordinary course of business
consistent with past practice) or any capital stock of any business
enterprise;
(m) contracts (other than those covered by clause (a) through (k) above)
pursuant to which 7th Level and the 7th Level Subsidiaries will receive or
pay in excess of $100,000 over the life of the contract; and
(n) any other material agreements, Contracts and commitments whether or
not entered into in the ordinary course of business.
Except as set forth in Section 3.15 of the 7th Level Disclosure Schedule,
neither 7th Level, any 7th Level Subsidiary nor, to the knowledge of 7th Level,
any other party thereto, is in material breach of or in material default under
any 7th Level Material Contract. Each such 7th Level Material Contract is in
full force and effect, and is a legal, valid and binding obligation of 7th Level
and/or the applicable 7th Level Subsidiaries and, to the knowledge of 7th Level,
each of the other parties thereto, enforceable in accordance with its terms.
SECTION 3.16. COMPLIANCE WITH LAWS.
Except as set forth in Section 3.16 of the 7th Level Disclosure Schedule, to
7th Level's knowledge, 7th Level and the 7th Level Subsidiaries are in
compliance with all Applicable Laws and all Orders of, and agreements with, any
Governmental Authority applicable to 7th Level, any 7th Level Subsidiary or any
of their respective assets, except for laws the violation of which, individually
or in the aggregate, would not have a 7th Level Material Adverse Effect. Except
as set forth in Section 3.16 of the 7th Level Disclosure Schedule, 7th Level and
the 7th Level Subsidiaries have all permits, certificates, licenses, approvals
and other authorizations required under Applicable Laws or necessary in
connection with the conduct of their businesses, except where the failure to
hold such permit, certificate, license, approval or authorization would not,
individually or in aggregate, have a 7th Level Material Adverse Effect.
SECTION 3.17. INSURANCE.
Except as set forth in Section 3.17 of the 7th Level Disclosure Schedule,
7th Level and the 7th Level Subsidiaries maintain policies of fire and casualty,
liability and other forms of insurance in such amounts, with such deductibles
and retained amounts, and against such risks and losses, as are, in the
reasonable judgment of 7th Level, reasonable for the conduct of their businesses
and their assets. Section 3.17 of the 7th Level Disclosure Schedule sets forth a
list of such insurance policies, to 7th Level's knowledge, based on a report by
7th Level's insurance broker, as are in full force and effect as
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of the date of this Agreement, which policies 7th Level shall maintain in full
force and effect during the period from the date of this Agreement through the
Closing Date.
SECTION 3.18. LABOR MATTERS.
Except as set forth in Section 3.18 of the 7th Level Disclosure Schedule,
(a) to 7th Level's knowledge, 7th Level and the 7th Level Subsidiaries are in
substantial compliance with all Applicable Laws regarding employment and
employment practices, (b) there is no unfair labor practice charge or complaint
against 7th Level nor any 7th Level Subsidiary pending before the National Labor
Relations Board nor is there any material grievance nor any material arbitration
proceeding arising out of or under collective bargaining agreements pending or,
to 7th Level's knowledge, threatened with respect to the businesses of 7th Level
and the 7th Level Subsidiaries, (c) there is no labor strike, slowdown, work
stoppage or lockout in effect, or, to the knowledge of 7th Level, threatened
against or otherwise affecting 7th Level or any 7th Level Subsidiary, and 7th
Level and the 7th Level Subsidiaries have not experienced any such labor
controversy within the past five years, (d) there is no material charge or
complaint pending or, to 7th Level's knowledge, threatened against 7th Level or
any 7th Level Subsidiary before the Equal Employment Opportunity Commission, the
Office of Federal Contract Compliance Programs or any similar state, local or
foreign agency responsible for the prevention of unlawful employment practices,
(e) neither 7th Level nor any 7th Level Subsidiary is a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental Authority
relating to employees or employment practices, (f) 7th Level and the 7th Level
Subsidiaries will not have any material liability under any benefit or severance
policy, practice, agreement, plan, or program which exists or arises, or may be
deemed to exist or arise, under any Applicable Law or otherwise, as a result of
the transactions contemplated hereunder, (g) neither 7th Level nor any 7th Level
Subsidiary is a party to any collective bargaining agreement, and (h) 7th Level
and the 7th Level Subsidiaries are in compliance with its obligations pursuant
to the WARN Act, and, except as would not have a 7th Level Material Adverse
Effect, all other notification and bargaining obligations arising under any
collective bargaining agreement, statute or otherwise. To the knowledge of 7th
Level, neither 7th Level nor any 7th Level Subsidiary has received written
notice of the intent of any federal, state, local or foreign agency responsible
for the enforcement of employment laws to conduct an investigation of or
relating to 7th Level or any 7th Level Subsidiary, and no such investigation is
in progress.
SECTION 3.19. ENVIRONMENTAL MATTERS.
Except as set forth in Section 3.19 of the 7th Level Disclosure Schedule,
(i) neither 7th Level nor any 7th Level Subsidiary has, as of the date hereof,
received any written notice alleging the material violation of, or any material
actual or potential liability relating to, any applicable federal, state or
local statutes, laws, regulations, rules, decrees, orders, judgments,
ordinances, or common law related to the protection of human health or the
environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, the Emergency Planning and Community
Right-To-Know Act, the Solid Waste Disposal Act, the Resource Conservation and
Recovery Act, the Clean Air Act, the Water Pollution Control Act, the Toxic
Substances Control Act, the Hazardous Materials Transportation Act, and the
Occupational Safety and Health Act, each as amended and supplemented, and any
regulations promulgated pursuant to such laws, and any similar state or local
statutes or regulations (collectively, the "Environmental Laws"), which
violation has not been resolved and, to the knowledge of 7th Level, no such
notice is threatened or otherwise expected; (ii) to 7th Level's knowledge, 7th
Level and the 7th Level Subsidiaries are and have been in material compliance
with all applicable Environmental Laws and, to the knowledge of 7th Level, there
is no condition that would likely prevent or materially interfere with such
compliance in the future; (iii) to 7th Level's knowledge, 7th Level and the 7th
Level Subsidiaries have obtained and are and have been in material compliance
with all required governmental environmental permits, registrations and
authorizations with respect to the businesses of 7th Level and the 7th Level
Subsidiaries; (iv) to 7th Level's knowledge, no
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hazardous waste, substance, material, or chemical, including, without
limitation, petroleum and petroleum products, asbestos and any other material
regulated under, or that can result in liability under, applicable Environmental
Laws ("Hazardous Substances"), has been transported, stored, treated or disposed
of by 7th Level or any 7th Level Subsidiary on the real estate owned, operated
or otherwise used by 7th Level or any 7th Level Subsidiary or at any other
location, except as would not result in material liability under any applicable
Environmental Laws; (v) neither 7th Level nor any 7th Level Subsidiary has
assumed, contractually or by operation of law, any liabilities, potential
liabilities or obligations of any other person or entity under any applicable
Environmental Laws; (vi) neither 7th Level nor any 7th Level Subsidiary has
entered into, agreed to, or is subject to any judgment, decree, order or other
similar requirement of any governmental authority under any Environmental Laws;
(vii) to 7th Level's knowledge, there are no (w) underground or aboveground
storage tanks, (x) surface impoundments, (y) landfills or (z) sewer or septic
systems currently present at or about any of the properties or facilities
currently or formerly owned, operated or otherwise used by 7th Level or any 7th
Level Subsidiary that would be reasonably likely to result in material liability
to 7th Level or any 7th Level Subsidiary under any applicable Environmental
Laws; and (viii) to 7th Level's knowledge, there are no actions, activities,
events, conditions or circumstances occurring or, existing during the time of
7th Level's or any 7th Level Subsidiary's operations and ownership of its
properties or prior to such time, including without limitation the release,
threatened release, emission, discharge, generation, treatment, storage or
disposal of Hazardous Substances, that would be reasonably likely to result in
any material liability or obligation of 7th Level or any 7th Level Subsidiary
under or relating to any Environmental Laws, except, in each case, which would
not be reasonably likely to have a 7th Level Material Adverse Effect.
SECTION 3.20. TRANSACTIONS WITH AFFILIATES.
Except as disclosed in Section 3.15 or 3.20 of the 7th Level Disclosure
Schedule there are no Contracts, agreements or arrangements between 7th Level
(or the 7th Level Subsidiaries) and any officer, director or affiliate of 7th
Level (or the 7th Level Subsidiaries) or beneficial owner of 10% or more of the
7th Level Common Stock.
SECTION 3.21. BROKERS.
No broker, finder or financial advisor or other person is entitled to any
brokerage fees, commissions, finders' fees or financial advisory fees in
connection with the transactions contemplated hereby by reason of any action
taken by 7th Level or any of their respective directors, officers, employees,
representatives or agents, except for the fees and expenses set forth in Section
3.21 of the 7th Level Disclosure Schedule.
SECTION 3.22. CERTAIN AGREEMENTS.
Except as set forth in Schedule 3.22 of the 7th Level Disclosure Schedule,
neither 7th Level nor any 7th Level Subsidiary is a party to any: (i) agreement
with any director, officer or other employee of 7th Level or any 7th Level
Subsidiary, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving 7th Level of
the nature contemplated by this Agreement; or (ii) agreement or plan (including
7th Level Plans), any of the benefits of or rights under which will be
increased, or the vesting or payment of the benefits of or rights under which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
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SECTION 3.23. ABSENCE OF CERTAIN COMMERCIAL PRACTICES.
Neither 7th Level nor any 7th Level Subsidiary, nor, to the knowledge of 7th
Level, any director, officer, agent, employee or other person acting on behalf
of 7th Level or any 7th Level Subsidiary, has: (i) given or agreed to give any
gift or similar benefit of more than nominal value to any customer, supplier, or
governmental employee or official or any other person who is or may be in a
position to help or hinder 7th Level or any 7th Level Subsidiary or assist 7th
Level or any 7th Level Subsidiary in connection with any proposed transaction,
which gift or similar benefit, if not given in the past, might have materially
and adversely affected the business or prospects of 7th Level or any 7th Level
Subsidiary, or which, if not continued in the future, might materially and
adversely affect the business or prospects of 7th Level or any 7th Level
Subsidiary; or (ii) used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither 7th Level nor any 7th Level Subsidiary,
nor, to the knowledge of 7th Level, any director, officer, agent, employee or
other person acting on behalf of 7th Level or any 7th Level Subsidiary, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
SECTION 3.24. YEAR 2000 ISSUES.
(a) Any failure of any of the software, computers, network equipment,
technical infrastructure, production equipment and other equipment and systems
that rely on, utilize or perform date or time processing ("System"), that are
material to the operations of 7th Level or any 7th Level Subsidiary, to be Year
2000 Compliant will not cause a 7th Level Material Adverse Effect except as set
forth in Section 3.24 of the 7th Level Disclosure Schedule.
(b) "Year 2000 Compliant" means a System will at all times: (i) consistently
and accurately handle and process date and time information and data values
before, during and after January 1, 2000, including but not limited to accepting
date input, providing date output, and performing calculations on or utilizing
dates or portions of dates; (ii) function accurately and in accordance with its
specifications without interruption, abnormal endings, degradation, change in
operation or other impact, or disruption of other Systems, resulting from
processing date or time data with values, before, during and after January 1,
2000; (iii) respond to and process two-digit input in a way that resolves any
ambiguity as to century; and (iv) store and provide output of the date
information in ways that are unambiguous as to century.
SECTION 3.25. BOOKS AND RECORDS.
The books of account, minute books, stock record books and other records of
7th Level and the 7th Level Subsidiaries, all of which have been made available
to ViaGrafix, are complete and correct in all material respects and have been
maintained in accordance with sound business practices in all material respects.
SECTION 3.26. OPINION OF FINANCIAL ADVISOR.
7th Level has received the opinion of Ladenburg Thalman & Co. Inc. dated the
date hereof, to the effect that, as of such date, the Conversion Ratio is fair
to 7th Level from a financial point of view.
SECTION 3.27. TAKEOVER STATUTES.
No "fair price," "moratorium," "control share acquisition" or other similar
anti-takeover statute or regulation enacted under state or federal laws in the
United States (each a "Takeover Statute"),
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applicable to 7th Level or any 7th Level Subsidiary, is applicable to the Merger
or the other transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VIAGRAFIX
Except as set forth in the applicable section of the disclosure schedule
delivered by ViaGrafix to 7th Level prior to the execution of this Agreement
(the "ViaGrafix Disclosure Schedule"), ViaGrafix represents and warrants to 7th
Level as follows:
SECTION 4.01. ORGANIZATION OF VIAGRAFIX; AUTHORITY.
ViaGrafix is a corporation duly organized, validly existing and in good
standing under the laws of the State of Oklahoma and has all requisite corporate
power and corporate authority to enter into the Transaction Documents, to
consummate the transactions contemplated hereby and thereby, to own, lease and
operate its properties and to conduct its business. Subject to the receipt of
stockholder approval, the execution, delivery and performance by ViaGrafix of
the Transaction Documents and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of ViaGrafix, including, without limitation, the approval of the
board of directors of ViaGrafix (other than Stephen Gott). The Transaction
Documents have been duly executed and delivered by ViaGrafix and, assuming that
the Transaction Documents constitute a valid and binding obligation of 7th
Level, constitutes a valid and binding obligation of ViaGrafix, enforceable
against ViaGrafix in accordance with its terms, except as may be limited by (i)
bankruptcy, reorganization, moratorium, fraudulent conveyance and insolvency
laws and by other laws affecting the rights of creditors generally and (ii) the
availability of equitable remedies. ViaGrafix is duly qualified or licensed to
do business as a foreign corporation and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification necessary, except where
the failure to obtain such qualification or license would not, individually or
in the aggregate, have a ViaGrafix Material Adverse Effect (as defined in
Section 4.07). ViaGrafix has heretofore delivered or made available to 7th Level
complete and correct copies of the articles of incorporation and by-laws of
ViaGrafix, the minute books and stock transfer records of ViaGrafix, as in
effect as of the date of this Agreement.
SECTION 4.02. CAPITALIZATION.
The authorized capital stock of ViaGrafix consists of 40,000,000 shares of
ViaGrafix Common Stock and 10,000,000 shares of preferred stock , $0.01 par
value per share (the "ViaGrafix Preferred Stock", and together with the
ViaGrafix Common Stock, the "ViaGrafix Capital Stock"), of ViaGrafix, of which
only 5,788,184 shares of ViaGrafix Common Stock (as reported by ViaGrafix's
transfer agent) and no shares of ViaGrafix Preferred Stock are outstanding on
the date hereof. Except as set forth in Section 4.02 of the ViaGrafix Disclosure
Schedule, no other shares of any other class or series of ViaGrafix Capital
Stock or securities exercisable or convertible into or exchangeable for
ViaGrafix Capital Stock ("ViaGrafix Capital Stock Equivalents") are authorized,
issued or outstanding. The outstanding shares of ViaGrafix Capital Stock have
been duly authorized and validly issued and are fully paid and nonassessable and
were not issued in violation of, and are not subject to, any preemptive,
subscription or similar rights. Except as set forth in Section 4.02 of the
ViaGrafix Disclosure Schedule, there are no outstanding warrants, options,
subscriptions, calls, rights, agreements, convertible or exchangeable securities
or other commitments or arrangements relating to the issuance, sale, purchase,
return or redemption, and, to ViaGrafix's knowledge, voting or transfer of any
shares, whether issued or unissued, of ViaGrafix Capital Stock, ViaGrafix
Capital Stock Equivalents or other securities of ViaGrafix.
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SECTION 4.03. SUBSIDIARIES.
Section 4.03 of the ViaGrafix Disclosure Schedule contains a list of the
name of each subsidiary of ViaGrafix (each such corporation, partnership or
other entity being referred to herein as a "ViaGrafix Subsidiary"). Section 4.03
of the ViaGrafix Disclosure Schedule sets forth, with respect to each ViaGrafix
Subsidiary, its type of entity, the jurisdiction of its organization, its
authorized and outstanding capital stock, partnership interests or equivalent
ownership interests and ViaGrafix's current ownership of such shares or
interests. Except as set forth in Section 4.03 of the ViaGrafix Disclosure
Schedule, each of the outstanding shares of capital stock of each of the
ViaGrafix Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by ViaGrafix or another ViaGrafix Subsidiary free and
clear of all Liens and were not issued in violation of, nor subject to, any
preemptive, subscription or similar rights. Except as set forth in Section 4.03
of the ViaGrafix Disclosure Schedule, there are no outstanding warrants,
options, subscriptions, calls, rights, agreements, convertible or exchangeable
securities or other commitments or arrangements relating to the issuance, sale,
purchase, return or redemption, voting or transfer of any shares, whether issued
or unissued, of any ViaGrafix Subsidiary. Except as set forth in Section 4.03 of
the ViaGrafix Disclosure Schedule, ViaGrafix and the ViaGrafix Subsidiaries do
not own any equity interests in any person. Each ViaGrafix Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
own, lease and operate its properties and to conduct its business.
SECTION 4.04. NO VIOLATION; CONSENTS AND APPROVALS.
Except as set forth in Section 4.04 of the ViaGrafix Disclosure Schedule,
the execution and delivery by ViaGrafix of the Transaction Documents does not,
and the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof conflict with, or result in any
violation of or default (or an event which, with notice or lapse of time or
both, would constitute a default) under, (a) any provision of the articles of
incorporation or by-laws of ViaGrafix, (b) any Order or Applicable Law
applicable to ViaGrafix or any ViaGrafix Subsidiary or the property or assets of
ViaGrafix or any ViaGrafix Subsidiary, or (c) give rise to any right of
termination, cancellation or acceleration under, or result in the creation of
any Lien upon any of the properties of ViaGrafix or any ViaGrafix Subsidiary
under, any Contracts to which ViaGrafix or any ViaGrafix Subsidiary is a party
or by which ViaGrafix or any ViaGrafix Subsidiary or any assets of ViaGrafix or
any ViaGrafix Subsidiary may be bound, except in the case of clauses (b) and
(c), for such conflicts, violations or defaults as to which requisite waivers or
consents will have been obtained prior to the Closing or which, individually or
in the aggregate, would not have a ViaGrafix Material Adverse Effect. Except as
set forth in Section 4.04 of the ViaGrafix Disclosure Schedule and except for
filings, permits, authorizations and approvals as may be required under the
Securities Act and the HSR Act, no Governmental Approval of any Governmental
Authority is required to be obtained or made by or with respect to ViaGrafix or
any ViaGrafix Subsidiary in connection with the execution and delivery of this
Agreement or the consummation by ViaGrafix of the transactions contemplated
hereby, except where the failure to obtain such Governmental Approval would not,
individually or in the aggregate, have a ViaGrafix Material Adverse Effect.
SECTION 4.05. VIAGRAFIX SEC DOCUMENTS.
ViaGrafix has filed with the SEC, and has heretofore made available to 7th
Level, true and complete copies of, each report, schedule, registration
statement, definitive proxy statement and other document required to be filed by
it since January 1, 1996 under the Exchange Act or the Securities Act (as such
documents have been amended since the time of their filing, collectively, the
"ViaGrafix SEC Documents"). As of their respective dates, the ViaGrafix SEC
Documents, (i) conformed, in all material respects, with the applicable
requirements of the Securities Act, the Exchange Act and the
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rules and regulations thereunder and (ii) did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
SECTION 4.06. FINANCIAL STATEMENTS.
Except as set forth in Section 4.06 of the ViaGrafix Disclosure Schedule,
the financial statements of ViaGrafix included or incorporated by reference in
the ViaGrafix SEC Documents (collectively, the "ViaGrafix Financial
Statements"), (a) fairly present in all material respects (subject, in the case
of the unaudited statements, to normal recurring audit adjustments), the
consolidated financial condition and the results of operations and cash flows of
ViaGrafix and the ViaGrafix Subsidiaries as of the dates and for the periods
indicated (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and other adjustments described therein) and (b)
have been prepared in accordance with the rules and regulations of the SEC and
GAAP applied consistently throughout the periods involved, except as disclosed
therein and in the notes thereto and, in the case of unaudited statements, as
permitted by Form 10-Q of the SEC.
SECTION 4.07. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as set forth in Section 4.07 of the ViaGrafix Disclosure Schedule or
for the transactions contemplated by this Agreement, since March 31, 1999, (i)
ViaGrafix and the ViaGrafix Subsidiaries have operated their businesses solely
in the ordinary course of business consistent with past practices, and (ii)
without limiting the generality of clause (i), neither ViaGrafix nor any
ViaGrafix Subsidiary has:
(a) created, incurred, assumed or guaranteed any indebtedness for
borrowed money (including, without limitation, obligations in respect of
capital leases), other than borrowings and issuances of letters of credit in
the ordinary course of business and consistent with past practice;
(b) issued, sold or delivered, redeemed or purchased, any shares of
ViaGrafix Capital Stock or any ViaGrafix Capital Stock Equivalents, or
granted or entered into any options, warrants, rights, agreements or
commitments with respect to the issuance of ViaGrafix Capital Stock or
ViaGrafix Capital Stock Equivalents, or amended any terms of any such
securities or agreements;
(c) declared, set aside or paid any dividends or other distributions in
respect of ViaGrafix Capital Stock;
(d) increased the rate of compensation or benefits of, or paid or agreed
to be paid any benefit to (including, but not limited to severance or
termination pay), present or former directors, officers or employees, except
as may be required by any existing ViaGrafix Plan (as defined in Section
4.13), agreement or arrangement disclosed to 7th Level prior to the date
hereof or to employees who are not officers in accordance with ViaGrafix's
ordinary course of business consistent with past practice;
(e) entered into, adopted, terminated or amended any ViaGrafix Plan,
employment or severance agreement or any plan, agreement, program, policy,
trust, fund or other arrangement that would be a ViaGrafix Plan if it were
in existence as of the date of this Agreement, except as required by law;
(f) sold, leased, transferred, or otherwise disposed of any properties
or assets, real, personal or mixed, which have an aggregate book value in
excess of $100,000 or mortgaged or encumbered any properties or assets,
whether real or personal, which have an aggregate book value in excess of
$100,000;
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(g) acquired or agreed to acquire by merging or consolidating with, or
by purchasing the stock or a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquired or
agreed to acquire any assets which are material, individually or in the
aggregate, to ViaGrafix and the ViaGrafix Subsidiaries;
(h) entered into, modified, amended or terminated any lease of ViaGrafix
Real Property (as defined in Section 4.10) (except modifications or
amendments in connection with renewals of leases in the ordinary course of
business) or any other ViaGrafix Material Contract (as defined in Section
4.15);
(i) waived or released any rights of material value, or canceled,
compromised, released or assigned any material indebtedness owed to it or
any material claims held by it;
(j) canceled or terminated any insurance policy naming it as a
beneficiary or a loss payable payee without obtaining comparable substitute
insurance coverage;
(k) effectuated a "plant closing" or "mass layoff" (as those terms are
defined under the WARN Act) affecting in whole or in part any site of
employment, facility, operating unit or employees of ViaGrafix or any
ViaGrafix Subsidiary;
(l) amended its articles of incorporation or by-laws;
(m) changed any of its accounting principles, methods or practices; or
(n) agreed, whether in writing or otherwise, to do any of the foregoing;
and
(iii) there have occurred no changes, events or effects which, individually or
in the aggregate, would have a ViaGrafix Material Adverse Effect. As used in
this Agreement, any reference to any event, change or effect having a "ViaGrafix
Material Adverse Effect" means an event, change or effect, individually or in
the aggregate with other events, changes or effects, is materially adverse to
(a) the business, properties, prospects, financial condition or results of
operations of ViaGrafix and the ViaGrafix Subsidiaries taken as a whole (other
than those events, changes or effects resulting from general economic conditions
or the industry in which ViaGrafix is engaged generally) or (b) the ability of
ViaGrafix and 7th Level to consummate the transactions contemplated hereby.
SECTION 4.08. ABSENCE OF UNDISCLOSED LIABILITIES.
Since March 31, 1999, neither ViaGrafix nor any of the ViaGrafix
Subsidiaries has incurred any liabilities of any nature, whether or not accrued,
absolute, contingent or otherwise that would be reasonably likely to cause a
ViaGrafix Material Adverse Effect, or be required to be reflected on, or
disclosed or reserved against in, a consolidated balance sheet of ViaGrafix or
in the notes thereto prepared in accordance with GAAP consistently applied other
than liabilities and obligations that were (i) so reserved on, or disclosed or
reflected in the consolidated balance sheet of ViaGrafix as of (x) December 31,
1998 and the notes thereto, included in the Annual Report on Form 10-K for the
year then ended, or (y) March 31, 1999, included in the Quarterly Report on Form
10-Q for the three months then ended, (ii) incurred in connection with this
Agreement, or (iii) incurred in the ordinary course of business.
SECTION 4.09. PERSONAL PROPERTY.
(a) Except as set forth in Section 4.09(a) of the ViaGrafix Disclosure
Schedule, ViaGrafix and the ViaGrafix Subsidiaries have good and valid title to
all of their Personal Property, in each case, free and clear of all Liens,
imperfections of title or encumbrances of any nature whatsoever, other than
Permitted Liens.
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(b) Except as set forth in Section 4.09(b) of the ViaGrafix Disclosure
Schedule, all material tangible items of Personal Property necessary for the
operation or conduct of the businesses of ViaGrafix and the ViaGrafix
Subsidiaries as currently conducted are in reasonably good maintenance,
operating condition and repair, normal wear and tear excepted, other than
machinery and equipment under repair or out of service in the ordinary course of
business.
(c) Except as set forth in Section 4.09(c) of the ViaGrafix Disclosure
Schedule, the accounts receivable reflected on the ViaGrafix Financial
Statements are valid receivables arising in the ordinary course of business and
not subject to any valid counterclaims or setoffs, except for products returned
or exchanged in ViaGrafix's ordinary course of business for which there has been
or will have been a reserve established consistently with past practice.
SECTION 4.10. REAL PROPERTY.
(a) As used in this Agreement, the term "ViaGrafix Real Property" shall mean
all real property and interests in real property leased or owned by ViaGrafix or
any ViaGrafix Subsidiary. Section 4.10(a) of the ViaGrafix Disclosure Schedule
lists all ViaGrafix Real Property. Except as set forth in Section 4.10(a) of the
ViaGrafix Disclosure Schedule, the ViaGrafix Real Property constitutes all of
the real property and interests in real property used in the conduct of the
businesses of ViaGrafix and the ViaGrafix Subsidiaries.
(b) As used in this Agreement, the term "ViaGrafix Real Estate Permitted
Liens" shall mean:
(i) All building codes and zoning ordinances and other laws, ordinances,
regulations, rules, orders or determinations of any federal, state, county,
municipal or other governmental authority heretofore, now or hereafter
enacted, made or issued by any such governmental authority affecting the
ViaGrafix Real Property;
(ii) All easements, rights-of-way, covenants, conditions, restrictions,
reservations, licenses, agreements and other similar matters which do not
materially impair the use of the ViaGrafix Real Property to which they
relate;
(iii) All electric power, telephone, gas, sanitary sewer, storm sewer,
water, steam, compressed air and other utility lines, pipelines, service
lines and similar facilities now located on, over or under the ViaGrafix
Real Property, and all licenses, easements, flowage rights, rights-of-way
and other similar agreements relating thereto granted in the ordinary course
of business; and
(iv) All existing public and private roads and the streets (whether
dedicated or undedicated), and all railroad lines and rights-of-way
affecting the ViaGrafix Real Property.
(c) Except as set forth in Section 4.10(c) of the ViaGrafix Disclosure
Schedule, ViaGrafix and the ViaGrafix Subsidiaries have, to ViaGrafix's
knowledge, valid leasehold interests in all ViaGrafix Real Property leased by
them, in each case, free and clear of all mortgages, Liens, security interests,
easements, covenants, rights-of-way and other encumbrances or restrictions of
any nature created by ViaGrafix, except for Permitted Liens and ViaGrafix Real
Estate Permitted Liens which, individually or in the aggregate, would not have a
ViaGrafix Material Adverse Effect.
(d) To ViaGrafix's knowledge and except as set forth in Section 4.10(d) of
the ViaGrafix Disclosure Schedule, there are no condemnation proceedings or
eminent domain proceedings of any kind pending or threatened against the
ViaGrafix Real Property.
(e) To ViaGrafix's knowledge and except as set forth in Section 4.10(e) of
the ViaGrafix Disclosure Schedule, all of the ViaGrafix Real Property is
occupied under a valid and current certificate of occupancy or similar permit,
the transactions contemplated by this Agreement will not require the issuance of
any new or amended certificate of occupancy and there are no facts which
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would prevent the ViaGrafix Real Property from being occupied after the Closing
Date in the same manner as before.
(f) To ViaGrafix's knowledge and except as set forth in Section 4.10(f) of
the ViaGrafix Disclosure Schedule, all improvements on the ViaGrafix Real
Property were constructed in compliance with all applicable federal, state,
local or foreign statutes, laws, ordinances, regulations, rules, codes, orders
or requirements (including, but not limited to, any building, zoning or
environmental laws or codes) affecting such property, except where the failure
to be in compliance would not, individually or in the aggregate, impair the
value or interfere with the present use of such ViaGrafix Real Property or
otherwise impair business operations.
(g) To ViaGrafix's knowledge and except as set forth in Section 4.10(g) of
the ViaGrafix Disclosure Schedule, all improvements on the ViaGrafix Real
Property and the present use and conditions thereof do not violate any
applicable deed restrictions or other applicable covenants, restrictions,
agreements, existing site plan approvals, zoning or subdivision regulations or
urban redevelopment plans as modified by any duly issued variances, and no
permits, licenses or certificates pertaining to the ownership or operation of
all improvements on the ViaGrafix Real Property, other than those which are
transferable with the ViaGrafix Real Property, are required by any governmental
agency having jurisdiction over the ViaGrafix Real Property.
(h) To ViaGrafix's knowledge and except as set forth in Section 4.10(h) of
the ViaGrafix Disclosure Schedule, all improvements on the ViaGrafix Real
Property are structurally sound in all material respects and in reasonably good
maintenance and repair, normal wear and tear excepted.
SECTION 4.11. INTELLECTUAL PROPERTY.
(a) Section 4.11(a) of the ViaGrafix Disclosure Schedule sets forth a
complete list of all Industrial Property owned, filed or licensed by ViaGrafix
or any ViaGrafix Subsidiary and, with respect to registered trademarks, all
jurisdictions in which such trademarks are registered.
(b) Except as set forth in Section 4.11(b) of the ViaGrafix Disclosure
Schedule, (i) to ViaGrafix's knowledge, the consummation of the transactions
contemplated by this Agreement will not materially impair any right to use any
of its Intellectual Property, (ii) except as would not have a ViaGrafix Material
Adverse Effect, all Intellectual Property owned by ViaGrafix or any ViaGrafix
Subsidiary is owned by ViaGrafix or such ViaGrafix Subsidiary free and clear of
all Liens, (iii) except as would not have a ViaGrafix Material Adverse Effect,
ViaGrafix and the ViaGrafix Subsidiaries own or have the right to use all of the
Intellectual Property used in the conduct of their businesses, and (iv) no
claims have been asserted of which ViaGrafix or any ViaGrafix Subsidiary has
been given written notice by any person with respect to the ownership or use by
ViaGrafix or any ViaGrafix Subsidiary of the Intellectual Property, except those
claims (if any) which, if adversely determined, would not have a ViaGrafix
Material Adverse Effect.
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SECTION 4.12. LITIGATION.
Except as set forth in Section 4.12 of the ViaGrafix Disclosure Schedule,
there are no claims, actions, suits, investigations or proceedings pending, or,
to the knowledge of ViaGrafix, threatened in writing against or affecting
ViaGrafix, any ViaGrafix Subsidiary or their respective assets, at law or in
equity, by or before any Governmental Authority, or by or on behalf of any third
party, which, if adversely determined, would have a ViaGrafix Material Adverse
Effect. Except as set forth in Section 4.12 of the ViaGrafix Disclosure
Schedule, ViaGrafix has not received any notice that ViaGrafix, any ViaGrafix
Subsidiary or any of their respective assets is subject to any material decree,
order or judgment.
SECTION 4.13. EMPLOYEE BENEFIT PLANS.
(a) Section 4.13(a) of the ViaGrafix Disclosure Schedule sets forth an
accurate and complete list of each bonus or incentive compensation arrangement
involving payment of $10,000 or more per annum to one person, deferred
compensation, excess benefit, pension, retirement, profit sharing, stock bonus,
thrift, stock option, stock ownership, stock appreciation right, stock purchase,
foreign employee benefit, cafeteria, life insurance, survivor or death benefit,
sickness or accident, business travel accident, health, medical, dental, vision,
hospitalization, savings, holiday, vacation, salary continuation, severance pay,
change of control payments, sick pay, leave of absence, disability, tuition
reimbursement, service award, dependent care assistance, legal assistance,
fringe benefit (cash and non-cash) or any other employee or executive benefit
plan, contract, agreement, practice, policy or arrangement, including, without
limitation, any such plan, contract, agreement, practice, policy or arrangement
which is an "employee benefit plan" as defined in Section 3(3) of ERISA, which
benefits, covers or relates to any current or former employee, director,
consultant, independent contractor, or officer of ViaGrafix or any ViaGrafix
Subsidiary (each such plan, contract, agreement, practice, policy or arrangement
is hereinafter referred to individually as a "ViaGrafix Plan" and collectively
as the "ViaGrafix Plans").
(b) With respect to each ViaGrafix Plan, ViaGrafix has delivered to 7th
Level a current, accurate and complete copy of such plan (or, to the extent no
such copy exists, an accurate description thereof) and, to the extent applicable
to each such plan, a copy of: (i) any trust agreement or other funding
instrument; (ii) the most recent determination letter; (iii) any summary plan
description and other written communications (or a description of any oral
communications) by ViaGrafix or the applicable ViaGrafix Subsidiary to its
employees concerning the extent of the benefits provided under such plan; and
(iv) for the most recent plan year of such plan (A) the Form 5500 and attached
schedules, (B) audited financial statements and (C) actuarial valuation reports.
(c) Neither ViaGrafix nor any ViaGrafix Subsidiary is contributing, or has
in the past contributed to, nor has incurred any liability in respect of, any
multiemployer plan within the meaning of Section 3(3) of ERISA, any multiple
employer plan described in Section 413 (c) of the Code or any multiple employer
welfare plan within the meaning of Section 3(40) of ERISA.
(d) Except as set forth in Section 4.13(d) of the ViaGrafix Disclosure
Schedule, (i) for each ViaGrafix Plan that is intended to be qualified within
the meaning of Section 401(a) of the Code, (A) the plan is so qualified, (B)
ViaGrafix, or the applicable ViaGrafix Subsidiary, has obtained a favorable
determination letter from the IRS to such effect, and such plan has been timely
amended to reflect any provisions which the IRS required to be included in such
plan as a condition to issuing such determination letter, (C) nothing has
occurred, whether by action or inaction, that could reasonably be expected to
cause the loss of such qualification, and (D) to the knowledge of ViaGrafix, or
the applicable ViaGrafix Subsidiary, such determination letter has not been
revoked by the IRS nor has the IRS given any written notice to ViaGrafix, or the
applicable ViaGrafix Subsidiary, that it intends to revoke such determination
letter, (ii) each ViaGrafix Plan, other than a plan described in (i), that is
intended to qualify for special tax treatment under any provision of the Code
is, and at all times since
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its inception, has been, in compliance with all conditions necessary for such
plan to so qualify, (iii) all returns, reports, notices and other documents
required to be filed with the IRS, the Department of Labor, the Pension Benefit
Guaranty Corporation or any other governmental agency, or distributed to plan
participants or beneficiaries (including, but not limited to, annual reports in
the 5500 series, summary annual reports and tax returns) with respect to each
ViaGrafix Plan have been timely filed or distributed, (iv) each ViaGrafix Plan
is in compliance in all material respects with (a) the terms and the applicable
governing document thereof and (b) the applicable requirements prescribed by all
statues, orders or governmental rules or regulations currently in effect with
respect to such plan, including, but not limited to, ERISA and the Code, (v) all
contributions to each ViaGrafix Plan (including both employee and employer
contributions) which are required to have been made, whether by virtue of the
terms of the particular plan or by operation of law, have been made by the due
date thereof (including all applicable extensions), and all contributions to the
ViaGrafix Plans which are not yet due but which relate to periods which began
prior to the Closing Date have either been paid or have been appropriately
reflected by ViaGrafix as an accrued liability in its Financial Statements, (vi)
no ViaGrafix Plan that is a funded pension plan and no trust established
thereunder has any accumulated funding deficiency within the meaning of Section
302(a) of ERISA or Section 412 of the Code (whether or not waived), (vii) no
reportable event within the meaning of Section 4043 of ERISA (other than any
such event for which the notice requirement has been waived by the regulations
under Section 4043 of ERISA) or "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code has occurred, and no material
tax has been imposed pursuant to Section 4975 or Section 4976 of the Code, with
respect to any ViaGrafix Plan, (viii) no governmental agency, including the IRS,
the Department of Labor or the PBGC, has initiated an examination or audit, or,
to the knowledge of ViaGrafix or any ViaGrafix Subsidiary, an investigation of a
ViaGrafix Plan which has not been completed, (ix) neither ViaGrafix nor any
ViaGrafix Subsidiary has incurred any liability to the PBGC, or has had any
penalty or Lien imposed on it in favor of the PBGC, with respect to any
ViaGrafix Plan which is subject to Title IV of ERISA other than liability for
routine premiums for which adequate provision has been made in the ViaGrafix
Financial Statements in accordance with GAAP and (x) neither ViaGrafix or any
ViaGrafix Subsidiary has any knowledge as to the existence of any state of
facts, or as to the occurrence of any event or transaction, pertaining to or
involving a ViaGrafix Plan that might reasonably be anticipated to result in any
liability, or the imposition of a penalty or Lien, of or on ViaGrafix or any
ViaGrafix Subsidiary to the PBGC under any provision of Title IV of ERISA.
(e) Except as set forth in Section 4.13(e) of the ViaGrafix Disclosure
Schedule, there are no claims, suits or actions pending or, to the knowledge of
ViaGrafix or any ViaGrafix Subsidiary, threatened against any of the ViaGrafix
Plans, by any employee or beneficiary covered under any such ViaGrafix Plan, or
otherwise involving any such ViaGrafix Plan (other than routine claims for
benefits).
(f) With respect to each ViaGrafix Plan that is subject to Title IV of
ERISA, as of the Closing Date, the assets of each such ViaGrafix Plan are at
least equal in value to the present value of the accrued benefits (vested and
unvested) of the participants in such ViaGrafix Plan on a termination basis,
based on the actuarial methods and assumptions indicated in the most recent
actuarial valuation reports for such plan.
(g) Except as disclosed in Section 4.13(g) of the ViaGrafix Disclosure
Schedule, the execution and delivery of the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby will not cause
any payment (whether of severance pay or otherwise) not otherwise due to become
due from any of the ViaGrafix Plans, or from ViaGrafix or any ViaGrafix
Subsidiary with respect to any of the ViaGrafix Plans, to any individual, or
cause the vesting, acceleration of payment, or increase in the amount of any
benefit payable under any of the ViaGrafix Plans to any individual.
(h) Except as disclosed in Section 4.13(h) of the ViaGrafix Disclosure
Schedule, any hospital, medical, dental, vision, sickness or accident, survivor
or death benefit, disability or similar benefit
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coverage provided under any ViaGrafix Plan is provided solely through insurance
policies, and in addition (i) no ViaGrafix Plan provides for hospital, medical,
death, survivor or any other welfare benefit for retired or former employees,
officers, directors, consultants or independent contractors, except as required
by Section 4980B of the Code or Sections 601 to 608 of ERISA, and (ii) no
ViaGrafix Plan is an unfunded plan of deferred compensation.
(i) Except as disclosed in Section 4.13 (i) of the ViaGrafix Disclosure
Schedule, neither ViaGrafix or any ViaGrafix Subsidiary is under any obligation
(express or implied) to modify any ViaGrafix Plan or to establish any additional
employee benefit plan.
(j) ViaGrafix's Financial Statements reflect the approximate total pension,
medical and other benefit liability and expense for all ViaGrafix Plans, and no
material funding changes or irregularities are reflected thereon which would
cause such financial statements to be not representative of any prior period.
(k) No entity (other than ViaGrafix or any ViaGrafix Subsidiary), which is
treated as a single employer with ViaGrafix or any ViaGrafix Subsidiary under
Section 414(b),(c),(m), or (o) of the Code, sponsors, maintains or contributes
to any employee benefit plan with respect to which any material liability (other
than for routine contributions or benefit payments), penalty or tax has been
incurred, or with respect to which any Lien has been imposed.
SECTION 4.14. TAXES.
(a) Except as set forth in Section 4.14 of the ViaGrafix Disclosure
Schedule:
(i) ViaGrafix or one of its affiliates has accurately prepared and
timely filed (after giving effect to applicable extensions) with the
appropriate taxing authorities all material Tax Returns required to be filed
by or with respect to ViaGrafix under all applicable laws and the ViaGrafix
Subsidiaries and such Tax Returns are true, correct and complete in all
material respects;
(ii) ViaGrafix or one of its affiliates has properly and fully paid to
the extent due and payable or made adequate provision in the case of Taxes
not yet due and payable in the ViaGrafix Financial Statements in accordance
with GAAP for the payment of all Taxes of ViaGrafix and the ViaGrafix
Subsidiaries shown to be due on such Tax Returns or that are otherwise
required to be paid by ViaGrafix or any ViaGrafix Subsidiary in the case of
Taxes payable or anticipated to be payable on account of the operations,
acts or omissions of ViaGrafix and all ViaGrafix Subsidiaries for any and
all periods through the date of reference;
(iii) no waivers of statutes of limitation have been given or requested
with respect to ViaGrafix or any ViaGrafix Subsidiary which are currently in
force in connection with any Tax Returns covering ViaGrafix or any ViaGrafix
Subsidiary with respect to any Taxes payable by them;
(iv) ViaGrafix has or has caused to be duly and timely withheld and has
paid over or deposited in a proper and timely manner to the appropriate
taxing authorities all Taxes required to be so withheld and paid over in
connection with amounts paid or owing to any employee, independent
contractor, stockholder, claimant or other party for all periods under all
Applicable Laws;
(v) neither ViaGrafix nor any ViaGrafix Subsidiary is a party to any tax
sharing or similar agreement or arrangement pursuant to which it will have
any obligation to make any payments after the Closing other than to
ViaGrafix or any ViaGrafix Subsidiary and neither ViaGrafix nor any
ViaGrafix Subsidiary could be liable for the Taxes of any other person
(other than ViaGrafix or a ViaGrafix Subsidiary) as a "transferee" within
the meaning of Section 6901 of the Code, by reason of Treasury Regulation
Section 1.1502-6 or any provision of state, local or foreign law, as a
successor, by contract or otherwise;
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(vi) there are no Liens with respect to Taxes (except for Liens for
Taxes which are not yet delinquent) upon any assets of ViaGrafix or any
ViaGrafix Subsidiary;
(vii) all material Tax Returns filed by or on behalf of ViaGrafix or any
ViaGrafix Subsidiary have been examined by the relevant taxing authorities
or the statute of limitations with respect to such Tax Returns has expired,
all deficiencies asserted or assessments made as a result of any examination
by the IRS or any other taxing authority of the Tax Returns of or covering
ViaGrafix or any ViaGrafix Subsidiary have been fully paid, and there are no
unpaid deficiencies asserted or assessments made by any taxing authority for
which ViaGrafix or any ViaGrafix Subsidiary may be liable, and no issue has
been asserted by the IRS or other taxing authority in any such examination
in writing which, by application of the same or similar principles,
reasonably could be expected to result in a Tax deficiency for any other
taxable period not so examined, and any adjustment in Taxes made by one tax
authority and required to be reported to any other taxing authority has been
so reported;
(viii) neither ViaGrafix nor any ViaGrafix Subsidiary has received any
written notice of deficiency or assessment or has any actual knowledge of
any proposed deficiency or assessment from any federal, state, local or
other taxing authority with respect to liabilities for which ViaGrafix or
any ViaGrafix Subsidiary may be liable nor is any examination of any Tax
Return of ViaGrafix or any ViaGrafix Subsidiary being conducted by any such
taxing authority and no notification of intention to examine any Tax Return
has been received from any such tax authority;
(ix) neither ViaGrafix, any ViaGrafix Subsidiary nor any person on their
respective behalf has (A) executed or entered into a closing agreement
pursuant to Section 7121 of the Code or any predecessor provision thereof or
any similar provision of state, local or foreign law, (B) agreed to or is
required to make any adjustment pursuant to Section 481(a) of the Code or
any similar provision of state, local or foreign law by reason of a change
in accounting method initiated by ViaGrafix or any ViaGrafix Subsidiary or
has any actual knowledge that the IRS has proposed any such adjustment or
change in accounting method, or has an application pending with any taxing
authority requesting permission for any changes in accounting methods that
relate to the subject business or operations of ViaGrafix or any ViaGrafix
Subsidiary or (C) granted any power of attorney with respect to any matter
involving Taxes which is currently in force;
(x) no claim has been made by any taxing jurisdiction where ViaGrafix
does not file Tax Returns that ViaGrafix or any ViaGrafix Subsidiary is or
may be subject to taxation by that jurisdiction;
(xi) no indebtedness of ViaGrafix or any ViaGrafix Subsidiary consists
of "corporate acquisition indebtedness" within the meaning of Section 279 of
the Code;
(xii) neither ViaGrafix nor any ViaGrafix Subsidiary has filed an
election, consent or agreement under Section 341(f) of the Code;
(xiii) neither ViaGrafix nor any ViaGrafix Subsidiary is a "loss
corporation" within the meaning of Section 382(k)(1) of the Code;
(xiv) no property of ViaGrafix or any ViaGrafix Subsidiary is
"tax-exempt use property" within the meaning of Section 168(h) of the Code;
(xv) neither ViaGrafix nor any ViaGrafix Subsidiary is a "United States
real property holding corporation" within the meaning of Section 897(c)(2)
of the Code;
(xvi) neither ViaGrafix nor any ViaGrafix Subsidiary is a party to any
agreement which would require ViaGrafix or any ViaGrafix Subsidiary, as a
result of the change in ownership of effective control of ViaGrafix or any
ViaGrafix Subsidiary resulting from transactions contemplated by this
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Agreement, to make any payment which would constitute a "parachute payment"
for purposes of Sections 280G and 4999 of the Code; and
(xvii) neither ViaGrafix nor any ViaGrafix Subsidiary have ever
participated in, or cooperated with, an international boycott within the
meaning of Section 999 of the Code.
(b) ViaGrafix has provided 7th Level with copies of: (i) all Tax Returns of
ViaGrafix and the ViaGrafix Subsidiaries for all periods (including periods for
which ViaGrafix or any ViaGrafix Subsidiary is or may have been a member of
another consolidated, combined or unitary group) with respect to which the
statute of limitations on assessment has not expired; (ii) any notices, protests
or closing agreements relating to issues arising, or potentially arising, in any
audit, litigation or similar proceeding with respect to the liability for Taxes
of ViaGrafix or any ViaGrafix Subsidiary; (iii) any elections or disclosure of
any controversial position filed by or on behalf of ViaGrafix or any ViaGrafix
Subsidiary with any taxing authority (whether or not filed with any Tax Return);
(iv) any letter rulings, determination letters or similar documents issued by
any taxing authority with respect to ViaGrafix or any ViaGrafix Subsidiary; and
(v) any Tax sharing or similar agreement or arrangement (whether or not written)
to which ViaGrafix or any ViaGrafix Subsidiary is or has been a party.
SECTION 4.15. CONTRACTS AND COMMITMENTS.
Section 4.15 of the ViaGrafix Disclosure Schedule sets forth a list of all
material agreements, Contracts and commitments to which ViaGrafix or any
ViaGrafix Subsidiary is a party or by which ViaGrafix, any ViaGrafix Subsidiary
or their respective assets are bound (each, a "ViaGrafix Material Contract"),
including, without limitation:
(a) agreements, contracts, commitments or arrangements involving
ViaGrafix's Intellectual Property;
(b) employment agreements or severance agreements or employee
termination arrangements that are not terminable at will by ViaGrafix or a
ViaGrafix Subsidiary without penalty;
(c) any change of control agreements with employees of ViaGrafix or any
ViaGrafix Subsidiary;
(d) agreements, contracts, commitments or arrangements containing any
covenant limiting the ability of ViaGrafix or any ViaGrafix Subsidiary to
engage in any line of business or to compete with any business or person;
(e) agreements or contracts with any officer, director or employee of
(i) ViaGrafix or (ii) any ViaGrafix Subsidiary (other than employment,
severance and change of control agreements covered by clause (b) or (c)
above);
(f) agreements or contracts under which ViaGrafix or any ViaGrafix
Subsidiary has borrowed or loaned money, or any note, bond, indenture,
mortgage, installment obligation or other evidence of indebtedness for
borrowed or loaned money or any guarantee of such indebtedness, in each
case, relating to amounts in excess of $25,000;
(g) joint venture agreements or other agreements involving the sharing
of profits;
(h) leases pursuant to which personal or real property is leased to or
from ViaGrafix or any ViaGrafix Subsidiary;
(i) powers of attorney from ViaGrafix or any ViaGrafix Subsidiary;
(j) guaranties, suretyships or other contingent agreements of ViaGrafix
or any ViaGrafix Subsidiary;
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(k) any agreement, contract, commitment or arrangement relating to
capital expenditures with respect to ViaGrafix or any ViaGrafix Subsidiary
and involving future payments which exceed $100,000 in any 12-month period;
(l) any agreement, contract, commitment or arrangement relating to the
acquisition of assets (other than in the ordinary course of business
consistent with past practice) or any capital stock of any business
enterprise;
(m) contracts (other than those covered by clause (a) through (l) above)
pursuant to which ViaGrafix and the ViaGrafix Subsidiaries will receive or
pay in excess of $100,000 over the life of the contract; and
(n) any other material agreements, Contracts and commitments whether or
not entered into in the ordinary course of business.
Except as set forth in Section 4.15 of the ViaGrafix Disclosure Schedule,
neither ViaGrafix, any ViaGrafix Subsidiary nor, to the knowledge of ViaGrafix,
any other party thereto, is in material breach of or in material default under
any ViaGrafix Material Contract. Each such ViaGrafix Material Contract is in
full force and effect, and is a legal, valid and binding obligation of ViaGrafix
and/or the applicable ViaGrafix Subsidiaries and, to the knowledge of ViaGrafix,
each of the other parties thereto, enforceable in accordance with its terms.
SECTION 4.16. COMPLIANCE WITH LAWS.
Except as set forth in Section 4.16 of the ViaGrafix Disclosure Schedule, to
ViaGrafix's knowledge, ViaGrafix and the ViaGrafix Subsidiaries are in
compliance with all Applicable Laws and all Orders of, and agreements with, any
Governmental Authority applicable to ViaGrafix, any ViaGrafix Subsidiary or any
of their respective assets, except for laws the violation of which, individually
or in the aggregate, would not have a ViaGrafix Material Adverse Effect. Except
as set forth in Section 4.16 of the ViaGrafix Disclosure Schedule, ViaGrafix and
the ViaGrafix Subsidiaries have all permits, certificates, licenses, approvals
and other authorizations required under Applicable Laws or necessary in
connection with the conduct of their businesses, except where the failure to
hold such permit, certificate, license, approval or authorization would not,
individually or in aggregate, have a ViaGrafix Material Adverse Effect.
SECTION 4.17. INSURANCE.
Except as set forth in Section 4.17 of the ViaGrafix Disclosure Schedule,
ViaGrafix and the ViaGrafix Subsidiaries maintain policies of fire and casualty,
liability and other forms of insurance in such amounts, with such deductibles
and retained amounts, and against such risks and losses, as are, in the
reasonable judgment of ViaGrafix, reasonable for the conduct of their businesses
and their assets. Section 4.17 of the ViaGrafix Disclosure Schedule sets forth a
list of such insurance policies, to ViaGrafix's knowledge, based on a report by
ViaGrafix's insurance broker, as are in full force and effect as of the date of
this Agreement, which policies ViaGrafix shall maintain in full force and effect
during the period from the date of this Agreement through the Closing Date.
SECTION 4.18. LABOR MATTERS.
Except as set forth in Section 4.18 of the ViaGrafix Disclosure Schedule,
(a) to ViaGrafix's knowledge, ViaGrafix and the ViaGrafix Subsidiaries are in
substantial compliance with all Applicable Laws regarding employment and
employment practices, (b) there is no unfair labor practice charge or complaint
against ViaGrafix nor any ViaGrafix Subsidiary pending before the National Labor
Relations Board nor is there any material grievance nor any material arbitration
proceeding arising out of or under collective bargaining agreements pending or,
to ViaGrafix's knowledge, threatened with respect
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to the businesses of ViaGrafix and the ViaGrafix Subsidiaries, (c) there is no
labor strike, slowdown, work stoppage or lockout in effect, or, to the knowledge
of ViaGrafix, threatened against or otherwise affecting ViaGrafix or any
ViaGrafix Subsidiary, and ViaGrafix and the ViaGrafix Subsidiaries have not
experienced any such labor controversy within the past five years, (d) there is
no material charge or complaint pending or, to ViaGrafix's knowledge, threatened
against ViaGrafix or any ViaGrafix Subsidiary before the Equal Employment
Opportunity Commission, the Office of Federal Contract Compliance Programs or
any similar state, local or foreign agency responsible for the prevention of
unlawful employment practices, (e) neither ViaGrafix nor any ViaGrafix
Subsidiary is a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority relating to employees or employment
practices, (f) ViaGrafix and the ViaGrafix Subsidiaries will not have any
material liability under any benefit or severance policy, practice, agreement,
plan, or program which exists or arises, or may be deemed to exist or arise,
under any Applicable Law or otherwise, as a result of the transactions
contemplated hereunder, (g) neither ViaGrafix nor any ViaGrafix Subsidiary is a
party to any collective bargaining agreement, and (h) ViaGrafix and the
ViaGrafix Subsidiaries are in compliance with its obligations pursuant to the
WARN Act, and, except as would not have a ViaGrafix Material Adverse Effect, all
other notification and bargaining obligations arising under any collective
bargaining agreement, statute or otherwise. To the knowledge of ViaGrafix,
neither ViaGrafix nor any ViaGrafix Subsidiary has received written notice of
the intent of any federal, state, local or foreign agency responsible for the
enforcement of employment laws to conduct an investigation of or relating to
ViaGrafix or any ViaGrafix Subsidiary, and no such investigation is in progress.
SECTION 4.19. ENVIRONMENTAL MATTERS.
Except as set forth in Section 4.19 of the ViaGrafix Disclosure Schedule,
(i) neither ViaGrafix nor any ViaGrafix Subsidiary has, as of the date hereof,
received any written notice alleging the material violation of, or any material
actual or potential liability relating to, any Environmental Laws, which
violation has not been resolved and, to the knowledge of ViaGrafix, no such
notice is threatened or otherwise expected; (ii) to ViaGrafix's knowledge,
ViaGrafix and the ViaGrafix Subsidiaries are and have been in material
compliance with all applicable Environmental Laws and, to the knowledge of
ViaGrafix, there is no condition that would likely prevent or materially
interfere with such compliance in the future; (iii) to ViaGrafix's knowledge,
ViaGrafix and the ViaGrafix Subsidiaries have obtained and are and have been in
material compliance with all required governmental environmental permits,
registrations and authorizations with respect to the businesses of ViaGrafix and
the ViaGrafix Subsidiaries; (iv) to ViaGrafix's knowledge, no Hazardous
Substance has been transported, stored, treated or disposed of by ViaGrafix or
any ViaGrafix Subsidiary on the real estate owned, operated or otherwise used by
ViaGrafix or any ViaGrafix Subsidiary or at any other location, except as would
not result in material liability under any applicable Environmental Laws; (v)
neither ViaGrafix nor any ViaGrafix Subsidiary has assumed, contractually or by
operation of law, any liabilities, potential liabilities or obligations of any
other person or entity under any applicable Environmental Laws; (vi) neither
ViaGrafix nor any ViaGrafix Subsidiary has entered into, agreed to, or is
subject to any judgment, decree, order or other similar requirement of any
governmental authority under any Environmental Laws; (vii) to ViaGrafix's
knowledge, there are no (w) underground or aboveground storage tanks, (x)
surface impoundments, (y) landfills or (z) sewer or septic systems currently
present at or about any of the properties or facilities currently or, to the
knowledge of ViaGrafix, formerly owned, operated or otherwise used by ViaGrafix
or any ViaGrafix Subsidiary that would be reasonably likely to result in
material liability to ViaGrafix or any ViaGrafix Subsidiary under any applicable
Environmental Laws; and (viii) to ViaGrafix's knowledge, there are no actions,
activities, events, conditions or circumstances occurring or, to the knowledge
of ViaGrafix, existing during the time of ViaGrafix's or any ViaGrafix
Subsidiary's operations and ownership of its properties or, to the knowledge of
ViaGrafix, prior to such time, including without limitation the release,
threatened release, emission, discharge, generation, treatment, storage or
disposal of Hazardous Substances, that would be
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reasonably likely to result in any material liability or obligation of ViaGrafix
or any ViaGrafix Subsidiary under or relating to any Environmental Laws except,
in each case, which would not be reasonably likely to have a ViaGrafix Material
Adverse Effect.
SECTION 4.20. TRANSACTIONS WITH AFFILIATES.
Except as disclosed in Section 4.15 or 4.20 of the ViaGrafix Disclosure
Schedule there are no Contracts, agreements or arrangements between ViaGrafix
(or the ViaGrafix Subsidiaries) and any officer, director or affiliate of
ViaGrafix (or the ViaGrafix Subsidiaries) or beneficial owner of 10% or more of
the ViaGrafix Common Stock.
SECTION 4.21. BROKERS.
No broker, finder or financial advisor or other person is entitled to any
brokerage fees, commissions, finders' fees or financial advisory fees in
connection with the transactions contemplated hereby by reason of any action
taken by ViaGrafix or any of their respective directors, officers, employees,
representatives or agents, except for the fees and expenses set forth in Section
4.21 of the ViaGrafix Disclosure Schedule.
SECTION 4.22. CERTAIN AGREEMENTS.
Except as set forth in Schedule 4.22 of the ViaGrafix Disclosure Schedule,
neither ViaGrafix nor any ViaGrafix Subsidiary is a party to any: (i) agreement
with any director, officer or other employee of ViaGrafix or any ViaGrafix
Subsidiary, the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving ViaGrafix of
the nature contemplated by this Agreement; or (ii) agreement or plan (including
ViaGrafix Plans), any of the benefits of or rights under which will be
increased, or the vesting or payment of the benefits of or rights under which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. No holder of any option to purchase shares of ViaGrafix Common Stock
or shares of ViaGrafix Common Stock granted in connection with the performance
of services for ViaGrafix is or will be entitled to receive cash from ViaGrafix
in lieu of or in exchange for such option or shares solely as a result of the
transactions contemplated by this Agreement, other than the receipt of cash in
lieu of fractional shares.
SECTION 4.23. ABSENCE OF CERTAIN COMMERCIAL PRACTICES.
Neither ViaGrafix nor any ViaGrafix Subsidiary, nor, to the knowledge of
ViaGrafix, any director, officer, agent, employee or other person acting on
behalf of ViaGrafix or any ViaGrafix Subsidiary, has: (i) given or agreed to
give any gift or similar benefit of more than nominal value to any customer,
supplier, or governmental employee or official or any other person who is or may
be in a position to help or hinder ViaGrafix or any ViaGrafix Subsidiary or
assist ViaGrafix or any ViaGrafix Subsidiary in connection with any proposed
transaction, which gift or similar benefit, if not given in the past, might have
materially and adversely affected the business or prospects of ViaGrafix or any
ViaGrafix Subsidiary, or which, if not continued in the future, might materially
and adversely affect the business or prospects of ViaGrafix or any ViaGrafix
Subsidiary; or (ii) used any corporate or other funds for unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
contributions, payments, gifts, or entertainment, or made any unlawful
expenditures relating to political activity to government officials or others or
established or maintained any unlawful or unrecorded funds in violation of
Section 30A of the Exchange Act. Neither ViaGrafix nor any ViaGrafix Subsidiary,
nor, to the knowledge of ViaGrafix, any director, officer, agent, employee or
other person acting on behalf of ViaGrafix or any ViaGrafix Subsidiary, has
accepted or received any unlawful contributions, payments, gifts or
expenditures.
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SECTION 4.24. YEAR 2000 ISSUES.
Any failure of any System, that are material to the operation of ViaGrafix
or any ViaGrafix Subsidiary, to be Year 2000 Compliant will not cause a
ViaGrafix Material Adverse Effect except as set forth in Section 4.24 of the
ViaGrafix Disclosure Schedule.
SECTION 4.25. BOOKS AND RECORDS.
The books of account, minute books, stock record books and other records of
ViaGrafix and the ViaGrafix Subsidiaries, all of which have been made available
to ViaGrafix, are complete and correct in all material respects and have been
maintained in accordance with sound business practices in all material respects.
SECTION 4.26. OPINION OF FINANCIAL ADVISOR.
ViaGrafix has received the opinion of Point West Securities, LLC, dated the
date hereof, to the effect that, as of such date, the Conversion Ratio is fair
to ViaGrafix's stockholders from a financial point of view.
SECTION 4.27. TAKEOVER STATUTES.
No Takeover Statute, applicable to ViaGrafix or any ViaGrafix Subsidiary, is
applicable to the Merger or the other transactions contemplated hereby.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF
BUSINESS PENDING THE MERGER
During the period from the date of this Agreement and continuing until the
Effective Time, each of ViaGrafix and 7th Level agrees as to itself and the
ViaGrafix Subsidiaries and the 7th Level Subsidiaries, respectively
(collectively, "Subsidiaries"), that except as expressly contemplated or
permitted by this Agreement, as disclosed in Section 5.01 of the ViaGrafix
Disclosure Schedule or the 7th Level Disclosure Schedule, as applicable, or to
the extent that the other party shall otherwise consent in writing:
SECTION 5.01. ORDINARY COURSE.
Except as otherwise provided for in this Section 5.01, its business and the
businesses of its Subsidiaries shall be conducted only in the ordinary course of
business and in a manner consistent with past practice. Except as otherwise
provided for herein, it shall use commercially reasonable efforts to preserve
substantially intact the business organization of itself and its Subsidiaries,
to keep available the services of its present officers, employees and
consultants and to preserve its present relationships with customers, suppliers
and other persons with which it has a significant business relationship.
SECTION 5.02. GOVERNING DOCUMENTS.
It shall not amend or propose to amend its certificate of incorporation or
by-laws or equivalent organizational documents except as contemplated in this
Agreement.
SECTION 5.03. ISSUANCE OF SECURITIES.
It shall not, nor shall it permit any of its Subsidiaries to, issue,
deliver, sell, redeem, acquire, authorize or propose to issue, deliver, sell,
redeem, acquire or authorize, any shares of its capital stock of any class or
any securities convertible into, or any rights, warrants or options to acquire,
any such shares or convertible securities or other ownership interest, provided
that: (i) 7th Level shall be
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permitted to issue the shares of 7th Level Common Stock to be issued to
ViaGrafix Stockholders hereunder; (ii) each party shall be permitted to issue
shares of its common stock pursuant to the exercise of stock options, warrants
and other convertible securities outstanding as of the date hereof and listed on
the ViaGrafix Disclosure Schedule or the 7th Level Disclosure Schedule, as the
case may be; and (iii) each Subsidiary that is wholly-owned shall be permitted
to issue to its parent, shares of its capital stock of any class or any
securities convertible in, or any rights, warrants or options to acquire, any
such share or convertible securities or other ownership interest.
SECTION 5.04. DIVIDENDS; CHANGES IN STOCK.
It shall not, nor shall it permit any of its Subsidiaries to, nor shall it
propose to: (i) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock or (ii) reclassify, combine, split, subdivide or redeem,
purchase or otherwise acquire, directly or indirectly, any of its capital stock;
provided, however, that each wholly-owned Subsidiary may declare, set aside,
make or pay any dividend or other distribution, payable in cash, stock, property
or otherwise, with respect to its capital stock, to its parent.
SECTION 5.05. NO DISPOSITIONS.
Other than dispositions in the ordinary course of business consistent with
past practice which would not cause a 7th Level Material Adverse Effect or a
ViaGrafix Material Adverse Effect (as applicable), individually or in the
aggregate, to it and its Subsidiaries, taken as a whole, it shall not, nor shall
it permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose
of, or agree to sell, lease (whether such lease is an operating or capital
lease), encumber or otherwise dispose of its assets.
SECTION 5.06. CHANGE IN CONDITION.
It shall confer on a regular and frequent basis with the other corporate
party hereto, report on operational matters and promptly advise the other in
writing of any change in the condition (financial or otherwise), operations or
properties, businesses or business prospects of such party or any of the
Subsidiaries which is material to such party and/or its subsidiaries, taken as a
whole.
SECTION 5.07. NO ACTION.
It shall not, and shall not permit any of its Subsidiaries to, take or agree
or commit to take any action, (i) that is reasonably likely to make any of its
representations or warranties hereunder inaccurate; or (ii) that is prohibited
pursuant to the provisions of this Article V.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. PREPARATION OF REGISTRATION STATEMENT ON FORM S-4 INCLUDING JOINT
PROXY STATEMENT.
7th Level agrees that as promptly as practicable following the date of this
Agreement it shall prepare and file a registration statement on Form S-4 (the
"Registration Statement") including a joint proxy statement/prospectus (the
"Proxy Statement") with the SEC. Each party shall use commercially reasonable
efforts to cause the Proxy Statement to be mailed to its stockholders at the
earliest practicable date following such filing. In connection with the
foregoing, ViaGrafix shall furnish to 7th Level (and be responsible for) all
information related to it as is required to be included in the Registration
Statement. If at any time prior to the Effective Time any event with respect to
ViaGrafix or any of the ViaGrafix Subsidiaries or with respect to other
information supplied by ViaGrafix for inclusion in the Registration Statement
shall occur which is required to be described in an amendment of, or a
supplement to, the Registration Statement, ViaGrafix shall provide written
notice thereof to 7th
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Level and such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated. If,
at any time prior to the Effective Time any event with respect to 7th Level or
any of the 7th Level Subsidiaries or with respect to other information supplied
by 7th Level for inclusion in the Registration Statement shall occur, which is
required to be described in an amendment of, or a supplement to, the
Registration Statement, 7th Level shall provide written notice thereof to
ViaGrafix, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated.
SECTION 6.02. 7TH LEVEL STOCKHOLDERS MEETING.
As soon as practicable following the effectiveness of the Registration
Statement, 7th Level shall promptly take all action necessary in accordance with
the DGCL and its certificate of incorporation and by-laws to convene a meeting
of its stockholders for the purpose of approving the Merger. Except as would
constitute a breach of the fiduciary duties of the 7th Level board of directors
to the 7th Level stockholders under applicable law, 7th Level shall, through the
7th Level board of directors, recommend to the 7th Level stockholders approval
of such matters.
SECTION 6.03. VIAGRAFIX STOCKHOLDERS MEETING.
As soon as practicable following the effectiveness of the Registration
Statement, ViaGrafix shall promptly take all action necessary in accordance with
the OGCA and its certificate of incorporation and by-laws to convene a meeting
of its stockholders for the purpose of approving the Merger. Subject to Section
6.06, ViaGrafix will, through the board of directors of ViaGrafix, recommend to
the ViaGrafix stockholders approval of the transactions contemplated hereby.
SECTION 6.04. VOTING AGREEMENTS.
On the date hereof, (x) 7th Level and certain stockholders of ViaGrafix
shall enter into a voting agreement in the form attached hereto as EXHIBIT D
(the "Voting Agreement"), pursuant to which such stockholders, each listed as
signatories to the Voting Agreement, shall agree to vote in favor of the Merger
and the transactions contemplated in this Agreement and (y) ViaGrafix and
certain stockholders of 7th Level shall enter into a voting agreement in the
form attached hereto as EXHIBIT E (the "7th Level Voting Agreement"), pursuant
to which such stockholders, each listed on Section 6.04 to the 7th Level
Disclosure Schedule, shall agree to vote in favor of the Merger and the
transactions contemplated by this Agreement.
SECTION 6.05. ACCESS TO INFORMATION.
From the date hereof until the Effective Time or the earlier termination of
this Agreement, and subject to the terms of the Confidentiality Agreement dated
May 19, 1999 (the "Confidentiality Agreement") by and between 7th Level and
ViaGrafix, each party shall give the other party and its respective counsel,
accountants, representatives and agents full access, upon reasonable notice and
during normal business hours, to such party's facilities and the financial,
legal, accounting and other representatives of such party with knowledge of the
business and the assets of such party and, upon reasonable notice, shall be
furnished all relevant documents, records and other information concerning the
business, finances and properties of such party and its subsidiaries that the
other party and its respective counsel, accountants, representatives and agents,
may reasonably request. No investigation pursuant to this Section 6.05 shall
affect or be deemed to modify any of the representations or warranties hereunder
or the condition to the obligations of the parties to consummate the Merger; it
being understood that the investigation will be made for the purposes among
others of the board of directors of each party determining in its good faith
reasonable business judgment the accuracy of the representations and warranties
of the other party. In the event of the termination of this Agreement, each
party, if so requested by the other party, will return promptly every document
furnished to it by or
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on behalf of the other party in connection with the transactions contemplated
hereby, whether so obtained before or after the execution of this Agreement, and
any copies thereof (except for copies of documents publicly available) which may
have been made, and will use reasonable efforts to cause its representatives and
any representatives of financial institutions and investors and others to whom
such documents were furnished promptly to return such documents and any copies
thereof any of them may have made.
SECTION 6.06. NO SHOP; ACQUISITION PROPOSALS.
ViaGrafix shall not, nor shall it permit any of the ViaGrafix Subsidiaries
to, nor shall it authorize or permit any of its officers, directors or employees
or any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of the ViaGrafix Subsidiaries to, solicit,
initiate or encourage (including by way of furnishing information), or take any
other action to facilitate, any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any Takeover Proposal (as
hereinafter defined), or negotiate with respect to, agree to or endorse any
Takeover Proposal; provided however, that (1) nothing herein shall prohibit
ViaGrafix's board of directors from taking and disclosing to its stockholders a
position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act; and (2) if (a) an unsolicited bona fide
written Takeover Proposal shall be received by ViaGrafix's board of directors,
(b) ViaGrafix's board of directors (with the exception of Stephen Gott)
determines in good faith, after consultation with a nationally recognized
investment banking firm, that such Takeover Proposal would, if consummated,
result in a transaction substantially more favorable to ViaGrafix's stockholders
from a financial point of view than the transaction contemplated by this
Agreement and that the proposed purchaser has sufficient means of financing such
transaction in order to make a closing likely to occur (any such more favorable
Takeover Proposal being referred to herein as a "Superior Proposal"), and (c)
ViaGrafix's board of directors (with the exception of Stephen Gott) by
resolution determines in good faith, upon the advice of outside counsel, that a
failure to recommend the Superior Proposal is reasonably likely to constitute a
breach of fiduciary duties under applicable law, then ViaGrafix and its
representatives, may (consistent with the provisions hereof) furnish in
connection therewith information, enter into discussions and negotiations,
recommend such Superior Proposal to ViaGrafix's stockholders and take such other
actions as are consistent with the fiduciary obligations of ViaGrafix's board of
directors and such actions shall not be considered a breach of this Section or
any other provisions of this Agreement. ViaGrafix shall promptly advise 7th
Level orally and in writing of any such inquiries or proposals and shall
promptly advise 7th Level of any developments or changes regarding such
inquiries or proposals. As used in this Agreement, "Takeover Proposal" shall
mean any proposal for a tender or exchange offer, merger, consolidation, sale of
all or substantially all of such party's assets, sale of in excess of fifteen
percent of the shares of capital stock or other business combination involving
such party or any of the ViaGrafix subsidiaries or any proposal or offer to
acquire in any manner a substantial equity interest (including any interest
exceeding fifteen percent of the equity outstanding) in, or all or substantially
all of the assets of, such party other than the transactions contemplated by
this Agreement. ViaGrafix shall immediately cease and cause to be terminated any
existing discussions or negotiations with any persons (other than 7th Level and
Merger Corporation) conducted heretofore with respect to any Takeover Proposal.
ViaGrafix agrees not to release (by waiver or otherwise) any third party from
the provisions of any confidentiality or standstill agreement to which ViaGrafix
is a party.
SECTION 6.07. LEGAL CONDITIONS TO MERGER; REASONABLE EFFORTS.
Each of ViaGrafix, 7th Level and Merger Corporation will take all reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on itself with respect to the Merger and will promptly cooperate with
and furnish information to each other in connection with any such requirements
imposed upon any of them or any of their Subsidiaries in connection with the
Merger.
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Specifically, each of ViaGrafix, 7th Level and Merger Corporation will as
promptly as practicable file with the United States Federal Trade Commission
(the "FTC") and the United States Department of Justice (the "DOJ") the
notification and report form, if any, required by the Merger, and any
supplemental information requested in connection therewith pursuant to the HSR
Act, and make any similar filing within, to the extent reasonably practicable, a
similar time frame with any other Governmental Authority for which such filing
is required. Any such notification and report form and supplemental information
will be in substantial compliance with the requirements of the HSR Act or other
applicable antitrust regulation. Each of ViaGrafix and 7th Level shall furnish
to the other such necessary information and reasonable assistance as the other
may request in connection with its preparation of any filing or submission which
is necessary under the HSR Act or other applicable antitrust regulation.
ViaGrafix and 7th Level shall request early termination of the waiting period
under the HSR Act and any other applicable antitrust regulation; shall respond
with reasonable diligence and dispatch to any request for additional information
made in response to such filings or in information requests by any other
Governmental Authority; and shall keep each other apprised of the status of any
communications with, and inquiries or requests for additional information from
the FTC, the DOJ or any other Governmental Authority and shall comply promptly
with any inquiry or request. Each of ViaGrafix, 7th Level and Merger Corporation
will, and will cause its Subsidiaries to, take all reasonable actions necessary
to obtain (and will cooperate with each other in obtaining) any other consent,
authorization, order or approval of, or any exemption by, any Governmental
Authority or other public or private third party, required to be obtained or
made by ViaGrafix, 7th Level or any of their Subsidiaries in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
SECTION 6.08. CERTAIN FILINGS.
Each party shall cooperate with the other in (a) connection with the
preparation of the Registration Statement, (b) determining whether any action by
or in respect of, or filing with, any governmental body, agency, official or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and (c)
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith or with the
Registration Statement and seeking timely to obtain any such actions, consents,
approvals or waivers. Each party shall consult with the other in connection with
the foregoing and shall use all reasonable commercial efforts to take any steps
as may be necessary in order to obtain any consents, approvals, permits or
authorizations required in connection with the Merger.
SECTION 6.09. PUBLIC ANNOUNCEMENTS AND FILINGS.
Each party shall give the other an opportunity to comment on, and, unless
disclosure is required by applicable law, approve (which approval shall not be
unreasonably withheld), all press releases or other public communications of any
sort relating to this Agreement or the transactions contemplated hereby.
SECTION 6.10. TAX TREATMENT.
7th Level and ViaGrafix shall each report the Merger as a tax-free
reorganization and shall not take, and shall use commercially reasonable efforts
to prevent any of their respective Subsidiaries or affiliates from taking, any
actions that could prevent the Merger from qualifying, as a tax free
reorganization under the provisions of Section 368(a) of the Code.
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SECTION 6.11. VIAGRAFIX'S ARTICLES OF INCORPORATION AND BY-LAWS.
For a period of six (6) years after the Closing, 7th Level agrees that it
shall not permit any amendment to the articles of incorporation or by-laws of
ViaGrafix which would in any way limit the indemnification provisions for the
ViaGrafix officers and directors as in effect on the Closing; provided that
nothing contained in this Section 6.11 shall prohibit 7th Level from merging
ViaGrafix with and into 7th Level of any 7th Level Subsidiary, provided that
such plan and agreement of merger provides that the successor shall assume such
indemnification obligations.
SECTION 6.12. TAX RETURNS.
ViaGrafix shall prepare and file on a timely basis all Tax Returns which are
due to be filed (giving effect to any extension of time) on or prior to the
Closing Date. 7th Level shall be responsible for the preparation and filing of
all Tax Returns which are due to be filed (giving effect to any extension of
time) after the Closing Date, but ViaGrafix shall use its best efforts to
conduct its affairs such that any Tax Returns due after the Closing Date can be
filed on a timely basis.
SECTION 6.13. EMPLOYMENT AGREEMENTS.
7th Level shall enter into mutually satisfactory employment agreements with
Michael A. Webster and Robert E. Webster at the Closing (the "Employment
Agreements").
SECTION 6.14. OPTIONS.
At the Closing, 7th Level shall grant employee stock options to the persons,
and in the amount specified, on Schedule 6.14 (the "Stock Options").
SECTION 6.15. SURVIVING CORPORATION.
7th Level agrees that for so long as the lawsuit referenced in Section 4.12
of the ViaGrafix Disclosure Schedule has not been settled, finally dismissed or
otherwise finally resolved, 7th Level shall cause the Surviving Corporation to
(a) maintain and not amend the indemnification provisions contained in Article
VII of the ViaGrafix certificate of incorporation, and (b) maintain and not
amend or repeal the resolutions of (x) the independent members of the Board of
Directors of ViaGrafix and (y) the Board of Directors of ViaGrafix adopted at
the meeting on May 20, 1999 regarding certain indemnification pursuant to such
Article VII.
SECTION 6.16. EMPLOYEE BENEFITS.
7th Level intends to implement benefit plans for ViaGrafix which are as
favorable to the ViaGrafix employees as those that are enjoyed on the date
hereof.
ARTICLE VII
CONDITIONS OF THE MERGER
SECTION 7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which may
be waived, in whole or in part to the extent permitted by applicable law:
(a) STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved and adopted by the requisite
vote of the ViaGrafix stockholders. This Agreement and the transactions
contemplated herein shall have been approved by the
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requisite vote of the 7th Level stockholders and by the requisite vote of
the 7th Level Preferred Stock voting together as a single class.
(b) NO INJUNCTIONS OR RESTRAINTS. No governmental authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, execution order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
which materially restricts, prevents or prohibits consummation of the Merger
or any transaction contemplated by this Agreement; provided, however, that
the parties shall use their reasonable commercial efforts to cause any such
decree, judgment, injunction or other order to be vacated or lifted.
(c) REGISTRATION STATEMENT. The Registration Statement shall have become
effective, and no stop order suspending such effectiveness shall have been
issued and remain in effect.
(d) HSR. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have expired or been terminated.
SECTION 7.02. ADDITIONAL CONDITIONS OF OBLIGATIONS OF 7TH LEVEL.
The obligations of 7th Level and Merger Corporation to effect the Merger and
the other transactions contemplated by this Agreement are also subject to the
satisfaction at or prior to the Closing Date of the following additional
conditions unless waived by 7th Level:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of ViaGrafix set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement.
(b) PERFORMANCE OF OBLIGATIONS OF VIAGRAFIX. ViaGrafix shall have
performed in all material respects all conditions, covenants, agreements and
obligations required to be performed by it under this Agreement at or prior
to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE TO VIAGRAFIX. From the date hereof
through and including the Effective Time, no event shall have occurred which
would have a ViaGrafix Material Adverse Effect.
(d) COMPLIANCE CERTIFICATE. ViaGrafix shall have delivered to 7th Level
a certificate, dated the Closing Date, signed on behalf of ViaGrafix by the
Chairman, President or any Vice-President of ViaGrafix, certifying as to the
fulfillment of the conditions specified in subsections (a), (b) and (c) of
this Section 7.02 including appropriate certification of ViaGrafix's
certificate of incorporation, by-laws and corporate resolutions related to
the transactions contemplated herein.
(e) THIRD PARTY CONSENTS. ViaGrafix shall have obtained all consents and
approvals, required to be obtained prior to or at the Closing Date, from
third parties or governmental and regulatory authorities in connection with
the execution, delivery and performance by ViaGrafix of this Agreement and
the consummation of the transactions contemplated hereby.
(f) OPINION OF VIAGRAFIX COUNSEL. 7th Level shall have been furnished
with an opinion of counsel to ViaGrafix, dated the Closing Date, mutually
acceptable to the parties.
(g) EMPLOYMENT AGREEMENTS. 7th Level shall have entered into the
Employment Agreements on terms satisfactory to it.
(h) NON-COMPETITION AGREEMENTS. 7th Level shall have entered into non-
competition agreements on terms satisfactory to it with Michael A. Webster
and Robert E. Webster.
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SECTION 7.03. ADDITIONAL CONDITIONS OF OBLIGATIONS OF VIAGRAFIX.
The obligation of ViaGrafix to effect the Merger and the other transactions
contemplated by this Agreement is also subject to the satisfaction at or prior
to the Closing Date of the following additional conditions unless waived by
ViaGrafix:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of 7th Level and Merger Corporation set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date,
except as otherwise contemplated by this Agreement.
(b) PERFORMANCE OF OBLIGATIONS OF 7TH LEVEL AND MERGER CORPORATION. 7th
Level and Merger Corporation shall have performed in all material respects
all conditions, covenants, agreements and obligations required to be
performed by them under this Agreement at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE TO 7TH LEVEL OR MERGER CORPORATION. From
the date hereof through and including the Effective Time, no event shall
have occurred which would have a 7th Level Material Adverse Effect.
(d) COMPLIANCE CERTIFICATES. 7th Level shall have delivered to ViaGrafix
a certificate, dated the Closing Date, signed on behalf of 7th Level by the
Chairman, President or any Vice-President of 7th Level, certifying as to the
fulfillment of the conditions specified in subsections (a), (b) and (c) of
this Section 7.03 including appropriate certification of 7th Level's
certificate of incorporation, by-laws and corporate resolutions related to
the transactions contemplated herein. Merger Corporation shall have
delivered to ViaGrafix a certificate, dated the Closing Date, signed on
behalf of Merger Corporation by the Chairman, President or any Vice-
President of Merger Corporation, certifying as to the fulfillment of the
conditions specified in subsections (a) and (b) of this Section 7.03
including appropriate certification of Merger Corporation's certificate of
incorporation, by-laws and corporate resolutions related to the transactions
contemplated herein.
(e) THIRD PARTY CONSENTS. 7th Level shall have obtained all consents and
approvals required to be obtained prior to or at the Closing Date from third
parties or governmental and regulatory authorities in connection with the
execution, delivery, and performance by 7th Level of this Agreement and the
consummation of the transactions contemplated hereby.
(f) OPINION OF 7TH LEVEL COUNSEL. ViaGrafix shall have been furnished
with an opinion of counsel to 7th Level, dated the Closing Date, mutually
acceptable to the parties.
(g) LISTING. The shares of 7th Level Common Stock to be issued to
ViaGrafix stockholders in the Merger shall be listed on Nasdaq and subject
to no restrictions on transfer other than Rule 145 promulgated by the SEC.
(h) STOCK OPTIONS. 7th Level shall have granted the Stock Options.
(i) EMPLOYMENT AGREEMENTS. Michael A. Webster and Robert E. Webster
shall have entered into the Employment Agreements on terms satisfactory to
them.
ARTICLE VIII
TERMINATION
SECTION 8.01. TERMINATION.
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval by the 7th Level stockholders or the ViaGrafix
stockholders of the matters presented in the Proxy Statement, by 7th Level or
ViaGrafix as set forth below:
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(a) by mutual consent of the boards of directors of 7th Level and
ViaGrafix; or
(b) by 7th Level upon written notice to ViaGrafix, if: (A) any condition
to the obligation of 7th Level to close contained in Article VII hereof has
not been satisfied by December 31, 1999 (the "End Date") (unless such
failure is the result of 7th Level's breach of any of its representations,
warranties, covenants or agreements contained herein); (B) the 7th Level
stockholders do not approve the Merger; (C) the board of directors of
ViaGrafix fails to make or withdraws or modifies or changes the
recommendation referred to in Section 6.03 or, (D) the board of directors of
ViaGrafix recommends to the ViaGrafix stockholders, or takes no position
with respect to, a Takeover Proposal; or
(c) by ViaGrafix upon written notice to 7th Level, if: (A) any condition
to the obligation of ViaGrafix to close contained in Article VII hereof has
not been satisfied by the End Date (unless such failure is the result of
ViaGrafix's breach of any of its representations, warranties, covenants or
agreements contained herein); (B) the ViaGrafix stockholders do not approve
the Merger or, (C) the board of directors of 7th Level fails to make or
withdraws or modifies or changes the recommendation referred to in Section
6.02; or
(d) by 7th Level if the 7th Level board of directors determines in good
faith, based upon the written opinion of its outside legal counsel, that the
failure to terminate this Agreement would constitute a breach of the
fiduciary duties of the 7th Level board of directors to the 7th Level
stockholders under applicable law; or
(e) by ViaGrafix if the ViaGrafix board of directors determines in good
faith, based upon the written opinion of its outside legal counsel, that the
failure to terminate this Agreement would constitute a breach of the
fiduciary duties of the ViaGrafix board of directors to the ViaGrafix
stockholders under applicable law.
SECTION 8.02. FEES AND EXPENSES.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expense, and, in connection
therewith, each of 7th Level and ViaGrafix shall pay, with its own funds and not
with funds provided by the other party, any and all property or transfer taxes
imposed on such party except that expenses incurred in connection with printing
and mailing the Proxy Statement shall be shared equally by 7th Level and
ViaGrafix.
(b) So long as 7th Level shall not have breached its obligations hereunder,
if this Agreement is terminated pursuant to Section 8.01(b)(D), then, within two
business days after such occurrence, ViaGrafix shall pay 7th Level a fee of
$5,000,000 which amount shall be payable by wire transfer of same day funds as
liquidated damages.
(c) So long as the other party shall not have breached its obligations
hereunder, if this Agreement is terminated pursuant to Section 8.01(b)(C) or
8.01(c)(C), then, within two business days after such occurrence, ViaGrafix or
7th Level, as the case may be, shall pay the other a fee of $5,000,000 which
amount shall be payable by wire transfer of same day funds as liquidated
damages.
(d) So long as the other party shall not have breached its obligations
hereunder, if this Agreement is terminated pursuant to Section 8.01(b)(B) or
8.01(c)(B), then, within two business days after such occurrence, 7th Level or
ViaGrafix, as the case may be, shall pay the other party's actual expenses
incurred in connection with this Agreement and the transactions hereunder,
provided, however, that such expense reimbursement shall not exceed $1,000,000
as liquidated damages.
(e) The parties agree that, the ability to determine the amount of actual
damages in connection with a termination of this Agreement under Sections
8.02(b), (c) and (d) will be difficult if not
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impossible to ascertain and that, accordingly, the amount of liquidated damages
provided for in Sections 8.02(b), (c) and (d) are reasonable under the
circumstances.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
SECTION 9.01. SURVIVAL; KNOWLEDGE.
The representations and warranties of the parties set forth in this
Agreement shall survive until the Closing Date. Following the expiration of the
periods set forth above with respect to any particular representation or
warranty, no party hereto shall have any further liability with respect to such
representation or warranty. Except as set forth herein, all of the covenants,
agreements and obligations of the parties hereto shall survive the Closing
indefinitely (or if indefinite survival is not permitted by law, then for the
maximum period permitted by applicable law). Anything herein to the contrary
notwithstanding, any claim for indemnification that is asserted by written
notice which notice specifies in reasonable detail the facts upon which such
claim is made as provided in this Article IX within the survival period shall
survive until resolved pursuant to a final non-appealable judicial determination
or otherwise in accordance with this Agreement.
SECTION 9.02. INDEMNIFICATION.
(a) AGREEMENT TO INDEMNIFY.
(i) Subject to the terms of this Article IX, prior to the Closing,
ViaGrafix hereby covenants and agrees to indemnify 7th Level, its
stockholders, directors, officers, employees, affiliates, and agents and
their respective successors and assigns and to hold them harmless from and
against any and all losses, claims, liabilities, obligations, fines,
penalties, damages and expenses, including reasonable attorneys' fees
(collectively, "Losses") incurred by any of them resulting from or arising
out of any breach of any of the representations or warranties made by
ViaGrafix in this Agreement or the failure of ViaGrafix to perform any of
the agreements or covenants contained herein.
(ii) Subject to the terms of this Article IX, prior to the Closing, 7th
Level hereby covenants and agrees to indemnify ViaGrafix, its stockholders,
directors, officers, employees, affiliates, and agents and their respective
successors and assigns and to hold them harmless from and against any Losses
incurred by any of them resulting from or arising out of any breach of any
of the representations or warranties made by 7th Level in this Agreement or
the failure of 7th Level to perform any of the agreements or covenants
contained herein.
(b) INDEMNIFICATION PROCEDURE.
(i) A party entitled to indemnification pursuant to this Article IX (an
"Indemnified Party") shall provide written notice to each party obligated to
provide indemnification pursuant to this Article IX (an "Indemnifying
Party") of any claim of such Indemnified Party for indemnification under
this Agreement within ten (10) days after the date on which such Indemnified
Party has actual knowledge of the existence of such claim. Such notice shall
specify the nature of such claim in reasonable detail and the Indemnifying
Parties shall be given reasonable access to any documents or properties
within the control of the Indemnified Parties as may be useful or necessary
in the investigation of the basis for such claim. The failure to timely
notify the Indemnifying Parties shall not constitute a waiver of such claim
unless the failure to so notify materially prejudices the Indemnifying
Party's ability to defend such claim.
(ii) In the event any Indemnified Party seeks indemnification hereunder
based upon a claim asserted by a third party, the Indemnifying Parties shall
have the right (without prejudice to the right of any Indemnified Party to
participate at its expense through counsel of its own choosing) to
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<PAGE>
defend or prosecute such claim at its expense and through counsel of its own
choosing if it gives written notice of its intention to do so no later than
twenty (20) days following notice thereof by an Indemnified Party or such
shorter time period as required so that the interests of the Indemnified
Party would not be materially prejudiced as a result of its failure to have
received such notice; provided, however, that, if the Indemnified Party
shall have obtained an opinion of counsel that separate counsel is required
because a conflict of interest would otherwise exist, the Indemnified Party
shall have the right to select separate counsel to participate in the
defense of such action on its behalf, at the expense of the Indemnifying
Party. If the Indemnifying Party does not so choose to defend or prosecute
any such claim asserted by a third party for which any Indemnified Party
would be entitled to indemnification hereunder, then the Indemnified Party
shall be entitled to recover from the Indemnifying Party on a monthly basis
all of the reasonable attorney's fees and other reasonable costs and
expenses of litigation of any nature whatsoever incurred in the defense of
such claim. Notwithstanding the assumption of the defense of any claim by an
Indemnifying Party pursuant to this paragraph, the Indemnified Party shall
have the right to approve the terms of any settlement of a claim (which
approval shall not be unreasonably delayed or withheld), other than a
settlement involving solely the payment of money damages by the Indemnifying
Party and resulting in the complete release of the Indemnified Party.
(iii) The Indemnifying Party and the Indemnified Party shall cooperate
in furnishing evidence and testimony and in any other manner which the other
may reasonably request pursuant to this Article IX, and shall in all other
respects have an obligation of good faith dealing, one to the other, so as
not to unreasonably expose the other to undue risk of loss.
(c) EXCLUSIVITY OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
PROVISION; RELATIONSHIP BETWEEN THE PARTIES. It is the explicit intent and
understanding of each of the parties hereto that neither party nor any of its
representatives or agents is making any representation or warranty whatsoever,
oral or written, express or implied, other than those set forth in this
Agreement and neither party is relying on any statement, representation or
warranty, oral or written, express or implied, made by the other party or such
other party's representatives or agents, except for the representations and
warranties set forth in this Agreement. The indemnity provided for in Section
9.02 of this Agreement, together with the provisions of Sections 8.02 and 8.03
shall be the sole and exclusive remedy of the parties after the Closing for any
inaccuracy of any representation or warranty of the respective party or any
failure or breach of any covenant, obligation, condition or agreement to be
performed or fulfilled by the respective party in this Agreement. The
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution of
this Agreement.
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ARTICLE X
MISCELLANEOUS
SECTION 10.01. NOTICES.
All notices, requests and other communications to any party hereunder shall
be in writing (including telecopy, telex or similar writing) and shall be deemed
given or made as of the date delivered, if delivered personally or by telecopy
(provided that delivery by telecopy shall be followed by delivery of an
additional copy personally, by mail or overnight courier), one day after being
delivered by overnight courier or three days after being mailed by registered or
certified mail (postage prepaid, return receipt requested), to the parties at
the following addresses:
if to 7th Level or Merger Corporation, to:
7th Level, Inc.
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax: 914-682-4440
with a copy to:
The Schupak Group
730 Fifth Avenue, Suite 1901
New York, New York 10019
Attention: Donald Schupak
Fax: 212-262-1031
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax: 212-758-9526
if to ViaGrafix, to:
ViaGrafix Corporation
One American Way
Pryor, Oklahoma 74361
Attention: President
Fax: 918-825-6744
with a copy to:
Johnson Allen Jones & Dornblaser
900 Petroleum Club Building
601 South Boulder
Tulsa, Oklahoma 74119
Attention: John B. Johnson, Jr., Esq.
Fax: 918-584-6645
or such other address or telex or telecopy number as such party may hereafter
specify for the purpose by notice to the other party hereto.
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<PAGE>
SECTION 10.02. AMENDMENT; WAIVER.
This Agreement may be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may be given, provided that
the same are in writing and signed by or on behalf of the parties hereto.
SECTION 10.03. SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
provided that no party shall assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the written consent of the
other party hereto.
SECTION 10.04. GOVERNING LAW.
This Agreement shall be construed in accordance with and governed by the law
of the State of Delaware without regard to principles of conflict of laws.
SECTION 10.05. COUNTERPARTS; EFFECTIVENESS.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
SECTION 10.06. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP.
Except as expressly provided herein, this Agreement (including the documents
and the instruments referred to herein), the Voting Agreement, the 7th Level
Voting Agreement and the Confidentiality Agreement constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof. Except as
expressly provided herein, this Agreement is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder. The
parties hereby acknowledge that no person shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
SECTION 10.07. HEADINGS.
The headings contained in this Agreement are for reference purposes only and
shall not in any way affect the meaning or interpretation of this Agreement.
SECTION 10.08. SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
unenforceable, all other provisions of this Agreement shall remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in a manner that is materially adverse to
any party.
[Remainder of page intentionally left blank.]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to
be duly executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By: /s/ STEPHEN P. GOTT
-----------------------------------------
Name: Stephen P. Gott
Title: President and Chief Financial
Officer
VIAGRAFIX CORPORATION
By: /s/ MICHAEL A. WEBSTER
-----------------------------------------
Name: Michael A. Webster
Title: President and Chief Executive
Officer
7TH LEVEL MERGER CORPORATION
By: /s/ STEPHEN P. GOTT
-----------------------------------------
Name: Stephen P. Gott
Title: President and Chief Executive
Officer
</TABLE>
A-47
<PAGE>
Appendix B
The Board of Directors
7th Level, Inc.
May 28, 1999
Page 1
May 28, 1999
The Board of Directors
7th Level, Inc.
925 Westchester Avenue
White Plains, NY 10604
Gentlemen:
You have engaged us pursuant to the engagement letter, dated May 26, 1999,
between 7th Level, Inc. ("7th Level" or the "Company") and Ladenburg Thalmann &
Co. Inc. ("Ladenburg"). Specifically, you have requested our opinion as to
whether the consideration to be paid by the Company in connection with the
acquisition of 100% of the outstanding common stock of ViaGrafix Corporation
(the "Transaction"), pursuant to the draft of the agreement and plan of merger
dated May 24, 1999 (the "Merger Agreement"), is fair, from a financial point of
view, to the shareholders of the Company.
In connection with rendering this opinion, we have reviewed such information
as we have deemed necessary or appropriate for the purpose of stating the
opinions expressed herein, including but not limited to the following: (i) the
Merger Agreement; (ii) the Annual Reports on Form 10-K for 7th Level for the
three fiscal years ended December 31, 1996, December 31, 1997 and December 31,
1998; (iii) the Quarterly Report on Form 10-Q for 7th Level for the three months
ended March 31, 1999; (iv) Form 8-K for the Street Technologies, Inc.
acquisition dated February 16, 1999; (v) projected financial statements for 7th
Level reviewed and approved by the Company for the years ending December 31,
1999, December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003
and December 31, 2004; (vi) certain information, including selected historical
financial information, pro forma financial information, financial forecasts and
pro forma financial forecasts relating to the business, earnings, cash flow,
assets, liabilities and prospects of 7th Level; (vii) certain publicly available
analysts' earnings' forecasts with respect to 7th Level; (viii) the Annual
Reports on Form 10-K for ViaGrafix for the fiscal year ended December 31, 1998;
(ix) the Quarterly Report on Form 10-Q for ViaGrafix for the three months ended
March 31, 1999; (x) the Initial Public Offering prospectus dated March 14, 1998;
(xi) projected financial statements for ViaGrafix reviewed and approved by
ViaGrafix's management for the fiscal years ending December 31, 1999, December
31, 2000, December 31, 2001, December 31, 2002, December 31, 2003 and December
31, 2004; (xii) certain information, including selected historical financial
information, operating data and sales information relating to the business,
earnings, cash flow, assets and liabilities and prospects of ViaGrafix; and
(xiii) publicly available information regarding the industry, 7th Level,
ViaGrafix and their competitors. In addition, we spoke with members of senior
management of 7th Level and members of senior management of ViaGrafix to discuss
the historical and prospective industry environment, business strategies and
operating results for 7th Level and ViaGrafix, respectively.
In rendering our opinion, we made, with your consent, certain assumptions.
We have, with your approval, assumed and relied upon the accuracy, completeness
and fairness, without assuming any responsibility for the independent
verification of, all financial and other information that was available to us
from public sources, that was provided to us by 7th Level and ViaGrafix, or that
was otherwise
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<PAGE>
The Board of Directors
7th Level, Inc.
May 28, 1999
Page 2
reviewed by us. With respect to financial projections reviewed and approved by
7th Level and ViaGrafix, we assume that they have been reasonably considered by
the respective management teams based on both 7th Level's and ViaGrafix's then
current estimate of results, and we have relied upon such projections and made
no independent verification of the bases, assumptions, calculations or other
information contained therein. We have not made or been provided with an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of 7th Level or ViaGrafix, and we do not assume any responsibility
for verifying any of the information reviewed by us. Our opinion is necessarily
based upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including without limitation: (i) historical revenues, operating earnings, net
income and capitalization of the Company and ViaGrafix and certain other
publicly held companies in businesses we believe to be comparable to the Company
and ViaGrafix; (ii) acquisition multiples that have historically been paid for
other companies in businesses we believe to be comparable to ViaGrafix; (iii)
the current financial and market position and results of operations of the
Company and ViaGrafix; and (iv) the general condition of the securities market.
In arriving at our opinion, we did not conduct a physical inspection of the
properties and facilities of ViaGrafix. We also did not take into account any
estimated costs savings or related expenses or synergies that may result from
the Transaction.
We have assumed, with your consent, that the Transaction will comply with
all applicable federal, foreign, state and local laws and will not result in the
breach or cancellation of any contracts material to The Company or ViaGrafix. We
have relied as to all legal matters on the advice of counsel to the Company.
Ladenburg, as part of its investment banking services, is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate or other
purposes. Ladenburg has been retained by the Board of Directors of the Company
to provide this opinion and has received fees and indemnification against
certain liabilities for the services rendered pursuant to this engagement. We
have, in the past, provided financial advisory services to the Company and have
received fees for providing such services.
In addition, in the ordinary course of business, we actively trade
securities for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in the debt or equity
securities of the Company. In addition, we hold a warrant for the purchase of
250,000 shares of the Company's common stock.
It is understood that this letter is solely for the benefit and use of the
Board of Directors of the Company in its consideration of the Transaction, does
not constitute a recommendation to any director as to how such director should
vote on the Transaction and may not be relied upon by any other person, used for
any other purpose or reproduced, disseminated, quoted or referred to, in whole
or in part, at any time, in any manner or for any purpose without our prior
written consent. This letter may be reprinted in a Proxy Statement mailed to the
shareholders of the Company provided it is reproduced in full. This letter is
not being rendered by Ladenburg as an agent or as a fiduciary of the
shareholders of the Company and Ladenburg shall not have any liability or
obligation with respect to its services hereunder to such shareholders or to any
other person, firm or corporation.
B-2
<PAGE>
The Board of Directors
7th Level, Inc.
May 28, 1999
Page 3
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the consideration to be paid in the Transaction is fair, from a
financial point of view, to the shareholders of the Company.
Very truly yours,
/s/ Ladenburg Thalmann & Co. Inc.
LADENBURG THALMANN & CO. INC.
B-3
<PAGE>
APPENDIX C
May 28, 1999
Board of Directors
ViaGrafix Corporation
One American Way
Pryor, OK 74361
Gentlemen:
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the shareholders of ViaGrafix Corporation, an
Oklahoma corporation ("ViaGrafix"), of a proposed merger (the "Transaction")
involving ViaGrafix and 7th Level Inc., a Delaware corporation ("7th Level"), of
the consideration to be received by such shareholders, pursuant to an Agreement
and Plan of Merger, to be executed on or about May 28, 1999 (the "Agreement"),
and to become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Oklahoma (the "Effective Time"). Defined
terms not otherwise defined herein shall have the meanings as set forth in the
Agreement.
It is our understanding that Merger Corporation was formed solely for the
purpose of the share exchange described below. We further understand that, in
accordance with the Agreement and subject to the terms and conditions contained
therein, the separate corporate existence of Merger Corporation shall cease and
Merger Corporation shall be merged with and into ViaGrafix, that ViaGrafix shall
be the surviving corporation and that, after the Effective Time, the corporate
existence of ViaGrafix will continue unaffected and unimpaired by the Merger.
Pursuant to the Agreement, as of the Effective Time, by virtue of the Merger and
without action on the part of any holder thereof: (a) each outstanding share of
ViaGrafix Common Stock held by ViaGrafix or any ViaGrafix Subsidiary, or that is
owned by 7th Level or Merger Corporation or any other 7th Level Subsidiary shall
be canceled without payment or consideration; (b) each issued and outstanding
share of ViaGrafix Common Stock (except for shares of ViaGrafix Common Stock
held by ViaGrafix, 7th Level, Merger Corporation and any other subsidiary of
ViaGrafix or 7th Level), shall be converted into 1.846 shares of 7th Level's
common stock, $0.01 par value per share ("7th Level Common Stock"); (c) each
share of capital stock of Merger Corporation that is issued and outstanding
immediately prior to the Effective Time shall be canceled and be converted into
one share of common stock of the Surviving Corporation, and each certificate
evidencing ownership of any such shares of Merger Corporation shall thereupon
evidence ownership of the same number of shares of the Surviving Corporation;
and (d) each stock option ("ViaGrafix Option") for ViaGrafix Common Stock that
is outstanding prior to the Effective Time shall be exercisable for the number
of shares of 7th Level Common Stock at the Conversion Ratio in accordance with
the terms of ViaGrafix's stock option plan.
In arriving at the opinion set forth herein, we among other things have: (i)
held detailed discussions with the management of ViaGrafix and certain members
of the management of 7th Level concerning historical and projected financial
information and their respective financial and business prospects; (ii) reviewed
the most recent draft of the Agreement in the form provided to us by ViaGrafix,
which has been represented to us as the final version to be executed by the
parties; (iii) reviewed certain publicly available documents for ViaGrafix and
7th Level, including Annual Reports, Forms 10-K and related financial
information, for the three fiscal years ended December 31, 1998, and Forms 10-Q
and related unaudited financial information for the three months ended March 31,
1999, (iv) reviewed internal budgets and projections, marketing materials and
press releases provided to us by ViaGrafix and 7th Level; (v) reviewed publicly
available data and information for companies which we have determined to be
comparable to ViaGrafix and 7th Level; (vi) reviewed the
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<PAGE>
ViaGrafix Corporation's Board of Directors
May 28, 1999
Page 2
historical stock prices for ViaGrafix and 7th Level and other companies which we
have determined to be comparable to ViaGrafix and 7th Level; (vii) reviewed
publicly available research reports for ViaGrafix and 7th Level and other
companies which we have determined to be comparable to ViaGrafix and 7th Level;
(viii) reviewed the financial terms of other recent business combinations of
comparable companies; and (ix) conducted such other financial analysis as we
have determined, based upon our judgement as investment bankers, to be
appropriate for purposes of this opinion. We have also considered the proforma
effect of Transaction on the combined businesses, as provided by managements of
ViaGrafix and 7th Level.
Managements of ViaGrafix and 7th Level have represented and confirmed to us
that there has been no material adverse change in the condition of the
respective companies.
In our review we have assumed, with your permission, that the documents to
be prepared, used or signed by the parties to effect the Transaction, including
the proxy or other disclosure material to be delivered to the shareholders of
ViaGrafix and 7th Level to elicit any necessary consents to the Transaction,
will effect the Transaction on the terms set forth in the draft Agreement, in
the form provided to us by ViaGrafix, without alteration.
We have not participated in the Transaction negotiations, provided any legal
advice or advised you with respect to alternatives to the Transaction. Although
we have reviewed information regarding ViaGrafix and 7th Level and analyzed
ViaGrafix and 7th Level utilizing a number of commonly accepted methodologies,
we have not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of ViaGrafix or 7th Level and have not
been provided with any such evaluations or appraisals.
In rendering this opinion, we have relied, without independent verification,
on the accuracy and completeness of all of the financial and other information
that was publicly available or furnished or otherwise communicated to us by
ViaGrafix and 7th Level. With respect to information provided to us used to
formulate financial projections, we have reviewed that information and have made
certain adjustments where we have determined it was appropriate to do so.
Independent of the foregoing, we have assumed that the information was
reasonably prepared, based upon assumptions reflecting the best currently
available estimates and good faith judgments of managements of ViaGrafix and 7th
Level as to the future performance and that neither the management of ViaGrafix,
nor the management of 7th Level, has any information or beliefs that would make
the information or projections misleading. Our opinion is based upon analysis of
the foregoing factors in light of our assessment of general economic, financial
and market conditions as they exist and as they can be evaluated by us as of the
date hereof. We are expressing no opinion as to what the value of 7th Level
Common Stock to be issued to ViaGrafix common shareholders pursuant to the
Agreement will actually trade at any time following the date hereof. We note
that, for federal income tax purposes, it is intended that the Merger shall
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended.
Point West Securities, LLC is a broker-dealer which is a wholly owned
affiliate of Point West Capital Corporation (NASD-PWCC). While we do not make
markets in the securities of ViaGrafix or 7th Level, we may from time to time
effect transactions or hold positions in securities of ViaGrafix or 7th Level,
or both. We have not performed any investment banking services for either
ViaGrafix or 7th Level prior to the engagement in connection with the
Transaction. We are not acting as financial advisor to ViaGrafix or 7th Level in
connection with the Transaction.
C-2
<PAGE>
ViaGrafix Corporation's Board of Directors
May 28, 1999
Page 3
This opinion does not constitute a recommendation to any shareholder of
ViaGrafix as to how any such shareholder should vote on the Merger. This opinion
does not address the relative merits of the Merger and any other transactions or
alternatives to the Merger or the decision of the Board of Directors of
ViaGrafix to proceed with the Merger.
This opinion has been prepared at the request and for the use of the Board
of Directors of ViaGrafix and shall not be reproduced, summarized, described or
referred to, or provided to any other person, without our prior written consent,
except that this letter may be reproduced in full in the proxy statement of
ViaGrafix to be filed with the Securities and Exchange Commission in connection
with the Merger.
On the basis of and subject to the foregoing, including the various
assumptions and limitations set forth herein, it is our opinion as of the date
hereof that the consideration to be received by the holders of Common Stock of
ViaGrafix in the Merger is fair to such holders from a financial point of view.
Very truly yours,
/s/ Michael P. Gallo
------------------------------------------------------------------------------
Michael P. Gallo
Managing Director
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APPENDIX D
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of , 1999 (this "Agreement"), by
and between 7TH LEVEL, INC., a Delaware corporation (the "Company"), and MICHAEL
A. WEBSTER ("Employee").
RECITALS
WHEREAS, the Company desires to employ Employee as President of ViaGrafix on
the terms and conditions hereinafter set forth and Employee desires to accept
such employment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT.
1.1 Subject to the terms and conditions of this Agreement, the Company
agrees to employ Employee during the Term (as defined in Section 2) as President
of ViaGrafix. Employee shall report to the Chief Executive Officer of the
Company and/or the President or Chief Operating Officer of the Company. As
President of ViaGrafix, Employee shall be responsible for the management of
ViaGrafix and shall perform such duties and responsibilities as are customarily
performed by a president of a company the size and nature of ViaGrafix, and such
other managerial duties and responsibilities with the Company which are
appropriate for his position at the Company as, from time to time, may be
assigned to him by the Chief Executive Officer of the Company and/or the
President or Chief Operating Officer of the Company.
1.2 Subject to the terms and conditions of this Agreement, Employee
hereby accepts employment as President of ViaGrafix and agrees to devote at
least a majority of his working time and efforts (but no less than such time as
is necessary to achieve the goals for ViaGrafix that are established by mutual
agreement of the Employee and the Company) to the performance of services,
duties and responsibilities in connection therewith (other than during periods
of illness, disability or vacation).
1.3 Employee agrees, that if requested by the Company, Employee shall
serve as a member of the Company's Board of Directors.
2. TERM OF EMPLOYMENT. The term of this Agreement (the "Term") shall be for
a period commencing on the date hereof and continuing through the fifth
anniversary of the date hereof; subject to earlier termination in accordance
with the terms and conditions contained in Section 6 hereof.
3. PLACE OF EMPLOYMENT. During the Term, Employee shall perform his services
at the principal place of business of the Company's ViaGrafix subsidiary which
will be located at One American Way, Pryor, Oklahoma 74361. Employee shall be
furnished with office facilities and services suitable to his position and
suitable for the performance of his duties. Employee acknowledges and agrees
that in connection with his employment, however, he may be required to travel on
behalf of the Company.
4. COMPENSATION.
4.1 SALARY. During the Term, the Company shall pay Employee a base
salary ("Base Salary") at the rate of One Hundred Eighty Five Thousand Dollars
($185,000) per annum (pro rated for the balance of fiscal 1999 ending December
31, 1999, and for any partial year during the Term). The Base Salary shall be
payable in accordance with the ordinary payroll practices of the Company for
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its Employee officers but in no event less frequently than semi-monthly. The
Base Salary shall be reviewed annually by the Board on or before the last day of
each fiscal year, and may be increased in the sole discretion of the Board
taking into account corporate and individual performance, any increase in
Employee's responsibilities on account of acquisitions by, or the general growth
of, ViaGrafix and general business conditions.
4.2 STOCK OPTIONS. As an inducement to Employee to enter into this
Agreement, the Company has on the date hereof (the "Grant Date") granted to
Employee options (the "Options") to purchase 900,000 shares of common stock, par
value $.01 per share, of the Company ("Common Stock") exercisable at a price
equal to the closing market price of the Common Stock on the Nasdaq Stock Market
(as reported by The Wall Street Journal) at the Effective Time (as defined in
the Merger Agreement). Pursuant to the terms of the grant, vesting of such
Options shall occur as follows, provided the Employee is still then employed by
the Company (except as set forth in Sections 7.1 and 7.3 hereof):
300,000 Options shall vest on the second anniversary of the Grant Date;
300,000 Options shall vest on the third anniversary of the Grant Date;
300,000 Options shall vest on the fourth anniversary of the Grant Date.
5. EMPLOYEE BENEFITS.
5.1 EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES. The Company shall
provide Employee during the Term, with coverage under all employee benefit
programs, plans and practices which the Company and ViaGrafix makes available
from time to time to its senior employees, with at least the same opportunity to
participate as the other senior employees of the Company and ViaGrafix
including, without limitation, retirement, pension, profit sharing, medical,
dental, hospitalization, life insurance, short and long term disability,
accidental death and dismemberment and travel accident coverage.
5.2 VACATION AND PERQUISITES. Employee shall be entitled to paid
vacation and perquisites consistent with historical practices at ViaGrafix.
5.3 EXPENSES. Employee is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement, (in
accordance with the policies and procedures established from time to time by the
Company) including, without limitation, entertainment and travel expenses (and
the cost of living while away from home on business or at the request of, and in
the service of the Company), and similar items related to such duties and
responsibilities. The Company will reimburse Employee in full for all such
out-of-pocket expenses upon presentation by Employee from time to time of a
proper account of such expenditures in accordance with the policies and
procedures established by the Board and applicable to employees of the Company.
6. TERMINATION OF EMPLOYMENT.
6.1 DISABILITY. If Employee shall fail during the Term, because of
illness, physical or mental disability or other incapacity, for a period of 120
consecutive days or any 180 days in any 365 consecutive days, to render the
services provided for by this Agreement or be adjudged an incompetent
("Disability"); provided that the date on which the Disability will be deemed to
occur shall be such 120th day or 180th day, respectively, or the date on which
Employee is adjudged an incompetent, as the case may be, the Company may
terminate Employee's employment on not less than two (2) weeks written notice
thereof, setting forth the facts and circumstances claimed to provide a basis
for termination of Employee's employment under this Section 6.1.
6.2 DEATH. Employee's employment hereunder will terminate automatically
if he should die.
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6.3 TERMINATION FOR CAUSE. The Company shall have the right to terminate
the employment of Employee with or without Cause (as hereinafter defined). The
term "Cause," as used herein, shall mean (i) Employee's willful refusal or
failure (other than during periods of illness, Disability or vacation) to
perform his duties hereunder or under any lawful directive of the Board
(consistent with the terms of this Agreement), (ii) Employee's willful
misconduct or gross neglect in the performance of his duties hereunder, (iii)
the willful breach of this Agreement by Employee, (iv) the conviction, plea of
guilty or nolo contendre of Employee in respect of any felony, other than motor
vehicle offenses, or for any misdemeanor constituting theft or embezzlement from
the Company; provided that an indictment of Employee in such matters shall cause
the Company to suspend Employee with pay until such matters are, to the
Company's satisfaction, clarified or finalized, (v) other fraudulent action
against the Company or (vi) any violation by Employee, or conduct by Employee
that poses a substantial threat of causing the Company to violate, any statute,
law, ordinance or regulation promulgated or enforced by any entity with
jurisdiction over the Company or Employee, concerning employment discrimination
or other employment-related wrongs. For purposes of this Section 6.3, no act, or
failure to act, on Employee's part, will be considered "willful" unless done or
omitted to be done by him not in good faith or without a reasonable belief that
his action or omission was in furtherance of and in the best interests of the
Company's business. Termination by the Company for Cause may be effected by
written notice of the Company to Employee; provided, however, that if the
Company determines to terminate the Employee's employment pursuant to clause (i)
or (iii) hereof, the Company shall give the Employee written notice of the facts
and circumstances providing Cause and shall allow Employee no less than twenty
(20) days in the case of a proposed termination pursuant to clause (i) or (iii)
above to remedy, cure or rectify the situation giving rise to Cause.
7. COMPENSATION UPON TERMINATION.
7.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. If Employee's employment
is terminated by the Company without Cause or by Employee for Good Reason (as
defined below), Employee shall be entitled to (A) receive Employee's Base Salary
and benefits as set forth in Section 5 to which Employee is entitled up to and
including the effective date of Employee's termination of employment hereunder,
(B) receive Employee's Base Salary paid consistent with the Company's payroll
practices for nine (9) months and (C) vesting of Options held by Employee pro
rata determined by the portion of the time period in the vesting schedule in
Section 4.2 that has elapsed at the time of such termination (for example, if
such termination occurs on the 250th day of the Term, employee shall vest in
102,740 options and if such termination occurs on the 900th day of the term,
employee shall vest in 433,151 options). Employee also shall be entitled to
receive, during the period he is being paid Base Salary under this Agreement,
the benefits provided under Section 5.1; except to the extent that such
continued participation is not permitted under the plan, program or practice or
would cause the plan, program or practice to cease to be qualified under any
applicable law or regulation. Notwithstanding the foregoing, nothing herein
shall cause the Company to maintain Employee's status as an employee of the
Company after termination.
7.2 TERMINATION BY EMPLOYEE WITHOUT GOOD REASON; TERMINATION BY THE
COMPANY FOR CAUSE. If Employee's employment is terminated by the Company for
Cause or by Employee without Good Reason, Employee shall be entitled to receive
Employee's Base Salary and benefits as set forth in Section 5 to which Employee
is entitled up to and including the effective date of Employee's termination of
employment hereunder. After such termination of employment, the obligations of
the Company under this Agreement to make any further payments, or to provide any
benefits specified herein, to Employee shall thereupon cease and terminate.
7.3 TERMINATION UPON A CHANGE OF CONTROL. In the event of a "Change of
Control", Employee shall become immediately and fully vested in all Options held
by Employee. For purposes of this Agreement, a "Change of Control" shall mean
that (i) any "person" (as such term is defined within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended
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(the "1934 Act")), other than any person who as of the date hereof beneficially
owns (as defined in Rule 13d-3 of the 1934 Act) directly or indirectly 15% or
more of the Company's outstanding Common Stock or as of the date hereof is on,
or has designated a member of, the Board, becomes a beneficial owner directly or
indirectly of securities of the Company representing in excess of fifty percent
(50%) of the Company's then outstanding securities having the right to vote for
the election of directors, (ii) the Company shall have consummated the sale of
all or substantially all of the assets of the Company, (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation (or other entity), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of the
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company; or (v) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended.
7.4 GOOD REASON. Employee shall be entitled to terminate his employment
for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean
(without Employee's express prior written consent as a stockholder or otherwise)
(i) failure by the Company to pay any compensation when due hereunder, (ii) any
significant reduction by the Company of Employee's authorities, powers,
functions, duties or responsibilities or the assignment of duties to Employee by
the Chief Executive Officer of the Company inconsistent with Employee's position
(except in connection with termination of Employee's employment for Cause, as a
result of Disability, as a result of Employee's death or by Employee other than
for Good Reason) or (iii) any material breach by the Company of any other
material provision of this Agreement. If Employee desires to terminate his
employment with the Company for Good Reason, he shall first give written notice
of the facts and circumstances providing Good Reason to the Company, and shall
allow the Company no less than twenty (20) days to remedy, cure or rectify the
situation giving rise to Good Reason. If the Company does not remedy, cure or
rectify such situation giving rise to Good Reason to the reasonable satisfaction
of Employee, Employee shall be entitled to terminate his employment for Good
Reason as of the expiration of such twenty day period.
7.5 NO SUBSTITUTION. Nothing contained in Section 7.1 shall be construed
to represent a substitution for compensation already paid to or earned by
Employee. In addition, Employee shall be entitled to receive all amounts in
respect of the period prior to the date of termination otherwise payable herein
(without double counting), including such payments provided for in Sections 4
and 5.
8. NONDISCLOSURE.
8.1 (a) Employee agrees to keep confidential and, without the prior
written approval of the Company, not to disclose, publish, use or authorize
anyone else to disclose, publish, use, any confidential information, proprietary
or technical information, and trade secrets, acquired by him in the course of
his employment hereunder. For purposes of this Agreement, "Confidential
Information" and "Trade Secrets" shall mean all information, computer software
or programs and related documentation, concerning methods, practices, fabricated
techniques, formulas, product design and development information, processes,
technical plans, customer lists, pricing techniques, marketing plans, financial
information of the Company and its subsidiaries and its dealers and all other
compilations of
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information which relate to the business of, and are owned by, the Company and
its subsidiaries and which have not been disclosed by the Company and its
subsidiaries to the general public or which do not exist in the public domain.
Employee acknowledges that, during the term of his employment hereunder, he will
have access to and become familiar with Confidential Information and Trade
Secrets that are owned by the Company and its subsidiaries. Employee agrees not
to use in any way or disclose any of the Confidential Information and Trade
Secrets, directly or indirectly, at any time after termination of his
employment. All files, records, documents, information, data and similar items
and documentation relating to the business of the Company and its subsidiaries,
whether prepared by or otherwise coming into his possession, shall remain the
exclusive property of the Company and its subsidiaries and shall not be removed
from the premises of the Company and its subsidiaries under any circumstances
without the prior written consent of the Company. If such materials are removed
during employment, they shall be promptly delivered to the Company upon
termination of employment.
(b) Employee agrees not to disclose and hereby assigns to the Company
(to the extent not already legally the property of the Company) all copyrights
in any copyrightable works and all inventions and improvements made by him
within the scope of his employment or that are otherwise made through the use of
the Company or its subsidiaries' time, facilities or material. Employee will
execute any and all assignments, applications or other documents deemed
necessary by the Company to file for and obtain copyright registrations or
patents, and to perfect and register the Company's title to, such copyrights,
inventions or improvements and any applications or registrations relating
thereto, when requested to by the Company at its expense.
8.2 Employee and the Company agree that the covenant of non-disclosure
is a reasonable covenant under the circumstances, and further agree that if in
the opinion of any court of competent jurisdiction such covenant is not
reasonable in any respect, such court shall have the right, power and authority
to excise or modify such provision or provisions of this covenant as to the
court shall appear not reasonable and to enforce the remainder of this covenant
as so amended. Employee agrees that any breach of the covenant contained herein
would irreparably injure the Company. Accordingly, Employee hereby agrees that,
in such event, the Company shall be entitled to obtain a temporary and/ or
permanent injunction to restrain any such breach or threatened breach or to
obtain specific performance of any such provisions, all without prejudice to any
and all other remedies which the Company may have at law or in equity.
9. NOTICES. Any notice, request, demand or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand, electronic transmission (with a copy following by
hand or by overnight courier), by registered or certified mail, postage prepaid,
return receipt requested or by overnight courier addressed to the other party.
All notices shall be addressed as follows, or to such other address or addresses
as may be substituted by notice in writing:
To the Company:
7th Level
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax No.: (914) 682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
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Attention: Gerald Adler, Esq.
Fax No.: (212) 758-9526
To Employee:
Michael A. Webster
c/o ViaGrafix Corporation
One American Way
Pryor, Oklahoma 74361
with a copy to:
Johnson, Allen, Jones & Dornblaser, Inc.
900 Petroleum Club Building
601 S. Boulder
Tulsa, Oklahoma
Attention: John B. Johnson, Jr., Esq.
Fax No.: (918) 584-6645
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
10. SEPARABILITY; LEGAL FEES. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. Each party shall bear the costs of any legal
fees and other fees and expenses which may be incurred in respect of enforcing
its respective rights under this Agreement.
11. ASSIGNMENT. This contract shall be binding upon and inure to the benefit
of the heirs and representatives of Employee and the assigns and successors of
the Company. Neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by Employee (except by will or by
operation of the laws of intestate succession) or by the Company, except that
the Company may assign this Agreement to any successor (whether by merger,
acquisition of stock, purchase or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
12. AMENDMENT; WAIVER. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
13. BENEFICIARIES; REFERENCES. Employee shall be entitled to select (and
change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Employee's death, and may change such election, in either case by giving the
Company written notice thereof. In the event of Employee's death or a judicial
determination of his incompetence, reference in this Agreement to Employee shall
be deemed, where appropriate, to refer to his beneficiary, estate or other legal
representative. Any reference to the masculine gender in this Agreement shall
include, where appropriate, the feminine.
14. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this Section 14 are in addition to the survivorship provisions of
any other section of this Agreement.
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15. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of Oklahoma, without reference
to rules relating to conflicts of law.
16. ENTIRE AGREEMENT. This Agreement and the Merger Agreement contain the
entire understanding between Employee and the Company and supersede in all
respects any prior or other agreement or understanding between the Company and
Employee as to the matters set forth herein and therein. Except for the
obligations specifically set forth herein and therein, the Company does not owe
any obligations to Employee and Employee does not owe any obligations to the
Company with respect to the matters set forth herein and therein.
17. WITHHOLDING. The Company shall withhold from any payments due to
Employee hereunder, all taxes, FICA or other amounts required to be withheld
pursuant to any applicable law.
18. HEADINGS. The section headings contained in this Agreement are for the
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
this shall constitute one and the same instrument.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement
to be signed on the date and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By:
-----------------------------------------
Name:
Title:
EMPLOYEE
---------------------------------------------
Michael A. Webster
</TABLE>
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APPENDIX E
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of , 1999 (this "Agreement"), by
and between 7TH LEVEL, INC., a Delaware corporation (the "Company"), and ROBERT
E. WEBSTER ("Employee").
RECITALS
WHEREAS, the Company desires to employ Employee as a Vice President of
ViaGrafix on the terms and conditions hereinafter set forth and Employee desires
to accept such employment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT.
1.1 Subject to the terms and conditions of this Agreement, the Company
agrees to employ Employee during the Term (as defined in Section 2) as a Vice
President of ViaGrafix. Employee shall report to the Chief Executive Officer of
the Company and/or the President or Chief Operating Officer of the Company. As a
Vice President of ViaGrafix, Employee shall perform such duties and
responsibilities as are customarily performed by a Vice President of a company
the size and nature of ViaGrafix, and such other managerial duties and
responsibilities with the Company which are appropriate for his position at the
Company as, from time to time, may be assigned to him by the Chief Executive
Officer of the Company and/or the President or Chief Operating Officer of the
Company.
1.2 Subject to the terms and conditions of this Agreement, Employee
hereby accepts employment as a Vice President of ViaGrafix and agrees to devote
at least a majority of his working time and efforts (but no less than such time
as is necessary to achieve the goals for ViaGrafix that are established by
mutual agreement of the Employee and the Company) to the performance of
services, duties and responsibilities in connection therewith (other than during
periods of illness, disability or vacation).
2. TERM OF EMPLOYMENT. The term of this Agreement (the "Term") shall be for
a period commencing on the date hereof and continuing through the fifth
anniversary of the date hereof; subject to earlier termination in accordance
with the terms and conditions contained in Section 6 hereof.
3. PLACE OF EMPLOYMENT. During the Term, Employee shall perform his services
at the principal place of business of the Company's ViaGrafix subsidiary which
will be located at One American Way, Pryor, Oklahoma 74361. Employee shall be
furnished with office facilities and services suitable to his position and
suitable for the performance of his duties. Employee acknowledges and agrees
that in connection with his employment, however, he may be required to travel on
behalf of the Company.
4. COMPENSATION.
4.1 SALARY. During the Term, the Company shall pay Employee a base
salary ("Base Salary") at the rate of $125,000 per annum (pro rated for the
balance of fiscal 1999 ending December 31, 1999, and for any partial year during
the Term). The Base Salary shall be payable in accordance with the ordinary
payroll practices of the Company for its Employee officers but in no event less
frequently than semi-monthly. The Base Salary shall be reviewed annually by the
Board on or before the last day of each fiscal year, and may be increased in the
sole discretion of the Board taking into account corporate and individual
performance, any increase in Employee's responsibilities on account of
acquisitions by, or the general growth of, ViaGrafix and general business
conditions.
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4.2 STOCK OPTIONS. As an inducement to Employee to enter into this
Agreement, the Company has on the date hereof (the "Grant Date") granted to
Employee options (the "Options") to purchase 750,000 shares of common stock, par
value $.01 per share, of the Company ("Common Stock") exercisable at a price
equal to the closing market price of the Common Stock on the Nasdaq Stock Market
(as reported by The Wall Street Journal) at the Effective Time (as defined in
the Merger Agreement). Pursuant to the terms of the grant, vesting of such
Options shall occur as follows, provided the Employee is still then employed by
the Company (except as set forth in Sections 7.1 and 7.3 hereof):
250,000 Options shall vest on the second anniversary of the Grant Date;
250,000 Options shall vest on the third anniversary of the Grant Date;
250,000 Options shall vest on the fourth anniversary of the Grant Date.
5. EMPLOYEE BENEFITS.
5.1 EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES. The Company shall
provide Employee during the Term, with coverage under all employee benefit
programs, plans and practices which the Company and ViaGrafix makes available
from time to time to its senior employees, with at least the same opportunity to
participate as the other senior employees of the Company and ViaGrafix
including, without limitation, retirement, pension, profit sharing, medical,
dental, hospitalization, life insurance, short and long term disability,
accidental death and dismemberment and travel accident coverage.
5.2 VACATION AND PERQUISITES. Employee shall be entitled to paid
vacation and perquisites consistent with historical practices at ViaGrafix.
5.3 EXPENSES. Employee is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement, (in
accordance with the policies and procedures established from time to time by the
Company) including, without limitation, entertainment and travel expenses (and
the cost of living while away from home on business or at the request of, and in
the service of the Company), and similar items related to such duties and
responsibilities. The Company will reimburse Employee in full for all such
out-of-pocket expenses upon presentation by Employee from time to time of a
proper account of such expenditures in accordance with the policies and
procedures established by the Board and applicable to employees of the Company.
6. TERMINATION OF EMPLOYMENT.
6.1 DISABILITY. If Employee shall fail during the Term, because of
illness, physical or mental disability or other incapacity, for a period of 120
consecutive days or any 180 days in any 365 consecutive days, to render the
services provided for by this Agreement or be adjudged an incompetent
("Disability"); provided that the date on which the Disability will be deemed to
occur shall be such 120th day or 180th day, respectively, or the date on which
Employee is adjudged an incompetent, as the case may be, the Company may
terminate Employee's employment on not less than two (2) weeks written notice
thereof, setting forth the facts and circumstances claimed to provide a basis
for termination of Employee's employment under this Section 6.1.
6.2 DEATH. Employee's employment hereunder will terminate automatically
if he should die.
6.3 TERMINATION FOR CAUSE. The Company shall have the right to terminate
the employment of Employee with or without Cause (as hereinafter defined). The
term "Cause," as used herein, shall mean (i) Employee's willful refusal or
failure (other than during periods of illness, Disability or vacation) to
perform his duties hereunder or under any lawful directive of the Board
(consistent with the terms of this Agreement), (ii) Employee's willful
misconduct or gross neglect in the performance of his duties hereunder, (iii)
the willful breach of this Agreement by Employee, (iv) the conviction, plea of
guilty or nolo contendre of Employee in respect of any felony, other than motor
vehicle offenses, or for any misdemeanor constituting theft or embezzlement from
the Company;
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provided that an indictment of Employee in such matters shall cause the Company
to suspend Employee with pay until such matters are, to the Company's
satisfaction, clarified or finalized, (v) other fraudulent action against the
Company or (vi) any violation by Employee, or conduct by Employee that poses a
substantial threat of causing the Company to violate, any statute, law,
ordinance or regulation promulgated or enforced by any entity with jurisdiction
over the Company or Employee, concerning employment discrimination or other
employment-related wrongs. For purposes of this Section 6.3, no act, or failure
to act, on Employee's part, will be considered "willful" unless done or omitted
to be done by him not in good faith or without a reasonable belief that his
action or omission was in furtherance of and in the best interests of the
Company's business. Termination by the Company for Cause may be effected by
written notice of the Company to Employee; provided, however, that if the
Company determines to terminate the Employee's employment pursuant to clause (i)
or (iii) hereof, the Company shall give the Employee written notice of the facts
and circumstances providing Cause and shall allow Employee no less than twenty
(20) days in the case of a proposed termination pursuant to clause (i) or (iii)
above to remedy, cure or rectify the situation giving rise to Cause.
7. COMPENSATION UPON TERMINATION.
7.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. If Employee's employment
is terminated by the Company without Cause or by Employee for Good Reason (as
defined below), Employee shall be entitled to (A) receive Employee's Base Salary
and benefits as set forth in Section 5 to which Employee is entitled up to and
including the effective date of Employee's termination of employment hereunder,
(B) receive Employee's Base Salary paid consistent with the Company's payroll
practices for nine (9) months and (C) vesting of Options held by Employee pro
rata determined by the portion of the time period in the vesting schedule in
Section 4.2 that has elapsed at the time of such termination. Employee also
shall be entitled to receive, during the period he is being paid Base Salary
under this Agreement, the benefits provided under Section 5.1; except to the
extent that such continued participation is not permitted under the plan,
program or practice or would cause the plan, program or practice to cease to be
qualified under any applicable law or regulation. Notwithstanding the foregoing,
nothing herein shall cause the Company to maintain Employee's status as an
employee of the Company after termination.
7.2 TERMINATION BY EMPLOYEE WITHOUT GOOD REASON; TERMINATION BY THE
COMPANY FOR CAUSE. If Employee's employment is terminated by the Company for
Cause or by Employee without Good Reason, Employee shall be entitled to receive
Employee's Base Salary and benefits as set forth in Section 5 to which Employee
is entitled up to and including the effective date of Employee's termination of
employment hereunder. After such termination of employment, the obligations of
the Company under this Agreement to make any further payments, or to provide any
benefits specified herein, to Employee shall thereupon cease and terminate.
7.3 TERMINATION UPON A CHANGE OF CONTROL. In the event of a "Change of
Control", Employee shall become immediately and fully vested in all Options held
by Employee. For purposes of this Agreement, a "Change of Control" shall mean
that (i) any "person" (as such term is defined within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act")),
other than any person who as of the date hereof beneficially owns (as defined in
Rule 13d-3 of the 1934 Act) directly or indirectly 15% or more of the Company's
outstanding Common Stock or as of the date hereof is on, or has designated a
member of, the Board, becomes a beneficial owner directly or indirectly of
securities of the Company representing in excess of fifty percent (50%) of the
Company's then outstanding securities having the right to vote for the election
of directors, (ii) the Company shall have consummated the sale of all or
substantially all of the assets of the Company, (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation (or other entity), other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of the
voting power of the voting securities of the Company or such surviving entity
E-3
<PAGE>
outstanding immediately after such merger or consolidation; (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company; or (v) the following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Company) whose appointment or election by
the Board or nomination for election by the Company's stockholders was approved
or recommended by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended.
7.4 GOOD REASON. Employee shall be entitled to terminate his employment
for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean
(without Employee's express prior written consent as a stockholder or otherwise)
(i) failure by the Company to pay any compensation when due hereunder, (ii) any
significant reduction by the Company of Employee's authorities, powers,
functions, duties or responsibilities or the assignment of duties to Employee by
the Chief Executive Officer of the Company inconsistent with Employee's position
(except in connection with termination of Employee's employment for Cause, as a
result of Disability, as a result of Employee's death or by Employee other than
for Good Reason) or (iii) any material breach by the Company of any other
material provision of this Agreement. If Employee desires to terminate his
employment with the Company for Good Reason, he shall first give written notice
of the facts and circumstances providing Good Reason to the Company, and shall
allow the Company no less than twenty (20) days to remedy, cure or rectify the
situation giving rise to Good Reason. If the Company does not remedy, cure or
rectify such situation giving rise to Good Reason to the reasonable satisfaction
of Employee, Employee shall be entitled to terminate his employment for Good
Reason as of the expiration of such twenty day period.
7.5 NO SUBSTITUTION. Nothing contained in Section 7.1 shall be construed
to represent a substitution for compensation already paid to or earned by
Employee. In addition, Employee shall be entitled to receive all amounts in
respect of the period prior to the date of termination otherwise payable herein
(without double counting), including such payments provided for in Sections 4
and 5.
8. NONDISCLOSURE.
8.1 (a) Employee agrees to keep confidential and, without the prior
written approval of the Company, not to disclose, publish, use or authorize
anyone else to disclose, publish, use, any confidential information, proprietary
or technical information, and trade secrets, acquired by him in the course of
his employment hereunder. For purposes of this Agreement, "Confidential
Information" and "Trade Secrets" shall mean all information, computer software
or programs and related documentation, concerning methods, practices, fabricated
techniques, formulas, product design and development information, processes,
technical plans, customer lists, pricing techniques, marketing plans, financial
information of the Company and its subsidiaries and its dealers and all other
compilations of information which relate to the business of, and are owned by,
the Company and its subsidiaries and which have not been disclosed by the
Company and its subsidiaries to the general public or which do not exist in the
public domain. Employee acknowledges that, during the term of his employment
hereunder, he will have access to and become familiar with Confidential
Information and Trade Secrets that are owned by the Company and its
subsidiaries. Employee agrees not to use in any way or disclose any of the
Confidential Information and Trade Secrets, directly or indirectly, at any time
after termination of his employment. All files, records, documents, information,
data and similar items and documentation relating to the business of the Company
and its subsidiaries, whether prepared by or otherwise coming into his
possession, shall remain the exclusive property of the Company and its
subsidiaries and shall not be removed from the premises of the Company and its
subsidiaries under any circumstances without the prior written consent of the
Company. If such materials are removed during employment, they shall be promptly
delivered to the Company upon termination of employment.
E-4
<PAGE>
(b) Employee agrees not to disclose and hereby assigns to the Company
(to the extent not already legally the property of the Company) all copyrights
in any copyrightable works and all inventions and improvements made by him
within the scope of his employment or that are otherwise made through the use of
the Company or its subsidiaries' time, facilities or material. Employee will
execute any and all assignments, applications or other documents deemed
necessary by the Company to file for and obtain copyright registrations or
patents, and to perfect and register the Company's title to, such copyrights,
inventions or improvements and any applications or registrations relating
thereto, when requested to by the Company at its expense.
8.2 Employee and the Company agree that the covenant of non-disclosure
is a reasonable covenant under the circumstances, and further agree that if in
the opinion of any court of competent jurisdiction such covenant is not
reasonable in any respect, such court shall have the right, power and authority
to excise or modify such provision or provisions of this covenant as to the
court shall appear not reasonable and to enforce the remainder of this covenant
as so amended. Employee agrees that any breach of the covenant contained herein
would irreparably injure the Company. Accordingly, Employee hereby agrees that,
in such event, the Company shall be entitled to obtain a temporary and/ or
permanent injunction to restrain any such breach or threatened breach or to
obtain specific performance of any such provisions, all without prejudice to any
and all other remedies which the Company may have at law or in equity.
9. NOTICES. Any notice, request, demand or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand, electronic transmission (with a copy following by
hand or by overnight courier), by registered or certified mail, postage prepaid,
return receipt requested or by overnight courier addressed to the other party.
All notices shall be addressed as follows, or to such other address or addresses
as may be substituted by notice in writing:
To the Company:
7th Level
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax No.: (914) 682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax No.: (212) 758-9526
To Employee:
Robert E. Webster
c/o ViaGrafix Corporation
One American Way
Pryor, Oklahoma 74361
E-5
<PAGE>
with a copy to:
Johnson, Allen, Jones & Dornblaser, Inc.
900 Petroleum Club Building
601 S. Boulder
Tulsa, Oklahoma
Attention: John B. Johnson, Jr., Esq.
Fax No.: (918) 584-6645
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
10. SEPARABILITY; LEGAL FEES. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. Each party shall bear the costs of any legal
fees and other fees and expenses which may be incurred in respect of enforcing
its respective rights under this Agreement.
11. ASSIGNMENT. This contract shall be binding upon and inure to the benefit
of the heirs and representatives of Employee and the assigns and successors of
the Company. Neither this Agreement nor any rights hereunder shall be assignable
or otherwise subject to hypothecation by Employee (except by will or by
operation of the laws of intestate succession) or by the Company, except that
the Company may assign this Agreement to any successor (whether by merger,
acquisition of stock, purchase or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
12. AMENDMENT; WAIVER. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
13. BENEFICIARIES; REFERENCES. Employee shall be entitled to select (and
change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable hereunder following
Employee's death, and may change such election, in either case by giving the
Company written notice thereof. In the event of Employee's death or a judicial
determination of his incompetence, reference in this Agreement to Employee shall
be deemed, where appropriate, to refer to his beneficiary, estate or other legal
representative. Any reference to the masculine gender in this Agreement shall
include, where appropriate, the feminine.
14. SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations. The
provisions of this Section 14 are in addition to the survivorship provisions of
any other section of this Agreement.
15. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of Oklahoma, without reference
to rules relating to conflicts of law.
16. ENTIRE AGREEMENT. This Agreement and the Merger Agreement contain the
entire understanding between Employee and the Company and supersede in all
respects any prior or other agreement or understanding between the Company and
Employee as to the matters set forth herein and therein. Except for the
obligations specifically set forth herein and therein, the Company does not
E-6
<PAGE>
owe any obligations to Employee and Employee does not owe any obligations to the
Company with respect to the matters set forth herein and therein.
17. WITHHOLDING. The Company shall withhold from any payments due to
Employee hereunder, all taxes, FICA or other amounts required to be withheld
pursuant to any applicable law.
18. HEADINGS. The section headings contained in this Agreement are for the
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
this shall constitute one and the same instrument.
[Remainder of page intentionally left blank.]
E-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement
to be signed on the date and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By:
-----------------------------------------
Name:
Title:
EMPLOYEE
---------------------------------------------
Robert E. Webster
</TABLE>
E-8
<PAGE>
APPENDIX F
NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT, dated as of , 1999 (this
"Agreement"), by and between 7TH LEVEL, INC., a Delaware corporation (the
"Company"), and MICHAEL A. WEBSTER ("Employee").
RECITALS
WHEREAS, the Company is simultaneously entering into an Agreement and Plan
of Merger (the "Merger Agreement"), by and among the Company, 7th Level Merger
Corporation ("Merger Corporation") and ViaGrafix Corporation, an Oklahoma
corporation ("ViaGrafix"), pursuant to which Merger Corporation shall merge with
and into ViaGrafix (the "Merger");
WHEREAS, Employee is the current President and Chief Executive Officer of
ViaGrafix and a principal stockholder of ViaGrafix; and
WHEREAS, the Company desires to employ Employee as President of the
Company's ViaGrafix subsidiary and Vice President of the Company pursuant to a
separate employment agreement;
WHEREAS, due to his stock ownership and operation of ViaGrafix, the Employee
could take actions to effectively impair the successful operation by the Company
of ViaGrafix after the Merger, and therefore it is a condition precedent to the
Merger that Employee enter into this Agreement in order to induce the Company to
complete the Merger.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. NON-COMPETITION AND NON-SOLICITATION.
1.1 PROHIBITION ON COMPETITION. During the greater of (x) three years
from the effective time of the Merger and (y) the period of his employment with
the Company (other than on behalf of the Company) and for twenty four (24)
months after the date of termination of his employment with the Company (the
"Non-Competition Period"), Employee agrees that, without the prior written
consent of the Company: he will not, either as principal, manager, agent,
consultant, officer, stockholder, partner, investor, lender or employee, or in
any other capacity (and whether or not for compensation) carry on, be engaged in
or employed by or be a consultant to or have any financial interest in, any
business which is "in competition with the business of the Company" (as defined
in Section 1.4 below). Nothing in this Section 1 shall be construed so as to
preclude Employee from (i) investing in any publicly held company provided
Employee's beneficial ownership of any class of such company's securities does
not exceed 5% of the outstanding securities of such class, (ii) owning
memberships, or other similar rights or interests therein, of any United States
or foreign securities, commodities, options or similar exchange, board of trade,
contract market or terminal association (collectively "Exchanges") and
exercising the rights and privileges attendant to such ownership for his own
personal account or for the account of any spouse, child, parent or sibling or
any trust created for the benefit of Employee or any of the foregoing or for the
account of any entity wholly owned by Employee or any of the foregoing relatives
or trusts or (iii) trading or dealing on any Exchanges for Employee's own
personal account or for the account of any relative or any trust created for the
benefit of any relative of Employee.
1.2 NON-SOLICITATION OF EMPLOYEES. During the Non-Competition Period,
Employee will not: solicit or request any employee of the Company or its
subsidiaries to leave the employ of the
F-1
<PAGE>
Company or its subsidiaries or join the employ of any individual or entity that
is in competition with the business of the Company.
1.3 NON-SOLICITATION OF CUSTOMERS. During the Non-Competition Period,
Employee will not solicit, or sell services or attempt to sell services that are
in competition with the business of the Company to any "Customer". For purposes
hereof, "Customer" shall mean all customers of the Company which are known to
Employee during the two (2) year period immediately prior to the termination of
Employee's employment.
1.4 A person or entity which is "in competition with the business of the
Company" means any entity engaged in the business of developing and marketing
training products, graphic software products, learning products and web-based
training products as presently conducted or as conducted during the Employee's
employment by the Company, or its subsidiaries.
1.5 Employee and the Company agree that the covenants of non-competition
and non-solicitation are reasonable covenants under the circumstances, and
further agree that if in the opinion of any court of competent jurisdiction such
covenants are not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of these
covenants as to the court shall appear not reasonable and to enforce the
remainder of these covenants as so amended. Employee agrees that any breach of
the covenants contained herein would irreparably injure the Company.
Accordingly, Employee hereby agrees that, in such event, the Company shall be
entitled to obtain a temporary and/or permanent injunction to restrain any such
breach or threatened breach or to obtain specific performance of any such
provisions, all without prejudice to any and all other remedies which the
Company may have at law or in equity.
2. NOTICES. Any notice, request, demand or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand, electronic transmission (with a copy following by
hand or by overnight courier), by registered or certified mail, postage prepaid,
return receipt requested or by overnight courier addressed to the other party.
All notices shall be addressed as follows, or to such other address or addresses
as may be substituted by notice in writing:
To the Company:
7th Level
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax No.: (914) 682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax No.: (212) 758-9526
To Employee:
Michael A. Webster
c/o ViaGrafix Corporation
One American Way
Pryor, Oklahoma 74361
F-2
<PAGE>
with a copy to:
Johnson, Allen, Jones & Dornblaser, Inc.
900 Petroleum Club Building
601 S. Boulder
Tulsa, Oklahoma
Attention: John B. Johnson, Jr., Esq.
Fax No.: (918) 584-6645
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
3. SEPARABILITY; LEGAL FEES. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. Each party shall bear the costs of any legal
fees and other fees and expenses which may be incurred in respect of enforcing
its respective rights under this Agreement.
4. ASSIGNMENT. The Company may assign this Agreement to any successor
(whether by operation of law or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
5. AMENDMENT; WAIVER. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
6. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of Oklahoma, without reference
to rules relating to conflicts of law.
7. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between Employee and the Company and supersede in all respects any prior or
other agreement or understanding between the Company and Employee as to the
matters set forth herein.
8. HEADINGS. The section headings contained in this Agreement are for the
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
9. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which will be deemed an original but all of which together this shall
constitute one and the same instrument.
F-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Non-Competition
Agreement to be signed on the date and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By:
-----------------------------------------
Name:
Title:
EMPLOYEE
---------------------------------------------
Michael A. Webster
</TABLE>
F-4
<PAGE>
APPENDIX G
NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT, dated as of , 1999 (this
"Agreement"), by and between 7TH LEVEL, INC., a Delaware corporation (the
"Company"), and ROBERT E. WEBSTER ("Employee").
RECITALS
WHEREAS, the Company is simultaneously entering into an Agreement and Plan
of Merger (the "Merger Agreement"), by and among the Company, 7th Level Merger
Corporation ("Merger Corporation") and ViaGrafix Corporation, an Oklahoma
corporation ("ViaGrafix"), pursuant to which Merger Corporation shall merge with
and into ViaGrafix (the "Merger");
WHEREAS, Employee is the current Executive Vice President of ViaGrafix and a
principal stockholder of ViaGrafix; and
WHEREAS, the Company desires to employ Employee pursuant to a separate
employment agreement;
WHEREAS, due to his stock ownership and operation of ViaGrafix, the Employee
could take actions to effectively impair the successful operation by the Company
of ViaGrafix after the Merger, and therefore it is a condition precedent to the
Merger that Employee enter into this Agreement in order to induce the Company to
complete the Merger.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties agree as follows:
1. NON-COMPETITION AND NON-SOLICITATION.
1.1 PROHIBITION ON COMPETITION. During the greater of (x) three years
from the effective time of the Merger and (y) the period of his employment with
the Company (other than on behalf of the Company) and for twenty four (24)
months after the date of termination of his employment with the Company (the
"Non-Competition Period"), Employee agrees that, without the prior written
consent of the Company: he will not, either as principal, manager, agent,
consultant, officer, stockholder, partner, investor, lender or employee, or in
any other capacity (and whether or not for compensation) carry on, be engaged in
or employed by or be a consultant to or have any financial interest in, any
business which is "in competition with the business of the Company" (as defined
in Section 1.4 below); provided, however, that Employee shall not be restricted
in activities for Websoft, Inc., as long as Websoft, Inc. (except Wingmaster)
does not compete with the Company's training products and services or with
graphics software products currently sold or under development by the Company.
Nothing in this Section 1 shall be construed so as to preclude Employee from (i)
investing in any publicly held company provided Employee's beneficial ownership
of any class of such company's securities does not exceed 5% of the outstanding
securities of such class, (ii) owning memberships, or other similar rights or
interests therein, of any United States or foreign securities, commodities,
options or similar exchange, board of trade, contract market or terminal
association (collectively "Exchanges") and exercising the rights and privileges
attendant to such ownership for his own personal account or for the account of
any spouse, child, parent or sibling or any trust created for the benefit of
Employee or any of the foregoing or for the account of any entity wholly owned
by Employee or any of the foregoing relatives or trusts or (iii) trading or
dealing on any Exchanges for Employee's own personal account or for the account
of any relative or any trust created for the benefit of any relative of
Employee.
G-1
<PAGE>
1.2 NON-SOLICITATION OF EMPLOYEES. During the Non-Competition Period,
Employee will not: solicit or request any employee of the Company or its
subsidiaries to leave the employ of the Company or its subsidiaries or join the
employ of any individual or entity that is in competition with the business of
the Company.
1.3 NON-SOLICITATION OF CUSTOMERS. During the Non-Competition Period,
Employee will not solicit, or sell services or attempt to sell services that are
in competition with the business of the Company to any "Customer", except on
behalf of Websoft, Inc. For purposes hereof, "Customer" shall mean all customers
of the Company which are known to Employee during the two (2) year period
immediately prior to the termination of Employee's employment.
1.4 A person or entity which is "in competition with the business of the
Company" means any entity engaged in the business of developing and marketing
training products, graphic software products, learning products and web-based
training products as presently conducted or as conducted during the Employee's
employment by the Company, or its subsidiaries.
1.5 Employee and the Company agree that the covenants of non-competition
and non-solicitation are reasonable covenants under the circumstances, and
further agree that if in the opinion of any court of competent jurisdiction such
covenants are not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of these
covenants as to the court shall appear not reasonable and to enforce the
remainder of these covenants as so amended. Employee agrees that any breach of
the covenants contained herein would irreparably injure the Company.
Accordingly, Employee hereby agrees that, in such event, the Company shall be
entitled to obtain a temporary and/or permanent injunction to restrain any such
breach or threatened breach or to obtain specific performance of any such
provisions, all without prejudice to any and all other remedies which the
Company may have at law or in equity.
2. NOTICES. Any notice, request, demand or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand, electronic transmission (with a copy following by
hand or by overnight courier), by registered or certified mail, postage prepaid,
return receipt requested or by overnight courier addressed to the other party.
All notices shall be addressed as follows, or to such other address or addresses
as may be substituted by notice in writing:
To the Company:
7th Level, Inc.
925 Westchester Avenue
White Plains, New York 10604
Attention: Chief Executive Officer
Fax No.: (914) 682-4440
with a copy to:
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
Attention: Gerald Adler, Esq.
Fax No.: (212) 758-9526
To Employee:
Robert E. Webster
c/o ViaGrafix Corporation
One American Way
Pryor, Oklahoma 74361
G-2
<PAGE>
with a copy to:
Johnson, Allen, Jones & Dornblaser, Inc.
900 Petroleum Club Building
601 S. Boulder
Tulsa, Oklahoma
Attention: John B. Johnson, Jr., Esq.
Fax No.: (918) 584-6645
Communications delivered by hand or by overnight courier shall be deemed
received on the date of delivery; communications sent by electronic means shall
be deemed received one (1) business day after the sending thereof, and
communications sent by registered or certified mail shall be deemed received
three (3) business days after the sending thereof.
3. SEPARABILITY; LEGAL FEES. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect. Each party shall bear the costs of any legal
fees and other fees and expenses which may be incurred in respect of enforcing
its respective rights under this Agreement.
4. ASSIGNMENT. The Company may assign this Agreement to any successor
(whether by operation of law or otherwise) to all or substantially all of the
assets or business of the Company, if such successor expressly agrees in writing
to assume the obligations of the Company hereunder.
5. AMENDMENT; WAIVER. This Agreement may only be amended by written
agreement signed by the parties hereto. A waiver by the Company or Employee of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
6. GOVERNING LAW. This Agreement shall be construed, interpreted and
governed in accordance with the laws of the State of Oklahoma, without reference
to rules relating to conflicts of law.
7. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between Employee and the Company and supersede in all respects any prior or
other agreement or understanding between the Company and Employee as to the
matters set forth herein.
8. HEADINGS. The section headings contained in this Agreement are for the
convenience of reference only and shall not affect the construction of any
provision of this Agreement.
9. COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which will be deemed an original but all of which together this shall
constitute one and the same instrument.
G-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Non-Competition
Agreement to be signed on the date and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By:
-----------------------------------------
Name:
Title:
EMPLOYEE
---------------------------------------------
Robert E. Webster
</TABLE>
G-4
<PAGE>
APPENDIX H
INDEMNITY AGREEMENT
This INDEMNITY AGREEMENT (the "Agreement"), dated as of , 1999,
by and between 7TH LEVEL, INC., a Delaware corporation ("7th Level"), MICHAEL A.
WEBSTER, ROBERT E. WEBSTER and ROBERT C. MOORE, JR., (a/k/a Robert Moore) (each
an "Indemnitee" and collectively, the "Indemnitees"). Any capitalized term which
is not defined in this Agreement shall have the meaning given such term in the
Merger Agreement (as defined below).
WHEREAS, pursuant to an agreement and plan of merger, dated as of the date
hereof (the "Merger Agreement"), by and among 7th Level, 7th Level Merger
Corporation ("Merger Corporation") and ViaGrafix Corporation, an Oklahoma
corporation ("ViaGrafix"), Merger Corporation shall be merged with and into
ViaGrafix (the "Merger") and the stockholders of ViaGrafix prior to the Merger
will receive 7th Level Common Stock;
WHEREAS, as an integral part of the Merger Agreement, 7th Level has agreed
to indemnify and hold harmless the Indemnitees from and against all Losses (as
defined herein), arising from the action entitled GORDON V. VIAGRAFIX, ET AL
(the "Suit"); and
WHEREAS, it is a condition precedent to the Merger that the parties hereto
enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and representations,
warranties, covenants and agreements set forth herein, as well as other good and
valid consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. INDEMNITY. 7th Level agrees to indemnify and hold harmless each Indemnitee
from and against any and all judgments, debts, losses, claims, liabilities,
damages, penalties, interest, obligations, demands and expenses, including
attorney's fees and expenses and amounts paid in settlement ("Losses") arising
from the Suit.
2. CERTAIN REPRESENTATIONS OF THE INDEMNITEES. Each Indemnitee represents and
warrants to 7th Level that the prospectus dated March 4, 1998 of ViaGrafix, at
the time it became effective under the Securities Act of 1933, as amended, and
each other document which the plaintiffs allege forms the factual basis for the
Suit, did not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3. COOPERATION. Each Indemnitee shall provide such assistance to 7th Level as
7th Level may reasonably request in connection with the defense of the Suit.
4. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement, together with Sections 6.11 and 6.15
of the Merger Agreement, constitutes the entire Agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof.
(b) AMENDMENTS, WAIVERS ETC. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated except upon the
execution and delivery of a written Agreement executed by the parties hereto.
(c) NOTICES. Any notice, demand, request, waiver, or other communication
under this Agreement shall be in writing (including facsimile or similar
writing) and shall be deemed to have been duly given (a) on the date of service
if personally served, (b) on the third day after mailing if mailed to the party
to whom notice is to be given, by first class mail, registered, return receipt
requested, postage
H-1
<PAGE>
prepaid, (c) on the next day after sending, if sent by overnight service, or (d)
on the date sent if sent by facsimile, to the parties at the following addresses
or facsimile numbers with a copy sent by mail as aforesaid on the same date (or
at such other address or facsimile number for a party as shall be specified by
like notice):
If to 7th Level:
7th Level, Inc.
925 Westchester Avenue
White Plains, NY 10604
Attention: Chief Executive Officer
Telephone: (914) 682-4300
Fax: (914) 682-4440
If to any Indemnitee, at his address set forth on the signature page
hereto.
(d) SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
(e) REMEDIES CUMULATIVE. All rights, powers and remedies provided under this
Agreement or otherwise available in respect hereof at law or in equity shall be
cumulative and not alternative, and the exercise of any thereof by any party
shall not preclude the simultaneous or later exercise of any other such right,
power or remedy by such party.
(f) NO WAIVER. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with terms hereof, shall not constitute a waiver by such party of its right to
exercise any such or other right, power or remedy or to demand such compliance.
(g) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be for
the benefit of, and shall not be enforceable by, any person or entity who or
which is not a party hereto.
(h) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.
(i) JURISDICTION AND FORUM. Each party hereto irrevocably submits to the
exclusive jurisdiction of the courts in the State of Oklahoma or any federal
court sitting in the State of Oklahoma in any action, suit or proceeding arising
in connection with this Agreement, and agrees that any such action, suit or
proceeding shall be brought only in such court (and waives any objection based
on FORUM NON CONVENIENS or any other objection to venue therein). Each party
hereto hereby waives any right to a trial by jury in connection with any such
action, suit or proceeding.
(j) DESCRIPTIVE HEADINGS. The descriptive headings used herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning of interpretation of this Agreement.
(k) COUNTERPARTS. This Agreement may be executed in two or more counterparts
and each of which shall be deemed to be an original and all of which shall be
considered one and the same Agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By:
-----------------------------------------
Name:
Title:
---------------------------------------------
MICHAEL A. WEBSTER
Address:
---------------------------------------------
ROBERT E. WEBSTER
Address:
---------------------------------------------
ROBERT C. MOORE, JR.
Address:
</TABLE>
H-3
<PAGE>
APPENDIX I
VOTING AGREEMENT
VOTING AGREEMENT, dated as of June 1, 1999 (this "Agreement"), by and among
7th Level, Inc., a Delaware corporation ("7th"), and the stockholders of
ViaGrafix Corporation ("ViaGrafix") who are signatories hereto (the
"Stockholders").
R E C I T A L S:
WHEREAS, 7th and ViaGrafix have entered into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"), relating to the
merger (the "Merger") of 7th and ViaGrafix;
WHEREAS, the Stockholders beneficially own in the aggregate 3,037,685 shares
of the common stock, par value $.01 per share, of ViaGrafix (the "ViaGrafix
Common Stock"), representing approximately 52.6% of the currently outstanding
shares of ViaGrafix Common Stock; and
WHEREAS, the Stockholders believe that the Merger is in their best interests
and accordingly, wish to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. VOTING. Each of the Stockholders agrees to vote all shares of ViaGrafix
Common Stock beneficially owned by him for the approval of the Merger Agreement
(in the form executed as of the date hereof, with such changes thereto as the
parties hereto may agree prior to such changes), and each of the transactions
contemplated therein.
2. TERM. This Agreement shall terminate on the earlier of (x) a termination
of the Merger Agreement pursuant to Section 8.01(a) or (y) the 120th day after
the date hereof; provided, however if the Registration Statement on Form S-4 (or
Proxy Statement/Prospectus which forms a part thereof) is filed with the
Securities and Exchange Commission on or prior to the 60th day from the date
hereof, this Agreement shall terminate on the earlier of (x) a termination of
the Merger Agreement pursuant to Section 8.01 (a) or (y) December 31, 1999.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Each of the Stockholders hereby, severally and not jointly,
represents and warrants as follows:
(i) Such stockholder is the beneficial owner of the shares of
ViaGrafix Common Stock set forth on SCHEDULE A hereto, free and clear of all
liens, charges and encumbrances whatsoever.
(ii) Such stockholder has all necessary power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary action on the part of such stockholder. This Agreement has been
duly executed and delivered by such stockholder and constitutes the legal, valid
and binding obligation of such stockholder, enforceable against such stockholder
in accordance with its terms, except as may be limited by bankruptcy,
reorganization, moratorium, fraudulent conveyance and insolvency laws and by
other laws affecting the rights of creditors generally and except as may be
limited by the availability of equitable remedies.
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<PAGE>
(iii) No consent, approval, order or authorization of any third
party (including any federal, state or local governmental authority) is required
by or with respect to such stockholder to validly execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
(b) Each of the Stockholders agrees that, until this Agreement has been
terminated, such stockholder will not sell, transfer, assign or otherwise
dispose of any of his shares of ViaGrafix Common Stock, unless the proposed
transferee of such shares becomes a signatory to this Agreement.
4. FURTHER ASSURANCES. Each party hereto shall perform such further acts and
execute such further documents as may be required to carry out the provisions of
this Agreement.
5. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, personal representatives,
successors and assigns.
6. SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to which
he/it is entitled at law or in equity, and the parties waive any requirement to
post any bond as a condition to seeking or obtaining equitable relief.
7. THIRD PARTY SUITS. The Parties agree that in the event that any third
party makes a claim or institutes an action or suit (a "Claim") against any of
the Stockholders resulting from this Agreement, 7th shall assume the defense of
any such Claim at its expense and through counsel of its choosing within twenty
(20) days following its receipt of written notice of the Claim. As a result
thereof, 7th shall indemnify and hold harmless each Stockholder from and against
any and all losses, claims, liabilities, obligations, fines, penalties, damages
and expenses incurred by any of them that they incur as a result of such Claim.
Each Stockholder shall provide written notice specifying the nature of each
Claim in reasonable detail to 7th promptly after he receives notice of such
Claim. Each Stockholder shall give access to any documents or properties within
the control of such Stockholder as may be useful or necessary in the
investigation of the basis for such Claim. Each Stockholder shall cooperate in
furnishing evidence and testimony and in any other manner which 7th may
reasonably request pursuant to this Section 7, and shall in all other respects
have an obligation of good faith dealing, so as not to unreasonably expose 7th
to undue risk of loss. Notwithstanding the assumption of the defense of any
claim by 7th pursuant to this Section 7, each Stockholder shall have the right
to approve the terms of any settlement of a Claim (which approval shall not be
unreasonably delayed or withheld), other than a settlement involving solely the
payment of money damages by 7th and resulting in the complete release of such
Stockholder.
8. NOTICES. Any notice, demand, request, waiver, or other communication
under this Agreement shall be in writing (including facsimile or similar
writing) and shall be deemed to have been duly given (a) on the date of service
if personally served, (b) on the third day after mailing if mailed to the party
to whom notice is to be given, by first class mail, registered, return receipt
requested, postage prepaid, (c) on the next day after sending, if sent by
overnight service, or (d) on the date sent if sent by facsimile, to the parties
at the following addresses or facsimile numbers with a copy sent by mail as
aforesaid on the same date (or at such other address or facsimile number for a
party as shall be specified by like notice):
If to 7th:
7th Level, Inc.
925 Westchester Avenue
White Plains, NY 10604
Attention: Chief Executive Officer
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<PAGE>
Telephone: (914) 682-4300
Fax: (914) 682-4440
If to any Stockholder, at his address set forth on the signature
page hereto.
9. SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, in whole or in part, the validity of the
remaining provisions shall not be affected and the remaining portion of any
provision held to be invalid, illegal or unenforceable shall in no way be
affected, prejudiced or disturbed thereby.
10. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall constitute a
single agreement.
11. GOVERNING LAW. This Agreement shall be construed in accordance with, and
governed by, the internal laws of the State of New York, without giving effect
to the principles of conflict of laws thereof. Any legal action, suit or
proceeding arising out of or relating to this Agreement may be instituted in any
state or federal court located within the County of New York, State of New York,
and each party hereto agrees not to assert, by way of motion, as a defense, or
otherwise, in any such action, suit or proceeding, any claim that it is not
subject personally to the jurisdiction of such court or that such court is an
inconvenient forum, that the venue of the action, suit or proceeding is improper
or that this Agreement or the subject matter hereof may not be enforced in or by
such court. Each party hereto further irrevocably submits to the jurisdiction of
any such court in any such action, suit or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
<TABLE>
<S> <C> <C>
7TH LEVEL, INC.
By: /s/ MARC E. LANDY
-----------------------------------------
Name: Marc E. Landy
Title: Vice President, Chief Financial
Officer and Secretary
---------------------------------------------
MICHAEL A. WEBSTER
Address:
Telephone:
Fax:
---------------------------------------------
Robert E. Webster
Address:
Telephone:
Fax:
</TABLE>
I-3
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME VIAGRAFIX COMMON STOCK
- ----------------------------------------------------------------- ---------------------------
<S> <C>
Michael A. Webster(1)............................................ 1,867,213
Robert E. Webster(2)............................................. 1,170,472
</TABLE>
- ------------------------
(1) Includes 114,285 shares held as trustee for trusts for the benefit of his
children.
(2) Includes 100 shares held by a son of Robert E. Webster.
I-4
<PAGE>
APPENDIX J
VOTING AGREEMENT
VOTING AGREEMENT, dated as of June 1, 1999 (this "Agreement"), by and among
ViaGrafix Corporation, an Oklahoma corporation ("ViaGrafix"), and the
stockholders of 7th Level, Inc. ("7th") who are signatories hereto (the
"Stockholders").
R E C I T A L S:
WHEREAS, 7th and ViaGrafix have entered into an Agreement and Plan of
Merger, dated as of the date hereof (the "Merger Agreement"), relating to the
merger (the "Merger") of 7th and ViaGrafix;
WHEREAS, the Stockholders beneficially own shares of the common stock, par
value $.01 per share, of 7th (the "7th Common Stock") and/or shares of the
Series D Preferred Stock of 7th (the "Preferred Stock"); and
WHEREAS, the Stockholders believe that the Merger is in their best interests
and accordingly, wish to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. VOTING. Each of the Stockholders agrees to vote all shares of 7th Common
Stock and Preferred Stock beneficially owned by him (other than as set forth on
the signature page hereto) for the approval of the Merger Agreement (in the form
executed as of the date hereof, with such changes thereto as the parties hereto
may agree prior to such changes), and each of the transactions contemplated
therein.
2. TERM. This Agreement shall terminate on the earlier of (x) a termination
of the Merger Agreement pursuant to Section 8.01(a) or (y) the 120th day after
the date hereof; provided, however if the Registration Statement on Form S-4 (or
Proxy Statement/Prospectus which forms a part thereof) is filed with the
Securities and Exchange Commission on or prior to the 60th day from the date
hereof, this Agreement shall terminate on the earlier of (x) a termination of
the Merger Agreement pursuant to Section 8.01 (a) or (y) December 31, 1999.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Each of the Stockholders hereby, severally and not jointly,
represents and warrants as follows:
(i) Such stockholder is the beneficial owner of his or its shares of
7th Common Stock and Preferred Stock subject hereto, free and clear of all
liens, charges and encumbrances whatsoever.
(ii) Such stockholder has all necessary power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary action on the part of such stockholder. This Agreement has been
duly executed and delivered by such stockholder and constitutes the legal, valid
and binding obligation of such stockholder, enforceable against such stockholder
in accordance with its terms, except as may be limited by bankruptcy,
reorganization, moratorium, fraudulent conveyance and insolvency laws and by
other laws affecting the rights of creditors generally and except as may be
limited by the availability of equitable remedies.
J-1
<PAGE>
(iii) No consent, approval, order or authorization of any third
party (including any federal, state or local governmental authority) is required
by or with respect to such stockholder to validly execute and deliver this
Agreement and to consummate the transactions contemplated hereby.
(b) Each of the Stockholders agrees that, until this Agreement has been
terminated, such stockholder will not sell, transfer, assign or otherwise
dispose of any of his or its shares of 7th Common Stock or Preferred Stock,
unless the proposed transferee of such shares becomes a signatory to this
Agreement.
4. FURTHER ASSURANCES. Each party hereto shall perform such further acts and
execute such further documents as may be required to carry out the provisions of
this Agreement.
5. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, personal representatives,
successors and assigns.
6. SPECIFIC PERFORMANCE. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to which
he/it is entitled at law or in equity, and the parties waive any requirement to
post any bond as a condition to seeking or obtaining equitable relief.
7. NOTICES. Any notice, demand, request, waiver, or other communication
under this Agreement shall be in writing (including facsimile or similar
writing) and shall be deemed to have been duly given (a) on the date of service
if personally served, (b) on the third day after mailing if mailed to the party
to whom notice is to be given, by first class mail, registered, return receipt
requested, postage prepaid, (c) on the next day after sending, if sent by
overnight service, or (d) on the date sent if sent by facsimile, to the parties
at the following addresses or facsimile numbers with a copy sent by mail as
aforesaid on the same date (or at such other address or facsimile number for a
party as shall be specified by like notice):
If to ViaGrafix:
ViaGrafix Corporation
One American Way
Pryer, Oklahoma 74361
Attention: President
Telephone: (918) 825-6700
Fax: (918) 825-6744
If to any Stockholder, at his address set forth on the signature
page hereto.
8. SEVERABILITY. In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, in whole or in part, the validity of the
remaining provisions shall not be affected and the remaining portion of any
provision held to be invalid, illegal or unenforceable shall in no way be
affected, prejudiced or disturbed thereby.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall constitute a
single agreement.
10. GOVERNING LAW. This Agreement shall be construed in accordance with, and
governed by, the internal laws of the State of New York, without giving effect
to the principles of conflict of laws thereof. Any legal action, suit or
proceeding arising out of or relating to this Agreement may be instituted in any
state or federal court located within the County of New York, State of New York,
and
J-2
<PAGE>
each party hereto agrees not to assert, by way of motion, as a defense, or
otherwise, in any such action, suit or proceeding, any claim that it is not
subject personally to the jurisdiction of such court or that such court is an
inconvenient forum, that the venue of the action, suit or proceeding is improper
or that this Agreement or the subject matter hereof may not be enforced in or by
such court. Each party hereto further irrevocably submits to the jurisdiction of
any such court in any such action, suit or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
<TABLE>
<S> <C> <C>
ViaGrafix Corporation
By:
-----------------------------------------
Name:
Title:
Name of Stockholder:
-----------------------------------------
By:
-----------------------------------------
Name:
Address:
Telephone:
Fax:
Number of shares of 7th Common Stock (if less
than all):
Number of shares of Preferred Stock (if less
than all):
</TABLE>
J-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The indemnification of officers and directors of Learn2.com is governed by
Section 145 of the General Corporation Law of the State of Delaware and the
restated certificate of incorporation and bylaws of Learn2.com. Subsection (a)
of DGCL Section 145 empowers a corporation to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Subsection (b) of DGCL Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of such action or suit if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
DGCL Section 145 further provides that to the extent that a present or
former director or officer is successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in subsections (a) and (b)
of Section 145, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith. In all cases in
which indemnification is permitted under subsections (a) and (b) of Section 145
(unless ordered by a court), it shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director, officer, employee or agent is proper in the
circumstances because the applicable standard of conduct has been met by the
party to be indemnified. Such determination must be made, with respect to a
person who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.
The statute authorizes the corporation to pay expenses incurred by an officer or
director in advance of the final disposition of a proceeding upon receipt of an
undertaking by or on behalf of the person to whom the advance will be made, to
repay the advances if it shall ultimately be determined that he was not entitled
to indemnification. DGCL Section 145 also provides that indemnification and
advancement of expenses
II-1
<PAGE>
permitted thereunder are not to be exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
By-law, agreement, vote of stockholders or disinterested directors, or
otherwise. DGCL Section 145 also authorizes the corporation to purchase and
maintain liability insurance on behalf of its directors, officers, employees and
agents regardless of whether the corporation would have the statutory power to
indemnify such persons against the liabilities insured.
Article eighth of the restated certificate of incorporation of Learn2.com,
as amended, provides that no director of Learn2.com shall be personally liable
to Learn2.com or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to Learn2.com or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (involving certain unlawful
dividends or stock purchases or redemptions), or (iv) for any transaction from
which the director derived an improper personal benefit.
Article tenth of Learn2.com's certificate entitles directors and officers of
Learn2.com to indemnification to the fullest extent permitted by Section 145 of
the DGCL, as the same may be supplemented from time to time. The certificate
further\provides that Learn2.com may, to the fullest extent authorized by the
Learn2.com Board, indemnify any employee or agent of Learn2.com.
Pursuant to Section 145(g) of the DGCL, Learn2.com's bylaws, as amended,
authorize Learn2.com to obtain insurance to protect officers and directors from
certain liabilities, including liabilities against which the joint proxy
statement/prospectus cannot indemnify its officers and directors. Learn2.com
maintains a primary directors and officers liability and company reimbursement
policy which, among other things, provides for payment up to $5 million on
behalf of any of Learn2.com's past, present or future directors or officers
against loss. Learn2.com also maintains a supplemental insurance and company
reimbursement policy providing for, among other things, payment up to $20
million on behalf of any of Learn2.com past, present or future directors or
officers against loss.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------
<C> <C> <S>
(1) 2.1 -- Agreement and Plan of Merger, dated as of February 16, 1999, by and among 7th Level, Inc., 7th Level
Merger Corporation, Street Technologies, Inc. and the stockholders of Street Technologies, Inc. named
therein.
(2) 2.2 -- Agreement and Plan of Merger, dated as of May 13, 1999, by and among 7th Level, Inc., 7th Level
Acquisition Corporation, Panmedia Corporation, Jason Roberts and Patricia Roberts
(3) 2.3 -- Agreement and Plan of Merger, dated as of June 1, 1999, by and among 7th Level, Inc., 7th Level
Merger Corporation and ViaGrafix Corporation
(4) 3(i) -- Restated Certificate of Incorporation of 7th Level, Inc.
(5) 3(ii) -- Bylaws of the 7th Level, Inc. as adopted by the Board of Directors of 7th Level, Inc. as of May 14,
1993; as amended by Amendment No. 1 thereto dated February 11, 1994 and Amendment No. 2 thereto dated
February 28, 1996.
(4) 4.1 -- Form of Bridge Loan Warrant.
(6) 4.2 -- Certificate of Designation of Series D Preferred Stock
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------
<C> <C> <S>
5.1 -- Opinion of Swidler Berlin Shereff Friedman, LLP
(5) 10.1 -- Stock Purchase Agreement entered into as of the 11th day of February, 1994 by and among 7th Level,
Inc. and the Purchasers listed on Exhibit A thereto.
(5) 10.2 -- Stockholders' Agreement entered into as of the 11th day of February, 1994 by and among 7th Level,
Inc. and George D. Grayson, Robert A. Ezrin, the George D. and Kathy Grayson Irrevocable Trust, David
R. Henkel, Onyx Partners, Inc. ("Onyx"), W. Scott Page, James E. Shepherd, Robert A. Tercek, Entec
Associates, Mezzonen S.A., Merv Adelson, Andrew Adelson, Tarragona Fund, Inc., and Zenga Investments,
Ltd.
(5) 10.3 -- Letter Agreement dated May 28, 1993 from Onyx to 7th Level, Inc.
(5) 10.4 -- Option Share Repurchase Agreement entered into as of the 11th day of February, 1994, by and among the
7th Level, Inc., George D. Grayson, Robert A. Ezrin and W. Scott Page.
(4) 10.5 -- Amended and Restated Incentive Stock Option Plan of 7th Level, Inc.
(4) 10.6 -- Employee Stock Purchase Plan of 7th Level, Inc.
(5) 10.7 -- Assignment and Assumption Agreement entered into as of the 11th day of February, 1994 by and among
7th Level, Inc. and 7th Level, a sole proprietorship.
(4) 10.8 -- Form of Exchange Agreement dated September , 1994 among the 7th Level, Inc. and the Investors.
(7) 10.9 -- Form of 7% Convertible Note Due February 11, 1999.
(6) 10.10 -- Securities Purchase Agreement dated as of May 6, 1998, by and among the 7th Level, Inc., Alpine
Associates, a New Jersey Limited Partnership ("Alpine") and East-West Capital Associates, Inc.
("Capital")
(6) 10.11 -- Security Agreement dated as of May 6, 1998, by and among the 7th Level, Inc., Capital, Alpine and
Alpine, as collateral agent for itself and Capital.
(6) 10.12 -- Securities Purchase Agreement dated as of May 6, 1998, between the 7th Level, Inc. and the Purchasers
parties thereto.
(6) 10.13 -- Registration Rights Agreement dated May 6, 1998 by and among the 7th Level, Inc. and the Purchasers
parties thereto
(6) 10.14 -- Specimen of Preferred Stock certificate.
(8) 10.15 -- Employment Agreement dated as of April 20, 1998 by and between the 7th Level, Inc. and Richard S.
Merrick.
(9) 10.16 -- Subscription Agreement dated as of December 14, 1998, by and between 7th Level, Inc. and Fletcher
International Limited.
(10) 10.17 -- Employment Agreement dated as of February 16, 1999 by and between the 7th Level, Inc. and Stephen
Gott.
(3) 10.18 -- Voting Agreement, dated as of June 1, 1999, by and among 7th Level, Inc., Michael A. Webster and
Robert E. Webster
(3) 10.19 -- Voting Agreement, dated as of June 1, 1999, by and among ViaGrafix Corporation and certain
stockholders of 7th Level, Inc. named therein.
(3) 10.20 -- Form of Employment Agreement by and between 7th Level, Inc. and Michael A. Webster.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------
<C> <C> <S>
(3) 10.21 -- Form of Employment Agreement by and between 7th Level, Inc. and Robert E. Webster.
(3) 10.22 -- Form of Non-Competition Agreement by and between 7th Level, Inc. and Michael A. Webster.
(3) 10.23 -- Form of Non-Competition Agreement by and between 7th Level, Inc. and Robert E. Webster.
(3) 10.24 -- Form of Indemnity Agreement by and among 7th Level, Inc., Michael A. Webster, Robert E. Webster and
Robert C. Moore, Jr.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Ernst & Young LLP
23.4 -- Consent of Point West Securities, LLC (contained in Appendix C of this Registration Statement on Form
S-4)
23.5 -- Consent of Ladenburg Thalmann & Co. Inc. (contained in Appendix B of this Registration Statement on
Form S-4)
23.6 -- Consent of Swidler Berlin Shereff Friedman, LLP (to be contained in Exhibit 5.1)
24.1 -- Power of Attorney of Form S-4 (contained in the signature page hereto)
(11) 99.1 -- Press release concerning the merger of 7th Level, Inc. with Pulse Entertainment, Inc.
(12) 99.2 -- Press release of 7th Level, Inc. dated April 22, 1998 concerning cancellation of proposed Merger with
Pulse Entertainment, Inc. and commitments and terms for $4.5 million bridge loan and $10 million
private placement.
(13) 99.3 -- Unaudited Pro Forma Condensed Balance Sheet of 7th Level, Inc. as of May 31, 1998.
(14) 99.4 -- Press Release of 7th Level, Inc. dated July 19, 1999.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on February 25, 1999 and incorporated
by reference herein.
(2) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on May 26, 1999 and incorporated by
reference herein.
(3) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on June 15, 1999 and incorporated by
reference herein.
(4) Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-79092) filed with the Commission on
September 19, 1994 and incorporated by reference herein.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-79092) filed with the Commission on May 18, 1994, and
incorporated by reference herein.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(7) Filed as an Exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (File No. 33-79092) filed with the Commission on
September 28, 1994, and incorporated by reference herein.
II-4
<PAGE>
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on December 14, 1998 and incorporated
by reference herein.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on December 9, 1997 and incorporated by
reference herein.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on April 23, 1998 and incorporated by
reference herein.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on July 9, 1998 and incorporated by
reference herein.
(14) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on July 19, 1999 and incorporated by
reference herein.
(b) Financial Statement Schedules
None
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a twenty percent
(20%) change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
II-5
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(1) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(1) The registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1993 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
caused this registration statement on Amendment No. 1 to Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
White Plains, State of New York, on the 15th day of July, 1999.
<TABLE>
<S> <C> <C>
LEARN2.COM, INC.
BY: /S/ STEPHEN P. GOTT
-----------------------------------------
Stephen P. Gott
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ STEPHEN P. GOTT Officer and Director
- ------------------------------ (Principal Executive July 15, 1999
Stephen P. Gott Officer)
Vice President, Chief
/s/ MARC E. LANDY Financial Officer and
- ------------------------------ Secretary (Principal July 15, 1999
Marc E. Landy Financial and Accounting
Officer)
/s/ DONALD SCHUPAK Chairman of the Board of
- ------------------------------ Directors and Director July 15, 1999
Donald Schupak
* Vice Chairman of the Board
- ------------------------------ of Directors and Director July 15, 1999
Robert Alan Ezrin
* Director
- ------------------------------ July 15, 1999
Merv Adelson
* Director
- ------------------------------ July 15, 1999
James A. Cannavino
* Director
- ------------------------------ July 15, 1999
Jason R. Roberts
</TABLE>
* By: /s/ MARC E. LANDY
-------------------------------------
Marc E. Landy
Attorney-in-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
(1) 2.1 Agreement and Plan of Merger, dated as of February 16, 1999, by and among 7th Level, Inc., 7th Level
Merger Corporation, Street Technologies, Inc. and the stockholders of Street Technologies, Inc. named
therein.
(2) 2.2 Agreement and Plan of Merger, dated as of May 13, 1999, by and among 7th Level, Inc., 7th Level
Acquisition Corporation, Panmedia Corporation, Jason Roberts and Patricia Roberts
(3) 2.3 Agreement and Plan of Merger, dated as of June 1, 1999, by and among 7th Level, Inc., 7th Level Merger
Corporation and ViaGrafix Corporation
(4) 3(i) Restated Certificate of Incorporation of 7th Level, Inc.
(5) 3(ii) Bylaws of the 7th Level, Inc. as adopted by the Board of Directors of 7th Level, Inc. as of May 14,
1993; as amended by Amendment No. 1 thereto dated February 11, 1994 and Amendment No. 2 thereto dated
February 28, 1996.
(4) 4.1 Form of Bridge Loan Warrant.
(6) 4.2 Certificate of Designation of Series D Preferred Stock
5.1 Opinion of Swidler Berlin Shereff Friedman, LLP
(5)10.1 Stock Purchase Agreement entered into as of the 11th day of February, 1994 by and among 7th Level,
Inc. and the Purchasers listed on Exhibit A thereto.
(5)10.2 Stockholders' Agreement entered into as of the 11th day of February, 1994 by and among 7th Level, Inc.
and George D. Grayson, Robert A. Ezrin, the George D. and Kathy Grayson Irrevocable Trust, David R.
Henkel, Onyx Partners, Inc. ("Onyx"), W. Scott Page, James E. Shepherd, Robert A. Tercek, Entec
Associates, Mezzonen S.A., Merv Adelson, Andrew Adelson, Tarragona Fund, Inc., and Zenga Investments,
Ltd.
(5)10.3 Letter Agreement dated May 28, 1993 from Onyx to 7th Level, Inc.
(5)10.4 Option Share Repurchase Agreement entered into as of the 11th day of February, 1994, by and among the
7th Level, Inc., George D. Grayson, Robert A. Ezrin and W. Scott Page.
(4)10.5 Amended and Restated Incentive Stock Option Plan of 7th Level, Inc.
(4)10.6 Employee Stock Purchase Plan of 7th Level, Inc.
(5)10.7 Assignment and Assumption Agreement entered into as of the 11th day of February, 1994 by and among 7th
Level, Inc. and 7th Level, a sole proprietorship.
(4)10.8 Form of Exchange Agreement dated September , 1994 among the 7th Level, Inc. and the Investors.
(7)10.9 Form of 7% Convertible Note Due February 11, 1999.
(6)10.10 Securities Purchase Agreement dated as of May 6, 1998, by and among the 7th Level, Inc., Alpine
Associates, a New Jersey Limited Partnership ("Alpine") and East-West Capital Associates, Inc.
("Capital")
(6)10.11 Security Agreement dated as of May 6, 1998, by and among the 7th Level, Inc., Capital, Alpine and
Alpine, as collateral agent for itself and Capital.
(6)10.12 Securities Purchase Agreement dated as of May 6, 1998, between the 7th Level, Inc. and the Purchasers
parties thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
(6)10.13 Registration Rights Agreement dated May 6, 1998 by and among the 7th Level, Inc. and the Purchasers
parties thereto
(6)10.14 Specimen of Preferred Stock certificate.
(8)10.15 Employment Agreement dated as of April 20, 1998 by and between the 7th Level, Inc. and Richard S.
Merrick.
(9)10.16 Subscription Agreement dated as of December 14, 1998, by and between 7th Level, Inc. and Fletcher
International Limited.
(10)10.17 Employment Agreement dated as of February 16, 1999 by and between the 7th Level, Inc. and Stephen
Gott.
(3)10.18 Voting Agreement, dated as of June 1, 1999, by and among 7th Level, Inc., Michael A. Webster and
Robert E. Webster
(3)10.19 Voting Agreement, dated as of June 1, 1999, by and among ViaGrafix Corporation and certain
stockholders of 7th Level, Inc. named therein.
(3)10.20 Form of Employment Agreement by and between 7th Level, Inc. and Michael A. Webster.
(3)10.21 Form of Employment Agreement by and between 7th Level, Inc. and Robert E. Webster.
(3)10.22 Form of Non-Competition Agreement by and between 7th Level, Inc. and Michael A. Webster.
(3)10.23 Form of Non-Competition Agreement by and between 7th Level, Inc. and Robert E. Webster.
(3)10.24 Form of Indemnity Agreement by and among 7th Level, Inc., Michael A. Webster, Robert E. Webster and
Robert C. Moore, Jr.
23.1 Consent of KPMG LLP.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Point West Securities, LLC (contained in Appendix C of this Registration Statement on Form
S-4)
23.5 Consent of Ladenburg Thalmann & Co. Inc. (contained in Appendix B of this Registration Statement on
Form S-4)
23.6 Consent of Swidler Berlin Shereff Friedman, LLP (to be contained in Exhibit 5.1)
24.1 Power of Attorney of Form S-4 (contained in the signature page hereto)
(11)99.1 Press release concerning the merger of 7th Level, Inc. with Pulse Entertainment, Inc.
(12)99.2 Press release of 7th Level, Inc. dated April 22, 1998 concerning cancellation of proposed Merger with
Pulse Entertainment, Inc. and commitments and terms for $4.5 million bridge loan and $10 million
private placement.
(13)99.3 Unaudited Pro Forma Condensed Balance Sheet of 7th Level, Inc. as of May 31, 1998.
(14)99.4 Press Release of 7th Level, Inc. dated July 19, 1999.
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on February 25, 1999 and incorporated
by reference herein.
(2) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on May 26, 1999 and incorporated by
reference herein.
<PAGE>
(3) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on June 15, 1999 and incorporated by
reference herein.
(4) Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-79092) filed with the Commission on
September 19, 1994 and incorporated by reference herein.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-79092) filed with the Commission on May 18, 1994, and
incorporated by reference herein.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(7) Filed as an Exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (File No. 33-79092) filed with the Commission on
September 28, 1994, and incorporated by reference herein.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on December 14, 1998 and incorporated
by reference herein.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on December 9, 1997 and incorporated by
reference herein.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on April 23, 1998 and incorporated by
reference herein.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on July 9, 1998 and incorporated by
reference herein.
(14) Filed as an Exhibit to the Company's Current Report on Form 8-K (File No.
000-24936) filed with the Commission on July 19, 1999 and incorporated by
reference herein.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors of Learn2.com, Inc. (formerly known as 7th Level, Inc.):
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Registration Statement.
Our reports dated January 30, 1998 contain explanatory paragraphs that state
that Learn2.com, Inc. (formerly known as 7th Level, Inc.) has suffered recurring
losses since inception and does not currently have sufficient resources to meet
its anticipated operating requirements during 1998, which conditions raise
substantial doubt about Learn2.com, Inc.'s (formerly known as 7th Level, Inc.)
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
<TABLE>
<S> <C>
/s/ KPMG LLP
-------------------------------------------
KPMG LLP
</TABLE>
Dallas, Texas
July 16, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this registration statement of our report dated March 17, 1999 related to the
consolidated balance sheet of Learn2.com, Inc. (formerly known as 7th Level,
Inc.) as of December 31, 1998, and the related consolidated statement of
operations, stockholders' equity, cash flows and the financial statement
schedule for the year ended December 31, 1998 and our report dated June 30, 1999
related to the supplementary consolidated balance sheet of Learn2.com, Inc.
(formerly known as 7th Level, Inc.), as of December 31, 1998, and the related
supplementary consolidated statement of operations, stockholders' equity and
cash flows for the year ended December 31, 1998 and to the adjustments that were
applied to restate the 1997 consolidated financial statements and to all
references to our firm included in this Registration Statement filed on Form
S-4.
<TABLE>
<S> <C>
/s/ ARTHUR ANDERSEN LLP
-------------------------------------------
ARTHUR ANDERSEN LLP
</TABLE>
New York, New York
July 16, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report, dated March 19, 1999, with respect to the financial
statements and schedule of ViaGrafix Corporation included in this Registration
Statement on Form S-4 and related joint proxy statement/prospectus of
Learn2.com, Inc. (formerly known as 7th Level, Inc.) related to the proposed
merger of Learn2.com, Inc. (formerly known as 7th Level, Inc.) and ViaGrafix
Corporation.
<TABLE>
<S> <C>
/s/ ERNST & YOUNG LLP
-------------------------------------------
ERNST & YOUNG LLP
</TABLE>
Tulsa, Oklahoma
July 16, 1999
